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

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 NUMBER 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 Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)

1855 BOSTON ROAD
WILBRAHAM, MASSACHUSETTS 01095
(413) 543-2400
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

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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 JULY 12, 2002
Common Stock, $.01 par value 7,370,763 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)

JUNE 30, DECEMBER 30,
2002 2001
----------- -------------
(UNAUDITED)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 20,130 $ 16,342
Accounts receivable....................................... 12,519 9,969
Inventories............................................... 18,177 12,987
Deferred income taxes..................................... 7,659 7,659
Prepaid expenses and other current assets................. 4,316 3,736
--------- ---------
TOTAL CURRENT ASSETS........................................ 62,801 50,693
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization.............................................. 159,998 169,489
INTANGIBLE ASSETS AND DEFERRED COSTS, net of accumulated
amortization.............................................. 20,455 21,208
OTHER ASSETS................................................ 13,015 11,172
--------- ---------
TOTAL ASSETS................................................ $ 256,269 $ 252,562
========= =========

LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 965 $ 1,068
Current maturities of capital lease and finance
obligations............................................. 1,790 1,851
Accounts payable.......................................... 23,041 20,505
Accrued salaries and benefits............................. 9,706 9,436
Accrued interest payable.................................. 1,980 1,543
Insurance reserves........................................ 13,067 13,333
Restructuring reserves.................................... 1,600 3,056
Other accrued expenses.................................... 17,529 19,260
--------- ---------
TOTAL CURRENT LIABILITIES................................... 69,678 70,052
--------- ---------
DEFERRED INCOME TAXES....................................... 12,439 10,584
CAPITAL LEASE AND FINANCE OBLIGATIONS, less current
maturities................................................ 5,400 6,267
LONG-TERM DEBT, less current maturities..................... 232,369 232,797
OTHER LONG-TERM LIABILITIES................................. 29,217 28,876
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock.............................................. 74 74
Additional paid-in capital................................ 139,511 139,290
Accumulated deficit....................................... (232,419) (235,378)
--------- ---------
TOTAL STOCKHOLDERS' DEFICIT................................. (92,834) (96,014)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT................. $ 256,269 $ 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 FOR THE SIX MONTHS
ENDED ENDED
--------------------- --------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2002 2001 2002 2001
--------- --------- --------- --------

REVENUES............................................ $155,994 $151,823 $287,480 $277,542

COSTS AND EXPENSES:
Cost of sales..................................... 52,890 52,857 98,884 94,917
Labor and benefits................................ 42,243 41,334 80,161 81,010
Operating expenses................................ 32,152 29,928 60,374 57,022
General and administrative expenses............... 8,681 9,345 17,280 18,677
Reduction of restructuring reserve................ (400) -- (400) --
Write-downs of property and equipment............. 311 68 431 68
Depreciation and amortization..................... 6,387 7,097 13,073 14,649
Gain on franchise sales of restaurant operations and
properties........................................ -- (3,823) -- (3,823)
Loss (gain) on sales of other property and
equipment, net.................................... 129 (261) 641 (2,242)
-------- -------- -------- --------
OPERATING INCOME.................................... 13,601 15,278 17,036 17,264
Interest expense, net............................... 6,215 6,918 12,552 14,503
-------- -------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES............ 7,386 8,360 4,484 2,761
Provision for income taxes.......................... (2,815) (3,328) (1,525) (932)
-------- -------- -------- --------
NET INCOME.......................................... $ 4,571 $ 5,032 $ 2,959 $ 1,829
======== ======== ======== ========
BASIC NET INCOME PER SHARE.......................... $ 0.62 $ 0.68 $ 0.40 $ 0.25
======== ======== ======== ========
DILUTED NET INCOME PER SHARE........................ $ 0.59 $ 0.68 $ 0.39 $ 0.25
======== ======== ======== ========
WEIGHTED AVERAGE SHARES:............................
Basic............................................. 7,366 7,364 7,359 7,370
======== ======== ======== ========
Diluted........................................... 7,722 7,370 7,668 7,377
======== ======== ======== ========

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 SIX MONTHS
ENDED
--------------------
JUNE 30, JULY 1,
2002 2001
--------- --------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 2,959 $ 1,829
Adjustments to reconcile net income to net cash provided by
operating activities:
Stock compensation expense................................ 133 168
Depreciation and amortization............................. 13,073 14,649
Write-downs of property and equipment..................... 431 68
Deferred income tax expense............................... 1,855 932
Loss (gain) on sales of other property and equipment,
net..................................................... 641 (6,023)
Changes in operating assets and liabilities:
Accounts receivable..................................... (2,550) (5,656)
Inventories............................................. (5,190) (3,875)
Other assets............................................ (2,669) (542)
Accounts payable........................................ 2,536 4,623
Accrued expenses and other long-term liabilities........ (2,542) (3,050)
------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 8,677 3,123
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (4,811) (5,726)
Proceeds from sales of property and equipment............... 1,293 19,868
------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES......... (3,518) 14,142
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.................................... -- 34,000
Repayments of debt.......................................... (531) (54,404)
Repayments of capital lease and finance obligations......... (928) (1,099)
Stock options exercised..................................... 88 --
------- --------
NET CASH USED IN FINANCING ACTIVITIES....................... (1,371) (21,503)
------- --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 3,788 (4,238)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 16,342 14,584
------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $20,130 $ 10,346
======= ========
SUPPLEMENTAL DISCLOSURES:
Cash paid (refunded) during the period for:
Interest.................................................. $11,648 $ 15,498
Income taxes.............................................. (18) 3
Capital lease obligations terminated........................ -- 151
Note received from sale of property and equipment........... -- 4,250

