FRIENDLY ICE CREAM CORP, S-1/A, 1997-11-06

FRIENDLY ICE CREAM CORP
S-1/A, 1997-11-06
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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 1997

REGISTRATION NO. 333-34635
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 3
TO
FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933
------------------------

<TABLE>
<S> <C>
FRIENDLY ICE CREAM FRIENDLY'S RESTAURANTS
CORPORATION FRANCHISE, INC.
(Exact name of registrant issuer as specified in its (Exact name of registrant guarantor as specified in its
charter) charter)
MASSACHUSETTS DELAWARE
(State of Incorporation) (State of Incorporation)
04-2053130 51-0296446
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
5812 5812
(Primary Standard Industrial (Primary Standard Industrial
Classification Code Number) Classification Code Number)
1855 BOSTON ROAD 1855 BOSTON ROAD
WILBRAHAM, MASSACHUSETTS 01095 WILBRAHAM, MASSACHUSETTS 01095
(413) 543-2400 (415) 543-2400
(Address, including zip code, and (Address, including zip code,
telephone number, including area code, and telephone number, including
of registrant's principal executive offices) area code, of agent for service)
</TABLE>

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:

<TABLE>
<S> <C>
MICHAEL A. CAMPBELL JOHN B. TEHAN
Mayer, Brown & Platt Simpson Thacher & Bartlett
190 South LaSalle Street 425 Lexington Avenue
Chicago, Illinois 60603-3441 New York, NY 10017
(312) 782-0600 (212) 455-2000
</TABLE>

--------------------------

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

<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PER MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED SENIOR NOTE OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
% Senior Notes due 2007......................... $175,000,000 100% $175,000,000 $53,031(2)
Guarantee of % Senior Notes due 2007 by
Friendly's Restaurants Franchise, Inc........... (3)
</TABLE>

(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.

(2) Previously paid.

(3) Pursuant to Rule 457(n), no separate filing fee is required for the
guarantee.
--------------------------

THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED NOVEMBER 6, 1997

INFORMATION CONTAINED HEREIN IS SUBJECT TO CHANGE, COMPLETION OR AMENDMENT,
WITHOUT NOTICE. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE
SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO
BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
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[LOGO]
$175,000,000

FRIENDLY ICE CREAM CORPORATION

% Senior Notes Due 2007
----------------

Friendly Ice Cream Corporation (the "Company") is offering (the "Senior Note
Offering") $175 million of its % Senior Notes due 2007 (the "Senior Notes").
Concurrent with the Senior Note Offering, the Company is offering to the public
5,000,000 shares of the Company's common stock (the "Common Stock") at an
estimated initial public offering price of between $19.00 and $21.00 per share
(the "Common Stock Offering" and, together with the Senior Note Offering, the
"Offerings"). Concurrent with, and contingent upon, the consummation of the
Offerings, the Company will enter into the New Credit Facility (as defined
herein). The Offerings, the New Credit Facility and the application of the
estimated net proceeds therefrom are hereinafter referred to as the
"Recapitalization." Consummation of each of the Senior Note Offering, the Common
Stock Offering and the New Credit Facility is contingent upon consummation of
the other. See "Use of Proceeds."

Interest on the Senior Notes will be payable semi-annually on and
of each year, commencing on , 1998. The Senior Notes will mature on
, 2007 unless previously redeemed. The Senior Notes will be redeemable, in
whole or in part, at the option of the Company, at any time on or after ,
2002, at the redemption prices set forth herein, plus accrued and unpaid
interest thereon, if any, to the date of redemption. In addition, on or prior to
, 2000, the Company may redeem, at any time and from time to time, up to
$60 million of the aggregate principal amount of the Senior Notes at a
redemption price of % of the principal amount thereof, plus accrued and
unpaid interest thereon, if any, to the date of redemption, with the net cash
proceeds from one or more Qualified Equity Offerings (as defined herein);
provided, however, that at least $115 million of the aggregate principal amount
of the Senior Notes remains outstanding following each such redemption. Upon the
occurrence of a Change of Control (as defined herein), each holder of Senior
Notes may require the Company to repurchase such holder's Senior Notes, in whole
or in part, at a repurchase price of 101% of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the date of repurchase. There is
no assurance that in the event of a Change of Control the Company will have, or
will have access to, sufficient funds to repurchase any of the Senior Notes. See
"Description of Senior Notes."

The Senior Notes will be unsecured, senior obligations of the Company, will
rank PARI PASSU in right of payment with all other existing and future senior
indebtedness of the Company and will rank senior in right of payment to all
existing and future subordinated indebtedness of the Company. The Senior Notes
will be effectively subordinated to all existing and certain future secured
indebtedness of the Company, including indebtedness under the New Credit
Facility, to the extent of the value of the assets securing such secured
indebtedness. The Senior Notes will be structurally subordinated to all existing
and future indebtedness of any subsidiary of the Company that is not a
Subsidiary Guarantor (as defined herein). The Senior Notes will be
unconditionally guaranteed on an unsecured, senior basis by Friendly's
Restaurants Franchise, Inc., the Company's franchise subsidiary. As of September
28, 1997, on a pro forma basis after giving effect to the Recapitalization and
the Related Transactions (as defined herein), the Company would have had a total
of $293.0 million of long-term debt and capital lease obligations outstanding,
$115.1 million of which would have been secured and none of which would have
been subordinated. As of September 28, 1997, on a pro forma basis after giving
effect to the Recapitalization and the Related Transactions, non-guarantor
subsidiaries of the Company would have had no long-term debt or capital lease
obligations outstanding. The Indenture relating to the Senior Notes (the
"Indenture") will permit the Company to incur additional indebtedness, including
senior indebtedness and indebtedness of non-guarantor subsidiaries, subject to
certain limitations. See "Description of Senior Notes."
---------------------------
See "Risk Factors" beginning on page 14 for a discussion of certain factors
that should be considered in connection with an investment in the Senior Notes.
-------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
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Price to Underwriting Proceeds to
Public (a) Discount (b) Company (a) (c)
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<S> <C> <C> <C>
Per Senior Note................................. % % %
Total........................................... $ $ $
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</TABLE>

(a) Plus accrued interest, if any, from the date of issuance.
(b) The Company and the Subsidiary Guarantor have agreed, jointly and severally,
to indemnify the Underwriters (as defined herein) against certain
liabilities, including liabilities under the Securities Act. See
"Underwriting."

---------------------------

The Senior Notes are being offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and subject
to certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the Senior Notes will be made against payment therefor
on or about , 1997, in book-entry form through the facilities of The
Depository Trust Company.

SOCIETE GENERALE
SECURITIES CORPORATION
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC MONTGOMERY
SECURITIES, INC.

, 1997
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[Inside Front Cover: the Company's "Friendly" logo, the words "Leave room for
the ice cream" and color pictures of three of the Company's products (a large
hamburger, a banana split and a Frozen dessert drink.)]

[Gatefold: the Company's "Friendly" logo and the words "Expanded Building,"
"Hand-Dipped Frozen Dessert Station," Revitalized Interior Decor," "Retail
Dessert Center," "Hearty Breakfasts," "Delicious Lunches," "Entree Salads,"
"Home Style Dinners," "Premium Half Gallons, "Great Temptations-TM- Low Fat Half
Gallons" and "Candy Shoppe Sundae Cup." Color picture of a Friendly's
restaurant, an ice cream dipping station, the interior of a revitalized
Friendly's restaurant, a grocery store ice cream freezer decorated with the
Company's logo, a truck with the Friendly's logo on its side, various frozen
dessert products (three half gallon packages, a sundae cup and two types of
sundaes), a "Kids meal" (including a sundae, drink, hamburger and fries) and
various other food presentations (chili, omelette, eggs, sandwich wraps, salad,
steak, shrimp and vegetables.)]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SENIOR NOTES,
INCLUDING OVERALLOTMENT, STABILIZING TRANSACTIONS AND SYNDICATE SHORT COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

2
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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.

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charges for each fiscal year since the TRC Acquisition except for the nine
months ended September 28, 1997. As a result of subsequent restructurings, and
upon completion of the Recapitalization and the Related Transactions (as defined
herein) approximately 16.8% and 9.8% of the Common Stock will be owned by the
Company's employees and lenders under the Old Credit Facility, respectively. See
"Risk Factors," "Selected Consolidated Financial Information" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Despite the Company's capital constraints, management implemented a number
of initiatives to restore and improve operational and financial efficiencies.
From the date of the TRC Acquisition through 1994, the Company (i) implemented a
major revitalization of its restaurants, (ii) repositioned the Friendly's
concept from a sandwich and ice cream shoppe to a full-service, family-oriented
restaurant with broader menu and day-part appeal, (iii) elevated customer
service levels by recruiting more qualified managers and expanding the Company's
training program, (iv) disposed of 123 under-performing restaurants and (v)
capitalized upon the Company's strong brand name recognition by initiating the
sale of Friendly's unique line of packaged frozen desserts through retail
locations.

Beginning in 1994, the Company began implementing several growth initiatives
including (i) testing and implementing a program to expand the Company's
domestic distribution network by selling frozen desserts and other menu items
through non-traditional locations, (ii) distributing frozen desserts
internationally by introducing dipping stores in South Korea and the United
Kingdom and (iii) implementing a franchising strategy to extend profitably the
Friendly's brand without the substantial capital required to build new
restaurants. As part of this strategy, on July 14, 1997 the Company entered into
the DavCo Agreement. See "--Recent Developments."

Implementation of these initiatives since the TRC Acquisition has resulted
in substantial improvements in revenues and EBITDA. Despite the closing of 152
restaurants (net of restaurants opened) since the beginning of 1989 and periods
of economic softness in the Northeast, the Company's restaurant revenues have
increased 7.5% from $557.3 million in 1989 to $599.3 million in the twelve
months ended September 28, 1997, while average revenue per restaurant has
increased 29.8% from $665,000 to $863,000 during the same period. Retail,
institutional and other revenues and franchise revenues have also increased from
$1.4 million in 1989 to $67.7 million in the twelve months ended September 28,
1997. In addition, EBITDA has increased 58.0% from $47.4 million in 1989 to
$74.9 million in the twelve-month period ended September 28, 1997, while
operating income has increased from $4.1 million to $42.0 million over the same
period.

Friendly's intends to utilize the increased liquidity and operating and
financial flexibility resulting from consummation of the Recapitalization in
order to continue to grow the Company's revenues and earnings by implementing
the following key business strategies: (i) continuously upgrade the menu and
introduce new products, (ii) revitalize and re-image existing Friendly's
restaurants, (iii) construct new restaurants, (iv) enhance the Friendly's dining
experience, (v) expand the restaurant base through high-quality franchisees,
(vi) increase market share through additional retail accounts and restaurant
locations, (vii) introduce modified formats of the Friendly's concept into
non-traditional locations and (viii) extend the Friendly's brand into
international markets.

COMPETITIVE STRENGTHS

THE COMPANY BELIEVES THAT, IN THE NORTHEAST, ITS LEADING POSITION IN
FULL-SERVICE RESTAURANT AND PREMIUM FROZEN DESSERT SALES IS ATTRIBUTABLE TO THE
FOLLOWING COMPETITIVE STRENGTHS:

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channels. The Company's independent surveys indicate that, in the Northeast,
over 90% of all households recognize the Friendly's brand and that over 30% of
these households visit a Friendly's restaurant every three months.

SIGNATURE FROZEN DESSERTS. Friendly's produces an innovative line of
high-quality freshly-scooped and packaged frozen desserts, which have been cited
by customers as a key reason for choosing Friendly's. Accordingly, approximately
50% of all visits to a Friendly's restaurant include a frozen dessert purchase.
Freshly-scooped specialties served in Friendly's restaurants include the Jim
Dandy and Oreo-Registered Trademark- Brownie sundaes, and the
Fribble-Registered Trademark-, the Company's signature thick shake. Packaged
goods available for purchase in both restaurant and retail locations include
traditional and low-fat ice cream, yogurt and sorbets in half gallons, pints and
cups and a wide variety of ice cream cakes, pies and rolls such as the Jubilee
Roll-Registered Trademark- and Wattamelon Roll-Registered Trademark-. In
addition, the Company licenses from Hershey the rights to feature in its
signature desserts certain candy brands such as Almond
Joy-Registered Trademark-, Mr. Goodbar-Registered Trademark-, Reeses
Pieces-Registered Trademark-, Reeses-Registered Trademark- Peanut Butter Cups
and York-Registered Trademark- Peppermint Patties.

BROAD, HIGH-QUALITY MENU. The Company has successfully capitalized on
Friendly's reputation for high-quality, wholesome foods including the well-known
$2.22 Breakfast, Big Beef-Registered Trademark- Hamburger,
Fishamajig-Registered Trademark- Sandwich and Clamboat-Registered Trademark-
Platter by extending these offerings into a broader product line including
freshly-prepared omelettes, SuperMelt-TM- Sandwiches, Colossal Sirloin
Burgers-TM-, tenderloin steaks and stir-fry entrees. Reflecting this increased
menu variety, food products now account for over 70% of restaurant revenues, and
guest check averages have increased significantly over the last five years.
Friendly's also has an extensive Kid's Menu which encourages family dining due
to the significant appeal to children of the Friendly's concept.

MULTIPLE DAY-PART APPEAL. Due to the appeal of Friendly's frozen desserts,
the Company generates approximately 35% of its restaurant revenues during the
afternoon and evening snack periods (2:00 p.m. to 5:00 p.m. and 8:00 p.m. to
closing), providing Friendly's with the highest share of snack day-part sales in
the Northeast. Accordingly, the Company endeavors to maximize revenue across
multiple day-parts by linking sales of its high-margin frozen desserts with its
lunch and dinner entrees. The Company generates approximately 12%, 24% and 29%
of restaurant revenues from breakfast, lunch and dinner, respectively.

STRONG RESTAURANT AND RETAIL MARKET PENETRATION. The Company has the
highest market share among full-service restaurants and a leading position in
premium frozen dessert sales in the Northeast. The Company's strong restaurant
and retail market penetration provides incremental revenues and cash flow, as
multiple levels of visibility and availability provide cross promotion
opportunities and enhance consumer awareness and trial of the Company's unique
products while effectively targeting consumers for both planned and impulse
purchases. For example, the new Colossal Sirloin Burger-TM- was introduced with
a new 79 CENTS Caramel Fudge Blast-TM- Sundae during the spring of 1997. In
addition to promoting sales of this new entree, this strategy increased consumer
awareness and trial of the new sundae combination, which in turn supported the
introduction of Caramel Fudge Nut Blast-TM- Sundae half gallons into restaurants
and retail locations.

VERTICALLY-INTEGRATED OPERATIONS. Friendly's vertically-integrated
operations are designed to deliver the highest quality food and frozen desserts
to its customers and to allow the Company to adapt to evolving customer tastes
and preferences. The Company formulates new products and upgrades existing food
and frozen desserts through its research and development group and controls all
stages in the production of its frozen desserts through its two manufacturing
facilities. In addition, the Company controls cost and product quality and
efficiently manages inventory levels from point of purchase through restaurant
delivery utilizing its three distribution facilities and fleet of 56 tractors
and 81 trailers. Furthermore, Friendly's maximizes its purchasing power when
sourcing materials and services for its restaurant and retail operations through
its integrated purchasing department.

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MANAGEMENT EXPERIENCE AND EMPLOYEE RETENTION. The Company has a talented
senior management team with extensive restaurant industry experience and an
average tenure with the Company of 17 years. In addition, the Company minimizes
turnover of both managers and line personnel through extensive employee training
and retention programs. In 1996, the Company's turnover among its restaurant
salaried management was approximately 24%, which was significantly lower than
the industry average.

BUSINESS STRATEGIES

FRIENDLY'S OBJECTIVE IS TO CAPITALIZE ON ITS COMPETITIVE STRENGTHS TO GROW
ITS RESTAURANT AND RETAIL OPERATIONS BY IMPLEMENTING THE FOLLOWING KEY BUSINESS
STRATEGIES:

UPGRADE MENU AND SELECTIVELY INTRODUCE NEW PRODUCTS. Friendly's strategy is
to increase consumer awareness and restaurant patronage by continuously
upgrading its menu and introducing new products. As part of this strategy,
Friendly's dedicated research and development group regularly formulates
proprietary new menu items and frozen desserts to capitalize on the evolving
tastes and preferences of its customers. In the fall of 1996, the Company
introduced a new dinner line which includes a high-quality steak entree,
home-style chicken dinners, pot pies and stir-frys, as well as several premium
frozen desserts including the new Oreo-Registered Trademark- Brownie Sundae.
Largely as a result of new premium items, guest check averages have increased
7.4% during the first nine months of 1997 as compared to the same period of
1996.

REVITALIZE AND RE-IMAGE RESTAURANTS. Friendly's seeks to continue to grow
restaurant revenues and cash flow through the ongoing revitalization and
re-imaging of existing restaurants and to increase total restaurant revenues
through the addition of new restaurants. The Company has revitalized
approximately 633 restaurants since the beginning of 1989, increasing average
restaurant revenues from $665,000 in 1989 to $863,000 in the twelve months ended
September 28, 1997. Further, the Company has initiated its FOCUS 2000 program
which includes an advanced re-imaging of restaurants and the installation of
custom designed restaurant automation systems in a majority of its restaurants.
In addition, as part of its ongoing capital spending program, the Company plans
to refurbish substantially all of its restaurants every five to six years to
further enhance customer appeal. The Company also expects to increase market
share through the opening of four new Company-owned restaurants in 1997 (two of
which have opened to date) and 10 new restaurants in 1998.

ENHANCE THE FRIENDLY'S DINING EXPERIENCE. In addition to menu upgrades and
restaurant re-imaging, the FOCUS 2000 program includes initiatives to improve
food presentation and customer service. The Company believes that implementation
of this program will create a consistent, enhanced Friendly's restaurant brand
image. This strategy recognizes that food quality, dining atmosphere and
attentive service all contribute to customer satisfaction. The Company maintains
a consistently high standard of food preparation and customer service through
stringent operational controls and intensive employee training. To help
guarantee that employees perform in this manner, Friendly's maintains a
dedicated training and development center where managers are thoroughly trained
in customer service.

EXPAND RESTAURANT BASE AND MARKET PENETRATION THROUGH HIGH-QUALITY
FRANCHISEES. Friendly's is implementing a franchising strategy to further
develop the Friendly's brand and grow both revenue and cash flow without the
substantial capital required to build new restaurants. This strategy seeks to
(i) expand its restaurant presence in under-penetrated markets, (ii) accelerate
restaurant growth in new markets, (iii) increase marketing and distribution
efficiencies and (iv) preempt the Company's competition from acquiring certain
prime real estate sites. Friendly's will receive a royalty based on total
franchisee revenues and revenues and earnings from the sale of its frozen
desserts and other products to franchisees.

INCREASE MARKET SHARE OF PREMIUM FROZEN DESSERTS. Capitalizing on its
position as a recognized leader in premium frozen desserts, Friendly's seeks to
increase its market share. The Company expects to build market share by
expanding distribution beyond its 696 Company-owned and franchised restaurants
and its more than 5,000 retail locations by (i) adding new locations, (ii)
increasing shelf space in current locations

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through new product introductions and more prominent freezer displays and (iii)
increasing consumer and trade merchandising.

INTRODUCE MODIFIED FORMATS INTO NON-TRADITIONAL LOCATIONS. In order to
capitalize on both planned and impulse purchases, the Company is leveraging the
Friendly's brand name and enhancing consumer awareness by introducing modified
formats of the Friendly's concept into non-traditional locations. These modified
formats include (i) Friendly's Cafe, a quick service concept offering frozen
desserts and a limited menu, (ii) Friendly's branded ice cream shoppes offering
freshly-scooped and packaged frozen desserts and (iii) Friendly's branded
display cases and novelty carts with packaged single-serve frozen desserts. The
first Friendly's Cafe opened in October 1997. The Company supplies frozen
desserts to non-traditional locations such as colleges and universities, sports
facilities, amusement parks, secondary school systems and business cafeterias
directly or through selected vendors pursuant to multi-year license agreements.

EXTEND THE FRIENDLY'S BRAND INTERNATIONALLY. The Company's long-term
international growth strategy is to utilize local partners and establish master
franchise or licensee agreements to extend the brand internationally and to
achieve profitable growth while minimizing capital investment. Currently, the
Company's Friendly's International, Inc. subsidiary ("FII") participates in a
licensing agreement with a South Korean enterprise to develop Friendly's "Great
American" ice cream shoppes in that country. As of September 28, 1997, the
licensee and its sublicensees were operating 18 ice cream shoppes, and the
Company expects such parties to operate 28 ice cream shoppes by the end of 1997.
FII also sells the Company's frozen desserts in several chain restaurants,
theaters and food courts in the United Kingdom. The Company selects its
international markets based on the high quality of the Company's frozen desserts
relative to locally-produced frozen desserts and the propensity of consumers in
these regions to purchase American-branded products.

The principal executive offices of the Company are located at 1855 Boston
Road, Wilbraham, Massachusetts 01095, and the telephone number is (413)
543-2400.

7
<PAGE>
RECENT DEVELOPMENTS

On July 14, 1997, the Company entered into a long-term agreement granting
DavCo Restaurants, Inc. ("DavCo"), a franchisor of more than 230 Wendy's
restaurants, exclusive rights to operate, manage and develop Friendly's
full-service restaurants in the franchising region of Maryland, Delaware, the
District of Columbia and northern Virginia (the "DavCo Agreement"). Pursuant to
the DavCo Agreement, DavCo has purchased certain assets and rights in 34
existing Friendly's restaurants in this franchising region, has committed to
open an additional 74 restaurants over the next six years and, subject to the
fulfillment of certain conditions, has further agreed to open 26 additional
restaurants, for a total of 100 new restaurants in this franchising region over
the next ten years. DavCo will also manage under contract 14 other Friendly's
locations in this franchising region with an option to acquire these restaurants
in the future. Friendly's received approximately $8.2 million in cash for the
sale of certain non-real property assets and in payment of franchise and
development fees, and receives (i) a royalty based on franchised restaurant
revenues and (ii) revenues and earnings from the sale to DavCo of Friendly's
frozen desserts and other products. DavCo is required to purchase from
Friendly's all of the frozen desserts to be sold in these restaurants. See
"Business--Restaurant Operations--Franchising Program."

8
<PAGE>
THE RECAPITALIZATION

The Offerings are part of a series of related transactions to refinance all
of the indebtedness under the Company's existing credit facilities (the "Old
Credit Facility") and thereby lengthen the average maturity of the Company's
outstanding indebtedness, reduce interest expense and increase liquidity and
operating and financial flexibility. Concurrent with, and contingent upon, the
consummation of the Offerings, the Company expects to enter into a new senior
secured credit facility consisting of (i) a $105 million term loan facility (the
"Term Loan Facility"), (ii) a $55 million revolving credit facility (the
"Revolving Credit Facility") and (iii) a $15 million letter of credit facility
(the "Letter of Credit Facility" and, together with the Term Loan Facility and
the Revolving Credit Facility, the "New Credit Facility"). The Offerings, the
New Credit Facility and the application of the estimated net proceeds therefrom
are hereinafter referred to as the "Recapitalization." In addition, subsequent
to September 28, 1997, the Company (i) has paid $9.6 million of interest on the
Old Credit Facility, (ii) will record $1.9 million of net income related to
deferred interest no longer payable under the Old Credit Facility, (iii) will
record $5.8 million of non-cash stock compensation expense, net of taxes,
arising out of the issuance of certain shares of Common Stock to management and
the vesting of certain shares of restricted stock previously issued to
management, (iv) will write-off $319,000 of deferred financing and debt
restructuring costs, net of taxes, related to the Old Credit Facility and (v)
will apply $10.0 million of previously restricted cash to be received from
Restaurant Insurance Corporation, its insurance subsidiary ("RIC"), in exchange
for a letter of credit, toward amounts outstanding under the Old Credit Facility
(collectively, the "Related Transactions").

Upon completion of the Recapitalization, Friendly's total available
borrowings under the New Credit Facility are expected to be $55.0 million,
excluding $2.1 million of letter of credit availability (compared to $27.0
million as of September 28, 1997 under the Old Credit Facility, excluding $2.1
million of letter of credit availability), which borrowings may be used, with
certain limitations, for capital spending and general corporate purposes. After
giving effect to the Recapitalization and the Related Transactions, the
aggregate pro forma net decrease in interest expense would have been $15.3
million for 1996 and $11.4 million for the nine-month period ended September 28,
1997. See "Selected Consolidated Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of New Credit
Facility."

The following table sets forth the estimated sources and uses of funds in
connection with the Recapitalization after giving effect to the Related
Transactions:

<TABLE>
<CAPTION>
AT CLOSING
---------------------
<S> <C>
(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
--------
--------
</TABLE>

- ----------------------------------

(a) Represents borrowing in full under the Term Loan Facility. As part of the
Recapitalization, the Company will have a $55,000 Revolving Credit Facility
which is expected to be undrawn at closing and $2,093 available under the
Letter of Credit Facility. These facilities are expected to be drawn in
part, from time to time, to finance the Company's working capital and other
general corporate requirements.

(b) Represents gross proceeds from the Senior Note Offering.

(c) Represents gross proceeds from the sale of 5,000,000 shares of Common Stock
at an assumed initial public offering price of $20.00 per share.

(d) Represents the balance of all amounts expected to be outstanding under the
Old Credit Facility ($358,042 as of September 28, 1997) after giving effect
to the application of $10,000 of previously restricted cash and investments
of RIC which is expected to be released to the Company in exchange for a
$12,907 letter of credit, with the $2,907 of additional released cash and
investments increasing the Company's cash balance.

(e) Includes estimated underwriting discounts and commissions and other fees and
expenses relating to the Offerings and the New Credit Facility of which
$8,427 relates to the Common Stock Offering and $10,823 relates to the
Senior Note Offering and the New Credit Facility. See "Underwriting."

9
<PAGE>
THE SENIOR NOTE OFFERING

<TABLE>
<S> <C>
Issuer....................... Friendly Ice Cream Corporation.

Securities Offered........... $175,000,000 aggregate principal amount of % Senior Notes
due 2007 (the "Senior Notes").

Maturity Date................ , 2007.

Interest Payment Dates....... and of each year, commencing , 1998.

Optional Redemption.......... The Senior Notes will be redeemable, in whole or in part, at
the option of the Company, at any time on or after ,
2002, at the redemption prices set forth herein, plus
accrued and unpaid interest thereon, if any, to the date of
redemption. In addition, on or prior to , 2000, the
Company may redeem, at any time and from time to time, up to
$60 million of the aggregate principal amount of the Senior
Notes at a redemption price of % of the principal amount
thereof, plus accrued and unpaid interest thereon, if any,
to the date of redemption, with the net cash proceeds from
one or more Qualified Equity Offerings (as defined herein);
PROVIDED, HOWEVER, that at least $115 million of the
aggregate principal amount of the Senior Notes remains
outstanding following each such redemption.

Subsidiary Guarantees........ The Senior Notes will be fully and unconditionally
guaranteed (the "Subsidiary Guarantees"), on an unsecured,
senior basis, by Friendly's Restaurants Franchise, Inc., the
Company's franchise subsidiary, and will also be guaranteed
by each new subsidiary (other than Unrestricted Subsidiaries
and Foreign Subsidiaries (as defined herein)) created or
acquired after the issue date of the Senior Notes
(collectively, the "Subsidiary Guarantors"). See
"Description of Senior Notes--Guarantees."

Ranking...................... The Senior Notes will be unsecured, senior obligations of
the Company, will rank PARI PASSU in right of payment with
all existing and future senior indebtedness of the Company
and will rank senior in right of payment to all existing and
future subordinated indebtedness of the Company. The Senior
Notes will be effectively subordinated to all existing and
certain future secured indebtedness of the Company,
including indebtedness under the New Credit Facility, to the
extent of the value of the assets securing such secured
indebtedness. The Senior Notes will be structurally
subordinated to all existing and future indebtedness of any
subsidiary of the Company that is not a Subsidiary
Guarantor. As of September 28, 1997, on a pro forma basis
after giving effect to the Recapitalization and the Related
Transactions, the Company would have had a total of $293.0
million of long-term debt and capital lease obligations
outstanding, $115.1 million of which would have been secured
and none of which would have been subordinated. The
Subsidiary Guarantees will be unsecured, senior obligations
of the Subsidiary Guarantors. As of September 28, 1997, on a
pro forma basis after giving effect to the Recapitalization
and the Related Transactions, non-guarantor subsidiaries of
the Company would have had no long-term debt or capital
lease obligations outstanding. See "Description of Senior
Notes--Ranking."
</TABLE>

10
<PAGE>

<TABLE>
<S> <C>
Change of Control............ Upon the occurrence of a Change of Control (as defined
herein), each holder of Senior Notes may require the Company
to repurchase any or all outstanding Senior Notes owned by
such holder at a repurchase price of 101% of the principal
amount thereof, plus accrued and unpaid interest thereon, if
any, to the date of repurchase. See "Description of Senior
Notes--Change of Control."

Restrictive Covenants........ The Indenture under which the Senior Notes will be issued
will contain certain covenants pertaining to the Company and
its Restricted Subsidiaries (as defined herein), including
but not limited to covenants with respect to the following
matters: (i) limitations on indebtedness and preferred
stock, (ii) limitations on restricted payments such as
dividends, repurchases of the Company's or subsidiaries'
stock, repurchases of subordinated obligations, and
investments, (iii) limitations on restrictions on
distributions from Restricted Subsidiaries, (iv) limitations
on sales of assets and of subsidiary stock, (v) limitations
on transactions with affiliates, (vi) limitations on liens,
(vii) limitations on sales of subsidiary capital stock and
(viii) limitations on mergers, consolidations and transfers
of all or substantially all assets. However, all of these
covenants are subject to a number of important
qualifications and exceptions. Each of Friendly's
International, Inc. and its United Kingdom subsidiaries will
be an Unrestricted Subsidiary on the Issue Date (as defined
herein). See "Description of Senior Notes--Certain
Covenants."
Concurrent Common Stock
Offering................... Concurrent with the Senior Note Offering, the Company is
offering to the public 5,000,000 shares of Common Stock at
an estimated initial public offering price of between $19.00
and $21.00 per share. Consummation of each of the Senior
Note Offering and the Common Stock Offering is contingent
upon consummation of the other.

Use of Proceeds.............. The Company intends to use up to approximately $356.0
million of the net proceeds from the Offerings and
borrowings under the New Credit Facility to refinance
indebtedness and thereby lengthen the average maturity of
the Company's outstanding indebtedness, reduce interest
expense and increase liquidity and operating and financial
flexibility. See "Use of Proceeds."

Risk Factors................. Prospective purchasers of the Senior Notes offered hereby
should carefully consider the information set forth under
the caption "Risk Factors" and all other information set
forth in this Prospectus before making any investment in the
Senior Notes. As set forth more fully in "Risk Factors," the
risk factors associated with such an investment include,
among others, those relating to the Company's (i)
substantial leverage and stockholders' deficit, (ii) history
of losses, resulting in its inability to cover fixed charges
since the TRC Acquisition, (iii) implementation of new
business concepts and strategies, (iv) development of a
franchising program beyond the DavCo Agreement, (v)
expansion of its international operations in existing and
new markets, (vi) geographic concentration in the Northeast,
and (vii) highly competitive business environment, as well
as factors relating to restrictions imposed under the New
Credit Facility, factors affecting the food service industry
generally and circumstances potentially impacting the
trading markets for, or value of, the Senior Notes offered
hereby.
</TABLE>

11
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant................................. $542,859 $580,161 $589,383 $593,570 $596,675 $ 452,373 $ 455,026
Retail, institutional and other............ 20,346 30,472 41,631 55,579 54,132 39,446 49,173
Franchise.................................. -- -- -- -- -- -- 3,834
-------- -------- -------- -------- -------- ------------- -------------
Total revenues............................... 563,205 610,633 631,014 649,149 650,807 491,819 508,033
-------- -------- -------- -------- -------- ------------- -------------
Non-cash write-downs (b)..................... -- 25,552 -- 7,352 227 -- 607
Depreciation and amortization................ 35,734 35,535 32,069 33,343 32,979 25,127 24,226
Operating income............................. 25,509 8,116 36,870 16,670 30,501 22,848 34,299
Interest expense, net (c).................... 37,630 38,786 45,467 41,904 44,141 33,084 32,972
Cumulative effect of changes in accounting
principles, net of income taxes (d)........ -- (42,248) -- -- -- -- 2,236
Net income (loss)............................ $(13,321) $(61,448) $ (3,936) $(58,653) $ (7,772) $ (5,794 ) $ 2,363
-------- -------- -------- -------- -------- ------------- -------------
-------- -------- -------- -------- -------- ------------- -------------

OTHER DATA:
EBITDA (e)................................... $ 61,243 $ 69,203 $ 68,939 $ 57,365 $ 63,707 $ 47,975 $ 59,132
Net cash provided by operating activities.... 34,047 42,877 38,381 27,790 26,163 23,637 29,224
Capital expenditures:
Cash....................................... 33,577 37,361 29,507 19,092 24,217 18,547 14,656
Non-cash (f)............................... 3,121 7,129 7,767 3,305 5,951 3,570 2,227
-------- -------- -------- -------- -------- ------------- -------------
Total capital expenditures................. $ 36,698 $ 44,490 $ 37,274 $ 22,397 $ 30,168 $ 22,117 $ 16,883
Ratio of earnings to fixed charges (g)....... -- -- -- -- -- -- 1.0 x

PRO FORMA DATA:
EBITDA (e)(h)................................ $ 64,653 $ 48,685 $ 59,132
Interest expense, net (c)(i)................. 28,804 21,580 21,617
Net income (j)............................... 1,835 1,412 9,062
Net income per share......................... $ 0.26 $ 0.20 $ 1.27
Weighted average shares outstanding (k)...... 7,125 7,125 7,125
Ratio of EBITDA to interest expense, net..... 2.2x 2.3 x 2.7 x
Ratio of earnings to fixed charges (g)....... 1.1x 1.1 x 1.4 x
Ratio of total long-term debt to EBITDA
(e) (l).................................... -- -- 3.8 x

RESTAURANT OPERATING DATA:
Number of restaurants (end of period) (m).... 764 757 750 735 707 710 662
Average revenue per restaurant (n)........... $ 708 $ 750 $ 783 $ 797 $ 828 -- $ 863
Increase in comparable restaurant revenues
(o)........................................ 6.0% 5.4% 3.4% 0.9% 1.8% 0.3% 3.1%
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 28, 1997
---------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
-------------- -----------

<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)....................................................................... $ (17,895) $ (10,949)(p)
Total assets.................................................................................... 362,914 358,348(q)
Total long-term debt and capital lease obligations, excluding current maturities................ 371,296 288,585(r)
Total stockholders' equity (deficit)............................................................ $ (170,684) $ (73,471)(s)
</TABLE>

12
<PAGE>
(a) All fiscal years presented include 52 weeks of operations except 1993 which
includes 53 weeks of operations.
(b) Includes non-cash write-downs of approximately $16,337 in 1993 related to a
trademark license agreement as a result of new product development and the
replacement of certain trademarked menu items and $3,346 in 1995 related to
a postponed debt restructuring. All other non-cash write-downs relate to
property and equipment disposed of in the normal course of the Company's
operations. See Notes 3, 5 and 6 of Notes to Consolidated Financial
Statements.
(c) Interest expense, net is net of capitalized interest of $128, $156, $176,
$62, $49, $44 and $27 and interest income of $222, $240, $187, $390, $318,
$273 and $239 for 1992, 1993, 1994, 1995, 1996, the nine months ended
September 29, 1996 and the nine months ended September 28, 1997,
respectively.
(d) Includes non-cash items, net of related income taxes, as a result of
adoption of accounting pronouncements related to income taxes of $30,968,
post-retirement benefits other than pensions of $4,140 and post-employment
benefits of $7,140 in 1993 and pensions of $2,236 in 1997.
(e) EBITDA represents consolidated Net income (loss) before (i) Cumulative
effect of changes in accounting principles, net of income taxes, (ii)
(Provision for) benefit from income taxes, (iii) Equity in net loss of joint
venture, (iv) Interest expense, net, (v) Depreciation and amortization and
(vi) Non-cash write-downs and all other non-cash items, plus cash
distributions from unconsolidated subsidiaries, each determined in
accordance with generally accepted accounting principles ("GAAP"). The
Company has included information concerning EBITDA in this Prospectus
because it believes that such information is used by certain investors as
one measure of an issuer's historical ability to service debt. EBITDA should
not be considered as an alternative to, or more meaningful than, earnings
from operations or other traditional indications of an issuer's operating
performance.
(f) Non-cash capital expenditures represent the cost of assets acquired through
the incurrence of capital lease obligations.
(g) The Ratio of earnings to fixed charges is computed by dividing (i) income
before interest expense, income taxes and other fixed charges by (ii) fixed
charges, including interest expense, amortization of debt issuance costs and
the portion of rent expense which represents interest (assumed to be
one-third). For 1992, 1993, 1994, 1995, 1996 and the nine months ended
September 29, 1996 earnings were insufficient to cover fixed charges by
$12,249, $30,826, $8,773, $25,296, $13,689 and $10,280, respectively.
(h) Represents historical EBITDA adjusted to give effect to the benefit from the
change in accounting for pensions related to determining the return-on-asset
component of annual pension expense of $946 in 1996 and $710 for the nine
months ended September 29, 1996. See Note 10 of Notes to Consolidated
Financial Statements.
(i) Represents historical interest expense adjusted to give effect to the
Recapitalization. Borrowings under the New Credit Facility will bear
interest at a floating rate equal to LIBOR plus 2.25% or the Alternative
Base Rate (as defined in the New Credit Facility) plus 0.75% per annum for
drawings under the Revolving Credit Facility and the Letter of Credit
Facility, 0.50% per annum for amounts undrawn under the Revolving Credit
Facility, 2.25% per annum for amounts issued but undrawn under the Letter of
Credit Facility and a weighted average floating rate equal to LIBOR plus
2.46% or the Alternative Base Rate plus 0.96% for the Term Loan Facility.
The following table represents changes to Interest expense, net on a pro
forma basis, resulting from the Recapitalization and the Related
Transactions:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ----------------------------------------
1996 SEPTEMBER 29, 1996 SEPTEMBER 28, 1997
------------------- ------------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Elimination of interest on Old Credit Facility......... $ (41,827) $ (31,337) $ (31,434)
Reduction of interest on capital lease obligations..... (774) (580) (580)
Interest on Revolving Credit Facility.................. 779 624 732
Interest on Letter of Credit Facility.................. 268 134 134
Interest on Term Loan Facility......................... 8,279 6,202 6,340
Interest on Senior Notes............................... 17,938 13,453 13,453
-------- -------- --------
Decrease in Interest expense, net.................... $ (15,337) $ (11,504) $ (11,355)
-------- -------- --------
-------- -------- --------
</TABLE>

In calculating pro forma Interest expense, net, the assumed rates on the
Revolving Credit Facility, Letter of Credit Facility, Term Loan Facility and
Senior Notes were 7.67%, 2.25%, 7.88%, and 10.25% for 1996, respectively,
7.66%, 2.25%, 7.87% and 10.25% for the nine months ended September 29, 1996,
respectively and 7.84%, 2.25%, 8.09% and 10.25% for the nine months ended
September 28, 1997, respectively.
(j) Represents historical net income adjusted to give effect to (i) the
reduction in interest expense, net of income taxes, of $9,049, $6,788 and
$6,699 for 1996, the nine months ended September 29, 1996 and the nine
months ended September 28, 1997, respectively, as a result of the
Recapitalization and the Related Transactions, and (ii) the benefit, net of
income taxes, related to the change in accounting for pensions described in
(h) above of $558, $418 and $0 for 1996, the nine months ended September 29,
1996 and the nine months ended September 28, 1997, respectively.
(k) Represents historical weighted average shares outstanding adjusted to give
effect to the issuance of 27 shares upon consummation of the
Recapitalization under the Management Stock Plan (as defined herein) and the
return of 375 net shares to the Company in connection with the
Recapitalization. Actual weighted average shares outstanding were 2,414,
2,394 and 2,473 for 1996, the nine months ended September 29, 1996 and the
nine months ended September 28, 1997, respectively. See "Ownership of Common
Stock" and Note 17 of Notes to Consolidated Financial Statements.
(l) For purposes of this ratio, EBITDA represents historical EBITDA for the
twelve months ended September 28, 1997 adjusted by $236 to give effect to
the benefit related to the change in accounting for pensions described in
(h) above.
(m) The number at September 28, 1997 reflects the acquisition by DavCo of 34
restaurants pursuant to the DavCo Agreement. See "Recent Developments."
(n) Represents restaurant revenues divided by the weighted average number of
restaurants open during such period. Fiscal 1993 has been adjusted to
conform to a 52-week year. The number at September 28, 1997 represents data
for the twelve months then ended.
(o) When computing comparable restaurant revenues, restaurants open for at least
twelve months are compared from period to period.
(p) As adjusted for (i) $3,307 reduction in current portion of capital lease
obligations in connection with the Recapitalization, (ii) $4,732 of working
capital provided in the Recapitalization, (iii) $2,907 of cash provided in
connection with the letter of credit issued to RIC and (iv) the use of
$4,000 of current restricted cash to reduce the amount outstanding under the
Old Credit Facility.
(q) As adjusted for (i) $10,000 of previously restricted cash applied to the Old
Credit Facility, (ii) payment of $9,581 of interest on the Old Credit
Facility, (iii) the write-off of $540 of deferred financing costs related to
the Old Credit Facility, (iv) $10,823 of estimated expenses related to the
Senior Note Offering and (v) $4,732 of working capital provided in the
Recapitalization.
(r) As adjusted for (i) the repayment of the $358,042 outstanding under the Old
Credit Facility and $4,669 of long-term portion of capital lease obligations
and (ii) proceeds of $280,000 from the Senior Note Offering and the New
Credit Facility.
(s) As adjusted for (i) estimated net proceeds of $91,573 from the Common Stock
Offering, (ii) $1,948 of net income related to deferred interest expense no
longer payable under the Old Credit Facility, (iii) the write-off of $319 of
deferred financing costs, net of taxes, related to the Old Credit Facility
and (iv) the tax benefit of $4,011 related to the non-cash stock
compensation expense arising out of the issuance of certain shares of Common
Stock to management and the vesting of certain shares of restricted stock
previously issued to management.

13
<PAGE>
RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN
THE SECURITIES OFFERED HEREBY.

SUBSTANTIAL LEVERAGE; STOCKHOLDERS' DEFICIT

The Company is highly leveraged. At September 28, 1997, on a pro forma basis
after giving effect to the Recapitalization and the Related Transactions, the
Company's total consolidated long-term debt and capital lease obligations
(including current maturities) would have been $293.0 million and the Company's
total consolidated stockholders' deficit would have been $73.5 million. Upon
completion of the Recapitalization, the Company's total available borrowings
under the New Credit Facility are estimated to be $55.0 million, excluding $2.1
million of availability under the Letter of Credit Facility (compared to $27.0
million as of September 28, 1997 under the Old Credit Facility, excluding $2.1
million of letter of credit availability). Additional borrowings may, subject to
certain limitations, be used for capital expenditures and general corporate
purposes, thereby increasing the Company's leverage. The Company's ability to
pay principal on the Senior Notes when due or to repurchase the Senior Notes
upon a Change of Control will be dependent upon the Company's ability to
generate cash from operations sufficient for such purposes or its ability to
refinance the Senior Notes. In addition, under the New Credit Facility, in the
event of circumstances which are similar to a Change of Control, repayment of
borrowings under the New Credit Facility will be subject to acceleration. See
"Description of New Credit Facility."

The degree to which the Company is leveraged could have important
consequences, including the following: (i) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired, (ii)
a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of the principal of and interest on its indebtedness
and, because borrowings under the New Credit Facility in part will bear interest
at floating rates, the Company could be adversely affected by any increase in
prevailing rates, (iii) the New Credit Facility and the Indenture relating to
the Senior Notes will impose significant financial and operating restrictions on
the Company and its subsidiaries which, if violated, could permit the Company's
creditors to accelerate payments thereunder or foreclose upon the collateral
securing the New Credit Facility, (iv) the Company is more leveraged than
certain of its principal competitors, which may place the Company at a
competitive disadvantage and (v) the Company's substantial leverage may limit
its ability to respond to changing business and economic conditions and make it
more vulnerable to a downturn in general economic conditions. See "Use of
Proceeds," "Business--Competition," "Description of New Credit Facility" and
"Description of Senior Notes."

HISTORY OF LOSSES

The Company has reported net losses of $13.3 million, $61.4 million, $3.9
million, $58.7 million and $7.8 million for 1992, 1993, 1994, 1995 and 1996,
respectively, and earnings of $2.4 million for the nine months ended September
28, 1997. There can be no assurance that the Company's profitability will be
sustained. The Company's earnings were insufficient to cover fixed charges by
$12.2 million, $30.8 million, $8.8 million, $25.3 million, and $13.7 million for
1992, 1993, 1994, 1995 and 1996, respectively, and there can be no assurance
that the Company's earnings will be sufficient to cover fixed charges in the
future. See "Selected Consolidated Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related Notes thereto.

14
<PAGE>
RESTRICTIONS IMPOSED UNDER NEW CREDIT FACILITY; SECURITY INTEREST

The New Credit Facility will impose significant operating and financial
restrictions on the Company's ability to, among other things, incur
indebtedness, create liens, sell assets, engage in mergers or consolidations,
pay dividends and engage in certain transactions with affiliates. The New Credit
Facility limits the amount which the Company may spend on capital expenditures
and requires the Company to comply with certain financial ratios. These
requirements may limit the ability of the Company to meet its obligations,
including its obligations with respect to the Senior Notes. The ability of the
Company to comply with the covenants in the New Credit Facility and the Senior
Notes may be affected by events beyond the control of the Company. Failure to
comply with any of these covenants could result in a default under the New
Credit Facility and the Senior Notes, and such default could result in
acceleration thereof. The New Credit Facility will restrict the Company's
ability to repurchase, directly or indirectly, the Senior Notes. In addition,
under the New Credit Facility, in the event of circumstances which are similar
to a Change of Control, repayment of borrowings under the New Credit Facility
will be subject to acceleration, which could further restrict the Company's
ability to repurchase the Senior Notes. There can be no assurance that the
Company will be permitted or have funds sufficient to repurchase the Senior
Notes when it would otherwise be required to offer to do so. It is expected that
the obligations of the Company under the New Credit Facility will be (i) secured
by a first priority security interest in substantially all material assets of
the Company and all other assets owned or hereafter acquired and (ii)
guaranteed, on a senior secured basis, by the Friendly's Restaurants Franchise,
Inc. subsidiary and the Friendly's International, Inc. subsidiary and may also
be so guaranteed by certain subsidiaries created or acquired after consummation
of the Recapitalization. The Senior Notes will be effectively subordinated to
all existing and certain future secured indebtedness of the Company, including
indebtedness under the New Credit Facility, to the extent of the value of the
assets securing such secured indebtedness. The Senior Notes will rank PARI PASSU
to any future senior indebtedness of the Company and be structurally
subordinated to all existing and future indebtedness of any subsidiary of the
Company that is not a guarantor of the Senior Notes. Lenders under the New
Credit Facility will also have a prior claim on the assets of subsidiaries of
the Company that are guarantors under the New Credit Facility. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Description of New Credit
Facility" and "Description of Senior Notes."

RISKS RELATING TO THE IMPLEMENTATION OF NEW BUSINESS CONCEPTS AND STRATEGIES

The Company has recently initiated several new business concepts and
strategies, including the remodeling and re-imaging of selected restaurants, the
upgrading of its menu and the development of modified restaurant formats in
non-traditional locations. There can be no assurance that the Company will
continue to develop such concepts and strategies, that such concepts and
strategies will be successful or profitable or that such concepts and strategies
will fill the strategic roles intended for them by the Company. See
"Business--Business Strategies."

RISKS ATTRIBUTABLE TO THE DEVELOPMENT OF A FRANCHISING PROGRAM

The success of the Company's business strategy will also depend, in part, on
the development and implementation of a franchising program. The Company does
not have significant experience in franchising restaurants and there can be no
assurance that the Company will continue to successfully locate and attract
suitable franchisees or that such franchisees will have the business abilities
or sufficient access to capital to open restaurants or will operate restaurants
in a manner consistent with the Company's concept and standards or in compliance
with franchise agreements. The success of the Company's franchising program will
also be dependent upon certain other factors, certain of which are not within
the control of the Company or its franchisees, including the availability of
suitable sites on acceptable lease or purchase

15
<PAGE>
terms, permitting and regulatory compliance and general economic and business
conditions. See "Prospectus Summary--Recent Developments" and
"Business--Restaurant Operations--Franchising Program."

RISKS ARISING OUT OF THE EXPANSION OF INTERNATIONAL OPERATIONS

The Company has operations in South Korea, the United Kingdom and the
People's Republic of China ("China"). These international operations are subject
to various risks, including changing political and economic conditions, currency
fluctuations, trade barriers, trademark rights, adverse tax consequences, import
tariffs, customs and duties and government regulations. Government regulations,
relating to, among other things, the preparation and sale of food, building and
zoning requirements, wages, working conditions and the Company's relationship
with its employees, may vary widely from those in the United States. There can
be no assurance that the Company will be successful in maintaining or expanding
its international operations.

GEOGRAPHIC CONCENTRATION

Approximately 85% of the Company-owned restaurants are located, and
substantially all of its retail sales are generated, in the Northeast. As a
result, a severe or prolonged economic recession or changes in demographic mix,
employment levels, population density, weather, real estate market conditions or
other factors specific to this geographic region may adversely affect the
Company more than certain of its competitors which are more geographically
diverse.

RELATIONSHIPS WITH PERKINS; POTENTIAL CONFLICTS OF INTEREST

After giving effect to the Recapitalization and the Related Transactions,
approximately 10.3% and 2.1% of the Company's Common Stock would have been
owned, as of October 15, 1997, by Donald N. Smith and The Equitable Life
Assurance Society of the United States (the "Equitable"), respectively. These
stockholders indirectly own 33.2% and 28.1%, respectively, of the general
partner of Perkins Family Restaurants, L.P. ("PFR"), which, through Perkins
Restaurants Operating Company, L.P. ("Perkins"), owns and franchises
family-style restaurants. Mr. Smith, the Company's Chairman, Chief Executive
Officer and President, is an officer of the general partner of PFR. In addition,
three of the directors of the general partner of PFR serve as directors of the
Company. In the ordinary course of business, the Company enters into
transactions with Perkins. See "Certain Transactions."

After giving effect to the Recapitalization and the Related Transactions,
the directors and executive officers of the Company would have owned
approximately 13.1% of the Common Stock as of October 15, 1997. Circumstances
could arise in which the interests of such stockholders could be in conflict
with the interests of the other stockholders of the Company and the holders of
the Senior Notes. In addition, Mr. Smith serves as Chairman, Chief Executive
Officer and President of the Company and as Chairman and Chief Executive Officer
of Perkins and, consequently, devotes a portion of his time to the affairs of
each Company and may be required to limit his involvement in those areas, if
any, where the interests of the Company conflict with those of Perkins. Mr.
Smith does not have an employment agreement with the Company nor is he
contractually prohibited from engaging in other business ventures in the future,
any of which could compete with the Company or its subsidiaries. See "Ownership
of Common Stock."

DEPENDENCE ON SENIOR MANAGEMENT

The Company's business is managed, and its business strategies formulated,
by a relatively small number of key executive officers and other personnel,
certain of whom have joined the Company since Mr. Smith's arrival. The loss of
these key management persons, including Mr. Smith, could have a material adverse
effect on the Company. See "Management."

16
<PAGE>
HIGHLY COMPETITIVE BUSINESS ENVIRONMENT

The restaurant business is highly competitive and is affected by changes in
the public's eating habits and preferences, population trends and traffic
patterns, as well as by local and national economic conditions affecting
consumer spending habits, many of which are beyond the Company's control. Key
competitive factors in the industry are the quality and value of the food
products offered, quality and speed of service, attractiveness of facilities,
advertising, name brand awareness and image and restaurant location. Each of the
Company's restaurants competes directly or indirectly with locally-owned
restaurants as well as restaurants with national or regional images, and to a
limited extent, restaurants operated by its franchisees. A number of the
Company's significant competitors are larger or more diversified and have
substantially greater resources than the Company. The Company's retail
operations compete with national and regional manufacturers of frozen desserts,
many of which have greater financial resources and more established channels of
distribution than the Company. Key competitive factors in the retail food
business include brand awareness, access to retail locations, price and quality.

EXPOSURE TO COMMODITY PRICING AND AVAILABILITY RISKS

The basic raw materials for the Company's frozen desserts are dairy products
and sugar. The Company's purchasing department purchases other food products,
such as coffee, in large quantities. Although the Company does not hedge its
positions in any of these commodities as a matter of policy, it may
opportunistically purchase some of these items in advance of a specific need. As
a result, the Company is subject to the risk of substantial and sudden price
increases, shortages or interruptions in supply of such items, which could have
a material adverse effect on the Company.

RISKS ASSOCIATED WITH THE FOOD SERVICE INDUSTRY

Food service businesses are often affected by changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns, the cost and availability of labor, purchasing power, availability of
products and the type, number and location of competing restaurants. The Company
could also be substantially adversely affected by publicity resulting from food
quality, illness, injury or other health concerns or alleged discrimination or
other operating issues stemming from one location or a limited number of
locations, whether or not the Company is liable. In addition, factors such as
increased costs of goods, regional weather conditions and the potential scarcity
of experienced management and hourly employees may also adversely affect the
food service industry in general and the results of operations and financial
condition of the Company.

REGULATION

The restaurant and food distribution industries are subject to numerous
Federal, state and local government regulations, including those relating to the
preparation and sale of food and building and zoning requirements. Also, the
Company is subject to laws governing its relationship with employees, including
minimum wage requirements, overtime, working conditions and citizenship
requirements. The failure to obtain or retain food licenses or an increase in
the minimum wage rate, employee benefit costs or other costs associated with
employees could adversely affect the Company. In September 1997, the second
phase of an increase in the minimum wage was implemented in accordance with the
Federal Fair Labor Standards Act of 1996, which could adversely affect the
Company. See "Business--Government Regulation."

FRAUDULENT CONVEYANCE

The incurrence of indebtedness and other obligations in connection with the
Recapitalization, including the issuance of the Senior Notes, may be subject to
review by a court under federal bankruptcy law or comparable provisions of state
fraudulent transfer law. Generally, if a court or other trier of fact

17
<PAGE>
were to find that the Company did not receive fair consideration or reasonably
equivalent value for incurring such indebtedness or obligation and, at the time
of such incurrence, the Company (i) was insolvent, (ii) was rendered insolvent
by reason of such incurrence, (iii) was engaged in a business or transaction for
which the assets remaining in the Company constituted unreasonably small capital
or (iv) intended to incur or believed it would incur debts beyond its ability to
pay such debts as they mature, such court, subject to applicable statutes of
limitations, could determine to invalidate, in whole or in part, such
indebtedness and obligations as fraudulent conveyances or subordinate such
indebtedness and obligations to existing or future creditors of the Company. The
definition or measure of such matters as fair consideration, reasonably
equivalent value, insolvency or unreasonably small capital for purposes of the
foregoing will vary depending on the law of the jurisdiction which is being
applied. Generally, however, the Company would be considered insolvent if, at
the time it incurred indebtedness, either the fair market value (or fair
saleable value) of its assets was less than the amount required to pay its total
debts and liabilities (including contingent liabilities) as they became absolute
and matured or it had incurred debt beyond its ability to repay such debt as it
matures.

The proceeds of the Recapitalization will be used primarily to repay debt of
the Company. There can be no assurance as to what standard a court would apply
in making determinations under bankruptcy or fraudulent transfer laws or whether
a court would agree with any Company assessment that the Company is receiving
fair consideration or reasonably equivalent value in return for incurring the
indebtedness and other obligations in connection with the Recapitalization or
that, after giving effect to indebtedness incurred in connection with the
Recapitalization and the use of the proceeds of such indebtedness, it will have
sufficient capital for the businesses in which it is engaged. In addition, as of
September 28, 1997 on a pro forma basis giving effect to the Recapitalization
and the Related Transactions as if they had occurred on such date, the Company
would have had a negative net worth as determined pursuant to generally accepted
accounting principles.

ABSENCE OF PRIOR PUBLIC MARKET

Prior to the Senior Note Offering, there has been no public market for the
Senior Notes. The Company has no present plans to list the Senior Notes on any
national securities exchange or to apply for quotation thereof on the Nasdaq
National Market. The Company has been advised by the Underwriters that the
Underwriters presently intend to make a market in the Senior Notes as permitted
by applicable laws and regulations. However, the Underwriters are not obligated
to do so, and any such market-making may be discontinued at any time without
notice at the sole discretion of the Underwriters. Accordingly, no assurance can
be given that any market for the Senior Notes will develop, or, if any such
market develops, as to the liquidity of such market.

18
<PAGE>
USE OF PROCEEDS

The Company is implementing the Recapitalization to refinance all of the
indebtedness under the Old Credit Facility and thereby lengthen the average
maturity of the Company's outstanding indebtedness, reduce interest expense and
increase liquidity and operating and financial flexibility. Concurrent with, and
contingent upon, the consummation of the Offerings, the Company will enter into
the New Credit Facility.

As of September 28, 1997, borrowings under the Old Credit Facility accrued
interest at a rate of 11.0% per annum, and such borrowings will become due in
May 1998, unless repaid or previously extended for an additional year pursuant
to the terms of the Old Credit Facility. Borrowings under the New Credit
Facility will bear interest at a floating rate equal to LIBOR plus 2.25% or the
Alternative Base Rate (as defined in the New Credit Facility) plus 0.75% per
annum for drawings under the Revolving Credit Facility and the Letter of Credit
Facility, 0.50% per annum for amounts undrawn under the Revolving Credit
Facility, 2.25% per annum for amounts issued but undrawn under the Letter of
Credit Facility and a weighted average floating rate equal to LIBOR plus 2.46%
or the Alternative Base Rate plus 0.96% for the Term Loan Facility. See
"Description of New Credit Facility."

The following table sets forth the estimated sources and uses of funds in
connection with the Recapitalization after giving effect to the Related
Transactions:

<TABLE>
<CAPTION>
AT CLOSING
--------------------
<S> <C>
(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
--------
--------
</TABLE>

- ------------------------------

(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.

19
<PAGE>
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.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 28, 1997
------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
----------- -----------

<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
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
----------- -----------
----------- -----------
</TABLE>

- ------------------------

(a) Gives effect to (i) the $9,581 interest payment made in October 1997 under
the Old Credit Facility, (ii) the receipt of $12,907 of previously
restricted cash from RIC released in exchange for a letter of credit, net of
$10,000 applied to the Old Credit Facility and (iii) $4,732 of working
capital provided in the Recapitalization.

(b) Gives effect to the application of (i) $348,042 of the gross proceeds from
the Recapitalization and (ii) $10,000 of restricted cash released from RIC.
See "Use of Proceeds."

(c) As part of the Recapitalization, the Company will have a $55,000 Revolving
Credit Facility which is expected to be undrawn at closing and $2,093
available under the Letter of Credit Facility. These facilities are expected
to be drawn in part, from time to time, to finance the Company's working
capital and other general corporate requirements.

(d) Historical share information includes Class A common shares and Class B
common shares. In connection with the Recapitalization, the Class A common
shares and Class B common shares will be converted into Common Stock.

(e) Gives effect to (i) an assumed $100,000 of gross proceeds from the Common
Stock Offering, (ii) $8,427 of expenses associated with the Common Stock
Offering, (iii) the 924-for-1 stock split which will occur prior to the
Common Stock Offering and (iv) $9,782 of non-cash stock compensation expense
arising out of the issuance of certain shares of Common Stock to management
and the vesting of certain shares of restricted stock previously issued to
management. See Note 17 of Notes to Consolidated Financial Statements.

(f) Gives effect to (i) $1,948 of net income related to deferred interest no
longer payable under the Old Credit Facility, (ii) $5,771 of non-cash stock
compensation expense, net of taxes, arising out of the issuance of certain
shares of Common Stock to management and the vesting of certain shares of
restricted stock previously issued to management discussed in (e) above and
(iii) the write-off of $319 of deferred financing and debt restructuring
costs, net of taxes, related to the Old Credit Facility.

20
<PAGE>
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.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FISCAL YEAR (A) -------------
----------------------------------------------------- SEPTEMBER 29,
1992 1993 1994 1995 1996 1996
--------- --------- --------- --------- --------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>

<CAPTION>
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Restaurant........................................ $ 542,859 $ 580,161 $ 589,383 $ 593,570 $ 596,675 $ 452,373
Retail, institutional and other................... 20,346 30,472 41,631 55,579 54,132 39,446
Franchise......................................... -- -- -- -- -- --
--------- --------- --------- --------- --------- -------------
Total revenues...................................... 563,205 610,633 631,014 649,149 650,807 491,819
--------- --------- --------- --------- --------- -------------

Costs and expenses:
Cost of sales..................................... 154,796 170,431 179,793 192,600 191,956 143,388
Labor and benefits................................ 201,431 209,522 211,838 214,625 209,260 159,502
Operating expenses................................ 108,363 120,626 132,010 143,854 143,163 109,006
General and administrative expenses............... 37,372 40,851 38,434 40,705 42,721 31,948
Non-cash write-downs (b).......................... -- 25,552 -- 7,352 227 --
Depreciation and amortization..................... 35,734 35,535 32,069 33,343 32,979 25,127
Gain on sale of restaurant operations............... -- -- -- -- -- --
--------- --------- --------- --------- --------- -------------
Operating income.................................... 25,509 8,116 36,870 16,670 30,501 22,848
Interest expense, net (c)........................... 37,630 38,786 45,467 41,904 44,141 33,084
Equity in net loss of joint venture................. -- -- -- -- -- --
--------- --------- --------- --------- --------- -------------
Income (loss) before (provision for) benefit from
income taxes and cumulative effect of changes in
accounting principles............................. (12,121) (30,670) (8,597) (25,234) (13,640) (10,236)
(Provision for) benefit from income taxes........... (1,200) 11,470 4,661 (33,419) 5,868 4,442
Cumulative effect of changes in accounting
principles, net of income taxes (d)............... -- (42,248) -- -- -- --
--------- --------- --------- --------- --------- -------------
Net income (loss)................................... $ (13,321) $ (61,448) $ (3,936) $ (58,653) $ (7,772) $ (5,794)
--------- --------- --------- --------- --------- -------------
--------- --------- --------- --------- --------- -------------

OTHER DATA:
EBITDA (e).......................................... $ 61,243 $ 69,203 $ 68,939 $ 57,365 $ 63,707 $ 47,975
Net cash provided by operating activities........... 34,047 42,877 38,381 27,790 26,163 23,637
Capital expenditures:
Cash.............................................. 33,577 37,361 29,507 19,092 24,217 18,547
Non-cash (f)...................................... 3,121 7,129 7,767 3,305 5,951 3,570
--------- --------- --------- --------- --------- -------------
Total capital expenditures.......................... $ 36,698 $ 44,490 $ 37,274 $ 22,397 $ 30,168 $ 22,117
Ratio of earnings to fixed charges (g).............. -- -- -- -- -- --
PRO FORMA DATA:
EBITDA (e)(h)....................................... $ 64,653 $ 48,685
Interest expense, net (c)(i)........................ 28,804 21,580
Net income (j)...................................... 1,835 1,412
Net income per share................................ $ 0.26 $ 0.20
Weighted average shares outstanding (k)............. 7,125 7,125
Ratio of EBITDA to interest expense, net............ 2.2x 2.3x
Ratio of earnings to fixed charges (g).............. 1.1x 1.1x
Ratio of total long-term debt to EBITDA (e)(l)...... -- --

SEPTEMBER 28,
1997
-------------

<S> <C>
STATEMENT OF OPERATIONS DATA:
<S> <C>
Revenues:
Restaurant........................................ $ 455,026
Retail, institutional and other................... 49,173
Franchise......................................... 3,834
-------------
Total revenues...................................... 508,033
-------------
Costs and expenses:
Cost of sales..................................... 147,105
Labor and benefits................................ 159,315
Operating expenses................................ 112,009
General and administrative expenses............... 32,775
Non-cash write-downs (b).......................... 607
Depreciation and amortization..................... 24,226
Gain on sale of restaurant operations............... 2,303
-------------
Operating income.................................... 34,299
Interest expense, net (c)........................... 32,972
Equity in net loss of joint venture................. 1,112
-------------
Income (loss) before (provision for) benefit from
income taxes and cumulative effect of changes in
accounting principles............................. 215
(Provision for) benefit from income taxes........... (88)
Cumulative effect of changes in accounting
principles, net of income taxes (d)............... 2,236
-------------
Net income (loss)................................... $ 2,363
-------------
-------------
OTHER DATA:
EBITDA (e).......................................... $ 59,132
Net cash provided by operating activities........... 29,224
Capital expenditures:
Cash.............................................. 14,656
Non-cash (f)...................................... 2,227
-------------
Total capital expenditures.......................... $ 16,883
Ratio of earnings to fixed charges (g).............. 1.0x
PRO FORMA DATA:
EBITDA (e)(h)....................................... $ 59,132
Interest expense, net (c)(i)........................ 21,617
Net income (j)...................................... 9,062
Net income per share................................ $ 1.27
Weighted average shares outstanding (k)............. 7,125
Ratio of EBITDA to interest expense, net............ 2.7x
Ratio of earnings to fixed charges (g).............. 1.4x
Ratio of total long-term debt to EBITDA (e)(l)...... 3.8x
</TABLE>

21
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR (A) AS OF AS OF
----------------------------------------------------- SEPTEMBER 29, SEPTEMBER 28,
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>

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)

<CAPTION>
AS ADJUSTED
SEPTEMBER 28,
1997
-------------
<S> <C>
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)
</TABLE>

- ------------------------

(a) All fiscal years presented include 52 weeks of operations except 1993 which
includes 53 weeks of operations.

(b) Includes non-cash write-downs of approximately $16,337 in 1993 related to a
trademark license agreement as a result of new product development and the
replacement of certain trademarked menu items and $3,346 in 1995 related to
a postponed debt restructuring. All other non-cash write-downs relate to
property and equipment disposed of in the normal course of the Company's
operations. See Notes 3, 5 and 6 of Notes to Consolidated Financial
Statements.

(c) Interest expense, net is net of capitalized interest of $128, $156, $176,
$62, $49, $44 and $27 and interest income of $222, $240, $187, $390, $318,
$273 and $239 for 1992, 1993, 1994, 1995, 1996, the nine months ended
September 29, 1996 and the nine months ended September 28, 1997,
respectively.

(d) Includes non-cash items, net of related income taxes, as a result of
adoption of accounting pronouncements related to income taxes of $30,968,
post-retirement benefits other than pensions of $4,140 and post-employment
benefits of $7,140 in 1993 and pensions of $2,236 in 1997.

(e) EBITDA represents consolidated Net income (loss) before (i) Cumulative
effect of changes in accounting principles, net of income taxes, (ii)
(Provision for) benefit from income taxes, (iii) Equity in net loss of joint
venture, (iv) Interest expense, net, (v) Depreciation and amortization and
(vi) Non-cash write-downs and all other non-cash items, plus cash
distributions from unconsolidated subsidiaries, each determined in
accordance with GAAP. The Company has included information concerning EBITDA
in this Prospectus because it believes that such information is used by
certain investors as one measure of an issuer's historical ability to
service debt. EBITDA should not be considered as an alternative to, or more
meaningful than, earnings from operations or other traditional indications
of an issuer's operating performance.

(f) Non-cash capital expenditures represent the cost of assets acquired through
the incurrence of capital lease obligations.

(g) The Ratio of earnings to fixed charges is computed by dividing (i) income
before interest expense, income taxes and other fixed charges by (ii) fixed
charges, including interest expense, amortization of debt issuance costs and
the portion of rent expense which represents interest (assumed to be
one-third). For 1992, 1993, 1994, 1995, 1996 and the nine months ended
September 29, 1996, earnings were insufficient to cover fixed charges by
$12,249, $30,826, $8,773, $25,296, $13,689 and $10,280, respectively.

(h) Represents historical EBITDA adjusted to give effect to the benefit from the
change in accounting for pensions related to determining the return-on-asset
component of annual pension expense of $946 in 1996 and $710 for the nine
months ended September 29, 1996. See Note 10 of Notes to Consolidated
Financial Statements.

(i) Represents historical interest expense adjusted to give effect to the
Recapitalization. Borrowings under the New Credit Facility will bear
interest at a floating rate equal to LIBOR plus 2.25% or the Alternative
Base Rate (as defined in the New Credit Facility) plus 0.75% per annum for
drawings under the Revolving Credit Facility and the Letter of Credit
Facility, 0.50% per annum for amounts undrawn under the Revolving Credit
Facility, 2.25% per annum for amounts issued but undrawn under the Letter of
Credit Facility and a weighted average floating rate equal to LIBOR plus
2.46% or the Alternative Base Rate plus 0.96% for the Term Loan Facility.

(j) Represents historical net income adjusted to give effect to (i) the
reduction in interest expense, net of income taxes of $9,049, $6,788 and
$6,699 for 1996, the nine months ended September 29, 1996 and the nine
months ended September 28, 1997, respectively, as a result of the
Recapitalization and the Related Transactions and (ii) the benefit, net of
income taxes, related to the change in accounting for pensions described in
(h) above of $558, $418 and $0 for 1996, the nine months ended September 29,
1996 and the nine months ended September 28, 1997, respectively.

(k) Represents historical weighted average shares outstanding adjusted to give
effect to the issuance of 27 shares upon consummation of the
Recapitalization under the Management Stock Plan (as defined herein) and the
return of 375 net shares to the Company in connection with the
Recapitalization. Actual weighted average shares outstanding were 2,414,
2,394 and 2,473 for 1996, the nine months ended September 29, 1996 and the
nine months ended September 28, 1997, respectively. See "Ownership of Common
Stock" and Note 17 of Notes to Consolidated Financial Statements.

