Edgar Filing: FRIENDLY ICE CREAM CORP

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-Q

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NO. 0-3930

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FRIENDLY ICE CREAM CORPORATION

(Exact name of registrant as specified in its charter)

MASSACHUSETTS 5812 04-2053130
(State of (Primary Standard (I.R.S. Employer
Incorporation) Industrial Identification No.)
Classification Code Number)

1855 BOSTON ROAD
WILBRAHAM, MASSACHUSETTS 01095
(413) 543-2400

(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

CLASS OUTSTANDING AT APRIL 8, 2002
----- ----------------------------

Common Stock, $.01 par value 7,353,828 shares

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PART I--FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

MARCH 31, DECEMBER 30,
2002 2001
----------- ------------
(UNAUDITED)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 14,519 $ 16,342
Accounts receivable....................................... 10,745 9,969
Inventories............................................... 16,903 12,987
Deferred income taxes..................................... 7,659 7,659
Prepaid expenses and other current assets................. 2,327 3,736
--------- ---------
TOTAL CURRENT ASSETS........................................ 52,153 50,693

PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization.............................................. 163,352 169,489
INTANGIBLE ASSETS AND DEFERRED COSTS, net of accumulated
amortization.............................................. 20,763 21,208
OTHER ASSETS................................................ 12,263 11,172
--------- ---------
TOTAL ASSETS................................................ $ 248,531 $ 252,562
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 951 $ 1,068
Current maturities of capital lease and finance
obligations............................................. 1,858 1,851
Accounts payable.......................................... 21,232 20,505
Accrued salaries and benefits............................. 9,137 9,436
Accrued interest payable.................................. 6,238 1,543
Insurance reserves........................................ 12,950 13,333
Restructuring reserves.................................... 2,397 3,056
Other accrued expenses.................................... 14,460 19,260
--------- ---------
TOTAL CURRENT LIABILITIES................................... 69,223 70,052
--------- ---------
DEFERRED INCOME TAXES....................................... 9,624 10,584
CAPITAL LEASE AND FINANCE OBLIGATIONS, less current
maturities................................................ 5,796 6,267
LONG-TERM DEBT, less current maturities..................... 232,534 232,797
OTHER LONG-TERM LIABILITIES................................. 28,897 28,876

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIT:
Common stock.............................................. 74 74
Additional paid-in capital................................ 139,373 139,290
Accumulated deficit....................................... (236,990) (235,378)
--------- ---------
TOTAL STOCKHOLDERS' DEFICIT................................. (97,543) (96,014)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT................. $ 248,531 $ 252,562
========= =========

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

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

FOR THE THREE MONTHS ENDED
---------------------------
MARCH 31, APRIL 1,
2002 2001
------------ ------------

REVENUES.................................................... $131,486 $125,719

COSTS AND EXPENSES:
Cost of sales............................................. 45,994 42,060
Labor and benefits........................................ 37,918 39,676
Operating expenses........................................ 28,222 27,094
General and administrative expenses....................... 8,599 9,332
Write-downs of property and equipment..................... 120 --
Depreciation and amortization............................. 6,686 7,552
Loss (gain) on sales of other property and equipment, net... 512 (1,981)
-------- --------

OPERATING INCOME............................................ 3,435 1,986

Interest expense, net....................................... 6,337 7,585
-------- --------

LOSS BEFORE BENEFIT FROM INCOME TAXES....................... (2,902) (5,599)

Benefit from income taxes................................... 1,290 2,396
-------- --------

NET LOSS AND COMPREHENSIVE LOSS............................. $ (1,612) $ (3,203)
======== ========

BASIC AND DILUTED NET LOSS PER SHARE........................ $ (0.22) $ (0.43)
======== ========

WEIGHTED AVERAGE BASIC AND DILUTED SHARES................... 7,353 7,376
======== ========

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

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)
(IN THOUSANDS)

FOR THE THREE MONTHS ENDED
---------------------------
MARCH 31, APRIL 1,
2002 2001
------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(1,612) $(3,203)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Stock compensation expense.............................. 70 93
Depreciation and amortization........................... 6,686 7,552
Write-downs of property and equipment................... 120 --
Deferred income tax benefit............................. (960) (2,396)
Loss (gain) on sales of other property and equipment,
net................................................... 512 (1,981)
Changes in operating assets and liabilities:
Accounts receivable................................... (776) 598
Inventories........................................... (3,916) (2,510)
Other assets.......................................... 318 37
Accounts payable...................................... 727 (467)
Accrued expenses and other long-term liabilities...... (1,562) 4,441
------- -------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES......... (393) 2,164
------- -------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (1,563) (2,026)
Proceeds from sales of property and equipment............. 964 5,246
------- -------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES......... (599) 3,220
------- -------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.................................. -- 8,000
Repayments of debt........................................ (380) (18,627)
Repayments of capital lease and finance obligations....... (464) (572)
Stock options exercised................................... 13 --
------- -------
NET CASH USED IN FINANCING ACTIVITIES....................... (831) (11,199)
------- -------

NET DECREASE IN CASH AND CASH EQUIVALENTS................... (1,823) (5,815)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 16,342 14,584
------- -------

CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $14,519 $ 8,769
======= =======

SUPPLEMENTAL DISCLOSURES:
Cash paid (refunded) during the period for:
Interest.................................................. $ 1,343 $ 2,136
Income taxes.............................................. (3) 2

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

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

INTERIM FINANCIAL INFORMATION--

The accompanying condensed consolidated financial statements as of
March 31, 2002 and for the first quarters ended March 31, 2002 and April 1, 2001
are unaudited, but, in the opinion of management, include all adjustments which
are necessary for a fair presentation of the consolidated financial position,
results of operations, cash flows and comprehensive loss of Friendly Ice Cream
Corporation ("FICC") and subsidiaries (unless the context indicates otherwise,
collectively, the "Company"). Such adjustments consist solely of normal
recurring accruals. Operating results for the three month period ended
March 31, 2002 are not necessarily indicative of the results that may be
expected for the entire year due, in part, to the seasonality of the Company's
business. Historically, higher revenues and operating income have been
experienced during the second and third fiscal quarters. The Company's
consolidated financial statements, including the notes thereto, which are
contained in the 2001 Annual Report on Form 10-K should be read in conjunction
with these condensed consolidated financial statements. Capitalized terms not
otherwise defined herein should be referenced to the 2001 Annual Report on
Form 10-K.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS--

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. The critical accounting policies and most
significant estimates and assumptions relate to revenue recognition, insurance
reserves, restructuring reserves, valuation allowances on net operating losses,
pension and other post-retirement benefits expense and the volatility of cream
prices. Actual amounts could differ significantly from the estimates.