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 June 30,
2002 and for the second quarters and six months ended June 30, 2002 and July 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 income 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 and six month periods
ended June 30, 2002 and July 1, 2001 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, recoverability of accounts receivable, restructuring reserves,
valuation allowances and pension and other post-retirement benefits expense.
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
(UNAUDITED) (CONTINUED)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
effect 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
$400,000 and $1,900,000 during the quarter ended June 30, 2002 and the year
ended December 30, 2001, respectively, since the reserve exceeded estimated
remaining payments.

As of June 30, 2002, the remaining restructuring reserve was $1,600,000. The
restructuring reserves may be increased or decreased based upon remaining
payments, which could vary materially from the estimates depending upon the
timing of restaurant 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 June 30, 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
(UNAUDITED) (CONTINUED)

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.

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 June 30, 2002 and December 30, 2001 were as follows (in
thousands):

JUNE 30, DECEMBER 30,
2002 2001
--------- -------------

Raw materials.......................................... $ 916 $ 1,269
Goods in process....................................... 78 73
Finished goods......................................... 17,183 11,645
------- -------
Total.................................................. $18,177 $12,987
======= =======

RECLASSIFICATIONS--

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

2. EARNINGS PER SHARE

Basic net income per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is calculated by dividing net income 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 income per share because to do so would
have been antidilutive was 55,340 and 602,665 for the three

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)

2. EARNINGS PER SHARE (CONTINUED)
months ended June 30, 2002 and July 1, 2001, respectively. 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 income per share because to do
so would have been antidilutive, was 308,923 and 602,665 for the six months
ended June 30, 2002 and July 1, 2001, respectively.

Presented below is the reconciliation between basic and diluted weighted
average shares for the three and six months ended June 30, 2002 and July 1, 2001
(in thousands):

FOR THE THREE MONTHS ENDED
-------------------------------------------
BASIC DILUTED
-------------------- --------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2002 2001 2002 2001
--------- -------- --------- --------

Weighted average number of common shares outstanding during
the period................................................ 7,366 7,364 7,366 7,364
Adjustments:
Assumed exercise of stock options........................... -- -- 356 6
----- ----- ----- -----
Weighted average number of shares outstanding............... 7,366 7,364 7,722 7,370
===== ===== ===== =====

FOR THE SIX MONTHS ENDED
-------------------------------------------
BASIC DILUTED
-------------------- --------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2002 2001 2002 2001
--------- -------- --------- --------

Weighted average number of common shares outstanding during
the period................................................ 7,359 7,370 7,359 7,370
Adjustments:
Assumed exercise of stock options........................... -- -- 309 7
----- ----- ----- -----
Weighted average number of shares outstanding............... 7,359 7,370 7,668 7,377
===== ===== ===== =====

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.

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)

3. SEGMENT REPORTING (CONTINUED)
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, the Company's foodservice division decreased its ice cream
pricing to all restaurants. This resulted in decreased total foodservice
revenues of 1.0% and 1.9% for the three and six months ended June 30, 2002 and a
decrease in external foodservice revenues of 0.5% and 1.0% for the three and six
months ended June 30, 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.

EBITDA represents net income (loss) before (i) (provision for) 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,

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)

3. SEGMENT REPORTING (CONTINUED)
or more meaningful than, earnings (loss) from operations or other traditional
indications of a company's operating performance.

FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED ENDED
--------------------- --------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2002 2001 2002 2001
--------- --------- --------- --------
(IN THOUSANDS)

Revenues:
Restaurant........................................ $121,893 $118,953 $226,149 $226,098
Foodservice....................................... 65,900 64,248 120,033 112,069
Franchise......................................... 2,550 3,101 4,679 4,662
-------- -------- -------- --------
Total........................................... $190,343 $186,302 $350,861 $342,829
======== ======== ======== ========
Intersegment revenues:
Restaurant........................................ $ -- $ -- $ -- $ --
Foodservice....................................... (34,349) (34,479) (63,381) (65,287)
Franchise......................................... -- -- -- --
-------- -------- -------- --------
Total........................................... $(34,349) $(34,479) $(63,381) $(65,287)
======== ======== ======== ========
External revenues:
Restaurant........................................ $121,893 $118,953 $226,149 $226,098
Foodservice....................................... 31,551 29,769 56,652 46,782
Franchise......................................... 2,550 3,101 4,679 4,662
-------- -------- -------- --------
Total........................................... $155,994 $151,823 $287,480 $277,542
======== ======== ======== ========

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)

3. SEGMENT REPORTING (CONTINUED)

FOR THE THREE FOR THE SIX MONTHS
MONTHS ENDED ENDED
-------------------- --------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2002 2001 2002 2001
--------- -------- --------- --------
(IN THOUSANDS)

EBITDA:
Restaurant............................................ $16,976 $16,036 $27,203 $24,731
Foodservice........................................... 4,792 4,809 8,466 7,888
Franchise............................................. 1,693 1,927 3,020 2,421
Corporate............................................. (3,981) (4,434) (8,383) (8,955)
Gain (loss) on property and equipment, net............ 482 4,180 (33) 6,064
Reduction of restructure reserve...................... 400 -- 400 --
------- ------- ------- -------
Total............................................... $20,362 $22,518 $30,673 $32,149
======= ======= ======= =======