(l) For purposes of this ratio, EBITDA represents historical EBITDA for the
twelve months ended September 28, 1997 adjusted by $236 to give effect to
the benefit related to the change in accounting for pensions described in
(h) above.

(m) As adjusted for (i) $3,307 reduction in current portion of capital lease
obligations in connection with the Recapitalization, (ii) $4,732 of working
capital provided in the Recapitalization, (iii) $2,907 of cash provided in
connection with the letter of credit issued to RIC and (iv) the use of
$4,000 of current restricted cash to reduce the amount outstanding under the
Old Credit Facility.

(n) As adjusted for (i) $10,000 of previously restricted cash applied to the Old
Credit Facility, (ii) payment of $9,581 of interest on the Old Credit
Facility, (iii) the write-off of $540 of deferred financing costs related to
the Old Credit Facility, (iv) $10,823 of expenses related to the Senior Note
Offering and (v) $4,732 of working capital provided in the Recapitalization.

(o) As adjusted for (i) the repayment of the $358,042 outstanding under the Old
Credit Facility and $4,669 of long-term portion of capital lease obligations
and (ii) proceeds of $280,000 from the Senior Note Offering and the New
Credit Facility.

(p) As adjusted for (i) estimated net proceeds of $91,573 from the Common Stock
Offering, (ii) $1,948 of net income related to deferred interest expense no
longer payable under the Old Credit Facility, (iii) the write-off of $319 of
deferred financing costs, net of taxes, related to the Old Credit Facility
and (iv) the tax benefit of $4,011 related to the non-cash stock
compensation expense arising out of the issuance of certain shares of Common
Stock to management and the vesting of certain shares of restricted stock
previously issued to management.

22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE IN
THIS PROSPECTUS.

OVERVIEW

Friendly's owns and operates 662 restaurants, franchises 34 restaurants and
distributes a full line of frozen desserts through more than 5,000 supermarkets
and other retail locations in 15 states. The Company was publicly held from 1968
until January 1979 at which time it was acquired by Hershey. Under Hershey's
ownership, the number of Company restaurants increased from 601 to 849. Hershey
subsequently sold the Company in September 1988 to TRC in a highly-leveraged
transaction.

Beginning in 1989, the new management focused on improving operating
performance through revitalizing and renovating restaurants, upgrading and
expanding the menu and improving management hiring, training, development and
retention. Also in 1989, the Company introduced its signature frozen desserts
into retail locations in the Northeast. Since the beginning of 1989, 24 new
restaurants have been opened while 176 under-performing restaurants have been
closed.

The high leverage associated with the TRC Acquisition has severely impacted
the liquidity and profitability of the Company. As of September 28, 1997, the
Company had a stockholders' deficit of $170.7 million. Cumulative interest
expense of $384.0 million since the TRC Acquisition has significantly
contributed to the deficit. The Company's net loss in 1996 of $7.8 million
included $44.1 million of interest expense.

The Company's revenue, EBITDA and operating income have improved
significantly since the TRC Acquisition. Despite the closing of 152 restaurants
(net of restaurants opened) since the beginning of 1989, Restaurant revenues
have increased 7.5% from $557.3 million in 1989 to $599.3 million in the twelve-
months ended September 28, 1997, while average revenue per restaurant has
increased 29.8% from $665,000 to $863,000 during the same period. Retail,
institutional and other revenues and Franchise revenues have also increased from
$1.4 million in 1989 to $67.7 million in the twelve months ended September 28,
1997. In addition, EBITDA has increased 58.0% from $47.4 million in 1989 to
$74.9 million in the twelve-month period ended September 28, 1997, while
operating income has increased from $4.1 million to $42.0 million over the same
period. As a result of the positive impact of the Company's revitalization
program, the closing of under-performing restaurants, the growth of the retail,
institutional and other businesses and the commencement in July 1997 of the
Company's franchising program, period to period comparisons may not be
meaningful.

The Company's revenues are derived primarily from the operation of
full-service restaurants and from the distribution and sale of frozen desserts
through retail locations. In addition, the Company derives a small amount of
revenue from the sale of frozen desserts in South Korea and the United Kingdom
under various distribution and licensing arrangements. Furthermore, the Company
is a 50% partner in a joint venture in Shanghai, China which has manufactured
and distributed frozen desserts on a limited basis. The joint venture is
currently seeking to establish additional distribution for its products in
China.

On July 14, 1997, the Company entered into the DavCo Agreement pursuant to
which the Company received $8.2 million in cash for the sale of certain non-real
property assets and in payment of franchise and development fees, and receives
(i) a royalty based on franchised restaurant revenues and (ii) revenues and
earnings from the sale to DavCo of Friendly's frozen desserts and other
products. The Company anticipates receiving similar fees and royalty streams in
connection with future franchising arrangements. See "Prospectus Summary--Recent
Developments."

Cost of sales includes direct food costs, the Company's costs to manufacture
frozen desserts and the Company's costs to distribute frozen desserts and other
food products to its restaurants, franchisees and its

23
<PAGE>
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.

<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS ENDED
--------------------------------- ---------------------
<S> <C> <C> <C> <C> <C>
SEPTEMBER SEPTEMBER
29, 28,
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
Revenues:
Restaurant.................. 93.4% 91.4% 91.7% 92.0% 89.6%
Retail, institutional and
other..................... 6.6 8.6 8.3 8.0 9.7
Franchise................... 0.0 0.0 0.0 0.0 0.7
--------- --------- --------- --------- ---------
Total revenues................ 100.0 100.0 100.0 100.0 100.0
--------- --------- --------- --------- ---------

Costs and expenses:
Cost of sales............... 28.5 29.7 29.5 29.2 29.0
Labor and benefits.......... 33.6 33.1 32.2 32.4 31.4
Operating expenses.......... 20.9 22.2 22.0 22.2 22.0
General and administrative
expenses.................. 6.1 6.2 6.5 6.5 6.4
Non-cash write-downs........ 0.0 1.1 0.0 0.0 0.1
Depreciation and
amortization.............. 5.1 5.1 5.1 5.1 4.8
Gain on sale of restaurant
operations.................. 0.0 0.0 0.0 0.0 0.4
--------- --------- --------- --------- ---------
Operating income.............. 5.8 2.6 4.7 4.6 6.7
Interest expense, net......... 7.2 6.5 6.8 6.7 6.5
Equity in net loss of joint
venture..................... 0.0 0.0 0.0 0.0 0.2
--------- --------- --------- --------- ---------
Income (loss) before benefit
from (provision for) income
taxes and cumulative effect
of change in accounting
principle................... (1.4) (3.9) (2.1) (2.1) 0.0
Benefit from (provision for)
income taxes................ 0.8 (5.1) 0.9 0.9 0.0
Cumulative effect of change in
accounting principle, net of
income tax expense.......... 0.0 0.0 0.0 0.0 0.5
--------- --------- --------- --------- ---------
Net income (loss)............. (0.6)% (9.0)% (1.2)% (1.2)% 0.5%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

NINE MONTHS ENDED SEPTEMBER 28, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
29, 1996

REVENUES--Total revenues increased $16.2 million, or 3.3%, to $508.0 million
for the nine months ended September 28, 1997 from $491.8 million for the nine
months ended September 29, 1996. Restaurant revenues increased $2.6 million, or
0.6%, to $455.0 million for the nine months ended September 28, 1997 from $452.4
million for the nine months ended September 29, 1996. Comparable restaurant
revenues increased 3.1%. The increase in Restaurant revenues and comparable
restaurant revenues was due to the

24
<PAGE>
introduction of higher-priced lunch and dinner entrees, selected menu price
increases, a shift in sales mix to higher-priced items, the opening of three new
restaurants, the re-imaging of four restaurants under the Company's FOCUS 2000
program, the revitalization of 14 restaurants, building expansions at five
restaurants and a milder winter in the 1997 period, which allowed for favorable
traffic comparisons. The increase was partially offset by the sale of 34
restaurants to DavCo which resulted in a $7.2 million reduction in Restaurant
revenues and the closing of 17 under-performing restaurants. Retail,
institutional and other revenues increased by $9.8 million, or 24.9%, to $49.2
million for the nine months ended September 28, 1997 from $39.4 million for the
nine months ended September 29, 1996. The increase was primarily due to a more
effective sales promotion program. Franchise revenue was $3.8 million for the
nine months ended September 28, 1997 compared to none for the nine months ended
September 29, 1996. The increase is a result of the consummation of the DavCo
Agreement on July 14, 1997. See Note 16 of Notes to Consolidated Financial
Statements.

COST OF SALES--Cost of sales increased $3.7 million, or 2.6%, to $147.1
million for the nine months ended September 28, 1997 from $143.4 million for the
nine months ended September 29, 1996. Cost of sales as a percentage of Total
revenues decreased to 29.0% in the 1997 period from 29.2% in the 1996 period.
The decrease was due to a 0.6% reduction in food costs at the restaurant level
despite higher guest check averages because of reduced promotional discounts.
The decrease was offset by a 0.4% increase in food costs at the retail and
institutional level.

LABOR AND BENEFITS--Labor and benefits decreased $0.2 million, or 0.1%, to
$159.3 million for the nine months ended September 28, 1997 from $159.5 million
for the nine months ended September 29, 1996. Labor and benefits as a percentage
of Total revenues decreased to 31.4% in the 1997 period from 32.4% in the 1996
period. The decrease was due to an increase in Retail, institutional and other
revenues as a percent of Total revenues as these revenues have no associated
labor and benefits cost and lower workers' compensation insurance and pension
costs.

OPERATING EXPENSES--Operating expenses increased $3.0 million, or 2.8%, to
$112.0 million for the nine months ended September 28, 1997 from $109.0 million
for the nine months ended September 29, 1996. Operating expenses as a percentage
of Total revenues decreased to 22.0% in the 1997 period from 22.2% in the 1996
period. The decrease was due to reduced costs for snow removal and the
allocation of fixed costs over higher Total revenues in the 1997 period
partially offset by higher advertising expenditures in the 1997 period.

GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased $0.9 million, or 2.8%, to $32.8 million for the nine months ended
September 28, 1997 from $31.9 million for the nine months ended September 29,
1996. General and administrative expenses as a percentage of Total revenues
decreased to 6.4% in the 1997 period from 6.5% in the 1996 period. This decrease
was due to reductions in pension costs and the elimination of field management
positions associated with the closing of 17 restaurants since the end of the
1996 period.

GAIN ON SALE OF RESTAURANT OPERATIONS--Gain on sale of restaurant operations
represents the income related to the sale of the equipment and operating rights
for the 34 existing locations franchised to DavCo. See Note 16 of Notes to
Consolidated Financial Statements.

EBITDA--As a result of the above, EBITDA increased $11.1 million, or 23.1%,
to $59.1 million for the nine months ended September 28, 1997 from $48.0 million
for the nine months ended September 29, 1996. EBITDA as a percentage of Total
revenues increased to 11.6% in the 1997 period from 9.8% in the 1996 period.

NON-CASH WRITE-DOWNS--Non-cash write-downs were $0.6 million for the nine
months ended September 28, 1997; there were no such write-downs during the nine
months ended September 29, 1996.

25
<PAGE>
DEPRECIATION AND AMORTIZATION--Depreciation and amortization decreased $0.9
million, or 3.6%, to $24.2 million for the nine months ended September 28, 1997
from $25.1 million for the nine months ended September 29, 1996. Depreciation
and amortization as a percentage of Total revenues decreased to 4.8% in the 1997
period from 5.1% in the 1996 period. The decrease was due to the closing of 17
units since the end of the 1996 period, partially offset by higher amortization
of debt restructuring costs incurred as a result of a debt restructuring which
was effective January 1, 1996.

INTEREST EXPENSE, NET--Interest expense, net of capitalized interest and
interest income, decreased by $0.1 million, or 0.3%, to $33.0 million for the
nine months ended September 28, 1997 from $33.1 million for the nine months
ended September 29, 1996. The decrease in interest expense was due to a
reduction in interest expense on capital lease obligations as a result of lower
amounts outstanding in the 1997 period.

EQUITY IN NET LOSS OF JOINT VENTURE--The equity in net loss of the China
joint venture of $1.1 million for the nine month period ended September 28, 1997
reflected the Company's 50% share of the China joint venture's net loss for such
period. Sales for the joint venture were minimal during the 1997 period.

BENEFIT FROM (PROVISION FOR) INCOME TAXES--The provision for income taxes
was $0.1 million for the nine months ended September 28, 1997 compared to a
benefit of $4.4 million for the nine months ended September 29, 1996 due to the
improved operating results in the 1997 period.

In 1997, the Company revised the method used in determining the
return-on-asset component of annual pension expense as described in Note 10 of
Notes to Consolidated Financial Statements. The cumulative effect of this change
was $2.2 million, net of income tax expense of $1.6 million.

NET INCOME (LOSS)--Net income was $2.4 million for the nine months ended
September 28, 1997 compared to a net loss of $5.8 million for the nine months
ended September 29, 1996 for the reasons discussed above.

1996 COMPARED TO 1995

REVENUES--Total revenues increased $1.7 million, or 0.3%, to $650.8 million
in 1996 from $649.1 million in 1995. Restaurant revenues increased $3.1 million,
or 0.5%, to $596.7 million in 1996 from $593.6 million in 1995. Comparable
restaurant revenues increased by 1.8%. The increase in Restaurant revenues and
comparable restaurant revenues was due to the introduction of higher-priced
lunch and dinner entrees in the fourth quarter of 1996, selected menu price
increases, a shift in sales mix to higher priced items, the opening of three new
restaurants, the revitalization of 16 restaurants and building expansions at
four existing locations. The increase was partially offset by the closing of 31
restaurants in 1996. Retail, institutional and other revenues declined by $1.5
million, or 2.7%, to $54.1 million in 1996 from $55.6 million in 1995. The
decrease was primarily attributable to the effects of a reduction in promotional
activities.

COST OF SALES--Cost of sales decreased $0.6 million, or 0.3%, to $192.0
million in 1996 from $192.6 million in 1995. Cost of sales as a percentage of
Total revenues decreased to 29.5% in 1996 from 29.7% in 1995. The decrease was
due to a 0.2% reduction in food costs at the restaurant level as a result of
reduced waste in food preparation.

LABOR AND BENEFITS--Labor and benefits decreased $5.3 million, or 2.5%, to
$209.3 million in 1996 from $214.6 million in 1995. Labor and benefits as a
percentage of Total revenues decreased to 32.2% in 1996 from 33.1% in 1995. The
decrease was due to a 1.1% reduction in labor and benefits as a percentage of
Restaurant revenues as a result of an improvement in labor utilization and lower
group and workers' compensation insurance costs. The decrease was offset by a
0.3% reduction in Retail, institutional and other revenues as a percentage of
Total revenues as these revenues have no associated labor and benefits.

26
<PAGE>
OPERATING EXPENSES--Operating expenses decreased $0.7 million, or 0.5%, to
$143.2 million in 1996 from $143.9 million in 1995. Operating expenses as a
percentage of Total revenues decreased in 1996 to 22.0% from 22.2% in 1995. The
decrease was due to the allocation of fixed costs over higher total revenues.

GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased $2.0 million, or 4.9%, to $42.7 million in 1996 from $40.7 million in
1995. General and administrative expenses as a percentage of Total revenues
increased to 6.5% in 1996 from 6.2% in 1995. This increase was due to an
increase in management bonuses and the annual merit-based salary increases,
partially offset by reductions in group medical insurance claims and the
elimination of field management positions associated with the closing of 31
restaurants in 1996. General and administrative expenses, exclusive of
management bonuses, increased $0.3 million in 1996.

EBITDA--As a result of the above, EBITDA increased by $6.3 million, or
11.0%, to $63.7 million in 1996 from $57.4 million in 1995. EBITDA as a
percentage of Total revenues increased to 9.8% in 1996 from 8.8% in 1995.

NON-CASH WRITE-DOWNS--Non-cash write-downs decreased $7.2 million to $0.2
million in 1996 from $7.4 million in 1995. The decrease was due to a reduction
in the carrying value of properties held for disposition of $0.2 million in 1996
and $4.0 million in 1995. In 1995, the Company also incurred a non-cash
write-down of $3.3 million relating to costs resulting from a postponed debt
refinancing. For further explanation of the non-cash write-downs, see Notes 3, 5
and 6 of Notes to Consolidated Financial Statements.

DEPRECIATION AND AMORTIZATION--Depreciation and amortization decreased $0.3
million, or 0.9%, to $33.0 million in 1996 from $33.3 million in 1995. The
decrease was due to lower amortization of debt restructuring costs, partially
offset by an increase in depreciation due to the addition of three restaurants
and the ongoing implementation of the Company's revitalization program.
Depreciation and amortization as a percentage of Total revenues was 5.1% for
both periods.

INTEREST EXPENSE, NET--Interest expense, net of capitalized interest and
interest income, increased by $2.2 million, or 5.3%, to $44.1 million in 1996
from $41.9 million in 1995. The increase was due to an increase in the interest
rate on the Company's bank debt as a result of the debt restructuring effective
January 1, 1996.

BENEFIT FROM (PROVISION FOR) INCOME TAXES--The benefit from income taxes was
$5.9 million in 1996 as compared to a provision for income taxes of $33.4
million in 1995. The benefit from income taxes of $5.9 million in 1996
represented the statutory federal and state tax benefit of the Company's loss
partially offset by the impact of the federal and state tax valuation
allowances. The income tax provision of $33.4 million in 1995 resulted primarily
from the anticipated deconsolidation from TRC. As a result, the deferred tax
asset of approximately $19 million related to the NOLs utilized by TRC as of
December 31, 1995 was written off in 1995. Additionally, as a result of the
anticipated change in ownership and Section 382 limitation, a valuation
allowance in 1995 was placed on all Federal NOL carryforwards generated through
December 31, 1995. See Note 9 of Notes to Consolidated Financial Statements and
"Net Operating Loss Carryforwards."

NET INCOME (LOSS)--As a result of the above, net loss decreased by $50.9
million, or 86.7%, to a net loss of $7.8 million in 1996 from a net loss of
$58.7 million in 1995.

1995 COMPARED TO 1994

REVENUES--Total revenues increased $18.1 million, or 2.9%, to $649.1 million
in 1995 from $631.0 million in 1994. Restaurant revenues increased $4.2 million,
or 0.7%, to $593.6 million in 1995 from $589.4 million in 1994. Comparable
restaurant revenues increased by 0.9%. The increase in Restaurant revenues and
comparable restaurant revenues was due to the introduction of frozen yogurt,
selected menu price

27
<PAGE>
increases, a shift in sales mix to higher-priced items, the opening of one new
restaurant, the revitalization of 14 restaurants and building expansions at five
existing restaurants. The increase was partially offset by the closing of 16
restaurants in 1995. Retail, institutional and other revenues increased $14.0
million, or 33.7%, to $55.6 million in 1995 from $41.6 million in 1994. This
increase was due to a successful promotional campaign in existing markets and
the introduction of frozen yogurt into these markets.

COST OF SALES--Cost of sales increased $12.8 million, or 7.1%, to $192.6
million in 1995 from $179.8 million in 1994. Cost of sales as a percentage of
Total revenues increased to 29.7% in 1995 from 28.5% in 1994. The increase was
due to a 0.8% rise in food costs at the restaurant level as a result of a sales
mix shift to higher quality items and increased waste in food preparation and to
a 0.4% rise in food costs at the retail and institutional level.

LABOR AND BENEFITS--Labor and benefits increased $2.8 million, or 1.3%, to
$214.6 million in 1995 from $211.8 million in 1994. Labor and benefits as a
percentage of Total revenues decreased in 1995 to 33.1% from 33.6% in 1994.
Approximately 0.7% of the decrease was due to an increase in Retail,
institutional and other revenues as a percent of Total revenues as these
revenues have no associated labor and benefits. This decrease was partially
offset by a 0.2% rise in labor and benefits as a percentage of Restaurant
revenue due to several large group medical claims and the introduction of a
restaurant leadership team concept which placed more focus on customer service
by increasing the hours of supervisory restaurant employees.

OPERATING EXPENSES--Operating expenses increased $11.9 million, or 9.0%, to
$143.9 million in 1995 from $132.0 million in 1994. Operating expenses as a
percentage of Total revenues increased to 22.2% in 1995 from 20.9% in 1994. The
increase was due to the cost of sponsoring a Ladies Professional Golf
Association golf tournament ("The Friendly's Classic") for the first time, an
increase in restaurant advertising expenses, higher restaurant renovation
expenses, an increase in credit card fees as a result of greater use of credit
cards by consumers and an increase in selling expenses associated with the
growth in the retail and institutional business.

GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased $2.3 million, or 6.0%, to $40.7 million in 1995 from $38.4 million in
1994. General and administrative expenses as a percentage of Total revenues
increased to 6.2% in 1995 from 6.1% in 1994. The increase was due to several
large group insurance claims in 1995, the annual merit-based salary increases
and the benefit in 1994 from eliminating a long-term bonus plan.

EBITDA--As a result of the above, EBITDA decreased by $11.5 million, or
16.7%, to $57.4 million in 1995 from $68.9 million in 1994. EBITDA as a
percentage of Total revenues decreased to 8.8% in 1995 from 10.9% in 1994.

NON-CASH WRITE-DOWNS--During 1995, the Company incurred a $3.3 million
non-cash write-down relating to costs resulting from a postponed debt
refinancing and a $4.0 million write-down of the carrying value of 51 restaurant
properties. For a further explanation of the write-downs, see Notes 3, 5 and 6
of Notes to Consolidated Financial Statements.

DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased $1.2
million, or 3.7%, to $33.3 million in 1995 from $32.1 million in 1994. The
increase was due to the addition of one new restaurant and the ongoing
implementation of the Company's revitalization program, partially offset by a
decrease in amortization as a result of TRC Acquisition financing costs being
fully amortized. Depreciation and amortization as a percentage of Total revenues
was 5.1% for both periods.

INTEREST EXPENSE, NET--Interest expense, net of capitalized interest and
interest income, decreased by $3.6 million, or 7.9%, to $41.9 million in 1995
from $45.5 million in 1994. The decrease was due to the payment of a $3.6
million fee to the Company's lenders in 1994 to facilitate a refinancing of the
Company's debt which was never consummated.

28
<PAGE>
BENEFIT FROM (PROVISION FOR) INCOME TAXES--The provision for income taxes
was $33.4 million as compared to the benefit from income taxes of $4.7 million
in 1994. The provision for income taxes of $33.4 million in 1995 was due to the
anticipated deconsolidation from TRC. As a result, the deferred tax asset of
approximately $19 million related to the NOLs utilized by TRC as of December 13,
1995 was written off in 1995. Additionally, as a result of the anticipated
change in ownership and Section 382 limitation, a valuation allowance in 1995
was placed on all Federal NOL carryforwards generated through December 31, 1995.
See Note 9 of Notes to Consolidated Financial Statements. The benefit from
income taxes of $4.7 million in 1994 represented the statutory federal and state
tax benefit of the Company's loss partially offset by the impact of the state
tax valuation allowance.

NET INCOME (LOSS)--As a result of the above, net loss increased by $54.8
million to a net loss of $58.7 million in 1995 from a net loss of $3.9 million
in 1994.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of liquidity and capital resources have been
cash generated from operations and borrowings under the Old Credit Facility. Net
cash provided by operating activities was $29.2 million for the nine months
ended September 28, 1997, $26.2 million in 1996, $27.8 million in 1995 and $38.4
million in 1994. Available borrowings under the Old Credit Facility were $27.0
million as of September 28, 1997, excluding $2.1 million of letter of credit
availability.

Additional sources of liquidity consist of capital and operating leases for
financing leased restaurant locations (in malls and shopping centers and land or
building leases), restaurant equipment, manufacturing equipment, distribution
vehicles and computer equipment. Additionally, sales of under-performing
existing restaurant properties and other assets (to the extent the Company's and
its subsidiaries' debt instruments, if any, permit) are sources of cash. The
amounts of debt financing that the Company will be able to incur under capital
leases and for property and casualty insurance financing and the amount of asset
sales by the Company will be limited by the terms of the New Credit Facility and
the Indenture relating to the Senior Notes. See "Description of New Credit
Facility" and "Description of Senior Notes."

The Company requires capital principally to maintain existing restaurant and
plant facilities, to continue to renovate and re-image existing restaurants, to
convert restaurants, to construct new restaurants and for general corporate
purposes. Since the TRC Acquisition and through September 28, 1997, the Company
has spent $270.3 million on capital expenditures, including $74.1 million on the
renovation of restaurants under its revitalization program.

The following table, which includes the 34 restaurants franchised to DavCo,
presents for the periods indicated (i) the number of restaurants opened and
closed during, and the number of restaurants open at the end of, each period,
(ii) the number of restaurants in which (a) seating capacity was expanded, (b)
certain exterior and interior renovation was completed under the original
revitalization program and (c) certain re-imaging was completed under the FOCUS
2000 program and (iii) the aggregate number of restaurants expanded, revitalized
and re-imaged since the TRC Acquisition and through the end of each period.

<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED
------------------------------------------------- SEPTEMBER 28,
1994 1995 1996 1997
--------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
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
</TABLE>

29
<PAGE>
Net cash used in investing activities was $19.1 million for the nine months
ended September 28, 1997, $20.3 million in 1996, $18.2 million in 1995 and $28.0
million in 1994. Capital expenditures for restaurant operations, including
capitalized leases, were approximately $12.8 million in the nine months ended
September 28, 1997, $22.6 million in 1996, $14.5 million in 1995 and $32.6
million in 1994. Capital expenditures were offset by proceeds from the sale of
property and equipment of $4.8 million, $8.4 million, $0.9 million and $1.5
million in the nine months ended September 28, 1997, and in 1996, 1995 and 1994,
respectively.

The Company also uses capital to repay borrowings when cash is sufficient to
allow for net repayments. Net cash used in financing activities to repay
borrowings was $16.7 million for the nine months ended September 28, 1997, $11.0
million in 1996 and $7.9 million in 1994 as compared to net cash provided by
financing activities of $0.2 million in 1995.

The Company had a working capital deficit of $17.9 million as of September
28, 1997. The Company is able to operate with a substantial working capital
deficit because (i) restaurant operations are conducted primarily on a cash (and
cash equivalent) basis with a low level of accounts receivable, (ii) rapid
turnover allows a limited investment in inventories and (iii) cash from sales is
usually received before related accounts for food, supplies and payroll become
due.

The full amount of the Term Loan Facility will be drawn at the closing of
the Offerings. Amounts repaid or prepaid under the Term Loan Facility may not be
reborrowed. The Company's primary sources of liquidity and capital resources in
the future will be cash generated from operations and borrowings under the
Revolving Credit Facility and the Letter of Credit Facility. The Revolving
Credit Facility will be a five-year facility providing for revolving loans to
the Company in a principal amount not to exceed $55 million, including a $5
million sublimit for each of trade and standby letters of credit. The Letter of
Credit Facility will mature contemporaneously with the Revolving Credit Facility
and will provide for up to $15 million of standby letters of credit. It is
expected that no amounts will initially be drawn under the Revolving Credit
Facility and $2.1 million will be available under the Letter of Credit Facility
at the consummation of the Recapitalization. These facilities are expected to be
drawn in part, from time to time, to finance the Company's working capital and
other general corporate requirements. See "Description of New Credit Facility."

It is expected that the Term Loan Facility will require quarterly
amortization payments beginning on April 15, 1999. Annual amortization amounts
will total $4.7 million, $10.7 million, $12.7 million, $14.7 million, $18.7
million, $20.3 million and $23.5 million in 1999 through 2005, respectively. In
addition to the scheduled amortization, it is expected that the Term Loan
Facility will be permanently reduced by (i) specified percentages of each year's
Excess Cash Flow (as defined in the New Credit Facility), (ii) specified
percentages of the aggregate net cash proceeds from certain issuances of
indebtedness and (iii) 100% of the aggregate net cash proceeds from asset sales
not in the ordinary course of business and certain insurance claim proceeds, in
each case in this clause (iii), not re-employed or committed to be re-employed
within a specified period in the Company's business, exclusive of up to $7.5
million of aggregate net proceeds received from asset sales subsequent to the
closing relating to the New Credit Facility. Such applicable proceeds and Excess
Cash Flow shall be applied to the Term Loan Facility in inverse order of
maturity. It is also expected that after the Term Loan Facility has been
prepaid, applicable proceeds of debt issuances, asset sales and insurance claims
shall be applied to permanently reduce the Revolving Credit Facility. At the
Company's option, loans may be prepaid at any time with certain notice and
breakage cost provisions.

The obligations of the Company under the New Credit Facility will (i) be
secured by a first priority security interest in substantially all material
assets of the Company and certain of its domestic subsidiaries and all other
assets owned or hereafter acquired and (ii) be guaranteed, on a senior secured
basis, by the

30
<PAGE>

Company's Friendly's Restaurants Franchise, Inc. subsidiary and the Friendly's
International, Inc. subsidiary and may also be so guaranteed by certain
subsidiaries created or acquired after consummation of the Recapitalization.

At the Company's option, the interest rates per annum applicable to the New
Credit Facility will be either the Eurodollar Rate (as defined in the New Credit
Facility), plus a margin ranging from 2.25% to 2.75%, or the ABR (as defined in
the New Credit Facility), plus a margin ranging from 0.75% to 1.25%. The ABR is
the greater of (a) Societe Generale's Prime Rate or (b) the Federal Funds Rate
plus 0.50%. It is expected that after the first twelve calendar months of the
New Credit Facility, pricing reductions will be available in certain
circumstances.

The Company anticipates requiring capital in the future principally to
maintain existing restaurants and plant facilities, to continue to renovate and
re-image existing restaurants, to convert restaurants and to construct new
restaurants. Capital expenditures for the fourth quarter of 1997 and for 1998
are anticipated to be $64.3 million in the aggregate, of which $56.3 million
will be spent on restaurant operations. See "Business--Restaurant
Operations--Capital Investment Program" for a further description of the
Company's estimated 1997 and 1998 capital expenditures. The Company's actual
1997 and 1998 capital expenditures may vary from the estimated amounts set forth
herein. See "Risk Factors--Substantial Leverage; Stockholders' Deficit" for a
discussion of certain factors, many of which are beyond the Company's control,
that could affect the Company's ability to make its planned capital
expenditures.

In addition, the Company may need capital in connection with (i) commitments
as of September 28, 1997 to purchase $51.2 million of raw materials, food
products and supplies used in the normal course of business and (ii) its
self-insurance through retentions or deductibles of the majority of its workers'
compensation, automobile, general liability and group health insurance programs.
The Company's self-insurance obligations may exceed its reserves. See Notes 12
and 15 of Notes to Consolidated Financial Statements.

The Company believes that the combination of the funds anticipated to be
generated from operating activities and borrowing availability under the New
Credit Facility will be sufficient to meet the Company's anticipated operating
and capital requirements for the foreseeable future. See "Risk
Factors--Substantial Leverage; Stockholders' Deficit," "--History of Losses" and
"--Restrictions Imposed Under New Credit Facility; Security Interest."

OLD CREDIT FACILITY

In January 1995, the Company and its lenders amended the Old Credit Facility
as a result of certain covenant violations and, in connection therewith, the
lenders were granted the right to receive a contingent payment in certain
circumstances. In January 1996, the Old Credit Facility was amended and restated
pursuant to which revolving credit and term loans totaling $373.6 million were
converted to revolving credit loans of $38.5 million and term loans of $335.1
million. In connection therewith, the lenders received Class B common shares
which increased their interests in the Company to an aggregate of 50% of the
then-issued and outstanding common shares. As a result of the issuance of
certain common shares to management and the exercise of certain warrants,
additional common shares were issued to the lenders in 1996 to maintain their
minimum equity interest at 47.5%. As a result of their ownership of Class B
common shares, the lenders obtained the right to elect two of the five members
of the Company's Board of Directors. The lenders were given the right to
increased board representation and voting rights and the right to receive
additional common shares upon certain events. As part of the Recapitalization,
the Old Credit Facility will be repaid, the outstanding Class B common shares
will be converted into shares of Common Stock, the ownership of such lenders
will decrease to approximately 9.8% of the outstanding Common Stock (4.5% if the
Underwriters' over-allotment option in the Common Stock Offering is exercised in
full) and such lenders' nominees on the Board of Directors will be replaced. See
"Management," "Ownership of Common Stock" and Note 7 of Notes to Consolidated
Financial Statements.

31
<PAGE>
NET OPERATING LOSS CARRYFORWARDS

As of December 29, 1996, the Company and its subsidiaries had a federal net
operating loss ("NOL") carryforward of $40.1 million. Because of a change of
ownership of the Company under Section 382 of the Internal Revenue Code on March
26, 1996 (see Note 9 of Notes to Consolidated Financial Statements), $29.7
million of the NOL carryforward can be used only to offset current or future
taxable income to the extent that net unrealized built-in gains which existed at
March 26, 1996 are recognized by March 26, 2001. Accordingly, a valuation
allowance has been recorded to offset the $29.7 million of the NOL carryforward.
The consolidated balance sheet of the Company as of December 29, 1996 includes
the tax effect of the remaining federal and state NOLs ("New NOLs") of $4.6
million for the periods prior to March 26, 1996 and $5.8 million for the period
from March 27, 1996 to December 29, 1996. It is expected that the Common Stock
Offering will result in the Company having another change of ownership under
Section 382 of the Internal Revenue Code. Accordingly, in tax years ending after
the Common Stock Offering, the Company will be limited in how much of its New
NOLs it can utilize. The amount of New NOLs that can be utilized in any tax year
ending after the date of the Common Stock Offering will be limited to an amount
equal to the equity value of the Company immediately prior to the Common Stock
Offering (without taking into account the proceeds of the Offerings) multiplied
by the long-term tax exempt rate in effect for the month of the Common Stock
Offering (5.3% for October 1997). While the limitation on the use of the New
NOLs will delay when the New NOLs are utilized, the Company expects all of the
New NOLs to be utilized before they expire. Accordingly, no valuation allowance
is required related to any New NOLs. The NOLs expire, if unused, between 2001
and 2012. In addition, the NOL carryforwards are subject to adjustment upon
review by the Internal Revenue Service. See Note 9 of Notes to Consolidated
Financial Statements.

INFLATION

The inflationary factors which have historically affected the Company's
results of operations include increases in cost of milk, sweeteners, purchased
food, labor and other operating expenses. Approximately 17% of wages paid in the
Company's restaurants are impacted by changes in the federal or state minimum
hourly wage rate. Accordingly, changes in the federal or states minimum hourly
wage rate directly affect the Company's labor cost. The Company is able to
minimize the impact of inflation on occupancy costs by owning the underlying
real estate for approximately 42% of its restaurants. The Company and the
restaurant industry typically attempt to offset the effect of inflation, at
least in part, through periodic menu price increases and various cost reduction
programs. However, no assurance can be given that the Company will be able to
offset such inflationary cost increases in the future. See "Risk Factors--
Regulation."

SEASONALITY

Due to the seasonality of frozen dessert consumption, and the effect from
time to time of weather on patronage in its restaurants, the Company's revenues
and EBITDA are typically higher in its second and third quarters.

32
<PAGE>
BUSINESS

GENERAL

Friendly's, founded in 1935, was publicly held from 1968 until January 1979,
at which time it was acquired by Hershey Foods Corporation ("Hershey"). While
owned by Hershey, the Company increased the total number of restaurants from 601
to 849 yet devoted insufficient resources to product development and capital
improvements. In 1988, The Restaurant Company ("TRC"), an investor group led by
Donald Smith, the Company's current Chairman, Chief Executive Officer and
President, acquired Friendly's from Hershey (the "TRC Acquisition"). The high
leverage associated with the TRC Acquisition and the Old Credit Facility
severely impacted the liquidity and profitability of the Company and, therefore,
limited the scope and implementation of certain of the Company's business and
growth strategies. The Company has reported net losses and had earnings that
were insufficient to cover fixed charges for each fiscal year since the TRC
Acquisition except for the nine months ended September 28, 1997. As a result of
subsequent restructurings, and upon completion of the Recapitalization and the
Related Transactions, approximately 16.8% and 9.8% of the Common Stock will be
owned by the Company's employees and lenders under the Old Credit Facility,
respectively. See "Risk Factors," "Selected Consolidated Financial Information,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Ownership of Common Stock."

33
<PAGE>
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.

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.

34
<PAGE>
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.

MANAGEMENT EXPERIENCE AND EMPLOYEE RETENTION. The Company has a talented
senior management team with extensive restaurant industry experience and an
average tenure with the Company of 17 years. In addition, the Company minimizes
turnover of both managers and line personnel through extensive employee training
and retention programs. In 1996, the Company's turnover among its restaurant
salaried management was approximately 24%, which was significantly lower than
the industry average.

BUSINESS STRATEGIES

FRIENDLY'S OBJECTIVE IS TO CAPITALIZE ON ITS COMPETITIVE STRENGTHS TO GROW
ITS RESTAURANT AND RETAIL OPERATIONS BY IMPLEMENTING THE FOLLOWING KEY BUSINESS
STRATEGIES:

UPGRADE MENU AND SELECTIVELY INTRODUCE NEW PRODUCTS. Friendly's strategy is
to increase consumer awareness and restaurant patronage by continuously
upgrading its menu and introducing new products. As

35
<PAGE>
part of this strategy, Friendly's dedicated research and development group
regularly formulates proprietary new menu items and frozen desserts to
capitalize on the evolving tastes and preferences of its customers. In the fall
of 1996, the Company introduced a new dinner line which includes a high-quality
steak entree, home-style chicken dinners, pot pies and stir-frys, as well as
several premium frozen desserts including the new Oreo-Registered Trademark-
Brownie Sundae. Largely as a result of new premium items, guest check averages
have increased 7.4% during the first nine months of 1997 as compared to the same
period of 1996.

36
<PAGE>
EXTEND THE FRIENDLY'S BRAND INTERNATIONALLY. The Company's long-term
international growth strategy is to utilize local partners and establish master
franchise or licensee agreements to extend the brand internationally and to
achieve profitable growth while minimizing capital investment. Currently, the
Company's Friendly's International, Inc. subsidiary ("FII") participates in a
licensing agreement with a South Korean enterprise to develop Friendly's "Great
American" ice cream shoppes in that country. As of September 28, 1997, the
licensee and its sublicensees were operating 18 ice cream shoppes, and the
Company expects such parties to operate 28 ice cream shoppes by the end of 1997.
FII also sells the Company's frozen desserts in several chain restaurants,
theaters and food courts in the United Kingdom. The Company selects its
international markets based on the high quality of the Company's frozen desserts
relative to locally-produced frozen desserts and the propensity of consumers in
these regions to purchase American-branded products.

RESTAURANT OPERATIONS

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.

<TABLE>
<CAPTION>
COMPANY-OWNED/LEASED
------------------------------------
FREESTANDING OTHER FRANCHISED TOTAL
STATE RESTAURANTS RESTAURANTS (A) RESTAURANTS (B) RESTAURANTS
- ----------------------------------------------------- --------------- ------------------- ------------------- ---------------
<S> <C> <C> <C> <C>
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
</TABLE>

- ------------------------

(a) Includes primarily malls and strip centers.

(b) The franchised restaurants (representing 30 freestanding and four other
restaurants) have been leased or subleased to DavCo pursuant to the DavCo
Agreement. See "Prospectus Summary-- Recent Developments."

37
<PAGE>
The 546 freestanding restaurants, including the 30 franchised to DavCo,
range in size from approximately 2,600 square feet to approximately 5,000 square
feet. The 150 mall and strip center restaurants, including the four franchised
to DavCo, average approximately 3,000 square feet. Of the 662 restaurants
operated by the Company at September 28, 1997, the Company owned the buildings
and the land for 279 restaurants, owned the buildings and leased the land for
145 restaurants, and leased both the buildings and the land for 238 restaurants.
The Company's leases generally provide for the payment of fixed monthly rentals
and related occupancy costs (e.g. property taxes, common area maintenance and
insurance). Additionally, most mall and strip center leases require the payment
of common area maintenance charges and incremental rent of between 3.0% and 6.0%
of the restaurant's sales.

RESTAURANT ECONOMICS

During the twelve-month period ended September 28, 1997, average revenue per
restaurant was $863,000, average restaurant cash flow was $153,000 (after rent
expense of $20,000) and average restaurant operating income was $121,000.
Average restaurant cash flow represents restaurant operating income before
depreciation and amortization. Average revenue per restaurant for the 232
freestanding restaurants with more than 100 seats was $1,099,000, average
revenue per restaurant for the 285 freestanding restaurants with less than 100
seats was $694,000 and average revenue per restaurant for the 145 other
restaurants was $818,000. The Company has opened 12 new restaurants since the
beginning of 1994, nine of which had been operating for at least 12 months as of
September 28, 1997. Such nine restaurants, which had an average of 136 seats,
generated average revenue per restaurant of $1,201,000, average restaurant cash
flow of $186,000 (after rent expense of $91,000) and average restaurant
operating income of $130,000.

The average cash investment to open such nine restaurants (all of which were
conversions) was approximately $460,000, excluding pre-opening expenses, or
$1,394,000 including rent expense capitalized at 9.0%. Pre-opening expenses were
approximately $85,000 per restaurant. The Company plans to continue to convert
restaurants and estimates that conversions will cost $500,000 to $600,000 per
restaurant, excluding land and pre-opening expenses. The Company converted a
178-seat restaurant in Burlington, Vermont in December 1996 at a cost of
$540,000 or $1,568,000 including rent expense capitalized at 9.0%. This
restaurant has achieved average weekly revenues of $36,000 through September 28,
1997. The Company also converted a 136-seat restaurant in Berlin, Vermont in
September 1997 at a cost of approximately $500,000, or approximately $972,000
including rent expense capitalized at 9.0%.

While conversions generally cost less than new construction, the Company
plans to selectively construct new restaurants when the anticipated return is
sufficient to warrant the increased cost of new construction. The Company has
developed two new freestanding restaurant prototypes for construction, including
108-seat and 156-seat prototypes, which are anticipated to cost approximately
$730,000 and $780,000 per restaurant, respectively, excluding land and
pre-opening expenses. Pre-opening expenses are estimated to be $85,000 per
restaurant. The Company opened its first 156-seat prototype restaurant in
Waterville, Maine in July 1997 at a cost of $800,000, or $1,080,000 including
rent expense capitalized at 9.0%.

CAPITAL INVESTMENT PROGRAM

A significant component of the Company's capital investment program is the
FOCUS 2000 initiative which is designed to establish a consistent, enhanced
Friendly's brand image across the Company's entire restaurant operations. The
Company's capital spending strategy seeks to increase comparable restaurant
revenues and restaurant cash flow through the on-going revitalizing and
re-imaging of existing restaurants and to increase total restaurant revenues
through the addition of new restaurants. The following illustrates the key
components of the Company's capital spending program. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of New Credit
Facility."

38
<PAGE>

RESTAURANT RE-IMAGING. The Company expects to complete the re-imaging of 70
restaurants in 1997 (23 of which have been completed to date) at an estimated
cost of $120,000 per restaurant (not including $850,000 of one time costs
related to development of the prototype). This cost typically includes interior
and exterior redecoration and a new exterior lighting package. The Company
expects to complete the re-imaging of approximately 110 restaurants during 1998.

NEW RESTAURANT CONVERSION AND CONSTRUCTION. The Company has converted one
restaurant in 1997 at a cost of approximately $500,000. The Company expects to
construct three new restaurants in 1997 (one of which has been completed to
date) at an estimated cost of approximately $800,000 per restaurant, excluding
land and pre-opening expenses. The Company expects to complete the conversion or
construction of approximately ten restaurants during 1998.

SEATING CAPACITY EXPANSION PROGRAM. Since the TRC Acquisition and through
September 28, 1997, the Company has expanded seating capacity by an average of
50 seats at 26 restaurants at an average cost of $292,000 per restaurant.
Revenue per restaurant increased approximately 24% in the full year following
completion of this expansion compared to the comparable prior period. The
Company expects to complete the expansion of seven restaurants in 1997 (five of
which have been completed to date) at an estimated cost of $244,000 per
restaurant. This cost typically includes adding 50 seats per restaurant,
relocating certain equipment and increasing parking capacity where necessary.
The Company expects to complete the expansion of approximately four restaurants
during 1998.

INSTALLATION OF RESTAURANT AUTOMATION SYSTEMS. Since the TRC Acquisition
and through September 28, 1997, the Company has installed touch-screen point of
sale ("POS") register systems in approximately 340 restaurants at an average
cost of $34,000 per restaurant. These POS register systems are designed to
improve revenue realization, food cost management and labor scheduling while
increasing the speed and accuracy of processing customer orders. The Company
expects to install POS register systems in approximately 40 restaurants during
1998.

FRANCHISING PROGRAM

The Company recently initiated a franchising strategy to expand its
restaurant presence in under-penetrated markets, accelerate restaurant growth in
new markets, increase marketing and distribution efficiencies and preempt
competition by acquiring restaurant locations in the Company's targeted markets.
With the substantial completion of the Company's restaurant revitalization
program, the development and initial deployment of its two new freestanding
restaurant prototypes and the successful introduction of its new dinner line,
the Company believes it is in a position to maximize the value of its brand
appeal to prospective franchisees. The Company's wholly owned subsidiary,
Friendly's Restaurants Franchise, Inc. ("FRFI") commenced operations in 1996 for
the purpose of franchising various restaurant concepts. Since it began
operations, FRFI has developed and now offers a franchise program for both
Friendly's restaurants and Friendly's Cafes. The Company seeks franchisees who
have related business experience, capital adequacy to build-out the Friendly's
concept and no operations which have directly competitive restaurant or food
concepts. On July 14, 1997, the Company entered into the DavCo Agreement
pursuant to which DavCo purchased certain assets and rights in 34 existing
Friendly's restaurants in Maryland, Delaware, the District of Columbia and
northern Virginia, committed to open an additional 74 restaurants over the next
six years and, subject to the fulfillment of certain conditions, further agreed
to open 26 additional restaurants, for a total of 100 new restaurants in this
franchising region over the next ten years.

QUALITY CONTROL PROGRAMS

The Company's high quality standards are promoted through strict product
specifications, guest service programs and defined daily operating systems and
procedures for maintenance, cleanliness and safety. Policy and operating manuals
and video support materials for employee training are maintained in all
Friendly's restaurants. The Company uses a variety of guest feedback systems to
measure, monitor and

39
<PAGE>
react to service performance including comment cards, "800" telephone call-in
lines, guest commentary follow-up systems, focus groups and an independent
quarterly consumer tracking study conducted by National Purchase Diary, Inc. The
Company's customer service center is implementing a chainwide program to receive
and log customer feedback by restaurant and to report monthly to field
management. All levels of field management are directly responsible for and
evaluated according to guest satisfaction levels.

CARRYOUT OPERATIONS

Through dedicated carryout areas, Friendly's restaurants offer the Company's
full line of frozen desserts and certain of its food menu items. Reserved
parking is available at many of the Company's free-standing restaurants to
facilitate quick carryout service. Approximately 15% of the Company's average
freestanding restaurant revenues are derived from its carryout business with a
significant portion of these sales occurring during the afternoon and evening
snack periods. Of this 15%, approximately 5% comes from sales of packaged frozen
desserts in display cases within its restaurants.

RETAIL AND RELATED OPERATIONS

RETAIL OPERATIONS

In 1989, the Company extended its premium packaged frozen dessert line from
its restaurants into retail locations. The Company has profitably grown its
revenue from the sale of such products to retail outlets from $1.4 million in
1989 to $60.1 million in the twelve months ended September 28, 1997. The Company
offers a branded product line that includes approximately 60 half gallon
varieties featuring premium ice cream shoppe flavors and unique sundae
combinations, low and no fat frozen yogurt, low fat ice cream and sherbet.
Specialty flavors include Royal Banana Split, Cappuccino Dream-TM- and Caramel
Fudge Nut Blast-TM-, and proprietary products include the Jubilee
Roll-Registered Trademark-, Wattamelon Roll-Registered Trademark- and Friendly's
branded ice cream cakes and pies. The Company also licenses from Hershey the
right to feature certain candy brands including Almond
Joy-Registered Trademark-, Mr. Goodbar-Registered Trademark-, Reese's
Pieces-Registered Trademark-, Reese's-Registered Trademark- Peanut Butter Cups
and York-Registered Trademark- Peppermint Patties on packaged sundae cups and
pints. See "Licenses and Trademarks."

The Company focuses its marketing and distribution efforts in areas where it
has higher restaurant penetration and consumer awareness. During the initial
expansion of its retail business in 1989 and 1990, Albany, Boston and
Hartford/Springfield were primary markets of opportunity, currently with 35, 118
and 95 restaurant locations, respectively. Targeting other markets with high
growth potential and strong Friendly's brand awareness, the Company added the
New York and Philadelphia markets, currently with 135 and 64 restaurants,
respectively, to its retail distribution efforts in 1992 and 1993. According to
recent A.C. Nielsen reports, the Company currently maintains a weighted average
market share of approximately 11% in the Albany, Boston and Hartford/Springfield
markets and 4% in the New York and Philadelphia markets.

The Company expects to continue building its retail distribution business by
increasing market share in its current retail markets. In these markets, the
Company intends to increase shelf space with existing accounts and add new
accounts by (i) capitalizing on its integrated restaurant and retail consumer
advertising and promotion programs, (ii) continuing new product introductions
and (iii) improving trade merchandising initiatives. Additionally, the Company
expects to continue to selectively enter new markets where its brand awareness
is high according to market surveys. In Pittsburgh, where the Company currently
has no restaurants, the Company has a packaged frozen dessert market share of
approximately 4%, according to A.C. Nielsen.

The Company has developed a broker/distributor network designed to protect
product quality through proper product handling and to enhance the merchandising
of the Company's frozen desserts. The Company's experienced sales force manages
this network to serve specific retailer needs on a market-by-

40
<PAGE>
market basis. In addition, the Company's retail marketing and sales departments
coordinate market development plans and key account management programs.

NON-TRADITIONAL LOCATIONS

In order to capitalize on both planned and impulse purchases, the Company is
leveraging the Friendly's brand name and enhancing consumer awareness by
introducing modified formats of the Friendly's concept into non-traditional
locations. These modified formats include (i) Friendly's Cafe, a quick service
concept offering frozen desserts and a limited menu, (ii) Friendly's branded ice
cream shoppes offering freshly-scooped and packaged frozen desserts and (iii)
Friendly's branded display cases and novelty carts with packaged single-serve
frozen desserts. The first Friendly's Cafe opened in October 1997. The Company
supplies frozen desserts to non-traditional locations such as colleges and
universities, sports facilities, amusement parks, secondary school systems and
business cafeterias directly or through selected vendors pursuant to multi-year
license agreements.

INTERNATIONAL OPERATIONS

The Company, through its FII subsidiary, has a master license agreement with
a South Korean enterprise to develop Friendly's "Great American" ice cream
shoppes offering freshly-scooped and packaged frozen desserts. As of September
28, 1997, the licensee and its sublicensees were operating 18 ice cream shoppes,
and the Company expects such parties to operate 28 ice cream shoppes by the end
of 1997. FII also has various licensing arrangements with several companies in
the United Kingdom under which certain of the Company's frozen desserts are
distributed in the United Kingdom. The Company's strategy in the United Kingdom
is to sell Friendly's branded frozen deserts in full and quick-service
restaurants, movie theaters, railway and bus stations, shopping malls and
airport locations pursuant to license agreements. Non-restaurant locations will
vary from full dipping stations to sundae station kiosks or sundae carts. In
addition, the Company's products will be distributed to selected retailers for
resale. In addition, the Company is a 50% partner in a joint venture in
Shanghai, China which has manufactured and distributed frozen desserts on a
limited basis. The joint venture is currently seeking additional distribution
for its products in China. In markets where a capital investment by the Company
is required to introduce its brand, the Company seeks to monetize such
investment by entering into franchising or licensing arrangements, and
subsequently to redeploy its capital, if necessary, into new international
markets. The Company believes that there are significant growth opportunities
within South Korea, the United Kingdom and China, as well as in other countries,
in particular those within the Pacific Rim.

MARKETING

The Company's marketing strategy is to continue to strengthen Friendly's
brand equity and further capitalize on its strong customer awareness to
profitably build revenues across all businesses. The primary advertising
message, built around its "Leave room for the ice cream-TM-" slogan, focuses on
introducing new lunch and dinner products or line extensions in combination with
unique frozen desserts. For example, in 1996, Friendly's introduced a new line
of steak dinners and promoted trial of the line with a free Happy
Ending-Registered Trademark- Sundae. Management utilizes this strategy to
encourage consumer trial of new products and increase the average guest check
while reinforcing Friendly's unique food-with-ice-cream experience. The
Company's food-with-ice-cream promotions also build sales of packaged frozen
desserts in its restaurants and in retail locations.

The Company's media plan is designed to build awareness and increase trial
among key target audiences while optimizing spending by market based on media
cost efficiencies. The Company classifies markets based upon restaurant
penetration and the resulting advertising and promotion costs per restaurant.
The Company's 19 most highly-penetrated markets are supported with regular spot
television advertisements from March through December. The Company augments its
marketing efforts in these markets with radio advertising to target the
breakfast day-part or to increase the frequency of the

41
<PAGE>
promotional message. In addition, the Company supports certain of these
highly-penetrated markets (Albany, Boston, Hartford-Springfield and Providence)
during the peak summer season with additional television media focusing on
freshly-scooped and packaged frozen desserts. In its secondary markets, the
Company utilizes more cost-effective local store marketing initiatives such as
radio, direct mail and newspaper advertising. All of the Company's markets are
supported with an extensive promotional coupon program.

The Company believes that its integrated restaurant and retail marketing
efforts provide a significant competitive advantage supporting development of
its retail business. Specifically, the retail business benefits from the
awareness and trial of Friendly's product offerings generated by 32 weeks of
food-with-ice-cream advertising and couponing efforts. The Company believes that
this approach delivers a significantly higher level of consumer exposure and
usage compared to the Company's packaged frozen dessert competitors which have
only retail distribution. In turn, sales of the Company's products through more
than 5,000 retail locations, supported by trade merchandising efforts, build
incremental awareness and usage of Friendly's which management believes benefits
the restaurants. The Company estimates that advertising and promotion
expenditures will be approximately $20 million for 1997.

MANUFACTURING

The Company produces substantially all of its frozen desserts in two
Company-owned manufacturing plants which employ a total of approximately 300
people. The Wilbraham, Massachusetts plant occupies approximately 41,000 square
feet of manufacturing space while the Troy, Ohio plant utilizes approximately
18,000 square feet. During 1996, the combined plants operated at an average
capacity of 68.0% and produced (i) over 17.0 million gallons of ice cream,
sherbets and yogurt in bulk, half-gallons and pints, (ii) nine million sundae
cups, (iii) 2.5 million frozen dessert rolls, pies and cakes and (iv) more than
1.4 million gallons of fountain syrups and toppings. The Company, through its
Shanghai, China joint venture, also owns a 13,000 square foot ice cream
manufacturing facility. The quality of the Company's products is important, both
to sustain Friendly's image and to enable the Company to satisfy customer
expectations. Wherever possible, the Company "engineers in" quality by
installing modern processes such as computerized mix-making equipment and
monitoring devices to ensure all storage tanks and rooms are kept at proper
temperatures for maximum quality.

PURCHASING AND DISTRIBUTION

In conjunction with the Company's product development department, the
Company's purchasing department evaluates the cost and quality of all major food
items on a quarterly basis and purchases these items through numerous vendors
with which it has long-term relationships. The Company contracts with vendors on
an annual, semiannual, or monthly basis depending on the item and the
opportunities within the marketplace. In order to promote competitive pricing
and uniform vendor specifications, the Company contracts directly for such
products as produce, milk and bread and other commodities and services. The
Company also minimizes the cost of all restaurant capital equipment by
purchasing directly from manufacturers or pooling volumes with master
distributors.

The Company owns two distribution centers and leases a third which allow the
Company to control quality, costs and inventory from the point of purchase
through restaurant delivery. The Company distributes most product lines to its
restaurants, and its packaged frozen desserts to its retail customers, from
warehouses in Chicopee and Wilbraham, Massachusetts and Troy, Ohio with a
combined non-union workforce of approximately 250 employees. The Company's truck
fleet delivers all but locally-sourced produce, milk and selected bakery
products to its restaurants at least weekly, and during the highest-sales
periods, delivers to over 50% of Friendly's restaurants twice-per-week. The
Chicopee, Wilbraham and Troy warehouses encompass 54,000 square feet, 109,000
square feet and 42,000 square feet, respectively. The Company believes that
these distribution facilities operate at or above industry standards with
respect to timeliness and accuracy of deliveries.

42
<PAGE>
The Company has distributed its products since its inception to protect the
product integrity of its frozen desserts. The Company delivers products to its
restaurants on its own fleet of 56 tractors and 81 trailers which display
large-scale images of the Company's featured products. The entire fleet is
specially built to be compatible with storage access doors, thus protecting
frozen desserts from "temperature shock." Recently acquired trailers have an
innovative design which provides individual temperature control for three
distinct compartments. To provide additional economies to the Company, the truck
fleet backhauls on over 50% of its delivery trips, bringing the Company's
purchased raw materials and finished products back to the distribution centers.

HUMAN RESOURCES AND TRAINING

The average Friendly's restaurant employs between two and four salaried team
members, which may include one General Manager, one Assistant Manager, one Guest
Service Supervisor and one Manager-in-Training. The General Manager is directly
responsible for day-to-day operations. General Managers report to a District
Manager who typically has responsibility for an average of seven restaurants.
District Managers report to a Division Manager who typically has responsibility
for approximately 50 restaurants. Division Managers report to a Regional Vice
President who typically has responsibility for six or seven Division Managers
covering approximately 350 restaurants.

The average Friendly's restaurant is staffed with four to ten employees per
shift, including the salaried restaurant management. Shift staffing levels vary
by sales volume level, building configuration and time of day. The average
restaurant typically utilized approximately 37,500 hourly-wage labor hours in
1996 in addition to salaried management.

To maintain its high service and quality standards, Friendly's has developed
its Restaurant Leadership Team ("RLT"). The RLT is comprised of highly-qualified
management employees, each of whom has received extensive training in Company
policies and procedures, as well as applicable federal, state and local
regulations. This team approach helps to ensure that the Company has the strong
leadership and management staff required to efficiently operate Friendly's
restaurants, provide quality service to customers and develop a pool of
well-qualified management candidates. These management candidates undergo
extensive training at the Company's dedicated training and development center.
Moreover, the Company has significantly improved its human resources training to
include sexual harassment, racial discrimination, diversity, employment
practices, government regulations, selection and assessment and other programs.
The Company also requires its District and Division Managers to participate in
training and development programs, provides courses to improve management skills
and offers development support for its headquarters employees.

EMPLOYEES

The total number of employees at the Company varies between 24,000 and
28,000 depending on the season of the year. As of September 28, 1997, the
Company employed approximately 24,000 employees, of which approximately 23,000
were employed in Friendly's restaurants (including approximately 120 in field
management), approximately 550 were employed at the Company's two manufacturing
and three distribution facilities and approximately 450 were employed at the
Company's corporate headquarters and other offices. None of the Company's
employees is a party to a collective bargaining agreement.

HEADQUARTERS AND OTHER NON-RESTAURANT PROPERTIES

In addition to the Company's restaurants, the Company owns (i) an
approximately 260,000 square foot facility on 46 acres in Wilbraham,
Massachusetts which houses the corporate headquarters, a manufacturing facility
and a warehouse, (ii) an approximately 77,000 square foot office, manufacturing
and warehouse facility on 13 acres in Troy, Ohio and (iii) an approximately
18,000 square foot restaurant construction and

43
<PAGE>
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

GOVERNMENT REGULATION

The Company is subject to various Federal, state and local laws affecting
its business. Each Friendly's restaurant is subject to licensing and regulation
by a number of governmental authorities, which include health, safety,
sanitation, building and fire agencies in the state or municipality in which the
restaurant is located. Difficulties in obtaining or failures to obtain required
licenses or approvals, or the loss of such licences and approvals once obtained,
can delay, prevent the opening of, or close, a restaurant in a

44
<PAGE>
particular area. The Company is also subject to Federal and state environmental
regulations, but these have not had a material adverse effect on the Company's
operations.

The Company's relationships with its current and potential franchisees is
governed by the laws of its several states which regulate substantive aspects of
the franchisor-franchisee relationship. Substantive state laws that regulate the
franchisor-franchisee relationship presently exist or are being considered in a
substantial number of states, and bills have been introduced in Congress (one of
which is now pending) which would provide for Federal regulation of substantive
aspects of the franchisor-franchisee relationship. These current and proposed
franchise relationship laws limit, among other things, the duration and scope of
non-competition provisions, the ability of a franchisor to terminate or refuse
to renew a franchise and the ability of a franchisor to designate sources of
supply.

The Company's restaurant operations are also subject to Federal and state
laws governing such matters as wages, working conditions, citizenship
requirements and overtime. Some states have set minimum wage requirements higher
than the Federal level, and the Federal government recently increased the
Federal minimum wage. In September 1997, the second phase of an increase in the
minimum wage was implemented in accordance with the Federal Fair Labor Standards
Act of 1996. Significant numbers of hourly personnel at the Company's
restaurants are paid at rates related to the Federal minimum wage and,
accordingly, increases in the minimum wage will increase labor costs at the
Company's restaurants. Other governmental initiatives such as mandated health
insurance, if implemented, could adversely affect the Company as well as the
restaurant industry in general. The Company is also subject to the Americans
with Disabilities Act of 1990, which, among other things, may require certain
minor renovations to its restaurants to meet federally-mandated requirements.
The cost of these renovations is not expected to be material to the Company.

LEGAL PROCEEDINGS

From time to time the Company is named as a defendant in legal actions
arising in the ordinary course of its business. The Company is not party to any
pending legal proceedings other than routine litigation incidental to its
business. The Company does not believe that the resolutions of these claims
should have a material adverse effect on the Company's financial condition or
results of operations.

45
<PAGE>
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:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ------------------------------ --- ---------------------------------------------------------------------------
<S> <C> <C>

Donald N. Smith 57 Chairman, Chief Executive Officer and President

Paul J. McDonald 53 Senior Executive Vice President, Chief Administrative Officer and Assistant
Secretary

Joseph A. O'Shaughnessy 62 Senior Executive Vice President

Larry W. Browne 52 Executive Vice President, Corporate Finance, General Counsel and Secretary

Gerald E. Sinsigalli 59 President, Food Service Division

Dennis J. Roberts 48 Senior Vice President, Restaurant Operations

Scott D. Colwell 40 Vice President, Marketing

Henry V. Pettis III 52 Vice President, Franchising and Operations Services

George G. Roller 49 Vice President, Finance, Chief Financial Officer and Treasurer

Garrett J. Ulrich 46 Vice President, Human Resources

Michael J. Daly* 55 Director

Steven L. Ezzes 50 Director

Barry Krantz* 53 Director

Charles A. Ledsinger, Jr. 47 Director

Burton J. Manning* 66 Director

Gregory L. Segall* 34 Director
</TABLE>

- ------------------------

* Messrs. Krantz and Segall, currently on the Board of Directors as the
nominees of the lenders under the Old Credit Facility, will be replaced as
directors by Messrs. Daly and Manning upon consummation of the
Recapitalization.

DONALD N. SMITH has been Chairman, Chief Executive Officer and President of
the Company since September 1988. Mr. Smith has also been Chairman of the Board
and Chief Executive Officer of TRC and Perkins since November 1985. Prior to
joining TRC, Mr. Smith was President and Chief Executive Officer for
Diversifoods, Inc. from 1983 to October 1985. From 1980 to 1983, Mr. Smith was
Senior Vice President, PepsiCo., Inc. and was President of its Food Service
Division. He was responsible for the operations of Pizza Hut Inc. and Taco Bell
Corp., as well as North American Van Lines, Lee Way Motor Freight, Inc.,
PepsiCo. Foods International and La Petite Boulangerie. Prior to 1980, Mr. Smith
was President and Chief Executive Officer of Burger King Corporation and Senior
Executive Vice President and Chief Operations Officer for McDonald's
Corporation.

PAUL J. MCDONALD has been Senior Executive Vice President, Chief
Administrative Officer and Assistant Secretary since January 1996. Mr. McDonald
has been employed in various capacities with the Company since 1976. Mr.
McDonald has held the positions of Director of Management Information Systems,
Vice President/Controller, Vice President Corporate Development and Vice
President, Finance and Chief Financial Officer. Mr. McDonald is a certified
public accountant.

JOSEPH A. O'SHAUGHNESSY has been Senior Executive Vice President since
October 1988. Mr. O'Shaughnessy has been employed in various capacities with the
Company since 1957. Mr.

46
<PAGE>
O'Shaughnessy's duties have included District and Division Manager, Director and
Vice President of Operations and Executive Vice President.

LARRY W. BROWNE has been Executive Vice President, Corporate Finance,
General Counsel and Secretary of the Company since September 1988. Mr. Browne
has also been President and Managing Director of Friendly's International, Inc.
since 1996. Mr. Browne has been the Executive Vice President, Corporate Finance,
General Counsel and Secretary of TRC since November 1985 and was with Perkins
from 1985 until 1996, most recently holding the position of Senior Vice
President, Corporate Finance.

GERALD E. SINSIGALLI has been President, Food Service Division of the
Company since January 1989. Mr. Sinsigalli has been employed in various
capacities with the Company since 1965. Mr. Sinsigalli's duties have included
District and Division Manager, Director and Vice President of Operations and
Senior Vice President.

DENNIS J. ROBERTS has been Senior Vice President, Restaurant Operations of
the Company since January 1996. Mr. Roberts has been employed in various
capacities with the Company since 1969. Mr. Roberts' duties have included
Restaurant, District and Division Manager, Regional Training Manager, Director
and Vice President of Restaurant Operations.

SCOTT D. COLWELL has been Vice President, Marketing of the Company since
January 1996. Mr. Colwell has been employed in various capacities with the
Company since 1982 including Director, New Business Development; Senior
Director, Marketing and Sales and Senior Director, Retail Business.

HENRY V. PETTIS III has been employed by the Company since 1990 and became
Vice President, Franchising and Operations Services in 1996. Mr. Pettis was
President and Chief Executive Officer of Florida Food Industries from 1988 to
1990.

GEORGE G. ROLLER has been Vice President, Finance and Chief Financial
Officer and Treasurer of the Company since January 1996. Mr. Roller was Vice
President and Treasurer of the Company from 1989 until January 1996. Mr. Roller
is a certified public accountant.

GARRETT J. ULRICH has been Vice President, Human Resources since September
1991. Mr. Ulrich held the position of Vice President, Human Resources for Dun &
Bradstreet Information Services, North America from 1988 to 1991. From 1978 to
1988, Mr. Ulrich held various Human Resource executive and managerial positions
at Pepsi Cola Company, a division of PepsiCo.

MICHAEL J. DALY will become a Director of the Company upon consummation of
the Recapitalization. Mr. Daly has been President and CEO of Baystate Health
System since December 1981.

STEVEN L. EZZES was reelected as a Director of the Company in December 1995.
Mr. Ezzes previously served as a Director of the Company from January 1991 to
May 1992. Mr. Ezzes has been a Managing Director of Scotia Capital Markets
(USA), an investment banking firm, since November 1996. Prior to that he was a
partner of the Airlie Group, a private investment firm, since 1988. Mr. Ezzes
has also been a Managing Director of Lehman Brothers, an investment banking
firm. Mr. Ezzes is a Director of the general partner of PFR.

BARRY KRANTZ has been a Director of the Company since April 1996. From
January 1994 to August 1995, Mr. Krantz served as President and Chief Operating
Officer of Family Restaurants, Inc. Mr. Krantz served at Restaurant Enterprises
Group, Inc. from December 1988 until January 1994 where he held the positions of
Chief Operating Officer and President of the Family Restaurant Division. Mr.
Krantz is a Director of Sizzler International, Inc.

CHARLES A. LEDSINGER, JR. became a Director of the Company in October 1997
and had previously served as a Director of the Company from August 1992 to July
1997. Mr. Ledsinger is the Senior Vice President and Chief Financial Officer of
St. Joe Corporation where he has been employed since May 1997. Prior to joining
St. Joe Corporation, he served as the Senior Vice President and Chief Financial
Officer of Harrah's Entertainment, Inc. where he was employed since 1978. Mr.
Ledsinger is a Director of the general partner of PFR.

BURTON J. MANNING will become a Director of the Company upon consummation of
the Recapitalization. Mr. Manning has been the Chairman and Chief Executive
Officer of J. Walter Thompson, Inc. since 1987. Mr. Manning is a Director of
International Specialty Products, Inc.

47
<PAGE>
GREGORY L. SEGALL has been a Director of the Company since April 1996. Mr.
Segall has served as Chairman, Chief Executive Officer and President of
Consolidated Vision Group, Inc. since April 1997. Since October 1992, Mr. Segall
has also been Managing Director and Principal of Chrysalis Management Group,
LLC. Prior to 1992, Mr. Segall was a Managing Director of Sigoloff & Associates,
Inc. Mr. Segall has also served as Chief Executive Officer of a number of
retail, real estate and technology companies. In connection with his management
consulting practice, Mr. Segall has, over the past ten years, served as an
officer and/or director of a variety of companies which have either filed
petitions or had petitions filed against them under the U.S. Bankruptcy Code.
Mr. Segall's involvement in these companies was required by his employment by
Chrysalis Management Group, LLC and Sigoloff & Associates, Inc., both of which
are management consulting groups which specialize in restructuring and
reorganizing businesses. In each case, Mr. Segall became an officer and/or
director only after his employer had been retained for the purpose of taking a
company through the reorganization process.

The Executive Officers of the Company serve at the discretion of the Board
of Directors.

INFORMATION REGARDING THE BOARD OF DIRECTORS AND COMMITTEES

CLASSES OF DIRECTORS

Following the closing of the Common Stock Offering, the Board of Directors
will be divided into three classes, each of whose members will serve for a
staggered three-year term. At this time, Messrs. Daly and Manning will join the
Board of Directors, replacing Messrs. Krantz and Segall who currently serve as
Directors as the nominees of the lenders under the Old Credit Facility. Messrs.
Daly and Manning will serve in the class whose term expires in 1998; Messrs.
Ezzes and Ledsinger will serve in the class whose term expires in 1999; and Mr.
Smith will serve in the class whose term expires in 2000. Upon the expiration of
the term of a class of Directors, Directors within such class will be elected
for a three-year term at the annual meeting of stockholders in the year in which
such term expires.