REVENUE RECOGNITION--

The Company's revenues are derived primarily from the operation of
full-service restaurants, the distribution and sale of frozen desserts through
retail and institutional locations and franchising. The Company recognizes
restaurant revenue upon receipt of payment from the customer and retail revenue
upon shipment of product. Reserves for discounts and allowances from retail
sales are estimated and accrued when revenue is recorded. Actual amounts could
differ materially from the estimates. Franchise royalty income, based on net
sales of franchisees, is payable monthly and is recorded on the accrual method.
Initial franchise fees are recorded as revenue upon completion of all
significant services, generally upon opening of the restaurant.

INSURANCE RESERVES--

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
liability and product liability insurance. Subsequent to September 2, 2000, the
Company discontinued its use of RIC as a captive insurer for new claims. The
Company's and RIC's liability for estimated incurred losses are actuarially
determined and recorded in the accompanying condensed consolidated financial
statements on an undiscounted basis. Actual incurred losses may vary from the
estimated incurred losses and could have a material affect on the Company's
insurance expense.

RESTRUCTURING RESERVES--

On October 10, 2001, the Company eliminated approximately 70 positions at
corporate headquarters. In addition, approximately 30 positions in the
restaurant construction and fabrication areas were eliminated by December 30,
2001. The purpose of the reduction was to streamline functions and reduce
redundancy amongst its business segments. As a result of the elimination of the
positions and the outsourcing of certain functions, the Company reported a
pre-tax restructuring charge of approximately $2,536,000 for severance, rent and
unusable construction supplies in the year ended December 30, 2001.

In March 2000, the Company's Board of Directors approved a restructuring
plan that provided for the immediate closing of 81 restaurants at the end of
March 2000 and the disposition of an additional 70 restaurants over the next
24 months. As a result of this plan, the Company reported a pre-tax
restructuring charge of approximately $12,100,000 for severance, rent, utilities
and real estate taxes, demarking, lease termination costs and certain other
costs associated with the closing of the locations, along with a pre-tax
write-down of property and equipment for these locations of approximately
$17,000,000 in the year ended December 31, 2000. The Company reduced the
restructuring reserve by $1,900,000 during the year ended December 30, 2001
since the reserve exceeded estimated remaining payments.

As of March 31, 2002, the remaining restructuring reserve was $2,397,000.
The restructuring reserves may be increased or decreased based upon remaining
payments, which could vary materially from the estimates depending upon the
timing of store closings and other factors.

INCOME TAXES--

The Company accounts for income taxes in accordance with SFAS 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. As of
December 30, 2001 and March 31, 2002, a valuation allowance of $11,295,000
existed related to state NOL carryforwards due to restrictions on the usage of
state NOL carryforwards and short carryforward periods for certain states.
Taxable income by state for future periods is difficult to estimate. The amount
and timing of any future taxable income may affect the usage of such
carryforwards, which could result in a material change in the valuation
allowance.

PENSION AND OTHER POST-RETIREMENT BENEFITS--

The determination of the Company's obligation and expense for pension and
other post-retirement benefits is dependent upon the selection of certain
assumptions used by actuaries in calculating such

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amounts. Those assumptions include, among other things, the discount rate,
expected long-term rate of return on plan assets and rates of increase in
compensation and health care costs. In accordance with accounting principles
generally accepted in the United States, actual results that differ from the
assumptions are accumulated and amortized over future periods and, therefore,
generally affect the recognized expense and recorded obligation in such future
periods. While FICC believes that the assumptions used are appropriate,
significant differences in actual experience or significant changes in the
assumptions may materially affect the future pension and other post-retirement
obligations and expense.

VOLATILITY OF CREAM PRICES--

The cost of cream, the principal ingredient used in making ice cream,
affects cost of sales as a percentage of total revenues, especially in
foodservice's retail business. The Company believes that cream prices will be
slightly higher in 2002 than in 2001. A $0.10 increase in the cost of a pound of
AA butter adversely affects the Company's annual cost of sales by approximately
$1,100,000. To minimize risk, alternative supply sources continue to be pursued.
However, no assurance can be given that the Company will be able to offset any
cost increases in the future and future increases in cream could have a material
adverse effect on the Company's results of operations.

DEBT--

In December 2001, the Company completed a financial restructuring plan (the
"Refinancing Plan") which included the repayment of $64,545,000 outstanding
under the Old Credit Facility and the repurchase of approximately $21,300,000 in
Senior Notes for $17,000,000 with the proceeds from $55,000,000 in long-term
mortgage financing (the "Mortgage Financing") and a $33,700,000 sale and
leaseback transaction (the "Sale/Leaseback Financing"). In addition, FICC
secured a new $30,000,000 revolving credit facility of which up to $20,000,000
is available to support letters of credit. The $30,000,000 commitment less
outstanding letters of credit is available for borrowing to provide working
capital and for other corporate needs (the "New Credit Facility").

INVENTORIES--

Inventories are stated at the lower of first-in, first-out cost or market.
Inventories as of March 31, 2002 and December 30, 2001 were as follows (in
thousands):

MARCH 31, DECEMBER 30,
2002 2001
--------- ------------

Raw materials......................................... $ 828 $ 1,269
Goods in process...................................... 142 73
Finished goods........................................ 15,933 11,645
------- -------
Total................................................. $16,903 $12,987
======= =======

RECLASSIFICATIONS--

Certain prior year amounts have been reclassified to conform with current
year presentation.

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

2. NET LOSS PER SHARE

Basic loss per share is calculated by dividing net loss by the weighted
average number of common shares outstanding during the period. Diluted loss per
share is calculated by dividing net loss by the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period. Common stock equivalents are dilutive stock options and warrants that
are assumed exercised for calculation purposes. The number of common stock
options which could dilute basic earnings per share in the future, that were not
included in the computation of diluted loss per share because to do so would
have been antidilutive, was 389,000 and 650,000 for the three months ended
March 31, 2002 and April 1, 2001, respectively.

3. SEGMENT REPORTING

Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision-maker, or decision-making group, in deciding how to allocate
resources and in assessing performance. The Company's chief operating
decision-maker is the Chairman of the Board and Chief Executive Officer of the
Company. The Company's operating segments include restaurant, foodservice and
franchise. The revenues from these segments include both sales to unaffiliated
customers and intersegment sales, which generally are accounted for on a basis
consistent with sales to unaffiliated customers. Intersegment sales and other
intersegment transactions have been eliminated in the accompanying condensed
consolidated financial statements.

The Company'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 dayparts. The menu currently features over 100 items comprised of
a broad selection of breakfast, lunch, dinner and afternoon and evening snack
items. Foodservice operations manufactures frozen dessert products and
distributes such manufactured products and purchased finished goods to the
Company's restaurants and franchised operations. Additionally, it sells frozen
dessert products to distributors and retail and institutional locations. The
Company's franchise segment includes a royalty based on franchise restaurant
revenue. In addition, the Company receives rental income from various franchised
restaurants. The Company does not allocate general and administrative expenses
associated with its headquarters operations to any business segment. These costs
include general and administrative expenses of the following functions: legal,
accounting, personnel not directly related to a segment, information systems and
other headquarters activities.

On May 1, 2001, foodservice decreased its ice cream pricing to all
restaurants. This resulted in decreased foodservice revenues of 3.9% for the
three months ended March 31, 2002.