Interest expense, net-Corporate......................... $ 6,215 $ 6,918 $12,552 $14,503
======= ======= ======= =======
Depreciation and amortization:
Restaurant............................................ $ 4,417 $ 4,613 $ 9,044 $ 9,659
Foodservice........................................... 656 841 1,327 1,695
Franchise............................................. 66 61 139 121
Corporate............................................. 1,248 1,582 2,563 3,174
------- ------- ------- -------
Total............................................... $ 6,387 $ 7,097 $13,073 $14,649
======= ======= ======= =======
Other non-cash expenses:
Corporate............................................. $ 63 $ 75 $ 133 $ 168
Write-downs of property and equipment................. 311 68 431 68
------- ------- ------- -------
Total............................................... $ 374 $ 143 $ 564 $ 236
======= ======= ======= =======
Income (loss) before income taxes:
Restaurant............................................ $12,559 $11,423 $18,159 $15,072
Foodservice........................................... 4,136 3,968 7,139 6,193
Franchise............................................. 1,627 1,866 2,881 2,300
Corporate............................................. (11,507) (13,009) (23,631) (26,800)
Gain (loss) on property and equipment, net............ 171 4,112 (464) 5,996
Reduction of restructure reserve...................... 400 -- 400 --
------- ------- ------- -------
Total............................................... $ 7,386 $ 8,360 $ 4,484 $ 2,761
======= ======= ======= =======

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)

3. SEGMENT REPORTING (CONTINUED)

JUNE 30, DECEMBER 30,
2002 2001
--------- -------------
(IN THOUSANDS)

Capital expenditures, including assets acquired under
capital leases:
Restaurant................................................ $ 3,936 $ 10,821
Foodservice............................................... 734 2,090
Corporate................................................. 141 1,011
-------- --------
Total................................................... $ 4,811 $ 13,922
======== ========
Total assets:
Restaurant................................................ $143,645 $148,475
Foodservice............................................... 43,926 38,474
Franchise................................................. 9,801 7,076
Corporate................................................. 58,897 58,537
-------- --------
Total................................................... $256,269 $252,562
======== ========

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 and six months ended July 1, 2001.

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)

5. RESTRUCTURING RESERVES

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

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

Severance pay......................................... $ 74 $ (74) $ --
Rent.................................................. 3,585 (643) 2,942
Utilities and real estate taxes....................... 1,105 (403) 702
Demarking............................................. 138 (30) 108
Lease termination costs............................... 120 (120) --
Inventory............................................. 5 (5) --
Other................................................. 544 (344) 200
------ ------- ------
Total............................................... $5,571 $(1,619) $3,952
====== ======= ======

FOR THE SIX MONTHS ENDED JUNE 30, 2002
-----------------------------------------------------------------------
RESTRUCTURING RESTRUCTURING
RESERVES AS OF RESERVE RESERVES AS OF
DECEMBER 30, 2001 EXPENSE COSTS PAID REDUCTION JUNE 30, 2002
------------------ -------- ---------- --------- --------------

Severance pay....................... $ 516 $ -- $ (473) $ (32) $ 11
Rent................................ 1,318 -- (223) (314) 781
Utilities and real estate taxes..... 185 -- (86) 17 116
Equipment........................... 480 -- (152) -- 328
Outplacement services............... 6 -- (6) -- --
Other............................... 551 -- (116) (71) 364
------ ------- ------- ----- ------
Total............................. $3,056 $ - $(1,056) $(400) $1,600
====== ======= ======= ===== ======

Based on information currently available, management believes that the
restructuring reserve as of June 30, 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 six months ended June 30, 2002, Davco transferred its rights to eight
additional franchised locations to three separate third parties.

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)

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
June 30, 2002 and July 1, 2001 and for the six months ended June 30, 2002 and
July 1, 2001 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.

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)

7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2002
(IN THOUSANDS)

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

Assets
Current assets:
Cash and cash equivalents................. $ 15,405 $ 2,286 $ 2,439 $ -- $ 20,130
Accounts receivable, net.................. 10,981 1,538 -- -- 12,519
Inventories............................... 18,177 -- -- -- 18,177
Deferred income taxes..................... 7,448 99 -- 112 7,659
Prepaid expenses and other current
assets.................................. 9,078 681 3,504 (8,947) 4,316
-------- ------- ------- -------- --------
Total current assets........................ 61,089 4,604 5,943 (8,835) 62,801
Deferred income taxes....................... -- 350 1,327 (1,677) --
Property and equipment, net................. 109,130 -- 50,868 -- 159,998
Intangible assets and deferred costs, net... 17,632 -- 2,823 -- 20,455
Investments in subsidiaries................. 5,567 -- -- (5,567) --
Other assets................................ 12,100 5,356 6,229 (10,670) 13,015
-------- ------- ------- -------- --------
Total assets................................ $205,518 $10,310 $67,190 $(26,749) $256,269
======== ======= ======= ======== ========
Liabilities and Stockholders' (Deficit)
Equity
Current liabilities:
Current maturities of long-term
obligations............................. $ 5,290 $ -- $ 965 $ (3,500) $ 2,755
Accounts payable.......................... 23,041 -- -- -- 23,041
Accrued expenses.......................... 37,527 3,646 8,041 (5,332) 43,882
-------- ------- ------- -------- --------
Total current liabilities................... 65,858 3,646 9,006 (8,832) 69,678
Deferred income taxes....................... 14,004 -- -- (1,565) 12,439
Long-term obligations, less current
maturities................................ 189,441 -- 53,642 (5,314) 237,769
Other long-term liabilities................. 29,049 903 4,736 (5,471) 29,217
Stockholders' (deficit) equity.............. (92,834) 5,761 (194) (5,567) (92,834)
-------- ------- ------- -------- --------
Total liabilities and stockholders'
(deficit) equity.......................... $205,518 $10,310 $67,190 $(26,749) $256,269
======== ======= ======= ======== ========