BOARD COMMITTEES

The Company's Board of Directors has established an Audit Committee, a
Compensation Committee and a Nominating Committee. The Audit Committee is
responsible for nominating the Company's independent accountants for approval by
the Board of Directors, reviewing the scope, results and costs of the audit by
the Company's independent accountants and reviewing the financial statements of
the Company. Upon consummation of the Recapitalization, Messrs. Ledsinger and
Ezzes will be the members of the Audit Committee. The Compensation Committee is
responsible for recommending compensation and benefits for the executive
officers of the Company to the Board of Directors and for administering the
Company's stock plans. Upon the consummation of the Recapitalization, a
Compensation Committee will be installed whose members will be Messrs. Ledsinger
and Manning. The Nominating Committee is responsible for nominating individuals
to stand for election to the Board of Directors. Upon consummation of the
Recapitalization, Messrs. Daly, Ezzes and Smith will be the members of the
Nominating Committee.

The Company's Restated Articles empower the Board of Directors to fix the
number of Directors and to fill any vacancies on the Board of Directors.

Each Director of the Company who is not an employee of the Company will
receive a fee of $2,500 per month and $1,500 per Board of Directors and special
Board of Directors meeting attended, plus expenses.

48
<PAGE>
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.

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------------------
RESTRICTED
STOCK OTHER ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS AWARDS(A) COMPENSATION COMPENSATION
- ---------------------------------- ------------- ---------- ---------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>

- ------------------------------

(a) Represents the value of restricted stock awarded on March 25, 1996 under the
Company's management stock plan (the "Management Stock Plan"), which was
issued in substitution of stock rights awarded under a subsequently
terminated stock rights plan. As of December 29, 1996, Messrs. Browne,
O'Shaughnessy, Sinsigalli and McDonald each had 3,765 shares with a value of
$151 as of such date. Twenty-five percent of the shares of restricted stock
vested on December 29, 1996 upon the attainment of a minimum operating cash
flow target. The remaining shares of restricted stock will vest upon
consummation of the Recapitalization. No dividends were payable on the
restricted shares.

(b) The Company paid a management fee to TRC in the amount of $800,000, $785,000
and $773,000 in 1996, 1995 and 1994, respectively. From these fees, TRC paid
Mr. Smith the salary and bonus amounts listed above. Mr. Smith serves as
Chairman, Chief Executive Officer and President of the Company and as
Chairman and Chief Executive Officer of Perkins and, consequently, devotes a
portion of his time to the affairs of each of the Company and Perkins.

49
<PAGE>
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).

<TABLE>
<CAPTION>
ESTIMATED BENEFIT BASED ON YEARS OF SERVICE (A)
----------------------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 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
</TABLE>

- ------------------------------

(a) Benefits under the Friendly Ice Cream Corporation Cash Balance Pension Plan
(the "Pension Plan") are generally determined based on the value of a
participant's cash balance account under the plan. Each year, a percentage
of compensation (limited to $150,000 for 1996 in accordance with rules
promulgated under the Internal Revenue Code of 1986 (the "Code")) is
contributed to an individual's cash balance account under the Pension Plan
based on his years of credited service. Interest credits are also
contributed to each cash balance account annually. The cash balance formula
was implemented effective January 1, 1992, at which time the accrued
benefits of participants were converted to the opening balance in the cash
balance account. The above amounts are annual straight life annuity amounts
(which are not reduced for social security benefits) payable upon retirement
at age 65 and assume salary increases of 5.0% per year, interest credits of
5.0% per year and that the cash balance formula under the Pension Plan has
always been in effect. The foregoing amounts also reflect amounts
attributable to benefits payable under the Friendly Ice Cream Corporation
Supplemental Executive Retirement Plan, (the "SERP"), which provides
benefits to the covered individuals which cannot be provided under the
Pension Plan due to the certain limitations of the Internal Revenue Code,
including the limitation on compensation. The SERP was implemented effective
as of January 1, 1995. Mr. Smith did not become a participant in the SERP
until January 1, 1996. As of January 1, 1997, Messrs. Smith, Browne and
McDonald had 8, 8 and 21 years of credited service, respectively, under the
Pension Plan. Benefits under the Pension Plan for Messrs. O'Shaughnessy and
Sinsigalli are determined primarily on final compensation and years of
credited service although such individuals would be entitled to a benefit
under the formula described above if such formula resulted in a larger
benefit. As of January 1, 1996, the estimated annual benefit payable upon
retirement at age 65 (expressed in the form of a straight life annuity) for
Messrs. O'Shaughnessy and Sinsigalli is $63,825 and $89,773, respectively,
taking into account benefits provided to such individuals under the SERP. As
of January 1, 1997, Messrs. O'Shaughnessy and Sinsigalli had 40 and 32 years
of credited service, respectively, under the Pension Plan.

LIMITED STOCK COMPENSATION PROGRAM

In connection with the Common Stock Offering, the Company established a
program pursuant to which a one-time award of Common Stock will be made to
approximately 70 employees of the Company in recognition of their services to
the Company (the "Limited Stock Compensation Program"). Approximately 300,000
shares of Common Stock will be awarded under the program (after giving effect to
the Recapitalization). The Common Stock awards will vest upon consummation of
the Common Stock Offering, however, the shares will be subject to transfer
restrictions for a period of four years. The shares will become transferable on
a pro rata basis on the first through fourth anniversaries of the Common Stock
Offering. Messrs. O'Shaughnessy, Sinsigalli and McDonald will be awarded 5,000,
17,284 and 17,284 shares respectively under the program. In addition, 114,532
shares of Common Stock will be awarded to all Directors and Executive Officers
as a group.

Under a separate component of the Limited Stock Compensation Program, Mr.
Smith will be awarded approximately 100,742 shares of Common Stock which will
vest upon consummation of the Common Stock Offering. This one-time award was
made in recognition of his services to the Company.

50
<PAGE>
RESTRICTED STOCK PLAN

The Company currently maintains a restricted stock plan for the benefit of
eligible employees. All outstanding awards under such restricted stock plan will
vest upon consummation of the Common Stock Offering, and no new awards will be
issued under that plan. Prior to the Common Stock Offering, the Company will
adopt a new restricted stock plan (the "Restricted Stock Plan"), pursuant to
which 375,000 shares of Common Stock will be reserved for issuance, subject to
adjustment in the case of certain corporate transactions affecting the number or
type of shares of outstanding common stock. The Restricted Stock Plan will
provide for the award of Common Stock, the vesting of which will be subject to
such conditions and limitations as shall be established by the Board of
Directors, which may include conditions relating to continued employment with
the Company or the achievement of performance measures. Unless the Board of
Directors determines otherwise, any shares of restricted stock which are not
vested upon the participant's termination of employment with the Company shall
be forfeited. Upon a change in control of the Company, all restrictions on
outstanding shares of restricted stock shall lapse and such shares shall become
nonforfeitable.

The Restricted Stock Plan shall be administered by the Board of Directors,
which shall have the authority to determine the employees who will receive
awards under the Restricted Stock Plan and the terms and conditions of such
awards. Approximately 70 employees of the Company who are classified as salary
grade 109 and above will initially be eligible for participation in the
Restricted Stock Plan. The Board of Directors, in its sole discretion, may
designate other employees and persons providing material services to the Company
as eligible for participation in the Restricted Stock Plan.

It is anticipated that approximately 30,000 shares of Common Stock will be
issued to all Directors and Executive Officers as a group under the Restricted
Stock Plan shortly after consummation of the Recapitalization.

STOCK OPTION PLAN

The Company does not currently maintain a stock option plan, although
certain employees of the Company participated in a previously terminated stock
rights plan. See Note 13 of Notes to Consolidated Financial Statements.

In connection with the Common Stock Offering, the Company will adopt a stock
option plan (the "Stock Option Plan"), pursuant to which approximately 400,000
shares of Common Stock will be reserved for issuance, subject to adjustment in
the case of certain corporate transactions affecting the number or type of
shares of outstanding Common Stock. The Stock Option Plan will provide for the
issuance of nonqualified stock options and incentive stock options which are
intended to satisfy the requirements of section 422 of the Code and stock
appreciation rights.

The Stock Option Plan will be administered by the Board of Directors. The
Board of Directors will determine the employees who will receive awards under
the Stock Option Plan and the terms of such awards. The award of a stock option
will entitle the recipient thereof to purchase a specified number of shares of
Common Stock at the exercise price specified by the Board of Directors. The
award of a stock appreciation right entitles the recipient thereof to a payment
equal to the excess of the fair market value of a share of Common Stock on the
date of exercise over the exercise price specified by the Board of Directors.
The exercise price of a stock option or stock appreciation right shall not be
less than the fair market value of a share of Common Stock on the date the stock
option or stock appreciation right is granted. The Board of Directors may
delegate its authority under the Stock Option Plan to a committee of the Board
of Directors.

Stock options and stock appreciation rights shall become exercisable in
accordance with the terms established by the Board of Directors, which terms may
relate to continued service with the Company or attainment of performance goals.
Stock options awarded in connection with the Common Stock Offering

51
<PAGE>
will become exercisable over a five-year period, subject to the optionee's
continued employment with the Company. All awards under the Stock Option Plan
will become fully vested and exercisable upon a change in control of the
Company.

Approximately 120 employees of the Company who are classified as salary
grade 107 or 108 will initially be eligible for participation in the Stock
Option Plan. The Board of Directors, in its sole discretion, may designate other
employees and persons providing material services to the Company as eligible for
participation in the Stock Option Plan.

Generally, a participant who is granted a stock option or stock appreciation
right will not be subject to federal income tax at the time of the grant, and
the Company will not be entitled to a corresponding tax deduction. Upon the
exercise of a nonqualified stock option, generally the difference between the
option price and the fair market value of the Common Stock will be considered
ordinary income to the participant, and generally the Company will be entitled
to a tax deduction.

Upon exercise of an incentive stock option, no taxable income will be
recognized by the participant, and the Company will not be entitled to a tax
deduction. However, if the Common Stock purchased upon exercise of the incentive
stock option is sold within two years of the option's grant date or within one
year after the exercise, then the difference, with certain adjustments, between
the fair market value of the Common Stock at the date of exercise and the option
price will be considered ordinary income to the participant, and generally the
Company will be entitled to a tax deduction. If the participant disposes of the
Common Stock after such holding periods, any gain or loss upon such disposition
will be treated as a capital gain or loss and the Company will not be entitled
to a deduction.

Upon exercise of a stock appreciation right, the participant will recognize
ordinary income in an amount equal to the payment received, and generally the
Company will be entitled to a corresponding tax deduction.

52
<PAGE>
OWNERSHIP OF COMMON STOCK

The following table sets forth certain information regarding beneficial
ownership of (i) the Class A and Class B common shares of the Company prior to
the Recapitalization, and (ii) the Common Stock, after giving effect to the
Common Stock Offering, by (a) each person who is known by the Company to own
beneficially more than 5% of the outstanding (1) Class A and Class B common
shares as of October 15, 1997 or (2) shares of the Common Stock after
consummation of the Recapitalization, (b) each Director of the Company, (c) each
of the Named Executive Officers and (d) all Directors and Executive Officers of
the Company as a group.

<TABLE>
<CAPTION>
COMMON STOCK
COMMON SHARES BENEFICIALLY OWNED
PRIOR TO THE RECAPITALIZATION BENEFICIALLY
---------------------------------------- OWNED AFTER THE
RECAPITALIZATION (A)
NUMBER ----------------------
------------------------- PERCENTAGE PERCENTAGE
NAME CLASS A (B) CLASS B (B) OF TOTAL NUMBER OF TOTAL
- ---------------------------------------------------------------- ----------- ----------- ------------ --------- ----------
Donald N. Smith................................................. 759,680 -- 30.7% 736,164 10.3%
<S> <C> <C> <C> <C> <C>
Equitable....................................................... 256,375 -- 10.4 151,349 2.1
Larry W. Browne................................................. 28,702 -- 1.2 21,130 *
Paul J. McDonald................................................ 7,726 -- * 26,031 *
Joseph A. O'Shaughnessy......................................... 7,726 -- * 13,747 *
Gerald E. Sinsigalli............................................ 7,726 -- * 26,031 *
Michael J. Daly (c)............................................. -- -- * -- *
Steven L. Ezzes................................................. -- -- * -- *
Barry Krantz (c)................................................ -- -- * 924 *
Charles L. Ledsinger, Jr........................................ -- -- * -- *
Burton J. Manning (c)........................................... -- -- * -- *
Gregory L. Segall(c)............................................ -- -- * 924 *
All Directors and Executive Officers as a group (14 persons).... 843,012 -- 34.1 934,544 13.1
Lenders under Old Credit Facility (d)(e) -- 1,187,503 48.0 701,036 9.8
</TABLE>

- ------------------------

* Represents less than 1% of the outstanding (i) Class A and Class B common
shares prior to the Recapitalization and (ii) Common Stock after the
Recapitalization.

(a) Gives effect to the Common Stock Offering, and the following, which will
occur in connection with the Recapitalization: (i) the return of 124,258,
105,026, 8,593, 486,467 and 51,398 shares of Common Stock to the Company by
Mr. Smith, Equitable, Mr. Browne, the lenders under the Old Credit Facility
and the other existing non-management shareholders, respectively, (ii) the
issuance of 100,742, and 300,000 of such shares to Mr. Smith and to certain
members of management under the Limited Stock Compensation Program,
respectively and (iii) the issuance of 27,113 shares of Common Stock under
the Management Stock Plan. Of the 300,000 shares issued under the Limited
Stock Compensation Program, 17,284, 5,000, 17,284 and 114,532 shares have
been allocated to Messrs. McDonald, O'Shaughnessy, Sinsigalli and to all
Directors and Executive Officers as a group, respectively. Of the 27,113
shares of Common Stock to be issued under the Management Stock Plan each of
Messrs. Brown, McDonald, O'Shaughnessy and Sinsigalli is to receive 1,021
shares. Does not reflect 400,000 shares and 375,000 shares reserved for
issuance under the Stock Option Plan and Restricted Stock Plan,
respectively. It is anticipated that approximately 30,000 shares of Common
Stock will be issued to all Directors and Executive Officers as a group
under the Restricted Stock Plan shortly after consummation of the
Recapitalization. See Note 17 of Notes to Consolidated Financial Statements.

(b) In connection with the Recapitalization, each outstanding Class A common
share and Class B common share of the Company will be converted into one
share of Common Stock.

(c) Messrs. Krantz and Segall, currently on the Board of Directors as nominees
of the lenders under the Old Credit Facility, will be replaced as Directors
by Messrs. Daly and Manning upon consummation of the Recapitalization. See
"Management."

(d) Prior to the Recapitalization, the Bank of Boston, as agent for the lenders
under the Old Credit Facility, held the Class B common shares for the
benefit of the lenders under the Old Credit Facility, having received Class
B common shares of the Company in 1996 in connection with the restructuring
of the Old Credit Facility. In connection with the Recapitalization, these
shares will automatically convert into shares of Common Stock and will be
distributed to the then existing lenders under the Old Credit Facility pro
rata according to the respective amounts of indebtedness thereunder held by
them. See Note 7 of Notes to Consolidated Financial Statements.

(e) Foothill Capital Corporation, Baker Nye Special Credits, Inc., D K
Acquisition Partners, L.P., Contrarian Capital Advisors, L.L.C., CoMac
Partners L.P., CoMac International N.V., Tribeca Investments L.L.C., Carl
Marks Management Company, L.P., Sanwa Business Credit Corporation, Halcyon
Distressed Securities L.P., Bedrock Asset Trust I and Morgan Stanley & Co.
International Limited, each of which is a lender under the Old Credit
Facility, and Equitable, Quidnet Partners, BMA Limited Partnership, Mr.
Browne and Peter Joost, other stockholders of the Company, have granted to
the underwriters of the Common Stock Offering a 30-day option to purchase
86,790, 11,680, 65,367, 8,970, 23,316, 8,970, 24,919, 57,286, 15,246,
48,409, 12,274, 15,066, 151,349, 46,893, 19,085, 21,130 and 8,092 shares of
Common Stock beneficially owned by such lenders and other stockholders,
respectively, as part of the Common Stock Offering over-allotment option. If
such over-allotment option is exercised in full, the lenders under the Old
Credit Facility would beneficially own 4.5%, and such other stockholders
would no longer beneficially own any, of the outstanding Common Stock. See
"Underwriting."

53
<PAGE>
CERTAIN TRANSACTIONS

The Company's policy is to only enter into a transaction with an affiliate
in the ordinary course of, and pursuant to the reasonable requirements of, its
business and upon terms that are no less favorable to the Company than could be
obtained if the transaction was entered into with an unaffiliated third party.
Set forth below is a description of certain transactions between the Company and
its affiliates during 1994, 1995 and 1996 and ongoing transactions between the
Company and its affiliates. The Company believes that the terms of such
transactions were or are no less favorable to the Company than could have been
obtained if the transaction was entered into with an unaffiliated third party.

In March 1996, the Company's pension plan acquired three restaurant
properties from the Company. The land, buildings and improvements were purchased
by the plan at their appraised value of $2.0 million and are located in
Connecticut, Vermont and Virginia. Simultaneously with the purchase, the pension
plan leased back the three properties to the Company at an aggregate annual base
rent of $214,000 for the first five years and $236,000 for the following five
years. The pension plan was represented by independent legal and financial
advisors.

In 1993, the Company subleased certain land, buildings and equipment from
Perkins. During 1996, 1995 and 1994, rent expense related to the subleases was
approximately $278,000, $266,000 and $245,000, respectively.

During 1996 and 1995, an insurance subsidiary of TRC, Restaurant Insurance
Corporation ("RIC"), assumed from a third party insurance company reinsurance
premiums related to insurance liabilities of the Company of approximately $4.2
million and $6.4 million, respectively. In addition, RIC had reserves of
approximately $13.0 million and $12.8 million related to Company claims at
December 29, 1996 and December 31, 1995, respectively. On March 19, 1997, the
Company acquired all of the outstanding shares of common stock of RIC from TRC
for $1.3 million in cash and a $1.0 million promissory note payable to TRC
bearing interest at an annual rate of 8.25%. The promissory note and accrued
interest aggregating approximately $1.0 million was paid on June 30, 1997. RIC,
which was formed in 1993, reinsures certain of the Company's risks (i.e.
workers' compensation, employer's liability, general liability and product
liability) from a third party insurer.

In fiscal 1994, TRC Realty Co. (a subsidiary of TRC) entered into a 10-year
operating lease for an aircraft, for use by both the Company and Perkins. The
Company shares equally with Perkins in reimbursing TRC Realty Co. for leasing,
tax and insurance expenses. In addition, the Company also incurs actual usage
costs. Total expense for 1996, 1995 and 1994 was approximately $590,000,
$620,000 and $336,000, respectively.

The Company purchases certain food products used in the normal course of
business from a division of Perkins. For 1996, 1995 and 1994, purchases were
approximately $1.4 million, $1.9 million and $1.3 million, respectively.

The Company currently pays TRC an annual management fee pursuant to a
management fee letter agreement between the Company and TRC dated March 19, 1996
(the "TRC Management Contract"). The fee serves as compensation for (i) the
services performed by Mr. Smith for the benefit of the Company (ii) office and
secretarial services attributable to the Company and (iii) other related
expenses. TRC was paid $800,000, $785,000 and $773,000 for such management
services in 1996, 1995 and 1994, respectively. See "Management--Executive
Compensation."

During 1996, the Company incurred approximately $69,000 of expense related
to fees and other reimbursements to the two board of directors members who
represented the Company's lenders. In addition, for 1996, 1995 and 1994, the
Company expensed approximately $196,000, $763,000 and $200,000, respectively,
for fees paid to the lenders' agent bank.

54
<PAGE>
The Company is a party to two agreements with TRC relating to taxes. In
connection with the distribution by TRC to its shareholders of the Common Stock
in the Company immediately prior to the 1996 bank restructuring, the Company
entered into a Tax Disaffiliation Agreement dated March 25, 1996. Under the Tax
Disaffiliation Agreement, TRC must indemnify the Company for all income taxes
during periods when the Company and its affiliates were includible in a
consolidated federal income tax return with TRC and for any income taxes due as
a result of the Company ceasing to be a member of the TRC consolidated group.
TRC does not retain any liability for periods when the Company and its
affiliates were not includible in the TRC consolidated federal income tax return
and the Company must indemnify TRC if any such income taxes are assessed against
TRC. TRC also does not indemnify the Company for a reduction of the Company's
existing NOLs or for NOLs previously utilized by TRC. The Tax Disaffiliation
Agreement terminates 90 days after the statute of limitations expires for each
tax covered by the agreement including unfiled returns as if such returns had
been filed by the appropriate due date.

The Company also entered into a Tax Responsibility Agreement dated as of
March 19, 1997 in connection with the sale of RIC to the Company. Under the Tax
Responsibility Agreement, the Company must indemnify TRC for any income taxes
that are assessed against TRC as a result of the operations of RIC. The Tax
Responsibility Agreement terminates 90 days after the statute of limitations
expires for each tax covered by the agreement.

55
<PAGE>
DESCRIPTION OF NEW CREDIT FACILITY

The Company has entered into a commitment letter with Societe Generale
relating to a $175 million senior secured credit facility to be entered into
contingent upon completion of the Offerings (the "New Credit Facility"). The
following description, which sets forth the material terms of the New Credit
Facility, does not purport to be complete and is qualified in its entirety by
reference to the agreement setting forth the principal terms of the New Credit
Facility, which is filed as an exhibit to the Registration Statement of which
this Prospectus is a part.

The senior secured New Credit Facility will consist of (a) the $105 million
Term Loan Facility, (b) the five-year Revolving Credit Facility providing for
revolving loans to the Company in a principal amount not to exceed $55 million
(including a $5 million sublimit for each of trade and standby letters of
credit) and (c) the $15 million Letter of Credit Facility providing for standby
letters of credit in the normal course of business and having a maturity
contemporaneous with that of the Revolving Credit Facility.

The full amount of the Term Loan Facility will be drawn on the closing date
of the Recapitalization (the "Closing Date"). Amounts repaid or prepaid under
the Term Loan Facility may not be reborrowed. Loans under the Revolving Credit
Facility will be available at any time on and after the Closing Date and prior
to the date which is five years after the Closing Date. Letters of credit shall
expire annually, but shall have a final expiration date no later than thirty
days prior to final maturity, which for the Letter of Credit Facility will also
be five years from the Closing Date.

It is expected that the Term Loan Facility will require quarterly
amortization payments beginning on April 15, 1999. Annual amortization payments
will total $4.7 million, $10.7 million, $12.7 million, $14.7 million, $18.7
million, $20.3 million and $23.5 million in 1999 through 2005, respectively. In
addition to the scheduled amortization, it is expected that the Term Loan
Facility will be permanently reduced by (i) specified percentages of each year's
Excess Cash Flow (as defined in the New Credit Facility), (ii) specified
percentages of the aggregate net cash proceeds from certain issuances of
indebtedness and (iii) 100% of the aggregate net cash proceeds from asset sales
not in the ordinary course of business and certain insurance claim proceeds, in
each case in this clause (iii), not re-employed or committed to be re-employed
within a specified period in the Company's business, exclusive of up to $7.5
million of aggregate net proceeds received from asset sales subsequent to the
closing relating to the New Credit Facility. Such applicable proceeds and Excess
Cash Flow shall be applied to the Term Loan Facility in inverse order of
maturity. It is also expected that after the Term Loan Facility has been
prepaid, applicable proceeds of debt issuances, asset sales and insurance claims
shall be applied to permanently reduce the Revolving Credit Facility. At the
Company's option, loans may be prepaid at any time with certain notice and
breakage cost provisions.

The obligations of the Company under the New Credit Facility will be (i)
secured by a first priority security interest in substantially all material
assets of the Company and certain of its domestic subsidiaries and all other
assets owned or hereafter acquired and (ii) guaranteed, on a senior secured
basis, by the Company's Friendly's Restaurants Franchise, Inc. subsidiary and
the Friendly's International, Inc. subsidiary and may also be so guaranteed by
certain subsidiaries of the Company created or acquired after consummation of
the Recapitalization.

The New Credit Facility will contain a number of significant covenants that
among other things, will operate as limitations on indebtedness; liens;
guarantee obligations; mergers; consolidations, formation of subsidiaries,
liquidations and dissolutions; sales of assets; leases; payments of dividends;
capital expenditures; investments; optional payments and modifications of debt
instruments; transactions with affiliates; sale and leaseback transactions;
changes in fiscal year; negative pledge clauses; changes in lines of business;
and restrictions on subsidiary distributions. In addition, under the New Credit
Facility, the Company will be required to comply with specified minimum fixed
charge coverage ratios, interest expense coverage ratios, cash flow leverage
ratios and minimum net worth requirements.

56
<PAGE>
DESCRIPTION OF SENIOR NOTES

GENERAL

The Senior Notes are to be issued under an Indenture, to be dated as of
, 1997 (the "Indenture"), between the Company, Friendly's Restaurants
Franchise, Inc. and The Bank of New York, as Trustee (the "Trustee"), a copy of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.

The following summary of certain provisions of the Indenture and the Senior
Notes does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part thereof by the
TIA. The summary provides an accurate description of all material terms of the
Senior Notes. Capitalized terms used herein and not otherwise defined have the
meanings set forth under "--Certain Definitions."

Principal of, premium, if any, and interest on the Senior Notes will be
payable, and the Senior Notes may be exchanged or transferred, at the office or
agency of the Company in the Borough of Manhattan, The City of New York (which
initially shall be the corporate trust office of the Trustee, at 101 Barclay
Street, New York, New York 10286), except that, at the option of the Company,
payment of interest may be made by check mailed to the registered holders of the
Senior Notes at their registered addresses.

The Senior Notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple of $1,000. No
service charge will be made for any registration of transfer or exchange of
Senior Notes, but the Company may require payment of a sum sufficient to cover
any transfer tax or other similar governmental charge payable in connection
therewith.

The definition of "Restricted Subsidiary" in the Indenture will exclude any
"Unrestricted Subsidiary" and, as a result, Unrestricted Subsidiaries generally
will not be bound by the restrictive provisions of the Indenture and will not be
Subsidiary Guarantors. Each of Friendly's International, Inc. and its United
Kingdom subsidiaries will be an Unrestricted Subsidiary on the Issue Date.

TERMS OF THE SENIOR NOTES

The Senior Notes will be unsecured, senior obligations of the Company,
limited to $175 million aggregate principal amount, and will mature on
, 2007. Each Senior Note will bear interest at the rate per annum shown on
the front cover of this Prospectus from , 1997, or from the most recent
date to which interest has been paid or provided for, payable semiannually to
Holders of record at the close of business on the or immediately
preceding the interest payment date on and of each year, commencing
, 1998. Interest on the Senior Notes will be computed on the basis of a
360-day year of twelve 30-day months.

OPTIONAL REDEMPTION

The Senior Notes will be redeemable, at the Company's option, in whole or in
part, at any time on or after , 2002, and prior to maturity, upon not less
than 30 nor more than 60 days' prior notice mailed by first-class mail to each
Holder's registered address, at the following redemption prices (expressed as a
percentage of principal amount), plus accrued interest, if any, to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date), if
redeemed during the 12-month period commencing on of the years set forth
below:

<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2002............................................................................. %
2003............................................................................. %
2004............................................................................. %
2005 and thereafter.............................................................. 100.000%
</TABLE>

57
<PAGE>
In addition, at any time and from time to time prior to , 2000, the
Company may redeem in the aggregate up to $60 million principal amount of the
Senior Notes with the proceeds of one or more Qualified Equity Offerings at a
redemption price (expressed as a percentage of principal amount thereof) of %
plus accrued interest, if any, to the redemption date (subject to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date); provided, however, that at least $115 million
principal amount of the Senior Notes must remain outstanding after each such
redemption.

In the case of any partial redemption, selection of the Senior Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Senior Note of $1,000 in original principal amount will
be redeemed in part. If any Senior Note is to be redeemed in part only, the
notice of redemption relating to such Senior Note shall state the portion of the
principal amount thereof to be redeemed. A new Senior Note in principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Senior Note.

GUARANTEES

The obligations of the Company pursuant to the Senior Notes, including the
repurchase obligation resulting from a Change of Control, will be
unconditionally guaranteed, on an unsecured, senior basis, by Friendly's
Restaurant Franchise, Inc. and will also be guaranteed by each new Subsidiary
(other than Unrestricted Subsidiaries and Foreign Subsidiaries) created or
acquired after the Issue Date. Each Subsidiary Guaranty will be limited in
amount to an amount not to exceed the maximum amount that can be guaranteed by
the applicable Subsidiary Guarantor without rendering the Subsidiary Guaranty,
as it relates to such Subsidiary Guarantor, void or voidable under applicable
law relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally. If a Subsidiary Guaranty were to be
rendered void or voidable, it could be rendered unenforceable or subordinated by
a court to all other indebtedness (including guarantees and other contingent
liabilities) of the applicable Subsidiary Guarantor, and, depending on the
amount of such indebtedness, a Subsidiary Guarantor's liability on its
Subsidiary Guaranty could be reduced to zero. See "Risk Factors--Fraudulent
Conveyance."

The Indenture will provide that, subject to the following paragraph, the
Company will not permit any Subsidiary Guarantor to consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all of its assets to any Person unless (i)
the resulting, surviving or transferee Person (if not such Subsidiary Guarantor)
shall be a Person organized and existing under the laws of the jurisdiction
under which such Subsidiary Guarantor was organized or under the laws of the
United States of America, or any State thereof or the District of Columbia, and
such Person shall expressly assume, by a supplement to the Indenture, in a form
satisfactory to the Trustee, all the obligations of such Subsidiary Guarantor
under its Subsidiary Guaranty; (ii) immediately after giving effect to such
transaction or transactions on a pro forma basis (and treating any Indebtedness
which becomes an obligation of the resulting, surviving or transferee Person as
a result of such transaction as having been incurred by such Person at the time
of such transaction), no Default or Event of Default shall have occurred and be
continuing; and (iii) the Company delivers to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger or transfer, if any, complies with the Indenture.

However, the Indenture will also provide that upon the sale or other
disposition (including by way of consolidation or merger) of a Subsidiary
Guarantor or the sale or disposition of all or substantially all the assets of a
Subsidiary Guarantor (in each case other than to the Company or an Affiliate of
the Company), such Subsidiary Guarantor will be released and relieved from all
its obligations under its Subsidiary Guaranty; provided that such sale or
disposition shall constitute an Asset Sale under, and the Net Available Cash
from such sale or disposition shall be applied in accordance with, the covenant
described below under "Limitation on Sales of Assets and Subsidiary Stock."

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RANKING

The indebtedness evidenced by the Senior Notes will be unsecured, Senior
Indebtedness of the Company, will rank PARI PASSU in right of payment with all
existing and future Senior Indebtedness of the Company and will rank senior in
right of payment to all existing and future Subordinated Obligations of the
Company. The Senior Notes will also be effectively subordinated to all existing
and future Secured Indebtedness of the Company to the extent of the value of the
assets securing such Secured Indebtedness and structurally subordinated to all
existing and future Indebtedness of any Subsidiary of the Company that is not a
Subsidiary Guarantor.

As of September 28, 1997, on a pro forma basis after giving effect to the
Recapitalization and the Related Transactions, the Company would have had a
total of $293.0 million of long-term debt and capital lease obligations
outstanding, $115.1 million of which would have been secured, and none of which
would have been subordinated. As of September 28, 1997, after giving effect to
the Recapitalization and the Related Transactions, Subsidiaries of the Company
which are not Subsidiary Guarantors would have had no long-term debt or capital
lease obligations outstanding. Although the Indenture contains limitations on
the amount of additional Indebtedness which the Company or any Restricted
Subsidiary may Incur, under certain circumstances the amount of such
Indebtedness could be substantial and, in any case, such Indebtedness may be
Senior Indebtedness, Secured Indebtedness or Indebtedness of Subsidiaries which
are not Subsidiary Guarantors. See "-- Certain Covenants -- Limitation on
Indebtedness and Preferred Stock."

CHANGE OF CONTROL

Upon the occurrence of any of the following events (each a "Change of
Control") with respect to the Company, each Holder will have the right to
require the Company to repurchase all or any part of such Holder's Senior Notes
at a purchase price in cash equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of repurchase (subject to the
right of Holders of record on the relevant record date to receive interest due
on the related interest payment date):

(i) (A) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act), other than one or more Permitted Holders, is or
becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, of more than 35% of the total voting
power of the Voting Stock of the Company and (B) the Permitted Holders
"beneficially own" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act), directly or indirectly, in the aggregate a lesser percentage of the
total voting power of the Voting Stock of the Company than such other person
and do not have the right or ability by voting power, contract or otherwise
to elect or designate for election a majority of the Board of Directors of
the Company;

(ii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors
or whose nomination for election by the shareholders of the Company was
approved by a vote of a majority of the directors of the Company then still
in office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors of the Company
then in office;

(iii) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all, or substantially all, the assets
of the Company to any Person or group of Persons (other than to any Wholly
Owned Subsidiary of the Company);

(iv) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company and the
securities of the Company that are outstanding immediately prior to such
transaction and which represent 100% of the voting power of the Voting

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Stock of the Company are changed into or exchanged for cash, securities or
property, unless pursuant to such transaction such securities are changed
into or exchanged for, in addition to any other consideration, securities of
the surviving corporation that represent immediately after such transaction,
at least a majority of the aggregate voting power of the Voting Stock of the
surviving Person or transferee; or

(v) the adoption of a plan of liquidation of the Company.

Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase any or all of such Holder's Senior Notes in denominations of $1,000
or any integral multiple thereof at a purchase price in cash equal to 101% of
the principal amount thereof, plus accrued and unpaid interest, if any, to the
date of repurchase (subject to the right of Holders of record on a record date
to receive interest on the relevant interest payment date); (2) the
circumstances and relevant facts and pro forma financial information regarding
such Change of Control; (3) the repurchase date (which shall be no earlier than
30 days nor later than 60 days from the date such notice is mailed); and (4) the
instructions determined by the Company, consistent with this covenant, that a
Holder must follow in order to have its Senior Notes purchased by the Company.
Notwithstanding the occurrence of a Change of Control, the Company shall not be
obligated to repurchase the Senior Notes upon a Change of Control if the Company
has irrevocably elected to redeem all of the Senior Notes under the provisions
described under "-- Optional Redemption" above, provided that the Company does
not default in its redemption obligations pursuant to such election.

Neither the Trustee nor the Board of Directors of the Company may waive the
covenant relating to the Holders' right to have its Senior Notes repurchased
upon a Change of Control.

The phrase "all or substantially all," as used with respect to a sale of
assets in the definition in the Indenture of "Change of Control," varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under New York law (the law governing the Indenture)
and is subject to judicial interpretation. Accordingly, in certain
circumstances, there may be a degree of uncertainty in ascertaining whether a
particular transaction would involve a disposition of "all or substantially all"
of the assets of a Person and therefore it may be unclear whether a Change of
Control has occurred.

The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Senior Notes pursuant to this covenant. To
the extent that the provisions of any securities laws or regulations conflict
with provisions of this covenant, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under this paragraph by virtue thereof.

The Change of Control purchase feature is a result of negotiations between
the Company and the Underwriters. Management has no present intention to engage
in a transaction involving a Change of Control, although it is possible that the
Company could decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect the Company's capital structure or credit rating.

The occurrence of certain of the events that would constitute a Change of
Control would constitute a default under the New Credit Facility. Future
Indebtedness of the Company may also contain prohibitions of certain events
which would constitute a Change of Control or require such Indebtedness to be
repurchased upon a Change of Control. Moreover, the exercise by the Holders of
their right to require the Company to repurchase the Senior Notes could cause a
default under such Indebtedness, even if the Change of Control itself does not,
due to the financial effect of such repurchase on the Company. Finally,

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the Company's ability to pay cash to the Holders upon a repurchase may be
limited by the Company's then existing financial resources. There can be no
assurance that sufficient funds will be available when necessary to make any
required repurchases.

CERTAIN COVENANTS

The Indenture contains covenants including, among others, the following:

LIMITATION ON INDEBTEDNESS AND PREFERRED STOCK. (a) (i) The Company will
not Incur, and will not permit any Restricted Subsidiary to Incur, any
Indebtedness (including Acquired Indebtedness) or issue Disqualified Stock and
(ii) the Company will not permit any of its Restricted Subsidiaries that are not
Subsidiary Guarantors to issue any shares of Preferred Stock; PROVIDED, HOWEVER,
that the Company and any Subsidiary Guarantor may Incur Indebtedness (including
Acquired Indebtedness) or issue Disqualified Stock if on the date thereof (and
after giving effect to the application of proceeds therefrom) the Consolidated
Coverage Ratio would be greater than 2.50:1 if such Incurrence shall occur prior
to , 1999 or greater than 2.75:1 if such Incurrence shall occur
thereafter.

(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness: (i) Indebtedness
of the Company or any Restricted Subsidiary (including any Guarantees thereof)
under the New Credit Facility and any Refinancing Indebtedness with respect
thereto in an aggregate principal amount outstanding at any time not to exceed
$175 million, less the aggregate amount of all proceeds from all Asset
Dispositions that have been applied since the Issue Date to permanently reduce
the outstanding amount of such Indebtedness pursuant to the covenant "Limitation
on Sale of Assets and Subsidiary Stock" and less the aggregate amount of all
mandatory repayments of principal of term loans thereunder that have been made
since the Issue Date (other than repayments that are immediately re-borrowed);
(ii) Indebtedness of the Company owing to and held by any Wholly Owned
Subsidiary or Indebtedness of a Restricted Subsidiary owing to and held by the
Company or any Wholly Owned Subsidiary; PROVIDED, HOWEVER, that (a) any such
Indebtedness is made pursuant to an intercompany note and (other than any such
Indebtedness of the Company to RIC or of RIC to the Company) is expressly
subordinated to the Senior Notes or the applicable Subsidiary Guaranty, as the
case may be, and (b) any subsequent issuance or transfer of any Capital Stock or
any other event which results in any such Wholly Owned Subsidiary ceasing to be
a Wholly Owned Subsidiary or any subsequent transfer of any such Indebtedness
(except to the Company or a Wholly Owned Subsidiary) will be deemed, in each
case, to constitute the Incurrence of such Indebtedness by the issuer thereof;
(iii) Indebtedness represented by the Senior Notes (including Subsidiary
Guarantees), any Indebtedness of the Company or any Restricted Subsidiary (other
than the Indebtedness described in clauses (i)-(ii) above) outstanding on the
Issue Date and any Refinancing Indebtedness Incurred in respect of any
Indebtedness described in this clause (iii); (iv) (A) Indebtedness of a
Restricted Subsidiary outstanding on or prior to the date on which such
Restricted Subsidiary was acquired by the Company or a Restricted Subsidiary
(other than Indebtedness Incurred in connection with, or in contemplation of,
the transaction or series of related transactions pursuant to which such
Restricted Subsidiary became a Restricted Subsidiary or was otherwise acquired
by the Company or a Restricted Subsidiary); PROVIDED, HOWEVER, that at the time
such Restricted Subsidiary is acquired by the Company or a Restricted
Subsidiary, the Company would have been able to Incur $1.00 of additional
Indebtedness pursuant to paragraph (a) of this covenant after giving effect to
the Incurrence of such Indebtedness pursuant to this clause (iv) and such
transaction or series of related transactions and (B) Refinancing Indebtedness
Incurred by a Restricted Subsidiary in respect of Indebtedness Incurred by such
Restricted Subsidiary pursuant to this clause (iv); (v) Indebtedness (A)
represented by letters of credit (and reimbursement obligations with respect
thereto) to secure the purchase price of inventory and/or equipment in the
ordinary course of business or to secure Indebtedness (including Capitalized
Lease Obligations) otherwise permitted to be incurred under the Indenture, (B)
in respect of performance bonds (and letters of credit in respect thereof),
bankers' acceptances, letters of credit for workers' compensation claims, and
surety or appeal bonds (and letters of credit in respect thereof) provided by
the Company or

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any Restricted Subsidiary in the ordinary course of its business and which do
not secure other Indebtedness and (C) under Currency Agreements, Interest Rate
Agreements and Commodity Agreements Incurred which, at the time of Incurrence,
is in the ordinary course of business; provided that such agreements are entered
into for bona fide hedging purposes, are not for speculation or trading purposes
and are designed to protect against fluctuations in interest rates, currency
exchange rates or commodity prices, as the case may be, and, in the case of
Interest Rate Agreements, any such Interest Rate Agreement has a notional amount
corresponding to the Indebtedness being hedged thereby; (vi) Indebtedness
represented by Guarantees by the Company of Indebtedness otherwise permitted to
be Incurred pursuant to this covenant and Indebtedness represented by Guarantees
by a Restricted Subsidiary of Indebtedness of the Company or of another
Restricted Subsidiary otherwise permitted to be Incurred pursuant to this
covenant; (vii) obligations with respect to customary provisions regarding
post-closing purchase price adjustments and indemnification in agreements for
the purchase or sale of a business or assets otherwise permitted by the
Indenture; (viii) Guarantees of Indebtedness of franchisees of the Company or a
Restricted Subsidiary in an aggregate principal amount at any one time
outstanding not to exceed $20 million, provided that any such Guarantees shall
be deemed to be Incurred by the Company or such Restricted Subsidiary at the
time any such franchisee ceases to be a franchisee of the Company or such
Restricted Subsidiary; (ix) Indebtedness Incurred by the Company or any
Restricted Subsidiary to finance the payment of property, casualty and specialty
insurance premiums in the ordinary course of the Company's business which is
repaid within 18 months of its Incurrence, provided that such Indebtedness does
not exceed $7.5 million in the aggregate at any one time outstanding; (x)
Indebtedness of the Company Incurred to finance the acquisition, construction or
improvement of fixed or capital assets, in an aggregate principal amount at any
one time outstanding not to exceed $15 million, provided that such Indebtedness
is incurred within 180 days after the date of such acquisition, construction or
improvement and does not exceed the fair market value of such acquired,
constructed or improved assets as determined in good faith by the Board of
Directors; (xi) Indebtedness represented by Capitalized Lease Obligations in
respect of Sale/Leaseback Transactions involving the sale of restaurants within
24 months of the purchase of the associated real property, in an aggregate
principal amount at any one time outstanding not to exceed $20 million; (xii)
Indebtedness represented by Guarantees of loans to employees of the Company or
its Subsidiaries for the purpose of paying withholding taxes incurred by such
employees in connection with the vesting of stock and/or stock options granted
by the Company, in an aggregate amount at any one time outstanding not to exceed
$3 million; and (xiii) other Indebtedness in an aggregate principal amount at
any one time outstanding not to exceed $20 million.

(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are
used, directly or indirectly, to Refinance any Subordinated Obligations unless
such new Indebtedness shall be subordinated to the Senior Notes to at least the
same extent as such Subordinated Obligations being Refinanced. No Subsidiary
Guarantor shall incur any Indebtedness pursuant to the foregoing paragraph (b)
if the proceeds thereof are used, directly or indirectly, to Refinance any
subordinated obligation of such Subsidiary Guarantor unless such Indebtedness
shall be subordinated to the obligations of such Subsidiary Guarantor under the
Subsidiary Guaranty to at least the same extent as such Subordinated Obligation
of such Subsidiary Guarantor.

(d) The Company will not permit any Unrestricted Subsidiary to Incur any
Indebtedness other than Non-Recourse Debt, except that an Unrestricted
Subsidiary may incur Indebtedness Guaranteed by the Company or any of its
Restricted Subsidiaries to the extent such Guarantee is permitted by clause (iv)
of paragraph (b) under the covenant "Limitation on Restricted Payments;"
provided, however, if any such Indebtedness ceases to be Non-Recourse Debt, such
event shall be deemed to constitute an Incurrence of Indebtedness by the Company
or a Restricted Subsidiary.

(e) For purposes of determining compliance with the foregoing covenant, (i)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, the Company will classify, in its
sole discretion, such item of Indebtedness and only be required to include the

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amount and type of such Indebtedness in one of the above clauses and (ii) an
item of Indebtedness may be divided and classified in more than one of the types
of Indebtedness described above.

LIMITATION ON RESTRICTED PAYMENTS. (a) The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, (i) declare or pay
any dividend or make any distribution on or in respect of its Capital Stock
(including any payment in connection with any merger or consolidation involving
the Company) except dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock) or in options, warrants or other rights to
purchase such Capital Stock and except dividends or distributions payable to the
Company or another Restricted Subsidiary (and, if such Restricted Subsidiary
making such dividend or distribution is not wholly owned, to its other
shareholders on a pro rata basis), (ii) purchase, repurchase, redeem, retire or
otherwise acquire or retire for value any Capital Stock of the Company or any
Restricted Subsidiary held by Persons other than the Company or another
Restricted Subsidiary, (iii) purchase, repurchase, redeem, defease or otherwise
acquire or retire for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment any Subordinated Obligations (other than the
purchase, repurchase or other acquisition of Subordinated Obligations in
anticipation of satisfying a sinking fund obligation, principal installment or
final maturity, in each case due within one year of the date of such purchase,
repurchase or acquisition) or (iv) make any Investment (other than a Permitted
Investment) in any Person (any such dividend, distribution, purchase,
redemption, repurchase, defeasance, other acquisition, retirement, payment or
Investment being herein referred to as a "Restricted Payment") if at the time
the Company or such Restricted Subsidiary makes such Restricted Payment: (1) a
Default or Event of Default shall have occurred and be continuing (or would
result therefrom); (2) the Company and its Restricted Subsidiaries could not
Incur at least $1.00 of additional Indebtedness under paragraph (a) of the
covenant described under "--Limitation on Indebtedness and Preferred Stock;" or
(3) the aggregate amount of such Restricted Payment and all other Restricted
Payments (the amount so expended, if other than in cash, to be determined in
good faith by the Board of Directors of the Company, whose determination will be
evidenced by a resolution of such Board of Directors certified in an Officers'
Certificate to the Trustee) declared or made subsequent to the Issue Date would
exceed the sum of: (A) 50% of the Consolidated Net Income with respect to the
period (treated as one accounting period) from the Issue Date to the end of the
most recent fiscal quarter ending at least 45 days prior to the date of such
Restricted Payment (or, in case such Consolidated Net Income is a deficit, minus
100% of such deficit); (B) the aggregate Net Cash Proceeds received by the
Company from the issue or sale of Capital Stock (other than Disqualified Stock
and other than the Common Stock issued in the Common Stock Offering) subsequent
to the Issue Date (other than an issuance or sale to a Subsidiary); (C) the
amount by which Indebtedness of the Company is reduced on the Company's balance
sheet upon the conversion or exchange (other than by a Restricted Subsidiary)
subsequent to the Issue Date of any Indebtedness of the Company convertible or
exchangeable for Capital Stock (other than Disqualified Stock) of the Company
(less the amount of any cash or other property distributed by the Company upon
such conversion or exchange); and (D) the amount equal to the net reduction in
Investments in Unrestricted Subsidiaries resulting from (i) repayments of the
principal of loans or advances or other transfers of assets to the Company or
any Restricted Subsidiary from Unrestricted Subsidiaries or (ii) the
redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in
each case as provided in the definition of "Investment") not to exceed, in the
case of any Unrestricted Subsidiary, the amount of Investments previously made
by the Company or any Restricted Subsidiary in such Unrestricted Subsidiary,
which amount was previously included in the calculation of the amount of
Restricted Payments.

(b) The provisions of the foregoing paragraph (a) will not prohibit: (i) any
purchase, redemption, defeasance or other acquisition of Capital Stock of the
Company or Subordinated Obligations made by exchange for, or out of the net
proceeds of the substantially concurrent sale of, Capital Stock of the Company
(other than Disqualified Stock and other than Capital Stock issued or sold to a
Subsidiary); PROVIDED, HOWEVER, that (A) such purchase, redemption, defeasance
or other acquisition will be excluded in the calculation of the amount of
Restricted Payments pursuant to clause (3) of paragraph (a) above and

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(B) the Net Cash Proceeds from such sale will be excluded from clause (3)(B) of
paragraph (a) above; (ii) any purchase, redemption, defeasance or other
acquisition of Subordinated Obligations made by exchange for, or out of the net
proceeds of the substantially concurrent sale of, Subordinated Obligations of
the Company; PROVIDED, HOWEVER, that (A) the principal amount of such new
Indebtedness does not exceed the principal amount of the Subordinated
Obligations being so redeemed, repurchased, acquired or retired for value (plus
the amount of any premium required to be paid under the terms of the instrument
governing the Subordinated Obligations being so redeemed, repurchased, acquired
or retired and related expenses), (B) such new Indebtedness is subordinated to
the Senior Notes at least to the same extent as such Subordinated Obligations so
purchased, exchanged, redeemed, repurchased, acquired or retired for value, (C)
such new Indebtedness has a final scheduled maturity date later than the final
scheduled maturity date of the Senior Notes and (D) such new Indebtedness has an
Average Life equal to or greater than the Average Life of the Senior Notes;
provided further, however, that such purchase, redemption, defeasance or other
acquisition will be excluded in the calculation of the amount of Restricted
Payments pursuant to clause (3) of paragraph (a) above; (iii) dividends paid
within 60 days after the date of declaration thereof if at such date of
declaration such dividend would have complied with this covenant; PROVIDED,
HOWEVER, that the amount of such dividend will be included in the calculation of
the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above;
(iv) Investments in the form of Guarantees by the Company or any of its
Restricted Subsidiaries of Indebtedness of an Unrestricted Subsidiary solely to
the extent that the Company or any such Restricted Subsidiary would then be
permitted to make an Investment in such Unrestricted Subsidiary pursuant to
clause (3) of paragraph (a) above; provided that the amount of any such
Investment will be included in the calculation of the amount of Restricted
Payments pursuant to clause (3) of paragraph (a) above; (v) the repurchase,
redemption or other acquisition or retirement for value of any Capital Stock of
the Company held by any member of the Company's management pursuant to employee
benefit plans or agreements; provided that the aggregate price paid for all such
Capital Stock shall not exceed $2 million in any 12-month period and $5 million
in the aggregate; provided further that such amounts will be included in the
calculation of the amount of Restricted Payments pursuant to clause (3) of
paragraph (a) above; and (vi) other Restricted Payments in an aggregate amount
not to exceed $5 million; provided that such amounts will be included in the
calculation of the amount of Restricted Payments pursuant to clause (3) of
paragraph (a) above; provided, however, that at the time of, and after giving
effect to, any Restricted Payment permitted by clauses (v) and (vi), no Default
or Event of Default shall have occurred and be continuing.

LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED
SUBSIDIARIES. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness or other obligation owed to the Company, (ii) make
any loans or advances to the Company or (iii) transfer any of its property or
assets to the Company or any Restricted Subsidiary, except: (1) any encumbrance
or restriction pursuant to an agreement in effect at or entered into on the
Issue Date (including pursuant to the New Credit Facility); (2) any encumbrance
or restriction with respect to a Restricted Subsidiary pursuant to an agreement
relating to any Indebtedness Incurred by such Restricted Subsidiary on or prior
to the date on which such Restricted Subsidiary was acquired by the Company or a
Restricted Subsidiary and outstanding on such date (other than Indebtedness
Incurred in connection with, or in contemplation of, the transaction or series
of related transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by the Company or a Restricted
Subsidiary); (3) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an agreement
referred to in clause (1) or (2) of this covenant or contained in any amendment
to an agreement referred to in clause (1) or (2) of this covenant; PROVIDED,
HOWEVER, that the encumbrances and restrictions contained in any such
refinancing agreement or amendment are not materially less favorable to the
Senior Noteholders than the encumbrances and restrictions contained in any such
agreement as determined in good faith by the Company and evidenced by an
Officers' Certificate; (4) in the case of clause (iii), any

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encumbrance or restriction (A) that restricts in a customary manner the
subletting, assignment or transfer of any property or asset that is subject to a
lease, license or similar contract, (B) by virtue of any transfer of, agreement
to transfer, option or right with respect to, or Lien on, any property or assets
of the Company or any Restricted Subsidiary not otherwise prohibited by the
Indenture or (C) contained in security agreements securing Indebtedness of a
Restricted Subsidiary to the extent such encumbrance or restrictions restrict
the transfer of the property subject to such security agreements; (5) any
restriction with respect to a Restricted Subsidiary imposed pursuant to an
agreement entered into for the sale or disposition of all or substantially all
the Capital Stock or assets of such Restricted Subsidiary pending the closing of
such sale or disposition; (6) any encumbrance or restriction arising under or by
reason of applicable law; (7) any encumbrance or restriction contained in the
Indenture; (8) customary provisions in joint venture agreements relating solely
to the securities, assets and revenues of such joint venture or other business
venture; (9) any encumbrance or restriction applicable to secured Indebtedness
otherwise permitted to be Incurred under the Indenture that limits the right of
the debtor to dispose of the assets securing such Indebtedness; (10) customary
net worth provisions contained in leases and other agreements entered into by a
Restricted Subsidiary in the ordinary course of business; and (11) customary
restrictions with respect to a Restricted Subsidiary pursuant to an agreement
that has been entered into for the sale or other disposition of all of the
Capital Stock or assets of such Restricted Subsidiary.

LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK. (a) The Company will
not, and will not permit any Restricted Subsidiary to, make any Asset
Disposition unless (i) the Company or such Restricted Subsidiary receives
consideration at the time of such Asset Disposition at least equal to the fair
market value, as determined in good faith by senior management for Asset
Dispositions of less than $5 million and by the Board of Directors of the
Company in good faith for Asset Dispositions of $5 million or more (including in
each case as to the value of all non cash consideration), of the shares and
assets subject to such Asset Disposition, (ii) at least 75% of the consideration
thereof received by the Company or such Restricted Subsidiary is in the form of
cash or Temporary Cash Investments and (iii) an amount equal to 100% of the Net
Available Cash from such Asset Disposition is applied by the Company or such
Restricted Subsidiary, as the case may be, (A) within 270 days from the receipt
of such Net Available Cash to the extent the Company or any Restricted
Subsidiary, as the case may be, elects (or is required by the terms of the New
Credit Facility or any Senior Indebtedness), to prepay, repay, purchase or
otherwise acquire Indebtedness under the New Credit Facility or other Senior
Indebtedness or Indebtedness (other than Disqualified Stock) of a Wholly Owned
Subsidiary (in each case other than Indebtedness owed to the Company or an
Affiliate of the Company); (B) to the extent of any remaining balance of Net
Available Cash after any election in accordance with clause (A), to the extent
the Company or such Restricted Subsidiary, as the case may be, elects, to the
investment by the Company or any Wholly Owned Subsidiary in Additional Assets
within 360 days from the receipt of such Net Available Cash (except that the
Company shall be deemed to have so invested such Net Available Cash within 360
days if, within such 360 days, it has entered into a binding commitment to
invest such Net Available Cash and such Net Available Cash is actually invested
within 90 days thereafter); (C) to the extent of any remaining balance of such
Net Available Cash after any election in accordance with clauses (A) and (B), to
make an Offer (as defined below) to purchase Senior Notes pursuant to and
subject to the conditions set forth in paragraph (b) of this covenant within 45
days from the application of Net Available Cash in accordance with clauses (A)
and (B); and (D) to the extent of any remaining balance of such Net Available
Cash after election or application in accordance with clauses (A), (B) and (C),
to (x) the acquisition by the Company or any Wholly Owned Subsidiary of
Additional Assets, (y) the prepayment, repayment, purchase or other acquisition
of Indebtedness of the Company (other than Indebtedness owed to an Affiliate of
the Company and other than Disqualified Stock of the Company) or Indebtedness of
any Restricted Subsidiary (other than Indebtedness owed to the Company or an
Affiliate of the Company) or (z) general corporate purposes; PROVIDED, HOWEVER
that in connection with any prepayment, repayment, purchase or other acquisition
of Indebtedness pursuant to clause (A), (C) or (D) above, the Company or such
Restricted Subsidiary will retire such Indebtedness and will cause any related
loan commitment or availability (if any) to be permanently reduced in an amount

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equal to the principal amount so prepaid, repaid, purchased or acquired, except
that pending the final application of any such Net Available Cash, the Company
or such Restricted Subsidiary may temporarily reduce Indebtedness under a
revolving credit facility or otherwise invest such Net Available Cash in
Temporary Cash Investments.

Notwithstanding the foregoing provisions, the Company and its Restricted
Subsidiaries shall not be required to apply any Net Available Cash in accordance
herewith except to the extent that the aggregate Net Available Cash from all
Asset Dispositions which are not applied in accordance with this covenant
exceeds $5,000,000. The Company shall not be required to make an Offer for
Senior Notes pursuant to this covenant if the Net Available Cash available
therefor (after application of the proceeds as provided in clauses (A) and (B))
is less than $7,500,000 (which lesser amounts shall be carried forward for
purposes of determining whether an Offer is required with respect to the Net
Available Cash from subsequent Asset Dispositions).

For the purposes of this covenant, the following are deemed to be cash: (x)
the assumption by the transferee of Indebtedness of the Company or any
Restricted Subsidiary (other than Indebtedness that is subordinated to the
Senior Notes or the Subsidiary Guarantees) and the release of the Company or
such Restricted Subsidiary from all liability on such Indebtedness in connection
with such Asset Disposition, (y) securities received by the Company or any
Restricted Subsidiary from the transferee that are promptly converted by the
Company or such Restricted Subsidiary into cash and (z) Additional Assets
received in an exchange of assets transaction; provided that (i) in the event
such exchange of assets transaction or series of related exchange of assets
transactions (each an "Exchange Transaction") involves an aggregate value in
excess of $2,500,000, the terms of such Exchange Transaction shall have been
approved by a majority of the disinterested members of the Board of Directors,
(ii) in the event such Exchange Transaction involves an aggregate value in
excess of $5,000,000, the Company shall have received a written opinion from a
nationally recognized independent investment banking firm that the Company has
received consideration equal to the fair market value of the assets disposed of
and (iii) any assets to be received shall be comparable to those being exchanged
as determined in good faith by the Board of Directors, except that up to
$1,000,000 of consideration in any Exchange Transaction may consist of marketing
and similar credits in lieu of comparable assets.

(b) In the event of an Asset Disposition that requires the purchase of
Senior Notes pursuant to clause (a)(iii)(C) of this covenant, the Company will
be required to purchase Senior Notes tendered pursuant to an offer by the
Company for the Senior Notes (the "Offer") at a purchase price of 100% of their
principal amount plus accrued interest to the date of purchase in accordance
with the procedures (including prorating in the event of oversubscription) set
forth in the Indenture. If the aggregate purchase price of Senior Notes tendered
pursuant to the Offer is less than the Net Available Cash allotted to the
purchase of the Senior Notes, the Company will apply the remaining Net Available
Cash in accordance with clause (a)(iii)(D) above.

(c) The Company will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Senior Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue thereof.

LIMITATION ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter into
or conduct any transaction or series of transactions (including the purchase,
sale, lease or exchange of any property, or rendering of any service) with any
Affiliate of the Company (an "Affiliate Transaction") unless (i) the terms of
such transaction are no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that could be obtained at the time of
such transaction in arm's-length dealings with a Person who is not such an
Affiliate; (ii) in the event such Affiliate Transaction involves an aggregate
amount in excess of $2,500,000, the terms

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of such transaction shall have been approved by a majority of the disinterested
members of the Board of Directors (and such majority determines that such
Affiliate Transaction satisfies the criteria in clause (i) above) and (iii) in
the event such Affiliate Transaction involves an aggregate amount in excess of
$5,000,000, the Company has received a written opinion from a nationally
recognized independent investment banking firm that such Affiliate Transaction
is fair to the Company from a financial point of view.

(b) The foregoing shall not apply to (i) any Restricted Payment permitted to
be made pursuant to "Limitation on Restricted Payments," (ii) any issuance of
securities, or other payments, awards or grants in cash, securities or otherwise
pursuant to, or the funding of, employment arrangements, stock options and stock
ownership plans approved by the Board of Directors, (iii) any fees, indemnities,
loans or advances to employees in the ordinary course of business, (iv) any
transaction between the Company and a Restricted Subsidiary or between
Restricted Subsidiaries, (v) transactions with suppliers or other purchasers of
goods and services (including, without limitation, pursuant to joint venture
agreements and franchise agreements) and (vi) any agreement in effect on the
Issue Date or any amendment thereto or transaction contemplated thereby (and any
replacement or amendment of any such agreement so long as any such amendment or
replacement thereof is not materially less favorable to the Holders than the
original agreement in effect on the Issue Date).

LIMITATION ON LIENS. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create or permit to exist any
Lien on any of its property or assets (including Capital Stock), whether owned
on the Issue Date or thereafter acquired, securing any obligation, other than
Permitted Liens, unless contemporaneously therewith effective provision is made
to secure the Senior Notes equally and ratably with (or on a senior basis to, in
the case of Subordinated Obligations) such obligation for so long as such
obligation is so secured by a Lien on property or assets of the Company or a
Restricted Subsidiary.

LIMITATION ON SALES OF SUBSIDIARY CAPITAL STOCK. The Company (i) will not,
and will not permit any Restricted Subsidiary of the Company to, transfer,
convey, sell, lease or otherwise dispose of any Capital Stock of any Restricted
Subsidiary to any Person (other than to the Company or a Wholly Owned
Subsidiary) and (ii) will not permit any Restricted Subsidiary to issue any of
its Capital Stock (other than, if necessary, shares of its Capital Stock
constituting directors' qualifying shares) to any Person other than to the
Company or a Wholly Owned Subsidiary, unless (a) after any such transfer,
conveyance, sale, lease, disposition or issuance, such Subsidiary constitutes a
Restricted Subsidiary and (b) the net cash proceeds from such transfer,
conveyance, sale, lease or other disposition are applied in accordance with the
covenant described above under "Limitation on Sales of Assets and Subsidiary
Stock;" provided, however, that this provision shall not prohibit the transfer,
conveyance, sale, lease or other disposition of all of the Capital Stock of any
Restricted Subsidiary.

SEC REPORTS. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company will file with the SEC and provide the Trustee and Senior
Noteholders with the annual reports and such information, documents and other
reports which are specified in Sections 13 and 15(d) of the Exchange Act. The
Company also will comply with the other provisions of TIA Section 314(a).

FUTURE GUARANTORS. The Company shall cause each new Subsidiary (other than
(i) a new Subsidiary designated as an Unrestricted Subsidiary and (ii) Foreign
Subsidiaries) to become a Subsidiary Guarantor under the Indenture and thereby
Guarantee the Senior Notes on the terms and conditions set forth in the
Indenture.

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MERGER AND CONSOLIDATION

The Company will not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor Company") will
be a corporation organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and the Successor Company
(if not the Company) will expressly assume, by supplemental indenture, executed
and delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company under the Senior Notes and the Indenture; (ii)
immediately after giving pro forma effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Restricted Subsidiary as a result of such transaction as having been Incurred by
the Successor Company or such Restricted Subsidiary at the time of such
transaction), no Default or Event of Default will have occurred and be
continuing; (iii) immediately after giving pro forma effect to such transaction,
the Successor Company would be able to Incur an additional $1.00 of Indebtedness
under paragraph (a) of the covenant described under "-- Limitation on
Indebtedness and Preferred Stock;" (iv) immediately after giving effect to such
transaction, the Successor Company will have a Consolidated Net Worth in an
amount which is not less than the Consolidated Net Worth of the Company
immediately prior to such transaction; and (v) the Company will have delivered
to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating
that such consolidation, merger or transfer and such supplemental indenture (if
any) comply with the Indenture, as set forth in the Indenture.

The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but the
predecessor Company in the case of a lease of all its assets or a conveyance,
transfer or lease of substantially all its assets will not be released from the
obligation to pay the principal of and interest on the Senior Notes.

DEFAULTS

An Event of Default is defined in the Indenture as (i) a default in any
payment of interest on any Senior Note when due, continued for 30 days, (ii) a
default in the payment of principal of any Senior Note when due at its Stated
Maturity, upon optional redemption, upon required repurchase, upon declaration
or otherwise, (iii) the failure by the Company to comply with its obligations
under "-- Merger and Consolidation," (iv) the failure by the Company to comply
for 30 days after notice with any of its obligations under the covenants
described under "-- Change of Control" or "-- Certain Covenants" (in each case,
other than a failure to purchase Senior Notes), (v) the failure by the Company
to comply for 60 days after notice with its other agreements contained in the
Indenture, (vi) the failure by the Company or any Significant Subsidiary of the
Company to pay any Indebtedness within any applicable grace period after final
maturity or the acceleration of any such Indebtedness by the holders thereof
because of a default and the total amount of such Indebtedness unpaid or
accelerated exceeds $10 million or its foreign currency equivalent (the "cross
acceleration provision"), (vii) certain events of bankruptcy, insolvency or
reorganization of the Company or any Significant Subsidiary of the Company (the
"bankruptcy provisions"), (viii) any judgment or decree for the payment of money
in excess of $10 million is rendered against the Company or any Significant
Subsidiary of the Company and such judgment or decree remains outstanding for a
period of 60 days following such judgment and is not discharged, waived or
stayed (the "judgment default provision") or (ix) a Subsidiary Guaranty ceases
to be in full force and effect (other than in accordance with the terms thereof)
or a Subsidiary Guarantor denies or disaffirms its obligations under its
Subsidiary Guaranty.

The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body.

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However, a default under clauses (iv) or (v) will not constitute an Event of
Default until the Trustee or the Holders of 25% in aggregate principal amount of
the outstanding Senior Notes notify the Company as provided in the Indenture of
the default and the Company does not cure such default within the time specified
in clauses (iv) and (v) hereof after receipt of such notice.

If an Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in aggregate principal amount of the outstanding Senior Notes by
notice to the Company may declare the principal of and accrued but unpaid
interest on all the Senior Notes to be due and payable. Upon such a declaration,
such principal and interest will be due and payable immediately. If an Event of
Default relating to certain events of bankruptcy, insolvency or reorganization
of the Company occurs and is continuing, the principal of and accrued interest
on all the Senior Notes will become immediately due and payable without any
declaration or other act on the part of the Trustee or any Holders. Under
certain circumstances, the Holders of a majority in aggregate principal amount
of the outstanding Senior Notes may rescind any such acceleration with respect
to the Senior Notes and its consequences.

Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
shall have offered to the Trustee reasonable indemnity or security against any
loss, liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Senior Notes unless (i) such Holder
shall have previously given the Trustee notice that an Event of Default is
continuing, (ii) Holders of at least 25% in aggregate principal amount of the
outstanding Senior Notes shall have requested the Trustee to pursue the remedy,
(iii) such Holders shall have offered the Trustee reasonable security or
indemnity against any loss, liability or expense, (iv) the Trustee shall not
have complied with such request within 60 days after the receipt of the request
and the offer of security or indemnity and (v) the Holders of a majority in
principal amount of the outstanding Senior Notes shall not have given the
Trustee a direction inconsistent with such request within such 60-day period.
Subject to certain restrictions, the Holders of a majority in principal amount
of the outstanding Senior Notes are given the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or of exercising any trust or power conferred on the Trustee. The Trustee,
however, may refuse to follow any direction that conflicts with law or the
Indenture or that the Trustee determines is unduly prejudicial to the rights of
any other Holder or that would involve the Trustee in personal liability. Prior
to taking any action under the Indenture, the Trustee will be entitled to
indemnification satisfactory to it in its sole discretion against all losses and
expenses caused by taking or not taking such action.

The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the Default
within the earlier of 90 days after it occurs or 30 days after it is known to a
Trust Officer or written notice of it is received by the Trustee. Except in the
case of a Default in the payment of principal of, premium (if any) or interest
on any Senior Note, the Trustee may withhold notice if and so long as a
committee of its Trust Officers in good faith determines that withholding notice
is in the interests of the Senior Noteholders. In addition, the Company is
required to deliver to the Trustee, within 120 days after the end of each fiscal
year, a certificate indicating whether the signers thereof know of any Default
that occurred during the previous year. The Company also is required to deliver
to the Trustee, within 30 days after the occurrence thereof, written notice of
any event which would constitute certain Defaults, their status and what action
the Company is taking or proposes to take in respect thereof.

AMENDMENTS AND WAIVERS

Subject to certain exceptions, the Indenture may be amended with the consent
of the Holders of a majority in principal amount of the Senior Notes then
outstanding and any past default or compliance with

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any provisions may be waived with the consent of the Holders of a majority in
principal amount of the Senior Notes then outstanding. However, without the
consent of each Holder of an outstanding Senior Note affected, no amendment may,
among other things, (i) reduce the amount of Senior Notes whose Holders must
consent to an amendment, (ii) reduce the rate of or extend the time for payment
of interest on any Senior Note, (iii) reduce the principal of or extend the
Stated Maturity of any Senior Note, (iv) reduce the premium payable upon the
redemption of any Senior Note or change the time at which any Senior Note may be
redeemed as described under "-- Optional Redemption," (v) make any Senior Note
payable in money other than that stated in the Senior Note, (vi) impair the
right of any Holder to receive payment of principal of and interest on such
Holder's Senior Notes on or after the due dates therefor or to institute suit
for the enforcement of any payment on or with respect to such Holder's Senior
Notes or (vii) make any change in the amendment provisions which require each
Holder's consent or in the waiver provisions.

Without the consent of any Holder, the Company and the Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation of the obligations the Company
under the Indenture, to provide for uncertificated Senior Notes in addition to
or in place of certificated Senior Notes (provided that the uncertificated
Senior Notes are issued in registered form for purposes of Section 163(f) of the
Code, or in a manner such that the uncertificated Senior Notes are as described
in Section 163(f)(2)(B) of the Code), to add additional Guarantees with respect
to the Senior Notes, to secure the Senior Notes, to add to the covenants of the
Company for the benefit of the Senior Noteholders or to surrender any right or
power conferred upon the Company, to make any change that does not adversely
affect the rights of any Holder and to comply with any requirement of the SEC in
connection with the qualification of the Indenture under the TIA.