The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies except that the
financial results for the foodservice operating segment, prior to intersegment
eliminations, have been prepared using a management approach, which is
consistent with the basis and manner in which the Company's management
internally reviews financial information for the purpose of assisting in making
internal operating decisions. The Company evaluates performance based on
stand-alone operating segment income (loss) before income taxes and generally
accounts for intersegment sales and transfers as if the sales or transfers were
to third parties, that is, at current market prices.

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

3. SEGMENT REPORTING (CONTINUED)
EBITDA represents net income (loss) before (i) benefit from income taxes,
(ii) interest expense, net, (iii) depreciation and amortization,
(iv) write-downs of property and equipment and (v) other non-cash items. The
Company has included information concerning EBITDA in this Form 10-Q because it
believes that such information is used by certain investors as one measure of a
company's historical ability to service debt. EBITDA should not be considered as
an alternative to, or more meaningful than, earnings (loss) from operations or
other traditional indications of a company's operating performance.

FOR THE THREE MONTHS ENDED
---------------------------
MARCH 31, APRIL 1,
2002 2001
------------ ------------
(IN THOUSANDS)

Revenues:
Restaurant...................................... $104,256 $107,145
Foodservice..................................... 54,133 47,822
Franchise....................................... 2,129 1,561
-------- --------
Total......................................... $160,518 $156,528
======== ========

Intersegment revenues:
Restaurant...................................... $ -- $ --
Foodservice..................................... (29,032) (30,809)
Franchise....................................... -- --
-------- --------
Total......................................... $(29,032) $(30,809)
======== ========

External revenues:
Restaurant...................................... $104,256 $107,145
Foodservice..................................... 25,101 17,013
Franchise....................................... 2,129 1,561
-------- --------
Total......................................... $131,486 $125,719
======== ========

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

3. SEGMENT REPORTING (CONTINUED)

FOR THE THREE MONTHS ENDED
---------------------------
MARCH 31, APRIL 1,
2002 2001
------------ ------------
(IN THOUSANDS)

EBITDA:
Restaurant...................................... $ 10,228 $ 8,767
Foodservice..................................... 3,674 3,079
Franchise....................................... 1,327 494
Corporate....................................... (4,403) (4,593)
(Loss) gain on property and equipment, net...... (515) 1,884
-------- --------
Total......................................... $ 10,311 $ 9,631
======== ========
Interest expense, net--Corporate.................. $ 6,337 $ 7,585
======== ========
Depreciation and amortization:
Restaurant...................................... $ 4,626 $ 5,046
Foodservice..................................... 671 854
Franchise....................................... 74 60
Corporate....................................... 1,315 1,592
-------- --------
Total......................................... $ 6,686 $ 7,552
======== ========
Other non-cash expenses:
Corporate....................................... $ 70 $ 93
Write-downs of property and equipment........... 120 --
-------- --------
Total......................................... $ 190 $ 93
======== ========
Income (loss) before income taxes:
Restaurant...................................... $ 5,602 $ 3,721
Foodservice..................................... 3,003 2,225
Franchise....................................... 1,253 434
Corporate....................................... (12,125) (13,863)
(Loss) gain on property and equipment, net...... (635) 1,884
-------- --------
Total......................................... $ (2,902) $ (5,599)
======== ========

MARCH 31, DECEMBER 30,
2002 2001
--------- ------------

Capital expenditures, including assets acquired under
capital leases:
Restaurant.......................................... $ 1,200 $ 10,821
Foodservice......................................... 368 2,090
Corporate........................................... (5) 1,011
-------- --------
Total............................................. $ 1,563 $ 13,922
======== ========
Total assets:
Restaurant.......................................... $144,443 $148,475
Foodservice......................................... 41,636 38,474
Franchise........................................... 6,384 7,076
Corporate........................................... 56,068 58,537
-------- --------
Total............................................. $248,531 $252,562
======== ========

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

4. NEW ACCOUNTING PRONOUNCEMENTS

In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 modifies the
rules for accounting for the impairment or disposal of long-lived assets. The
impact of adopting SFAS No. 144 on December 31, 2001 had no material effect on
the Company's financial condition or results of operations.

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangibles." SFAS No. 142 modifies the rules for accounting for goodwill and
other intangible assets. The new rules became effective for the Company on
December 31, 2001. The impact of adopting SFAS No. 142 on December 31, 2001 had
no effect on the Company's financial condition or results of operations and the
Company is continuing to amortize its license agreement related to certain
trademarked products over the term of the license agreement.

In April 2001, the FASB reached consensus on Emerging Issues Task Force
("EITF") Issue No. 00-25, "Accounting for Consideration from a Vendor to a
Retailer in Connection with the Purchase or Promotion of the Vendor's Products."
EITF Issue No. 00-25 was effective for quarters beginning after December 15,
2001, with prior financial statements restated if practicable. EITF Issue
No. 00-25 requires that consideration from a vendor to a retailer be recorded as
a reduction in revenue unless certain criteria are met. Arrangements within the
scope of this Issue include slotting fees, cooperative advertising arrangements
and buy-downs. As a result of EITF Issue No. 00-25, certain costs previously
recorded as expense have been reclassified and offset against revenue for the
quarter ended April 1, 2001.

5. RESTRUCTURING RESERVES

The following represents the reserve and activity associated with the
March 2000 and October 2001 restructurings (in thousands):

FOR THE THREE MONTHS ENDED APRIL 1, 2001
-----------------------------------------------
RESTRUCTURING RESTRUCTURING
RESERVES AS OF RESERVES AS OF
DECEMBER 31, 2000 COSTS PAID APRIL 1, 2001
----------------- ---------- --------------

Severance pay....................................... $ 74 $ (74) $ --
Rent................................................ 3,585 (278) 3,307
Utilities and real estate taxes..................... 1,105 (210) 895
Demarking........................................... 138 (12) 126
Lease termination costs............................. 120 -- 120
Inventory........................................... 5 (5) --
Other............................................... 544 (148) 396
------ ----- ------
Total............................................. $5,571 $(727) $4,844
====== ===== ======

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

5. RESTRUCTURING RESERVES (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2002
----------------------------------------------------------
RESTRUCTURING RESTRUCTURING
RESERVES AS OF RESERVES AS OF
DECEMBER 30, 2001 EXPENSE COSTS PAID MARCH 31, 2002
----------------- -------- ---------- --------------

Severance pay.............................. $ 516 $ -- $(408) $ 108
Rent....................................... 1,318 -- (136) 1,182
Utilities and real estate taxes............ 185 91 (78) 198
Equipment.................................. 480 -- -- 480
Outplacement services...................... 6 -- (1) 5
Other...................................... 551 (91) (36) 424
------ ---- ----- ------
Total.................................... $3,056 $ -- $(659) $2,397
====== ==== ===== ======

Based on information currently available, management believes that the
restructuring reserve as of March 31, 2002 is adequate and not excessive.