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)

7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)

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

Revenues.................................... $153,792 $ 2,202 $ -- $ -- $155,994
Costs and expenses:
Cost of sales............................. 52,890 -- -- -- 52,890
Labor and benefits........................ 42,243 -- -- -- 42,243
Operating expenses and write-downs of
property and equipment.................. 34,204 -- (1,741) -- 32,463
Reduction of restructure reserve.......... (400) -- -- -- (400)
General and administrative expenses....... 7,517 1,164 -- -- 8,681
Depreciation and amortization............. 5,803 -- 584 -- 6,387
Loss on sales of other property and
equipment, net............................ 129 -- -- -- 129
Interest expense............................ 5,043 -- 1,172 -- 6,215
-------- ------- ------- -------- --------
Income (loss) before provision for income
taxes and equity in net income of
consolidated subsidiaries................. 6,363 1,038 (15) - 7,386
Provision for income taxes.................. (2,331) (426) (58) -- (2,815)
-------- ------- ------- -------- --------
Income (loss) before equity in net income of
consolidated subsidiaries................. 4,032 612 (73) -- 4,571
Equity in net income of consolidated
subsidiaries.............................. 539 -- -- (539) --
-------- ------- ------- -------- --------
Net income (loss)........................... $ 4,571 $ 612 $ (73) $ (539) $ 4,571
======== ======= ======= ======== ========

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)

7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)

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

Revenues.................................... $283,491 $ 3,989 $ -- $ -- $287,480
Costs and expenses:
Cost of sales............................. 98,884 -- -- -- 98,884
Labor and benefits........................ 80,161 -- -- -- 80,161
Operating expenses and write-downs of
property and equipment.................. 64,295 -- (3,490) -- 60,805
General and administrative expenses....... 14,952 2,328 -- -- 17,280
Reduction of restructure reserve.......... (400) -- -- -- (400)
Depreciation and amortization............. 11,902 -- 1,171 -- 13,073
Loss on sales of other property and
equipment, net............................ 641 -- -- -- 641
Interest expense............................ 10,217 -- 2,335 -- 12,552
-------- ------- ------- -------- --------
Income (loss) before provision for income
taxes and equity in net income of
consolidated subsidiaries................. 2,839 1,661 (16) -- 4,484
Provision for income taxes.................. (667) (681) (177) -- (1,525)
-------- ------- ------- -------- --------
Income (loss) before equity in net income of
consolidated subsidiaries................. 2,172 980 (193) -- 2,959
Equity in net income of consolidated
subsidiaries.............................. 787 -- -- (787) --
-------- ------- ------- -------- --------
Net income (loss)........................... $ 2,959 $ 980 $ (193) $ (787) $ 2,959
======== ======= ======= ======== ========

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)

7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)

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

Net cash provided by operating activities... $ 4,785 $ 2,182 $ 1,304 $ 406 $ 8,677
-------- ------- ------- -------- -------
Cash flows from investing activities:
Purchases of property and equipment......... (4,811) -- -- -- (4,811)
Proceeds from sales of property and
equipment................................. 1,293 -- -- -- 1,293
-------- ------- ------- -------- -------
Net cash used in investing activities....... (3,518) -- -- -- (3,518)
-------- ------- ------- -------- -------
Cash flows from financing activities:
Repayments of obligations................... (1,066) -- (393) -- (1,459)
Stock options exercised..................... 88 -- -- -- 88
Reinsurance deposits received............... -- -- 2,024 (2,024) --
Reinsurance payments made from deposits..... -- -- (1,618) 1,618 --
-------- ------- ------- -------- -------
Net cash (used in) provided by financing
activities................................ (978) -- 13 (406) (1,371)
-------- ------- ------- -------- -------
Net increase in cash and cash equivalents... 289 2,182 1,317 -- 3,788

Cash and cash equivalents, beginning of
period.................................... 15,116 104 1,122 -- 16,342
-------- ------- ------- -------- -------
Cash and cash equivalents, end of period.... $ 15,405 $ 2,286 $ 2,439 $ -- $20,130
======== ======= ======= ======== =======
Supplemental disclosures:
Interest paid............................... $ 9,758 $ -- $ 1,890 $ -- $11,648
Income taxes (refunded) paid................ (1,030) 1,012 -- -- (18)

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)

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

NON-
PARENT GUARANTOR 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
(UNAUDITED) (CONTINUED)

7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 1, 2001
(IN THOUSANDS)