The consent of the Senior Noteholders is not necessary under the Indenture
to approve the particular form of any proposed amendment. It is sufficient if
such consent approves the substance of the proposed amendment.

After an amendment under the Indenture becomes effective, the Company is
required to mail to Senior Noteholders a notice briefly describing such
amendment. However, the failure to give such notice to all Senior Noteholders,
or any defect therein, will not impair or affect the validity of the amendment.

TRANSFER AND EXCHANGE

A Senior Noteholder may transfer or exchange Senior Notes in accordance with
the Indenture. Upon any transfer or exchange, the registrar and the Trustee may
require a Senior Noteholder, among other things, to furnish appropriate
endorsements and transfer documents and the Company may require a Senior
Noteholder to pay any taxes required by law or permitted by the Indenture,
including any transfer tax or other similar governmental charge payable in
connection therewith. The Company is not required to transfer or exchange any
Senior Note selected for redemption or to transfer or exchange any Senior Note
for a period of 15 days prior to a selection of Senior Notes to be redeemed. The
Senior Notes will be issued in registered form and the registered holder of a
Senior Note will be treated as the owner of such Senior Note for all purposes.

DEFEASANCE

The Company at any time may terminate all its obligations under the Senior
Notes and the Indenture ("legal defeasance"), except for certain obligations,
including those with respect to the defeasance trust and obligations to register
the transfer or exchange of the Senior Notes, to replace mutilated, destroyed,
lost or stolen Senior Notes and to maintain a registrar and paying agent in
respect of the Senior Notes. The Company at any time may terminate its
obligations under the covenants described under "Certain Covenants," the
operation of the cross acceleration provision, the bankruptcy provisions with
respect to

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Significant Subsidiaries and the judgment default provision described under "--
Defaults" and the limitations contained in clauses (iii) and (iv) under "--
Merger and Consolidation" ("covenant defeasance").

The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Senior Notes may not be accelerated
because of an Event of Default with respect thereto. If the Company exercises
its covenant defeasance option, payment of the Senior Notes may not be
accelerated because of an Event of Default specified in clause (iv), (v), (vi),
(vii) (with respect only to Significant Subsidiaries) or (viii) under "--
Defaults" above or because of the failure of the Company to comply with clause
(iii) or (iv) under "-- Merger and Consolidation."

In order to exercise either defeasance option, the Company must irrevocably
deposit or cause to be deposited in trust (the "defeasance trust") with the
Trustee money or U.S. Government Obligations which through the scheduled payment
of principal and interest in respect thereof in accordance with their terms will
provide cash at such times and in such amounts as will be sufficient to pay
principal and interest when due on all the Senior Notes (except lost, stolen or
destroyed Senior Notes which have been replaced or repaid) to maturity or
redemption, as the case may be, and must comply with certain other conditions,
including delivery to the Trustee of an Opinion of Counsel to the effect that
holders of the Senior Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such deposit and defeasance and will be
subject to federal income tax on the same amount and in the same manner and at
the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable federal income tax law).

CONCERNING THE TRUSTEE

The Bank of New York is to be the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the Senior
Notes.

GOVERNING LAW

The Indenture provides that it and the Senior Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.

CERTAIN DEFINITIONS

"Acquired Indebtedness" of any specified Person means Indebtedness of any
other Person existing at the time such other Person is merged with or into or
becomes a Restricted Subsidiary of such specified Person, including Indebtedness
Incurred in connection with, or in contemplation of, such other Person's
becoming a Restricted Subsidiary of such specified Person.

"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by the Company or another Restricted Subsidiary; or (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary; PROVIDED, HOWEVER, that, in the case of clauses (ii)
and (iii), such Restricted Subsidiary is primarily engaged in a Related
Business.

"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of

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this definition, "control" when used with respect to any Person means the power
to direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing. For purposes of the covenants in the Indenture, "Affiliate" shall
also mean any beneficial owner of shares representing 10% or more of the total
voting power of the Voting Stock (on a fully diluted basis) of the Company or of
rights or warrants to purchase such Voting Stock (whether or not currently
exercisable) and any Person who would be an Affiliate of any such beneficial
owner pursuant to the first sentence hereof; provided that Donald N. Smith shall
be deemed to be an "Affiliate" so long as he is the beneficial owner of shares
representing 5% or more of the total voting power of the Voting Stock (on a
fully diluted basis) of the Company or of rights or warrants to purchase such
Voting Stock (whether or not currently exercisable).

"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) of shares of Capital
Stock of a Restricted Subsidiary (other than directors' qualifying shares),
property or other assets (including sales and other dispositions of tangible
assets to franchisees and licensees and tangible assets at underperforming
restaurants, but excluding sales, dispositions or licenses of trademarks,
service marks, tradenames and other intangibles), including by way of a
Sale/Leaseback Transaction (each referred to for the purposes of this definition
as a "disposition"), by the Company or any of its Restricted Subsidiaries
(including any disposition by means of a merger, consolidation or similar
transaction) other than (i) a disposition by a Restricted Subsidiary to the
Company or by the Company or a Restricted Subsidiary to a Wholly Owned
Subsidiary, (ii) a disposition of property or assets in the ordinary course of
business, (iii) dispositions of inventory in the ordinary course of business,
(iv) for purposes of the "Limitation on Sales of Assets and Subsidiary Stock"
covenant only, a disposition that constitutes a Restricted Payment permitted by
the "Limitation on Restricted Payments" covenant, (v) the sale, lease, transfer
or other disposition of all or substantially all the assets of the Company as
permitted under the covenant "Merger and Consolidation", (vi) the grant of Liens
permitted by the covenant "Limitation on Liens" and (vii) sales of obsolete or
worn-out equipment.

"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the product of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.

"Board of Directors" means the Board of Directors or equivalent governing
body of a Person (or the general partner of such Person, as the case may be) or
any committee thereof duly authorized to act on behalf of such Board or
equivalent governing body.

"Business Day" means a day other than a Saturday, Sunday or other day on
which banking institutions in New York State are authorized or required by law
to close.

"Capitalized Lease Obligation" of a Person means an obligation of such
Person that is required to be classified and accounted for on the balance sheet
of such Person as a capitalized lease for financial reporting purposes in
accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease.

"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participation or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.

"Code" means the Internal Revenue Code of 1986, as amended.

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"Commodity Agreement" means any commodity swap agreement, commodity future
agreement, commodity hedge agreement or other similar agreement relating to
commodities, in each case relating to those commodities used in the ordinary
course of business of the Company and its Subsidiaries.

"Common Stock Offering" means the offering to the public by the Company of
5,000,000 shares of its Common Stock concurrently with the offering of the
Senior Notes, including any offering of shares pursuant to over-allotment
options.

"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters for which internal financial information is
available ending at least 45 days prior to the date of such determination to
(ii) Consolidated Interest Expense for such four fiscal quarters; provided,
however, that (1) if the Company or any Restricted Subsidiary has Incurred any
Indebtedness since the beginning of such period that remains outstanding or if
the transaction giving rise to the need to calculate the Consolidated Coverage
Ratio is an Incurrence of Indebtedness, or both, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving effect on a
pro forma basis to such Indebtedness as if such Indebtedness had been Incurred
on the first day of such period and the discharge of any other Indebtedness
repaid, repurchased, defeased or otherwise discharged with the proceeds of such
new Indebtedness as if such discharge had occurred on the first day of such
period, (2) if since the beginning of such period the Company or any Restricted
Subsidiary shall have made any Asset Disposition or if the transaction giving
rise to the need to calculate the Consolidated Coverage Ratio is an Asset
Disposition, the EBITDA for such period shall be reduced by an amount equal to
the EBITDA (if positive) directly attributable to the assets which are the
subject of such Asset Disposition for such period, or increased by an amount
equal to the EBITDA (if negative) directly attributable thereto for such period
and Consolidated Interest Expense for such period shall be reduced by an amount
equal to the Consolidated Interest Expense directly attributable to any
Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased,
defeased or otherwise discharged with respect to the Company and its continuing
Restricted Subsidiaries in connection with such Asset Disposition for such
period (or, if the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company and its
continuing Restricted Subsidiaries are no longer liable for such Indebtedness
after such sale), (3) if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an Investment in
any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary)
or an acquisition of assets, including any acquisition of assets occurring in
connection with a transaction causing a calculation to be made hereunder, which
constitutes all or substantially all of an operating unit of a business, EBITDA
and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the Incurrence or retirement of any
Indebtedness) as if such Investment or acquisition occurred on the first day of
such period and (4) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period) shall
have made any Asset Disposition or any Investment that would have required an
adjustment pursuant to clause (2) or (3) above if made by the Company or a
Restricted Subsidiary during such period, EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving pro forma effect
thereto as if such Asset Disposition or Investment occurred on the first day of
such period. For purposes of this definition, whenever pro forma effect is to be
given to an acquisition of assets, the amount of income or earnings relating
thereto and the amount of Consolidated Interest Expense associated with any
Indebtedness Incurred in connection therewith, the pro forma calculations shall
be determined in good faith by a responsible financial or accounting officer of
the Company. If any Indebtedness bears a floating rate of interest and is being
given pro forma effect, the interest expense on such Indebtedness shall be
calculated as if the rate in effect on the date of determination had been the
applicable rate for the entire period (taking into account any Interest Rate
Agreement applicable to such Indebtedness).

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"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such interest expense, (i) interest expense
attributable to capital leases, (ii) amortization of debt discount and debt
issuance cost, (iii) capitalized interest, (iv) non-cash interest expense, (v)
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing, (vi) interest actually paid by the
Company or any such Restricted Subsidiary under any Guarantee of Indebtedness or
other obligation of any other Person, (vii) Preferred Stock dividends in respect
of all Preferred Stock of the Company and its Subsidiaries held by Persons other
than the Company or a Wholly Owned Subsidiary and (viii) the cash contributions
to any employee stock ownership plan or similar trust to the extent such
contributions are used by such plan or trust to pay interest or fees to any
Person (other than the Company) in connection with Indebtedness Incurred by such
plan or trust; PROVIDED, HOWEVER, that there shall be excluded therefrom any
such interest expense of any Unrestricted Subsidiary to the extent the related
Indebtedness is not Guaranteed or paid by the Company or any Restricted
Subsidiary.

"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its consolidated Subsidiaries; PROVIDED, HOWEVER, that there
shall not be included in such Consolidated Net Income:

(i) any net income (loss) of any Person (other than the Company) if such
Person is not a Restricted Subsidiary, except that (A), subject to the
limitations contained in clause (iv) below, the Company's equity in the net
income of any such Person for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Person during such period to the Company or a Restricted
Subsidiary as a dividend or other distribution (subject, in the case of a
dividend or other distribution paid to a Restricted Subsidiary, to the
limitations contained in clause (iii) below) and (B) the Company's equity in
a net loss of any such Person (other than an Unrestricted Subsidiary) for
such period shall be included in determining such Consolidated Net Income,

(ii) any net income (but not loss) of any Person acquired by the Company
or a Subsidiary in a pooling of interests transaction for any period prior
to the date of such acquisition,

(iii) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that (A), subject
to the exclusion contained in clause (iv) below, the Company's equity in the
net income of any such Restricted Subsidiary for such period shall be
included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Restricted Subsidiary during such period to the
Company or another Restricted Subsidiary as a dividend or other distribution
(subject, in the case of a dividend paid to another Restricted Subsidiary,
to the limitation contained in this clause) and (B) the Company's equity in
a net loss of any such Restricted Subsidiary for such period shall be
included in determining such Consolidated Net Income,

(iv) any gain (but not loss) realized upon the sale or other disposition
of any property, plant or equipment of the Company or its consolidated
Subsidiaries (including pursuant to any Sale/Leaseback Transaction) which is
not sold or otherwise disposed of in the ordinary course of business and any
gain (but not loss) realized upon the sale or other disposition of any
Capital Stock of any Person,

(v) any extraordinary gain or loss,

(vi) the cumulative effect of a change in accounting principles,

(vii) foreign currency exchange gains and losses, and

(xiii) any income (loss) from discontinued operations.

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Notwithstanding the foregoing, for the purpose of the covenant described
under "Certain Covenants--Limitation on Restricted Payments" only, there shall
be excluded from Consolidated Net Income any dividends, repayments of loans or
advances or other transfers of assets from Unrestricted Subsidiaries to the
Company or a Restricted Subsidiary to the extent such dividends, repayments or
transfers increase the amount of Restricted Payments permitted under such
covenant pursuant to clause (a)(3)(D) thereof.

"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and its Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as (i) the par
or stated value of all outstanding Capital Stock of the Company plus (ii)
paid-in capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit and (B) any
amounts attributable to Disqualified Stock.

"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.

"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.

"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or
(iii) is redeemable at the option of the holder thereof, in whole or in part, in
each case on or prior to the Stated Maturity of the Senior Notes.

"EBITDA" for any period means the Consolidated Net Income for such period,
plus the following to the extent deducted in calculating such Consolidated Net
Income: (i) income tax expense, (ii) Consolidated Interest Expense, (iii)
depreciation expense, (iv) amortization expense and (v) non-cash charges, in
each case for such period. Notwithstanding the foregoing, the income tax
expense, depreciation expense and amortization expense of a Restricted
Subsidiary of the Company shall be included in EBITDA only to the extent (and in
the same proportion) that the net income of such Subsidiary was included in
calculating Consolidated Net Income and only if a corresponding amount would be
permitted at the date of determination to be distributable to the Company by
such Subsidiary as a dividend.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Foreign Subsidiary" means any Subsidiary which is incorporated or otherwise
organized under the laws of any jurisdiction other than the United States of
America, any state thereof or the District of Columbia.

"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations based on GAAP contained in
the Indenture shall be computed in conformity with GAAP.

"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness or other obligation of such other Person
(whether arising by virtue of partnership arrangements, or by agreement to
keep-well, to purchase assets, goods, securities or

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services, to take-or-pay, or to maintain financial statement conditions or
otherwise) or (ii) entered into for purposes of assuring in any other manner the
obligee of such Indebtedness or other obligation of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.

"Hedging Obligations" of any Person means the obligations of such Person to
a counterparty (net of amounts receivable from such counterparty) pursuant to
any Interest Rate Agreement, or Currency Agreement or Commodity Agreement.

"Holder" or "Senior Noteholder" means the Person in whose name a Senior Note
is registered on the Registrar's books.

"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Disqualified Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be incurred by such
Subsidiary at the time it becomes a Subsidiary.

"Indebtedness" means, with respect to any Person on any date of
determination (without duplication),

(i) the principal of and premium (if any) in respect of indebtedness of
such Person for borrowed money,

(ii) the principal of and premium (if any) in respect of obligations of
such Person evidenced by bonds, debentures, Senior Notes or other similar
instruments,

(iii) all obligations of such Person in respect of unreimbursed drawings
under letters of credit or other similar instruments (including
reimbursement obligations with respect thereto),

(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except Trade Payables and accrued
expenses), which purchase price is due more that six months after the date
of placing such property in service or taking delivery and title thereto or
the completion of such services,

(v) all Capitalized Lease Obligations of such Person,

(vi) the amount of all non-contingent obligations of such Person with
respect to the redemption, repayment or other repurchase of any Disqualified
Stock or, with respect to any Restricted Subsidiary that is not a Subsidiary
Guarantor, any Preferred Stock (but excluding, in each case, any accrued
dividends),

(vii) all Indebtedness of other Persons secured by a Lien on any asset of
such Person, whether or not such Indebtedness is assumed by such Person;
PROVIDED, HOWEVER, that the amount of such Indebtedness shall be the lesser
of (A) the fair market value of such asset at such date of determination and
(B) the amount of such Indebtedness of such other Person,

(viii) all Indebtedness of other Persons to the extent Guaranteed by such
Person,

(ix) to the extent not otherwise included in this definition, Hedging
Obligations and,

(x) Acquired Indebtedness.

The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.

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"Interest Rate Agreement" means with respect to any Person any interest rate
protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.

"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of such Person) or other extension
of credit (including by way of Guarantee or similar arrangement) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, Indebtedness or other similar
instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary" and the "Limitation on Restricted Payments" covenant,
(i) "Investment" shall include the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the net assets
of any Subsidiary of the Company at the time that such Subsidiary is designated
an Unrestricted Subsidiary; PROVIDED, HOWEVER, that upon a redesignation of such
Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue
to have a permanent "Investment" in an Unrestricted Subsidiary in an amount (if
positive) equal to (x) the Company's "Investment" in such Subsidiary at the time
of such redesignation less (y) the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the net assets
of such Subsidiary at the time that such Subsidiary is so re-designated a
Restricted Subsidiary; and (ii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer, in each case as determined in good faith by the Board of
Directors and evidenced by a resolution of such Board of Directors certified in
an Officers' Certificate to the Trustee. For the purposes of calculating the
amount of other "Investments," including Permitted Investments, the amount of
any Investment shall be the original cost of such Investment plus the cost of
all additional Investments by the Company or any of its Restricted Subsidiaries,
without any adjustments for increases or decreases in value, or write-ups,
write-downs or write-offs with respect to such Investment, reduced by the
payment of dividends or distributions in connection with such Investment or any
other amounts received in respect of such Investment; provided that no such
payment of dividends or distributions or receipt of any such other amounts shall
reduce the amount of any Investment if such payment of dividends or
distributions or receipt of any such amounts would be included in Consolidated
Net Income.

"Issue Date" means the date on which the Senior Notes are originally issued.

"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).

"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a Senior Note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets or received in any other non cash form) therefrom,
in each case net of (i) all legal, accounting, investment banking, title and
recording tax expenses, commissions and other fees and expenses incurred, and
all Federal, state, provincial, foreign and local taxes required to be paid or
accrued as a liability under GAAP, as a consequence of such Asset Disposition,
(ii) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any Lien upon
such assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law be repaid out of the
proceeds from such Asset Disposition, (iii) all distributions and other payments
required to be made to minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Disposition and (iv) the deduction of
appropriate amounts to be provided by the seller as a reserve, in accordance
with GAAP, against any liabilities associated with the

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assets disposed of in such Asset Disposition and retained by the Company or any
Restricted Subsidiary after such Asset Disposition.

"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.

"New Credit Facility" means that certain credit facility to be entered into
on the Issue Date among the Company, Societe Generale, and the lenders from time
to time party thereto, including any collateral documents, instruments and
agreements executed in connection therewith, and the term New Credit Facility
shall also include any amendments, supplements, modifications, extensions,
renewals, restatements or refundings thereof and any credit facilities that
replace, refund or refinance any part of the loans, other credit facilities or
commitments thereunder, including any such replacement, refunding or refinancing
facility that increases the amount borrowable thereunder or alters the maturity
thereof.

"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any Restricted Subsidiary (a) provides any Guarantee or credit support of
any kind (including any undertaking, Guarantee, indemnity, agreement or
instrument that would constitute Indebtedness) or (b) is directly or indirectly
liable (as a guarantor or otherwise) and (ii) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness of the Company or any
Restricted Subsidiary to declare a default under such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its stated
maturity.

"Permitted Holders" means Donald N. Smith, The Equitable Life Assurance
Society of the U.S., the Company's existing senior management and their
respective Affiliates.

"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) the Company, or a Restricted Subsidiary or a Person which
will, upon the making of such Investment, become a Restricted Subsidiary;
PROVIDED, HOWEVER, that the primary business of such Restricted Subsidiary is a
Related Business; (ii) another Person if as a result of such Investment such
other Person is merged or consolidated with or into, or transfers or conveys all
or substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Related Business;
(iii) Temporary Cash Investments; (iv) accounts and receivables owing to the
Company or any Restricted Subsidiary, if created or acquired in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms; PROVIDED, HOWEVER, that such trade terms may include such
concessionary trade terms as the Company or any such Restricted Subsidiary deems
reasonable under the circumstances; (v) payroll, travel and similar advances to
cover matters that are expected at the time of such advances ultimately to be
treated as expenses for accounting purposes and that are made in the ordinary
course of business; (vi) loans or advances to employees made in the ordinary
course of business; (vii) stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to the
Company or any Restricted Subsidiary or in satisfaction of judgments and which
are readily convertible into cash in U.S. dollars in an amount equal to the fair
market value thereof as determined in good faith by the Board of Directors;
(viii) franchisees of the Company in an amount at any one time outstanding not
to exceed $10 million; (ix) Unrestricted Subsidiaries in an aggregate amount at
any one time outstanding not to exceed $10 million; (x) Guarantees permitted to
be made pursuant to the covenant "Limitation on Indebtedness and Preferred
Stock"; (xi) securities of account debtors received in settlement of obligations
or pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy of insolvency of any account debtors or customers, (xii) Currency
Agreements, Interest Rate Agreements and Commodity Agreements entered into in
the ordinary course of business; provided that such agreements are entered into
for bona fide hedging purposes, are not for speculation or trading purposes and
are designed to protect against fluctuations in interest rates, currency
exchange rates or

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commodity prices, as the case may be, and, in the case of Interest Rate
Agreements, any such Interest Rate Agreement has a notional amount corresponding
to the Indebtedness being hedged thereby, (xiii) accounts and notes receivable
from franchisees, customers, suppliers and others in the ordinary course of
business, (xiv) connection with an Asset Disposition made in compliance with the
covenant "Limitation on Sales of Assets and Subsidiary Stock" and (xv)
Friendly's International, Inc. or its United Kingdom subsidiaries represented by
the transfer by the Company of the Company's interests in Shanghai Friendly Food
Co., Ltd.

"Permitted Liens" means, with respect to any Person, (a) pledges or deposits
by such Person under workmen's compensation laws, unemployment insurance laws or
similar legislation, or good faith deposits in connection with bids, tenders,
contracts (other than for the payment of Indebtedness) or leases to which such
Person is a party, or deposits to secure public or statutory obligations of such
Person or deposits or cash or United States government bonds to secure surety or
appeal bonds to which such Person is a party, or deposits as security for
contested taxes or import duties or for the payment of rent, in each case
incurred in the ordinary course of business; (b) Liens imposed by law, such as
carriers', warehousemen's and mechanics' Liens, in each case for sums not yet
due or being contested in good faith by appropriate proceedings or other Liens
arising out of judgments or awards against such Person with respect to which
such Person shall then be proceeding with an appeal or other proceedings for
review; (c) Liens for taxes, assessments, governmental charges or claims not yet
subject to penalties for non-payment or which are being contested in good faith
by appropriate proceedings; (d) Liens in favor of issuers of surety bonds or
letters of credit issued pursuant to the request of and for the account of such
Person, and Liens to secure bankers' acceptances, in each case in the ordinary
course of its business; (e) survey exceptions, encumbrances, easements or
reservations of, or rights of others for, licenses, rights of way, sewers,
electric lines, telegraph and telephone lines and other similar purposes, or
zoning or other restrictions as to the use of real properties or Liens
incidental to the conduct of the business of such Person or to the ownership of
its properties which were not incurred in connection with Indebtedness and which
do not in the aggregate materially adversely affect the value of said properties
or materially impair their use in the operation of the business of such Person;
(f) Liens (A) securing obligations under Interest Rate Agreements so long as the
related Indebtedness is, and is permitted to be under the Indenture, secured by
a Lien on the same property securing such obligations and (B) securing
obligations under Currency Agreements and Commodity Agreements, provided that
such Liens shall not encumber any assets or property of the Company other than
the underlying contracts and the rights thereunder; (g) Liens existing as of the
date on which the Senior Notes are originally issued and Liens created by the
Indenture; (h) Liens created solely for the purpose of securing the payment of
all or a part of the purchase price of assets or property acquired or
constructed in the ordinary course of business after the date on which the
Senior Notes are originally issued; PROVIDED, HOWEVER, that (A) the aggregate
principal amount of Indebtedness secured by such Liens shall not exceed the cost
of the assets or property so acquired or constructed, (B) the Indebtedness
secured by such Liens shall have otherwise been permitted to be issued under the
Indenture and (C) such Liens shall not encumber any other assets or property of
the Company or any of its Restricted Subsidiaries and shall attach to such
assets or property within 90 days of the construction or acquisition of such
assets or property; (i) Liens on the assets or property of a Restricted
Subsidiary of the Company existing at the time such Restricted Subsidiary became
a Subsidiary of the Company and not incurred as a result of (or in connection
with or in anticipation of) such Restricted Subsidiary becoming a Subsidiary of
the Company; PROVIDED, HOWEVER, that (A) any such Lien does not by its terms
cover any categories of property or assets after the time such Restricted
Subsidiary becomes a Subsidiary which were not covered immediately prior to such
transaction, (B) the incurrence of the Indebtedness secured by such Lien shall
have otherwise been permitted to be issued under the Indenture, and (C) such
Liens do not extend to or cover any other categories of property or assets of
the Company or any of its Restricted Subsidiaries; (j) Liens to secure
Capitalized Lease Obligations permitted to be Incurred under the Indenture; (k)
Liens securing Indebtedness outstanding under the New Credit Facility
(including, without limitation, any Refinancing Indebtedness in respect thereof
to the extent permitted under the covenant "Limitation on Indebtedness and

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Preferred Stock"); (l) any interest or title of a lessor under any lease,
whether or not characterized as an operating or capital lease; (m) Liens
encumbering deposits made to secure obligations arising from statutory,
regulatory, contractual or warranty requirements of the Company or any
Restricted Subsidiary, including rights of set-off; (n) leases or subleases
granted in the ordinary course of business; (o) Liens arising out of consignment
or similar arrangements for the sale of goods; (p) rights of set-off arising
under law by banks; (q) Liens in addition to the foregoing incurred in the
ordinary course of business which are not incurred in connection with the
borrowing of money or the obtaining of advances of credit; provided that the
amount of the obligations of the Company and its Restricted Subsidiaries secured
by such Liens does not exceed in the aggregate $2 million at any one time
outstanding; and (r) Liens extending, renewing or replacing in whole or in part
a Lien permitted by the Indenture; provided, however, that (A) such Liens do not
extend beyond the property subject to the existing Lien and improvements and
construction on such property and (B) the Indebtedness secured by the Lien may
not exceed the Indebtedness secured at the time by the existing Lien.

"Person" means any individual, corporation, partnership joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.

"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.

"Qualified Equity Offering" means (i) an underwritten primary public
offering (other than the Common Stock Offering) of common stock of the Company
pursuant to an effective registration statement under the Securities Act or (ii)
a private offering of common stock other than issuances of common stock pursuant
to employee benefit plans or as compensation to employees.

"Refinancing Indebtedness" means Indebtedness that refunds, refinances,
replaces, renews, repays or extends (including pursuant to any defeasance or
discharge mechanism) (collectively, "refinances," and "refinanced" shall have a
correlative meaning) any Indebtedness existing on the date of the Indenture or
Incurred in compliance with the Indenture (including Indebtedness of the Company
that refinances Indebtedness of any Restricted Subsidiary and Indebtedness of
any Restricted Subsidiary that refinances Indebtedness of another Restricted
Subsidiary) including Indebtedness that refinances other Refinancing
Indebtedness; provided, however, that (i) the Refinancing Indebtedness has a
Stated Maturity no earlier than the Stated Maturity of the Indebtedness being
refinanced, (ii) the Refinancing Indebtedness has an Average Life at the time
such Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being refinanced and (iii) such Refinancing
Indebtedness is Incurred in an aggregate principal amount (or if issued with
original issue discount, an aggregate issue price) that is equal to or less than
the sum of the aggregate principal amount (or if issued with original issue
discount, the aggregate accreted value) then outstanding of the Indebtedness
being refinanced; provided further, however, that Refinancing Indebtedness shall
not include (x) Indebtedness of a Restricted Subsidiary that refinances
Indebtedness of the Company or (y) Indebtedness of the Company or a Restricted
Subsidiary that refinances Indebtedness of an Unrestricted Subsidiary (unless
such Unrestricted Subsidiary is concurrently redesignated a Restricted
Subsidiary).

"Related Business" means the businesses of the Company and the Restricted
Subsidiaries on the date of the Indenture and any business related, ancillary or
complementary thereto, in each case as determined by the Company in good faith.

"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.

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"RIC" means Restaurant Insurance Corporation, the Company's insurance
Subsidiary, and its successors.

"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.

"SEC" means the U.S. Securities and Exchange Commission.

"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.

"Senior Indebtedness" means all Indebtedness of the Company including
interest thereon, whether outstanding on the Issue Date or thereafter Incurred,
unless in the instrument creating or evidencing the same or pursuant to which
the same is outstanding it is provided that such obligations are subordinated in
right of payment to the Senior Notes; PROVIDED, HOWEVER, that Senior
Indebtedness shall not include (1) any obligation of the Company to any
Subsidiary, (2) any liability for Federal, state, local or other taxes owed or
owing by the Company, (3) any accounts payable or other liability to trade
creditors arising in the ordinary course of business (including Guarantees
thereof or instruments evidencing such liabilities), (4) any Indebtedness,
Guarantee or obligation of the Company which is subordinate or junior in any
respect to any other Indebtedness, Guarantee or obligation of the Company,
including any Subordinated Obligations, (5) any obligations with respect to any
Capital Stock, (6) Indebtedness which, when Incurred and without respect to any
election under Section 1111(b) of Title II, United States Code, is without
recourse to the Company, or (7) any Indebtedness Incurred in violation of the
Indenture.

"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.

"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).

"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Senior Notes pursuant to a written agreement.

"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such
Person.

"Subsidiary Guarantor" means Friendly's Restaurants Franchise, Inc. and each
new Subsidiary (other than Foreign Subsidiaries and Unrestricted Subsidiaries)
that guarantees the Company's obligations with respect to the Senior Notes.

"Subsidiary Guaranty" means the Guaranty by a Subsidiary Guarantor of the
Company's obligations with respect to the Senior Notes.

"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 360 days of the date of acquisition thereof
issued by a bank or trust

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company which is organized under the laws of the United States of America, any
state thereof or any foreign country recognized by the United States of America
having capital, surplus and undivided profits aggregating in excess of
$250,000,000 (or the foreign currency equivalent thereof) and whose long-term
debt is rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule 436
under the Securities Act), (iii) repurchase obligations with a term of not more
than 60 days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in clause
(ii) above, (iv) investments in commercial paper, maturing not more than 270
days after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United States
of America with a rating at the time as of which any investment therein is made
of "P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or
higher) according to Standard & Poor's Ratings Group, (v) investments in
securities with maturities of 12 months or less from the date of acquisition
issued or fully guaranteed by any state, commonwealth or territory of the United
States of America, or by any political subdivision or taxing authority thereof,
and rated at least "A" by Standard & Poor's Ratings Group or "A" by Moody's
Investors Service, Inc. and (vi) investments in shares of money market funds
registered under the Investment Company Act of 1940, as amended.

"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. SectionSection
77aaa-77bbbb) as in effect on the date of the Indenture.

"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.

"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any other Subsidiary of the Company that
is not a Subsidiary of the Subsidiary to be so designated; PROVIDED, HOWEVER,
that either (A) the Subsidiary to be so designated has total consolidated assets
of $1,000 or less or (B) if such Subsidiary has consolidated assets greater than
$1,000, then such designation would be permitted under "Limitation on Restricted
Payments." The Board of Directors may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; PROVIDED, HOWEVER, that immediately after giving
effect to such designation (x) the Company could Incur $1.00 of additional
Indebtedness under clause (a) of "Limitation on Indebtedness and Preferred
Stock" and (y) no Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.

"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.

"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.

"Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company all
the Capital Stock of which (other than directors' qualifying shares and, in the
case of Foreign Subsidiaries, shares required to

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be held by foreign nationals representing not more than 2% of such Capital
Stock) is owned by the Company or another Wholly Owned Subsidiary.

BOOK-ENTRY SYSTEM

The Senior Notes will initially be issued in the form of one or more Global
Securities (as defined in the Indenture) held in book-entry form. Accordingly,
DTC or its nominee will initially be the sole registered holder of the Senior
Notes for all purposes under the Indenture.

Upon the issuance of a Global Security, DTC or its nominee will credit the
accounts of persons holding through it with the respective principal amounts of
the Senior Notes represented by such Global Security purchased by such persons
in the Offering. Such accounts shall be designated by the Underwriters with
respect to Senior Notes placed by the Underwriters for the Company. Ownership of
beneficial interests in a Global Security will be limited to persons that have
accounts with DTC ("participants") or persons that may hold interests through
participants. Ownership of beneficial interests by participants in a Global
Security will be shown on, and the transfer of that ownership interest will be
effected only through, records maintained by DTC for such Global Security.
Ownership of beneficial interests in such Global Security by persons that hold
through participants will be shown on, and the transfer of that ownership
interest within such participant will be effected only through, records
maintained by such participant. The laws of some jurisdictions require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Security.

Payment of principal and interest on Senior Notes represented by any such
Global Security will be made to DTC or its nominee, as the case may be, as the
sole registered owner and the sold holder of the Senior Notes represented
thereby for all purposes under the Indenture. None of the Company, the Trustee,
any agent of the Company, or the Underwriters will have any responsibility or
liability for any aspect of DTC's records relating to or payments made on
account of beneficial ownership interests in a
Global Security representing any Senior Notes or for maintaining, supervising,
or reviewing any of DTC's records relating to such beneficial ownership
interests.

The Company has been advised by DTC that upon receipt of any payment of
principal of, or interest on, any Global Security, DTC will immediately credit,
on its book-entry registration and transfer system, the accounts of participants
with payments in amounts proportionate to their respective beneficial interests
in the principal or face amount of such Global Security as shown on the records
of DTC. Payments by participants to owners of beneficial interests in a Global
Security held through such participants will be governed by standing
instructions and customary practices as is now the case with securities held for
customer accounts registered in "street name" and will be the sole
responsibility of such participants.

A Global Security may not be transferred except as a whole by DTC to a
nominee of DTC or by a nominee of DTC to DTC. A Global Security is exchangeable
for certificated Senior Notes only if (i) DTC notifies the Issuers that it is
unwilling or unable to continue as a Depositary (as defined in the Indenture)
for such Global Security or if at any time DTC ceases to be a clearing agency
registered under the Exchange Act, (ii) the Company executes and delivers to the
Trustee a notice that such Global Security shall be so transferable,
registrable, and exchangeable, and such transfers shall be registrable, or (iii)
there shall have occurred and be continuing an Event of Default or an event
which, with the giving of notice or lapse of time or both, would constitute an
Event of Default with respect to the Senior Notes represented by such Global
Security. Any Global Security that is exchangeable for certificated Senior Notes
pursuant to the preceding sentence will be transferred to, and registered and
exchanged for, certificated Senior Notes in authorized denominations and
registered in such names as the Depositary holding such Global Security may
direct. Subject to the foregoing, a Global Security is not exchangeable, except
for a Global Security of like denomination to be registered in the name of the
Depositary or its nominee. In the event that a Global

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Security becomes exchangeable for certificated Senior Notes, (i) certificated
Senior Notes will be issued only in fully registered form in denominations of
$1,000 or integral multiples thereof, (ii) payment of principal, any repurchase
price, and interest on the certificated Senior Notes will be payable, and the
transfer of the certificated Senior Notes will be registerable, at the office or
agency of the Company maintained for such purposes, and (iii) no service charge
will be made for any registration of transfer or exchange of the certificated
Senior Notes, although the Company may require payment of a sum sufficient to
cover any tax or governmental charge imposed in connection therewith.

So long as the Depositary for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depositary or such nominee, as
the case may be, will be considered the sole owner or holder of the Senior Notes
represented by such Global Security for the purposes of receiving payment on the
Senior Notes, receiving notices, and for all other purposes under the Indenture
and the Senior Notes. Beneficial interests in Senior Notes will be evidenced
only by, and transfers thereof will be effected only through, records maintained
by the Depositary and its participants. Cede & Co. has been appointed as the
nominee of DTC. Except as provided above, owners of beneficial interests in a
Global Security will not be entitled to and will not be considered the holders
thereon for any purposes under the Indenture. Accordingly, each person owning a
beneficial interest in a Global Security must rely on the procedures of the
Depositary, and, if such person is not a participant, on the procedures of the
participant through which such person owns its interest, to exercise any rights
of a holder under the Indenture. The Company understands that under existing
industry practices, in the event that the Company requests any action of holders
or that an owner of a beneficial interest in a Global Security desires to give
or take any action which a holder is entitled to give or take under the
Indenture, the Depositary would authorize the participants holding the relevant
beneficial interest to give or take such action and such participants would
authorize beneficial owners owning through such participants to give or take
such action or would otherwise act upon the instructions of beneficial owners
owning through them.

DTC has advised the Company that DTC is a limited-purpose trust company
organized under the Banking Law of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code, and a "clearing agency" registered under the
Exchange Act. DTC was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers (including the Underwriters), banks, trust companies, clearing
corporations, and certain other organizations some of whom (and/or their
representatives) own DTC. Access to DTC's book-entry system is also available to
others, such as banks, brokers, dealers, and trust companies that clear through
or maintain a custodial relationship with a participant, either direct or
indirectly.

SAME-DAY SETTLEMENT AND PAYMENT

Settlement for the Senior Notes will be made in immediately available funds.
All payments of principal and interest will be made by the Company in
immediately available funds. The Senior Notes will trade in the Same-Day Funds
Settlement System of DTC until maturity, and secondary market trading activity
for the Senior Notes will therefore settle in immediately available funds.

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UNDERWRITING

Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among the Company and Societe Generale Securities
Corporation, Donaldson, Lufkin & Jenrette Securities Corporation and NationsBanc
Montgomery Securities, Inc. (the "Underwriters"), the Company has agreed to sell
to the Underwriters, and the Underwriters have severally agreed to purchase from
the Company, the following respective amounts of the Senior Notes:

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
UNDERWRITER SENIOR NOTES
- ---------------------------------------------------------------------------------------- --------------
<S> <C>
Societe Generale Securities Corporation................................................. $
Donaldson, Lufkin & Jenrette Securities Corporation.....................................
NationsBanc Montgomery Securities, Inc..................................................
--------------
Total............................................................................. $ 175,000,000
--------------
--------------
</TABLE>

In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Senior Notes
offered hereby if any of the Senior Notes are purchased. The Company has been
advised by the Underwriters that the Underwriters propose to offer the Senior
Notes to the public initially at the public offering price set forth on the
cover page of this Prospectus, and to certain dealers initially at such price
less a discount not in excess of % of the principal amount of the Senior
Notes. The Underwriters may allow, and such dealers may reallow, a concession to
certain other dealers not in excess of % of the principal amount of the
Senior Notes. After the initial offering of the Senior Notes to the public, the
Underwriters may change the public offering price, the discount and the
concession.

The Senior Notes are a new issue of securities with no established trading
market. The Company has been advised by the Underwriters that the Underwriters
intend to make a market in the Senior Notes, as permitted by applicable laws and
regulations. No assurance can be given, however, that the Underwriters will make
a market in the Senior Notes, or as to the liquidity of, or the trading market
for, the Senior Notes.

The Company and the initial Subsidiary Guarantor have agreed to indemnify
the Underwriters against certain civil liabilities, including liabilities under
the Securities Act, and to contribute to payments which the Underwriters might
be required to make in respect thereof.

In connection with the offering, Societe Generale Securities Corporation, on
behalf of the Underwriters, may engage in overallotment, stabilizing and
syndicate covering transactions. Overallotment involves sales in excess of the
offering size, which create a short position for the Underwriters. Stabilizing
transactions involve bids to purchase the Senior Notes in the open market for
the purpose of pegging, fixing or maintaining the price of the Senior Notes.
Syndicate covering transactions involve purchases of the Senior Notes in the
open market after the distribution has been completed in order to cover short
positions. Such stabilizing transactions and syndicate covering transactions may
cause the price of the Senior Notes to be higher than it would otherwise be in
the absence of such transactions. Such activities, if commenced, may be
discontinued at any time.

Societe Generale, an affiliate of Societe Generale Securities Corporation,
is to be a lender under the New Credit Facility and to act as arranger and
administrative agent thereunder. Societe Generale Securities Corporation is
providing certain advisory services in connection with the Recapitalization, for
which it is receiving a fee. See "Description of New Credit Facility."

The Equitable, which currently beneficially owns 10.4% of the outstanding
common shares, is an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation, a member of the National Association of

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Securities Dealers, Inc. (the "NASD") and an Underwriter in the Senior Note
Offering. As a result of the foregoing, the Senior Note Offering is subject to
the provisions of Section 2720 of the Conduct Rules of the NASD (formerly
Schedule E to the Bylaws of the NASD) ("Section 2720"). Accordingly, the
underwriting terms for the Senior Note Offering will conform with the
requirements set forth in Section 2720. In particular, the price at which the
Senior Notes are to be distributed to the public must be at a yield no lower
than that recommended by a "qualified independent underwriter" who has also
participated in the preparation of this Prospectus and the Registration
Statement of which this Prospectus is a part and who meets certain standards. In
accordance with this requirement, Societe Generale Securities Corporation will
serve in such role and will recommend the public offering price in compliance
with the requirements of Section 2720. Societe Generale Securities Corporation,
in its role as qualified independent underwriter, has performed the due
diligence investigations and reviewed and participated in the preparation of
this Prospectus and the Registration Statement of which this Prospectus is a
part.

The Underwriters have informed the Company that they do not intend to make
sales of Senior Notes offered by this Prospectus to accounts over which they
exercise discretionary authority.

CERTAIN UNITED STATES TAX CONSEQUENCES TO FOREIGN HOLDERS

The following summary describes certain United States federal income and
estate tax consequences of the ownership of Senior Notes as of the date hereof.
It deals only with Senior Notes held as capital assets by Non-United States
Holders. As used herein, the term "Non-United States Holder" means any person
that is, as to the United States, a foreign corporation, a nonresident alien
individual, a nonresident fiduciary of a foreign estate or trust or a foreign
partnership one or more of the members of which is, as to the United States, a
foreign corporation, a nonresident alien individual or a nonresident fiduciary
of a foreign estate or trust.

The discussion set forth below is based upon the provisions of the Code and
regulations, rulings and judicial decisions thereunder as of the date hereof,
and such authorities may be repealed, revoked or modified so as to result in
federal income tax consequences different from those discussed below. Persons
considering the purchase, ownership or disposition of Senior Notes should
consult their own tax advisors concerning the federal income tax consequences in
light of their particular situations as well as any consequences arising under
the laws of any other taxing jurisdiction.

Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:

(a) no withholding of United States federal income tax will be required
with respect to the payment by the Company or any paying agent of principal
or interest (which for purposes of this discussion includes original issue
discount (the "OID")) on a Senior Note owned by a Non-United States Holder,
provided (i) that the beneficial owner does not actually or constructively
own 10% or more of the total combined voting power of all classes of stock
of the Company entitled to vote within the meaning of section 871(h)(3) of
the Code and the regulations thereunder, (ii) the beneficial owner is not a
controlled foreign corporation that is related to the Company through stock
ownership, (iii) the beneficial owner is not a bank whose receipt of
interest on a Senior Note is described in section 881(c)(3)(A) of the Code
and (iv) the beneficial owner satisfies the statement requirement (described
generally below) set forth in section 871(h) and section 881(c) of the Code
and the regulations thereunder;

(b) no withholding of United States federal income tax will be required
with respect to any gain or income realized by a Non-United States Holder
upon the sale, exchange or retirement of a Senior Note; and

(c) a Senior Note beneficially owned by an individual who at the time of
death is a Non-United States Holder will not be subject to United States
federal estate tax as a result of such individual's

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death, provided that such individual does not actually or constructively own
10% or more of the total combined voting power of all classes of stock of
the Company entitled to vote within the meaning of section 871(h)(3) of the
Code and provided that the interest payments with respect to such Senior
Note would not have been, if received at the time of such individual's
death, effectively connected with the conduct of a United States trade or
business by such individual.

To satisfy the requirement referred to in (a)(iv) above, the beneficial
owner of such Senior Note, or a financial institution holding the Senior Note on
behalf of such owner, must provide, in accordance with specified procedures, a
paying agent of the Company with a statement to the effect that the beneficial
owner is not a U.S. person. Currently these requirements will be met if (1) the
beneficial owner provides his name and address, and certifies, under penalties
of perjury, that he is not a U.S. person (which certification may be made on an
Internal Revenue Service ("IRS") Form W-8) or (2) a financial institution
holding the Senior Note on behalf of the beneficial owner certifies, under
penalties of perjury, that such statement has been received by it and furnishes
a paying agent with a copy thereof. Under recently finalized Treasury
regulations (the "Final Regulations"), the statement requirement referred to in
(a)(iv) above may also be satisfied with other documentary evidence for interest
paid after December 31, 1998 with respect to an offshore account or through
certain foreign intermediaries.

If a Non-United States Holder cannot satisfy the requirements of the
"portfolio interest" exception described in (a) above, payments of premium, if
any, and interest (including OID) made to such Non-United States Holder will be
subject to a 30% withholding tax unless the beneficial owner of the Senior Note
provides the Company or its paying agent, as the case may be, with a properly
executed (1) Internal Revenue Code Form 1001 (or successor form) claiming an
exemption from withholding under the benefit of a tax treaty or (2) Internal
Revenue Code Form 4224 (or successor form) stating that interest paid on the
Senior Note is not subject to withholding tax because it is effectively
connected with the beneficial owner's conduct of a trade or business in the
United States. Under the Final Regulations, Non-United States Holders will
generally be required to provide IRS Form W-8 in lieu of IRS Form 1001 and IRS
Form 4224, although alternative documentation may be applicable in certain
situations.

If a Non-United States Holder is engaged in a trade or business in the
United States and premium, if any, or interest (including OID) on the Senior
Note is effectively connected with the conduct of such trade or business, the
Non-United States Holder, although exempt from the withholding tax discussed
above, will be subject to United States federal income tax on such interest and
OID on a net income basis in the same manner as if it were a United States
Holder (i.e., Holders who are not Non-United States Holders). In addition, if
such holder is a foreign corporation, it may be subject to a branch profits tax
equal to 30% of its effectively connected earnings and profits for the taxable
year, subject to adjustments. For this purpose, such premium, if any, and
interest (including OID) on a Senior Note will be included in such foreign
corporation's earnings and profits.

Any gain or income realized upon the sale, exchange or retirement of a
Senior Note generally will not be subject to United States federal income tax
unless (i) such gain or income is effectively connected with a trade or business
in the United States of the Non-United States Holder, or (ii) in the case of a
Non-United States Holder who is an individual, such individual is present in the
United States for 183 days or more in the taxable year of such sale, exchange or
retirement, and certain other conditions are met.

INFORMATION REPORTING AND BACKUP WITHHOLDING

In general, information reporting requirements will apply to certain
payments of principal, interest, OID and premium paid on Senior Notes and to the
proceeds of sale of a Senior Note made to United States Holders other than
certain exempt recipients (such as corporations). A 31% backup withholding tax
will apply to such payments if the Unites States Holder fails to provide a
taxpayer identification number or certification of foreign or other exempt
status or fails to report, in full, dividend and interest income.

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No information reporting or backup withholding will be required with respect
to payments made by the Company or any paying agent to Non-United States Holders
if a statement described in (a)(iv) under "Non-United States Holders" has been
received and the payor does not have actual knowledge that the beneficial owner
is a United States person.

In addition, backup withholding and information reporting will not apply if
payments of the principal, interest, OID or premium on a Senior Note are paid or
collected by a foreign office of a custodian, nominee or other foreign agent on
behalf of the beneficial owner of such Senior Note, or if a foreign office of a
broker (as defined in applicable Treasury regulations) pays the proceeds of the
sale of a Senior Note to the owner thereof. If, however, such nominee,
custodian, agent or broker is, for United States federal income tax purposes, a
U.S. person, a controlled foreign corporation or a foreign person that derives
50% or more of its gross income for certain periods from the conduct of a trade
or business in the United States, such payments will not be subject to backup
withholding but will be subject to information reporting, unless (1) such
custodian, nominee, agent or broker has documentary evidence in its records that
the beneficial owner is not a U.S. person and certain other conditions are met
or (2) the beneficial owner otherwise establishes an exemption. Under the Final
Regulation backup withholding will not apply to such payments absent actual
knowledge that the payee is a United States person.

Payments of principal, interest, OID and premium on a Senior Note paid to
the beneficial owner of a Senior Note by a United States office of a custodian,
nominee or agent, or the payment by the United States office of a broker of the
proceeds of sale of a Senior Note, will be subject to both backup withholding
and information reporting unless the beneficial owner provides the statement
referred to in (a)(iv) above and the payor does not have actual knowledge that
the beneficial owner is a United States person or otherwise establishes an
exemption.

Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.

LEGAL MATTERS

The validity of the securities offered hereby will be passed upon for the
Company by Mayer, Brown & Platt, Chicago, Illinois. Certain legal matters with
respect to the securities offered hereby will be passed upon for the
Underwriters by Simpson Thacher & Bartlett (a partnership which includes
professional corporations), New York, New York.

EXPERTS

The financial statements included in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.

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AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include any amendment
thereto) on Form S-1 under the Securities Act, for the registration of the
securities offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain items of which are omitted as permitted by the
rules and regulations of the Commission. For further information with respect to
the Company and the Senior Notes, reference is hereby made to the Registration
Statement and the exhibits and schedules filed as a part thereof. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document are not necessarily complete and, in each instance, reference is made
to the copy of such document, filed as an exhibit to the Registration Statement,
for a more complete description of the matter involved and each such statement
shall be deemed qualified in its entirety by such reference. The Registration
Statement and the exhibits and schedules thereto filed by the Company with the
Commission may be inspected, without charge, at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549, and at the following regional offices of the
Commission: Seven World Trade Center, New York, New York 10048 and 500 West
Madison Street, Chicago, Illinois 60661-2511. Copies of all or any portion of
the Registration Statement may be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of prescribed fees.

The Company is not currently subject to the informational requirements of
the Exchange Act. As a result of the Offerings, the Company will become subject
to the informational requirements of the Exchange Act.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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
</TABLE>

F-1
<PAGE>
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
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands)

<TABLE>
<CAPTION>
SEPTEMBER 28,
1997
DECEMBER 31, DECEMBER 29, -------------
1995 1996
------------ ------------ (UNAUDITED)
<S> <C> <C> <C>
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
------------ ------------ -------------
------------ ------------ -------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-3
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands except per share data)
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEARS ENDED MONTHS ENDED
----------------------------------------- -------------
JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29,
1995 1995 1996 1996
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
REVENUES..................................................... $ 631,014 $ 649,149 $ 650,807 $ 491,819
COSTS AND EXPENSES:
Cost of sales............................................ 179,793 192,600 191,956 143,388
Labor and benefits....................................... 211,838 214,625 209,260 159,502
Operating expenses....................................... 132,010 143,854 143,163 109,006
General and administrative expenses...................... 38,434 40,705 42,721 31,948
Debt restructuring expenses (Note 5)..................... -- 3,346 -- --
Write-down of property and equipment (Note 6)............ -- 4,006 227 --
Depreciation and amortization............................ 32,069 33,343 32,979 25,127
GAIN ON SALE OF RESTAURANT OPERATIONS (NOTE 16).............. -- -- -- --
----------- ------------- ------------- -------------
OPERATING INCOME............................................. 36,870 16,670 30,501 22,848
Interest expense, net of capitalized interest of $176, $62,
$49, $44 (unaudited) and $27 (unaudited) and interest
income of $187, $390, $318, $273 (unaudited) and $239
(unaudited) for the years ended January 1, 1995, December
31, 1995 and December 29, 1996 and the nine months ended
September 29, 1996 and September 28, 1997, respectively.... 45,467 41,904 44,141 33,084
Equity in net loss of joint venture.......................... -- -- -- --
----------- ------------- ------------- -------------
INCOME (LOSS) BEFORE BENEFIT FROM (PROVISION FOR) INCOME
TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE.................................................. (8,597) (25,234) (13,640) (10,236)
Benefit from (provision for) income taxes.................... 4,661 (33,419) 5,868 4,442
----------- ------------- ------------- -------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE....................................... (3,936) (58,653) (7,772) (5,794)
Cumulative effect of change in accounting principle, net of
income tax expense of $1,554 (Note 10)..................... -- -- -- --
----------- ------------- ------------- -------------
NET INCOME (LOSS)............................................ $ (3,936) $ (58,653) $ (7,772) $ (5,794)
----------- ------------- ------------- -------------
----------- ------------- ------------- -------------
PRO FORMA NET INCOME (LOSS) PER SHARE (NOTE 17) (UNAUDITED):
Income (loss) before cumulative effect of change in
accounting principle................................... $ (1.09) $ (0.81)
Cumulative effect of change in accounting principle, net
of income tax expense.................................. -- --
------------- -------------
Net income (loss)........................................ $ (1.09) $ (0.81)
------------- -------------
------------- -------------
PRO FORMA AMOUNTS ASSUMING NEW PENSION METHOD IS
RETROACTIVELY APPLIED:
Net income (loss) (Note 10).............................. $ (3,506) $ (58,134) $ (7,214) $ (5,375)
----------- ------------- ------------- -------------
----------- ------------- ------------- -------------
Net income (loss) per share (unaudited).................. $ (1.01) $ (0.75)
------------- -------------
------------- -------------
PRO FORMA SHARES USED IN NET INCOME (LOSS) PER SHARE
CALCULATION (NOTE 17) (UNAUDITED).......................... 7,125 7,125
------------- -------------
------------- -------------

SEPTEMBER 28,
1997
-------------
<S> <C>
(UNAUDITED)
REVENUES..................................................... $ 508,033
COSTS AND EXPENSES:
Cost of sales............................................ 147,105
Labor and benefits....................................... 159,315
Operating expenses....................................... 112,009
General and administrative expenses...................... 32,775
Debt restructuring expenses (Note 5)..................... --
Write-down of property and equipment (Note 6)............ 607
Depreciation and amortization............................ 24,226
GAIN ON SALE OF RESTAURANT OPERATIONS (NOTE 16).............. 2,303
-------------
OPERATING INCOME............................................. 34,299
Interest expense, net of capitalized interest of $176, $62,
$49, $44 (unaudited) and $27 (unaudited) and interest
income of $187, $390, $318, $273 (unaudited) and $239
(unaudited) for the years ended January 1, 1995, December
31, 1995 and December 29, 1996 and the nine months ended
September 29, 1996 and September 28, 1997, respectively.... 32,972
Equity in net loss of joint venture.......................... 1,112
-------------
INCOME (LOSS) BEFORE BENEFIT FROM (PROVISION FOR) INCOME
TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE.................................................. 215
Benefit from (provision for) income taxes.................... (88)
-------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE....................................... 127
Cumulative effect of change in accounting principle, net of
income tax expense of $1,554 (Note 10)..................... 2,236
-------------
NET INCOME (LOSS)............................................ $ 2,363
-------------
-------------
PRO FORMA NET INCOME (LOSS) PER SHARE (NOTE 17) (UNAUDITED):
Income (loss) before cumulative effect of change in
accounting principle................................... $ 0.02
Cumulative effect of change in accounting principle, net
of income tax expense.................................. 0.31
-------------
Net income (loss)........................................ $ 0.33
-------------
-------------
PRO FORMA AMOUNTS ASSUMING NEW PENSION METHOD IS
RETROACTIVELY APPLIED:
Net income (loss) (Note 10).............................. $ 127
-------------
-------------
Net income (loss) per share (unaudited).................. $ 0.02
-------------
-------------
PRO FORMA SHARES USED IN NET INCOME (LOSS) PER SHARE
CALCULATION (NOTE 17) (UNAUDITED).......................... 7,125
-------------
-------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-4
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
COMMON STOCK
- ---------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C ADDITIONAL
---------------------- ---------------------- -------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ----------- --------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
--
--
--------- --- --------- --- --- -------
--------- --- --------- --- --- -------

<CAPTION>
UNREALIZED
- ------------------------------ GAIN ON
INVESTMENT CUMULATIVE
SECURITIES, ACCUMULATED TRANSLATION
NET OF TAXES DEFICIT ADJUSTMENT TOTAL
------------------- ----------------- ------------------- ---------
<S> <C> <C> <C> <C>
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)

--- ----------------- --- ---------
--- ----------------- --- ---------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-5
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEARS ENDED MONTHS ENDED
----------------------------------------- -------------
JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29,
1995 1995 1996 1996
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(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
-------------
<S> <C>
(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........................ --
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-6
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 29, 1996 AND SEPTEMBER 28, 1997 IS UNAUDITED)

1. ORGANIZATION

In September 1988, The Restaurant Company ("TRC") and another investor
acquired Friendly Ice Cream Corporation ("FICC") for $297,500,000. Subsequent to
the acquisition, Friendly Holding Corporation ("FHC") was organized to hold the
outstanding common stock of FICC and in March 1996, FHC was merged into FICC.
The accompanying consolidated financial statements include the accounts of FICC
and its wholly-owned subsidiaries (collectively, "FICC").

Under the terms of the TRC acquisition financing agreements, warrants to
purchase shares of FICC's common stock were issued to the lenders. These
warrants were exercisable on or before September 2, 1998. In connection with
FICC's debt restructuring in 1991 (see Note 7), these warrants were cancelled
and one of the lenders was issued new warrants for 13,836 shares of FICC's
(formerly FHC's) Class A Common Stock, subject to dilution, at an exercise price
of $445,000 or $32.16 per share. These warrants expire on September 2, 1998. As
of December 29, 1996 and September 28, 1997, none of these warrants had been
exercised.

As of December 29, 1996 and September 28, 1997, three classes of common
stock were authorized: Class A ("voting"), Class B ("limited voting") and Class
C ("non-voting"). Prior to the occurrence of a Special Rights Default (see Note
7), lenders with limited voting common stock have voting rights only for certain
transactions as defined in the loan documents. Common stock held by the lenders
will automatically convert to voting common stock upon an underwritten public
offering by FICC of at least $30,000,000 (see Note 17).

As of December 31, 1995, TRC owned 913,632 shares or 83.75% of FICC's voting
common stock. In March 1996, TRC distributed its shares of FICC's voting common
stock to TRC's shareholders and FICC deconsolidated from TRC. As of December 29,
1996, TRC's shareholders and FICC's lenders (see Note 7) owned 36.95% and
48.03%, respectively, of FICC's outstanding common stock.

As part of the debt restructuring in 1991 (see Note 7), certain officers of
FICC purchased 97,906 shares of Class A Common Stock and warrants convertible
into an additional 71,527 shares of voting common stock for an aggregate
purchase price of $55,550. These warrants were exercised on April 19, 1996 at an
aggregate exercise price of $22,000.

2. NATURE OF OPERATIONS

FICC owns and operates full-service restaurants in fifteen states. The
restaurants offer a wide variety of reasonably priced breakfast, lunch and
dinner menu items as well as frozen dessert products. FICC manufactures
substantially all of the frozen dessert products it sells, which are also
distributed to supermarkets and other retail locations. For the years ended
January 1, 1995, December 31, 1995 and December 29, 1996 and the nine months
ended September 29, 1996 and September 28, 1997, restaurant sales were
approximately 93%, 91%, 92%, 92% and 90%, respectively, of FICC's revenues. As
of January 1, 1995, December 31, 1995, December 29, 1996 and September 28, 1997,
approximately 80%, 80%, 80%, and 85%, respectively, of FICC's owned restaurants
were located in the Northeast United States. As a result, a severe or prolonged
economic recession in this geographic area may adversely affect FICC more than
certain of its competitors which are more geographically diverse. Commencing in
1997, FICC has franchised restaurants (see Note 16).

F-7
<PAGE>
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):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
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
------------ ------------ -------------
------------ ------------ -------------
</TABLE>

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
<PAGE>
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):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
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
------------ ------------ -------------
</TABLE>

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
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
LONG-LIVED ASSETS --

Effective January 2, 1995, FICC adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" which had no impact.

FICC reviews the license agreement for the right to use various trademarks
and tradenames (see Note 5) for impairment on a quarterly basis. FICC recognizes
an impairment has occurred when the carrying value of the license agreement
exceeds the estimated future cash flows of the trademarked products.

FICC reviews each restaurant property quarterly to determine which
properties should be disposed of. This determination is made based on poor
operating results, deteriorating property values and other factors. FICC
recognizes an impairment has occurred when the carrying value of property
exceeds its estimated fair value, which is estimated based on FICC's experience
with similar properties and local market conditions, less costs to sell. (see
Note 6).

RESTAURANT CLOSURE COSTS--

Restaurant closure costs are recognized when a decision is made to close a
restaurant. Restaurant closure costs include the cost of writing down the
carrying amount of a restaurant's assets to estimate fair market value, less
costs of disposal, and the net present value of any remaining operating lease
payments after the expected closure date.

INSURANCE RESERVES --

FICC is self-insured through retentions or deductibles for the majority of
its workers' compensation, automobile, general liability, product liability and
group health insurance programs. Self-insurance amounts vary up to $500,000 per
occurrence. Insurance with third parties, some of which is then reinsured
through RIC (see Note 4), is in place for claims in excess of these self-insured
amounts. RIC assumes 100% of the risk from $500,000 to $1,000,000 per occurrence
for FICC's worker's compensation, general liability and product liability
insurance. FICC and RIC's liability for estimated incurred losses are
actuarially determined and recorded on an undiscounted basis.

INCOME TAXES --

FICC accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. A valuation allowance is recorded for deferred tax assets whose
realization is not likely.

ADVERTISING --

FICC expenses production and other advertising costs the first time the
advertising takes place. For the years ended January 1, 1995, December 31, 1995
and December 29, 1996 and the nine months ended September 29, 1996 and September
28, 1997, advertising expense was approximately $15,430,000, $17,459,000,
$18,231,000, $13,854,000 and $15,270,000, respectively.

F-10
<PAGE>
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
<PAGE>
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):

<TABLE>
<S> <C>
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
---------
---------
</TABLE>

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):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
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
------------ ------------ -------------
------------ ------------ -------------
</TABLE>

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
<PAGE>
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
<PAGE>
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:

<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 29, 1996 SEPTEMBER 28, 1997
---------------------------- ---------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
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)
</TABLE>

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
<PAGE>
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):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
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
------------ ------------ -------------
------------ ------------ -------------
</TABLE>

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
<PAGE>
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:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1996 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
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
--- --- ---
--- --- ---
</TABLE>

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):

<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR LEASES LEASES
- ------------------------------------------------------------------------ ----------- ---------
<S> <C> <C>
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
---------
---------
</TABLE>

F-16
<PAGE>
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):

<TABLE>
<CAPTION>
YEAR AMOUNT
- --------------------------------------------------------------- ---------
<S> <C>
1997........................................................... $ 6,353
1998........................................................... 4,967
1999........................................................... 2,371
2000........................................................... 1,539
2001........................................................... 1,187
2002 and thereafter............................................ 4,118
---------
Total.................................................... $ 20,535
---------
---------
</TABLE>

Rent expense included in the accompanying consolidated financial statements
for operating leases was (in thousands):

<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, SEPTEMBER 28,
1995 1995 1996 1996 1997
----------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
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
----------- ------------ ------------ ------------- -------------
----------- ------------ ------------ ------------- -------------
</TABLE>

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
<PAGE>
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):

<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, SEPTEMBER 28,
1995 1995 1996 1996 1997
----------- ------------ ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
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)
----------- ------------ ------ ------ ---
----------- ------------ ------ ------ ---
</TABLE>

F-18
<PAGE>
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:

<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
---------- ------------ ------------
<S> <C> <C> <C>
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%
-- --
-- --
---
---
</TABLE>

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):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
<S> <C> <C>
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)
------------ ------------
------------ ------------
</TABLE>

At December 31, 1995, December 29, 1996 and September 28, 1997, the
classification of deferred taxes was as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Current Asset.................................... $ 9,885 $ 12,375 $ 12,381
Long-term Liability.............................. (51,908) (48,472) (50,104)
------------ ------------ -------------
$ (42,023) $ (36,097) $ (37,723)
------------ ------------ -------------
------------ ------------ -------------
</TABLE>

F-19
<PAGE>
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):

<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
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
----------- ------------ ------------
----------- ------------ ------------
</TABLE>

The funded status of the plan as of December 31, 1995 and December 29, 1996
was (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
<S> <C> <C>
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)
------------ ------------
------------ ------------
</TABLE>

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
<PAGE>
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
<PAGE>
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):

<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
------------- --------------- ---------------
<S> <C> <C> <C>
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
----- ----- -----
----- ----- -----
</TABLE>

The postretirement benefit liability as of December 31, 1995 and December
29, 1996 included the following components (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------- -------------
<S> <C> <C>
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
------ ------
------ ------
</TABLE>

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
<PAGE>
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):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Current.......................................... $ 6,605 $ 3,973 $ 6,773
Long-term........................................ 14,242 12,967 22,533
------------ ------------ -------------
Total........................................ $ 20,847 $ 16,940 $ 29,306
------------ ------------ -------------
------------ ------------ -------------
</TABLE>

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):

<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1995 1996 1997
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
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
----------- ------------ ------------ -------------
----------- ------------ ------------ -------------
</TABLE>

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
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. STOCK PLANS (CONTINUED)
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation" which was adopted by FICC effective January 1, 1996.
SFAS No. 123 requires the measurement of the fair value of stock options or
warrants granted to be included in the statement of operations or that pro forma
information related to the fair value be disclosed in the notes to financial
statements. FICC has determined that it will continue to account for stock-based
compensation for employees under Accounting Principles Board Opinion No. 25 and
elect the disclosure-only alternative under SFAS No. 123. Since no options were
granted since January 2, 1995, the pro forma disclosures required by SFAS No.
123 are not applicable.

14. RELATED PARTY TRANSACTIONS

In March 1996, the FICC pension plan acquired three restaurant properties
from FICC. The land, buildings and improvements were purchased by the plan at
their appraised value of $2,043,000 and are located in Connecticut, Vermont and
Virginia. Simultaneous with the purchase, the pension plan leased back the three
properties to FICC at an aggregate annual base rent of $214,000 for the first
five years and $236,000 for the following five years. The pension plan was
represented by independent legal and financial advisors. The transaction was
recorded by FICC as a direct financing lease since FICC has the right to
repurchase the property at fair market value.

FICC's Chairman and President is an officer of the general partner of
Perkins Family Restaurant L.P. ("PFR"), a subsidiary of TRC (formerly FICC's
majority shareholder). Three of FICC's directors are also directors of PFR. FICC
entered into subleases for certain land, buildings, and equipment with Perkins
Restaurants Operating Company, L.P. (Perkins), a subsidiary of TRC. During the
years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the
nine months ended September 29, 1996 and September 28, 1997, rent expense
related to the subleases was approximately $245,000, $266,000, $278,000,
$208,000 and $209,000, respectively. Additionally, during the year ended January
1, 1995, FICC purchased leasehold improvements and personal property at one of
the locations for approximately $303,000 from Perkins.

On March 19, 1997, FICC acquired all of the outstanding shares of common
stock of Restaurant Insurance Corporation ("RIC") from TRC (see Note 4). Prior
to the acquisition, RIC assumed, from a third party insurance company,
reinsurance premiums related to insurance liabilities of FICC of approximately
$7,046,000, $6,409,000 and $4,198,000 during the years ended January 1, 1995,
December 31, 1995 and December 29, 1996, respectively. In addition, RIC had
reserves of approximately $10,456,000, $12,830,000 and $13,038,000 related to
FICC claims at January 1, 1995, December 31, 1995 and December 29, 1996,
respectively.

In fiscal 1994, TRC Realty Co. (a subsidiary of TRC) entered into a ten year
operating lease for an aircraft, for use by both FICC and Perkins. FICC shares
equally with Perkins in reimbursing TRC Realty Co. for leasing, tax and
insurance expenses. In addition, FICC also incurs actual usage costs. Total
expense for the years ended January 1, 1995, December 31, 1995 and December 29,
1996 and the nine months ended September 29, 1996 and September 28, 1997 was
approximately $336,000, $620,000, $590,000, $447,000 and $465,000, respectively.

FICC purchased certain food products used in the normal course of business
from a division of Perkins. For the years ended January 1, 1995, December 31,
1995 and December 29, 1996 and the nine

F-24
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. RELATED PARTY TRANSACTIONS (CONTINUED)
months ended September 29, 1996 and September 28, 1997, purchases were
approximately $1,335,000, $1,909,000, $1,425,000, $1,103,000 and $741,000,
respectively.

TRC provided FICC with certain management services for which TRC was
reimbursed approximately $773,000, $785,000, $800,000, $600,000 and $618,000 for
the years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the
nine months ended September 29, 1996 and September 28, 1997, respectively.
Expenses were charged to FICC on a specific identification basis. FICC believes
the allocation method used was reasonable and approximates the amount that would
have been incurred on a stand alone basis had FICC been operated as an
unaffiliated entity.

During the year ended December 29, 1996 and the nine months ended September
29, 1996 and September 28, 1997, FICC paid approximately $69,000, $46,000 and
$138,000, respectively, for fees and other reimbursements to four of FICC's
board of directors members, two of whom represented FICC's lenders.

For the years ended January 1, 1995, December 31, 1995 and December 29, 1996
and the nine months ended September 29, 1996 and September 28, 1997, FICC
expensed approximately $200,000, $763,000, $196,000, $146,000 and $150,000,
respectively, for fees paid to the lenders' agent bank. The expense for the year
ended December 31, 1995 included approximately $563,000 related to the filing of
a Form S-1 Registration Statement (see Note 5).

15. COMMITMENTS AND CONTINGENCIES

FICC is a party to various legal proceedings arising in the ordinary course
of business which management believes, after consultation with legal counsel,
will not have a material adverse effect on FICC's financial position or future
operating results.

As of December 29, 1996, FICC had commitments to purchase approximately
$50,587,000 of raw materials, food products and supplies used in the normal
course of business that cover periods of one to twelve months. Most of these
commitments are non-cancellable.