6. FRANCHISE TRANSACTIONS

In 2000, the Company and its first franchisee, Davco, agreed to terminate
Davco's rights as the exclusive developer of new Friendly's restaurants in
Maryland, Delaware, the District of Columbia and northern Virginia, effective
December 28, 2000. Davco has the right to close up to 16 existing franchised
locations and will operate the remaining 32 locations under their respective
existing franchise agreements until such time as a new franchisee is found for
those locations. The existing franchise agreements for the 32 locations were
modified as of December 29, 2001 to allow early termination subject to
liquidated damages on 22 of the 32 franchise agreements. Effective August 6,
2001, Davco transferred its rights to three franchised locations to a third
party. Davco closed two units during the year ended December 30, 2001. During
the quarter ended March 31, 2002, Davco transferred its rights to eight
additional franchised locations to three separate third parties.

7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

FICC's obligation related to the Senior Notes are guaranteed fully and
unconditionally by one of FICC's wholly owned 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, balance sheets, statements of operations and statements of
cash flows for FICC (the "Parent Company"), Friendly's Restaurants
Franchise, Inc. (the "Guarantor Subsidiary") and Friendly's
International, Inc., Restaurant Insurance Corporation, and the three LLC
subsidiaries created in 2001, Friendly's Realty I, LLC, Friendly's Realty II,
LLC and Friendly's Realty III, LLC (collectively, the "Non-guarantor
Subsidiaries"). All of the LLCs' assets are owned by the LLCs, which are
separate entities with separate creditors which will be entitled to be satisfied
out of the LLCs' assets. Separate complete financial statements and other
disclosures of the Guarantor Subsidiary as of March 31, 2002 and April 1, 2001
and for the three months ended March 31, 2002 and April 1, 2001 are not
presented because management has determined that such information is not
material to investors.

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

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.

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2002
(In thousands)

PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------

Assets
Current assets:
Cash and cash equivalents......... $ 12,449 $ 16 $ 2,054 $ -- $ 14,519
Accounts receivable, net.......... 10,087 658 -- -- 10,745
Inventories....................... 16,903 -- -- -- 16,903
Deferred income taxes............. 7,448 99 -- 112 7,659
Prepaid expenses and other current
assets.......................... 6,606 255 3,503 (8,037) 2,327
-------- ------ ------- -------- --------
Total current assets................ 53,493 1,028 5,557 (7,925) 52,153
Deferred income taxes............... -- 350 1,327 (1,677) --
Property and equipment, net......... 111,956 -- 51,396 -- 163,352
Intangibles and deferred costs,
net............................... 17,884 -- 2,879 -- 20,763
Investments in subsidiaries......... 5,254 -- -- (5,254) --
Other assets........................ 11,348 5,100 6,229 (10,414) 12,263
-------- ------ ------- -------- --------
Total assets........................ $199,935 $6,478 $67,388 $(25,270) $248,531
======== ====== ======= ======== ========
Liabilities and Stockholders' (Deficit) Equity

Current liabilities:
Current maturities of long-term
obligations..................... $ 5,358 $ -- $ 951 $ (3,500) $ 2,809
Accounts payable.................. 21,232 -- -- -- 21,232
Accrued expenses.................. 41,137 271 8,076 (4,302) 45,182
-------- ------ ------- -------- --------
Total current liabilities........... 67,727 271 9,027 (7,802) 69,223
Deferred income taxes............... 11,189 -- -- (1,565) 9,624
Long-term obligations, less current
maturities........................ 189,837 -- 53,807 (5,314) 238,330
Other long-term liabilities......... 28,725 1,057 4,450 (5,335) 28,897
Stockholders' (deficit) equity...... (97,543) 5,150 104 (5,254) (97,543)
-------- ------ ------- -------- --------
Total liabilities and stockholders'
(deficit) equity.................. $199,935 $6,478 $67,388 $(25,270) $248,531
======== ====== ======= ======== ========

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(In thousands)

PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------

Revenues............................ $129,699 $1,787 $ -- $ -- $131,486
Costs and expenses:
Cost of sales..................... 45,994 -- -- -- 45,994
Labor and benefits................ 37,918 -- -- -- 37,918
Operating expenses and write-downs
of property and equipment....... 30,091 -- (1,749) -- 28,342
General and administrative
expenses........................ 7,435 1,164 -- -- 8,599
Depreciation and amortization..... 6,099 -- 587 -- 6,686
Loss on sales of other property and
equipment, net.................... 512 -- -- -- 512
Interest expense.................... 5,174 -- 1,163 -- 6,337
-------- ------ ------- ----- --------

(Loss) income before benefit from
(provision for) income taxes and
equity in net income of
consolidated subsidiaries......... (3,524) 623 (1) -- (2,902)

Benefit from (provision for) income
taxes............................. 1,664 (255) (119) -- 1,290
-------- ------ ------- ----- --------

(Loss) income before equity in net
income of consolidated
subsidiaries...................... (1,860) 368 (120) -- (1,612)

Equity in net income of consolidated
subsidiaries...................... 248 -- -- (248) --
-------- ------ ------- ----- --------

Net (loss) income................... $ (1,612) $ 368 $ (120) $(248) $ (1,612)
======== ====== ======= ===== ========

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(In thousands)

PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------

Net cash (used in) provided by
operating activities............... $(1,479) $(88) $1,054 $ 120 $ (393)
------- ---- ------ ------- -------
Cash flows from investing activities:
Purchases of property and
equipment........................ (1,563) -- -- -- (1,563)
Proceeds from sales of property and
equipment........................ 964 -- -- -- 964
------- ---- ------ ------- -------
Net cash used in investing
activities......................... (599) -- -- -- (599)
------- ---- ------ ------- -------

Cash flows from financing activities:
Repayments of obligations.......... (602) -- (242) -- (844)
Stock options exercised............ 13 13
Reinsurance deposits received...... -- -- 1,000 (1,000) --
Reinsurance payments made from
deposits......................... -- -- (880) 880 --
------- ---- ------ ------- -------
Net cash used in financing
activities......................... (589) -- (122) (120) (831)
------- ---- ------ ------- -------

Net (decrease) increase in cash and
cash equivalents................... (2,667) (88) 932 -- (1,823)

Cash and cash equivalents, beginning
of period.......................... 15,116 104 1,122 -- 16,342
------- ---- ------ ------- -------

Cash and cash equivalents, end of
period............................. $12,449 $ 16 $2,054 $ -- $14,519
======= ==== ====== ======= =======

Supplemental disclosures:
Interest paid...................... $ 180 $ -- $1,163 $ -- $ 1,343
Income taxes (refunded) paid....... (5) 2 -- -- (3)

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 30, 2001
(In thousands)

PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------

Assets

Current assets:
Cash and cash equivalents......... $ 15,116 $ 104 $ 1,122 $ -- $ 16,342
Accounts receivable, net.......... 9,468 501 -- -- 9,969
Inventories....................... 12,987 -- -- -- 12,987
Deferred income taxes............. 7,448 99 -- 112 7,659
Prepaid expenses and other current
assets.......................... 8,704 1,002 3,560 (9,530) 3,736
-------- ------ ------- -------- --------
Total current assets................ 53,723 1,706 4,682 (9,418) 50,693
Deferred income taxes............... -- 350 1,327 (1,677) --
Property and equipment, net......... 117,564 -- 51,925 -- 169,489
Intangibles and deferred costs,
net............................... 18,271 -- 2,937 -- 21,208
Investments in subsidiaries......... 5,061 -- -- (5,061) --
Other assets........................ 10,258 4,863 6,229 (10,178) 11,172
-------- ------ ------- -------- --------
Total assets........................ $204,877 $6,919 $67,100 $(26,334) $252,562
======== ====== ======= ======== ========

Liabilities and Stockholders' (Deficit) Equity

Current liabilities:
Current maturities of long-term
obligations..................... $ 5,489 $ -- $ 930 $ (3,500) $ 2,919
Accounts payable.................. 20,505 -- -- -- 20,505
Accrued expenses.................. 43,853 1,042 7,491 (5,758) 46,628
-------- ------ ------- -------- --------
Total current liabilities........... 69,847 1,042 8,421 (9,258) 70,052
Deferred income taxes............... 12,149 -- -- (1,565) 10,584
Long-term obligations, less current
maturities........................ 190,308 -- 54,070 (5,314) 239,064
Other long-term liabilities......... 28,587 1,095 4,330 (5,136) 28,876
Stockholders' (deficit) equity...... (96,014) 4,782 279 (5,061) (96,014)
-------- ------ ------- -------- --------
Total liabilities and stockholders'
(deficit) equity.................. $204,877 $6,919 $67,100 $(26,334) $252,562
======== ====== ======= ======== ========

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 1, 2001
(In thousands)

PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------

Revenues............................ $124,526 $1,193 $ -- $ -- $125,719
Costs and expenses:
Cost of sales..................... 42,060 -- -- -- 42,060
Labor and benefits................ 39,676 -- -- -- 39,676
Operating expenses and write-downs
of property and equipment....... 27,103 -- (9) -- 27,094
General and administrative
expenses........................ 8,173 1,159 -- -- 9,332
Depreciation and amortization..... 7,552 -- -- -- 7,552
Gain on sales of other property and
equipment, net.................... (1,981) -- -- -- (1,981)
Interest expense (income)........... 7,806 -- (221) -- 7,585
-------- ------ ----- ----- --------

(Loss) income before benefit from
(provision for) income taxes and
equity in net income of
consolidated subsidiaries......... (5,863) 34 230 -- (5,599)

Benefit from (provision for) income
taxes............................. 2,491 (14) (81) -- 2,396
-------- ------ ----- ----- --------

(Loss) income before equity in net
income of consolidated
subsidiaries...................... (3,372) 20 149 -- (3,203)

Equity in net income of consolidated
subsidiaries...................... 169 -- -- (169) --
-------- ------ ----- ----- --------

Net (loss) income................... $ (3,203) $ 20 $ 149 $(169) $ (3,203)
======== ====== ===== ===== ========

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 1, 2001
(In thousands)

PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------

Net cash provided by (used in)
operating activities.............. $ 1,986 $(21) $1,184 $(985) $ 2,164
-------- ---- ------ ----- --------

Cash flows from investing
activities:
Purchases of property and
equipment....................... (2,026) -- -- -- (2,026)
Proceeds from sales of property
and equipment................... 5,246 -- -- -- 5,246
-------- ---- ------ ----- --------
Net cash provided by investing
activities........................ 3,220 -- -- -- 3,220
-------- ---- ------ ----- --------

Cash flows from financing
activities:
Proceeds from borrowings.......... 8,000 -- -- -- 8,000
Repayments of obligations......... (19,199) -- -- -- (19,199)
Reinsurance payments made from
deposits........................ -- -- (962) 962 --
-------- ---- ------ ----- --------
Net cash used in financing
activities........................ (11,199) -- (962) 962 (11,199)
-------- ---- ------ ----- --------

Net (decrease) increase in cash and
cash equivalents.................. (5,993) (21) 222 (23) (5,815)

Cash and cash equivalents, beginning
of period......................... 13,619 33 932 -- 14,584
-------- ---- ------ ----- --------

Cash and cash equivalents, end of
period............................ $ 7,626 $ 12 $1,154 $ (23) $ 8,769
======== ==== ====== ===== ========

Supplemental disclosures:
Interest paid (received).......... $ 2,357 $ -- $ (221) $ -- $ 2,136
Income taxes paid................. -- 2 -- -- 2

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

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

FORWARD LOOKING STATEMENTS

Statements contained herein that are not historical facts constitute
"forward looking statements" as that term is defined in the Private Securities
Litigation Reform Act of 1995. All forward looking statements are subject to
risks and uncertainties which could cause results to differ materially from
those anticipated. These factors include the Company's highly competitive
business environment, exposure to commodity prices, risks associated with the
foodservice industry, the ability to retain and attract new employees,
government regulations, the Company's high geographic concentration in the
Northeast and its attendant weather patterns, conditions needed to meet
restaurant re-imaging and new opening targets and risks associated with improved
service and other initiatives. Other factors that may cause actual results to
differ from the forward looking statements contained herein and that may affect
the Company's prospects in general are included in the Company's other filings
with the Securities and Exchange Commission.

OVERVIEW

Friendly's owns and operates 390 restaurants, franchises 160 full-service
restaurants and six non-traditional units and manufactures a full line of frozen
desserts distributed through more than 3,500 supermarkets and other retail
locations in 17 states. The restaurants offer a wide variety of reasonably
priced breakfast, lunch and dinner menu items as well as the frozen dessert
products.

Following is a summary of the Company-owned and franchised units:

FOR THE THREE MONTHS ENDED
---------------------------
MARCH 31, APRIL 1,
2002 2001
------------ ------------

COMPANY UNITS:
Beginning of period............................... 393 449
Closings.......................................... (3) (11)
--- ---
End of Period..................................... 390 438
=== ===

FRANCHISED UNITS:
Beginning of period............................... 167 127
Openings.......................................... 2 1
Closings.......................................... (3) --
--- ---
End of Period..................................... 166 128
=== ===

REVENUES:

Total revenues increased $5.8 million, or 4.6%, to $131.5 million for the
first quarter ended March 31, 2002 from $125.7 million for the same quarter in
2001. Restaurant revenues decreased $2.8 million, or 2.7%, to $104.3 million for
the first quarter of 2002 from $107.1 million for the same quarter in 2001.
Restaurant revenues decreased by $11.9 million in the 2002 period as compared to
the 2001 period due to the closing of 19 under-performing restaurants and the
re-franchising of 57 additional locations over the past 15 months. Closing of
restaurants accounted for $1.5 million of the restaurant revenue decline in the
2002 period as compared to the 2001 period and re-franchising reduced restaurant
revenues by an additional $10.4 million in the 2002 period as compared to the
2001 period. Partially offsetting these decreases was an 8.8% increase in
comparable restaurant revenues

from the 2001 quarter to the 2002 quarter. Revenues from the one location open
less than one year were $0.3 million. Foodservice (product sales to franchisees,
retail and institutional) revenues increased by $8.1 million, or 47.5%, to
$25.1 million for the first quarter ended March 31, 2002 from $17.0 million for
the same quarter in 2001. The increase in the number of franchised units and
increases in comparable franchised restaurant revenues accounted for
$4.7 million of the increase, sales to foodservice retail supermarket customers
increased by $3.6 million and sales to outside distributors decreased by
$0.2 million. On May 1, 2001, foodservice decreased its ice cream pricing to all
restaurants. This resulted in decreased foodservice revenues of 3.9% for the
three months ended March 31, 2002. Franchise revenue increased $0.5 million, or
36.4%, to $2.1 million for the first quarter ended March 31, 2002 compared to
$1.6 million for the same quarter in 2001. The increase is largely the result of
the difference in the number of franchised locations operating during each
period. Comparable franchised restaurant revenues also rose in the 2002 period
when compared to the same period in 2001. There were 166 franchise units open at
March 31, 2002 compared to 128 franchise units open at April 1, 2001.

COST OF SALES:

Cost of sales increased $3.9 million, or 9.3%, to $46.0 million for the
three months ended March 31, 2002 from $42.1 million for the same period in
2001. Cost of sales as a percentage of total revenues increased to 35.0% for the
quarter ended March 31, 2002 from 33.5% for the same period in 2001. The higher
food cost as a percentage of total revenue was partially due to a shift in sales
mix from Company-owned restaurant sales to foodservice sales and a shift in
restaurant sales to entrees with a higher food cost as a percentage of revenues.
Foodservice sales to franchisees and retail customers have a higher food cost as
a percentage of revenue than sales in Company-owned restaurants to restaurant
patrons. The cost of cream, the principal ingredient used in making ice cream,
was lower in 2002 when compared to 2001; however, the Company expects that cream
prices will increase during the remainder of 2002. In May 2001, the Company
raised prices to its retail customers, which decreased cost of sales as a
percentage of revenues. To minimize risk, alternative supply sources continue to
be pursued.

LABOR AND BENEFITS:

Labor and benefits decreased $1.8 million, or 4.5%, to $37.9 million for the
first quarter ended March 31, 2002 from $39.7 million for the same quarter in
2001. Labor and benefits as a percentage of total revenues decreased to 28.8%
for the first quarter ended March 31, 2002 from 31.6% for the same quarter in
2001. The lower labor cost as a percentage of total revenue is partially the
result of revenue increases derived from additional franchised locations and
higher sales to foodservice retail supermarket customers, which do not have any
associated restaurant labor and benefits. In addition, the closing of 19
under-performing Company-owned units over the past 15 months improved the
relationship of restaurant labor and benefits to restaurant sales as well as to
total revenues.

OPERATING EXPENSES:

Operating expenses increased $1.1 million, or 4.1%, to $28.2 million for the
first quarter ended March 31, 2002 from $27.1 million for the same quarter in
2001. Operating expenses as a percentage of total revenues were 21.5% and 21.6%
for the first quarters ended March 31, 2002 and April 1, 2001, respectively. The
decrease as a percentage of total revenues resulted from lower costs for
restaurant utilities and snow removal in the 2002 period. These benefits were
mostly offset by higher costs for restaurant rent associated with the
December 2001 sale/leaseback transaction and higher costs for foodservice retail
selling expense in the 2002 period when compared to the 2001 period.

GENERAL AND ADMINISTRATIVE EXPENSES:

General and administrative expenses were $8.6 million and $9.3 million for
the first quarters ended March 31, 2002 and April 1, 2001, respectively. General
and administrative expenses as a percentage of total revenues decreased to 6.5%
for the first quarter ended March 31, 2002 from 7.4% for the same period in
2001. The decrease is primarily the result of the elimination of certain
management and administrative positions associated with the Company's closing of
19 locations and the re-franchising of 57 locations over the past 15 months. In
October 2001, the Company eliminated approximately 70 positions at corporate
headquarters. The Company has a hiring freeze at its corporate headquarters.

EBITDA:

As a result of the above, EBITDA (EBITDA represents net income (loss) before
(i) benefit from income taxes, (ii) interest expense, net, (iii) depreciation
and amortization, (iv) write-downs of property and equipment and (v) other
non-cash items) increased $0.7 million, or 7.3%, to $10.3 million for the
quarter ended March 31, 2002 from $9.6 million for the same quarter in 2001.
EBITDA as a percentage of total revenues was 7.8% and 7.7% for the 2002 and 2001
periods, respectively.

DEPRECIATION AND AMORTIZATION:

Depreciation and amortization decreased $0.9 million, or 11.5%, to
$6.7 million for the first quarter ended March 31, 2002 from $7.6 million for
the same quarter in 2001. Depreciation and amortization as a percentage of total
revenues was 5.1% and 6.0% in the 2002 and 2001 quarters, respectively. The
reduction reflects the impact on depreciation associated with the Company's
closing of 19 locations and the re-franchising of 57 locations over the past
15 months.

(LOSS) GAIN ON SALES OF OTHER PROPERTY AND EQUIPMENT, NET:

The loss on sales of other property and equipment, net was $0.5 million for
the quarter ended March 31, 2002 as compared to a gain of $2.0 million for the
quarter ended April 1, 2001. The loss in the 2002 quarter primarily resulted
from the sale of idle land and two closed locations. The gain in the 2001
quarter primarily resulted from the sale of 11 closed locations.

WRITE-DOWNS OF PROPERTY AND EQUIPMENT:

Write-downs of property and equipment were $0.1 million for the three months
ended March 31, 2002 as a result of a write down of a vacant land parcel.

INTEREST EXPENSE, NET:

Interest expense, net of capitalized interest and interest income, decreased
by $1.3 million, or 16.5%, to $6.3 million for the first quarter ended
March 31, 2002 from $7.6 million for the same period in 2001. The decrease is
primarily impacted by the decrease in the average outstanding debt in the 2002
quarter compared to the 2001 quarter as a result of the Refinancing Plan. Total
outstanding debt, including capital lease obligations, was reduced from
$287.6 million at April 1, 2001 to $241.1 million at March 31, 2002.

BENEFIT FROM INCOME TAXES:

The benefit from income taxes was $1.3 million, an effective tax rate of
44%, for the first quarter ended March 31, 2002 compared to a benefit from taxes
of $2.4 million, or 43%, for the 2001 quarter. The Company records income taxes
based on the effective rate expected for the year with any changes in the
valuation allowance reflected in the period of change.