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

Revenues.................................... $149,099 $ 2,724 $ -- $ -- $151,823
Costs and expenses:.........................
Cost of sales............................. 52,857 -- -- -- 52,857
Labor and benefits........................ 41,334 -- -- -- 41,334
Operating expenses and write-downs of
property and equipment.................. 29,998 -- (2) -- 29,996
General and administrative expenses....... 8,188 1,157 -- -- 9,345
Depreciation and amortization............. 7,097 -- -- -- 7,097
Gain on franchise sales of restaurant
operations and properties................. (3,823) -- -- -- (3,823)
Gain on sales of other property and
equipment, net............................ (261) -- -- -- (261)
Interest expense (income)................... 7,094 -- (176) -- 6,918
-------- ------- ------- -------- --------
Income before provision for income taxes and
equity in net income of consolidated
subsidiaries.............................. 6,615 1,567 178 -- 8,360
Provision for income taxes.................. (2,623) (642) (63) -- (3,328)
-------- ------- ------- -------- --------
Income before equity in net income of
consolidated subsidiaries................. 3,992 925 115 -- 5,032
Equity in net income of consolidated
subsidiaries.............................. 1,040 -- -- (1,040) --
-------- ------- ------- -------- --------
Net income.................................. $ 5,032 $ 925 $ 115 $ (1,040) $ 5,032
======== ======= ======= ======== ========

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)

7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 1, 2001
(IN THOUSANDS)

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

Revenues.................................... $273,625 $ 3,917 $ -- $ -- $277,542
Costs and expenses:
Cost of sales............................. 94,917 -- -- -- 94,917
Labor and benefits........................ 81,010 -- -- -- 81,010
Operating expenses and write-downs of
property and equipment.................. 57,101 -- (11) -- 57,090
General and administrative expenses....... 16,361 2,316 -- -- 18,677
Depreciation and amortization............. 14,649 -- -- -- 14,649
Gain on franchise sales of restaurant
operations and properties................. (3,823) -- -- -- (3,823)
Gain on sales of other property and
equipment, net............................ (2,242) -- -- -- (2,242)
Interest expense (income)................... 14,900 -- (397) -- 14,503
-------- ------- ------- -------- --------
Income before provision for income taxes and
equity in net income of consolidated
subsidiaries.............................. 752 1,601 408 -- 2,761
Provision for income taxes.................. (132) (656) (144) -- (932)
-------- ------- ------- -------- --------
Income before equity in net income of
consolidated subsidiaries................. 620 945 264 -- 1,829
Equity in net income of consolidated
subsidiaries.............................. 1,209 -- -- (1,209) --
-------- ------- ------- -------- --------
Net income.................................. $ 1,829 $ 945 $ 264 $ (1,209) $ 1,829
======== ======= ======= ======== ========

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)

7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 1, 2001
(IN THOUSANDS)

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

Net cash provided by (used in) operating
activities................................ $ 2,750 $ (24) $ 1,688 $ (1,291) $ 3,123
-------- ------- ------- -------- -------
Cash flows from investing activities:
Purchases of property and equipment....... (5,726) -- -- -- (5,726)
Proceeds from sales of property and
equipment............................... 19,868 -- -- -- 19,868
-------- ------- ------- -------- -------
Net cash provided by investing activities... 14,142 -- -- -- 14,142
-------- ------- ------- -------- -------
Cash flows from financing activities:
Proceeds from borrowings.................. 34,000 -- -- -- 34,000
Repayments of obligations................. (55,503) -- -- -- (55,503)
Reinsurance deposits received............. -- -- 505 (505) --
Reinsurance payments made from deposits... -- -- (1,796) 1,796 --
-------- ------- ------- -------- -------
Net cash used in financing activities....... (21,503) -- (1,291) 1,291 (21,503)
-------- ------- ------- -------- -------
Net (decrease) increase in cash and cash
equivalents............................... (4,611) (24) 397 -- (4,238)
Cash and cash equivalents, beginning of
period.................................... 13,619 33 932 -- 14,584
-------- ------- ------- -------- -------
Cash and cash equivalents, end of period.... $ 9,008 $ 9 $ 1,329 $ -- $10,346
======== ======= ======= ======== =======
Supplemental disclosures:
Interest paid (received).................. $ 15,895 $ -- $ (397) $ -- $15,498
Income taxes paid......................... 1 2 -- -- 3
Capital lease obligations terminated...... 151 -- -- -- 151
Note received from the sale of property
and equipment........................... 4,250 -- -- -- 4,250

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 159 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 FOR THE SIX
MONTHS ENDED MONTHS ENDED
-------------------- --------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2002 2001 2002 2001
--------- -------- --------- --------

COMPANY UNITS:
Beginning of period......................................... 390 438 393 449
Openings.................................................... -- -- -- --
Re-franchised............................................... -- (33) -- (33)
Closings.................................................... (--) (2) (3) (13)
--- --- --- ---
End of period............................................... 390 403 390 403
=== === === ===

FRANCHISED UNITS:
Beginning of period......................................... 166 128 167 127
Re-franchised openings...................................... -- 33 -- 33
Openings.................................................... 1 2 3 3
Closings.................................................... (2) -- (5) --
--- --- --- ---
End of period............................................... 165 163 165 163
=== === === ===

REVENUES:

Total revenues increased $4.2 million, or 2.7%, to $156.0 million for the
second quarter ended June 30, 2002 from $151.8 million for the same quarter in
2001. Restaurant revenues increased $2.9 million, or 2.5%, to $121.9 million for
the second quarter of 2002 from $119.0 million for the same quarter in 2001.
Restaurant revenues increased by $2.9 million in the 2002 period as compared to
the 2001 period largely due to a 6.4% increase in comparable restaurant revenues
from the 2001 quarter to

the 2002 quarter. Partially offsetting this increase was the closing of 5
under-performing restaurants and the re-franchising of 41 additional locations
over the past 15 months. Closing of restaurants accounted for $1.1 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 $3.7 million in
the 2002 period as compared to the 2001 period. Revenues from the one location
open less than one year were $0.4 million. Foodservice (product sales to
franchisees, retail and institutional) revenues increased by $1.8 million, or
6.0%, to $31.6 million for the second quarter ended June 30, 2002 from
$29.8 million for the same quarter in 2001. The increase in the number of
franchised units and increases in comparable franchised restaurant revenues
accounted for $1.7 million of the increase and sales to foodservice retail
supermarket customers increased by $0.1 million. On May 1, 2001, the Company's
foodservice division decreased its ice cream pricing to all restaurants. This
resulted in decreased foodservice revenues of 0.5% for the three months ended
June 30, 2002. Franchise revenue decreased $0.5 million, or 17.7%, to
$2.6 million for the second quarter ended June 30, 2002 compared to
$3.1 million for the same quarter in 2001. The decrease is largely the result of
$0.9 million in initial fees recorded as 35 new locations were added in the
quarter ended July 1, 2001. The reduction in initial fees was partially offset
by an increase in royalty revenue due to the difference in the number of
franchised locations operating during each period and the increase in comparable
sales. Comparable franchised restaurant revenues also rose in the 2002 period
when compared to the same period in 2001. There were 165 franchise units open at
June 30, 2002 compared to 163 franchise units open at July 1, 2001.

Total revenues increased $10.0 million, or 3.6%, to $287.5 million for the
six months ended June 30, 2002 from $277.5 million for the same period in 2001.
Restaurant revenues were $226.1 million for the six-month periods ended
June 30, 2002 and July 1, 2001. Restaurant revenues benefited from a 7.5%
increase in comparable restaurant revenues from the 2001 period to the 2002
period. Offsetting this increase was lost revenues associated with the closing
of 19 under-performing restaurants and the re-franchising of 41 additional
locations over the past 18 months. Closing of restaurants reduced restaurant
revenues by $2.6 million in the 2002 period as compared to the 2001 period and
re-franchising reduced restaurant revenues by an additional $14.1 million in the
2002 period as compared to the 2001 period. Revenues from the one location open
less than one year were $0.7 million. Foodservice (product sales to franchisees,
retail and institutional) revenues increased by $9.9 million, or 21.1%, to $56.7
million for the six months ended June 30, 2002 from $46.8 million for the same
period in 2001. The increase in the number of franchised units and increases in
comparable franchised restaurant revenues accounted for $6.2 million of the
increase and sales to foodservice retail supermarket customers increased by $3.7
million. On May 1, 2001, the Company's foodservice division decreased its ice
cream pricing to all restaurants. This resulted in decreased foodservice
revenues of 1.0% for the six months ended June 30, 2002. Franchise revenues were
$4.7 million for the six months ended June 30, 2002 and July 1, 2001. Included
was a decrease of $0.9 million in initial fees recorded as 35 new locations were
added in the six months ended July 1, 2001. This decrease was offset by an
increase in royalty revenue due to 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 165 franchise units open at June 30, 2002 compared to 163 franchise
units open at July 1, 2001.

COST OF SALES:

Cost of sales were $52.9 million for the quarters ended June 30, 2002 and
July 1, 2001. Cost of sales as a percentage of total revenues decreased to 33.9%
for the quarter ended June 30, 2002 from 34.8% for the same period in 2001. The
lower food cost as a percentage of total revenue was due to lower cream prices
in the current period. Cream is the principal ingredient used in making ice
cream. The Company expects that cream prices will continue to be lower during
the remainder of 2002 when compared to 2001. Partially offsetting the cream
benefit was 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.

Cost of sales increased $4.0 million, or 4.2%, to $98.9 million for the six
months ended June 30, 2002 from $94.9 million for the same period in 2001. Cost
of sales as a percentage of total revenues increased to 34.4% for the six months
ended June 30, 2002 from 34.2% for the same period in 2001. The higher food cost
as a percentage of total revenue was 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. The Company expects that cream prices will continue to be
lower during the remainder of 2002 when compared to 2001. 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 for cream
continue to be evaluated.

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 lower 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 prices
could have a material adverse effect on the Company's results of operations.

LABOR AND BENEFITS:

Labor and benefits increased $0.9 million, or 2.2%, to $42.2 million for the
second quarter ended June 30, 2002 from $41.3 million for the same quarter in
2001. Labor and benefits as a percentage of total revenues decreased to 27.1%
for the second quarter ended June 30, 2002 from 27.2% for the same quarter in
2001. The lower labor cost as a percentage of total revenue is 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. Labor and benefits as a percentage of restaurant
revenues at 34.7% was the same in both periods. During the quarter ended June
30, 2002, the Company introduced a training program called "Friendly you bet we
are." This program was designed to improve customer service at its Company-owned
restaurants. The cost of this program had an unfavorable impact on restaurant
labor as a percentage of revenues during the quarter ended June 30, 2002.