16. FRANCHISE AGREEMENT

On July 14, 1997, FICC entered into an agreement which granted a franchisee
exclusive rights to operate, manage and develop Friendly's full-service
restaurants in the franchising region of Maryland, Delaware, the District of
Columbia and northern Virginia (the "Agreement"). Pursuant to the Agreement, the
franchisee purchased certain assets and rights in 34 existing Friendly's
restaurants in this franchising region, has committed to open an additional 74
restaurants over the next six years and, subject to the fulfillment of certain
conditions, has further agreed to open 26 additional restaurants, for a total of
100 new restaurants in this franchising region over the next ten years. Gross
proceeds from the sale were approximately $8,488,000 which amount includes
$250,000 held in escrow, $860,000 for initial franchise fees for the 34 initial
restaurants, $500,000 for development rights and $930,000 for franchise fees for
certain of the additional restaurants described above. FICC deferred the escrow
amount as the franchisee has ninety days to make a claim against the escrow for
losses relating to cash, inventory and restaurant conditions existing as of the
date of the Agreement. The $860,000 was recorded as revenue in the nine months
ended September 28, 1997 and the development and franchise fees received will be
amortized into income over the initial ten-year term of the Agreement and as
additional restaurants are opened, respectively. FICC recognized income of
$2,303,000 related to the sale of the equipment and operating

F-25
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16. FRANCHISE AGREEMENT (CONTINUED)
rights for the 34 existing franchised locations in the nine months ended
September 28, 1997. The proceeds were allocated between the assets sold and the
development rights by FICC and the franchisee based on the estimated fair market
values. As part of the Agreement, the franchisee will also manage 14 other
Friendly's restaurants located in the same area with an option to acquire these
restaurants in the future. The franchisee is required by the terms of the
Agreement to purchase from FICC all of the frozen dessert products it sells in
the franchised restaurants.

17. PROPOSED INITIAL PUBLIC OFFERING AND PRO FORMA INFORMATION (UNAUDITED)

The Company has filed Registration Statements with the Securities and
Exchange Commission related to an initial public offering of 5,000,000 shares of
the Company's Common Stock (the "Common Stock Offering") and $175 million of
Senior Notes due 2007 (the "Senior Note Offering") and will, contingent upon
consummation of the offerings, enter into a new credit facility consisting of a
$105 million term loan facility, a $55 million revolving credit facility and a
$15 million letter of credit facility (the "New Credit Facility").

The Company will amend its articles of organization in connection with the
Common Stock Offering to give effect to a 923.6442-for-1 split of Class A and
Class B Common Stock and increase the number of authorized shares. The
accompanying consolidated financial statements have been restated to reflect the
anticipated share split.

Pursuant to a stockholder rights plan FICC plans to adopt (the "Plan"),
prior to the consummation of the Common Stock Offering, the Board will declare a
dividend distribution of one purchase right (a "Right") for each outstanding
share of Common Stock. The Plan provides, in substance, that should any person
or group (other than Mr. Smith, Equitable, senior management and their
respective affiliates) acquire 15% or more of FICC's Common Stock, each Right,
other than Rights held by the acquiring person or group, would entitle its
holder to purchase a specified number of shares of Common Stock for 50% of their
then current market value. Unless a 15% acquisition has occurred, the Rights may
be redeemed by FICC at any time prior to the termination date of the Plan.

In connection with the offerings, the 27,113 shares in the MSP not
previously allocated will be allocated and immediately vested and the 61,238
shares previously issued but not vested will become vested (see Note 13).
Additionally, 775,742 shares of Class A Common Stock will be returned to FICC
from certain shareholders for no consideration. The shares are being returned in
accordance with an agreement with FICC's existing lenders as a condition to the
offerings. Of such shares, 100,742 shares will be issued to FICC's Chief
Executive Officer and vest immediately, 375,000 shares will be reserved for
issuance under a restricted stock option plan (the "Restricted Stock Plan") to
be adopted by FICC in connection with the offerings and 300,000 shares will be
issued to certain employees. The 300,000 shares will vest immediately. The
estimated fair value of $9,782,000 of the (i) 27,113 vested shares to be issued
under the MSP, (ii) 61,238 shares previously issued under the MSP which will
vest in connection with the offerings, (iii) 100,742 vested shares to be issued
to the Company's Chief Executive Officer in connection with the offerings and
(iv) 300,000 vested shares to be issued to certain employees will be recorded as
compensation expense by FICC upon consummation of the offerings. In connection
with the offerings, FICC also plans to adopt a stock option plan.

Pro forma net loss per share amounts assume the issuance of 5,000,000
additional shares of Common Stock in connection with the Common Stock Offering
and the return of 375,000 net shares to FICC in

F-26
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

17. PROPOSED INITIAL PUBLIC OFFERING AND PRO FORMA INFORMATION (UNAUDITED)
(CONTINUED)
connection with the offerings. In addition, pursuant to the requirements of the
Securities and Exchange Commission, common stock to be issued at prices below
the anticipated public offering price during the twelve months immediately
preceding the initial public offering are to be included in the calculation of
weighted average number of common shares outstanding. Therefore, the 27,113
incremental shares issued to management in connection with the offerings have
been included in the pro forma shares used in computing net loss per share.
Historical net loss per share is not presented in the accompanying consolidated
financial statements, as such amounts are not meaningful.

18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

FICC's obligation related to the $175,000,000 of Senior Notes (see Note 17)
are guaranteed fully and unconditionally by one of FICC's subsidiaries. There
are no restrictions on FICC's ability to obtain dividends or other distributions
of funds from this subsidiary, except those imposed by applicable law. The
following supplemental financial information sets forth, on a condensed
consolidating basis, statements of operations, balance sheets and statements of
cash flows for Friendly Ice Cream Corporation ("the Parent Company"), Friendly's
Restaurants Franchise, Inc. ("the Guarantor Subsidiary") and Friendly's
International, Inc. (FII), Friendly Holding (UK) Limited, Friendly Ice Cream
(UK) Limited and Restaurant Insurance Corporation (collectively "the
Non-guarantor Subsidiaries"). Prior to the consummation of the offerings (see
Note 17), the investment in joint venture will be transferred to FII, therefore,
the equity in net loss of joint venture and investment in joint venture are
included in Non-guarantor Subsidiaries in the accompanying consolidating
financial statements. Stockholders' equity (deficit), total assets and net
income (loss) of the Non-guarantor Subsidiaries are insignificant to
consolidated amounts for prior periods. Accordingly, supplemental condensed
consolidating financial information is not presented for prior periods. Separate
complete financial statements and other disclosures of the respective Guarantor
Subsidiary as of December 29, 1996 and September 28, 1997 and for the year and
nine months then ended are not presented because management has determined that
such information is not material to investors.

Investments in subsidiaries are accounted for by the Parent Company on the
equity method for purposes of the supplemental consolidating presentation.
Earnings of the subsidiaries are, therefore, reflected in the Parent Company's
investment accounts and earnings. The principal elimination entries eliminate
the Parent Company's investments in subsidiaries and intercompany balances and
transactions.

F-27
<PAGE>
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)

<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
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)
---------- ----------- ------------- ------ ------------
---------- ----------- ------------- ------ ------------
</TABLE>

F-28
<PAGE>
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)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>

<CAPTION>
Assets
<S> <C> <C> <C> <C> <C>
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
---------- ----- ------ ------------ ------------
---------- ----- ------ ------------ ------------
<CAPTION>
Liabilities and Stockholders' Equity
(Deficit)
<S> <C> <C> <C> <C> <C>
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
---------- ----- ------ ------------ ------------
---------- ----- ------ ------------ ------------
</TABLE>

F-29
<PAGE>
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)

<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>

F-30
<PAGE>
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)

<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
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
---------- ----------- ------------- ------------ ------------
---------- ----------- ------------- ------------ ------------
</TABLE>

F-31
<PAGE>
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)

<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
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
----------- ----------- ------------- ------------ ------------
----------- ----------- ------------- ------------ ------------
</TABLE>

F-32
<PAGE>
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)

<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>

F-33
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with this offering and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or any Underwriter. This Prospectus does not constitute an offer
to sell or solicitation of an offer to buy any of the securities offered hereby
in any jurisdiction to any person to whom it is unlawful to make such offer in
such jurisdiction. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any time subsequent to the date
hereof or that there has been no change in the affairs of the Company since such
date.

---------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
---
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 14
Use of Proceeds................................. 19
Capitalization.................................. 20
Selected Consolidated Financial Information..... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 23
Business........................................ 33
Management...................................... 46
Ownership of Common Stock....................... 53
Certain Transactions............................ 54
Description of New Credit Facility.............. 56
Description of Senior Notes..................... 57
Underwriting.................................... 85
Certain United States Tax Consequences To
Foreign Holders............................... 86
Legal Matters................................... 88
Experts......................................... 88
Available Information........................... 89
Index to Consolidated Financial Statements...... F-1
</TABLE>

---------------------

Until , 1998 (90 days after the date of the Senior Note Offering),
all dealers effecting transactions in the Senior Notes, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.

$175,000,000

[LOGO]

FRIENDLY ICE CREAM
CORPORATION

% Senior Notes due 2007

-------------------

PROSPECTUS

-------------------

SOCIETE GENERALE
SECURITIES CORPORATION

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

NATIONSBANC MONTGOMERY
SECURITIES, INC.

, 1997

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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.

<TABLE>
<S> <C>
SEC registration fee............................................. $ 60,607
NASD filing fee.................................................. 20,500
Printing and engraving........................................... 110,500
Legal fees and expenses.......................................... 552,600
Accounting fees and expenses..................................... 110,500
Trustee fees and expenses........................................ 15,000
Blue sky fees and expenses....................................... 7,500
Miscellaneous.................................................... 520,793
----------
Total........................................................ $1,398,000
----------
----------
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 67 of Chapter 156B of the Massachusetts General Laws provides that a
corporation may indemnify its directors and officers to the extent specified in
or authorized by (i) the articles of organization, (ii) a by-law adopted by the
stockholders, or (iii) a vote adopted by the holders of a majority of the shares
of stock entitled to vote on the election of directors. In all instances, the
extent to which a corporation provides indemnification to its directors and
officers under Section 67 is optional. In its Restated Articles of Organization,
the Registrant has elected to commit to provide indemnification to its directors
and officers in specified circumstances. Generally, the Restated Articles of
Organization provide that the Registrant shall indemnify directors, officers,
employee or agents of the Registrant against liabilities and expenses arising
out of legal proceedings brought against them by reason of their status as
directors, officers, employees or agents of the Registrant or by reason of their
agreeing to serve, at the request of the Registrant, as a director, officer,
employee or agent of another organization. Under this provision, a director,
officer, employee or agent of the Registrant shall be indemnified by the
Registrant for all costs and expenses (including attorneys' fees), judgments,
liabilities and amounts paid in settlement of such proceedings, if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Registrant, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was unlawful.
Any indemnification shall be made by the Registrant only upon a determination
that indemnification is proper in the specific case as made (i) by the Board of
Directors by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, (ii) if such quorum is not
obtainable, or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (iii) by the
stockholders. The Board of Directors may authorize advancing litigation expenses
to a director, officer, employee or agent at his request upon receipt of an
undertaking by any such director, officer, employee or agent to repay such
expenses if it is ultimately determined that he is not entitled to
indemnification for such expenses.

Article VI of the Registrant's Restated Articles of Organization eliminates
the personal liability of the Registrant's directors to the Registrant or its
stockholders for monetary damages for breach of a director's fiduciary duty,
except that such Article VI does not eliminate or limit any liability of a
director (i) for any breach of a director's duty of loyalty to the Registrant or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 61 or

II-1
<PAGE>
62 of Chapter 156B of the Massachusetts General Laws, or (iv) with respect to
any transaction from which the directors derived an improper personal benefit.

Section 10 of the Underwriting Agreement provides that the Underwriters are
obligated, under certain circumstances, to indemnify the Company, directors,
officers and controlling persons of the Company against certain liabilities,
including liabilities under the Securities Act. Reference is made to the form of
Underwriting Agreement filed as Exhibit 1.1 hereto.

The Company maintains directors and officers liability insurance for the
benefit of its directors and certain of its officers.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Since the beginning of 1994, the Company sold the following securities
without registration under the Securities Act of 1933, as amended (the "Act").
No underwriter was involved in such sales and no underwriting commissions or
discounts were paid with respect to any of such sales.

1. In connection with a restructuring of the Company's old credit agreement
in March 1996, the Company issued 1,187,503 shares of its Class B Common Stock
to the Bank of Boston, as agent for the other lenders under such credit
agreement, in reliance upon the exemption from the registration requirements of
the Securities Act contained in Section 4(2) of the Securities Act.

2. In April 1996, two officers of the Company exercised warrants held by
them for an aggregate of 71,527 shares of the Company's Class A Common Shares
for an aggregate consideration of approximately $21,000. Such shares were issued
in reliance upon the exemption from the registration requirements of the
Securities Act contained in Section 4(2) of the Securities Act.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits

<TABLE>
<C> <S>
**1.1 Form of Underwriting Agreement
**3.1 Restated Articles of Organization of Friendly Ice Cream Corporation (the
"Company"). (Incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1, No. 333-34633.)
**3.2 Amended and Restated By-laws of the Company. (Incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1, No.
333-34633.)
3.3 Certificate of Incorporation of Friendly's Restaurant Franchise, Inc., as
amended.
3.4 By-laws of Friendly's Restaurant Franchise, Inc.
**4.1 Form of Senior Note Indenture between Friendly Ice Cream Corporation,
Friendly's Restaurants Franchise, Inc. and The Bank of New York, as
Trustee.
**4.2 Stockholder and Registration Rights Agreement of the Company, as amended.
(Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1, No. 333-34633.)
4.3 Registration Rights Agreement between the Company and Donald N. Smith
(Incorporated by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-1, No. 333-34633.)
**4.4 Rights Agreement between the Company and the Bank of New York as Rights
Agent. (Incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-1, No. 333-34633.)
5.1 Opinion and consent of Mayer, Brown & Platt, counsel for the Company
regarding the validity of the offered securities.
</TABLE>

II-2
<PAGE>

<TABLE>
<C> <S>
10.1 Form of Credit Agreement to be entered into among the Company, Societe
Generale, New York Branch, and certain other banks and financial
institutions.
**10.2 The Company's Stock Option Plan. (Incorporated by reference to Exhibit 10.3
to the Company's Registration Statement on Form S-1, No. 333-34633.)
**10.3 The Company's Restricted Stock Plan. (Incorporated by reference to Exhibit
10.4 to the Company's Registration Statement on Form S-1, No. 333-34633.)
**10.4 Form of Agreement relating to the Company's Limited Stock Compensation
Program. (Incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1, No. 333-34633.)
**10.5 Development Agreement between Friendly Ice Cream Corporation and FriendCo
Restaurants, Inc. (Incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1, No. 333-34633.)
**10.6 Franchise Agreement between Friendly's Restaurants Franchise, Inc. and
FriendCo Restaurants, Inc. (Incorporated by reference to Exhibit 10.7 to
the Company's Registration Statement on Form S-1, No. 333-34633.)
**10.7 Management Agreement between Friendly Ice Cream Corporation and FriendCo
Restaurants, Inc. (Incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-1, No. 333-34633.)
**10.8 Purchase and Sale Agreement between Friendly Ice Cream Corporation and
FriendCo Restaurants, Inc. (Incorporated by reference to Exhibit 10.9 to
the Company's Registration Statement on Form S-1, No. 333-34633.)
**10.9 Software License Agreement between Friendly's Restaurants Franchise, Inc.
and FriendCo Restaurants, Inc. (Incorporated by reference to Exhibit
10.10 to the Company's Registration Statement on Form S-1, No.
333-34633.) (Exhibits 10.5 through 10.9, collectively, the "DavCo
Agreement")
**10.10 Sublease between SSP Company, Inc. and the Company, as amended, for the
Chicopee, Massachusetts Distribution Center. (Incorporated by reference
to Exhibit 10.11 to the Company's Registration Statement on Form S-1, No.
333-34633.)
**10.11 Master License and Distribution Agreement for the Territory of Korea
between Friendly's International, Inc. and Hansung Enterprise Co., Ltd.
(Incorporated by reference to Exhibit 10.12 to the Company's Registration
Statement on Form S-1, No. 333-34633.)
**10.12 TRC Management Contract between the Company and The Restaurant Company.
(Incorporated by reference to Exhibit 10.13 to the Company's Registration
Statement on Form S-1, No. 333-34633.)
**10.13 License Agreement between the Company and Hershey Foods Corporation for the
1988 Non-Friendly marks. (Incorporated by reference to Exhibit 10.14 to
the Company's Registration Statement on Form S-1, No. 333-34633.)
**12.1 Schedule of Computation of Ratios of Earnings to Fixed Charges.
**21.1 Subsidiaries of the Company.
23.1 Consent of Mayer, Brown & Platt (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
**24.1 Power of attorney (included on Registration Statement signature page).
**24.2 Power of Attorney of Charles A. Ledsinger, Jr. (Incorporated by reference
to Exhibit 24.2 to the Company's Registration Statement on Form S-1, No.
333-34633.)
**25.1 Form T-1 Statement of Eligibility of The Bank of New York, as Trustee for
the Senior Notes.
**99.1 Consent of Michael J. Daly, as a person about to become a director.
**99.2 Consent of Burton J. Manning, as a person about to become a director.
</TABLE>

------------------------------

** Previously filed.

II-3
<PAGE>
(b) Financial Statement Schedules.

All schedules are omitted because they are not applicable, or not required,
or because the required information is included in the financial statements or
notes thereto.

ITEM 17. UNDERTAKINGS.

The undersigned Registrants hereby undertake that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrants pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of
this Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

(3) At the closing specified in the underwriting agreement, it will
provide to the underwriter certificates in such denominations and registered
in such names as required by the underwriter to permit prompt delivery to
each purchaser.

(4) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the foregoing provisions, or otherwise, the Registrants
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in such Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrants of expenses incurred
or paid by a director, officer or controlling person of the Registrants in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrants will, unless in the opinion of their counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

II-4
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement, or amendment thereto, to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Wilbraham, State of Massachusetts, on the 5th day of November, 1997.

<TABLE>
<S> <C> <C>
FRIENDLY ICE CREAM CORPORATION

By: /s/ GEORGE G. ROLLER
-----------------------------------------
Name: George G. Roller
Title: Vice President, Finance, Chief
Financial Officer and Treasurer
</TABLE>

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement, or amendment thereto, has been signed by the following
persons in the capacities and on the date indicated.

SIGNATURES TITLE (CAPACITY) DATE
- ------------------------------ -------------------------- -------------------

Chairman of the Board,
* Chief Executive Officer
- ------------------------------ and President (Principal November 5, 1997
Donald N. Smith Executive Officer and
Director)

Vice President, Finance,
/s/ GEORGE G. ROLLER Chief Financial Officer
- ------------------------------ and Treasurer November 5, 1997
George G. Roller (Principal Financial and
Accounting Officer)

*
- ------------------------------ Director November 5, 1997
Charles A. Ledsinger, Jr.

*
- ------------------------------ Director November 5, 1997
Steven L. Ezzes

- ------------------------------ Director
Barry Krantz

- ------------------------------ Director
Gregory L. Segall

* /s/ GEORGE G. ROLLER
- ------------------------------
George G. Roller
Attorney-in-Fact

II-5
<PAGE>
SIGNATURES

FRIENDLY'S RESTAURANTS FRANCHISE, INC.

By: /s/ GEORGE G. ROLLER
-----------------------------------------
Name: George G. Roller
Title: Vice President, Finance

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement, or amendment thereto, has been signed by the following
persons in the capacities and on the date indicated.

SIGNATURES TITLE (CAPACITY) DATE
- ------------------------------ --------------------------- -------------------

Chairman of the Board and
* Chief Executive Officer
- ------------------------------ (Principal Executive November 5, 1997
Donald N. Smith Officer and Director)

Vice President, Chief
/s/ GEORGE G. ROLLER Financial Officer and
- ------------------------------ Treasurer (Principal November 5, 1997
George G. Roller Financial and Accounting
Officer)

*
- ------------------------------ Director November 5, 1997
Joseph A. O'Shaughnessy

* /s/ GEORGE G. ROLLER
- ------------------------------
George G. Roller
Attorney-in-Fact

II-6

<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
FAMILY RESTAURANTS FRANCHISE, INC.

Family Restaurants Franchise, Inc., a corporation organized and existing
under and by virtue of the General Corporation Law of Delaware (the
"Corporation")

DOES HEREBY CERTIFY:

FIRST, That the Board of Directors of said Corporation adopted resolutions
by Unanimous Written Consent setting forth a proposed amendment of the
Corporation's Certificate of Incorporation, declaring said amendment to be
advisable and calling a meeting of the stockholders of said corporation for
consideration of such amendment. The resolution setting forth the proposed
amendment declared it advisable to make the following amendment to Article I of
the Certificate of Incorporation of said Corporation:

1. The name of the Corporation is
FRIENDLY'S RESTAURANTS FRANCHISE, INC.

SECOND, That thereafter pursuant to resolution of its Board of Directors, a
special meeting of the stockholders of said Corporation was called and in lieu
of such meeting, the written consent of the stockholders was obtained in
accordance with Section 228(d) of Delaware Corporation Law in which consent the
necessary number of shares as required by statute and the Corporation's By-Laws
were voted in favor of the amendment.

THIRD, That the aforesaid amendment was duly adopted in accordance with the
applicable provisions of Section 242 of the General Corporation Law of the State
of Delaware.

FOURTH, That notice of the consent of the stockholders in lieu of a meeting
adopting the amendment to the Certificate of Incorporation was sent to all
stockholders of the Corporation who did not consent in writing to such
amendment.

IN WITNESS WHEREOF, said Corporation has caused this Certificate to be
signed by George G. Roller, Vice President and Treasurer this 20TH day of MAY,
1996.

By:
---------------------------------
George G. Roler
Its: Vice President and Treasurer

<PAGE>

CERTIFICATE OF INCORPORATION

FAMILY RESTAURANTS FRANCHISE, INC.

* * * *
1. The name of the corporation is

FAMILY RESTAURANTS FRANCHISE, INC.

2. The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.

3. The nature of the business or purposes to be conducted or
promoted is:

To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.

4. The total number of shares of common stock which the corporation
shall have authority to issue is One Thousand (1,000) and the par value of each
of such share is One Dollar ($1.00) amounting in the aggregate to One Thousand
Dollars ($1,000.00).

5. The name and mailing address of each incorporator is as follows:

NAME MAILING ADDRESS
---- ----------------

D.A. Hampton Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801

J.A. Grodzicki Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801

K. Bowman Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801

<PAGE>

6. The corporation is to have perpetual existence.

7. In furtherance and not in limitation of the powers conferred by
statute, the board of directors is expressly authorized:

To make, alter or repeal the by-laws of the corporation.

8. Elections of directors need not be by written ballot unless the
by-laws of the corporation shall so provide.

Meetings of stockholders may be held within or without the State of
Delaware, as the by-laws may provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
board of directors or in the by-laws of the corporation.

9. The corporation reserves the right to amend, alter, change or
repeal any provision contained in this certificate of incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.

WE, THE UNDERSIGNED, being each of the incorporators hereinbefore
named, for the purpose of forming a corporation pursuant to the General
Corporation Law of the State of Delaware, do make this certificate, hereby
declaring and certifying that this is our act and deed and the facts herein
stated are true, and accordingly have hereunto set our hands this 20th day of
June, 1986.

-----------------------------
D.A. Hampton

-----------------------------
J.A. Grodzicki

-----------------------------
K. Bowman

<PAGE>

Received for Record

June 23rd, A.D. 1986

Leo J. Dugan, Jr., Recorder

STATE OF DELAWARE :
: SS.:
NEW CASTLE COUNTY :

Recorded in the Recorder's Office at

Wilmington, Vol. Page &c., the

23rd day of June, A. D. 1986.

Witness my hand and official seal.

Leo J. Dugan, Jr.

Recorder.

"""""""""""""""""""""""""""""""
" Recorders Office "
" New Castle Co. Del. "
" Mercy Justice "
"""""""""""""""""""""""""""""""

<PAGE>

FAMILY RESTAURANTS FRANCHISE, INC.
BY-LAWS
INDEX

PAGE
----

SECTION 1 - OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Section 1.1. Registered Office . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2. Other Offices . . . . . . . . . . . . . . . . . . . . . . . 1

SECTION 2 - STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Section 2.1. Time and Place of Meetings. . . . . . . . . . . . . . . . . 1
Section 2.2. Annual Meetings . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.3. Special Meetings. . . . . . . . . . . . . . . . . . . . . . 1
Section 2.4. Notice of Meetings. . . . . . . . . . . . . . . . . . . . . 1
Section 2.5. Quorum; Adjournment of Meeting. . . . . . . . . . . . . . . 2
Section 2.6. Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2.7. Informal Action by Stockholders . . . . . . . . . . . . . . 2
Section 2.8. Significant Stockholder Actions . . . . . . . . . . . . . . 2
Section 2.9. One Share One Vote. . . . . . . . . . . . . . . . . . . . . 3

SECTION 3 - DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Section 3.1. General Powers. . . . . . . . . . . . . . . . . . . . . . . 3
Section 3.2. Number, Qualification and Tenure. . . . . . . . . . . . . . 3
Section 3.3. Vacancies; Resignations.. . . . . . . . . . . . . . . . . . 3
Section 3.4. Place of Meetings . . . . . . . . . . . . . . . . . . . . . 3
Section 3.5. Newly-Elected Board . . . . . . . . . . . . . . . . . . . . 3
Section 3.6. Regular Meetings. . . . . . . . . . . . . . . . . . . . . . 4
Section 3.7. Special Meetings. . . . . . . . . . . . . . . . . . . . . . 4
Section 3.8. Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 3.9. Organization. . . . . . . . . . . . . . . . . . . . . . . . 4
Section 3.10. Committees. . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 3.11. Action without Meeting. . . . . . . . . . . . . . . . . . . 4
Section 3.12. Attendance by Telephone . . . . . . . . . . . . . . . . . . 4
Section 3.13. Compensation. . . . . . . . . . . . . . . . . . . . . . . . 5

SECTION 4 - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Section 4.1. Enumeration . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 4.2. Salaries. . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 4.3. Term of Office. . . . . . . . . . . . . . . . . . . . . . . 5

i
<PAGE>

Section 4.4. Chairman. . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 4.5. President . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 4.6. Vice President. . . . . . . . . . . . . . . . . . . . . . . 5
Section 4.7. Secretary . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 4.8. Assistant Secretary.. . . . . . . . . . . . . . . . . . . . 6
Section 4.9. Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 4.10. Assistant Treasurer.. . . . . . . . . . . . . . . . . . . . 6
Section 4.11. Other Duties. . . . . . . . . . . . . . . . . . . . . . . . 6

SECTION 5 - CERTIFICATE OF STOCK AND OTHER STOCKHOLDER MATTERS . . . . . . . . 6

Section 5.1. Form. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 5.2. Replacement.. . . . . . . . . . . . . . . . . . . . . . . . 7
Section 5.3. Transfer. . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 5.4. Stockholders Entitled to Notice or to Vote. . . . . . . . . 7
Section 5.5. Stock Ledger Determinative of Dividend Distributions and
Voting Entitlements . . . . . . . . . . . . . . . . . . . . 7

SECTION 6 - INDEMNIFICATION OF DIRECTORS AND OFFICERS. . . . . . . . . . . . . 8

Section 6.1. Good Faith Requirement. . . . . . . . . . . . . . . . . . . 8
Section 6.2. Expenses Indemnified. . . . . . . . . . . . . . . . . . . . 8
Section 6.3. Determination of Indemnification. . . . . . . . . . . . . . 8
Section 6.4. Expenses Paid in Advance of Determination of
Indemnification . . . . . . . . . . . . . . . . . . . . . . 8
Section 6.5. Indemnification Provisions Not Exclusive. . . . . . . . . . 9
Section 6.6. Directors and officers Liability Insurance. . . . . . . . . 9

SECTION 7 - DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Section 7.1. Declaration of Dividends. . . . . . . . . . . . . . . . . . 9
Section 7.2. Reserves for Dividends. . . . . . . . . . . . . . . . . . . 9

SECTION 8 - GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . 9

Section 8.1. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 8.2. Corporate Seal. . . . . . . . . . . . . . . . . . . . . . .10
Section 8.3. Form of Notice. . . . . . . . . . . . . . . . . . . . . . .10
Section 8.4. Waiver of Notice. . . . . . . . . . . . . . . . . . . . . .10
Section 8.5. Corporation Checks. . . . . . . . . . . . . . . . . . . . .10
Section 8.6. Protection of Corporate Books . . . . . . . . . . . . . . .10

SECTION 9 - AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Section 9.1. Amendments of By-Laws . . . . . . . . . . . . . . . . . . .10

<PAGE>

B Y - L A W S

FAMILY RESTAURANTS FRANCHISE INC.

SECTION 1.

OFFICES

SECTION a.. REGISTERED OFFICE. The registered office of the corporation
shall be in the City of Wilmington, County of New Castle, State of Delaware.

SECTION b.. OTHER OFFICES. The corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors ("Board") may from time to time determine or the business of the
corporation may require.

SECTION 2.

STOCKHOLDERS

SECTION a.. TIME AND PLACE OF MEETINGS. All meetings of the stockholders
for the election of directors or for any other purpose shall be held at such
time and place, within or without the State of Delaware, as shall be designated,
from time to time, by the Board. In the absence of any such designation by the
Board, each such meeting shall be held at the principal office of the
corporation in Wilmington, Delaware.

SECTION b.. ANNUAL MEETINGS. An annual meeting of stockholders shall be
held for the purpose of electing directors to serve on the Board and transacting
such other business as may properly be brought before the meeting. The date of
the annual meeting shall be determined by the Board.

SECTION c.. SPECIAL MEETINGS. Special meetings of the stockholders, for
any purpose or purposes, unless otherwise prescribed by law, may be called by
the Chairman or the President and shall be called by the Secretary or at the
request in writing of stockholders owning a majority in amount of the entire
capital stock of the corporation issued and outstanding and entitled to vote.

SECTION d.. NOTICE OF MEETINGS. Written notice of each meeting of the
stockholders stating the place, date and time of the meeting shall be given not
less than ten (10) nor more than sixty days

<PAGE>

(60) before the date of the meeting, to each stockholder entitled to vote at
such meeting. The notice of any special meeting of stockholders shall state the
purpose or purposes for which the meeting is called.

SECTION e.. QUORUM; ADJOURNMENT OF MEETING. The holders of a majority of
the stock issued and outstanding and entitled to vote thereat, present in person
or represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business, except as otherwise provided by
law. If a quorum is not present or represented, the holders of the stock
present in person or represented by proxy at the meeting and entitled to vote
thereat shall have the power, by the affirmative vote of the holders of a
majority of such stock, to adjourn the meeting to another time and/or place,
without notice other than announcement at the meeting, until a quorum shall be
present or represented. At such adjourned meeting, at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the original meeting. If the adjournment is for more than thirty
(30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.

SECTION f.. VOTING. At all meetings of the stockholders, each stockholder
shall be entitled to vote, in person or by proxy, the shares of voting stock
owned by such stockholder of record on the record date for the meeting. When a
quorum is present or represented at any meeting, the vote of the holders of a
majority of the stock having voting power present In person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which, by express provision of law or of the Certificate of
Incorporation or of these By-Laws, a different vote is required, in which case
such express provision shall govern and control the voting.

SECTION g.. INFORMAL ACTION BY STOCKHOLDERS. Any action required to be
taken at a meeting of the stockholders or any other action which may be taken at
a meeting of the stockholders, may be taken without a meeting if a consent in
writing, setting forth the action so taken, - shall be signed by all of the
stockholders entitled to vote with respect to the subject matter thereof.

SECTION h.. SIGNIFICANT STOCKHOLDER ACTIONS. The affirmative vote of
ninety-five (95) percent (or eighty-five (85) percent if Donald N. Smith ceases
for any reason to be the Chairman of the corporation) of the issued and
outstanding capital stock of the corporation shall be required for any of the
following "Significant Stockholder Actions":
i. the amendment or repeal of the corporation's Certificate of
Incorporation or By-Laws or the adoption of a new or restated
Certificate of Incorporation or new By-Laws;
ii. any merger or consolidation to which the corporation or any subsidiary
of the corporation is a constituent corporation;
iii. any sale, lease or exchange of all or substantially all of the
property and assets of the corporation; and
iv. dissolution or liquidation of the corporation.

SECTION i.. ONE SHARE ONE VOTE. Each stockholder shall at every meeting
of the stockholders

<PAGE>

be entitled to one vote in person or by proxy for each share of stock having
voting power held by such stockholder, but no proxy shall be voted after three
(3) years from its date unless the proxy provides for a longer period.

SECTION 3.

DIRECTORS

SECTION a.. GENERAL POWERS. The business and affairs of the corporation
shall be managed and controlled by or under the direction of the Board, which
may exercise all such powers of the corporation and do all such lawful acts and
things as are not by law or by Certificate of Incorporation or by these By-Laws
directed or required to be exercised or done by the stockholders.

SECTION b.. NUMBER, QUALIFICATION AND TENURE. The Board of Directors
shall consist of up to five (5) members (Directors). The Directors shall be
elected at the annual meeting of the stockholders, except as provided in
Section 3.3 and each Director elected shall hold office until his successor is
elected and qualified or until his earlier resignation or removal. Directors
need not be stockholders.

SECTION c.. VACANCIES; RESIGNATIONS. Vacancies and newly created
directorships resulting from any increase in the number of Directors may be
filled by a majority of the Directors then in office though less than a quorum,
and each Director so chosen shall hold office until his successor is elected and
qualified or until his earlier resignation or removal. If there are no
Directors in office, then an election of Directors may be held in the manner
provided by law. Any director may resign at any time and such resignation may
be made contingent upon the occurrence of a future event. such resignation shall
be made in writing and shall take effect at the later of the date designated in
the written resignation and the time of its receipt by the Chairman or the
Secretary of the corporation. Acceptance of a resignation shall not be
necessary to make it effective.

SECTION d.. PLACE OF MEETINGS. The Board may hold meetings, both regular
and special, either within or without the State of Delaware.

SECTION e.. NEWLY-ELECTED BOARD. The first meeting of each newly-elected
Board shall be held at such time and place as shall be fixed by the stockholders
at the annual meeting, and no notice of such meeting shall be necessary to the
newly elected Directors in order legally to constitute the meeting, provided a
quorum shall be present. In the event of the failure of the stockholders to fix
the time and place of such first meeting of the newly elected Board, or in the
event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
Board.

SECTION f.. REGULAR MEETINGS. The Board shall hold a regular meeting, to
be known as the annual meeting, immediately following each annual meeting of the
stockholders. Other regular meetings of the Board shall be held at such time
and at such place as shall from time to time be

<PAGE>

determined by the Board. No notice of regular meetings need be given.

SECTION g.. SPECIAL MEETINGS. Special meetings of the Board may be called
by the Chairman or the President. Special meetings shall also be called by the
Secretary on written request of any Director. No notice of special meetings
need be given.

SECTION h.. QUORUM. At all meetings of the Board, a majority of the total
number of Directors shall constitute a quorum for the transaction of business
and the act of a majority of the Directors present at any meeting at which there
is a quorum shall be the act of the Board except as may be otherwise
specifically provided by these By-Laws, the -Certificate of Incorporation or by
' law. If a quorum shall not be present at any meeting of the Board, the
Directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.

SECTION i.. ORGANIZATION. The Chairman, if elected, shall act as chairman
at all meetings of the Board. If the Chairman is not elected or, if elected, is
not present, the President or, in the absence of the President, a Vice Chairman
(who is also a member of the Board and, if more than one, in order designated by
the Board or, in the absence of such designation, in order of their election),
If any, or if no such Vice Chairman is present, a Director chosen by a majority
of the Directors present, shall act as chairman at meetings of the Board.

SECTION j.. COMMITTEES. The Board may, by resolution adopted by a
majority of the whole Board, appoint one or more of its members to constitute
one or more committees and such committees shall have such powers and duties
(without further approval of the Board) as the Board shall prescribe, as such
powers and duties may be limited by General Corporation Law of the State of
Delaware.

SECTION k.. ACTION WITHOUT MEETING. Unless otherwise restricted by the
certificate of Incorporation or these By-Laws, any action required or permitted
to be taken at any meeting of the Board or any committee thereof may be taken
without a meeting, if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.

SECTION l.. ATTENDANCE BY TELEPHONE. Members of the Board, or of any
committee designated by the Board, may participate in a meeting of the Board, or
any committee, by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.

SECTION m.. COMPENSATION. The Board shall have the authority to fix the
compensation of Directors, which may include their expenses, if any, of
attendance at each meeting of the Board or of a committee.

SECTION 4.

<PAGE>

OFFICERS

SECTION a.. ENUMERATION. The officers of the corporation shall be chosen
by the Board and shall be a Chairman, President, a Secretary, and a Treasurer.
The Board may also elect one or more Vice Chairmen, one or more Vice Presidents,
one or more Assistant Secretaries and Assistant Treasurers and such other
officers and agents as it shall deem appropriate. Any-number of offices may be
held by the same person.

SECTION b.. SALARIES. The salaries of all officers of the corporation
shall be fixed by the Board.

SECTION c.. TERM OF OFFICE. The officers of the corporation shall be
elected at the annual meeting of the Board and shall hold office until their
successors are elected and qualified or until their earlier resignation, removal
or death. Any officer elected or appointed by the Board may be removed at any
time by the Board. Any vacancy occurring In any office of the corporation
required by this section shall be filled by the Board, and any vacancy in any
other office may be filled by the Board.

SECTION d.. CHAIRMAN. The Chairman shall preside, when present, at each
meeting of the Board and shall perform such other duties and the Board and shall
perform such other duties and have such powers as the Board may from time to
time prescribe. The Chairman shall have general supervision, direction and
control of the business and affairs of the corporation, subject to the control
of the Board, shall preside at meetings of stockholders and shall have such
other functions, authority and duties as customarily appertain to the office of
the chief executive of a business corporation or as may be prescribed by the
Board.

SECTION e.. PRESIDENT. During any period when there shall be an office of
Chairman, the President shall have such functions, authority and duties as may
be prescribed by the Board or the chairman. During any period when there shall
not be an office of chairman, the President shall have the functions, authority
and duties provided for the Chairman.

SECTION f.. VICE PRESIDENT. The Vice President shall perform, such duties
and have such other powers as may from time to time be prescribed by the Board,
the Chairman or the President.

SECTION g.. SECRETARY. The Secretary shall keep a record of all
proceedings of the stockholders of the corporation and of the Board, and shall
perform like duties for the standing committees when required. The Secretary
shall give, or cause to be given, notice, if any, of all meetings of the
stockholders and shall perform such other duties as may be prescribed by the
Board, the Chairman or the President. The Secretary shall have custody of the
corporate seal of the corporation and the Secretary or in the absence of the
Secretary any Assistant Secretary, shall have the authority to affix the same to
any Instrument requiring it, and when so affixed it may be attested by the
signature of the Secretary or an Assistant Secretary. The Board may give
general authority to any other officer to affix the seal of the corporation and
to attest such affixing of the seal.

<PAGE>

SECTION h.. ASSISTANT SECRETARY. The Assistant Secretary or if there be
more than one, the Assistant Secretaries in the order determined by the Board
(or if there be no such determination, then in order of their election), shall,
in the absence of the secretary or in the event of the Secretary's inability or
refusal to act, perform the duties and exercise the powers of the Secretary and
shall perform such other duties as may from time to time be prescribed by the
Board, the Chairman, or the President.

SECTION i.. TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
deposit all moneys and other valuable assets in the name and to the credit of
the corporation in such depositories as may be designated by the Board. The
Treasurer shall disburse the funds of the corporation as may be ordered by the
Board, taking proper vouchers for such disbursements, and shall render to the
Chairman, the President and the Board, at its regular meetings or when the Board
so requires, an account of all transactions as Treasurer and of the financial
condition of the corporation. The Treasurer shall perform such other duties as
may from time to time be prescribed by the Board, the Chairman, or the
President.

SECTION j.. ASSISTANT TREASURER. The Assistant Treasurer, or if there
shall be more than one, the Assistant Treasurers in the order determined by the
Board (or if there be no such determination, then in order of their election),
shall, in absence of the Treasurer or in the event of the Treasurer's Inability
or refusal to act, perform the duties and exercise the powers of the Treasurer
and shall perform such other duties and have such other powers as may from time
to time be prescribed by the Board, the Chairman., the President, or the
Treasurer.

SECTION k.. OTHER DUTIES. Any officer who is elected or appointed from
time to time BY the Board and whose duties are not specified in these By-Laws
shall perform such duties and have such powers as may be prescribed from time to
time by the Board, the Chairman or the President.

SECTION 5.

CERTIFICATE OF STOCK AND OTHER STOCKHOLDER MATTERS

SECTION a.. FORM. The shares of the corporation shall be represented by
certificates; provided, however, that the Board may provide by resolution or
resolutions that some or all of any or all classes or series of the
corporation's stock shall be uncertificated shares. Certificates of stock in
the corporation, if any, shall be signed by or in the name of the corporation by
the Chairman or the President or a Vice President and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant secretary of the
corporation. Where a certificate is countersigned by a transfer agent, other
than the corporation or an employee of the corporation, or by a registrar, the
signatures of the Chairman, the President or a ' Vice President and the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary
may be facsimiles. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, the certificate may be issued by the corporation with the
same effect as if such officer, transfer agent or registrar were such

<PAGE>

officer, transfer agent or registrar at the date of its issue.

SECTION b.. REPLACEMENT. In case of the loss, destruction or theft of a
certificate for any stock of the corporation, a new certificate of stock or
uncertificated shares in place of any certificate therefor issued by the
corporation may be issued upon satisfactory proof of such loss, destruction or
theft and upon such terms as the Board may prescribe. The Board may in its
discretion require the owner of the lost, destroyed or stolen certificate, or
his legal representative, to give the corporation a bond, in such sum and in
such form and with such -surety or sureties as it may direct, to indemnify the
corporation against any claim that may be made against it with respect to a
certificate alleged to have been lost, destroyed or stolen.

SECTION c.. TRANSFER. Upon surrender to the corporation or the transfer
agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the corporation to issue a new certificate of
stock or uncertificated shares in place of any certificate therefor Assured by
the corporation to the person entitled thereto, cancel the old certificate and
record the transaction on its books.

SECTION d.. STOCKHOLDERS ENTITLED TO NOTICE OR TO VOTE. In order that the
corporation may determine the stockholders entitled to notice of or to vote at
any meeting of the stockholders or any adjournment thereof, or to express
consent to corporate action in writing without a meeting, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any lawful action, the Board may fix in advance, a record
date which shall not be more than sixty (60) nor less than ten (10) days before
the date of such meeting, nor more than sixty (60) days prior to any other
action. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board may fix a new record date for the adjourned
meeting.

SECTION e.. STOCK LEDGER DETERMINATIVE OF DIVIDEND DISTRIBUTIONS AND
VOTING ENTITLEMENTS. The corporation shall be entitled to recognize the
exclusive right of a person registered on its books as the owner of shares to
receive dividends and other distributions, and to vote as such owner, and shall
not be bound to recognize any equitable or other claim to, or interest in, such
share or shares on the part of any other person, whether or not it shall have
express or either notice thereof, except as otherwise provided by the laws of
the State of Delaware.

SECTION 6.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

SECTION a.. GOOD FAITH REQUIREMENT. The corporation shall indemnify any
person who was or is a party or is threatened to be made party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer,

<PAGE>

employee or agent of another corporation, partnership, joint venture, trust
or other enterprise, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him
in connection with such action, suit or proceeding if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit - or proceeding by judgment, order,
settlement, conviction or upon a plea of NOLO CONTENDERS or its equivalent,
shall not, of itself, create a presumption that the person did not act in
good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his
conduct was unlawful.

SECTION b.. EXPENSES INDEMNIFIED. To the extent that a director, officer,
employee or agent of the corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
Section 6.1 of these By-Laws, or in defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.

SECTION c.. DETERMINATION OF INDEMNIFICATION. Any indemnification under
Section 6.1 of these By-Laws (unless ordered by a court) shall be made by the
corporation only as authorized in the specific case upon a determination that
Indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
section 6.1 of these By-Laws. Such determination shall be made (1) by the Board
by a majority vote of a quorum consisting of directors who were not parties to
such action, suit or proceeding, or (2) if such a quorum is not obtainable, or,
even if obtainable a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, or (3) by the stockholders.

SECTION d.. EXPENSES PAID IN ADVANCE OF DETERMINATION OF INDEMNIFICATION.
Expenses incurred in defending a civil or criminal action suit or proceeding may
be paid by the corporation in advance of the final disposition of such action,
suit or proceeding as authorized by the Board in the manner provided in section
6.3 of these By-Laws upon receipt of an undertaking by or on behalf of the
director, officer, employee or agent to repay such amount unless it shall
ultimately be determined that he or she is entitled to be Indemnified by the
corporation under these By-Laws.

SECTION e.. INDEMNIFICATION PROVISIONS NOT EXCLUSIVE. The Indemnification
provided by the By-Laws shall not be deemed exclusive of any other rights to
which those indemnified may be entitled under any By-Law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.

SECTION f.. DIRECTORS AND OFFICERS LIABILITY INSURANCE. The corporation
may purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any

<PAGE>

liability asserted against him and Incurred by him in any such capacity, or
arising out of his status a such, whether or not he would be entitled to
indemnity against such liability under the provisions of these By-Laws.

SECTION 7.

DIVIDENDS

SECTION a.. DECLARATION OF DIVIDENDS. Dividends may be declared by the
Board at any regular or special meeting, pursuant to law and in accordance with
the voting requirements stated in these By-Laws. Dividends may be paid in cash,
in property or in shares of the corporation's capital stock.

SECTION b.. RESERVES FOR DIVIDENDS. Before payment of any dividend, there
may be set aside out of any funds of the corporation available for dividends
such sum or sums as the Board from time to time, in its absolute discretion,
deems proper as a reserve or reserve to meet contingencies, or for repairing or
maintaining any property of the corporation, or for such other purpose as the
Board determine promotes the interest of the corporation and the Board may
modify or abolish any such reserve in the manner in which it was created.

SECTION 8.

GENERAL PROVISIONS

SECTION a.. FISCAL YEAR. The fiscal year of the corporation shall be
fixed by resolution of the Board.

SECTION b.. CORPORATE SEAL. The corporate seal shall be in such form as
may be approved from time to time by the Board. The seal. may be used by
causing it or a facsimile thereof to be impressed or affixed or in any other
manner reproduced.

SECTION c.. FORM OF NOTICE. Whenever, under the provisions of the
applicable statutes or of the Certificate of Incorporation or of these By-Laws,
notice is required to be given to any director or stockholder, personal notice
is not required; any notice shall be given in writing either in person, by air
courier service, or mail addressed to such director or stockholder at his
address as it appears on the records of the corporation, with postage thereon
prepaid if sent by air courier service or mail, and such notice shall be deemed
to be given when handed to such director or stockholder, one (1) business day
after being delivered to an air courier service, or two (2) business days after
being deposited in the United States mail.

SECTION d.. WAIVER OF NOTICE. Whenever any notice is required to be given
under law or the provisions of the Certificate of Incorporation or these By-
Laws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of

<PAGE>

notice of such meeting, except when the person attends the meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting was not lawfully called or
convened. Neither the business to be transacted at nor the purpose of, any
regular or special meeting of the stockholders or directors need to be specified
in any written waiver of notice.

SECTION e.. CORPORATION CHECKS. All checks or other orders for the payment
of money and notes of the corporation shall be signed by such officer or
officers or such other person or persons as the Board my from time to time
designate.

SECTION f.. PROTECTION OF CORPORATE BOOKS. As provided under applicable
laws of the State of Delaware, or any successor laws the corporation shall make
available to the stockholders the books and records of the corporation,
including without limitation, periodic financial statements of the corporation.

SECTION 9.

AMENDMENTS

SECTION a.. AMENDMENTS OF BY-LAWS. These By-Laws may be altered, amended
new By-Laws may be adopted by the Board. The fact that the alter, repeal or
adopt the By-Laws has been conferred upon the divest stockholders of same
powers.

<PAGE>

Exhibit 5.1

[Mayer, Brown & Platt Letterhead]

November 5, 1997

Friendly Ice Cream Corporation
1855 Boston Road
Wilbraham, Massachusetts 01095

Ladies and Gentlemen:

We have acted as counsel to Friendly Ice Cream Corporation, a Massachusetts
corporation (the "Corporation") and Friendly's Restaurant Franchise, Inc., a
Delaware corporation (the "Subsidiary"), in connection with the corporate
proceedings (the "Proceedings") taken and to be taken relating to the public
offering of $175,000,000 of the Company's Senior Notes due 2007 (the "Notes"),
as unconditionally guaranteed by the Subsidiary (such guarantee being the
"Guarantees"). The Notes and the Guarantees are to be issued pursuant to an
Indenture between the Company, the Subsidiary and The Bank of New York, as
Trustee (the "Indenture"). In this connection, we have examined such corporate
and other records, instruments, certificates and documents as we considered
necessary to enable us to express this opinion.

Based on the foregoing, it is our opinion that, upon completion of the
Proceedings, the Notes and the Guarantees will have been duly authorized for
issuance and, when the Indenture has been duly executed and delivered by the
parties thereto and when the Notes and the Guarantees are duly executed,
authenticated, issued and delivered, the Notes and the Guarantees will
constitute valid and legally binding obligations of the Company and the
Subsidiary, respectively, entitled to the benefits of the Indenture, subject to
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
and to general equity principles (whether considered in a proceeding at law or
in equity).

We consent to the filing of this opinion as an exhibit to the registration
statement relating to the Notes and the Guarantees and to the reference to us
under the caption "Legal Matters" therein.

Very truly yours,

/s/ Mayer Brown & Platt

MAYER, BROWN & PLATT

MAC:dpz

<PAGE>
Exhibit 10.1

================================================================================

$175,000,000

CREDIT AGREEMENT

among

FRIENDLY ICE CREAM CORPORATION,
as Borrower,

The Several Lenders
from Time to Time Parties Hereto

and

SOCIETE GENERALE,
as Arranger and Administrative Agent

and

Dated as of _____________, 1997

================================================================================

<PAGE>

TABLE OF CONTENTS
-----------------

Page
----

SECTION 1. DEFINITIONS.................................................... 1
1.1 Defined Terms.................................................... 1
1.2 Other Definitional Provisions.................................... 23

SECTION 2. AMOUNT AND TERMS OF COMMITMENTS................................ 23
2.1 Term Loan Commitments............................................ 24
2.2 Procedure for Term Loan Borrowing................................ 24
2.3 Repayment of Term Loans.......................................... 24
2.4 Revolving Credit Commitments..................................... 26
2.5 Procedure for Revolving Credit Borrowing......................... 27
2.6 Repayment of Loans; Evidence of Debt............................. 27
2.7 Commitment Fees, etc. ........................................... 28
2.8 Termination or Reduction of Revolving Credit Commitments......... 28
2.9 Optional Prepayments............................................. 28
2.10 Mandatory Prepayments and Commitment Reductions................. 29
2.11 Conversion and Continuation Options............................. 30
2.12 Minimum Amounts and Maximum Number of Eurodollar Tranches....... 30
2.13 Interest Rates and Payment Dates................................ 31
2.14 Computation of Interest and Fees................................ 31
2.15 Inability to Determine Interest Rate............................ 32
2.16 Pro Rata Treatment and Payments................................. 32
2.17 Requirements of Law............................................. 34
2.18 Taxes........................................................... 35
2.19 Indemnity....................................................... 37
2.20 Change of Lending Office........................................ 37
2.21 Replacement of Lenders under Certain Circumstances.............. 38

SECTION 3. LETTERS OF CREDIT.............................................. 38
3.1 L/C Commitment................................................... 38
3.2 Procedure for Issuance of Letter of Credit....................... 39
3.3 Commissions, Fees and Other Charges.............................. 39
3.4 L/C Participations............................................... 39
3.5 Reimbursement Obligation of the Borrower......................... 40
3.6 Obligations Absolute............................................. 41
3.7 Letter of Credit Payments........................................ 41
3.8 Applications..................................................... 41

SECTION 4. REPRESENTATIONS AND WARRANTIES................................. 41
4.1 Financial Condition.............................................. 41
4.2 No Change........................................................ 42
4.3 Corporate Existence; Compliance with Law......................... 42
4.4 Corporate Power; Authorization; Enforceable Obligations.......... 42
4.5 No Legal Bar..................................................... 43
4.6 No Material Litigation........................................... 43

-i-
<PAGE>

Page
----

4.7 No Default....................................................... 43
4.8 Ownership of Property; Liens..................................... 43
4.9 Intellectual Property............................................ 44
4.10 Taxes........................................................... 44
4.11 Federal Regulations............................................. 44
4.12 Labor Matters................................................... 44
4.13 ERISA........................................................... 44
4.14 Investment Company Act; Other Regulations....................... 45
4.15 Subsidiaries.................................................... 45
4.16 Use of Proceeds................................................. 45
4.17 Environmental Matters........................................... 45
4.18 Accuracy of Information, etc.................................... 46
4.19 Security Documents.............................................. 47
4.20 Solvency........................................................ 47
4.21 Regulation H.................................................... 47
4.22 Material Contracts.............................................. 47

SECTION 5. CONDITIONS PRECEDENT........................................... 48
5.1 Conditions to Initial Extension of Credit........................ 48
5.2 Conditions to Each Extension of Credit........................... 51

SECTION 6. AFFIRMATIVE COVENANTS.......................................... 52
6.1 Financial Statements............................................. 52
6.2 Certificates; Other Information.................................. 52
6.3 Payment of Obligations........................................... 54
6.4 Conduct of Business and Maintenance of Existence, etc. .......... 54
6.5 Maintenance of Property; Insurance............................... 54
6.6 Inspection of Property; Books and Records; Discussions........... 55
6.7 Notices.......................................................... 55
6.8 Environmental Laws............................................... 56
6.9 Interest Rate Protection......................................... 56
6.10 Additional Collateral, etc...................................... 56
6.11 Mortgage Recording Taxes........................................ 57

SECTION 7. NEGATIVE COVENANTS............................................. 58
7.1 Financial Condition Covenants.................................... 58
7.2 Limitation on Indebtedness....................................... 60
7.3 Limitation on Liens.............................................. 62
7.4 Limitation on Fundamental Changes................................ 63
7.5 Limitation on Sale of Assets..................................... 64
7.6 Limitation on Dividends.......................................... 64
7.7 Limitation on Capital Expenditures............................... 65
7.8 Limitation on Investments, Loans and Advances.................... 65
7.9 Limitation on Optional Payments and Modifications of Debt
Instruments, etc................................................. 66
7.10 Limitation on Transactions with Affiliates...................... 67
7.11 Limitation on Sales and Leasebacks.............................. 67
7.12 Limitation on Changes in Fiscal Periods......................... 67
7.13 Limitation on Negative Pledge Clauses........................... 67
7.14 Limitation on Restrictions on Subsidiary Distributions.......... 67
7.15 Limitation on Lines of Business................................. 69

-ii-
<PAGE>

Page
----

SECTION 8. EVENTS OF DEFAULT.............................................. 69

SECTION 9. THE AGENT...................................................... 72
9.1 Appointment...................................................... 72
9.2 Delegation of Duties............................................. 72
9.3 Exculpatory Provisions........................................... 72
9.4 Reliance by Agent................................................ 73
9.5 Notice of Default................................................ 73
9.6 Non-Reliance on Agent and Other Lenders.......................... 73
9.7 Indemnification.................................................. 74
9.8 Agent in Its Individual Capacity................................. 74
9.9 Successor Agent.................................................. 75
9.10 Authorization to Release Liens.................................. 75

SECTION 10. MISCELLANEOUS................................................. 75
10.1 Amendments and Waivers.......................................... 75
10.2 Notices......................................................... 76
10.3 No Waiver; Cumulative Remedies.................................. 77
10.4 Survival of Representations and Warranties...................... 77
10.5 Payment of Expenses............................................. 77
10.6 Successors and Assigns; Participations and Assignments.......... 78
10.7 Adjustments; Set-off............................................ 80
10.8 Counterparts.................................................... 81
10.9 Severability.................................................... 81
10.10 Integration.................................................... 81
10.11 GOVERNING LAW.................................................. 81
10.12 Submission To Jurisdiction; Waivers............................ 81
10.13 Acknowledgements............................................... 82
10.14 WAIVERS OF JURY TRIAL.......................................... 82
10.15 Confidentiality................................................ 82

-iii-
<PAGE>

ANNEXES:

A Pricing Grid
B ECF Percentage Grid
C Permitted Capital Expenditure Grid

SCHEDULES:

1.1A Commitments
1.1B Mortgaged Properties
1.1C Management Permitted Holders
4.4 Consents, Authorizations, Filings and Notices
4.15 Subsidiaries
4.19(a) UCC Filing Jurisdictions
4.19(b) Mortgage Filing Jurisdictions
4.22 Material Contracts
5.1(p) Plant and Headquarters Properties
7.1 Financial Covenant Calculations
7.2(e) Existing Indebtedness
7.3(f) Existing Liens
7.8(h) Existing Investments

EXHIBITS:

A Form of Guarantee and Collateral Agreement
B Form of Compliance Certificate
C Form of Closing Certificate
D-1 Form of Mortgage (Leasehold)
D-2 Form of Mortgage (Fee)
E Form of Assignment and Acceptance
F-1 Form of Legal Opinion of Mayer, Brown & Platt
F-2 Form of Legal Opinion of Larry W. Browne, Esq.
G-1 Form of Term Note
G-2 Form of Revolving Credit Note
H Form of Prepayment Option Notice
I Form of Exemption Certificate

-iv-
<PAGE>

CREDIT AGREEMENT, dated as of _____________, 1997, among FRIENDLY ICE
CREAM CORPORATION, a Massachusetts corporation (the "BORROWER"), the several
banks and other financial institutions or entities from time to time parties to
this Agreement (the "LENDERS") and SOCIETE GENERALE, as arranger and
administrative agent for the Lenders hereunder.

W I T N E S S E T H:
- - - - - - - - - -

WHEREAS, the Borrower, certain subsidiaries of the Borrower, the
financial institutions party thereto and BankBoston, N.A. (formerly known as The
First National Bank of Boston), as administrative agent, collateral agent and
issuing bank, are parties to the Second Amended and Restated Revolving Credit
and Term Loan Agreement, dated as of January 1, 1996 and as amended,
supplemented or otherwise modified (the "EXISTING CREDIT FACILITY");

WHEREAS, the Borrower desires to refinance the indebtedness
outstanding under the Existing Credit Facility;

WHEREAS, concurrently with the initial extension of credit under this
Agreement the Borrower is offering to the public (a) $175,000,000 aggregate
principal amount of its unsecured senior notes due 2007 (the "SENIOR NOTE
OFFERING"), and (b) 5,000,000 shares of its common stock (the "COMMON STOCK
OFFERING" and, together with the Senior Note Offering, the "OFFERINGS");

WHEREAS, the Borrower has requested that the Lenders make credit
facilities available to it in an aggregate principal amount of up to
$175,000,000 consisting of (a) a $55,000,000 five-year revolving credit
facility, (b) a $15,000,000 five-year letter of credit facility (to be
implemented together with the Revolving Credit Facility), (c) a $40,000,000
five-year term loan facility, (d) a $40,000,000 seven-year term loan facility
and (e) a $25,000,000 eight-year term loan facility (collectively, the "CREDIT
FACILITIES" and, together with the Offerings and the application of the net
proceeds hereunder and thereunder, the "RECAPITALIZATION"); and

WHEREAS, the Lenders are willing to make the Credit Facilities
available upon and subject to the terms and conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the premises and the agreements
hereinafter set forth, the parties hereto hereby agree as follows:

SECTION 1. DEFINITIONS

1.1 DEFINED TERMS. As used in this Agreement, the terms listed in
this Section 1.1 shall have the respective meanings set forth in this Section
1.1.

<PAGE>
2

"ABR": for any day, a rate per annum (rounded upwards, if necessary,
to the next 1/100 of 1%) equal to the greater of (a) the Prime Rate in
effect on such day and (b) the Federal Funds Effective Rate in effect on
such day plus 1/2 of 1%. For purposes hereof: "PRIME RATE" shall mean the
rate of interest per annum publicly announced from time to time by the
Reference Lender as its prime rate in effect at its principal office in New
York City (the Prime Rate not being intended to be the lowest rate of
interest charged by the Reference Lender in connection with extensions of
credit to debtors). Any change in the ABR due to a change in the Prime
Rate or the Federal Funds Effective Rate shall be effective as of the
opening of business on the effective day of such change in the Prime Rate
or the Federal Funds Effective Rate, respectively.

"ABR LOANS": Loans the rate of interest applicable to which is based
upon the ABR.

"ADJUSTMENT DATE": as defined in the Pricing Grid.

"AFFILIATE": as to any Person, any other Person which, directly or
indirectly, is in control of, is controlled by, or is under common control
with, such Person. For purposes of this definition, "control" of a Person
means the power, directly or indirectly, either to (a) vote 10% or more of
the securities having ordinary voting power for the election of directors
(or persons performing similar functions) of such Person or (b) direct or
cause the direction of the management and policies of such Person, whether
by contract or otherwise.

"AGENT": Societe Generale, together with its affiliates, as the
arranger of the Commitments and as the administrative agent for the Lenders
under this Agreement and the other Loan Documents.

"AGREEMENT": this Credit Agreement, as amended, supplemented or
otherwise modified from time to time.

"APPLICABLE MARGIN": for each Type of Loan, the rate per annum set
forth under the relevant column heading below:

Eurodollar ABR
Loans Loans
---------- -----

Revolving Credit Loans 2.25% 0.75%
Tranche A Term Loans 2.25% 0.75%
Tranche B Term Loans 2.50% 1.00%
Tranche C Term Loans 2.75% 1.25% ;

PROVIDED, that on and after the first Adjustment Date occurring after the
completion of four full fiscal quarters of the Borrower after the Closing
Date, the Applicable Margin with respect to Revolving Credit Loans and
Tranche A Term Loans will be determined pursuant to the Pricing Grid.

<PAGE>
3

"APPLICATION": an application, in such form as the Issuing Lender may
specify from time to time, requesting the Issuing Lender to open a Letter
of Credit, and specifying the date on which such Letter of Credit is to be
issued, the expiration date of such Letter of Credit, the name and address
of the beneficiary of such Letter of Credit, whether such Letter of Credit
is to be a Trade Letter of Credit or a Standby Letter of Credit and such
other information as may be necessary or desirable to complete such Letter
of Credit.

"ASSET SALE": any Disposition of Property or series of related
Dispositions of Property (excluding any such Disposition permitted by
clause (a), (b), (c), (d) or (g) of Section 7.5) which yields gross
proceeds to the Borrower or any of its Subsidiaries (valued at the initial
principal amount thereof in the case of non-cash proceeds consisting of
notes or other debt securities and valued at fair market value in the case
of other non-cash proceeds) in excess of $100,000.

"ASSIGNEE": as defined in Section 10.6(c).

"ASSIGNOR": as defined in Section 10.6(c).

"AUTHORIZED SIGNATORY": the chief executive officer, president, chief
administrative officer or chief financial officer of the Borrower, or
their respective designees notified to the Agent in writing, but in any
event, with respect to financial matters, the chief financial officer of
the Borrower.

"AVAILABLE REVOLVING CREDIT COMMITMENT": as to any Revolving Credit
Lender at any time, an amount equal to the excess, if any, of (a) such
Lender's Revolving Credit Commitment OVER (b) such Lender's Revolving
Extensions of Credit.

"BOARD": the Board of Governors of the Federal Reserve System of the
United States (or any successor).

"BORROWING DATE": any Business Day specified by the Borrower as a
date on which the Borrower requests the relevant Lenders to make Loans
hereunder.

"BUSINESS": as defined in Section 4.17.

"BUSINESS DAY": (a) for all purposes other than as covered by clause
(b) below, a day other than a Saturday, Sunday or other day on which
commercial banks in New York City are authorized or required by law to
close and (b) with respect to all notices and determinations in connection
with, and payments of principal and interest on, Eurodollar Loans, any day
which is a Business Day described in clause (a) and which is also a day for
trading by and between banks in Dollar deposits in the interbank eurodollar
market.

"BUSINESS-SUSTAINING CAPITAL EXPENDITURES": for any period of four
consecutive fiscal quarters, Capital Expenditures during such period in an
amount equal to $15,000,000, constituting the amount of Capital
Expenditures necessary to maintain the

<PAGE>
4

then existing Property of the Borrower and its Subsidiaries in good working
order and condition (excluding payments in respect of the principal amount
of Indebtedness incurred in connection with such expenditures).

"CAPITAL EXPENDITURES": for any period, with respect to any Person,
the aggregate of all expenditures by such Person and its Subsidiaries for
the acquisition or leasing (pursuant to a capital lease) of fixed or
capital assets or additions to equipment (including replacements,
capitalized repairs and improvements during such period) which should be
capitalized under GAAP on a consolidated balance sheet of such Person and
its Subsidiaries.

"CAPITAL LEASE OBLIGATIONS": as to any Person, the obligations of
such Person to pay rent or other amounts under any lease of (or other
arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such Person under
GAAP, and, for the purposes of this Agreement, the amount of such
obligations at any time shall be the capitalized amount thereof at such
time determined in accordance with GAAP.

"CAPITAL STOCK": any and all shares, interests, participations or
other equivalents (however designated) of capital stock of a corporation,
any and all equivalent ownership interests in a Person (other than a
corporation) and any and all warrants, rights or options to purchase any of
the foregoing.

"CASH EQUIVALENTS": (a) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by
any agency thereof and backed by the full faith and credit of the United
States, in each case maturing within one year from the date of acquisition;
(b) certificates of deposit, time deposits, eurodollar time deposits or
overnight bank deposits having maturities of six months or less from the
date of acquisition issued by any Lender or by any commercial bank
organized under the laws of the United States of America or any state
thereof having combined capital and surplus of not less than $500,000,000;
(c) commercial paper of an issuer rated at least A-1 by Standard & Poor's
Ratings Services ("S&P") or P-1 by Moody's Investors Service, Inc.
("MOODY'S"), or carrying an equivalent rating by a nationally recognized
rating agency, if both of the two named rating agencies cease publishing
ratings of commercial paper issuers generally, and maturing within nine
months from the date of acquisition; (d) repurchase obligations of any
Lender or of any commercial bank satisfying the requirements of clause (b)
of this definition, having a term of not more than 30 days with respect to
securities issued or fully guaranteed or insured by the United States
government; (e) securities with maturities of one year or less from the
date of acquisition issued or fully guaranteed by any state, commonwealth
or territory of the United States, by any political subdivision or taxing
authority of any such state, commonwealth or territory or by any foreign
government, the securities of which state, commonwealth, territory,
political subdivision, taxing authority or foreign government (as the case
may be) are rated at least A by S&P or A by Moody's; (f) securities with
maturities of six months or less from the date of acquisition backed by
standby letters of credit issued by any

<PAGE>
5

Lender or any commercial bank satisfying the requirements of clause (b) of
this definition; or (g) shares of money market mutual or similar funds
which invest exclusively in assets satisfying the requirements of clauses
(a) through (f) of this definition or which comply with the risk limiting
conditions of Rule 2a-7 or any successor rule of the Securities and
Exchange Commission under the Investment Company Act of 1940.

"CLOSING DATE": the date on which the conditions precedent set forth
in Section 5.1 shall have been satisfied.

"CODE": the Internal Revenue Code of 1986, as amended from time to
time.

"COLLATERAL": all Property of the Loan Parties, now owned or
hereafter acquired, upon which a Lien is purported to be created by any
Security Document.

"COMMITMENT": as to any Lender, the sum of the Tranche A Term Loan
Commitment, the Tranche B Term Loan Commitment, the Tranche C Term Loan
Commitment and the Revolving Credit Commitment of such Lender.

"COMMITMENT FEE RATE": 1/2 of 1% per annum; PROVIDED, that on and
after the first Adjustment Date occurring after the completion of four full
fiscal quarters of the Borrower after the Closing Date, the Commitment Fee
Rate will be determined pursuant to the Pricing Grid.

"COMMONLY CONTROLLED ENTITY": an entity, whether or not incorporated,
which is under common control with the Borrower within the meaning of
Section 4001 of ERISA or is part of a group which includes the Borrower and
which is treated as a single employer under Section 414 of the Code.

"COMMON STOCK": the Borrower's common stock, par value $0.01 per
share.

"COMMON STOCK OFFERING": as defined in the recitals to this
Agreement.

"COMPLIANCE CERTIFICATE": a certificate duly executed by a Authorized
Signatory substantially in the form of Exhibit B.

"CONSOLIDATED CASH INTEREST EXPENSE": for any period, total cash
interest expense (including that attributable to Capital Lease Obligations)
of the Borrower and its Subsidiaries for such period with respect to all
outstanding Indebtedness of the Borrower and its Subsidiaries (including,
without limitation, all commissions, discounts and other fees and charges
owed with respect to letters of credit and bankers' acceptance financing
and net costs under Interest Rate Protection Agreements to the extent such
net costs are allocable to such period in accordance with GAAP); PROVIDED
that for purposes of calculating Consolidated Cash Interest Expense of the
Borrower and its Subsidiaries for the fourth fiscal quarter of the
Borrower's 1997 fiscal year, cash interest expense with respect to
Indebtedness created in connection with the Recapitalization shall be
included on a PRO FORMA basis for such fiscal quarter

<PAGE>
6

(assuming that the consummation of the Recapitalization and the incurrence
of such Indebtedness occurred on the first day of such fiscal quarter and
that the rate applicable to any floating rate Indebtedness from the first
day of such fiscal quarter to the Closing Date is the 30-day Eurodollar
Rate in effect on the Closing Date).

"CONSOLIDATED EBITDA": for any period, Consolidated Net Income for
such period PLUS, without duplication and to the extent reflected as a
charge in the statement of such Consolidated Net Income for such period,
the sum of (a) income tax expense, (b) interest expense, amortization or
writeoff of debt discount and debt issuance costs and commissions,
discounts and other fees and charges associated with Indebtedness
(including the Loans), (c) depreciation and amortization expense, (d)
amortization of intangibles (including, but not limited to, goodwill) and
organization costs, (e) any extraordinary, unusual or non-recurring
expenses or losses (including, whether or not otherwise includable as a
separate item in the statement of such Consolidated Net Income for such
period, losses on sales of assets outside of the ordinary course of
business) and (f) any other non-cash charges, and MINUS, to the extent
included in the statement of such Consolidated Net Income for such period,
the sum of (a) interest income, (b) any extraordinary, unusual or
non-recurring income or gains (including, whether or not otherwise
includable as a separate item in the statement of such Consolidated Net
Income for such period, gains on the sales of assets outside of the
ordinary course of business (it being understood that sales of restaurants
in an aggregate amount up to $2,500,000 in any fiscal year are deemed to be
in the ordinary course of business)) and (c) any other non-cash income, all
as determined on a consolidated basis.