NET LOSS:

Net loss was $1.6 million and $3.2 million for the first quarters ended
March 31, 2002 and April 1, 2001, respectively, for the reasons discussed above.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of liquidity and capital resources are cash
generated from operations and borrowings under its revolving credit facility.
Net cash used in operating activities was $0.4 million for the first quarter
ended March 31, 2002 compared to net cash provided by operations of
$2.2 million for the same quarter of 2001. During the three months ended
March 31, 2002, inventories increased $3.9 million in an effort to build
manufactured inventory to take advantage of lower cream prices. Accrued expenses
and other long-term liabilities decreased $1.6 million as a result of
$3.9 million of payments made for corporate and restaurant bonuses,
$0.7 million of payments made against the restructuring reserve and
$1.2 million of payments made for accrued construction costs. These decreases
were offset by an increase in accrued interest of $4.7 million related to the
timing of interest payment dates. During the 2001 quarter, inventory increased
$2.5 million as a result of anticipated increases in retail sales. Accrued
expenses and other long-term liabilities increased $4.4 million from
December 31, 2000 to April 1, 2001 primarily due to a $5.2 million increase in
accrued interest on the Senior Notes due to four months accrued at April 1, 2001
compared to one month accrued at December 31, 2000. This increase was offset by
$1.0 million of payments made against the captive insurance company's reserves
for workers compensation claims. Available borrowings under the revolving credit
facility were $17.1 million as of March 31, 2002. Total letters of credit issued
and outstanding were approximately $12.9 million and there were no revolving
credit loans outstanding.

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 FICC's and its
subsidiaries' debt instruments, if any, permit) are sources of cash. The amount
of debt financing that FICC will be able to incur is limited by the terms of its
New Credit Facility and Senior Notes.

Net cash (used in) provided by investing activities was ($0.6 million) and
$3.2 million for the three months ended March 31, 2002 and April 1, 2001,
respectively. Capital expenditures for restaurant operations were approximately
$1.2 million and $1.3 million for the quarters ended March 31, 2002 and
April 1, 2001, respectively. Capital expenditures were offset by proceeds from
the sales of property and equipment of $1.0 million and $5.2 million in the 2002
quarter and the 2001 quarter, respectively.

The Company had a working capital deficit of $17.1 million as of March 31,
2002. 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 expenses for food, supplies and payroll are paid.

In December 2001, the Company completed a financial restructuring plan (the
"Refinancing Plan") which included the repayment of the $64.5 million
outstanding under the Old Credit Facility and the repurchase of approximately
$21.3 million in Senior Notes with the proceeds from $55.0 million in long-term
mortgage financing (the "Mortgage Financing") and a $33.7 million sale and
leaseback transaction (the "Sale/Leaseback Financing"). In addition, FICC
secured a new $30.0 million revolving credit facility of which up to
$20.0 million is available to support letters of credit. The $30.0 million
commitment less outstanding letters of credit is available for borrowing to
provide working capital and for other corporate needs (the "New Credit
Facility"). As of March 31, 2002, $17.1 million was available for additional
borrowings under the New Credit Facility. The refinancing improved the

Company's financial condition by reducing total debt by approximately
$30.8 million and by extending the average life of the Company's debt.

Three new limited liability corporations ("LLCs") were organized in
connection with the Mortgage Financing. Friendly Ice Cream Corporation is the
sole member of each LLC. FICC sold 75 of its operating Friendly's restaurants to
the LLCs in exchange for the proceeds from the Mortgage Financing. Promissory
notes were issued for each of the 75 properties. Each LLC is a separate entity
with separate creditors which will be entitled to be satisfied out of such LLC's
assets. Each LLC is a borrower under the Mortgage Financing.

The Mortgage Financing has a maturity date of January 1, 2022 and is
amortized over 20 years. Interest on $10.0 million of the Mortgage Financing is
variable and is the sum of the 30-day LIBOR rate in effect (1.87875% at
March 31, 2002) plus 6% on an annual basis. Changes in the interest rate are
calculated monthly and recognized annually when the monthly payment amount is
adjusted. Changes in the monthly payment amounts owed due to interest rate
changes are reflected in the principal balances which are reamortized over the
remaining life of the mortgages. The remaining $45.0 million of the Mortgage
Financing bears interest at a fixed annual rate of 10.16%. Each promissory note
may be prepaid in full. The variable rate notes are subject to prepayment
penalties during the first five years. The fixed rate notes may not be prepaid
without the Company providing the note holders with a yield maintenance premium.

The Mortgage Financing requires the Company to maintain an annual fixed
charge coverage ratio, as defined, of at least 1.10 to 1 and each LLC to
maintain a fixed charge coverage ratio, as defined, on an aggregate restaurant
basis of at least 1.25 to 1.

The New Credit Facility is secured by substantially all of the assets of
FICC and two of its six subsidiaries, Friendly's Restaurants Franchise Inc. and
Friendly's International Inc. These two subsidiaries also guaranty FICC's
obligations under the New Credit Facility. The New Credit Facility expires on
December 17, 2004. As of March 31, 2002, there were no revolving credit loans
outstanding.

The revolving credit loans bear interest at the Company's option at either
(a) the Base Rate plus the applicable margin as in effect from time to time (the
"Base Rate") (7.25% at March 31, 2002) or (b) the Eurodollar rate plus the
applicable margin as in effect from time to time (the "Eurodollar Rate") (6.33%
at March 31, 2002).

As of March 31, 2002 and December 30, 2001, total letters of credit issued
and outstanding were approximately $12.9 million and $14.6 million,
respectively.

The New Credit Facility has an annual "clean-up" provision which obligates
the Company to repay in full all revolving credit loans on or before
September 30 (or, if September 30 is not a business day, as defined, then the
next business day) of each year and maintain a zero balance on such revolving
credit for at least 30 consecutive days, to include September 30, immediately
following the date of such repayment.

The New Credit Facility includes certain restrictive covenants including
limitations on indebtedness, limitations on restricted payments such as
dividends and stock repurchases and limitations on sales of assets and of
subsidiary stock. Additionally, the New Credit Facility limits the amount which
the Company may spend on capital expenditures, restricts the use of proceeds, as
defined, from asset sales and requires the Company to comply with certain
financial covenants.

In connection with the Refinancing Plan, in December 2001, the Company
entered into and accounted for the Sale/Leaseback Financing, which provided
approximately $33.7 million of proceeds to the Company. The Company sold 44
properties operating as Friendly's Restaurants and entered into a master lease
with the buyer to lease the 44 properties for an initial term of 20 years under
a triple net lease. There are four five-year renewal options and lease payments
are subject to escalator provisions

every five years based upon increases in the Consumer Price Index. A gain of
$11.3 million was deferred and was included in other accrued expenses and other
long-term liabilities in the accompanying condensed consolidated balance sheets.
The deferred gain is being amortized in proportion to the rent charged to
expense over the initial lease term.