Labor and benefits decreased $0.8 million, or 1.0%, to $80.2 million for the
six months ended June 30, 2002 from $81.0 million for the same period in 2001.
Labor and benefits as a percentage of total revenues decreased to 27.9% for the
six months ended June 30, 2002 from 29.2% for the same period 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. Labor and benefits as a percentage of restaurant
revenues decreased to 35.4% for the six months ended June 30, 2002 from 35.8%
for the same period in 2001. The closing of 19 under-performing Company-owned
units over the past 18 months improved the relationship of restaurant labor and
benefits to restaurant sales as well as to total revenues.

OPERATING EXPENSES:

Operating expenses increased $2.3 million, or 7.4%, to $32.2 million for the
second quarter ended June 30, 2002 from $29.9 million for the same quarter in
2001. Operating expenses as a percentage of total revenues were 20.6% and 19.7%
for the second quarters ended June 30, 2002 and July 1, 2001, respectively. The
increase as a percentage of total revenues resulted from 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. Additionally, the Company spent more on restaurant
maintenance during the 2002 period when compared to 2001. Restaurant utility
costs were lower in the 2002 period when compared to 2001.

Operating expenses increased $3.4 million, or 5.9%, to $60.4 million for the
six months ended June 30, 2002 from $57.0 million for the same period in 2001.
Operating expenses as a percentage of total revenues were 21.0% and 20.5% for
the six months ended June 30, 2002 and July 1, 2001, respectively. The increase
as a percentage of total revenues resulted from 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. Restaurant utility costs were lower in the 2002 period when
compared to 2001.

GENERAL AND ADMINISTRATIVE EXPENSES:

General and administrative expenses were $8.7 million and $9.3 million for
the second quarters ended June 30, 2002 and July 1, 2001, respectively. General
and administrative expenses as a percentage of total revenues decreased to 5.6%
for the second quarter ended June 30, 2002 from 6.2% for the same period in
2001. The decrease in expense is primarily the result of the elimination of
certain management and administrative positions associated with the Company's
closing of five locations and the re-franchising of 41 locations over the past
15 months. In October 2001, the Company eliminated approximately 70 positions at
corporate headquarters. The Company also has a hiring freeze at its corporate
headquarters. Bonus expense was higher in the 2002 period when compared to the
same period in 2001.

General and administrative expenses were $17.3 million and $18.7 million for
the six months ended June 30, 2002 and July 1, 2001, respectively. General and
administrative expenses as a percentage of total revenues decreased to 6.0% for
the six months ended June 30, 2002 from 6.7% for the same period in 2001. The
decrease in expense 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 41 locations over the past 18 months. In
October 2001, the Company eliminated approximately 70 positions at corporate
headquarters. The Company also has a hiring freeze at its corporate
headquarters. Bonus expense was higher in the 2002 period when compared to the
same period in 2001.

EBITDA:

As a result of the above and the gains (losses) on franchise and other
property sales below, EBITDA (EBITDA represents net income (loss) before
(i) (provision for) 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) decreased $2.1 million, or 9.6%, to $20.4 million
for the quarter ended June 30, 2002 from $22.5 million for the same quarter in
2001. EBITDA as a percentage of total revenues was 13.1% and 14.8% for the 2002
and 2001 periods, respectively.

EBITDA decreased $1.4 million, or 4.6%, to $30.7 million for the six months
ended June 30, 2002 from $32.1 million for the same period in 2001. EBITDA as a
percentage of total revenues was 10.7% and 11.6% for the six months ended June
30, 2002 and July 1, 2001, respectively.

WRITE-DOWNS OF PROPERTY AND EQUIPMENT:

Write-downs of property and equipment were $0.3 million and $0.1 million for
the quarters ended June 30, 2002 and July 1, 2001, respectively. Write-downs of
property and equipment were $0.4 million and $0.1 million for the six months
ended June 30, 2002 and July 1, 2001, respectively.

DEPRECIATION AND AMORTIZATION:

Depreciation and amortization decreased $0.7 million, or 10.0%, to
$6.4 million for the second quarter ended June 30, 2002 from $7.1 million for
the same quarter in 2001. Depreciation and amortization as a percentage of total
revenues was 4.1% and 4.7% in the 2002 and 2001 quarters, respectively. The
reduction reflects the impact on depreciation associated with the Company's
closing of five locations and the re-franchising of 41 locations over the past
15 months.

Depreciation and amortization decreased $1.5 million, or 10.8%, to
$13.1 million for the six months ended June 30, 2002 from $14.6 million for the
same period in 2001. Depreciation and amortization as a percentage of total
revenues was 4.5% and 5.3% in the 2002 and 2001 periods, respectively. The
reduction reflects the impact on depreciation associated with the Company's
closing of 19 locations and the re-franchising of 41 locations over the past 18
months.

GAIN ON FRANCHISE SALES OF RESTAURANT OPERATIONS AND PROPERTIES:

Gain on franchise sales of restaurant operations and properties was
$3.8 million for the second quarter and six months ended July 1, 2001. The gain
was primarily the result of the sale of 31 restaurants to a franchisee during
the second quarter ended July 1, 2001.

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

The loss on sales of other property and equipment, net was $0.1 million for
the quarter ended June 30, 2002 as compared to a gain of $0.3 million for the
quarter ended July 1, 2001. The loss on sales of other property and equipment,
net was $0.6 million for the six months ended June 30, 2002 as compared to a
gain of $2.2 million for the six months ended July 1, 2001. The loss during the
six-month period in 2002 primarily resulted from the sale of idle land and four
closed locations. The gain in 2001 resulted from the sale of 18 closed locations
during the six-month period ended July 1, 2001.