"CONSOLIDATED FIXED CHARGE COVERAGE RATIO": for any period, the ratio
of (a) Consolidated EBITDA for such period MINUS (i) Business-Sustaining
Capital Expenditures for such period and (ii) cash income taxes for such
period to (b) Consolidated Fixed Charges for such period.

"CONSOLIDATED FIXED CHARGES": for any period, the sum (without
duplication) of (a) Consolidated Cash Interest Expense for such period, (b)
scheduled payments made during such period on account of principal of
Indebtedness of the Borrower or any of its Subsidiaries (including
scheduled principal payments in respect of the Term Loans) and (c)
scheduled payments (excluding interest expense attributable to such Capital
Lease Obligations) made during such period on account of Capital Lease
Obligations.

"CONSOLIDATED INTEREST COVERAGE RATIO": for any period, the ratio of
(a) Consolidated EBITDA MINUS (i) Business-Sustaining Capital Expenditures
for such period and (ii) cash income taxes for such period to (b)
Consolidated Cash Interest Expense for such period.

"CONSOLIDATED LEVERAGE RATIO": as at the last day of any period, the
ratio of (a) Consolidated Total Debt on such day to (b) Consolidated EBITDA
for such period; PROVIDED that for purposes of calculating Consolidated
EBITDA of the Borrower and its Subsidiaries for any period, the
Consolidated EBITDA of any Person acquired by

<PAGE>
7

the Borrower or its Subsidiaries during such period shall be included on a
PRO FORMA basis for such period (assuming the consummation of each such
acquisition and the incurrence or assumption of any Indebtedness in
connection therewith occurred on the first day of such period) if the
consolidated balance sheet of such acquired Person and its consolidated
Subsidiaries as at the end of the period preceding the acquisition of such
Person and the related consolidated statements of income and stockholders'
equity and of cash flows for the period in respect of which Consolidated
EBITDA is to be calculated (i) have been previously provided to the Agent
and the Lenders and (ii) either (A) have been reported on without a
qualification arising out of the scope of the audit or a "going concern" or
like qualification or exception by independent certified public accountants
of nationally recognized standing or (B) have been found acceptable by the
Agent.

"CONSOLIDATED NET INCOME": for any period, the consolidated net
income (or loss) of the Borrower and its Subsidiaries, determined on a
consolidated basis in accordance with GAAP; PROVIDED that there shall be
excluded (a) the income (or deficit) of any Person accrued prior to the
date it becomes a Subsidiary of the Borrower or is merged into or
consolidated with the Borrower or any of its Subsidiaries, (b) the income
(or deficit) of any Person (other than a Subsidiary of the Borrower) in
which the Borrower or any of its Subsidiaries has an ownership interest,
except to the extent that any such income is actually received by the
Borrower or such Subsidiary in the form of dividends or similar
distributions and (c) the undistributed earnings of any Subsidiary of the
Borrower to the extent that the declaration or payment of dividends or
similar distributions by such Subsidiary is not at the time permitted by
the terms of any Contractual Obligation (other than under any Loan
Document) or Requirement of Law applicable to such Subsidiary.

"CONSOLIDATED NET WORTH": at any date, all amounts which would, in
conformity with GAAP, be included on a consolidated balance sheet of the
Borrower and its Subsidiaries under stockholders' equity at such date.

"CONSOLIDATED TOTAL DEBT": at any date, the aggregate principal
amount of all Indebtedness of the Borrower and its Subsidiaries at such
date, determined on a consolidated basis in accordance with GAAP.

"CONTINUING DIRECTORS": the directors of the Borrower on the Closing
Date, after giving effect to the Recapitalization and the other
transactions contemplated hereby, and each other director, if, in each
case, such other director's nomination for election to the board of
directors of the Borrower is recommended by at least a majority of the then
Continuing Directors or such other director receives the vote of the
Permitted Holders in his or her election by the shareholders of the
Borrower.

"CONTRACTUAL OBLIGATION": as to any Person, any provision of any
security issued by such Person or of any agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
Property is bound.

<PAGE>
8

"DEFAULT": any of the events specified in Section 8, whether or not
any requirement for the giving of notice, the lapse of time, or both, has
been satisfied.

"DISPOSITION": with respect to any Property, any sale, lease, sale
and leaseback, assignment, conveyance, transfer or other disposition
thereof; and the terms "DISPOSE" and "DISPOSED OF" shall have correlative
meanings.

"DISQUALIFIED STOCK": means, with respect to any Person, any Capital
Stock which by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable) or upon the happening or any
event (a) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (b) is convertible or exchangeable for
Indebtedness or Disqualified Stock or (c) is redeemable at the option of
the holder thereof, in whole or in part, in each case prior to the Tranche
C Maturity Date.

"DOLLARS" and "$": dollars in lawful currency of the United States of
America.

"DOMESTIC SUBSIDIARY": any Subsidiary of the Borrower organized under
the laws of any jurisdiction within the United States of America.

"ECF PERCENTAGE": 80%; PROVIDED, that on and after the first ECF
Percentage Adjustment Date occurring after the completion of four fiscal
quarters of the Borrower after the Closing Date, the ECF Percentage will be
determined pursuant to the ECF Percentage Grid.

"ECF PERCENTAGE ADJUSTMENT DATE": as defined in the ECF Percentage
Grid.

"ECF PERCENTAGE GRID": the Grid attached hereto as Annex B.

"ENVIRONMENTAL LAWS": any and all foreign, federal, state, local or
municipal laws, rules, orders, regulations, statutes, ordinances, codes,
decrees, requirements of any Governmental Authority or other Requirements
of Law (including common law) regulating, relating to or imposing liability
or standards of conduct concerning protection of human health or the
environment, as now or may at any time hereafter be in effect.

"ERISA": the Employee Retirement Income Security Act of 1974, as
amended from time to time.

"EUROCURRENCY RESERVE REQUIREMENTS": for any day as applied to a
Eurodollar Loan, the aggregate (without duplication) of the maximum rates
(expressed as a decimal fraction) of reserve requirements in effect on such
day (including, without limitation, basic, supplemental, marginal and
emergency reserves under any regulations of the Board or other Governmental
Authority having jurisdiction with respect thereto) dealing with reserve
requirements prescribed for eurocurrency funding (currently referred to as
"Eurocurrency Liabilities" in Regulation D of the Board) maintained by a
member bank of the Federal Reserve System.

<PAGE>
9

"EURODOLLAR BASE RATE": with respect to each day during each Interest
Period pertaining to a Eurodollar Loan, the rate per annum determined on
the basis of the rate for deposits in Dollars for a period equal to such
Interest Period commencing on the first day of such Interest Period
appearing on Page 3750 of the Telerate screen as of 11:00 A.M., London
time, two Business Days prior to the beginning of such Interest Period. In
the event that such rate does not appear on Page 3750 of the Telerate
Service (or otherwise on such service), the "EURODOLLAR BASE RATE" for
purposes of this definition shall be determined by reference to such other
comparable publicly available service for displaying eurodollar rates as
may be selected by the Agent or, in the absence of such availability, by
reference to the rate at which the Agent is offered Dollar deposits at or
about 11:00 A.M., New York City time, two Business Days prior to the
beginning of such Interest Period in the interbank eurodollar market where
its eurodollar and foreign currency and exchange operations are then being
conducted for delivery on the first day of such Interest Period for the
number of days comprised therein.

"EURODOLLAR LOANS": Loans the rate of interest applicable to which is
based upon the Eurodollar Rate.

"EURODOLLAR RATE": with respect to each day during each Interest
Period pertaining to a Eurodollar Loan, a rate per annum determined for
such day in accordance with the following formula (rounded upward, if
necessary, to the nearest 1/100th of 1%):

Eurodollar Base Rate
---------------------------------------
1.00 - Eurocurrency Reserve Requirements

"EURODOLLAR TRANCHE": the collective reference to Eurodollar Loans
the then current Interest Periods with respect to all of which begin on the
same date and end on the same later date (whether or not such Loans shall
originally have been made on the same day).

"EVENT OF DEFAULT": any of the events specified in Section 8,
PROVIDED that any requirement for the giving of notice, the lapse of time,
or both, has been satisfied.

"EXCESS CASH FLOW": for any fiscal year of the Borrower, the excess,
if any, of (a) Consolidated EBITDA for such fiscal year, over (b) the sum,
without duplication, of (i) the aggregate amount actually paid by the
Borrower and its Subsidiaries in cash during such fiscal year on account of
Capital Expenditures (excluding the principal amount of Indebtedness
incurred in connection with such expenditures and any such expenditures
financed with the proceeds of any Reinvestment Deferred Amount), (ii) the
aggregate amount of all prepayments of Revolving Credit Loans during such
fiscal year to the extent accompanying permanent optional reductions of the
Revolving Credit Commitments and all optional prepayments of the Term Loans
during such fiscal year, (iii) the aggregate amount of all regularly
scheduled principal payments of Funded Debt (including, without limitation,
the Term Loans) of the Borrower and its Subsidiaries made during such
fiscal year (other than in respect of any revolving credit

<PAGE>
10

facility to the extent there is not an equivalent permanent reduction in
commitments thereunder) and (iv) the aggregate amount actually paid by the
Borrower and its Subsidiaries in cash during such fiscal year on account of
income taxes.

"EXCLUDED FOREIGN SUBSIDIARIES": any Foreign Subsidiary the pledge of
all of whose Capital Stock as Collateral would, in the good faith judgment
of the Borrower, result in adverse tax consequences to the Borrower.

"EXISTING CREDIT FACILITY": as defined in the recitals to this
Agreement.

"FACILITY": each of (a) the Tranche A Term Loan Commitments and the
Tranche A Term Loans made thereunder (the "TRANCHE A TERM LOAN FACILITY"),
(b) the Tranche B Term Loan Commitments and the Tranche B Term Loans made
thereunder (the "TRANCHE B TERM LOAN FACILITY"), (c) the Tranche C Term
Loan Commitments and the Tranche C Term Loans made thereunder (the "TRANCHE
TERM LOAN FACILITY") and (d) the Revolving Credit Commitments and the
extensions of credit made thereunder (the "REVOLVING CREDIT FACILITY").

"FEDERAL FUNDS EFFECTIVE RATE"; for any day, the weighted average of
the rates on overnight federal funds transactions with members of the
Federal Reserve System arranged by federal funds brokers, as published on
the next succeeding Business Day by the Federal Reserve Bank of New York,
or, if such rate is not so published for any day which is a Business Day,
the average of the quotations for the day of such transactions received by
the Reference Lender from three federal funds brokers of recognized
standing selected by it.

"FOREIGN SUBSIDIARY": any Subsidiary of the Borrower that is not a
Domestic Subsidiary.

"FUNDED DEBT": as to any Person, all Indebtedness of such Person that
matures more than one year from the date of its creation or matures within
one year from such date but is renewable or extendible, at the option of
such Person, to a date more than one year from such date or arises under a
revolving credit or similar agreement that obligates the lender or lenders
to extend credit during a period of more than one year from such date,
including, without limitation, all current maturities and current sinking
fund payments in respect of such Indebtedness whether or not required to be
paid within one year from the date of its creation and, in the case of the
Borrower, Indebtedness in respect of the Loans.

"FUNDING OFFICE": the office of the Agent set forth in Section 10.2.

"GAAP": generally accepted accounting principles in the United States
of America as in effect from time to time set forth in the opinions and
pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and
pronouncements of the Financial Accounting Standards Board and the rules
and regulations of the Securities and Exchange Commission, or in such other
statements by such other entity as may be in general use

<PAGE>
11

by significant segments of the accounting profession, which are applicable
to the circumstances of the Borrower as of the date of determination,
except that for purposes of Section 7.1, GAAP shall be determined on the
basis of such principles in effect on the date hereof and consistent with
those used in the preparation of the most recent audited financial
statements delivered pursuant to Section 4.1(b).

"GOVERNMENTAL AUTHORITY": any nation or government, any state or
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or
pertaining to government.

"GUARANTEE AND COLLATERAL AGREEMENT": the Guarantee and Collateral
Agreement to be executed and delivered by the Borrower and each Guarantor,
substantially in the form of Exhibit A, as the same may be amended,
supplemented or otherwise modified from time to time.

"GUARANTEE OBLIGATION": as to any Person (the "GUARANTEEING PERSON"),
any obligation of (a) the guaranteeing person or (b) another Person
(including, without limitation, any bank under any letter of credit) to
induce the creation of which the guaranteeing person has issued a
reimbursement, counterindemnity or similar obligation, in either case
guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends
or other obligations (the "PRIMARY OBLIGATIONS") of any other third Person
(the "PRIMARY OBLIGOR") in any manner, whether directly or indirectly,
including, without limitation, any obligation of the guaranteeing person,
whether or not contingent, (i) to purchase any such primary obligation or
any Property constituting direct or indirect security therefor, (ii) to
advance or supply funds (1) for the purchase or payment of any such primary
obligation or (2) to maintain working capital or equity capital of the
primary obligor or otherwise to maintain the net worth or solvency of the
primary obligor, (iii) to purchase Property, securities or services
primarily for the purpose of assuring the owner of any such primary
obligation of the ability of the primary obligor to make payment of such
primary obligation or (iv) otherwise to assure or hold harmless the owner
of any such primary obligation against loss in respect thereof; PROVIDED,
HOWEVER, that the term Guarantee Obligation shall not include endorsements
of instruments for deposit or collection in the ordinary course of
business. The amount of any Guarantee Obligation of any guaranteeing
person shall be deemed to be the lower of (a) an amount equal to the stated
or determinable amount of the primary obligation in respect of which such
Guarantee Obligation is made and (b) the maximum amount for which such
guaranteeing person may be liable pursuant to the terms of the instrument
embodying such Guarantee Obligation, unless such primary obligation and the
maximum amount for which such guaranteeing person may be liable are not
stated or determinable, in which case the amount of such Guarantee
Obligation shall be such guaranteeing person's maximum reasonably
anticipated liability in respect thereof as determined by the Borrower in
good faith.

"GUARANTORS": each Subsidiary of the Borrower other than any Excluded
Foreign Subsidiary and other than RIC.

"INCUR": as defined in Section 7.2.

<PAGE>
12

"INDEBTEDNESS": of any Person at any date, without duplication, (a)
all indebtedness of such Person for borrowed money, (b) all obligations of
such Person for the deferred purchase price of Property or services (other
than current trade payables incurred in the ordinary course of such
Person's business), (c) all obligations of such Person evidenced by notes,
bonds, debentures or other similar instruments, (d) all indebtedness
created or arising under any conditional sale or other title retention
agreement with respect to Property acquired by such Person (even though the
rights and remedies of the seller or lender under such agreement in the
event of default are limited to repossession or sale of such Property), (e)
all Capital Lease Obligations of such Person, (f) all obligations of such
Person, contingent or otherwise, as an account party under acceptance
facilities and all obligations of such Person in respect of unreimbursed
drawings under any letter of credit facility, (g) all obligations of such
Person, contingent or otherwise, to purchase, redeem, retire or otherwise
acquire for value any Capital Stock (other than common stock) of such
Person, (h) all Guarantee Obligations of such Person in respect of
obligations of the kind referred to in clauses (a) through (g) above; (i)
all obligations of the kind referred to in clauses (a) through (h) above
secured by (or for which the holder of such obligation has an existing
right, contingent or otherwise, to be secured by) any Lien on Property
(including, without limitation, accounts and contract rights) owned by such
Person, whether or not such Person has assumed or become liable for the
payment of such obligation, and (j) for the purposes of Sections 7.2 and
8(e) only, all obligations of such Person in respect of Interest Rate
Protection Agreements.

"INSOLVENCY": with respect to any Multiemployer Plan, the condition
that such Plan is insolvent within the meaning of Section 4245 of ERISA.

"INSOLVENT": pertaining to a condition of Insolvency.

"INTELLECTUAL PROPERTY": the collective reference to all rights,
priorities and privileges relating to intellectual property, whether
arising under United States, multinational or foreign laws or otherwise,
including, without limitation, copyrights, copyright licenses, patents,
patent licenses, trademarks, trademark licenses, technology, know-how and
processes, and all rights to sue at law or in equity for any infringement
or other impairment thereof, including the right to receive all proceeds
and damages therefrom.

"INTEREST PAYMENT DATE": (a) as to any ABR Loan, the fifteenth day of
each January, April, July and October to occur while such Loan is
outstanding and the final maturity date of such Loan, (b) as to any
Eurodollar Loan having an Interest Period of three months or less, the last
day of such Interest Period, (c) as to any Eurodollar Loan having an
Interest Period longer than three months, each day which is three months,
or a whole multiple thereof, after the first day of such Interest Period
and the last day of such Interest Period and (d) as to any Loan (other than
any Revolving Credit Loan that is an ABR Loan), the date of any repayment
or prepayment made in respect thereof, but only to the extent of the
portion prepaid or repaid.

<PAGE>
13

"INTEREST PERIOD": as to any Eurodollar Loan, (a) initially, the
period commencing on the borrowing or conversion date, as the case may be,
with respect to such Eurodollar Loan and ending one, two, three or six
months thereafter, as selected by the Borrower in its notice of borrowing
or notice of conversion, as the case may be, given with respect thereto;
and (b) thereafter, each period commencing on the last day of the next
preceding Interest Period applicable to such Eurodollar Loan and ending
one, two, three or six months thereafter, as selected by the Borrower by
irrevocable notice to the Agent not less than three Business Days prior to
the last day of the then current Interest Period with respect thereto;
PROVIDED that, all of the foregoing provisions relating to Interest Periods
are subject to the following:

(i) if any Interest Period would otherwise end on a day that is
not a Business Day, such Interest Period shall be extended to the next
succeeding Business Day unless the result of such extension would be
to carry such Interest Period into another calendar month in which
event such Interest Period shall end on the immediately preceding
Business Day;

(ii) any Interest Period that would otherwise extend beyond the
Revolving Credit Termination Date or beyond the date final payment is
due on the Tranche A Term Loans, the Tranche B Term Loans or the
Tranche C Term Loans, as the case may be, shall end on the Revolving
Credit Termination Date or such due date, as applicable;

(iii) any Interest Period that begins on the last Business Day of
a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Business Day of a calendar month; and

(iv) the Borrower shall select Interest Periods so as not to
require a payment or prepayment of any Eurodollar Loan during an
Interest Period for such Loan.

"INTEREST RATE PROTECTION AGREEMENT": any interest rate protection
agreement, interest rate futures contract, interest rate option, interest
rate cap or other interest rate hedge arrangement, to or under which the
Borrower or any of its Subsidiaries is a party or a beneficiary on the date
hereof or becomes a party or a beneficiary after the date hereof.

"ISSUING LENDER": Societe Generale, in its capacity as issuer of any
Letter of Credit.

"L/C COMMITMENT": $25,000,000.

"L/C FEE PAYMENT DATE": the fifteenth day of each January, April,
July and October and the last day of the Revolving Credit Commitment
Period.

<PAGE>
14

"L/C OBLIGATIONS": at any time, an amount equal to the sum of (a) the
aggregate then undrawn and unexpired amount of the then outstanding Letters
of Credit and (b) the aggregate amount of drawings under Letters of Credit
which have not then been reimbursed pursuant to Section 3.5.

"L/C PARTICIPANTS": the collective reference to all the Revolving
Credit Lenders other than the Issuing Lender.

"LETTERS OF CREDIT": any Standby Letter of Credit or Trade Letter of
Credit issued pursuant to Section 3.

"LIEN": any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), charge or other
security interest or any preference, priority or other security agreement
or preferential arrangement of any kind or nature whatsoever (including,
without limitation, any conditional sale or other title retention agreement
and any capital lease having substantially the same economic effect as any
of the foregoing).

"LOAN": any loan made by any Lender pursuant to this Agreement.

"LOAN DOCUMENTS": this Agreement, the Notes, the Guarantee and
Collateral Agreement and each other Security Document.

"LOAN PARTIES": the Borrower and each Subsidiary of the Borrower
which is a party to a Loan Document.

"MAJORITY FACILITY LENDERS": with respect to any Facility, the
holders of more than 50% of the aggregate unpaid principal amount of the
Term Loans or the Total Revolving Extensions of Credit, as the case may be,
outstanding under such Facility (or, in the case of the Revolving Credit
Facility, prior to any termination of the Revolving Credit Commitments, the
holders of more than 50% of the Total Revolving Credit Commitments).

"MAJORITY REVOLVING CREDIT FACILITY LENDERS": the Majority Facility
Lenders in respect of the Revolving Credit Facility.

"MAJOR MORTGAGED PROPERTIES": as defined in Section 5.1(p).

"MATERIAL ADVERSE EFFECT": a material adverse effect on (a) the
Recapitalization, (b) the business, assets, property, condition (financial
or otherwise), operations, performance or prospects of the Borrower and its
Subsidiaries taken as a whole or (c) the validity or enforceability of this
Agreement or any of the other Loan Documents against the Borrower or any
Guarantor party thereto or the rights or remedies of the Agent or the
Lenders hereunder or thereunder.

<PAGE>
15

"MATERIAL ENVIRONMENTAL AMOUNT": an amount payable by the Borrower
and/or its Subsidiaries in excess of $5,000,000 for remedial costs,
compliance costs, compensatory damages, punitive damages, fines, penalties
or any combination thereof.

"MATERIALS OF ENVIRONMENTAL CONCERN": any gasoline or petroleum
(including crude oil or any fraction thereof) or petroleum products or any
hazardous or toxic substances, materials or wastes, defined or regulated as
such in or under any Environmental Law, including, without limitation,
asbestos, polychlorinated biphenyls and urea-formaldehyde insulation.

"MORTGAGED PROPERTIES": the real properties listed on Schedule 1.1B,
as to which the Agent for the benefit of the Lenders shall be granted a
Lien pursuant to the Mortgages.

"MORTGAGES": each of the mortgages and deeds of trust made by any
Loan Party in favor of, or for the benefit of, the Agent for the benefit of
the Lenders, substantially in the form of Exhibit D (with such changes
thereto as shall be advisable under the law of the jurisdiction in which
such mortgage or deed of trust is to be recorded), as the same may be
amended, supplemented or otherwise modified from time to time.

"MULTIEMPLOYER PLAN": a Plan which is a multiemployer plan as defined
in Section 4001(a)(3) of ERISA.

"NET CASH PROCEEDS": (a) in connection with any Asset Sale or any
Recovery Event, the proceeds thereof in the form of cash and Cash
Equivalents (including any such proceeds received by way of deferred
payment of principal pursuant to a note or installment receivable or
purchase price adjustment receivable or otherwise, but only as and when
received) of such Asset Sale or Recovery Event, net of (i) attorneys' fees,
accountants' fees, investment banking fees, amounts required to be applied
to the repayment of Indebtedness secured by a Lien expressly permitted
hereunder on any asset which is the subject of such Asset Sale or Recovery
Event (other than any Lien pursuant to a Security Document) and other
customary fees and expenses actually incurred in connection therewith, (ii)
taxes paid or reasonably estimated to be payable as a result thereof (after
taking into account any available tax credits or deductions and any tax
sharing arrangements) and (iii) appropriate amounts to be provided by the
Borrower or any Subsidiary, as the case may be, as a reserve, in accordance
with GAAP, against any liabilities associated with such Asset Sale and
retained by the Borrower or any Subsidiary, as the case may be, after such
Asset Sale, including pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities
under any indemnification obligations associated with such Asset Sale
(provided that, if and to the extent that such reserves are no longer
required to be maintained in accordance with GAAP, such amounts shall
constitute Net Cash Proceeds) and (b) in connection with any issuance or
sale of equity securities or debt securities or instruments or the
incurrence of loans, the cash proceeds received from such issuance or
incurrence, net of attorneys' fees, investment

<PAGE>
16

banking fees, accountants' fees, underwriting discounts and commissions and
other customary fees and expenses actually incurred in connection
therewith.

"NON-EXCLUDED TAXES": as defined in Section 2.18(a).

"NON-U.S. LENDER": as defined in Section 2.18(d).

"NOTES": the collective reference to any promissory note evidencing
Loans.

"OBLIGATIONS": the unpaid principal of and interest on (including,
without limitation, interest accruing after the maturity of the Loans and
Reimbursement Obligations and interest accruing after the filing of any
petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, relating to the Borrower, whether or not
a claim for post-filing or post-petition interest is allowed in such
proceeding) the Loans and all other obligations and liabilities of the
Borrower to the Agent or to any Lender (or, in the case of Interest Rate
Protection Agreements, any affiliate of any Lender), whether direct or
indirect, absolute or contingent, due or to become due, or now existing or
hereafter incurred, which may arise under, out of, or in connection with,
this Agreement, any other Loan Document, the Letters of Credit, any
Interest Rate Protection Agreement entered into with any Lender or any
affiliate of any Lender or any other document made, delivered or given in
connection herewith or therewith, whether on account of principal,
interest, reimbursement obligations, fees, indemnities, costs, expenses
(including, without limitation, all reasonable fees, charges and
disbursements of counsel to the Agent or to any Lender that are required to
be paid by the Borrower pursuant hereto) or otherwise.

"OFFERINGS": as defined in the recitals to this Agreement.

"OTHER TAXES": any and all present or future stamp or documentary
taxes or any other excise or property taxes, charges or similar levies
arising from any payment made hereunder or from the execution, delivery or
enforcement of, or otherwise with respect to, this Agreement.

"PARTICIPANT": as defined in Section 10.6(b).

"PAYMENT OFFICE": the office of the Agent set forth in Section 10.2.

"PBGC": the Pension Benefit Guaranty Corporation established pursuant
to Subtitle A of Title IV of ERISA (or any successor).

"PERMITTED CAPITAL EXPENDITURE ADJUSTMENT DATE": as defined in the
Permitted Capital Expenditure Grid.

"PERMITTED CAPITAL EXPENDITURE AMOUNT": with respect to any fiscal
year, the amount set forth opposite such fiscal year under the caption
"Capital Expenditure Amount" on the Permitted Capital Expenditure Grid;
PROVIDED that on and after the first Permitted Capital Expenditure
Adjustment Date occurring after the Closing Date,

<PAGE>
17

the Permitted Capital Expenditure Amount with respect to the Borrower's
1999 fiscal year and each subsequent fiscal year shall be an amount equal
to the product of (a) the Capital Expenditure Amount otherwise applicable
for such fiscal year and (b) the relevant Permitted Capital Expenditure
Percentage from the Permitted Capital Expenditure Grid.

"PERMITTED CAPITAL EXPENDITURE GRID": the grid attached hereto as
Annex C.

"PERMITTED HOLDERS": the collective reference to Donald N. Smith,
Harrah's Operating Company, Inc., The Equitable Life Assurance Society of
the U.S., the members of the Borrower's existing senior management listed
on Schedule 1.1C and their respective Affiliates.

"PERSON": an individual, partnership, corporation, limited liability
company, business trust, joint stock company, trust, unincorporated
association, joint venture, Governmental Authority or other entity of
whatever nature.

"PLAN": at a particular time, any employee benefit plan which is
covered by ERISA and in respect of which the Borrower or a Commonly
Controlled Entity is (or, if such plan were terminated at such time, would
under Section 4069 of ERISA be deemed to be) an "employer" as defined in
Section 3(5) of ERISA.

"PRICING GRID": the pricing grid attached hereto as Annex A.

"PRO FORMA BALANCE SHEET": as defined in Section 4.1(a).

"PROJECTIONS": as defined in Section 6.2(c).

"PROPERTIES": as defined in Section 4.17.

"PROPERTY": any right or interest in or to property of any kind
whatsoever, whether real, personal or mixed and whether tangible or
intangible, including, without limitation, Capital Stock.

"RATIO OF CONSOLIDATED EBITDA TO CONSOLIDATED EBITDA TARGET": as at
the last day of any period of four consecutive fiscal quarters, the ratio
of (a) Consolidated EBITDA for such period to (b) the "Consolidated EBITDA
Target" set forth for such period on the Permitted Capital Expenditure
Grid.

"REAL PROPERTY": all real property owned or leased by the Borrower or
any of its Subsidiaries and all improvements thereon.

"RECAPITALIZATION": as defined in the recitals to this Agreement.

"RECOVERY EVENT": any settlement of or payment in respect of any
property or casualty insurance claim or any condemnation proceeding
relating to any asset of the

<PAGE>
18

Borrower or any of its Subsidiaries which yields gross proceeds to the
Borrower or any of its Subsidiaries in excess of $100,000.

"REFERENCE LENDER": Societe Generale.

"REGISTER": as defined in Section 10.6(d).

"REGULATION G": Regulation G of the Board as in effect from time to
time.

"REGULATION U": Regulation U of the Board as in effect from time to
time.

"REIMBURSEMENT OBLIGATION": the obligation of the Borrower to
reimburse the Issuing Lender pursuant to Section 3.5 for amounts drawn
under Letters of Credit.

"REINVESTMENT DEFERRED AMOUNT": with respect to any Reinvestment
Event, the aggregate Net Cash Proceeds received by the Borrower or any of
its Subsidiaries in connection therewith which are not applied to prepay
the Term Loans or reduce the Revolving Credit Commitments pursuant to
Section 2.10(b) as a result of the delivery of a Reinvestment Notice.

"REINVESTMENT EVENT": any Asset Sale or Recovery Event in respect of
which the Borrower has delivered a Reinvestment Notice.

"REINVESTMENT NOTICE": a written notice executed by an Authorized
Signatory stating that no Event of Default has occurred and is continuing
and that the Borrower (directly or indirectly through a Subsidiary) intends
and expects to use all or a specified portion of the Net Cash Proceeds of
an Asset Sale or Recovery Event to acquire assets useful in its business.

"REINVESTMENT PREPAYMENT AMOUNT": with respect to any Reinvestment
Event, the Reinvestment Deferred Amount relating thereto less any amount
expended prior to the relevant Reinvestment Prepayment Date to acquire
assets useful in the Borrower's business.

"REINVESTMENT PREPAYMENT DATE": with respect to any Reinvestment
Event, the earlier of (a) the date occurring 180 days after such
Reinvestment Event and (b) the date on which the Borrower shall have
determined not to, or shall have otherwise ceased to, acquire assets useful
in the Borrower's business with all or any portion of the relevant
Reinvestment Deferred Amount.

"REORGANIZATION": with respect to any Multiemployer Plan, the
condition that such plan is in reorganization within the meaning of Section
4241 of ERISA.

"REPORTABLE EVENT": any of the events set forth in Section 4043(c) of
ERISA, other than those events as to which the thirty day notice period is
waived under subsection .22, .23, .25, .27 or .28 of PBGC Reg. Section
4043.

<PAGE>
19

"REQUIRED LENDERS": the holders of more than 50% of (a) until the
Closing Date, the Commitments and (b) thereafter, the sum of (i) the
aggregate unpaid principal amount of the Term Loans and (ii) the Total
Revolving Credit Commitments or, if the Revolving Credit Commitments have
been terminated, the Total Revolving Extensions of Credit.

"REQUIRED PREPAYMENT LENDERS": the Majority Facility Lenders in
respect of each Facility.

"REQUIREMENT OF LAW": as to any Person, the Certificate of
Incorporation and By-Laws or other organizational or governing documents of
such Person, and any law, treaty, rule or regulation or determination of an
arbitrator or a court or other Governmental Authority, in each case
applicable to or binding upon such Person or any of its Property or to
which such Person or any of its Property is subject.

"RIC": Restaurant Insurance Corporation, a Vermont corporation, and
its successors.

"REVOLVING CREDIT COMMITMENT": as to any Lender, the obligation of
such Lender, if any, to make Revolving Credit Loans and participate in
Letters of Credit, in an aggregate principal and/or face amount not to
exceed the amount set forth under the heading "Revolving Credit Commitment"
opposite such Lender's name on Schedule 1.1A, as the same may be changed
from time to time pursuant to the terms hereof. The original amount of the
Total Revolving Credit Commitments is $70,000,000.

"REVOLVING CREDIT COMMITMENT PERIOD": the period from and including
the Closing Date to the Revolving Credit Termination Date.

"REVOLVING CREDIT LENDER": each Lender which has a Revolving Credit
Commitment or which has made Revolving Credit Loans.

"REVOLVING CREDIT LOANS": as defined in Section 2.4.

"REVOLVING CREDIT PERCENTAGE": as to any Revolving Credit Lender at
any time, the percentage which such Lender's Revolving Credit Commitment
then constitutes of the Total Revolving Credit Commitments (or, at any time
after the Revolving Credit Commitments shall have expired or terminated,
the percentage which the aggregate principal amount of such Lender's
Revolving Credit Loans then outstanding constitutes of the aggregate
principal amount of the Revolving Credit Loans then outstanding).

"REVOLVING CREDIT TERMINATION DATE": November 15, 2002.

"REVOLVING EXTENSIONS OF CREDIT": as to any Revolving Credit Lender
at any time, an amount equal to the sum of (a) the aggregate principal
amount of all Revolving Credit Loans made by such Lender then outstanding
and (b) such Lender's Revolving Credit Percentage of the L/C Obligations
then outstanding.

<PAGE>
20

"SALE/LEASEBACK TRANSACTION": an arrangement relating to property now
owned or hereafter acquired whereby the Borrower or any of its Subsidiaries
transfers such property to a Person and the Borrower or any of its
Subsidiaries leases it from such Person.

"SECURITY DOCUMENTS": the collective reference to the Guarantee and
Collateral Agreement, the Mortgages and all other security documents
hereafter delivered to the Agent granting a Lien on any Property of any
Person to secure the obligations and liabilities of any Loan Party under
any Loan Document.

"SENIOR NOTE INDENTURE": the Indenture entered into by the Borrower,
Friendly's Restaurants Franchise, Inc., the Borrower's franchise
Subsidiary, and The Bank of New York, as Trustee, in connection with the
issuance of the Senior Notes, together with all instruments and other
agreements entered into by the Borrower or such Subsidiary in connection
therewith, as the same may be amended, supplemented or otherwise modified
from time to time in accordance with Section 7.9.

"SENIOR NOTE OFFERING": as defined in the recitals to this Agreement.

"SENIOR NOTES": the senior notes due 2007 of the Borrower issued on
the Closing Date pursuant to the Senior Note Indenture.

"SINGLE EMPLOYER PLAN": any Plan which is covered by Title IV of
ERISA, but which is not a Multiemployer Plan.

"SOLVENT": when used with respect to any Person, means that, as of
any date of determination, (a) the amount of the "present fair saleable
value" of the assets of such Person will, as of such date, exceed the
amount of all "liabilities of such Person, contingent or otherwise", as of
such date, as such quoted terms are determined in accordance with
applicable federal and state laws governing determinations of the
insolvency of debtors, (b) the present fair saleable value of the assets of
such Person will, as of such date, be greater than the amount that will be
required to pay the liability of such Person on its debts as such debts
become absolute and matured, (c) such Person will not have, as of such
date, an unreasonably small amount of capital with which to conduct its
business, and (d) such Person will be able to pay its debts as they mature.
For purposes of this definition, (i) "debt" means liability on a "claim",
and (ii) "claim" means any (x) right to payment, whether or not such a
right is reduced to judgment, liquidated, unliquidated, fixed, contingent,
matured, unmatured, disputed, undisputed, legal, equitable, secured or
unsecured or (y) right to an equitable remedy for breach of performance if
such breach gives rise to a right to payment, whether or not such right to
an equitable remedy is reduced to judgment, fixed, contingent, matured or
unmatured, disputed, undisputed, secured or unsecured.

"STANDBY LETTER OF CREDIT": an irrevocable letter of credit (other
than a Trade Letter of Credit) for the account of the Borrower and for the
benefit of any holder of obligations of the Borrower or any Subsidiary.

<PAGE>
21

"SUBSIDIARY": as to any Person, a corporation, partnership, limited
liability company or other entity of which shares of stock or other
ownership interests having ordinary voting power (other than stock or such
other ownership interests having such power only by reason of the happening
of a contingency) to elect a majority of the board of directors or other
managers of such corporation, partnership or other entity are at the time
owned, or the management of which is otherwise controlled, directly or
indirectly through one or more intermediaries, or both, by such Person.
Unless otherwise qualified, all references to a "Subsidiary" or to
"Subsidiaries" in this Agreement shall refer to a Subsidiary or
Subsidiaries of the Borrower.

"TERM LOAN LENDERS": the collective reference to the Tranche A Term
Loan Lenders, the Tranche B Term Loan Lenders and the Tranche C Term Loan
Lenders.

"TERM LOANS": the collective reference to the Tranche A Term Loans,
Tranche B Term Loans and the Tranche C Term Loans.

"TOTAL REVOLVING CREDIT COMMITMENTS": at any time, the aggregate
amount of the Revolving Credit Commitments at such time.

"TOTAL REVOLVING EXTENSIONS OF CREDIT": at any time, the aggregate
amount of the Revolving Extensions of Credit of all the Revolving Credit
Lenders at such time.

"TRADE LETTER OF CREDIT": a documentary, trade or commercial letter
of credit in respect of the purchase of goods or services issued for the
account of the Borrower and for the benefit of any holder of obligations of
the Borrower or any Subsidiary incurred in the ordinary course of business.

"TRANCHE A MATURITY DATE": November 15, 2002.

"TRANCHE A TERM LOAN": as defined in Section 2.1.

"TRANCHE A TERM LOAN COMMITMENT": as to any Lender, the obligation of
such Lender, if any, to make a Tranche A Term Loan to the Borrower
hereunder in a principal amount not to exceed the amount set forth under
the heading "Tranche A Term Loan Commitment" opposite such Lender's name on
Schedule 1.1A. The original aggregate amount of the Tranche A Term Loan
Commitments is $40,000,000.

"TRANCHE A TERM LOAN LENDER": each Lender which has a Tranche A Term
Loan Commitment or which has made a Tranche A Term Loan.

"TRANCHE A TERM LOAN PERCENTAGE": as to any Lender at any time, the
percentage which such Lender's Tranche A Term Loan Commitment then
constitutes of the aggregate Tranche A Term Loan Commitments (or, at any
time after the Closing Date, the percentage which the aggregate principal
amount of such Lender's Tranche A Term Loans then outstanding constitutes
of the aggregate principal amount of the Tranche A Term Loans then
outstanding).

<PAGE>
22

"TRANCHE B MATURITY DATE": November 15, 2004.

"TRANCHE B TERM LOAN": as defined in Section 2.1.

"TRANCHE B TERM LOAN COMMITMENT": as to any Lender, the obligation of
such Lender, if any, to make a Tranche B Term Loan to the Borrower
hereunder in a principal amount not to exceed the amount set forth under
the heading "Tranche B Term Loan Commitment" opposite such Lender's name on
Schedule 1.1A. The original aggregate amount of the Tranche B Term Loan
Commitments is $40,000,000.

"TRANCHE B TERM LOAN LENDER": each Lender which has a Tranche B Term
Loan Commitment or which has made a Tranche B Term Loan.

"TRANCHE B TERM LOAN PERCENTAGE": as to any Lender at any time, the
percentage which such Lender's Tranche B Term Loan Commitment then
constitutes of the aggregate Tranche B Term Loan Commitments (or, at any
time after the Closing Date, the percentage which the aggregate principal
amount of such Lender's Tranche B Term Loans then outstanding constitutes
of the aggregate principal amount of the Tranche B Term Loans then
outstanding); PROVIDED, that solely for purposes of calculating the amount
of each installment of Tranche B Term Loans (other than the last
installment) payable to a Term Loan Lender pursuant to Section 2.3(b), such
Term Loan Lender's Tranche B Term Loan Percentage shall be calculated
without giving effect to any portion of any prior mandatory or optional
prepayment attributable to such Term Loan Lender's Tranche B Term Loans
which shall have been declined by such Term Loan Lender (or, in the case of
any Term Loan Lender which shall have acquired its Tranche B Term Loans by
assignment from another Person, by such other Person).

"TRANCHE C MATURITY DATE": November 15, 2005.

"TRANCHE C TERM LOAN": as defined in Section 2.1.

"TRANCHE C TERM LOAN COMMITMENT": as to any Lender, the obligation of
such Lender, if any, to make a Tranche C Term Loan to the Borrower
hereunder in a principal amount not to exceed the amount set forth under
the heading "Tranche C Term Loan Commitment" opposite such Lender's name on
Schedule 1.1A. The original aggregate amount of the Tranche C Term Loan
Commitments is $25,000,000.

"TRANCHE C TERM LOAN LENDER": each Lender which has a Tranche C Term
Loan Commitment or which has made a Tranche C Term Loan.

"TRANCHE C TERM LOAN PERCENTAGE": as to any Lender at any time, the
percentage which such Lender's Tranche C Term Loan Commitment then
constitutes of the aggregate Tranche C Term Loan Commitments (or, at any
time after the Closing Date, the percentage which the aggregate principal
amount of such Lender's Tranche C Term Loans then outstanding constitutes
of the aggregate principal amount of the Tranche C Term Loans then
outstanding); PROVIDED, that solely for purposes of

<PAGE>
23

calculating the amount of each installment of Tranche C Term Loans (other
than the last installment) payable to a Term Loan Lender pursuant to
Section 2.3(c), such Term Loan Lender's Tranche C Term Loan Percentage
shall be calculated without giving effect to any portion of any prior
mandatory or optional prepayment attributable to such Term Loan Lender's
Tranche C Term Loans which shall have been declined by such Term Loan
Lender (or, in the case of any Term Loan Lender which shall have acquired
its Tranche C Term Loans by assignment from another Person, by such other
Person).

"TRANSFEREE": as defined in Section 10.15.

"TYPE": as to any Loan, its nature as an ABR Loan or a Eurodollar
Loan.

"UNIFORM CUSTOMS": the Uniform Customs and Practice for Documentary
Credits (1993 Revision), International Chamber of Commerce Publication
No. 500, as the same may be amended from time to time.

"WHOLLY OWNED SUBSIDIARY": as to any Person, any other Person all of
the Capital Stock of which (other than directors' qualifying shares
required by law or shares required by law to be held by foreign nationals
representing not more than 2% of such Capital Stock) is owned by such
Person directly and/or through other Wholly Owned Subsidiaries.

"WHOLLY OWNED SUBSIDIARY GUARANTOR": any Guarantor that is a Wholly
Owned Subsidiary of the Borrower.

1.2 OTHER DEFINITIONAL PROVISIONS. (a) Unless otherwise specified
therein, all terms defined in this Agreement shall have the defined meanings
when used in the other Loan Documents or any certificate or other document made
or delivered pursuant hereto or thereto.

(b) As used herein and in the other Loan Documents, and any
certificate or other document made or delivered pursuant hereto or thereto,
accounting terms relating to the Borrower and its Subsidiaries not defined in
Section 1.1 and accounting terms partly defined in Section 1.1, to the extent
not defined, shall have the respective meanings given to them under GAAP.

(c) The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement, and Section, Schedule and
Exhibit references are to this Agreement unless otherwise specified.

(d) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.

SECTION 2. AMOUNT AND TERMS OF COMMITMENTS

<PAGE>
24

2.1 TERM LOAN COMMITMENTS. Subject to the terms and conditions
hereof, (a) each Tranche A Term Loan Lender severally agrees to make a term loan
(a "TRANCHE A TERM LOAN") to the Borrower on the Closing Date in an amount not
to exceed the amount of the Tranche A Term Loan Commitment of such Lender, (b)
each Tranche B Term Loan Lender severally agrees to make a term loan (a "TRANCHE
B TERM LOAN") to the Borrower on the Closing Date in an amount not to exceed the
amount of the Tranche B Term Loan Commitment of such Lender and (c) each Tranche
C Term Loan Lender severally agrees to make a term loan (a "TRANCHE C TERM
LOAN") to the Borrower on the Closing Date in an amount not to exceed the amount
of the Tranche C Term Loan Commitment of such Lender. The Term Loans may from
time to time be Eurodollar Loans or ABR Loans, as determined by the Borrower and
notified to the Agent in accordance with Sections 2.2 and 2.11.

2.2 PROCEDURE FOR TERM LOAN BORROWING. The Borrower shall give the
Agent irrevocable notice (which notice must be received by the Agent prior to
10:00 A.M., New York City time, (a) three Business Days prior to the anticipated
Closing Date if all or any part of the Term Loans are to be initially Eurodollar
Loans or (b) one Business Day prior to the anticipated Closing Date otherwise)
requesting that the Term Loan Lenders make the Term Loans on the Closing Date
and specifying (i) the amount to be borrowed, (ii) whether the Term Loans are to
be initially Eurodollar Loans, ABR Loans or a combination thereof and (iii) if
the Term Loans are to be entirely or partly Eurodollar Loans, the amount
thereof. The Term Loans made on the Closing Date shall initially be ABR Loans,
and no Term Loan may be converted into or continued as a Eurodollar Loan having
an Interest Period in excess of one month prior to the date which is 60 days
after the Closing Date. Upon receipt of such notice the Agent shall promptly
notify each Term Loan Lender thereof. Not later than 12:00 Noon, New York City
time, on the Closing Date each Term Loan Lender shall make available to the
Agent at the Funding Office an amount in immediately available funds equal to
the Term Loan or Term Loans to be made by such Lender. The Agent shall make
available to the Borrower the aggregate of the amounts made available to the
Agent by the Term Loan Lenders in immediately available funds.

2.3 REPAYMENT OF TERM LOANS. (a) The Tranche A Term Loan of each
Tranche A Lender shall mature in 15 consecutive quarterly installments,
commencing on April 15, 1999, to be followed by a final installment on the
Tranche A Maturity Date, each of which shall be in an amount equal to such
Lender's Tranche A Term Loan Percentage multiplied by the amount set forth below
opposite such installment:

INSTALLMENT PRINCIPAL AMOUNT
----------- ----------------

April 15, 1999 $1,333,333.33
July 15, 1999 1,333,333.33
October 15, 1999 1,333,333.34
January 15, 2000 2,500,000.00
April 15, 2000 2,500,000.00
July 15, 2000 2,500,000.00
October 15, 2000 2,500,000.00
January 15, 2001 3,000,000.00
April 15, 2001 3,000,000.00

<PAGE>
25

July 15, 2001 3,000,000.00
October 15, 2001 3,000,000.00
January 15, 2002 3,500,000.00
April 15, 2002 3,500,000.00
July 15, 2002 3,500,000.00
Tranche A Maturity Date 3,500,000.00

(b) The Tranche B Term Loan of each Tranche B Lender shall mature in
23 consecutive quarterly installments, commencing on April 15, 1999, to be
followed by a final installment on the Tranche B Maturity Date, each of which
shall be in an amount equal to such Lender's Tranche B Term Loan Percentage
multiplied by the amount set forth below opposite such installment:

INSTALLMENT PRINCIPAL AMOUNT
----------- ----------------

April 15, 1999 $133,333.33
July 15, 1999 133,333.33
October 15, 1999 133,333.34
January 15, 2000 100,000.00
April 15, 2000 100,000.00
July 15, 2000 100,000.00
October 15, 2000 100,000.00
January 15, 2001 100,000.00
April 15, 2001 100,000.00
July 15, 2001 100,000.00
October 15, 2001 100,000.00
January 15, 2002 100,000.00
April 15, 2002 100,000.00
July 15, 2002 100,000.00
October 15, 2002 100,000.00
January 15, 2003 4,600,000.00
April 15, 2003 4,600,000.00
July 15, 2003 4,600,000.00
October 15, 2003 4,600,000.00
January 15, 2004 5,000,000.00
April 15, 2004 5,000,000.00
July 15, 2004 5,000,000.00
Tranche B Maturity Date 5,000,000.00

(c) The Tranche C Term Loan of each Tranche C Lender shall mature in
27 consecutive quarterly installments, commencing on April 15, 1999, to be
followed by a final installment on the Tranche C Maturity Date, each of which
shall be in an amount equal to such Lender's Tranche C Term Loan Percentage
multiplied by the amount set forth below opposite such installment:

INSTALLMENT PRINCIPAL AMOUNT
----------- ----------------

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26

April 15, 1999 $83,333.33
July 15, 1999 83,333.33
October 15, 1999 83,333.34
January 15, 2000 62,500.00
April 15, 2000 62,500.00
July 15, 2000 62,500.00
October 15, 2000 62,500.00
January 15, 2001 62,500.00
April 15, 2001 62,500.00
July 15, 2001 62,500.00
October 15, 2001 62,500.00
January 15, 2002 62,500.00
April 15, 2002 62,500.00
July 15, 2002 62,500.00
October 15, 2002 62,500.00
January 15, 2003 62,500.00
April 15, 2003 62,500.00
July 15, 2003 62,500.00
October 15, 2003 62,500.00
January 15, 2004 62,500.00
April 15, 2004 62,500.00
July 15, 2004 62,500.00
October 15, 2004 62,500.00
January 15, 2005 5,875,000.00
April 15, 2005 5,875,000.00
July 15, 2005 5,875,000.00
Tranche C Maturity Date 5,875,000.00

2.4 REVOLVING CREDIT COMMITMENTS. (a) Subject to the terms and
conditions hereof, each Revolving Credit Lender severally agrees to make
revolving credit loans ("REVOLVING CREDIT LOANS") to the Borrower from time to
time during the Revolving Credit Commitment Period in an aggregate principal
amount at any one time outstanding which, when added to such Lender's Revolving
Credit Percentage of the L/C Obligations then outstanding does not exceed the
amount of such Lender's Revolving Credit Commitment; PROVIDED, HOWEVER, that in
no event shall the aggregate principal amount of Revolving Credit Loans exceed
$55,000,000 less the amount of any reduction in the Revolving Credit Commitments
pursuant to Sections 2.8 and 2.10. During the Revolving Credit Commitment
Period the Borrower may use the Revolving Credit Commitments by borrowing,
prepaying the Revolving Credit Loans in whole or in part, and reborrowing, all
in accordance with the terms and conditions hereof. The Revolving Credit Loans
may from time to time be Eurodollar Loans or ABR Loans, as determined by the
Borrower and notified to the Agent in accordance with Sections 2.5 and 2.13,
PROVIDED that no Revolving Credit Loan shall be made as a Eurodollar Loan after
the day that is one month prior to the Revolving Credit Termination Date.

(b) The Borrower shall repay all outstanding Revolving Credit Loans
on the Revolving Credit Termination Date.

<PAGE>
27

2.5 PROCEDURE FOR REVOLVING CREDIT BORROWING. The Borrower may
borrow under the Revolving Credit Commitments during the Revolving Credit
Commitment Period on any Business Day, PROVIDED that the Borrower shall give the
Agent irrevocable notice (which notice must be received by the Agent prior to
12:00 Noon, New York City time, (a) three Business Days prior to the requested
Borrowing Date, in the case of Eurodollar Loans, or (b) one Business Day prior
to the requested Borrowing Date, in the case of ABR Loans), specifying (i) the
amount and Type of Revolving Credit Loans to be borrowed, (ii) the requested
Borrowing Date and (iii) in the case of Eurodollar Loans, the respective amounts
of each such Type of Loan and the respective lengths of the initial Interest
Period therefor. Any Revolving Credit Loans made on the Closing Date shall
initially be ABR Loans, and no Revolving Credit Loan may be made as, converted
into or continued as a Eurodollar Loan having an Interest Period in excess of
one month prior to the date which is 60 days after the Closing Date. Each
borrowing under the Revolving Credit Commitments shall be in an amount equal to
(x) in the case of ABR Loans, $1,000,000 or a whole multiple thereof (or, if the
then aggregate Available Revolving Credit Commitments are less than $1,000,000,
such lesser amount) and (y) in the case of Eurodollar Loans, $5,000,000 or a
whole multiple of $1,000,000 in excess thereof. Upon receipt of any such notice
from the Borrower, the Agent shall promptly notify each Revolving Credit Lender
thereof. Each Revolving Credit Lender will make the amount of its pro rata
share of each borrowing available to the Agent for the account of the Borrower
at the Funding Office prior to 12:00 Noon, New York City time, on the Borrowing
Date requested by the Borrower in funds immediately available to the Agent.
Such borrowing will then be made available to the Borrower by the Agent
crediting the account of the Borrower on the books of the Funding Office with
the aggregate of the amounts made available to the Agent by the Revolving Credit
Lenders and in like funds as received by the Agent.

2.6 REPAYMENT OF LOANS; EVIDENCE OF DEBT. (a) The Borrower hereby
unconditionally promises to pay to the Agent for the account of the appropriate
Revolving Credit Lender or Term Loan Lender, as the case may be, (i) the then
unpaid principal amount of each Revolving Credit Loan of such Revolving Credit
Lender on the Revolving Credit Termination Date (or such earlier date on which
the Loans become due and payable pursuant to Section 8) and (ii) the principal
amount of each Term Loan of such Term Loan Lender in installments according to
the amortization schedules set forth in Section 2.3 (or on such earlier date on
which the Loans become due and payable pursuant to Section 8). The Borrower
hereby further agrees to pay interest on the unpaid principal amount of the
Loans from time to time outstanding from the date hereof until payment in full
thereof at the rates per annum, and on the dates, set forth in Section 2.13.

(b) Each Lender shall maintain in accordance with its usual practice
an account or accounts evidencing indebtedness of the Borrower to such Lender
resulting from each Loan of such Lender from time to time, including the amounts
of principal and interest payable and paid to such Lender from time to time
under this Agreement.

(c) The Agent, on behalf of the Borrower, shall maintain the Register
pursuant to Section 10.6(e), and a subaccount therein for each Lender, in which
shall be recorded (i) the amount of each Loan made hereunder and any Note
evidencing such Loan, the Type thereof and each Interest Period applicable
thereto, (ii) the amount of any principal or interest

<PAGE>
28

due and payable or to become due and payable from the Borrower to each Lender
hereunder and (iii) both the amount of any sum received by the Agent hereunder
from the Borrower and each Lender's share thereof.

(d) The entries made in the Register and the accounts of each Lender
maintained pursuant to Section 2.6(b) shall, to the extent permitted by
applicable law, be PRIMA FACIE evidence of the existence and amounts of the
obligations of the Borrower therein recorded; PROVIDED, HOWEVER, that the
failure of any Lender or the Agent to maintain the Register or any such account,
or any error therein, shall not in any manner affect the obligation of the
Borrower to repay (with applicable interest) the Loans made to such Borrower by
such Lender in accordance with the terms of this Agreement.

(e) The Borrower agrees that, upon the request to the Agent by any
Lender, the Borrower will execute and deliver to such Lender a promissory note
of the Borrower evidencing any Term Loans or Revolving Credit Loans, as the case
may be, of such Lender, substantially in the forms of Exhibit G-1 or G-2,
respectively, with appropriate insertions as to date and principal amount.

2.7 COMMITMENT FEES, ETC. (a) The Borrower agrees to pay to the Agent
for the account of each Revolving Credit Lender a commitment fee for the period
from and including the Closing Date to the last day of the Revolving Credit
Commitment Period, computed at the Commitment Fee Rate on the average daily
amount of the Available Revolving Credit Commitment of such Lender during the
period for which payment is made, payable quarterly in arrears on the fifteenth
day of each January, April, July and October and on the Revolving Credit
Termination Date, commencing on the first of such dates to occur after the date
hereof.

(b) The Borrower agrees to pay to the Agent the fees in the amounts
and on the dates previously agreed to, and from time to time agreed to, in
writing by the Borrower and the Agent.

2.8 TERMINATION OR REDUCTION OF REVOLVING CREDIT COMMITMENTS. The
Borrower shall have the right, upon not less than three Business Days' notice to
the Agent, to terminate the Revolving Credit Commitments or, from time to time,
to reduce the amount of the Revolving Credit Commitments; PROVIDED that no such
termination or reduction of Revolving Credit Commitments shall be permitted if,
after giving effect thereto and to any prepayments of the Revolving Credit Loans
made on the effective date thereof, the Total Revolving Extensions of Credit
would exceed the Total Revolving Credit Commitments. Any such reduction shall
be in an amount equal to $1,000,000, or a whole multiple thereof, and shall
reduce permanently the Revolving Credit Commitments then in effect.

2.9 OPTIONAL PREPAYMENTS. The Borrower may at any time and from time
to time prepay the Loans, in whole or in part, without premium or penalty, upon
irrevocable notice delivered to the Agent at least three Business Days prior
thereto in the case of Eurodollar Loans and at least one Business Day prior
thereto in the case of ABR Loans, which notice shall specify the date and amount
of prepayment and whether the prepayment is of Eurodollar Loans or ABR Loans;
PROVIDED, that if a Eurodollar Loan is prepaid on any day

<PAGE>
29

other than the last day of the Interest Period applicable thereto, the Borrower
shall also pay any amounts owing pursuant to Section 2.19. Upon receipt of any
such notice the Agent shall promptly notify each relevant Lender thereof. If
any such notice is given, the amount specified in such notice shall be due and
payable on the date specified therein, together with (except in the case of
Revolving Credit Loans which are ABR Loans) accrued interest to such date on the
amount prepaid. Partial prepayments of Term Loans and Revolving Credit Loans
shall be in an aggregate principal amount of $1,000,000 or a whole multiple
thereof.

2.10 MANDATORY PREPAYMENTS AND COMMITMENT REDUCTIONS. (a) Unless the
Required Prepayment Lenders shall otherwise agree, if any Indebtedness shall be
issued or Incurred by the Borrower or any of its Subsidiaries (excluding any
Indebtedness Incurred in accordance with Section 7.2 as in effect on the date of
this Agreement), an amount equal to 100% of the Net Cash Proceeds thereof shall
be applied on the date of such issuance or Incurrence toward the prepayment of
the Term Loans and the reduction of the Revolving Credit Commitments as set
forth in Section 2.10(d); PROVIDED, HOWEVER, that if any such subordinated
Indebtedness in an aggregate principal amount not to exceed $100,000,000 shall
be issued or Incurred by the Borrower on terms and conditions (including,
without limitation, terms of subordination) satisfactory to the Required
Lenders, as evidenced by their prior written consent, which consent shall not be
unreasonably withheld, an amount equal to 50% of the Net Cash Proceeds thereof
shall be applied on the date of such issuance or Incurrence toward the
prepayment of the Term Loans and the reduction of the Revolving Credit
Commitments as set forth in Section 2.10(d).

(b) Unless the Required Prepayment Lenders shall otherwise agree, if
on any date, the Borrower or any of its Subsidiaries shall receive Net Cash
Proceeds from any Asset Sale or Recovery Event then, unless a Reinvestment
Notice shall be delivered in respect thereof, such Net Cash Proceeds shall be
applied on such date toward the prepayment of the Term Loans and the reduction
of the Revolving Credit Commitments as set forth in Section 2.10(d); PROVIDED
that, notwithstanding the foregoing, (i) the Borrower may exclude from the
requirements of this paragraph the first $7,500,000 of aggregate Net Cash
Proceeds from Asset Sales and Recovery Events and (ii) on each Reinvestment
Prepayment Date, an amount equal to the Reinvestment Prepayment Amount with
respect to the relevant Reinvestment Event shall be applied toward the
prepayment of the Term Loans and the reduction of the Revolving Credit
Commitments as set forth in Section 2.10(d).

(c) Unless the Required Prepayment Lenders shall otherwise agree, if,
for any fiscal year of the Borrower commencing with the fiscal year ending
December 31, 1998, there shall be Excess Cash Flow, the Borrower shall apply the
ECF Percentage of such Excess Cash Flow toward the prepayment of the Term Loans
as set forth in Section 2.10(d) on a date no later than five days after the
earlier of (i) the date on which the financial statements of the Borrower
referred to in Section 6.1(a), for the fiscal year with respect to which such
prepayment is made, are required to be delivered to the Lenders and (ii) the
date such financial statements are actually delivered.

(d) Amounts to be applied in connection with prepayments and
Commitment reductions made pursuant to Section 2.10 shall be applied, FIRST, to
the prepayment of the Term Loans and, SECOND, to reduce permanently the
Revolving Credit Commitments; PROVIDED

<PAGE>
30

that no Excess Cash Flow shall be applied to reduce the Revolving Credit
Commitments. Any such reduction of the Revolving Credit Commitments shall be
accompanied by prepayment of the Revolving Credit Loans to the extent, if any,
that the Total Revolving Extensions of Credit exceed the amount of the Total
Revolving Credit Commitments as so reduced, PROVIDED that if the aggregate
principal amount of Revolving Credit Loans then outstanding is less than the
amount of such excess (because L/C Obligations constitute a portion thereof),
the Borrower shall, to the extent of the balance of such excess, replace
outstanding Letters of Credit and/or deposit an amount in cash in a cash
collateral account established with the Agent for the benefit of the Lenders on
terms and conditions satisfactory to the Agent. The application of any
prepayment pursuant to Section 2.10 shall be made first to ABR Loans and second
to Eurodollar Loans. Each prepayment of the Loans under Section 2.10 (except in
the case of Revolving Credit Loans that are ABR Loans) shall be accompanied by
accrued interest to the date of such prepayment on the amount prepaid.

2.11 CONVERSION AND CONTINUATION OPTIONS.(a) The Borrower may elect
from time to time to convert Eurodollar Loans to ABR Loans by giving the Agent
at least two Business Days' prior irrevocable notice of such election, PROVIDED
that any such conversion of Eurodollar Loans may only be made on the last day of
an Interest Period with respect thereto. The Borrower may elect from time to
time to convert ABR Loans to Eurodollar Loans by giving the Agent at least three
Business Days' prior irrevocable notice of such election (which notice shall
specify the length of the initial Interest Period therefor), PROVIDED that no
ABR Loan under a particular Facility may be converted into a Eurodollar Loan (i)
when any Event of Default has occurred and is continuing and the Agent has or
the Majority Facility Lenders in respect of such Facility have determined in its
or their sole discretion not to permit such conversions or (ii) after the date
that is one month prior to the final scheduled termination or maturity date of
such Facility. Upon receipt of any such notice the Agent shall promptly notify
each relevant Lender thereof.

(b) Any Eurodollar Loan may be continued as such upon the expiration
of the then current Interest Period with respect thereto by the Borrower giving
irrevocable notice to the Agent, in accordance with the applicable provisions of
the term "Interest Period" set forth in Section 1.1, of the length of the next
Interest Period to be applicable to such Loans, PROVIDED that no Eurodollar Loan
under a particular Facility may be continued as such (i) when any Event of
Default has occurred and is continuing and the Agent has or the Majority
Facility Lenders in respect of such Facility have determined in its or their
sole discretion not to permit such continuations or (ii) after the date that is
one month prior to the final scheduled termination or maturity date of such
Facility, and PROVIDED, FURTHER, that if the Borrower shall fail to give any
required notice as described above in this paragraph or if such continuation is
not permitted pursuant to the preceding proviso such Loans shall be
automatically converted to ABR Loans on the last day of such then expiring
Interest Period. Upon receipt of any such notice the Agent shall promptly
notify each relevant Lender thereof.

2.12 MINIMUM AMOUNTS AND MAXIMUM NUMBER OF EURODOLLAR TRANCHES.
Notwithstanding anything to the contrary in this Agreement, all borrowings,
conversions, continuations and optional prepayments of Eurodollar Loans
hereunder and all selections of Interest Periods hereunder shall be in such
amounts and be made pursuant to such elections so that, (a) after giving effect
thereto, the aggregate principal amount of the Eurodollar Loans

<PAGE>
31

comprising each Eurodollar Tranche shall be equal to $5,000,000 or a whole
multiple of $1,000,000 in excess thereof and (b) no more than ten Eurodollar
Tranches shall be outstanding at any one time.

2.13 INTEREST RATES AND PAYMENT DATES. (a) Each Eurodollar Loan shall
bear interest for each day during each Interest Period with respect thereto at a
rate per annum equal to the Eurodollar Rate determined for such day plus the
Applicable Margin.

(b) Each ABR Loan shall bear interest at a rate per annum equal to the
ABR plus the Applicable Margin.

(c) (i) If all or a portion of the principal amount of any Loan or
Reimbursement Obligation shall not be paid when due (whether at the stated
maturity, by acceleration or otherwise), all outstanding Loans and Reimbursement
Obligations (whether or not overdue) shall bear interest at a rate per annum
which is equal to (x) in the case of the Loans, the rate applicable to ABR Loans
under the relevant Facility PLUS 2% or (y) in the case of Reimbursement
Obligations, the rate applicable to ABR Loans under the Revolving Credit
Facility PLUS 2%, and (ii) if all or a portion of any interest payable on any
Loan or Reimbursement Obligation or any commitment fee or other amount payable
hereunder shall not be paid when due (whether at the stated maturity, by
acceleration or otherwise), such overdue amount shall bear interest at a rate
per annum equal to the rate applicable to ABR Loans under the relevant Facility
PLUS 2% (or, in the case of any such other amounts that do not relate to a
particular Facility, the ABR PLUS 2.75%), in each case, with respect to clauses
(i) and (ii) above, from the date of such non-payment until such amount is paid
in full (as well after as before judgment).

(d) Interest shall be payable in arrears on each Interest Payment
Date, PROVIDED that interest accruing pursuant to paragraph (c) of this Section
2.13 shall be payable from time to time on demand.

2.14 COMPUTATION OF INTEREST AND FEES. (a) Interest, fees and
commissions payable pursuant hereto shall be calculated on the basis of a
360-day year for the actual days elapsed, except that, with respect to ABR Loans
the rate of interest on which is calculated on the basis of the Prime Rate, the
interest thereon shall be calculated on the basis of a 365- (or 366-, as the
case may be) day year for the actual days elapsed. The Agent shall as soon as
practicable notify the Borrower and the relevant Lenders of each determination
of a Eurodollar Rate. Any change in the interest rate on a Loan resulting from
a change in the ABR or the Eurocurrency Reserve Requirements shall become
effective as of the opening of business on the day on which such change becomes
effective. The Agent shall as soon as practicable notify the Borrower and the
relevant Lenders of the effective date and the amount of each such change in
interest rate.

(b) Each determination of an interest rate by the Agent pursuant to
any provision of this Agreement shall be conclusive and binding on the Borrower
and the Lenders in the absence of manifest error. The Agent shall, at the
request of the Borrower, deliver to the Borrower a statement showing the
quotations used by the Agent in determining any interest rate pursuant to
Section 2.13(a).

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32

2.15 INABILITY TO DETERMINE INTEREST RATE. If prior to the first day
of any Interest Period:

(a) the Agent shall have determined (which determination shall be
conclusive and binding upon the Borrower) that, by reason of circumstances
affecting the relevant market, adequate and reasonable means do not exist
for ascertaining the Eurodollar Rate for such Interest Period, or

(b) the Agent shall have received notice from the Majority Facility
Lenders in respect of the relevant Facility that the Eurodollar Rate
determined or to be determined for such Interest Period will not adequately
and fairly reflect the actual cost to such Lenders (as conclusively
certified by such Lenders) of making or maintaining their affected Loans
during such Interest Period,

the Agent shall give telecopy or telephonic notice thereof to the Borrower and
the relevant Lenders as soon as practicable thereafter. If such notice is given
(x) any Eurodollar Loans under the relevant Facility requested to be made on the
first day of such Interest Period shall be made as ABR Loans, (y) any Loans
under the relevant Facility that were to have been converted on the first day of
such Interest Period to Eurodollar Loans shall be continued as ABR Loans and (z)
any outstanding Eurodollar Loans under the relevant Facility shall be converted,
on the first day of such Interest Period, to ABR Loans. Until such notice has
been withdrawn by the Agent, no further Eurodollar Loans under the relevant
Facility shall be made or continued as such, nor shall the Borrower have the
right to convert Loans under the relevant Facility to Eurodollar Loans.

2.16 PRO RATA TREATMENT AND PAYMENTS. (a) Each borrowing by the
Borrower from the Lenders hereunder, each payment by the Borrower on account of
any commitment fee and any reduction of the Commitments of the Lenders shall be
made pro rata according to the respective Tranche A Term Loan Percentages,
Tranche B Term Loan Percentages, Tranche C Term Loan Percentages or Revolving
Credit Percentages, as the case may be, of the relevant Lenders.

(b) Each payment (including each prepayment) by the Borrower on
account of principal of and interest on the Term Loans shall be made pro rata
according to the respective outstanding principal amounts of the Term Loans then
held by the Term Loan Lenders (except as otherwise provided in Section 2.16(d)).
The amount of each principal prepayment of the Term Loans shall be applied to
reduce the then remaining installments of the Tranche A Term Loans, Tranche B
Term Loans and Tranche C Term Loans, as the case may be, in the inverse order of
maturity. Amounts prepaid on account of the Term Loans may not be reborrowed.

(c) Each payment (including each prepayment) by the Borrower on
account of principal of and interest on the Revolving Credit Loans shall be made
pro rata according to the respective outstanding principal amounts of the
Revolving Credit Loans then held by the Revolving Credit Lenders.