The $200 million Senior Notes issued in connection with the November 1997
Recapitalization (the "Senior Notes") are unsecured senior obligations of FICC,
guaranteed on an unsecured senior basis by FICC's Friendly's Restaurants
Franchise, Inc. subsidiary, but are effectively subordinated to all secured
indebtedness of FICC, including the indebtedness incurred under the New Credit
Facility. The Senior Notes mature on December 1, 2007. Interest on the Senior
Notes is payable at 10.50% per annum semi-annually on June 1 and December 1 of
each year. In connection with the Refinancing Plan, FICC repurchased
approximately $21.3 million in aggregate principal amount of the Senior Notes
for $17.0 million. The gain of $4.3 million ($2.5 million net of tax) was
recorded as an extraordinary item in the consolidated statement of operations
for the year ended December 30, 2001. The remaining Senior Notes are redeemable,
in whole or in part, at FICC's option any time on or after December 1, 2002 at
redemption prices from 105.25% to 100.00%, based on the redemption date.

The Company anticipates requiring capital in the future principally to
maintain existing restaurant and plant facilities and to continue to renovate
and re-image existing restaurants. Capital expenditures for 2002 are anticipated
to be $16.0 million in the aggregate, of which $13.0 million is expected to be
spent on restaurant operations. The Company's actual 2002 capital expenditures
may vary from these estimated amounts. 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 requirements, capital requirements and
obligations associated with the restructuring.

The following represents the contractual obligations and commercial
commitments of the Company as of March 31, 2002 (in thousands):

PAYMENTS DUE BY PERIOD
---------------------------------------------
CONTRACTUAL OBLIGATIONS: TOTAL 2002 2003-2004 2005-2006 THEREAFTER
------------------------ -------- -------- --------- --------- ----------

Long-term debt............................... $233,485 $ 688 $2,124 $2,605 $228,068
Capital lease obligations.................... 11,564 1,941 2,940 1,817 4,866
Operating leases............................. 158,333 16,869 30,175 24,503 86,786
Purchase commitments......................... 86,218 78,200 7,945 65 8

AMOUNT OF COMMITMENT EXPIRATION BY PERIOD
-----------------------------------------------
OTHER COMMERCIAL COMMITMENTS: TOTAL 2002 2003-2004 2005-2006 THEREAFTER
----------------------------- -------- --------- --------- ---------- ----------

Revolving credit facility................ $17,089 $ -- $17,089 $ -- $ --
Letters of credit........................ 12,911 -- 12,911 -- --

SEASONALITY

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

GEOGRAPHIC CONCENTRATION

Approximately 89% 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.

SIGNIFICANT ACCOUNTING POLICIES

Financial Reporting Release No. 60 issued by the Securities and Exchange
Commission requires all companies to include a discussion of critical accounting
policies or methods used in the preparation of financial statements. The
following is a brief discussion of the more significant accounting policies and
methods used by the Company. The Company's consolidated financial statements,
including the notes thereto, which are contained in the 2001 Annual Report on
Form 10-K should be read in conjunction with this discussion.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS--

REVENUE RECOGNITION--

INSURANCE RESERVES--

The Company is self-insured through retentions or deductibles for the
majority of its workers' compensation, automobile, general liability, employer's
liability, product liability and group health insurance programs. Self-insurance
amounts vary up to $0.5 million per occurrence. Insurance with third parties,
some of which is then reinsured through RIC, is in place for claims in excess of
these self-insured amounts. RIC reinsured 100% of the risk from $0.5 million to
$1.0 million per occurrence through September 2, 2000 for the Company's workers'
compensation, general liability, employer's liability and product liability
insurance. Subsequent to September 2, 2000, the Company discontinued its use of
RIC as a captive insurer for new claims. The Company's and RIC's liability for
estimated incurred losses are actuarially determined and recorded in the
accompanying condensed consolidated financial statements on an undiscounted
basis. Actual incurred losses may vary from the estimated incurred losses and
could have a material affect on the Company's insurance expense.

RESTRUCTURING RESERVES--

and reduce redundancy amongst its business segments. As a result of the
elimination of the positions and the outsourcing of certain functions, the
Company reported a pre-tax restructuring charge of approximately $2.5 million
for severance, rent and unusable construction supplies in the year ended
December 30, 2001.

In March 2000, the Company's Board of Directors approved a restructuring
plan that provided for the immediate closing of 81 restaurants at the end of
March 2000 and the disposition of an additional 70 restaurants over the next
24 months. As a result of this plan, the Company reported a pre-tax
restructuring charge of approximately $12.1 million for severance, rent,
utilities and real estate taxes, demarking, lease termination costs and certain
other costs associated with the closing of the locations, along with a pre-tax
write-down of property and equipment for these locations of approximately
$17.0 million in the year ended December 31, 2000. The Company reduced the
restructuring reserve by $1.9 million during the year ended December 30, 2001
since the reserve exceeded estimated remaining payments.

As of March 31, 2002, the remaining restructuring reserve was $2.4 million.
The restructuring reserves may be increased or decreased based upon remaining
payments, which could vary materially from the estimates depending upon the
timing of store closings and other factors.

INCOME TAXES--

The Company accounts for income taxes in accordance with SFAS 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. As of
December 30, 2001 and March 31, 2002, a valuation allowance of $11.3 million
existed related to state NOL carryforwards due to restrictions on the usage of
state NOL carryforwards and short carryforward periods for certain states.
Taxable income by state for future periods is difficult to estimate. The amount
and timing of any future taxable income may affect the usage of such
carryforwards, which could result in a material change in the valuation
allowance.

PENSION AND OTHER POST-RETIREMENT BENEFITS--

The determination of the Company's obligation and expense for pension and
other post-retirement benefits is dependent upon the selection of certain
assumptions used by actuaries in calculating such amounts. Those assumptions
include, among other things, the discount rate, expected long-term rate of
return on plan assets and rates of increase in compensation and health care
costs. In accordance with accounting principles generally accepted in the United
States, actual results that differ from the assumptions are accumulated and
amortized over future periods and, therefore, generally affect the recognized
expense and recorded obligation in such future periods. While FICC believes that
the assumptions used are appropriate, significant differences in actual
experience or significant changes in the assumptions may materially affect the
future pension and other post-retirement obligations and expense.

VOLATILITY OF CREAM PRICES--

The cost of cream, the principal ingredient used in making ice cream,
affects cost of sales as a percentage of total revenues, especially in
foodservice's retail business. The Company believes that cream prices will be
slightly higher in 2002 than in 2001. A $0.10 increase in the cost of a pound of
AA butter adversely affects the Company's annual cost of sales by approximately
$1.1 million. To minimize risk, alternative supply sources continue to be
pursued. However, no assurance can be given that the Company will be able to
offset any cost increases in the future and future increases in cream could have
a material adverse effect on the Company's results of operations.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change in the Company's market risk exposure
since the filing of the Annual Report on Form 10-K.

PART II--OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

None

(b) No report on Form 8-K was filed during the three months ended March 31,
2002.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

FRIENDLY ICE CREAM CORPORATION

By: /s/ PAUL V. HOAGLAND
-----------------------------------------
Name: Paul V. Hoagland
Title: Senior Vice President, Chief
Financial
Officer, Treasurer and Assistant Clerk