INTEREST EXPENSE, NET:

Interest expense, net of capitalized interest and interest income, decreased
by $0.7 million, or 10.2%, to $6.2 million for the second quarter ended
June 30, 2002 from $6.9 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.

Interest expense, net of capitalized interest and interest income, decreased
by $1.9 million, or 13.5%, to $12.6 million for the six months ended June 30,
2002 from $14.5 million for the same period in 2001. The decrease is primarily
impacted by the decrease in the average outstanding debt in the 2002 period
compared to the 2001 period as a result of the Refinancing Plan. Total
outstanding debt, including capital lease obligations, was reduced from
$277.2 million at July 1, 2001 to $240.5 million at June 30, 2002.

PROVISION FOR INCOME TAXES:

The provision for income taxes was $2.8 million, or 38.1%, and
$3.3 million, or 39.8%, for the second quarters ended June 30, 2002 and July 1,
2001, respectively. The provision for income taxes was $1.5 million, or 34.0%,
and $0.9 million, or 33.8%, for the six months ended June 30, 2002 and July 1,

2001, respectively. 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 INCOME:

Net income was $4.6 million and $5.0 million for the second quarters ended
June 30, 2002 and July 1, 2001, respectively. Net income was $3.0 million and
$1.8 million for the six months ended June 30, 2002 and July 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 provided by operating activities was $8.7 million and $3.1 million for
the six months ended June 30, 2002 and July 1, 2001, respectively. During the
six months ended June 30, 2002, inventories increased $5.2 million in an effort
to build manufactured inventory to take advantage of lower cream prices. Accrued
expenses and other long-term liabilities decreased $2.5 million primarily as a
result of $1.1 million of payments made against the restructuring reserve and
$1.3 million of payments made for accrued construction costs. During the 2001
period, inventories increased $3.9 million as a result of increased retail and
restaurant promotional activity during the summer months. Accounts payable
increased $4.6 million primarily as a result of increased inventory purchases.
Accounts receivable increased $5.7 million primarily due to increased retail
supermarket sales along with the increase in volume of Foodservice product sales
to franchisees. Accrued expenses and other long term-liabilities decreased $3.1
million as a result of a $1.5 million reduction in accrued interest on the
revolver and term loans due to the timing of interest payments and $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 $16.6 million as of June 30, 2002. Total letters of credit issued and
outstanding were $13.4 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 ($3.5 million) and
$14.1 million for the six months ended June 30, 2002 and July 1, 2001,
respectively. Capital expenditures for restaurant operations were approximately
$3.9 million and $4.0 million for the six months ended June 30, 2002 and
July 1, 2001, respectively. Capital expenditures were offset by proceeds from
the sales of property and equipment of $1.3 million and $19.9 million in the
2002 period and the 2001 period, respectively. The decrease in proceeds was
primarily due to the receipt of $12.9 million in 2001 related to sales of
restaurants to franchisees.

The Company had a working capital deficit of $6.9 million as of June 30,
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 June
30, 2002, $16.6 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 (1.8388% at June 30,
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 June 30, 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 June 30, 2002) or (b) the Eurodollar rate plus the
applicable margin as in effect from time to time (the "Eurodollar Rate") (6.28%
at June 30, 2002).

As of June 30, 2002 and December 30, 2001, total letters of credit issued
and outstanding were $13.4 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 $12.0 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 June 30, 2002 (in thousands):

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

Long-term debt.............................. $233,334 $ 537 $ 2,124 $ 2,605 $228,068
Capital lease obligations................... 10,902 1,279 2,940 1,817 4,866
Operating leases............................ 151,352 15,805 28,302 23,692 83,553
Purchase commitments........................ 65,759 55,787 9,899 65 8

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

Revolving credit facility....................... $16,575 $ -- $16,575 $ -- $ --
Letters of credit............................... 13,425 -- 13,425 -- --

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 effect 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 $2.5 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
$0.4 million and $1.9 million during the quarter ended June 30, 2002 and the
year ended December 30, 2001, respectively, since the reserve exceeded estimated
remaining payments.

As of June 30, 2002, the remaining restructuring reserve was $1.6 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 restaurant 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 June 30, 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.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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 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 and six months ended July 1, 2001.

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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a) An annual meeting of the Company's shareholders was held on May 15,
2002.

(b) Not applicable.

(c) The election of two nominees for directors of the Company was voted upon
at the meeting. The number of affirmative votes and the number of votes
withheld with respect to such approvals are as follows:

NOMINEE AFFIRMATIVE VOTES VOTES WITHHELD
------- ----------------- --------------

Steven L. Ezzes................ 5,303,820 268,086
Charles A. Ledsinger, Jr....... 5,328,679 243,227

There were no matters voted upon at the Company's annual meeting to which
broker non-votes applied.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

None

(b) Reports on Form 8-K

DATE OF EVENT REPORTED EVENT REPORTED
---------------------- ------------------------------------------------------------------

May 15, 2002 Item 4 -- Changes in Registrant's Certifying Accountant

May 15, 2002 Item 7 -- Exhibit 16.1, Letter of Arthur Andersen LLP
regarding change in certifying accountant

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