<PAGE>
33

(d) Notwithstanding anything to the contrary in Section 2.10 or
elsewhere in this Section 2.16, so long as any Tranche A Term Loans are
outstanding, each Tranche B Term Loan Lender and each Tranche C Term Loan Lender
may, at its option, decline the portion of any optional prepayment or mandatory
payment applicable to the Tranche B Term Loans or, as the case may be, Tranche C
Term Loans of such Lender; accordingly, with respect to the amount of any
mandatory prepayment described in Section 2.10 that is allocated to Tranche B
Term Loans or, as the case may be, Tranche C Term Loans (such amount, the
"TRANCHE B PREPAYMENT AMOUNT" or, as the case may be, the "TRANCHE C PREPAYMENT
AMOUNT"), at any time when Tranche A Term Loans remain outstanding, the Borrower
will, in lieu of applying such amount to the prepayment of Tranche B Term Loans
or, as the case may be, Tranche C Term Loans, as provided in paragraph Section
2.10(d), on the date specified in Section 2.10 for such prepayment, give the
Agent telephonic notice (promptly confirmed in writing) requesting that the
Agent prepare and provide to each Tranche B Term Loan Lender and each Tranche C
Term Loan Lender a notice (each, a "PREPAYMENT OPTION NOTICE") as described
below. As promptly as practicable after receiving such notice from the
Borrower, the Agent will send to each Tranche B Term Loan Lender and each
Tranche C Term Loan Lender a Prepayment Option Notice, which shall be in the
form of Exhibit H, and shall include an offer by the Borrower to prepay on the
date (each, a "PREPAYMENT DATE") that is 10 Business Days after the date of the
Prepayment Option Notice, the Tranche B Term Loans or, as the case may be,
Tranche C Term Loans of such Lender by an amount equal to the Tranche B
Prepayment Amount or, as the case may be, Tranche C Prepayment Amount indicated
in such Lender's Prepayment Option Notice. On the Prepayment Date, (A) the
Borrower shall pay to the Agent the aggregate amount necessary to prepay that
portion of the outstanding Tranche B Term Loans and Tranche C Term Loans in
respect of which Tranche B Term Loan Lenders and Tranche C Term Loan Lenders
have accepted prepayment as described above (such Lenders, the "ACCEPTING
LENDERS"), and such amount shall be applied to reduce the Tranche B Prepayment
Amounts and the Tranche C Prepayment Amounts, respectively, with respect to each
Accepting Lender and (B) the Borrower shall pay to the Agent an amount equal to
the portion of the Tranche B Prepayment Amount and the Tranche C Prepayment
Amount not accepted by the Accepting Lenders, and such amount shall be applied
to the prepayment of the Tranche A Term Loans.

(e) All payments (including prepayments) to be made by the Borrower
hereunder, whether on account of principal, interest, fees or otherwise, shall
be made without setoff or counterclaim and shall be made prior to 12:00 Noon,
New York City time, on the due date thereof to the Agent, for the account of the
Lenders, at the Payment Office, in Dollars and in immediately available funds.
The Agent shall distribute such payments to the Lenders promptly upon receipt in
like funds as received. If any payment hereunder (other than payments on the
Eurodollar Loans) becomes due and payable on a day other than a Business Day,
such payment shall be extended to the next succeeding Business Day. If any
payment on a Eurodollar Loan becomes due and payable on a day other than a
Business Day, the maturity thereof shall be extended to the next succeeding
Business Day unless the result of such extension would be to extend such payment
into another calendar month, in which event such payment shall be made on the
immediately preceding Business Day. In the case of any extension of any payment
of principal pursuant to the preceding two sentences, interest thereon shall be
payable at the then applicable rate during such extension.

<PAGE>
34

(f) Unless the Agent shall have been notified in writing by any Lender
prior to a borrowing that such Lender will not make the amount that would
constitute its share of such borrowing available to the Agent, the Agent may
assume that such Lender is making such amount available to the Agent, and the
Agent may, in reliance upon such assumption, make available to the Borrower a
corresponding amount. If such amount is not made available to the Agent by the
required time on the Borrowing Date therefor, such Lender shall pay to the
Agent, on demand, such amount with interest thereon at a rate equal to the daily
average Federal Funds Effective Rate for the period until such Lender makes such
amount immediately available to the Agent. A certificate of the Agent submitted
to any Lender with respect to any amounts owing under this Section 2.16(f) shall
be conclusive in the absence of manifest error. If such Lender's share of such
borrowing is not made available to the Agent by such Lender within three
Business Days of such Borrowing Date, the Agent shall also be entitled to
recover such amount with interest thereon at the rate per annum applicable to
ABR Loans under the relevant Facility, on demand, from the Borrower.

(g) Unless the Agent shall have been notified in writing by the
Borrower prior to the date of any payment being made hereunder that the Borrower
will not make such payment to the Agent, the Agent may assume that the Borrower
is making such payment, and the Agent may, but shall not be required to, in
reliance upon such assumption, make available to the Lenders their respective
PRO RATA shares of a corresponding amount. If such payment is not made to the
Agent by the Borrower within three Business Days of such required date, the
Agent shall be entitled to recover, on demand, from each Lender to which any
amount which was made available pursuant to the preceding sentence, such amount
with interest thereon at the rate per annum equal to the daily average Federal
Funds Effective Rate. Nothing herein shall be deemed to limit the rights of the
Agent or any Lender against the Borrower.

2.17 REQUIREMENTS OF LAW. (a) If the adoption of or any change in any
Requirement of Law or in the interpretation or application thereof or compliance
by any Lender with any request or directive (whether or not having the force of
law) from any central bank or other Governmental Authority made subsequent to
the date hereof:

(i) shall subject any Lender to any tax of any kind whatsoever with
respect to this Agreement, any Letter of Credit, any Application or any
Eurodollar Loan made by it, or change the basis of taxation of payments to
such Lender in respect thereof (except for Non-Excluded Taxes covered by
Section 2.18 and changes in the rate of tax on the overall net income of
such Lender);

(ii) shall impose, modify or hold applicable any reserve, special
deposit, compulsory loan or similar requirement against assets held by,
deposits or other liabilities in or for the account of, advances, loans or
other extensions of credit by, or any other acquisition of funds by, any
office of such Lender which is not otherwise included in the determination
of the Eurodollar Rate hereunder; or

(iii) shall impose on such Lender any other condition;

and the result of any of the foregoing is to increase the actual cost to such
Lender, by an amount which such Lender deems to be material, of making,
converting into, continuing or

<PAGE>
35

maintaining Eurodollar Loans or issuing or participating in Letters of Credit,
or to reduce any amount receivable hereunder in respect thereof, then, in any
such case, the Borrower shall promptly pay such Lender, within 15 days of
demand, any additional amounts necessary to compensate such Lender for such
increased cost or reduced amount receivable; PROVIDED that the Borrower shall
not be required to compensate a Lender pursuant to this paragraph for any
amounts incurred more than six months prior to the date that such Lender
notifies the Borrower of such Lender's intention to claim compensation therefor;
and PROVIDED FURTHER that, if the circumstances giving rise to such claim have a
retroactive effect, then such six-month period shall be extended to include the
period of such retroactive effect. If any Lender becomes entitled to claim any
additional amounts pursuant to this Section 2.17, it shall promptly notify the
Borrower (with a copy to the Agent) of the event by reason of which it has
become so entitled.

(b) If any Lender shall have determined that the adoption of or any
change in any Requirement of Law regarding capital adequacy or in the
interpretation or application thereof or compliance by such Lender or any
corporation controlling such Lender with any request or directive regarding
capital adequacy (whether or not having the force of law) from any Governmental
Authority made subsequent to the date hereof shall have the effect of reducing
the rate of return on such Lender's or such corporation's capital as a
consequence of its obligations hereunder or under or in respect of any Letter of
Credit to a level below that which such Lender or such corporation could have
achieved but for such adoption, change or compliance (taking into consideration
such Lender's or such corporation's policies with respect to capital adequacy)
by an amount deemed by such Lender to be material, then from time to time, after
submission by such Lender to the Borrower (with a copy to the Agent) of a
written request therefor, the Borrower shall pay to such Lender such additional
amount or amounts as will compensate such Lender for such reduction; PROVIDED
that the Borrower shall not be required to compensate a Lender pursuant to this
paragraph for any amounts incurred more than six months prior to the date that
such Lender notifies the Borrower of such Lender's intention to claim
compensation therefor; and PROVIDED FURTHER that, if the circumstances giving
rise to such claim have a retroactive effect, then such six-month period shall
be extended to include the period of such retroactive effect.

(c) Any Lender claiming reimbursement or compensation under this
Section 2.17 shall deliver to the Borrower a certificate (with a copy to the
Agent) setting forth in reasonable detail the basis for such claim and a
calculation of the amount payable to such Lender in connection therewith. Such
certificate shall be conclusive in the absence of manifest error. The
obligations of the Borrower pursuant to this Section 2.17 shall survive the
termination of this Agreement and the payment of the Loans and all other amounts
payable hereunder.

2.18 TAXES. (a) All payments made by the Borrower under this
Agreement shall be made free and clear of, and without deduction or withholding
for or on account of, any present or future income, stamp or other taxes,
levies, imposts, duties, charges, fees, deductions or withholdings, now or
hereafter imposed, levied, collected, withheld or assessed by any Governmental
Authority, excluding net income taxes and franchise taxes (imposed in lieu of
net income taxes) imposed on the Agent or any Lender as a result of a present or
former connection between the Agent or such Lender and the jurisdiction of the

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Governmental Authority imposing such tax or any political subdivision or taxing
authority thereof or therein (other than any such connection arising solely from
the Agent or such Lender having executed, delivered or performed its obligations
or received a payment under, or enforced, this Agreement or any other Loan
Document). If any such non-excluded taxes, levies, imposts, duties, charges,
fees, deductions or withholdings ("NON-EXCLUDED TAXES") or Other Taxes are
required to be withheld from any amounts payable to the Agent or any Lender
hereunder, the amounts so payable to the Agent or such Lender shall be increased
to the extent necessary to yield to the Agent or such Lender (after payment of
all Non-Excluded Taxes and Other Taxes) interest or any such other amounts
payable hereunder at the rates or in the amounts specified in this Agreement,
PROVIDED, HOWEVER, that the Borrower shall not be required to increase any such
amounts payable to any Lender with respect to any Non-Excluded Taxes (i) that
are attributable to such Lender's failure to comply with the requirements of
paragraph (d) or (e) of this Section 2.18 or (ii) that are United States
withholding taxes imposed on amounts payable to such Lender at the time the
Lender becomes a party to this Agreement, except to the extent that such
Lender's assignor (if any) was entitled, at the time of assignment, to receive
additional amounts from the Borrower with respect to such Non-Excluded Taxes
pursuant to this Section 2.18(a).

(b) In addition, the Borrower shall pay any Other Taxes to the
relevant Governmental Authority in accordance with applicable law.

(c) Whenever any Non-Excluded Taxes or Other Taxes are payable by the
Borrower, as promptly as possible thereafter the Borrower shall send to the
Agent for the account of the Agent or relevant Lender, as the case may be, a
certified copy of an original official receipt received by the Borrower showing
payment thereof. If the Borrower fails to pay any Non-Excluded Taxes or Other
Taxes when due to the appropriate taxing authority or fails to remit to the
Agent the required receipts or other required documentary evidence, the Borrower
shall indemnify the Agent and the Lenders for any incremental taxes, interest or
penalties that may become payable by the Agent or any Lender as a result of any
such failure. The agreements in this Section 2.18 shall survive the termination
of this Agreement and the payment of the Loans and all other amounts payable
hereunder.

(d) Each Lender (or Transferee) that is not a citizen or resident of
the United States of America, a corporation, partnership or other entity created
or organized in or under the laws of the United States of America (or any
jurisdiction thereof), or any estate or trust that is subject to federal income
taxation regardless of the source of its income (a "NON-U.S. LENDER") shall
deliver to the Borrower and the Agent (or, in the case of a Participant, to the
Lender from which the related participation shall have been purchased) two
copies of either U.S. Internal Revenue Service Form 1001 or Form 4224, or, in
the case of a Non-U.S. Lender claiming exemption from U.S. federal withholding
tax under Section 871(h) or 881(c) of the Code with respect to payments of
"portfolio interest" a statement substantially in the form of Exhibit I and a
Form W-8, or any subsequent versions thereof or successors thereto properly
completed and duly executed by such Non-U.S. Lender claiming complete exemption
from, or a reduced rate of, U.S. federal withholding tax on all payments by the
Borrower under this Agreement and the other Loan Documents. Such forms shall be
delivered by each Non-U.S. Lender on or before the date it becomes a party to
this Agreement (or, in the case of any Participant, on or before the date such
Participant purchases the related participation). In

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37

addition, each Non-U.S. Lender shall deliver such forms or successors thereto
promptly upon the obsolescence or invalidity of any form previously delivered by
such Non-U.S. Lender. Each Non-U.S. Lender shall promptly notify the Borrower
at any time it determines that it is no longer in a position to provide any
previously delivered certificate to the Borrower (or any other form of
certification adopted by the U.S. taxing authorities for such purpose).
Notwithstanding any other provision of this Section 2.18(d), a Non-U.S. Lender
shall not be required to deliver any form pursuant to this Section 2.18(d) that
such Non-U.S. Lender is not legally able to deliver.

(e) A Lender that is entitled to an exemption from or reduction of
non-U.S. withholding tax under the law of the jurisdiction in which the Borrower
is located, or any treaty to which such jurisdiction is a party, with respect to
payments under this Agreement shall deliver to the Borrower (with a copy to the
Agent), at the time or times prescribed by applicable law or reasonably
requested by the Borrower, such properly completed and executed documentation
prescribed by applicable law as will permit such payments to be made without
withholding or at a reduced rate, PROVIDED that such Lender is legally entitled
to complete, execute and deliver such documentation and in such Lender's
reasonable judgment such completion, execution or submission would not
materially prejudice the legal position of such Lender.

2.19 INDEMNITY. The Borrower agrees to indemnify each Lender and to
hold each Lender harmless from any loss or expense which such Lender may sustain
or incur as a consequence of (a) default by the Borrower in making a borrowing
of, conversion into or continuation of Eurodollar Loans after the Borrower has
given a notice requesting the same in accordance with the provisions of this
Agreement, (b) default by the Borrower in making any prepayment after the
Borrower has given a notice thereof in accordance with the provisions of this
Agreement or (c) the making of a prepayment of Eurodollar Loans on a day which
is not the last day of an Interest Period with respect thereto. Such
indemnification may include an amount equal to the excess, if any, of (i) the
amount of interest which would have accrued on the amount so prepaid, or not so
borrowed, converted or continued, for the period from the date of such
prepayment or of such failure to borrow, convert or continue to the last day of
such Interest Period (or, in the case of a failure to borrow, convert or
continue, the Interest Period that would have commenced on the date of such
failure) in each case at the applicable rate of interest for such Loans provided
for herein (excluding, however, the Applicable Margin included therein, if any)
OVER (ii) the amount of interest (as reasonably determined by such Lender) which
would have accrued to such Lender on such amount by placing such amount on
deposit for a comparable period with leading banks in the interbank eurodollar
market. A certificate as to any amounts payable pursuant to this Section 2.21
submitted to the Borrower by the Lender shall be conclusive in the absence of
manifest error. This covenant shall survive the termination of this Agreement
and the payment of the Loans and all other amounts payable hereunder.

2.20 CHANGE OF LENDING OFFICE. Each Lender agrees that, upon the
occurrence of any event giving rise to the operation of Section 2.17 or 2.18(a)
with respect to such Lender, it will, if requested by the Borrower, use
reasonable efforts (subject to overall policy considerations of such Lender) to
designate another lending office for any Loans affected by such event with the
object of avoiding the consequences of such event; PROVIDED that such

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38

designation is made on terms that, in the sole judgment of such Lender, cause
such Lender and its lending office(s) to suffer no economic, legal or regulatory
disadvantage, and PROVIDED, FURTHER, that nothing in this Section 2.20 shall
affect or postpone any of the obligations of any Borrower or the rights of any
Lender pursuant to Section 2.17 or 2.18(a).

2.21 REPLACEMENT OF LENDERS UNDER CERTAIN CIRCUMSTANCES. The Borrower
shall be permitted to replace any Lender which requests reimbursement for
amounts owing pursuant to Section 2.17 or 2.18 with a replacement financial
institution; PROVIDED that (a) such replacement does not conflict with any
Requirement of Law, (b) no Event of Default shall have occurred and be
continuing at the time of such replacement, (c) prior to any such replacement,
such Lender shall have taken no action under Section 2.20 so as to eliminate the
continued need for payment of amounts owing pursuant to Section 2.17 or 2.18,
(d) the replacement financial institution shall purchase, at par, all Loans and
other amounts owing to such replaced Lender on or prior to the date of
replacement, (e) the Borrower shall be liable to such replaced Lender under
Section 2.19 if any Eurodollar Loan owing to such replaced Lender shall be
purchased other than on the last day of the Interest Period relating thereto,
(f) the replacement financial institution, if not already a Lender, shall be
reasonably satisfactory to the Agent, (g) the replaced Lender shall be obligated
to make such replacement in accordance with the provisions of Section 10.6
(provided that the Borrower shall be obligated to pay the registration and
processing fee referred to therein), (h) until such time as such replacement
shall be consummated, the Borrower shall pay all additional amounts (if any)
required pursuant to Section 2.17 or 2.18, as the case may be, and (i) any such
replacement shall not be deemed to be a waiver of any rights which the Borrower,
the Agent or any other Lender shall have against the replaced Lender.

SECTION 3. LETTERS OF CREDIT

3.1 L/C COMMITMENT. (a) Subject to the terms and conditions hereof,
the Issuing Lender, in reliance on the agreements of the other Revolving Credit
Lenders set forth in Section 3.4(a), agrees to issue Letters of Credit for the
account of the Borrower on any Business Day during the Revolving Credit
Commitment Period in such form as may be approved from time to time by the
Issuing Lender; PROVIDED that the Issuing Lender shall have no obligation to
issue any Letter of Credit if, after giving effect to such issuance, (i) the L/C
Obligations would exceed the L/C Commitment, (ii) the L/C Obligations in respect
of all Standby Letters of Credit would exceed $20,000,000, (iii) the L/C
Obligations in respect of all Trade Letters of Credit would exceed $5,000,000 or
(iv) the aggregate amount of the Available Revolving Credit Commitments would be
less than zero. Each Letter of Credit shall (i) be denominated in Dollars and
(ii) expire no later than the earlier of (x) the first anniversary of its date
of issuance and (y) the date which is 30 days prior to the Revolving Credit
Termination Date, PROVIDED that any Standby Letter of Credit with a one-year
term may provide for the renewal thereof for additional one-year periods (which
shall in no event extend beyond the date referred to in clause (y) above).

(b) Each Letter of Credit shall be subject to the Uniform Customs and,
to the extent not inconsistent therewith, the laws of the State of New York.

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39

(c) The Issuing Lender shall not at any time be obligated to issue any
Letter of Credit hereunder if such issuance would conflict with, or cause the
Issuing Lender or any L/C Participant to exceed any limits imposed by, any
applicable Requirement of Law.

3.2 PROCEDURE FOR ISSUANCE OF LETTER OF CREDIT. The Borrower may from
time to time request that the Issuing Lender issue a Letter of Credit by
delivering to the Issuing Lender at its address for notices specified herein an
Application therefor, completed to the satisfaction of the Issuing Lender, and
such other certificates, documents and other papers and information as the
Issuing Lender may request. Upon receipt of any Application, the Issuing Lender
will process such Application and the certificates, documents and other papers
and information delivered to it in connection therewith in accordance with its
customary procedures and shall promptly issue the Letter of Credit requested
thereby (but in no event shall the Issuing Lender be required to issue any
Letter of Credit earlier than three Business Days after its receipt of the
Application therefor and all such other certificates, documents and other papers
and information relating thereto) by issuing the original of such Letter of
Credit to the beneficiary thereof or as otherwise may be agreed to by the
Issuing Lender and the Borrower. The Issuing Lender shall furnish a copy of
such Letter of Credit to the Borrower promptly following the issuance thereof.
The Issuing Lender shall promptly furnish to the Agent, which shall in turn
promptly furnish to the Lenders, notice of the issuance of each Letter of Credit
(including the amount thereof).

3.3 COMMISSIONS, FEES AND OTHER CHARGES. (a) The Borrower will pay a
commission on the undrawn amount of all outstanding Letters of Credit at a per
annum rate equal to the Applicable Margin then in effect with respect to
Eurodollar Loans under the Revolving Credit Facility, shared ratably among the
Revolving Credit Lenders and payable quarterly in arrears on each L/C Fee
Payment Date after the issuance date. In addition, the Borrower shall pay to
the Issuing Lender for its own account a fronting fee of 1/4 of 1% per annum,
payable quarterly in arrears on each L/C Fee Payment Date after the Issuance
Date.

(b) In addition to the foregoing fees and commissions, the Borrower
shall pay or reimburse the Issuing Lender for such normal and customary costs
and expenses as are incurred or charged by the Issuing Lender in issuing,
negotiating, effecting payment under, amending or otherwise administering any
Letter of Credit.

3.4 L/C PARTICIPATIONS. (a) The Issuing Lender irrevocably agrees to
grant and hereby grants to each L/C Participant, and, to induce the Issuing
Lender to issue Letters of Credit hereunder, each L/C Participant irrevocably
agrees to accept and purchase and hereby accepts and purchases from the Issuing
Lender, on the terms and conditions hereinafter stated, for such L/C
Participant's own account and risk an undivided interest equal to such L/C
Participant's Revolving Credit Percentage in the Issuing Lender's obligations
and rights under each Letter of Credit issued hereunder and the amount of each
draft paid by the Issuing Lender thereunder. Each L/C Participant
unconditionally and irrevocably agrees with the Issuing Lender that, if a draft
is paid under any Letter of Credit for which the Issuing Lender is not
reimbursed in full by the Borrower in accordance with the terms of this
Agreement, such L/C Participant shall pay to the Issuing Lender upon demand at
the Issuing Lender's address for notices specified herein an amount equal to
such L/C Participant's Revolving

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40

Credit Percentage of the amount of such draft, or any part thereof, which is not
so reimbursed.

(b) If any amount required to be paid by any L/C Participant to the
Issuing Lender pursuant to Section 3.4(a) in respect of any unreimbursed portion
of any payment made by the Issuing Lender under any Letter of Credit is paid to
the Issuing Lender within three Business Days after the date such payment is
due, such L/C Participant shall pay to the Issuing Lender on demand an amount
equal to the product of (i) such amount, times (ii)the daily average Federal
Funds Effective Rate during the period from and including the date such payment
is required to the date on which such payment is immediately available to the
Issuing Lender, times (iii) a fraction the numerator of which is the number of
days that elapse during such period and the denominator of which is 360. If any
such amount required to be paid by any L/C Participant pursuant to Section
3.4(a) is not made available to the Issuing Lender by such L/C Participant
within three Business Days after the date such payment is due, the Issuing
Lender shall be entitled to recover from such L/C Participant, on demand, such
amount with interest thereon calculated from such due date at the rate per annum
applicable to ABR Loans under the Revolving Credit Facility. A certificate of
the Issuing Lender submitted to any L/C Participant with respect to any amounts
owing under this Section shall be conclusive in the absence of manifest error.

(c) Whenever, at any time after the Issuing Lender has made payment
under any Letter of Credit and has received from any L/C Participant its PRO
RATA share of such payment in accordance with Section 3.4(a), the Issuing Lender
receives any payment related to such Letter of Credit (whether directly from the
Borrower or otherwise, including proceeds of collateral applied thereto by the
Issuing Lender), or any payment of interest on account thereof, the Issuing
Lender will distribute to such L/C Participant its PRO RATA share thereof;
PROVIDED, HOWEVER, that in the event that any such payment received by the
Issuing Lender shall be required to be returned by the Issuing Lender, such L/C
Participant shall return to the Issuing Lender the portion thereof previously
distributed by the Issuing Lender to it.

3.5 REIMBURSEMENT OBLIGATION OF THE BORROWER. The Borrower agrees to
reimburse the Issuing Lender on each date on which the Issuing Lender notifies
the Borrower of the date and amount of a draft presented under any Letter of
Credit and paid by the Issuing Lender for the amount of (a) such draft so paid
and (b) any taxes, fees, charges or other costs or expenses incurred by the
Issuing Lender in connection with such payment. Each such payment shall be made
to the Issuing Lender at its address for notices specified herein in lawful
money of the United States of America and in immediately available funds.
Interest shall be payable on any and all amounts remaining unpaid by the
Borrower under this Section from the date such amounts become payable (whether
at stated maturity, by acceleration or otherwise) until the date that is two
Business Days after such draft is so paid at the rate set forth in Section
2.13(b) and thereafter until payment in full at the rate set forth in Section
2.13(c). Each drawing under any Letter of Credit shall (unless an event of the
type described in clause (i) or (ii) of Section 8(f) shall have occurred and be
continuing with respect to the Borrower, in which case the procedures specified
in Section 3.4 for funding by L/C Participants shall apply) constitute a request
by the Borrower to the Agent for a borrowing pursuant to Section 2.5 of ABR
Loans in the amount of such drawing. The Borrowing Date with respect to such
borrowing shall be the date of such drawing.

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41

3.6 OBLIGATIONS ABSOLUTE. The Borrower's obligations under this
Section 3 shall be absolute and unconditional under any and all circumstances
and irrespective of any setoff, counterclaim or defense to payment which the
Borrower may have or have had against the Issuing Lender, any beneficiary of a
Letter of Credit or any other Person. The Borrower also agrees with the Issuing
Lender that the Issuing Lender shall not be responsible for, and the Borrower's
Reimbursement Obligations under Section 3.5 shall not be affected by, among
other things, the validity or genuineness of documents or of any endorsements
thereon, even though such documents shall in fact prove to be invalid,
fraudulent or forged, or any dispute between or among the Borrower and any
beneficiary of any Letter of Credit or any other party to which such Letter of
Credit may be transferred or any claims whatsoever of the Borrower against any
beneficiary of such Letter of Credit or any such transferee. The Issuing Lender
shall not be liable for any error, omission, interruption or delay in
transmission, dispatch or delivery of any message or advice, however
transmitted, in connection with any Letter of Credit, except for errors or
omissions that resulted from the gross negligence or willful misconduct of the
Issuing Lender. The Borrower agrees that any action taken or omitted by the
Issuing Lender under or in connection with any Letter of Credit or the related
drafts or documents, if done in the absence of gross negligence or willful
misconduct and in accordance with the standards of care specified in the Uniform
Commercial Code of the State of New York, shall be binding on the Borrower and
shall not result in any liability of the Issuing Lender to the Borrower.

3.7 LETTER OF CREDIT PAYMENTS. If any draft shall be presented for
payment under any Letter of Credit, the Issuing Lender shall promptly notify the
Borrower of the date and amount thereof. The responsibility of the Issuing
Lender to the Borrower in connection with any draft presented for payment under
any Letter of Credit shall, in addition to any payment obligation expressly
provided for in such Letter of Credit, be limited to determining that the
documents (including each draft) delivered under such Letter of Credit in
connection with such presentment are substantially in conformity with such
Letter of Credit.

3.8 APPLICATIONS. To the extent that any provision of any Application
related to any Letter of Credit is inconsistent with the provisions of this
Section 3, the provisions of this Section 3 shall apply.

SECTION 4. REPRESENTATIONS AND WARRANTIES

To induce the Agent and the Lenders to enter into this Agreement and
to make the Loans and issue or participate in the Letters of Credit, the
Borrower hereby represents and warrants to the Agent and each Lender that:

4.1 FINANCIAL CONDITION. (a) The unaudited PRO FORMA consolidated
balance sheet of the Borrower and its consolidated Subsidiaries as at September
28, 1997 (including the notes thereto) (the "PRO FORMA BALANCE SHEET"), copies
of which have heretofore been furnished to each Lender, has been prepared giving
effect (as if such events had occurred on such date) to (i) the consummation of
the Recapitalization, (ii) the use of proceeds of the Loans to be made, and the
Senior Notes and Common Stock to be issued, on the Closing Date and (iii) the
payment of fees and expenses in connection with the foregoing. The Pro

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Forma Balance Sheet has been prepared based on the best information available to
the Borrower as of the date of delivery thereof, and presents fairly on a PRO
FORMA basis the estimated financial position of Borrower and its consolidated
Subsidiaries as at September 28, 1997, assuming that the events specified in the
preceding sentence had actually occurred at such date.

(b) The audited consolidated balance sheets of the Borrower and its
consolidated Subsidiaries as at January 1, 1995, December 31, 1995 and December
29, 1996, and the related consolidated statements of income and of cash flows
for the fiscal years ended on such dates, reported on by and accompanied by an
unqualified report from Arthur Andersen LLP, present fairly the consolidated
financial condition of the Borrower and its consolidated Subsidiaries as at such
dates, and the consolidated results of its operations and its consolidated cash
flows for the respective fiscal years then ended. The unaudited consolidated
balance sheet of the Borrower and its consolidated Subsidiaries as at
September 28, 1997, and the related unaudited consolidated statements of income
and cash flows for the nine-month period ended on such date, present fairly the
consolidated financial condition of the Borrower and its consolidated
Subsidiaries as at such date, and the consolidated results of its operations and
its consolidated cash flows for the nine-month period then ended (subject to
normal year-end audit adjustments). All such financial statements, including
the related schedules and notes thereto, have been prepared in accordance with
GAAP applied consistently throughout the periods involved (except as approved by
the aforementioned firm of accountants and disclosed therein). The Borrower and
its Subsidiaries do not have any material Guarantee Obligations, contingent
liabilities and liabilities for taxes, or any long-term leases or unusual
forward or long-term commitments, including, without limitation, any interest
rate or foreign currency swap or exchange transaction or other obligation in
respect of derivatives, which are not reflected in the most recent financial
statements referred to in this paragraph (b). During the period from December
29, 1996 to and including the date hereof there has been no Disposition by the
Borrower or any of its consolidated Subsidiaries of any material part of its
business or Property, other than its sale of Properties to DavCo Restaurants,
Inc. on July 14, 1997.

4.2 NO CHANGE. Since September 28, 1997 there has been no development
or event which has had or could reasonably be expected to have a Material
Adverse Effect.

4.3 CORPORATE EXISTENCE; COMPLIANCE WITH LAW. Each of the Borrower
and its Subsidiaries (a) is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization, (b) has the
corporate power and authority, and the legal right, to own and operate its
Property, to lease the Property it operates as lessee and to conduct the
business in which it is currently engaged, (c) is duly qualified as a foreign
corporation and in good standing under the laws of each jurisdiction where its
ownership, lease or operation of Property or the conduct of its business
requires such qualification and (d) is in compliance with all Requirements of
Law, except, in the case of clauses (b), (c) and (d), to the extent that the
failure to do so could not, in the aggregate, reasonably be expected to have a
Material Adverse Effect.

4.4 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. Each
Loan Party has the corporate power and authority, and the legal right, to make,
deliver and perform

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the Loan Documents to which it is a party and, in the case of the Borrower, to
borrow hereunder. Each Loan Party has taken all necessary corporate action to
authorize the execution, delivery and performance of the Loan Documents to which
it is a party and, in the case of the Borrower, to authorize the borrowings on
the terms and conditions of this Agreement. No consent or authorization of,
filing with, notice to or other act by or in respect of, any Governmental
Authority or any other Person is required in connection with the
Recapitalization and the borrowings hereunder or with the execution, delivery,
performance, validity or enforceability of this Agreement or any of the Loan
Documents, except (i) consents, authorizations, filings and notices described in
Schedule 4.4, which consents, authorizations, filings and notices have been
obtained or made and are in full force and effect and (ii) the filings referred
to in Section 4.19. Each Loan Document has been duly executed and delivered on
behalf of each Loan Party thereto. This Agreement constitutes, and each other
Loan Document upon execution will constitute, a legal, valid and binding
obligation of each Loan Party thereto, enforceable against each such Loan Party
in accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and by general
equitable principles (whether enforcement is sought by proceedings in equity or
at law).

4.5 NO LEGAL BAR. The execution, delivery and performance of this
Agreement and the other Loan Documents, the issuance of Letters of Credit, the
borrowings hereunder and the use of the proceeds thereof will not violate any
Requirement of Law or any Contractual Obligation of the Borrower or any of its
Subsidiaries and will not result in, or require, the creation or imposition of
any Lien on any of their respective properties or revenues pursuant to any
Requirement of Law or any such Contractual Obligation (other than the Liens
created by the Security Documents). No Requirement of Law or Contractual
Obligation applicable to the Borrower or any of its Subsidiaries could
reasonably be expected to have a Material Adverse Effect.

4.6 NO MATERIAL LITIGATION. No litigation, investigation or
proceeding of or before any arbitrator or Governmental Authority is pending or,
to the knowledge of the Borrower, threatened by or against the Borrower or any
of its Subsidiaries or against any of their respective properties or revenues
(a) with respect to any of the Loan Documents or any of the transactions
contemplated hereby or thereby or (b) as to which there is a reasonable
possibility of an adverse determination and which could reasonably be expected
to have a Material Adverse Effect.

4.7 NO DEFAULT. Neither the Borrower nor any of its Subsidiaries is
in default under or with respect to any of its Contractual Obligations in any
respect which could reasonably be expected to have a Material Adverse Effect.
No Default or Event of Default has occurred and is continuing.

4.8 OWNERSHIP OF PROPERTY; LIENS. Each of the Borrower and each of
its Subsidiaries has title in fee simple to, or a valid leasehold interest in,
all its Real Property, and good title to, or a valid leasehold interest in, all
its other Property, except for such defects in title as could not, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect,
and none of such Property is subject to any Lien except as permitted

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by Section 7.3. The Borrower has previously furnished to the Agent a list of
all Real Property and such list, and the information set forth thereon, is true
and complete in all material respects.

4.9 INTELLECTUAL PROPERTY. Each of the Borrower and each of its
Subsidiaries owns, or is licensed to use, all Intellectual Property necessary
for the conduct of its business as currently conducted, except for such
Intellectual Property the failure to so own or be licensed to use could not
reasonably be expected to have a Material Adverse Effect. To the Borrower's
knowledge, no material claim has been asserted and is pending by any Person
challenging or questioning the use of any Intellectual Property or the validity
or effectiveness of any Intellectual Property, nor does Borrower know of any
valid basis for any such claim. To the Borrower's knowledge, the use of
Intellectual Property by the Borrower and its Subsidiaries does not infringe on
the rights of any Person in any material respect.

4.10 TAXES. Each of the Borrower and each of its Subsidiaries has
filed or caused to be filed all federal, state and other material tax returns
which are required to be filed and has paid all taxes shown to be due and
payable on said returns or on any assessments made against it or any of its
Property and all other taxes, fees or other charges imposed on it or any of its
Property by any Governmental Authority (other than any the amount or validity of
which are currently being contested in good faith by appropriate proceedings and
with respect to which reserves in conformity with GAAP have been provided on the
books of the Borrower or its Subsidiaries, as the case may be); no tax Lien has
been filed, and, to the knowledge of the Borrower, no claim is being asserted,
with respect to any such tax, fee or other charge.

4.11 FEDERAL REGULATIONS. No part of the proceeds of any Loans will
be used for "purchasing" or "carrying" any "margin stock" within the respective
meanings of each of the quoted terms under Regulation G or Regulation U as now
and from time to time hereafter in effect or for any purpose which violates the
provisions of such Regulations of the Board. If requested by any Lender or the
Agent, the Borrower will furnish to the Agent and each Lender a statement to the
foregoing effect in conformity with the requirements of FR Form G-3 or FR Form
U-1 referred to in Regulation G or Regulation U, as the case may be.

4.12 LABOR MATTERS. There are no strikes or other labor disputes
against the Borrower or any of its Subsidiaries pending or, to the knowledge of
the Borrower, threatened that (individually or in the aggregate) could
reasonably be expected to have a Material Adverse Effect. Hours worked by and
payment made to employees of the Borrower and its Subsidiaries have not been in
violation of the Fair Labor Standards Act or any other applicable Requirement of
Law dealing with such matters that (individually or in the aggregate) could
reasonably be expected to have a Material Adverse Effect. All payments due from
the Borrower or any of its Subsidiaries on account of employee health and
welfare insurance that (individually or in the aggregate) could reasonably be
expected to have a Material Adverse Effect if not paid have been paid or accrued
as a liability on the books of the Borrower or the relevant Subsidiary.

4.13 ERISA. Neither a Reportable Event nor an "accumulated funding
deficiency" (within the meaning of Section 412 of the Code or Section 302 of
ERISA) has

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45

occurred during the five-year period prior to the date on which this
representation is made or deemed made with respect to any Plan, and each Plan
has complied in all material respects with the applicable provisions of ERISA
and the Code. No termination of a Single Employer Plan has occurred, and no
Lien in favor of the PBGC or a Plan has arisen, during such five-year period.
The present value of all accrued benefits under each Single Employer Plan (based
on those assumptions used to fund such Plans) did not, as of the last annual
valuation date prior to the date on which this representation is made or deemed
made, exceed the value of the assets of such Plan allocable to such accrued
benefits by a material amount. Neither the Borrower nor any Commonly Controlled
Entity has had a complete or partial withdrawal from any Multiemployer Plan
which has resulted or could reasonably be expected to result in a material
liability under ERISA, and neither the Borrower nor any Commonly Controlled
Entity would become subject to any material liability under ERISA if the
Borrower or any such Commonly Controlled Entity were to withdraw completely from
all Multiemployer Plans as of the valuation date most closely preceding the date
on which this representation is made or deemed made. No such Multiemployer Plan
is in Reorganization or Insolvent.

4.14 INVESTMENT COMPANY ACT; OTHER REGULATIONS. No Loan Party is an
"investment company", or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended. No Loan
Party is subject to regulation under any Requirement of Law (other than
Regulation X of the Board) which limits its ability to incur Indebtedness.

4.15 SUBSIDIARIES. The Subsidiaries listed on Schedule 4.15
constitute all the Subsidiaries of the Borrower at the date hereof.

4.16 USE OF PROCEEDS. The proceeds of the Term Loans, together with
the proceeds of the Offerings, shall be used to repay all outstanding
obligations under, and terminate, the Existing Credit Facility and to pay
related fees and expenses. The proceeds of the Revolving Credit Loans and the
Letters of Credit shall be used for general corporate purposes.

4.17 ENVIRONMENTAL MATTERS.

(a) The facilities and properties owned, leased or operated by the
Borrower or any of its Subsidiaries (the "PROPERTIES") do not contain, and to
the Borrower's knowledge have not previously contained, any Materials of
Environmental Concern in amounts or concentrations or under circumstances which
(i) constitute or constituted a violation of, or (ii) could give rise to
liability under, any Environmental Law, except in either case insofar as such
violation or liability, or any aggregation thereof, could not reasonably be
expected to result in the payment of a Material Environmental Amount.

(b) The Properties and all operations at the Properties are in
material compliance, and have to the Borrower's knowledge in the last five years
been in material compliance, with all applicable Environmental Laws, and to the
Borrower's knowledge there is no contamination at, under or about the Properties
or violation of any Environmental Law with respect to the Properties or the
business operated by the Borrower or any of its Subsidiaries (the "BUSINESS")
which to the Borrower's knowledge could materially interfere

<PAGE>
46

with the continued operation of the Properties or materially impair the fair
saleable value thereof. Neither the Borrower nor any of its Subsidiaries has
assumed any material liability of any other Person under Environmental Laws.

(c) Neither the Borrower nor any of its Subsidiaries has received or
is aware of any written notice of violation, alleged violation, non-compliance,
liability or potential liability regarding environmental matters or compliance
with Environmental Laws with regard to any of the Properties or the Business,
nor does the Borrower have knowledge or reason to believe that any such notice
will be received or is being threatened, except insofar as such notice or
threatened notice, or any aggregation thereof, does not involve a matter or
matters that could reasonably be expected to result in the payment of a Material
Environmental Amount.

(d) Materials of Environmental Concern have not to the Borrower's
knowledge been transported or disposed of from the Properties in violation of,
or in a manner or to a location which could give rise to liability under, any
Environmental Law, nor to the Borrower's knowledge have any Materials of
Environmental Concern been generated, treated, stored or disposed of at, on or
under any of the Properties in violation of, or in a manner that could give rise
to liability under, any applicable Environmental Law, except insofar as any such
violation or liability referred to in this paragraph, or any aggregation
thereof, could not reasonably be expected to result in the payment of a Material
Environmental Amount.

(e) No judicial proceeding or governmental or administrative action is
pending or, to the knowledge of the Borrower, threatened, under any
Environmental Law to which the Borrower or any Subsidiary is or will be named as
a party with respect to the Properties or the Business, nor are there any
consent decrees or other decrees, consent orders, administrative orders or other
orders, or other administrative or judicial requirements outstanding under any
Environmental Law with respect to the Properties or the Business, except insofar
as such proceeding, action, decree, order or other requirement, or any
aggregation thereof, could not reasonably be expected to result in the payment
of a Material Environmental Amount.

(f) To the Borrower's knowledge, there has been no release or threat
of release of Materials of Environmental Concern at or from the Properties, or
arising from or related to the operations of the Borrower or any Subsidiary in
connection with the Properties or otherwise in connection with the Business, in
violation of or in amounts or in a manner that could give rise to liability
under Environmental Laws, except insofar as any such violation or liability
referred to in this paragraph, or any aggregation thereof, could not reasonably
be expected to result in the payment of a Material Environmental Amount.

4.18 ACCURACY OF INFORMATION, ETC. No statement or information
contained in this Agreement, any other Loan Document or any other document,
certificate or statement furnished to the Agent or the Lenders or any of them,
by or on behalf of any Loan Party for use in connection with the transactions
contemplated by this Agreement or the other Loan Documents, contained as of the
date such statement, information, document or certificate was so furnished,
considering each in the context in which it was made and taken as a whole with
all other statements and information provided, any untrue statement of a
material fact or

<PAGE>
47

omitted to state a material fact necessary in order to make the statements
contained herein or therein, in light of the circumstances in which made, not
misleading; PROVIDED that the Borrower's representation and warranty as to the
projections and PRO FORMA financial information contained in the materials
referenced above is based upon good faith estimates and assumptions believed by
management of the Borrower to be reasonable at the time made, it being
recognized by the Lenders that such financial information as it relates to
future events is not to be viewed as fact, that actual results during the period
or periods covered by such financial information may differ from the projected
results set forth therein by a material amount and that no assurance can be
given that such projected results will be realized. There is no fact known to
any Loan Party that could reasonably be expected to have a Material Adverse
Effect that has not been expressly disclosed herein, in the other Loan Documents
or in any other documents, certificates and statements furnished to the Agent
and the Lenders for use in connection with the transactions contemplated hereby
and by the other Loan Documents.

4.19 SECURITY DOCUMENTS. (a) The Guarantee and Collateral Agreement
is effective to create in favor of the Agent, for the benefit of the Lenders, a
legal, valid and enforceable security interest in the Collateral described
therein and proceeds thereof. In the case of the Pledged Stock described in the
Guarantee and Collateral Agreement, when stock certificates representing such
Pledged Stock are delivered to the Agent, and in the case of the other
Collateral described in the Guarantee and Collateral Agreement, when financing
statements in appropriate form are filed in the offices specified on
Schedule 4.19(a), the Guarantee and Collateral Agreement shall constitute a
fully perfected Lien on, and security interest in, all right, title and interest
of the Loan Parties in such Collateral and the proceeds thereof, as security for
the Obligations (as defined in the Guarantee and Collateral Agreement).

(b) Each of the Mortgages is effective to create in favor of the
Agent, for the benefit of the Lenders, a legal, valid and enforceable Lien on
the Mortgaged Properties described therein and proceeds thereof, and when the
Mortgages are filed in the offices specified on Schedule 4.19(b), each such
Mortgage shall constitute a fully perfected Lien on, and security interest in,
all right, title and interest of the Loan Parties in the Mortgaged Properties
and the proceeds thereof, as security for the Obligations (as defined in the
relevant Mortgage).

4.20 SOLVENCY. Each Loan Party is, and after giving effect to the
Recapitalization and the incurrence of all Indebtedness and obligations being
incurred in connection herewith and therewith will be, Solvent.

4.21 REGULATION H. No Mortgage encumbers improved Real Property which
is located in an area that has been identified by the Secretary of Housing and
Urban Development as an area having special flood hazards and in which flood
insurance has been made available under the National Flood Insurance Act
of 1968.

4.22 MATERIAL CONTRACTS. Set forth on Schedule 4.22 is a complete
list as of the date hereof of all material agreements, instruments and
undertakings to which the

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48

Borrower or any of its Subsidiaries is a party or by which any of their
respective Properties are bound.

SECTION 5. CONDITIONS PRECEDENT

5.1 CONDITIONS TO INITIAL EXTENSION OF CREDIT. The agreement of each
Lender to make the initial extension of credit requested to be made by it is
subject to the satisfaction, prior to or concurrently with the making of such
extension of credit on the Closing Date, of the following conditions precedent:

(a) LOAN DOCUMENTS. The Agent shall have received (i) this Agreement,
executed and delivered by a duly authorized officer of the Borrower, (ii)
the Guarantee and Collateral Agreement, executed and delivered by a duly
authorized officer of the Borrower and each Guarantor, (iii) Mortgages
covering each of the Mortgaged Properties, each executed and delivered by a
duly authorized officer of each party thereto, and (iv) for the account of
each relevant Lender, Notes conforming to the requirements hereof and
executed and delivered by a duly authorized officer of the Borrower.

(b) OFFERINGS. Each of the Offerings shall have been consummated, in
each case on terms and conditions reasonably satisfactory to the Lenders,
for gross cash proceeds of at least $275,000,000 of which not less than
$75,000,000 shall consist of the gross cash proceeds from the Common Stock
Offering.

(c) APPROVALS. All governmental and third party approvals (including
landlords' and other consents) necessary in connection with the
Recapitalization, the continuing operations of the Borrower and its
Subsidiaries and the transactions contemplated hereby shall have been
obtained and be in full force and effect, and all applicable waiting
periods shall have expired without any action being taken or threatened by
any competent authority which would restrain, prevent or otherwise impose
adverse conditions on the Recapitalization or the financing contemplated
hereby.

(d) RELATED AGREEMENTS. The Agent shall have received (in a form
reasonably satisfactory to it), with a copy for each Lender, true and
correct copies, certified as to authenticity by the Borrower, of the Senior
Note Indenture and such other documents or instruments as may be reasonably
requested by the Agent, including, without limitation, a copy of any other
debt instrument, security agreement or other material contract to which the
Loan Parties may be a party.

(e) EXISTING CREDIT FACILITY. The Agent shall have received evidence
satisfactory to it that the Existing Credit Facility shall be
simultaneously terminated or assigned to the Lenders, all amounts
thereunder shall be simultaneously paid in full or assigned to the Lenders
and arrangements satisfactory to the Agent shall have been made for the
termination of Liens and security interests granted in connection
therewith.

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49

(f) FEES. The Lenders and the Agent shall have received all fees
required to be paid, and all expenses for which invoices have been
presented, on or before the Closing Date.

(g) BUSINESS PLAN. The Lenders shall have received a satisfactory
business plan for fiscal years 1997 through 2002 and a satisfactory written
analysis of the business and prospects of the Borrower and its Subsidiaries
for the period from the Closing Date through December 31, 2002.

(h) SOLVENCY ANALYSIS. The Lenders shall have received a reasonably
satisfactory solvency analysis certified by the chief financial officer of
the Borrower which shall document the solvency of the Borrower and its
Subsidiaries considered as a whole after giving effect to the transactions
contemplated hereby.

(i) BUDGET. The Lenders shall have received a budget for the Borrower
and its Subsidiaries for the 1998 fiscal year.

(j) LIEN SEARCHES. The Agent shall have received the results of a
recent lien search in each of the jurisdictions where assets of the Loan
Parties are located, and such search shall reveal no liens on any of the
assets of the Borrower or its Subsidiaries except for liens permitted by
Section 7.3 and liens to be terminated on the Closing Date.

(k) EXPENSES. The Agent shall have received satisfactory evidence
that the fees and expenses to be incurred in connection with the
Recapitalization and the financing thereof shall not exceed $25,000,000.

(l) CLOSING CERTIFICATE. The Agent shall have received, with a
counterpart for each Lender, a certificate of each Loan Party, dated the
Closing Date, substantially in the form of Exhibit C, with appropriate
insertions and attachments.

(m) LEGAL OPINIONS. The Agent shall have received the following
executed legal opinions:

(i) the legal opinion of Mayer, Brown & Platt, special counsel
to the Borrower and its Subsidiaries, substantially in the form of
Exhibit F-1;

(ii) the legal opinion of Larry W. Browne, Esq., General Counsel
of the Borrower and its Subsidiaries, substantially in the form of
Exhibit F-2;

(iii) to the extent consented to by the relevant counsel, each
legal opinion, if any, delivered in connection with the Offerings
accompanied by a reliance letter in favor of the Lenders; and

(iv) the legal opinion of Choate, Hall & Stewart, special
Massachusetts counsel to the Borrower and its Subsidiaries.

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50

Each such legal opinion shall cover such other matters incident to the
transactions contemplated by this Agreement as the Agent may reasonably
require.

(n) PLEDGED STOCK; STOCK POWERS. The Agent shall have received the
certificates representing the shares of Capital Stock pledged pursuant to
the Guarantee and Collateral Agreement, together with an undated stock
power for each such certificate executed in blank by a duly authorized
officer of the pledgor thereof.

(o) FILINGS, REGISTRATIONS AND RECORDINGS. Each document (including,
without limitation, any Uniform Commercial Code financing
statement) required by the Security Documents or under law or reasonably
requested by the Agent to be filed, registered or recorded in order to
create in favor of the Agent, for the benefit of the Lenders, a perfected
Lien on the Collateral described therein, prior and superior in right to
any other Person (other than with respect to Liens expressly permitted by
Section 7.3), shall be in proper form for filing, registration or
recordation.

(p) MORTGAGES, ETC. (i) The Agent shall have received, and the title
insurance company issuing the policy referred to in Section 5.1(p)(ii) (the
"TITLE INSURANCE COMPANY") shall have received to the extent reasonably
requested by the Agent, maps or plats of an as-built survey of the sites of
the Mortgaged Properties listed on Schedule 5.1(p) (the "MAJOR MORTGAGED
PROPERTIES") certified to the Agent and the Title Insurance Company in a
manner satisfactory to them, dated a date satisfactory to the Agent and the
Title Insurance Company by an independent professional licensed land
surveyor satisfactory to the Agent and the Title Insurance Company, which
maps or plats and the surveys on which they are based shall be made in
accordance with the Minimum Standard Detail Requirements for Land Title
Surveys jointly established and adopted by the American Land Title
Association and the American Congress on Surveying and Mapping in 1992,
and, without limiting the generality of the foregoing, there shall be
surveyed and shown on such maps, plats or surveys the following: (A) the
locations on such sites of all the buildings, structures and other
improvements and the established building setback lines; (B) the lines of
streets abutting the sites and width thereof; (C) all access and other
easements appurtenant to the sites; (D) all roadways, paths, driveways,
easements, encroachments and overhanging projections and similar
encumbrances affecting the site, whether recorded, apparent from a physical
inspection of the sites or otherwise known to the surveyor; (E) any
encroachments on any adjoining property by the building structures and
improvements on the sites; (F) if the site is described as being on a filed
map, a legend relating the survey to said map; and (G) the flood zone
designations, if any, in which the Major Mortgaged Properties are located.

(ii) The Agent shall have received in respect of each Major Mortgaged
Property a mortgagee's title insurance policy (or policies) or marked up
unconditional binder for such insurance. Each such policy shall (A) be in
an amount equal to the fair market value of such Major Mortgaged Property;
(B) be issued at ordinary rates; (C) insure that the Mortgage insured
thereby creates a valid first Lien on such Major Mortgaged Property free
and clear of all defects and encumbrances, except as disclosed therein; (D)
name the Agent for the benefit of the Lenders as the insured

<PAGE>
51

thereunder; (E) be in the form of 1992 ALTA Loan Policy (or equivalent
policies); (F) contain such endorsements and affirmative coverage as the
Agent may reasonably request; and (G) be issued by title companies
satisfactory to the Agent (including any such title companies acting as
co-insurers or reinsurers, at the option of the Agent). The Agent shall
have received evidence satisfactory to it that all premiums in respect of
each such policy, all charges for mortgage recording tax, and all related
expenses, if any, have been paid.

(iii) If reasonably requested by the Agent, the Agent shall have
received (A) a policy of flood insurance which (1) covers any parcel of
improved Real Property located in a flood hazard zone and which is
encumbered by any Mortgage, (2) is written in an amount not less than the
outstanding principal amount of the indebtedness secured by such Mortgage
which is reasonably allocable to such Real Property or the maximum limit of
coverage made available with respect to the particular type of property
under the National Flood Insurance Act of 1968, whichever is less, and (3)
has a term ending not later than the maturity of the Indebtedness secured
by such Mortgage; and (B) confirmation that the Borrower has received the
notice required pursuant to Section 208(e)(3) of Regulation H of the Board.

(iv) The Agent shall have received a copy of all recorded documents
referred to, or listed as exceptions to title in, the title policy or
policies referred to in Section 5.1(p)(ii).

(q) INSURANCE. The Agent shall have received insurance certificates
satisfying the requirements of Section 6.5.

(r) APPRAISALS. The Agent shall have received and be satisfied with
the form and content of asset appraisal reports with respect to the
Property owned by the Borrower and its Subsidiaries.

5.2 CONDITIONS TO EACH EXTENSION OF CREDIT. The agreement of each
Lender to make any extension of credit requested to be made by it on any date
(including, without limitation, its initial extension of credit) is subject to
the satisfaction of the following conditions precedent:

(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by any Loan Party in or pursuant to the Loan Documents
shall be true and correct in all material respects on and as of such date
as if made on and as of such date, except for representations and
warranties expressly stated to relate to a specific earlier date, in which
case such representations and warranties shall continue to be true and
correct in all material respects as of such earlier date.

(b) NO DEFAULT. No Default or Event of Default shall have occurred
and be continuing on such date or after giving effect to the extensions of
credit requested to be made on such date.

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52

Each borrowing by and issuance of a Letter of Credit on behalf of the Borrower
hereunder shall constitute a representation and warranty by the Borrower as of
the date of such extension of credit that the conditions contained in this
Section 5.2 have been satisfied.

SECTION 6. AFFIRMATIVE COVENANTS

The Borrower hereby agrees that, so long as the Commitments remain in
effect, any Letter of Credit remains outstanding or any Loan or other amount is
owing to any Lender or the Agent hereunder, the Borrower shall and shall cause
each of its Subsidiaries to:

6.1 FINANCIAL STATEMENTS. Furnish to the Agent:

(a) as soon as available, but in any event within 90 days after the
end of each fiscal year of the Borrower, a copy of the audited consolidated
balance sheet of the Borrower and its consolidated Subsidiaries as at the
end of such year and the related audited consolidated statements of income
and of cash flows for such year, setting forth in each case in comparative
form the figures for the previous year, reported on without a "going
concern" or like qualification or exception, or qualification arising out
of the scope of the audit, by Arthur Andersen LLP or other independent
certified public accountants of nationally recognized standing; and

(b) as soon as available, but in any event not later than 45 days
after the end of each of the first three quarterly periods of each fiscal
year of the Borrower, the unaudited consolidated balance sheet of the
Borrower and its consolidated Subsidiaries as at the end of such quarter
and the related unaudited consolidated statements of income and of cash
flows for such quarter and the portion of the fiscal year through the end
of such quarter, setting forth in each case in comparative form the figures
for the previous year, certified by an Authorized Signatory as being fairly
stated in all material respects (subject to normal year-end audit
adjustments); and

all such financial statements shall be complete and correct in all material
respects and shall be prepared in reasonable detail and in accordance with GAAP
applied consistently throughout the periods reflected therein and with prior
periods (except as approved by such accountants or officer, as the case may be,
and disclosed therein). Notwithstanding the foregoing, it is understood and
agreed that so long as the Borrower is required to file Forms 10-K and 10-Q (or
any successor forms) with the Securities and Exchange Commission (or any
successor agency), the Borrower may deliver copies of such Forms with respect to
the relevant time periods in lieu of the deliveries specified in Sections 6.1(a)
and (b).

6.2 CERTIFICATES; OTHER INFORMATION. Furnish to the Agent or, in the
case of clause (h), to the relevant Lender:

(a) concurrently with the delivery of the financial statements
referred to in Section 6.1(a), a certificate of the independent certified
public accountants reporting on such financial statements stating that in
making the examination necessary therefor no knowledge was obtained of any
Default or Event of Default, except as specified in such certificate;

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53

(b) concurrently with the delivery of any financial statements
pursuant to Section 6.1, (i) a certificate of an Authorized Signatory
stating that, to the best of such Authorized Signatory's knowledge, each
Loan Party during such period has observed or performed all of its
covenants and other agreements, and satisfied every condition, contained in
this Agreement and the other Loan Documents to which it is a party to be
observed, performed or satisfied by it, and that such Authorized Signatory
has obtained no knowledge of any Default or Event of Default except as
specified in such certificate and (ii) in the case of quarterly or annual
financial statements, (x) a Compliance Certificate containing all
information necessary for determining compliance by the Borrower and its
Subsidiaries with the provisions of this Agreement referred to therein as
of the last day of the fiscal quarter or fiscal year of the Borrower, as
the case may be, and (y) to the extent not previously disclosed to the
Agent, a listing of any county or state within the United States where any
Loan Party keeps inventory or equipment and of any Intellectual Property
acquired by any Loan Party since the date of the most recent list delivered
pursuant to this clause (y) (or, in the case of the first such list so
delivered, since the Closing Date);

(c) as soon as available, and in any event no later than 45 days after
the end of each fiscal year of the Borrower, a detailed consolidated budget
for the following fiscal year (including a projected consolidated balance
sheet of the Borrower and its Subsidiaries as of the end of the following
fiscal year, and the related consolidated statements of projected cash
flow, projected changes in financial position and projected income), and,
as soon as available, significant revisions, if any, of such budget and
projections with respect to such fiscal year (collectively, the
"PROJECTIONS"), which Projections shall in each case be accompanied by a
certificate of an Authorized Signatory stating that such Projections are
based on reasonable estimates, information and assumptions and that such
Authorized Signatory has no reason to believe that such Projections are
incorrect or misleading in any material respect;

(d) within 45 days after the end of each fiscal quarter of the
Borrower, a narrative discussion and analysis of the financial condition
and results of operations of the Borrower and its Subsidiaries for such
fiscal quarter and for the period from the beginning of the then current
fiscal year to the end of such fiscal quarter, as compared to the portion
of the Projections covering such periods and to the comparable periods of
the previous year;

(e) no later than ten Business Days prior to the effectiveness
thereof, copies of substantially final drafts of any proposed amendment,
supplement, waiver or other modification with respect to the Senior Note
Indenture;

(f) within five days after the same are sent, copies of all financial
statements and reports which the Borrower sends to the holders of any class
of its debt securities or public equity securities and within five days
after the same are filed, copies of all financial statements and reports
which the Borrower may make to, or file with, the Securities and Exchange
Commission or any successor or analogous Governmental Authority;

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54

(g) within ten days of receipt, copies of any management letter issued
or provided by the auditors of the Borrower or any Subsidiary; and

(h) promptly, such additional financial and other information as any
Lender may from time to time reasonably request.

6.3 PAYMENT OF OBLIGATIONS. (a) Pay, discharge or otherwise satisfy
at or before maturity or before they become delinquent, as the case may be, all
its material obligations of whatever nature, except where the amount or validity
thereof is currently being contested in good faith by appropriate proceedings
and reserves in conformity with GAAP with respect thereto have been provided on
the books of the Borrower or its Subsidiaries, as the case may be, and (b) pay
when due all real estate taxes, assessments and other charges assessed or levied
against any Real Property.

6.4 CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE, ETC. (a) (i)
Preserve, renew and keep in full force and effect its corporate existence and
(ii) take all reasonable action to maintain all rights, privileges and
franchises necessary or desirable in the normal conduct of its business, except,
in each case, as otherwise permitted by Section 7.4 and except, in the case of
clause (ii) above, to the extent that failure to do so could not reasonably be
expected to have a Material Adverse Effect; (b) comply with all Contractual
Obligations and Requirements of Law (including, without limitation, those
relating to Real Property) except to the extent that failure to comply therewith
could not, in the aggregate, reasonably be expected to have a Material Adverse
Effect.

6.5 MAINTENANCE OF PROPERTY; INSURANCE. (a) Keep all Property useful
and necessary in its business (including, without limitation, all Real Property)
in good working order and condition, ordinary wear and tear excepted.

(b) Maintain with financially sound and reputable insurance companies
insurance on all its Property (including, without limitation, all Inventory,
Equipment and Vehicles) in at least such amounts and against at least such risks
(but including in any event fire, explosion, theft, such other casualties as may
be reasonably requested by the Agent, public liability, product liability and
business interruption) as are usually insured against in the same general area
by companies engaged in the same or a similar business, it being understood that
dealings with RIC in accordance with past practice shall not cause this Section
6.5 to be breached, and insuring the Borrower, its Subsidiaries, the Agent and
the Lender against liability for personal injury and property damage relating to
such Property.

(c) With respect to all Real Property, maintain casualty insurance in
an amount equal to "full replacement value", covering risks customarily insured
against in the prudent operation of a similar business.

(d) All such insurance shall (i) name the Agent as insured party,
loss payee or mortgagee, (ii) provide that 30 days' notice will be given to the
Agent for any cancellation, material reduction in amount, material change in
coverage or other modification, (iii) if reasonably requested by the Agent,
include a breach of warranty clause and (iv) be reasonably satisfactory in all
other respects to the Agent.

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55

(e) The Borrower shall deliver to the Agent and the Lenders a
certificate reputable insurance broker with respect to such insurance on an
annual basis upon policy renewal and such supplemental reports with respect
thereto as the Agent may from time to time reasonably request.

6.6 INSPECTION OF PROPERTY; BOOKS AND RECORDS; DISCUSSIONS. (a) Keep
proper books of records and account in which full, true and correct entries in
conformity with GAAP and all Requirements of Law shall be made of all dealings
and transactions in relation to its business and activities and (b) permit
representatives of any Lender to visit and inspect any of its properties and
examine and make abstracts from any of its books and records at any reasonable
time during normal business hours and upon reasonable advance notice to the
Borrower and as often as may reasonably be desired and to discuss the business,
operations, properties and financial and other condition of the Borrower and its
Subsidiaries with officers and employees of the Borrower and its Subsidiaries
and with its independent certified public accountants; PROVIDED, HOWEVER, that
(i) the Agent and each Lender agree to use reasonable efforts to coordinate
their visits and inspections so as not to be unreasonably burdensome to the
Borrower and (ii) any discussions between a Lender or the Agent and the
Borrower's accountants shall be with the right of a representative of the
Borrower to be in attendance.

6.7 NOTICES. Promptly give notice to the Agent and each Lender of:

(a) the occurrence of any Default or Event of Default;

(b) any (i) default or event of default under any Contractual
Obligation of the Borrower or any of its Subsidiaries or (ii) litigation,
investigation or proceeding which may exist at any time between the
Borrower or any of its Subsidiaries and any Governmental Authority, which
in either case, if not cured or if adversely determined, as the case may
be, could reasonably be expected to have a Material Adverse Effect;

(c) any litigation or proceeding which, if adversely determined, could
result in a liability to the Borrower or any of its Subsidiaries of
$1,000,000 or more and not covered by insurance or in which injunctive or
similar relief is sought;

(d) the following events, as soon as possible and in any event within
30 days after the Borrower knows or has reason to know thereof: (i) the
occurrence of any Reportable Event with respect to any Plan, a failure to
make any required contribution to a Plan, the creation of any Lien in favor
of the PBGC or a Plan or any withdrawal from, or the termination,
Reorganization or Insolvency of, any Multiemployer Plan or (ii) the
institution of proceedings or the taking of any other action by the PBGC or
the Borrower or any Commonly Controlled Entity or any Multiemployer Plan
with respect to the withdrawal from, Reorganization or Insolvency of, or
termination under circumstances to which the provisions of Section 4041(c)
of ERISA apply of, any Plan; and

(e) any development or event which has had or could reasonably be
expected to have a Material Adverse Effect.

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56

Each notice pursuant to this Section 6.7 shall be accompanied by a statement of
an Authorized Signatory setting forth details of the occurrence referred to
therein and stating what action the Borrower or the relevant Subsidiary proposes
to take with respect thereto.

6.8 ENVIRONMENTAL LAWS. (a) Comply in all material respects with, and
ensure compliance in all material respects by all tenants and subtenants, if
any, with, all applicable Environmental Laws, and obtain and comply in all
material respects with and maintain, and ensure that all tenants and subtenants
obtain and comply in all material respects with and maintain, any and all
licenses, approvals, notifications, registrations or permits required by
applicable Environmental Laws.

(b) Conduct and complete all investigations, studies, sampling and
testing, and all remedial, removal and other actions required under
Environmental Laws and promptly comply in all material respects with all lawful
orders and directives of all Governmental Authorities regarding Environmental
Laws.

6.9 INTEREST RATE PROTECTION. In the case of the Borrower, within 60
days after the Closing Date, enter into Interest Rate Protection Agreements to
the extent necessary to provide that at least 50% of the aggregate principal
amount of outstanding Loans and Letters of Credit is subject to either a fixed
interest rate or interest rate protection for a period of not less than two
years, which Interest Rate Protection Agreements shall have terms and conditions
reasonably satisfactory to the Agent.

6.10 ADDITIONAL COLLATERAL, ETC. (a) With respect to any Property
acquired after the Closing Date by the Borrower or any of its Subsidiaries other
than RIC and Excluded Foreign Subsidiaries (other than (x) any Property
described in paragraph (b), (c) or (d) below and (y) any Property subject to a
Lien expressly permitted by Section 7.3(g)) as to which the Agent, for the
benefit of the Lenders, does not have a perfected Lien, promptly (i) execute and
deliver to the Agent such amendments to the Guarantee and Collateral Agreement
or such other documents as the Agent deems necessary or advisable in order to
grant to the Agent, for the benefit of the Lenders, a security interest in such
Property and (ii) take all actions necessary or advisable to grant to the Agent,
for the benefit of the Lenders, a perfected security interest in such Property,
including without limitation, the filing of Uniform Commercial Code financing
statements in such jurisdictions as may be required by the Guarantee and
Collateral Agreement or by law or as may be requested by the Agent.

(b) With respect to any fee interest or leasehold interest in any real
estate having a value (together with improvements thereof) of at least $100,000
acquired after the Closing Date by the Borrower or any of its Subsidiaries other
than RIC and Excluded Foreign Subsidiaries (other than any such real estate
subject to a Lien expressly permitted by Section 7.3(g)), promptly (i) execute
and deliver a Mortgage in favor of the Agent, for the benefit of the Lenders,
covering such real estate, (ii) if such value is in excess of $1,000,000,
provide the Lenders with (x) title and extended coverage insurance covering such
real estate in an amount at least equal to the purchase price of such real
estate (or such other amount as shall be reasonably specified by the Agent) as
well as a current ALTA survey thereof, together with a surveyor's certificate
and (y) any consents or estoppels reasonably deemed necessary or advisable by
the Agent in connection with such mortgage or deed of trust, each of the

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57

foregoing in form and substance reasonably satisfactory to the Agent, and (iii)
if requested by the Agent, deliver to the Agent legal opinions relating to the
matters described above, which opinions shall be in form and substance, and from
counsel, reasonably satisfactory to the Agent.

(c) With respect to any new Subsidiary (other than an Excluded Foreign
Subsidiary) created or acquired by the Borrower or any of its Subsidiaries after
the Closing Date (which, for the purposes of this paragraph (c), shall include
any existing Subsidiary that ceases to be an Excluded Foreign Subsidiary),
promptly (i) execute and deliver to the Agent such amendments to the Guarantee
and Collateral Agreement as the Agent deems necessary or advisable in order to
grant to the Agent, for the benefit of the Lenders, a perfected first priority
security interest in the Capital Stock of such new Subsidiary which is owned by
the Borrower or any of its Subsidiaries, (ii) deliver to the Agent the
certificates representing such Capital Stock, together with undated stock
powers, in blank, executed and delivered by a duly authorized officer of the
Borrower or such Subsidiary, as the case may be, (iii) cause such new Subsidiary
(A) to become a party to the Guarantee and Collateral Agreement and (B) to take
such actions necessary or advisable to grant to the Agent for the benefit of the
Lenders a perfected first priority security interest in the Collateral described
in the Guarantee and Collateral Agreement with respect to such new Subsidiary,
including, without limitation, the filing of Uniform Commercial Code financing
statements in such jurisdictions as may be required by the Guarantee and
Collateral Agreement or by law or as may be requested by the Agent, and (iv) if
requested by the Agent, deliver to the Agent legal opinions relating to the
matters described above, which opinions shall be in form and substance, and from
counsel, reasonably satisfactory to the Agent.

(d) With respect to any new Excluded Foreign Subsidiary created or
acquired after the Closing Date by the Borrower or any of its Subsidiaries,
promptly (i) execute and deliver to the Agent such amendments to the Guarantee
and Collateral Agreement as the Agent deems necessary or advisable in order to
grant to the Agent, for the benefit of the Lenders, a perfected first priority
security interest in the Capital Stock of such new Subsidiary which is owned by
the Borrower or any of its Subsidiaries (other than Excluded Foreign
Subsidiaries) (provided that in no event shall more than 65% of the total
outstanding Capital Stock of any such new Subsidiary be required to be so
pledged), (ii) deliver to the Agent the certificates representing such Capital
Stock, together with undated stock powers, in blank, executed and delivered by a
duly authorized officer of the Borrower or such Subsidiary, as the case may be,
and take such other actions as may be necessary or, in the opinion of the Agent,
desirable to perfect the Lien thereon, and (iii) if requested by the Agent,
deliver to the Agent legal opinions relating to the matters described above,
which opinions shall be in form and substance, and from counsel, reasonably
satisfactory to the Agent.

6.11 MORTGAGE RECORDING TAXES. The Borrower shall pay all taxes and
other charges imposed by any Governmental Authority or by any Requirement of Law
in connection with the recording or filing of any of the Mortgages, which taxes
and charges shall be paid when due or when assessed or requested by such
Governmental Authority.

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58

SECTION 7. NEGATIVE COVENANTS

7.1 FINANCIAL CONDITION COVENANTS.

(a) CONSOLIDATED LEVERAGE RATIO. Permit the Consolidated Leverage
Ratio as at the last day of any period of four consecutive fiscal quarters of
the Borrower (or, if less, the number of full fiscal quarters subsequent to the
Closing Date) ending with any fiscal quarter set forth below to exceed the ratio
set forth below opposite such fiscal quarter:

Consolidated
Fiscal Quarter Leverage Ratio
-------------- --------------

Fiscal quarters from and including fourth
quarter of fiscal 1997 through and including
third quarter of fiscal 1998 4.50 to 1.00

Fiscal quarters from and including fourth
quarter of fiscal 1998 through and including
third quarter of fiscal 1999 4.25 to 1.00

Fiscal quarters from and including fourth
quarter of fiscal 1999 through and including
third quarter of fiscal 2000 4.00 to 1.00

Fiscal quarters from and including fourth
quarter of fiscal 2000 through and including
third quarter of fiscal 2001 3.50 to 1.00

Fiscal quarters from and including fourth
quarter of fiscal 2001 through and including
third quarter of fiscal 2002 3.00 to 1.00

Fiscal quarters from and including fourth
quarter of fiscal 2002 through and including
third quarter of fiscal 2003 2.50 to 1.00

Fiscal quarters from and including fourth
quarter of fiscal 2003 through and including
third quarter of fiscal 2004 2.25 to 1.00

Fourth fiscal quarter of fiscal 2004 and all
fiscal quarters thereafter 2.00 to 1.00;

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59

PROVIDED that, for purposes of determining the ratio described above for the
first three fiscal quarters of the Borrower following the Closing Date,
Consolidated EBITDA for each of the first three fiscal quarters of 1997 shall be
deemed to be the respective amounts set forth on Schedule 7.1.

(b) CONSOLIDATED INTEREST COVERAGE RATIO. Permit the Consolidated
Interest Coverage Ratio for any period of four consecutive fiscal quarters of
the Borrower (or, if less, the number of full fiscal quarters subsequent to the
Closing Date) ending with any fiscal quarter set forth below to be less than the
ratio set forth below opposite such fiscal quarter:

Consolidated Interest
Fiscal Quarter Coverage Ratio
-------------- ---------------------
Fiscal quarters from and including fourth
quarter of fiscal 1997 through and including
third quarter of fiscal 1999 1.70 to 1.00

Fiscal quarters from and including fourth
quarter of fiscal 1999 through and including
third quarter of fiscal 2000 1.90 to 1.00

Fiscal quarters from and including fourth
quarter of fiscal 2000 through and including
third quarter of fiscal 2001 2.30 to 1.00

Fiscal quarters from and including fourth
quarter of fiscal 2001 through and including
third quarter of fiscal 2002 2.50 to 1.00

Fiscal quarters from and including fourth
quarter of fiscal 2002 through and including
third quarter of fiscal 2003 2.90 to 1.00

Fourth fiscal quarter of fiscal 2003 and all
fiscal quarters thereafter 3.50 to 1.00;

PROVIDED that, for purposes of determining the ratio described above for the
first three fiscal quarters of the Borrower following the Closing Date,
Consolidated EBITDA, Consolidated Cash Interest Expense and cash income taxes
for each of the first three fiscal quarters of 1997 shall be deemed to be the
respective amounts set forth on Schedule 7.1.

(c) CONSOLIDATED FIXED CHARGE COVERAGE RATIO. Permit the Consolidated
Fixed Charge Coverage Ratio for any period of four consecutive fiscal quarters
of the Borrower (or, if less, the number of full fiscal quarters subsequent to
the Closing Date) ending with any fiscal quarter set forth below to be less than
the ratio set forth below opposite such fiscal quarter:

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Consolidated Fixed
Fiscal Quarter Charge Coverage Ratio
-------------- ---------------------

Fiscal quarters from and including fourth
quarter of fiscal 1997 through and including
third quarter of fiscal 2000 1.50 to 1.00

Fiscal quarters from and including fourth
quarter of fiscal 2000 through and including
third quarter of fiscal 2001 1.60 to 1.00

Fiscal quarters from and including fourth
quarter of fiscal 2001 through and including
third quarter of fiscal 2002 1.75 to 1.00

Fourth fiscal quarter of fiscal 2002 and all
fiscal quarters thereafter 2.00 to 1.00;

PROVIDED that, for purposes of determining the ratio described above for the
first three fiscal quarters of the Borrower following the Closing Date,
Consolidated EBITDA, Consolidated Cash Interest Expense, cash income taxes and
the other components of Consolidated Fixed Charges for each of the first three
fiscal quarters of 1997 shall be deemed to be the respective amounts set forth
on Schedule 7.1.

(d) MAINTENANCE OF NET WORTH. Permit Consolidated Net Worth as of the
last day of any fiscal quarter of the Borrower ending during any fiscal year set
forth below to be less than the amount set forth below opposite such fiscal
year:

Consolidated
Fiscal Year Net Worth
----------- ------------

1997 ($85,000,000)
1998 ($75,000,000)
1999 ($65,000,000)
2000 ($50,000,000)
2001 ($25,000,000)
2002 $10,000,000
2003 $40,000,000
2004 $80,000,000
2005 $130,000,000

7.2 LIMITATION ON INDEBTEDNESS AND DISQUALIFIED STOCK. Create, incur,
assume or suffer to exist (in each case, to "INCUR") any Indebtedness or issue
Disqualified Stock, except:

(a) Indebtedness of any Loan Party pursuant to any Loan Document;

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61

(b) Indebtedness (i) of the Borrower to any Subsidiary, (ii) of any
Wholly Owned Subsidiary Guarantor to the Borrower or any other Subsidiary
and (iii) to the extent permitted by Section 7.8(h), of any Subsidiary that
is not a Guarantor to the Borrower or any other Subsidiary;

(c) Indebtedness of the Borrower or any of its Subsidiaries incurred
to finance the acquisition, construction or improvement of fixed or capital
assets, in an aggregate principal amount at any one time outstanding not to
exceed $15,000,000, PROVIDED that such Indebtedness is incurred within 180
days after the date of such acquisition, construction or improvement and
does not exceed the fair market value of such acquired, constructed or
improved assets as determined in good faith by the Borrower's Board of
Directors;

(d) Indebtedness represented by Capital Lease Obligations in respect
of Sale/Leaseback Transactions involving the sale of restaurants within 24
months of the purchase of the associated real property, in an aggregate
principal amount not to exceed $20,000,000 at any one time outstanding;

(e) Indebtedness outstanding on the date hereof and listed on Schedule
7.2(e) and any refinancings, refundings, renewals or extensions thereof
(without any increase in the principal amount thereof);

(f) guarantees made in the ordinary course of business by the Borrower
or any of its Subsidiaries of obligations of any Subsidiary of the
Borrower, PROVIDED that, in the case of any guarantee of obligations of any
Subsidiary that is not a Guarantor, such guarantee is permitted by Section
7.8(h);

(g) guarantees made in the ordinary course of business by the Borrower
or any of its Subsidiaries of Indebtedness of franchisees of the Borrower
or any Wholly Owned Subsidiary Guarantor in an aggregate principal amount
at any one time outstanding not to exceed $20,000,000;

(h) Indebtedness incurred by the Borrower or any of its Subsidiaries
to finance the payment of property, casualty and specialty insurance
premiums in the ordinary course of the Borrower's business which is repaid
within 18 months of its incurrence, PROVIDED that such Indebtedness does
not exceed $7,500,000 in the aggregate at any one time outstanding;

(i) Indebtedness represented by guarantees of loans to employees of
the Borrower or any of its Subsidiaries for the purpose of paying
withholding taxes incurred by such employees in connection with the vesting
of stock and/or stock options granted by the Borrower, in an aggregate
amount not to exceed $3,000,000 at any one time outstanding;

(j) (i) Indebtedness of the Borrower in respect of the Senior Notes in
an aggregate principal amount not to exceed $175,000,000 and (ii) Guarantee
Obligations of any Guarantor in respect of such Indebtedness;

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62

(k) interest rate protection, currency swap, commodity swap and
foreign exchange arrangements entered into in connection with bona fide
hedging operations;

(l) initial or successive refinancings of the Indebtedness permitted
by clause (j) above; PROVIDED that (i) such refinancing Indebtedness has a
stated maturity no earlier than the stated maturity of the Indebtedness
being refinanced, (ii) such refinancing Indebtedness has a weighted average
life at the time such Indebtedness is incurred that is equal to or greater
than the weighted average life of the Indebtedness being refinanced, (iii)
such refinancing Indebtedness is unsecured and (iv) such refinancing
Indebtedness is in an aggregate principal amount (or if issued with
original issue discount, an aggregate issue price) that is equal to or less
than the aggregate principal amount (or if issued with original issue
discount, the aggregate accreted value) then outstanding of the
Indebtedness being refinanced; and PROVIDED FURTHER that such refinancing
Indebtedness shall not include Indebtedness of a Subsidiary of the Borrower
that refinances Indebtedness of the Borrower; and

(m) obligations with respect to customary provisions regarding
post-closing purchase price adjustments and indemnification in agreements
for the purchase or sale of a business or assets otherwise permitted by
this Agreement.

7.3 LIMITATION ON LIENS. Create, incur, assume or suffer to exist any
Lien upon any of its Property or revenues, whether now owned or hereafter
acquired, except for:

(a) Liens for taxes, fees, assessments and other governmental charges
not yet due or which are being contested in good faith by appropriate
proceedings, PROVIDED that adequate reserves with respect thereto are
maintained on the books of the Borrower or its Subsidiaries, as the case
may be, in conformity with GAAP;

(b) carriers', warehousemen's, mechanics', materialmen's, repairmen's
or other like Liens arising in the ordinary course of business which are
not overdue for a period of more than 30 days or which are being contested
in good faith by appropriate proceedings;

(c) pledges or deposits in connection with workers' compensation,
unemployment insurance and other social security legislation;

(d) deposits to secure the performance of bids, trade contracts (other
than for borrowed money), leases, statutory obligations, surety and appeal
bonds, performance bonds and other obligations of a like nature incurred in
the ordinary course of business;

(e) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount and which do not in any case
materially detract from the value of the Property subject thereto or
materially interfere with the ordinary conduct of the business of the
Borrower or any of its Subsidiaries;

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63

(f) Liens in existence on the date hereof listed on Schedule 7.3(f),
securing Indebtedness permitted by Section 7.2(e), PROVIDED that no such
Lien is spread to cover any additional Property after the Closing Date and
that the amount of Indebtedness secured thereby is not increased;

(g) Liens securing Indebtedness of the Borrower or any other
Subsidiary incurred pursuant to Section 7.2(c) to finance the acquisition,
construction or improvement of fixed or capital assets, PROVIDED that (i)
such Liens shall be created substantially simultaneously with, or within 90
days after, the acquisition, construction or improvement of such fixed or
capital assets, (ii) such Liens do not at any time encumber any Property
other than the Property financed by such Indebtedness and (iii) the amount
of Indebtedness secured thereby shall not exceed the cost of the assets or
property so acquired, constructed or improved;

(h) Liens created pursuant to the Security Documents;

(i) any interest or title of a lessor under any lease entered into by
the Borrower or any other Subsidiary in the ordinary course of its business
and covering only the assets so leased;

(j) Liens securing Capital Lease Obligations permitted by Section
7.2(d), PROVIDED that (i) such Liens shall be created substantially
simultaneously with the related Sale/Leaseback Transaction, (ii) such Liens
do not at any time encumber any Property other than the Property subject to
such Sale/Leaseback Transaction and (iii) the amount of the Indebtedness
secured thereby shall not exceed the fair market value of the Property
subject to such Sale/Leaseback Transaction;

(k) Liens arising by virtue of any statutory or common law provision
relating to banker's liens, rights of set-off or similar rights and
remedies as to deposit accounts or other funds maintained with a depository
institution;

(l) leases or subleases granted in the ordinary course of business;
and

(m) Liens arising in the ordinary course of business out of
consignment or similar arrangements for the sale of goods.

7.4 LIMITATION ON FUNDAMENTAL CHANGES. Enter into any merger,
consolidation or amalgamation, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), or Dispose of all or substantially all
of its Property or business, except:

(a) any Subsidiary of the Borrower may be merged or consolidated with
or into the Borrower (PROVIDED that the Borrower shall be the continuing or
surviving corporation) or with or into any Wholly Owned Subsidiary
Guarantor (PROVIDED that the Wholly Owned Subsidiary Guarantor shall be the
continuing or surviving corporation);

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64

(b) any Subsidiary of the Borrower may Dispose of any or all of its
assets (upon voluntary liquidation or otherwise) to the Borrower or any
Wholly Owned Subsidiary Guarantor; and

7.5 LIMITATION ON SALE OF ASSETS. Dispose of any of its Property or
business (including, without limitation, receivables and leasehold interests),
whether now owned or hereafter acquired, or, in the case of any Subsidiary,
issue or sell any shares of such Subsidiary's Capital Stock to any Person,
except:

(a) the Disposition of obsolete or worn out property in the ordinary
course of business;

(b) the sale of inventory in the ordinary course of business;

(d) the sale or issuance of any Subsidiary's Capital Stock to the
Borrower or any Wholly Owned Subsidiary Guarantor;

(e) Dispositions permitted by Section 7.2(d);

(f) any Asset Sale or Recovery Event, PROVIDED that at least 75% of
the consideration for any Asset Sale shall consist of cash and Cash
Equivalents and PROVIDED FURTHER that the requirements of Sections 2.10(b)
and 2.10(c) are complied with in connection with any such Asset Sale or
Recovery Event; and

(g) the license of trademarks, service marks, tradenames and other
similar intangibles in the ordinary course of business.

7.6 LIMITATION ON DIVIDENDS. Declare or pay any dividend (other than
dividends payable solely in common stock of the Person making such dividend) on,
or make any payment on account of, or set apart assets for a sinking or other
analogous fund for, the purchase, redemption, defeasance, retirement or other
acquisition of, any shares of any class of Capital Stock of the Borrower or any
Subsidiary or any warrants or options to purchase any such Capital Stock,
whether now or hereafter outstanding, or make any other distribution in respect
thereof, either directly or indirectly, whether in cash or property or in
obligations of the Borrower or any Subsidiary (collectively, "RESTRICTED
PAYMENTS"), except that:

(a) any Subsidiary may make Restricted Payments to the Borrower or any
Wholly Owned Subsidiary Guarantor;

(b) any Subsidiary may declare and pay pro rata cash dividends to
Persons other than the Borrower and its Subsidiaries, PROVIDED, that the
aggregate amount of payments under this paragraph shall not exceed
$5,000,000 or, if as of the last day of each of three consecutive fiscal
quarters ending subsequent to the date hereof

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65

Consolidated EBITDA for the four consecutive fiscal quarters ending on such
days shall exceed $100,000,000, $10,000,000; and

(c) so long as no Default or Event of Default shall have occurred and
be continuing, the Borrower may purchase its Common Stock or Common Stock
options from present or former officers of the Borrower or any of its
Subsidiaries upon the death, disability or termination of employment of
such officer, PROVIDED, that the aggregate amount of payments under this
paragraph during the term of this Agreement shall not exceed $2,000,000 in
any 12-month period and $5,000,000 in the aggregate.

7.7 LIMITATION ON CAPITAL EXPENDITURES. Make or commit to make (by
way of the acquisition of securities of a Person or otherwise) any Capital
Expenditure, except (a) Capital Expenditures of the Borrower and its
Subsidiaries in the ordinary course of business not exceeding the Permitted
Capital Expenditure Amount; PROVIDED, that (i) so long as no Default or Event of
Default shall have occurred and be continuing or would occur as a result
thereof, any such amount referred to above, if not so expended in the fiscal
year for which it is permitted, may be carried over for expenditure in the next
succeeding fiscal year and (ii) Capital Expenditures made pursuant to this
clause (a) during any fiscal year shall be deemed made, FIRST, in respect of
amounts carried over from the prior fiscal year pursuant to subclause (i) above
and, SECOND, in respect of amounts permitted for such fiscal year as provided
above and (b) Capital Expenditures made with the proceeds of any Reinvestment
Deferred Amount.

7.8 LIMITATION ON INVESTMENTS, LOANS AND ADVANCES. Make any advance,
loan, extension of credit (by way of guaranty or otherwise) or capital
contribution to, or purchase any stock, bonds, notes, debentures or other
securities of or any assets constituting all or a material part of a business
unit of, or make any other investment in, any Person, except:

(a) extensions of trade credit in the ordinary course of business;

(b) investments in Cash Equivalents;

(d) loans and advances to employees of the Borrower or any of its
Subsidiaries in the ordinary course of business (including, without
limitation, for travel, entertainment and relocation expenses) in an
aggregate amount for the Borrower and its Subsidiaries not to exceed
$2,000,000 at any one time outstanding;

(e) purchases of Common Stock and Common Stock options permitted by
Section 7.6(b);

(f) investments made by the Borrower or any of its Subsidiaries with
the proceeds of any Reinvestment Deferred Amount;

(g) investments by the Borrower or any of its Subsidiaries in any
Person that, prior to such investment, is a Guarantor;

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66

(h) investments in existence on the date hereof and listed on Schedule
7.8(h) and additional investments in, and extensions of credit to, any
Subsidiary that is not a Guarantor and/or other Persons, PROVIDED that such
additional investments and extensions of credit shall not exceed an
aggregate amount of $10,000,000 or, if as of the last day of each of three
consecutive fiscal quarters ending subsequent to the date hereof
Consolidated EBITDA for the four consecutive fiscal quarters ending on such
days shall exceed $100,000,000, $20,000,000;

(i) investments by Friendly's International, Inc. or its United
Kingdom Subsidiaries in Shanghai Friendly Food Co., Ltd. as a result of the
transfer by the Borrower of its interests in Shanghai Friendly Food Co.,
Ltd. to such Person;

(j) investments in stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to
the Borrower or any of its Subsidiaries or in satisfaction of judgments and
which are readily convertible into cash in U.S. dollars in an amount equal
to the fair market value thereof as determined in good faith by the Board
of Directors of the Borrower;

(k) investments in securities of account debtors received in
settlement of obligations or pursuant to any plan of reorganization or
similar arrangement upon the bankruptcy or insolvency of such account
debtors;

(l) investments in foreign exchange contracts, currency swap
agreements, commodity swap agreements, commodity future agreements,
commodity hedge agreements, Interest Rate Protection Agreements and other
similar agreements entered into in the ordinary course of business,
PROVIDED that such agreements are entered into for bona fide hedging
purposes, are not for speculation or trading purposes and are designed to
protect against fluctuations in currency exchange rates, commodity prices
or interest rates, as the case may be, and, in the case of Interest Rate
Protection Agreements, any such Interest Rate Protection Agreement has a
notional amount corresponding to the Indebtedness being hedged thereby;

(m) investments in franchisees of the Borrower in an aggregate amount
at any one time outstanding not to exceed $10,000,000;

(n) investments in accounts and notes receivable from franchisees,
customers, suppliers and others in the ordinary course of business; and

(o) investments made by the Borrower or any of its Subsidiaries in
connection with a Disposition of Property permitted by Section 7.5,
PROVIDED that the aggregate amount of such investments held at any time
shall not exceed $5,000,000.

7.9 LIMITATION ON OPTIONAL PAYMENTS AND MODIFICATIONS OF DEBT
INSTRUMENTS, ETC. (a) Make or offer to make any payment, prepayment,
repurchase or redemption of or otherwise defease or segregate funds with respect
to the Senior Notes (other than scheduled interest payments required to be made
in cash), or (b) amend, modify, waive or otherwise change, or consent or agree
to any amendment, modification, waiver or other change to, any

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of the terms of the Senior Notes (other than any such amendment, modification,
waiver or other change which (i) would extend the maturity or reduce the amount
of any payment of principal thereof or which would reduce the rate or extend the
date for payment of interest thereon and (ii) does not involve the payment of a
consent fee), except that (x) upon any private or public offering of Capital
Stock of the Borrower (other than the Common Stock Offering and the issuance of
common stock pursuant to employee benefit plans or as compensation to
employees), the Borrower may repurchase or redeem Senior Notes with the Net Cash
Proceeds of such offering, PROVIDED that no more than $60,000,000 principal
amount of Senior Notes may be so repurchased or redeemed, and (y) the Senior
Notes may be refinanced in accordance with Section 7.2(l).

7.10 LIMITATION ON TRANSACTIONS WITH AFFILIATES. Enter into any
transaction, including, without limitation, any purchase, sale, lease or
exchange of Property, the rendering of any service or the payment of any
management, advisory or similar fees, with any Affiliate (other than the
Borrower or any Guarantor) unless such transaction is (a) otherwise permitted
under this Agreement, (b) in the ordinary course of business of the Borrower or
such Subsidiary, as the case may be, and (c) upon fair and reasonable terms no
less favorable to the Borrower or such Subsidiary, as the case may be, than it
would obtain in a comparable arm's length transaction with a Person which is not
an Affiliate.

7.11 LIMITATION ON SALES AND LEASEBACKS. Enter into any arrangement
with any Person providing for the leasing by the Borrower or any Subsidiary of
real or personal property which has been or is to be sold or transferred by the
Borrower or such Subsidiary to such Person or to any other Person to whom funds
have been or are to be advanced by such Person on the security of such property
or rental obligations of the Borrower or such Subsidiary other than the
Sale/Leaseback Transactions permitted by Sections 7.2(d) and 7.5(e).

7.12 LIMITATION ON CHANGES IN FISCAL PERIODS. Permit the fiscal year
of the Borrower to end on a day other than the last Sunday in December (unless
that day is earlier than December 27, in which case the fiscal year ends on the
following Sunday) or change the Borrower's method of determining fiscal
quarters.

7.13 LIMITATION ON NEGATIVE PLEDGE CLAUSES. Enter into or suffer to
exist or become effective any agreement which prohibits or limits the ability of
the Borrower or any of its Subsidiaries to create, incur, assume or suffer to
exist any Lien upon any of its Property or revenues, whether now owned or
hereafter acquired, to secure the Obligations or, in the case of any Guarantor,
its obligations under the Guarantee and Collateral Agreement, other than (a)
this Agreement and the other Loan Documents and (b) any agreements governing any
purchase money Liens or Capital Lease Obligations otherwise permitted hereby (in
which case, any prohibition or limitation shall only be effective against the
assets financed thereby).

7.14 LIMITATION ON RESTRICTIONS ON SUBSIDIARY DISTRIBUTIONS. Enter
into or suffer to exist or become effective any consensual encumbrance or
restriction on the ability of any Subsidiary of the Borrower to (a) pay
dividends or make any other distributions in respect of any Capital Stock of
such Subsidiary held by, or pay any Indebtedness owed to, the Borrower or any
other Subsidiary of the Borrower, (b) make loans or advances to the

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Borrower or any other Subsidiary of the Borrower or (c) transfer any of its
assets to the Borrower or any other Subsidiary of the Borrower, except for such
encumbrances or restrictions existing under or by reason of

(i) any restrictions existing under the Loan Documents,

(ii) any restrictions with respect to a Subsidiary imposed pursuant to
an agreement which has been entered into in connection with the Disposition
of all or substantially all of the Capital Stock or assets of such
Subsidiary,

(iii) any encumbrance or restriction in the Existing Credit Facility
prior to the termination thereof,

(iv) any encumbrance or restriction with respect to a Subsidiary
pursuant to an agreement relating to any Indebtedness Incurred by such
Subsidiary on or prior to the date on which such Subsidiary was acquired by
the Borrower or a Subsidiary and outstanding on such date (other than
Indebtedness Incurred in connection with, or in contemplation of, the
transaction or series of related transactions pursuant to which such
Subsidiary became a Subsidiary or was acquired by the Borrower or a
Subsidiary),

(v) any encumbrance or restriction pursuant to an agreement contained
in any amendment to an agreement referred to in clause (iv) of this
covenant; PROVIDED, HOWEVER, that the encumbrances and restrictions
contained in any such refinancing agreement or amendment are not materially
less favorable to the Lenders than the encumbrances and restrictions
contained in any such agreement,

(vi) in the case of clause (c), any encumbrance or restriction (A)
that restricts in a customary manner the subletting, assignment or transfer
of any property or asset that is subject to a lease, license or similar
contract, (B) by virtue of any transfer of, agreement to transfer, option
or right with respect to, or Lien on, any property or assets of the
Borrower or any Subsidiary not otherwise prohibited by this Agreement or
(C) contained in security agreements securing Indebtedness of a Subsidiary
to the extent such encumbrance or restrictions restrict the transfer of the
property subject to such security agreements,

(vii) any encumbrance or restriction arising under or by reason of
applicable law,

(viii) any encumbrance or restriction contained in the Senior Note
Indenture,

(ix) customary provision in joint venture agreements relating solely
to the securities, assets and revenues of such joint venture or other
business venture,

(x) any encumbrance or restriction applicable to secured Indebtedness
otherwise permitted to be Incurred under this Agreement that limits the
right of the debtor to dispose of the assets securing such Indebtedness,
and

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(xi) customary net worth provisions contained in leases and other
agreements entered into by a Subsidiary in the ordinary course of business.

7.15 LIMITATION ON LINES OF BUSINESS. Enter into any business, either
directly or through any Subsidiary, except for those businesses in which the
Borrower and its Subsidiaries are engaged on the date of this Agreement or which
are reasonably related thereto, or permit RIC to engage in any business other
than the reinsurance of certain of the Borrower's risks (i.e. workers'
compensation, employer's liability, general liability and product liability)
from a third party insurer.

SECTION 8. EVENTS OF DEFAULT

If any of the following events shall occur and be continuing:

(a) The Borrower shall fail to pay any principal of any Loan or
Reimbursement Obligation when due in accordance with the terms hereof; or
the Borrower shall fail to pay any interest on any Loan or Reimbursement
Obligation, or any other amount payable hereunder or under any other Loan
Document, within three Business Days after any such interest or other
amount becomes due in accordance with the terms hereof; or

(b) Any representation or warranty made or deemed made by any Loan
Party herein or in any other Loan Document or which is contained in any
certificate, document or financial or other statement furnished by it at
any time under or in connection with this Agreement or any such other Loan
Document shall prove to have been inaccurate in any material respect on or
as of the date made or deemed made; or

(c) (i) Any Loan Party shall default in the observance or performance
of any agreement contained in clause (i) of Section 6.4(a) (with respect to
the Borrower only), Section 6.7(a), Section 7, or Section 5.6 of the
Guarantee and Collateral Agreement or (ii) an "Event of Default" under and
as defined in any Mortgage shall have occurred and be continuing; or

(d) any Loan Party shall default in the observance or performance of
any other agreement contained in this Agreement or any other Loan Document
(other than as provided in paragraphs (a) through (c) of this Section), and
such default shall continue unremedied for a period of 30 days after notice
to the Borrower from the Agent or the Required Lenders; or

(e) The Borrower or any of its Subsidiaries shall (i) default in
making any payment of any principal of any Indebtedness (including, without
limitation, any Guarantee Obligation, but excluding the Loans and
Reimbursement Obligations) when due (giving effect to any applicable grace
period) with respect thereto; or (ii) default in making any payment of any
interest on any such Indebtedness beyond the period of grace, if any,
provided in the instrument or agreement under which such Indebtedness was
created; or (iii) default in the observance or performance of any other
agreement or condition relating to any such Indebtedness or contained in
any instrument or

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agreement evidencing, securing or relating thereto, or any other event
shall occur or condition exist, the effect of which default or other event
or condition is to cause, or to permit the holder or beneficiary of such
Indebtedness (or a trustee or agent on behalf of such holder or
beneficiary) to cause, with the giving of notice if required, such
Indebtedness to become due prior to its stated maturity or (in the case of
any such Indebtedness constituting a Guarantee Obligation) to become
payable; PROVIDED, that a default, event or condition described in clause
(i), (ii) or (iii) of this paragraph (e) shall not at any time constitute
an Event of Default unless, at such time, one or more defaults, events or
conditions of the type described in clauses (i), (ii) and (iii) of this
paragraph (e) shall have occurred and be continuing with respect to
Indebtedness the outstanding principal amount of which exceeds in the
aggregate $5,000,000; or

(f) (i) The Borrower or any of its Subsidiaries shall commence any
case, proceeding or other action (A) under any existing or future law of
any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking to have an order for relief
entered with respect to it, or seeking to adjudicate it a bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment, winding-up,
liquidation, dissolution, composition or other relief with respect to it or
its debts, or (B) seeking appointment of a receiver, trustee, custodian,
conservator or other similar official for it or for all or any substantial
part of its assets, or the Borrower or any of its Subsidiaries shall make a
general assignment for the benefit of its creditors; or (ii) there shall be
commenced against the Borrower or any of its Subsidiaries any case,
proceeding or other action of a nature referred to in clause (i) above
which (A) results in the entry of an order for relief or any such
adjudication or appointment or (B) remains undismissed, undischarged or
unbonded for a period of 60 days; or (iii) there shall be commenced against
the Borrower or any of its Subsidiaries any case, proceeding or other
action seeking issuance of a warrant of attachment, execution, distraint or
similar process against all or any substantial part of its assets which
results in the entry of an order for any such relief which shall not have
been vacated, discharged, or stayed or bonded pending appeal within 60 days
from the entry thereof; or (iv) the Borrower or any of its Subsidiaries
shall take any action in furtherance of, or indicating its consent to,
approval of, or acquiescence in, any of the acts set forth in clause (i),
(ii), or (iii) above; or (v) the Borrower or any of its Subsidiaries shall
generally not, or shall be unable to, or shall admit in writing its
inability to, pay its debts as they become due; or

(g) (i) Any Person shall engage in any "prohibited transaction" (as
defined in Section 406 of ERISA or Section 4975 of the Code) involving any
Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302
of ERISA), whether or not waived, shall exist with respect to any Plan or
any Lien in favor of the PBGC or a Plan shall arise on the assets of the
Borrower or any Commonly Controlled Entity, (iii) a Reportable Event shall
occur with respect to, or proceedings shall commence to have a trustee
appointed, or a trustee shall be appointed, to administer or to terminate,
any Single Employer Plan, which Reportable Event or commencement of
proceedings or appointment of a trustee is, in the reasonable opinion of
the Required Lenders, likely to result in the termination of such Plan for
purposes of Title IV of ERISA, (iv) any Single Employer Plan shall
terminate for purposes of Title IV of ERISA, (v) the

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Borrower or any Commonly Controlled Entity shall, or in the reasonable
opinion of the Required Lenders is likely to, incur any liability in
connection with a withdrawal from, or the Insolvency or Reorganization of,
a Multiemployer Plan or (vi) any other event or condition shall occur or
exist with respect to a Plan; and in each case in clauses (i) through (vi)
above, such event or condition, together with all other such events or
conditions, if any, could reasonably be expected to have a Material Adverse
Effect; or

(h) One or more judgments or decrees shall be entered against the
Borrower or any of its Subsidiaries involving in the aggregate a liability
(not paid or fully covered by insurance as to which the relevant insurance
company has acknowledged coverage) of $5,000,000 or more, and all such
judgments or decrees shall not have been vacated, discharged, stayed or
bonded pending appeal within 30 days from the entry thereof; or

(i) Any of the Security Documents shall cease, for any reason, to be
in full force and effect, or any Loan Party or any Affiliate of any Loan
Party shall so assert, or any Lien created by any of the Security Documents
shall cease to be enforceable and of the same effect and priority purported
to be created thereby; or

(j) The guarantee contained in Section 2 of the Guarantee and
Collateral Agreement shall cease, for any reason, to be in full force and
effect or any Loan Party or any Affiliate of any Loan Party shall so
assert; or

(k)(i) (A) Any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT")), excluding the Permitted Holders, shall become, or
obtain rights (whether by means or warrants, options or otherwise) to
become, the "beneficial owner" (as defined in Rules 13(d)-3 and 13(d)-5
under the Exchange Act), directly or indirectly, of more than 35% of the
outstanding common stock of the Borrower and (B) the Permitted Holders
"beneficially own" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act), directly or indirectly, in the aggregate a lesser percentage of total
voting power of the Voting Stock of the Borrower than such other person and
do not have the right or ability by voting power, contract or otherwise to
elect or designate for election a majority of the Board of Directors of the
Borrower; (ii) a majority of the board of directors of the Borrower shall
cease to consist of Continuing Directors; or (iii) there shall occur a
"Change of Control" as defined in the Senior Note Indenture; or

then, and in any such event, (A) if such event is an Event of Default specified
in clause (i) or (ii) of paragraph (f) above with respect to the Borrower,
automatically the Commitments shall immediately terminate and the Loans
hereunder (with accrued interest thereon) and all other amounts owing under this
Agreement and the other Loan Documents (including, without limitation, all
amounts of L/C Obligations, whether or not the beneficiaries of the then
outstanding Letters of Credit shall have presented the documents required
thereunder) shall immediately become due and payable, and (B) if such event is
any other Event of Default, either or both of the following actions may be
taken: (i) with the consent of the Majority Revolving Credit Facility Lenders,
the Agent may, or upon the request of the Majority Revolving Credit Facility
Lenders, the Agent shall, by notice to the Borrower declare the

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Revolving Credit Commitments to be terminated forthwith, whereupon the Revolving
Credit Commitments shall immediately terminate; and (ii) with the consent of the
Required Lenders, the Agent may, or upon the request of the Required Lenders,
the Agent shall, by notice to the Borrower, declare the Loans hereunder (with
accrued interest thereon) and all other amounts owing under this Agreement and
the other Loan Documents (including, without limitation, all amounts of L/C
Obligations, whether or not the beneficiaries of the then outstanding Letters of
Credit shall have presented the documents required thereunder) to be due and
payable forthwith, whereupon the same shall immediately become due and payable.
With respect to all Letters of Credit with respect to which presentment for
honor shall not have occurred at the time of an acceleration pursuant to this
paragraph, the Borrower shall at such time deposit in a cash collateral account
opened by the Agent an amount equal to the aggregate then undrawn and unexpired
amount of such Letters of Credit. Amounts held in such cash collateral account
shall be applied by the Agent to the payment of drafts drawn under such Letters
of Credit, and the unused portion thereof after all such Letters of Credit shall
have expired or been fully drawn upon, if any, shall be applied to repay other
obligations of the Borrower hereunder and under the other Loan Documents. After
all such Letters of Credit shall have expired or been fully drawn upon, all
Reimbursement Obligations shall have been satisfied and all other obligations of
the Borrower hereunder and under the other Loan Documents shall have been paid
in full, the balance, if any, in such cash collateral account shall be returned
to the Borrower (or such other Person as may be lawfully entitled thereto).

SECTION 9. THE AGENT

9.1 APPOINTMENT. Each Lender hereby irrevocably designates and
appoints the Agent as the agent of such Lender under this Agreement and the
other Loan Documents, and each such Lender irrevocably authorizes the Agent, in
such capacity, to take such action on its behalf under the provisions of this
Agreement and the other Loan Documents and to exercise such powers and perform
such duties as are expressly delegated to the Agent by the terms of this
Agreement and the other Loan Documents, together with such other powers as are
reasonably incidental thereto. Notwithstanding any provision to the contrary
elsewhere in this Agreement, the Agent shall not have any duties or
responsibilities, except those expressly set forth herein, or any fiduciary
relationship with any Lender, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Agreement or any other Loan Document or otherwise exist against the Agent.

9.2 DELEGATION OF DUTIES. The Agent may execute any of its duties
under this Agreement and the other Loan Documents by or through agents or
attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. The Agent shall not be responsible for the
negligence or misconduct of any agents or attorneys in-fact selected by it with
reasonable care.

9.3 EXCULPATORY PROVISIONS. Neither the Agent nor any of its
respective officers, directors, employees, agents, attorneys-in-fact or
affiliates shall be (i) liable for any action lawfully taken or omitted to be
taken by it or such Person under or in connection with this Agreement or any
other Loan Document (except to the extent that any of the foregoing are found by
a final and nonappealable decision of a court of competent jurisdiction to have
resulted from its or such Person's own gross negligence or willful misconduct)
or (ii)

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responsible in any manner to any of the Lenders for any recitals, statements,
representations or warranties made by any Loan Party or any officer thereof
contained in this Agreement or any other Loan Document or in any certificate,
report, statement or other document referred to or provided for in, or received
by the Agent under or in connection with, this Agreement or any other Loan
Document or for the value, validity, effectiveness, genuineness, enforceability
or sufficiency of this Agreement or any other Loan Document or for any failure
of any Loan Party a party thereto to perform its obligations hereunder or
thereunder. The Agent shall not be under any obligation to any Lender to
ascertain or to inquire as to the observance or performance of any of the
agreements contained in, or conditions of, this Agreement or any other Loan
Document, or to inspect the properties, books or records of any Loan Party.

9.4 RELIANCE BY AGENT. The Agent shall be entitled to rely, and shall
be fully protected in relying, upon any instrument, writing, resolution, notice,
consent, certificate, affidavit, letter, telecopy, telex or teletype message,
statement, order or other document or conversation believed by it to be genuine
and correct and to have been signed, sent or made by the proper Person or
Persons and upon advice and statements of legal counsel (including, without
limitation, counsel to the Borrower), independent accountants and other experts
selected by the Agent. The Agent may deem and treat the payee of any Note as
the owner thereof for all purposes unless a written notice of assignment,
negotiation or transfer thereof shall have been filed with the Agent. The Agent
shall be fully justified in failing or refusing to take any action under this
Agreement or any other Loan Document unless it shall first receive such advice
or concurrence of the Required Lenders (or, if so specified by this Agreement,
all Lenders) as it deems appropriate or it shall first be indemnified to its
satisfaction by the Lenders against any and all liability and expense which may
be incurred by it by reason of taking or continuing to take any such action.
The Agent shall in all cases be fully protected in acting, or in refraining from
acting, under this Agreement and the other Loan Documents in accordance with a
request of the Required Lenders (or, if so specified by this Agreement, all
Lenders), and such request and any action taken or failure to act pursuant
thereto shall be binding upon all the Lenders and all future holders of the
Loans.

9.5 NOTICE OF DEFAULT. The Agent shall not be deemed to have
knowledge or notice of the occurrence of any Default or Event of Default
hereunder unless it has received notice from a Lender or the Borrower referring
to this Agreement, describing such Default or Event of Default and stating that
such notice is a "notice of default". In the event that the Agent receives such
a notice, the Agent shall give notice thereof to the Lenders. The Agent shall
take such action with respect to such Default or Event of Default as shall be
reasonably directed by the Required Lenders (or, if so specified by this
Agreement, all Lenders); PROVIDED that unless and until the Agent shall have
received such directions, the Agent may (but shall not be obligated to) take
such action, or refrain from taking such action, with respect to such Default or
Event of Default as it shall deem advisable in the best interests of the
Lenders.

9.6 NON-RELIANCE ON AGENT AND OTHER LENDERS. Each Lender expressly
acknowledges that neither the Agent nor any of its officers, directors,
employees, agents, attorneys-in-fact or affiliates have made any representations
or warranties to such Lender and that no act by the Agent hereinafter taken,
including any review of the affairs of a Loan Party

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or any affiliate of a Loan Party, shall be deemed to constitute any
representation or warranty by the Agent to any Lender. Each Lender represents
to the Agent that it has, independently and without reliance upon the Agent or
any other Lender, and based on such documents and information as it has deemed
appropriate, made its own appraisal of and investigation into the business,
operations, property, financial and other condition and creditworthiness of the
Loan Parties and their affiliates and made its own decision to make its Loans
hereunder and enter into this Agreement. Each Lender also represents that it
will, independently and without reliance upon the Agent or any other Lender, and
based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit analysis, appraisals and decisions in
taking or not taking action under this Agreement and the other Loan Documents,
and to make such investigation as it deems necessary to inform itself as to the
business, operations, property, financial and other condition and
creditworthiness of the Loan Parties and their affiliates. Except for notices,
reports and other documents expressly required to be furnished to the Lenders by
the Agent hereunder, the Agent shall not have any duty or responsibility to
provide any Lender with any credit or other information concerning the business,
operations, property, condition (financial or otherwise), prospects or
creditworthiness of any Loan Party or any affiliate of a Loan Party which may
come into the possession of the Agent or any of its officers, directors,
employees, agents, attorneys-in-fact or affiliates.

9.7 INDEMNIFICATION. The Lenders agree to indemnify the Agent in its
capacity as such (to the extent not reimbursed by the Borrower and without
limiting the obligation of the Borrower to do so), ratably according to their
respective Revolving Credit Percentages, Tranche A Term Loan Percentages,
Tranche B Term Loan Percentages and Tranche C Term Loan Percentages in effect on
the date on which indemnification is sought under this Section (or, if
indemnification is sought after the date upon which the Commitments shall have
terminated and the Loans shall have been paid in full, ratably in accordance
with such Percentages immediately prior to such date), from and against any and
all liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements of any kind whatsoever which may at any
time (including, without limitation, at any time following the payment of the
Loans) be imposed on, incurred by or asserted against the Agent in any way
relating to or arising out of, the Commitments, this Agreement, any of the other
Loan Documents or any documents contemplated by or referred to herein or therein
or the transactions contemplated hereby or thereby or any action taken or
omitted by the Agent under or in connection with any of the foregoing; PROVIDED
that no Lender shall be liable for the payment of any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements which are found by a final and nonappealable
decision of a court of competent jurisdiction to have resulted from the Agent's
gross negligence or willful misconduct. The agreements in this Section 9.7
shall survive the payment of the Loans and all other amounts payable hereunder.

9.8 AGENT IN ITS INDIVIDUAL CAPACITY. The Agent and its affiliates
may make loans to, accept deposits from and generally engage in any kind of
business with any Loan Party as though the Agent was not the Agent. With
respect to its Loans made or renewed by it and with respect to any Letter of
Credit issued or participated in by it, the Agent shall have the same rights and
powers under this Agreement and the other Loan Documents as any Lender and may
exercise the same as though it were not the Agent, and the terms "Lender" and
"Lenders" shall include the Agent in its individual capacity.

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9.9 SUCCESSOR AGENT. Subject to the appointment of a successor agent
as provided below, the Agent may resign as Agent upon 10 days' notice to the
Lenders and the Borrower. If the Agent shall resign as Agent under this
Agreement and the other Loan Documents, then the Required Lenders shall appoint
from among the Lenders a successor agent for the Lenders, which successor agent
shall (unless an Event of Default under Section 8(a) or Section 8(f) with
respect to the Borrower shall have occurred and be continuing) be subject to
approval by the Borrower (which approval shall not be unreasonably withheld or
delayed), whereupon such successor agent shall succeed to the rights, powers and
duties of the Agent and the term "Agent" shall mean such successor agent
effective upon such appointment and approval, and the former Agent's rights,
powers and duties as Agent shall be terminated, without any other or further act
or deed on the part of such former Agent or any of the parties to this Agreement
or any holders of the Loans. After any retiring Agent's resignation as Agent,
the provisions of this Section 9 shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Agent under this Agreement and
the other Loan Documents.

9.10 AUTHORIZATION TO RELEASE LIENS. The Agent is hereby irrevocably
authorized by each of the Lenders to release any Lien covering any Property of
the Borrower or any of its Subsidiaries that is the subject of a Disposition
which is permitted by this Agreement or which has been consented to in
accordance with Section 10.1.

SECTION 10. MISCELLANEOUS

10.1 AMENDMENTS AND WAIVERS. Neither this Agreement, any other Loan
Document, nor any terms hereof or thereof may be amended, supplemented or
modified except in accordance with the provisions of this Section 10.1. The
Required Lenders and each Loan Party to the relevant Loan Document may, or (with
the written consent of the Required Lenders) the Agent and each Loan Party to
the relevant Loan Document may, from time to time, (a) enter into written
amendments, supplements or modifications hereto and to the other Loan Documents
for the purpose of adding any provisions to this Agreement or the other Loan
Documents or changing in any manner the rights of the Lenders or of the Loan
Parties hereunder or thereunder or (b) waive, on such terms and conditions as
the Required Lenders, or the Agent, as the case may be, may specify in such
instrument, any of the requirements of this Agreement or the other Loan
Documents or any Default or Event of Default and its consequences; PROVIDED,
HOWEVER, that no such waiver and no such amendment, supplement or modification
shall (i) forgive the principal amount or extend the final scheduled date of
maturity of any Loan, extend the scheduled date of any amortization payment in
respect of any Term Loan, reduce the stated rate of any interest, fee or letter
of credit commission payable hereunder or extend the scheduled date of any
payment thereof, or increase the amount or extend the expiration date of any
Lender's Revolving Credit Commitment, in each case without the consent of each
Lender directly affected thereby; (ii) amend, modify or waive any provision of
this Section 10.1 or reduce any percentage specified in the definition of
Required Lenders or Required Prepayment Lenders, consent to the assignment or
transfer by the Borrower of any of its rights and obligations under this
Agreement and the other Loan Documents, release all or substantially all of the
Collateral or release all or substantially all of the Guarantors from their
obligations under the Guarantee and Collateral Agreement, in each case without
the written consent of all Lenders; (iii)

<PAGE>
76

amend, modify or waive any condition precedent to any extension of credit under
the Revolving Credit Facility set forth in Section 5.2 (including, without
limitation, in connection with any waiver of an existing Default or Event of
Default) without the written consent of the Majority Revolving Credit Facility
Lenders; (iv) reduce the percentage specified in the definition of Majority
Facility Lenders without the written consent of all Lenders under each affected
Facility; (v) amend, modify or waive any provision of Section 9 without the
written consent of the Agent; or (vi) amend, modify or waive any provision of
Section 3 without the written consent of the Issuing Lender. Any such waiver
and any such amendment, supplement or modification shall apply equally to each
of the Lenders and shall be binding upon the Loan Parties, the Lenders, the
Agent and all future holders of the Loans. In the case of any waiver, the Loan
Parties, the Lenders and the Agent shall be restored to their former position
and rights hereunder and under the other Loan Documents, and any Default or
Event of Default waived shall be deemed to be cured and not continuing; but no
such waiver shall extend to any subsequent or other Default or Event of Default,
or impair any right consequent thereon.

10.2 NOTICES. All notices, requests and demands to or upon the
respective parties hereto to be effective shall be in writing (including by
telecopy), and, unless otherwise expressly provided herein, shall be deemed to
have been duly given or made when delivered, or three Business Days after being
deposited in the mail, postage prepaid, or, in the case of telecopy notice, when
received, addressed as follows in the case of the Borrower and the Agent, and as
set forth in an administrative questionnaire delivered to the Agent in the case
of the Lenders, or to such other address as may be hereafter notified by the
respective parties hereto:

The Borrower: Friendly Ice Cream Corporation
1855 Boston Road
Wilbraham, Massachusetts 01095
Attention: George Roller
Telecopy: (413) 543-3186
Telephone: (413) 543-2400

with a copy to: Friendly Ice Cream Corporation
1855 Boston Road
Wilbraham, Massachusetts 01095
Attention: Aaron Parker
Telecopy: (413) 543-3282
Telephone: (413) 543-2400

The Agent: Societe Generale
1221 Avenue of the Americas
New York, New York 10020
Attention: Kateline Martinez
Telecopy: (212) 278-7490
Telephone: (212) 278-6855

<PAGE>
77

with a copy to: Societe Generale
1221 Avenue of the Americas
New York, New York 10020
Attention: Brent Johnston
Telecopy: (212) 278-7430
Telephone: (212) 278-6881

PROVIDED that any notice, request or demand to or upon the Agent or the Lenders
shall not be effective until received.

10.3 NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no
delay in exercising, on the part of the Agent or any Lender, any right, remedy,
power or privilege hereunder or under the other Loan Documents shall operate as
a waiver thereof; nor shall any single or partial exercise of any right, remedy,
power or privilege hereunder preclude any other or further exercise thereof or
the exercise of any other right, remedy, power or privilege. The rights,
remedies, powers and privileges herein provided are cumulative and not exclusive
of any rights, remedies, powers and privileges provided by law.

10.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties made hereunder, in the other Loan Documents and in any document,
certificate or statement delivered pursuant hereto or in connection herewith
shall survive the execution and delivery of this Agreement and the making of the
Loans hereunder.

10.5 PAYMENT OF EXPENSES. The Borrower agrees (a) to pay or reimburse
the Agent for all its reasonable out-of-pocket costs and expenses incurred in
connection with the development, syndication, preparation and execution of, and
any amendment, supplement or modification to, this Agreement and the other Loan
Documents and any other documents prepared in connection herewith or therewith,
and the consummation and administration of the transactions contemplated hereby
and thereby, including, without limitation, the reasonable fees and
disbursements of counsel to the Agent, (b) to pay or reimburse each Lender and
the Agent for all their respective costs and expenses incurred in connection
with the enforcement or preservation of any rights under this Agreement, the
other Loan Documents and any such other documents, including, without
limitation, the fees and disbursements of counsel (including the non-duplicative
allocated fees and expenses of in-house counsel) to each Lender and of counsel
to the Agent, (c) to pay, indemnify, and hold each Lender and the Agent harmless
from, any and all recording and filing fees or any amendment, supplement or
modification of, or any waiver or consent under or in respect of, this
Agreement, the other Loan Documents and any such other documents and (d) to pay,
indemnify, and hold each Lender and the Agent and their respective officers,
directors, employees, affiliates, agents and controlling persons (each, an
"INDEMNITEE") harmless from and against any and all other liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind or nature whatsoever with respect to the
execution, delivery, enforcement, performance and administration of this
Agreement, the other Loan Documents and any such other documents, including,
without limitation, any of the foregoing relating to the use of proceeds of the
Loans or the violation of, noncompliance with or liability under, any
Environmental Law applicable to the operations of the Borrower or any of its
Subsidiaries or any of the Properties (all the foregoing in this clause (d),
collectively, the

<PAGE>
78

"INDEMNIFIED LIABILITIES"), PROVIDED, that the Borrower shall have no obligation
hereunder to any indemnitee with respect to indemnified liabilities to the
extent such indemnified liabilities resulted from the gross negligence or
willful misconduct of such indemnitee. The agreements in this Section shall
survive repayment of the Loans and all other amounts payable hereunder.

10.6 SUCCESSORS AND ASSIGNS; PARTICIPATIONS AND ASSIGNMENTS. (a) This
Agreement shall be binding upon and inure to the benefit of the Borrower, the
Lenders, the Agent, all future holders of the Loans and their respective
successors and assigns, except that the Borrower may not assign or transfer any
of its rights or obligations under this Agreement without the prior written
consent of the Agent and each Lender. Nothing expressed or implied herein is
intended to give, or shall be construed to give, any Person, other than the
parties hereto and their permitted successors and assigns hereunder, any benefit
or legal or equitable right, remedy or claim under or by virtue of this
Agreement or under or by virtue of any provision herein.

(b) Any Lender may, without the consent of the Borrower, in accordance
with applicable law, at any time sell to one or more banks, financial
institutions or other entities (each, a "PARTICIPANT") participating interests
in any Loan owing to such Lender, any Commitment of such Lender or any other
interest of such Lender hereunder and under the other Loan Documents; PROVIDED
that no such participation to a Participant shall be in an aggregate principal
amount of less than $5,000,000 (other than in the case of a participation of all
of a Lender's interests under this Agreement), unless otherwise agreed by the
Borrower and the Agent. In the event of any such sale by a Lender of a
participating interest to a Participant, such Lender's obligations under this
Agreement to the other parties to this Agreement shall remain unchanged, such
Lender shall remain solely responsible for the performance thereof, such Lender
shall remain the holder of any such Loan for all purposes under this Agreement
and the other Loan Documents, and the Borrower and the Agent shall continue to
deal solely and directly with such Lender in connection with such Lender's
rights and obligations under this Agreement and the other Loan Documents. In no
event shall any Participant under any such participation have any right to
approve any amendment or waiver of any provision of any Loan Document, or any
consent to any departure by any Loan Party therefrom, except to the extent that
such amendment, waiver or consent would reduce the principal of, or interest on,
the Loans or any fees payable hereunder, or postpone the date of the final
maturity of the Loans, in each case to the extent subject to such participation.
The Borrower agrees that if amounts outstanding under this Agreement and the
Loans are due or unpaid, or shall have been declared or shall have become due
and payable upon the occurrence of an Event of Default, each Participant shall,
to the maximum extent permitted by applicable law, be deemed to have the right
of set-off in respect of its participating interest in amounts owing under this
Agreement to the same extent as if the amount of its participating interest were
owing directly to it as a Lender under this Agreement, PROVIDED that, in
purchasing such participating interest, such Participant shall be deemed to have
agreed to share with the Lenders the proceeds thereof as provided in Section
10.7(a) as fully as if it were a Lender hereunder. The Borrower also agrees
that each Participant shall be entitled to the benefits of Sections 2.17, 2.18
and 2.19 with respect to its participation in the Commitments and the Loans
outstanding from time to time as if it was a Lender; PROVIDED that, in the case
of Section 2.18, such Participant shall have complied with the requirements of
said Section and PROVIDED, FURTHER, that no Participant shall be entitled to
receive any

<PAGE>
79

greater amount pursuant to any such Section than the transferor Lender would
have been entitled to receive in respect of the amount of the participation
transferred by such transferor Lender to such Participant had no such
participation occurred.

(c) Any Lender (an "ASSIGNOR") may, in accordance with applicable law,
at any time and from time to time assign to any Lender or any affiliate thereof
or, with the consent of the Borrower, and the Agent (which, in each case, shall
not be unreasonably withheld or delayed) (PROVIDED that no such consent need be
obtained in the case of any assignment made when any Event of Default shall have
occurred and be continuing), to an additional bank, financial institution or
other entity (an "ASSIGNEE") all or any part of its rights and obligations under
this Agreement pursuant to an Assignment and Acceptance, substantially in the
form of Exhibit E, executed by such Assignee, such Assignor and the Agent (and,
where the consent of the Borrower is required pursuant to the foregoing
provisions, by the Borrower) and delivered to the Agent for its acceptance and
recording in the Register; PROVIDED that no such assignment to an Assignee
(other than any Lender or any affiliate thereof) shall be in an aggregate
principal amount of less than $10,000,000 (or, in the case of any Tranche C Term
Loan, $5,000,000) other than in the case of an assignment of all of a Lender's
interests under this Agreement, unless otherwise agreed by the Borrower and the
Agent. Any such assignment need not be ratable as among the Facilities. Upon
such execution, delivery, acceptance and recording, from and after the effective
date determined pursuant to such Assignment and Acceptance, (x) the Assignee
thereunder shall be a party hereto and, to the extent provided in such
Assignment and Acceptance, have the rights and obligations of a Lender hereunder
with a Commitment and/or Loans as set forth therein, and (y) the Assignor
thereunder shall, to the extent provided in such Assignment and Acceptance, be
released from its obligations under this Agreement (and, in the case of an
Assignment and Acceptance covering all of an Assignor's rights and obligations
under this Agreement, such assigning Lender shall cease to be a party hereto).

(d) The Agent shall maintain at its address referred to in Section
10.2 a copy of each Assignment and Acceptance delivered to it and a register
(the "REGISTER") for the recordation of the names and addresses of the Lenders
and the Commitment of, and principal amount of the Loans owing to, each Lender
from time to time and any Notes evidencing such Loans. The entries in the
Register shall be conclusive, in the absence of manifest error, and the
Borrower, the Agent and the Lenders shall treat each Person whose name is
recorded in the Register as the owner of the Loan and any Note evidencing such
Loan recorded therein for all purposes of this Agreement. Any assignment of any
Loan whether or not evidenced by a Note shall be effective only upon appropriate
entries with respect thereto being made in the Register (and each Note shall
expressly so provide). Any assignment or transfer of all or part of a Loan
evidenced by a Note shall be registered on the Register only upon surrender for
registration of assignment or transfer of the Note evidencing such Loan,
accompanied by a duly executed Assignment and Acceptance, and thereupon one or
more new Notes in the same aggregate principal amount shall be issued to the
designated Assignee and the old Notes shall be returned by the Agent to the
Borrower marked "cancelled". The Register shall be available for inspection by
the Borrower or any Lender at any reasonable time and from time to time upon
reasonable prior notice.

<PAGE>
80

(e) Upon its receipt of an Assignment and Acceptance executed by an
assigning Lender and an Assignee (and, in the case of an Assignee that is not
then a Lender or an affiliate thereof or a Person under common management with
such Lender, by the Borrower, the Agent and the Issuing Lender) together with
payment to the Agent of a registration and processing fee of $3,500 (except that
no such registration and processing fee shall be payable in the case of an
Assignee which is already a Lender or is an affiliate of a Lender or a Person
under common management with a Lender), the Agent shall (i) promptly accept such
Assignment and Acceptance and (ii) on the effective date determined pursuant
thereto record the information contained therein in the Register and give notice
of such acceptance and recordation to the Lenders and the Borrower. On or prior
to such effective date, the Borrower, at its own expense, upon request, shall
execute and deliver to the Agent (in exchange for the Revolving Credit Note
and/or Term Notes, as the case may be, of the assigning Lender) a new Revolving
Credit Note and/or Term Notes, as the case may be, to the order of such Assignee
in an amount equal to the Revolving Credit Commitment and/or applicable Term
Loans, as the case may be, assumed or acquired by it pursuant to such Assignment
and Acceptance and, if the assigning Lender has retained a Revolving Credit
Commitment and/or Term Loans, as the case may be, upon request, a new Revolving
Credit Note and/or Term Notes, as the case may be, to the order of the assigning
Lender in an amount equal to the Revolving Credit Commitment and/or applicable
Term Loans, as the case may be, retained by it hereunder. Such new Notes shall
be dated the Closing Date and shall otherwise be in the form of the Note
replaced thereby.

(f) For avoidance of doubt, the parties to this Agreement acknowledge
that the provisions of this Section concerning assignments of Loans and Notes
relate only to absolute assignments and that such provisions do not prohibit
assignments creating security interests, including, without limitation, any
pledge or assignment by a Lender of any Loan or Note to any Federal Reserve Bank
in accordance with applicable law.

10.7 ADJUSTMENTS; SET-OFF. (a) Except to the extent that this
Agreement provides for payments to be allocated to the Lenders under a
particular Facility, if any Lender (a "BENEFITTED LENDER") shall at any time
receive any payment of all or part of its Loans or the Reimbursement Obligations
owing to it, or interest thereon, or receive any collateral in respect thereof
(whether voluntarily or involuntarily, by set-off, pursuant to events or
proceedings of the nature referred to in Section 8(f), or otherwise), in a
greater proportion than any such payment to or collateral received by any other
Lender, if any, in respect of such other Lender's Loans or the Reimbursement
Obligations owing to such other Lender, or interest thereon, such Benefitted
Lender shall purchase for cash from the other Lenders a participating interest
in such portion of each such other Lender's Loans and/or of the Reimbursement
Obligations owing to each such other Lender, or shall provide such other Lenders
with the benefits of any such collateral, or the proceeds thereof, as shall be
necessary to cause such Benefitted Lender to share the excess payment or
benefits of such collateral or proceeds ratably with each of the Lenders;
PROVIDED, HOWEVER, that if all or any portion of such excess payment or benefits
is thereafter recovered from such Benefitted Lender, such purchase shall be
rescinded, and the purchase price and benefits returned, to the extent of such
recovery, but without interest.

<PAGE>
81

(b) In addition to any rights and remedies of the Lenders provided by
law, each Lender shall have the right, without prior notice to the Borrower, any
such notice being expressly waived by the Borrower to the extent permitted by
applicable law, upon any amount becoming due and payable by the Borrower
hereunder (whether at the stated maturity, by acceleration or otherwise) to set
off and appropriate and apply against such amount any and all deposits (general
or special, time or demand, provisional or final), in any currency, and any
other credits, indebtedness or claims, in any currency, in each case whether
direct or indirect, absolute or contingent, matured or unmatured, at any time
held or owing by such Lender or any branch or agency thereof to or for the
credit or the account of the Borrower. Each Lender agrees promptly to notify
the Borrower and the Agent after any such setoff and application made by such
Lender, PROVIDED that the failure to give such notice shall not affect the
validity of such setoff and application.

10.8 COUNTERPARTS. This Agreement may be executed by one or more of
the parties to this Agreement on any number of separate counterparts (including
by telecopy), and all of said counterparts taken together shall be deemed to
constitute one and the same instrument. A set of the copies of this Agreement
signed by all the parties shall be lodged with the Borrower and the Agent.

10.9 SEVERABILITY. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.

10.10 INTEGRATION. This Agreement and the other Loan Documents
represent the agreement of the Borrower, the Agent and the Lenders with respect
to the subject matter hereof, and there are no promises, undertakings,
representations or warranties by the Agent or any Lender relative to subject
matter hereof not expressly set forth or referred to herein or in the other Loan
Documents.

10.11 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.

10.12 SUBMISSION TO JURISDICTION; WAIVERS. Each of the Borrower, the
Agent and each Lender hereby irrevocably and unconditionally:

(a) submits for itself and its Property in any legal action or
proceeding relating to this Agreement and the other Loan Documents to which
it is a party, or for recognition and enforcement of any judgment in
respect thereof, to the non-exclusive general jurisdiction of the Courts of
the State of New York, the courts of the United States of America for the
Southern District of New York, and appellate courts from any thereof;

<PAGE>
82

(b) consents that any such action or proceeding may be brought in such
courts and waives any objection that it may now or hereafter have to the
venue of any such action or proceeding in any such court or that such
action or proceeding was brought in an inconvenient court and agrees not to
plead or claim the same;

(c) agrees that service of process in any such action or proceeding
may be effected by mailing a copy thereof by registered or certified mail
(or any substantially similar form of mail), postage prepaid, to the
Borrower at its address set forth in Section 10.2 or at such other address
of which the Agent shall have been notified pursuant thereto;

(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the
right to sue in any other jurisdiction; and

(e) waives, to the maximum extent not prohibited by law, any right it
may have to claim or recover in any legal action or proceeding referred to
in this Section 10.12 any special, exemplary, punitive or consequential
damages.

10.13 ACKNOWLEDGEMENTS. The Borrower hereby acknowledges that:

(a) it has been advised by counsel in the negotiation, execution and
delivery of this Agreement and the other Loan Documents;

(b) neither the Agent nor any Lender has any fiduciary relationship
with or duty to the Borrower arising out of or in connection with this
Agreement or any of the other Loan Documents, and the relationship between
the Agent and Lenders, on one hand and the Borrower, on the other hand, in
connection herewith or therewith is solely that of debtor and creditor; and

(c) no joint venture is created hereby or by the other Loan Documents
or otherwise exists by virtue of the transactions contemplated hereby among
the Lenders or among the Borrower and the Lenders.

10.14 WAIVERS OF JURY TRIAL. THE BORROWER, THE AGENT AND THE LENDERS
HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION
OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY
COUNTERCLAIM THEREIN.

10.15 CONFIDENTIALITY. Each of the Agent and each Lender agrees to
keep confidential all non-public information provided to it by any Loan Party
pursuant to this Agreement that is designated by such Loan Party as
confidential; PROVIDED that nothing herein shall prevent the Agent or any Lender
from disclosing any such information (a) to the Agent, any other Lender or any
affiliate of any Lender, (b) to any Participant or Assignee (each, a
"TRANSFEREE") or prospective Transferee which agrees to comply with the
provisions of this Section 10.15, (c) to the employees, directors, agents,
attorneys, accountants and other

<PAGE>
83

professional advisors of such Lender or its affiliates, (d) upon the request or
demand of any Governmental Authority having jurisdiction over the Agent or such
Lender, (e) in response to any order of any court or other Governmental
Authority or as may otherwise be required pursuant to any Requirement of Law,
(f) if requested or required to do so in connection with any litigation or
similar proceeding, (g) which has been publicly disclosed other than in breach
of this Section, (h) to the National Association of Insurance Commissioners or
any similar organization or any nationally recognized rating agency that
requires access to information about a Lender's investment portfolio in
connection with ratings issued with respect to such Lender, or (i) in connection
with the exercise of any remedy hereunder or under any other Loan Document.

<PAGE>
84

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their proper and duly authorized officers as
of the day and year first above written.

FRIENDLY ICE CREAM CORPORATION

By:
-------------------------------
Name:
Title:

SOCIETE GENERALE,
as Arranger, Administrative Agent and a
Lender

By:
-------------------------------
Name:
Title:

FIRST SOURCE

By:
-------------------------------
Name:
Title:

GE CAPITAL

By:
-------------------------------
Name:
Title:

PROTECTIVE ASSET MANAGEMENT
COMPANY

By:
-------------------------------
Name:
Title:

<PAGE>
85

SANWA BUSINESS CREDIT CORP.

By:
-------------------------------
Name:
Title:

TRANSAMERICA BUSINESS CREDIT

By:
-------------------------------
Name:
Title:

NATIONSBANK, N.A.

By:
-------------------------------
Name:
Title:

BANK OF BOSTON

By:
-------------------------------
Name:
Title:

BLACK DIAMOND CAPITAL MANAGEMENT

By:
-------------------------------
Name:
Title:

<PAGE>
86

CREDIT LYONNAIS

By:
-------------------------------
Name:
Title:

EATON VANCE

By:
-------------------------------
Name:
Title:

<PAGE>
ANNEX A
-------

PRICING GRID FOR REVOLVING CREDIT LOANS,
TRANCHE A TERM LOANS AND COMMITMENT FEES

=========================================== ============== ==============
Applicable
Margin
Consolidated for Eurodollar Commitment
Leverage Ratio Loans Fee Rate
- ------------------------------------------- -------------- --------------
> or equal to 4.0 to 1.0 2.500% 0.500%
- ------------------------------------------- -------------- --------------
> or equal to 3.5 to 1.0 and < 4.0 to 1.0 2.250% 0.500%
- ------------------------------------------- -------------- --------------
> or equal to 3.0 to 1.0 and < 3.5 to 1.0 2.125% 0.500%
- ------------------------------------------- -------------- --------------
> or equal to 2.5 to 1.0 and < 3.0 to 1.0 1.875% 0.375%
- ------------------------------------------- -------------- --------------
< 2.5 to 1.0 1.625% 0.375%
=========================================== ============== ==============

Changes in the Applicable Margin with respect to Revolving Loans and
Tranche A Loans or in the Commitment Fee Rate resulting from changes in the
Consolidated Leverage Ratio shall become effective on the date (the "ADJUSTMENT
DATE") on which financial statements are delivered to the Lenders pursuant to
Section 6.1 (but in any event not later than the 45th day after the end of each
of the first three quarterly periods of each fiscal year or the 90th day after
the end of each fiscal year, as the case may be) and shall remain in effect
until the next change to be effected pursuant to this paragraph. If any
financial statements referred to above are not delivered within the time periods
specified above, then, until such financial statements are delivered, the
Consolidated Leverage Ratio as at the end of the fiscal period that would have
been covered thereby shall for the purposes of this definition be deemed to be
greater than 4.0 to 1.0. Each determination of the Consolidated Leverage Ratio
pursuant to this definition shall be made as at the end of and with respect to
the period of four consecutive fiscal quarters of the Borrower ending at the end
of the period covered by the relevant financial statements and shall reflect the
matters set forth in the proviso to Section 7.1(a).

<PAGE>
ANNEX B

ECF PERCENTAGE GRID

========================================== ============
Consolidated ECF
Leverage Ratio Percentage
------------------------------------------ ------------
> or equal to 3.5 to 1.0 80%
------------------------------------------ ------------
> or equal to 3.0 to 1.0 and < 3.5 to 1.0 65%
------------------------------------------ ------------
> or equal to 2.0 to 1.0 and < 3.0 to 1.0 50%
------------------------------------------ ------------
< 2.0 to 1.0 0%
========================================== ============

Changes in the ECF Percentage resulting from changes in the
Consolidated Leverage Ratio shall become effective on the date (the "ECF
PERCENTAGE ADJUSTMENT DATE") on which audited financial statements are delivered
to the Lenders pursuant to Section 6.1(a) (but in any event not later than the
90th day after the end of each fiscal year) and shall remain in effect until the
next change to be effected pursuant to this paragraph. If any financial
statements are not delivered within the time period specified above, then, until
such financial statements are delivered, the Consolidated Leverage Ratio as at
the end of the fiscal year that would have been covered thereby shall for the
purposes of this definition be deemed to be greater than 3.5 to 1.0. Each
determination of the Consolidated Leverage Ratio pursuant to this definition
shall be made as at the end of and with respect to the period of four
consecutive fiscal quarters of the Borrower ending at the end of the fiscal year
covered by the relevant financial statements.

<PAGE>

ANNEX C
-------

PERMITTED CAPITAL EXPENDITURE GRID
<TABLE>
<CAPTION>
=========== ============== ============= ============================ =============
Ratio of
Consolidated Permitted
Capital Consolidated EBITDA to Capital
Fiscal Expenditure EBITDA Consolidated Expenditure
Year Amount Target EBITDA Target Percentage
- ----------- -------------- ------------- ---------------------------- -------------
<S> <C> <C> <C> <C>
1998 $ $ > or equal to 1.00 to 1.00 120%
- ----------- -------------- ------------- ---------------------------- -------------
1999 $ $ < 1.00 to 1.00 100%
- ----------- -------------- ------------- and
2000 $ $ > or equal to 0.90 to 1.00
- ----------- -------------- ------------- ---------------------------- -------------
2001 $ $ < 0.90 to 1.00 80%
and
2002 $ $ > or equal to 0.80 to 1.00
- ----------- -------------- ------------- ---------------------------- -------------
2003 $ $ < 0.80 to 1.00 50%
- ----------- -------------- ------------- ---------------------------- -------------
2004 and
thereafter $ $
=========== ============== ============= ============================ =============
</TABLE>

Changes in the Permitted Capital Expenditure Amount resulting from
changes in the Ratio of Consolidated EBITDA to Consolidated EBITDA Target shall
become effective on the date (the "PERMITTED CAPITAL EXPENDITURE ADJUSTMENT
DATE") on which audited financial statements are delivered to the Lenders
pursuant to Section 6.1(a) with respect to any fiscal year, commencing with the
Borrower's 1998 fiscal year (but in any event not later than the 90th day after
the end of each such fiscal year), and shall remain in effect until the next
change to be effected pursuant to this paragraph. If any financial statements
are not delivered within the time period specified above, then, until such
financial statements are delivered, the Ratio of Consolidated EBITDA to
Consolidated EBITDA Target as at the end of the fiscal year that would have been
covered thereby shall for the purposes of this definition be deemed to be less
than 0.80 to 1.00. Each determination of the Ratio of Consolidated EBITDA to
Consolidated EBITDA Target shall be made with respect to the period of four
consecutive quarters of the Borrower ending at the end of the fiscal year
covered by the relevant financial statements.

<PAGE>
EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
report (and to all reference to our Firm) included in or made a part of this
Registration Statement.

ARTHUR ANDERSEN LLP

Hartford, Connecticut

November 5, 1997