10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2003
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to

Commission File No. 0-3930

FRIENDLY ICE CREAM CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Massachusetts	04-2053130
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)
1855 Boston Road Wilbraham, Massachusetts	01095
(Address of Principal Executive Offices)	(Zip Code)
(413) 543-2400
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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 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 ý  No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o  No ý

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 October 15, 2003
Common Stock, $.01 par value	7,459,009 shares

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	September 28, 2003			December 29, 2002
	(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	31,551		$	34,341
Restricted cash	1,945			—
Accounts receivable	10,452			10,853
Inventories	15,393			17,278
Deferred income taxes	7,771			7,771
Prepaid expenses and other current assets	2,885			3,062
TOTAL CURRENT ASSETS	69,997			73,305
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization	163,518			158,373
INTANGIBLE ASSETS AND DEFERRED COSTS, net of accumulated amortization	18,315			19,642
OTHER ASSETS	5,817			5,878
TOTAL ASSETS	$	257,647		$	257,198
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt	$	1,093		$	1,031
Current maturities of capital lease and finance obligations	759			1,362
Accounts payable	22,565			23,902
Accrued salaries and benefits	10,301			9,329
Accrued interest payable	6,637			1,961
Insurance reserves	10,274			11,330
Restructuring reserves	530			937
Other accrued expenses	15,443			22,885
TOTAL CURRENT LIABILITIES	67,602			72,737
DEFERRED INCOME TAXES	3,856			1,533
CAPITAL LEASE AND FINANCE OBLIGATIONS, less current maturities	5,135			5,044
LONG-TERM DEBT, less current maturities	228,258			231,830
ACCRUED PENSION COST	15,431			16,281
OTHER LONG-TERM LIABILITIES	33,739			33,475
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ DEFICIT:
Common stock	74			74
Additional paid-in capital	140,386			139,974
Accumulated other comprehensive loss	(14,559		)	(14,559		)
Accumulated deficit	(222,275		)	(229,191		)
TOTAL STOCKHOLDERS’ DEFICIT	(96,374		)	(103,702		)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	257,647		$	257,198

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

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FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

	For the Three Months Ended						For the Nine Months Ended
	September 28, 2003			September 29, 2002			September 28, 2003			September 29, 2002
REVENUES	$	160,350		$	158,314		$	444,688		$	439,669
COSTS AND EXPENSES:
Cost of sales	56,561			57,079			157,717			156,071
Labor and benefits	45,402			43,457			127,326			123,618
Operating expenses	29,510			30,946			85,112			84,408
General and administrative expenses	9,939			9,369			28,397			26,649
Reduction of restructuring reserve	—			—			—			(400		)
Write-downs of property and equipment	26			—			26			431
Depreciation and amortization	5,391			6,097			16,764			19,170
Loss on franchise sales of restaurant operations and properties	—			21			—			21
Loss (gain) on disposals of other property and equipment, net	91			(150		)	1,499			491
OPERATING INCOME	13,430			11,495			27,847			29,210
Interest expense, net	6,048			6,212			18,242			18,764
INCOME BEFORE PROVISION FOR INCOME TAXES	7,382			5,283			9,605			10,446
Provision for income taxes	(2,067		)	(1,795		)	(2,689		)	(3,551		)
NET INCOME	$	5,315		$	3,488		$	6,916		$	6,895
BASIC NET INCOME PER SHARE	$	0.71		$	0.47		$	0.93		$	0.94
DILUTED NET INCOME PER SHARE	$	0.70		$	0.46		$	0.91		$	0.91
WEIGHTED AVERAGE SHARES:
Basic	7,452			7,379			7,436			7,366
Diluted	7,606			7,607			7,577			7,574

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

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FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	For the Nine Months Ended
	September 28, 2003			September 29, 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	6,916		$	6,895
Adjustments to reconcile net income to net cash provided by operating activities:
Stock compensation expense	184			302
Depreciation and amortization	16,764			19,170
Write-offs of deferred financing costs	44			—
Write-downs of property and equipment	26			431
Deferred income tax expense	2,323			3,881
Loss on disposals of other property and equipment, net	1,499			491
Changes in operating assets and liabilities:
Accounts receivable	401			(122		)
Inventories	1,885			(2,259		)
Other assets	(1,707		)	(3,533		)
Accounts payable	(1,337		)	4,932
Accrued expenses and other long-term liabilities	(4,086		)	1,609
NET CASH PROVIDED BY OPERATING ACTIVITIES	22,912			31,797
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(21,291		)	(9,004		)
Proceeds from sales of property and equipment	63			3,426
NET CASH USED IN INVESTING ACTIVITIES	(21,228		)	(5,578		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt	(3,510		)	(753		)
Repayments of capital lease and finance obligations	(1,192		)	(1,396		)
Stock options exercised	228			133
NET CASH USED IN FINANCING ACTIVITIES	(4,474		)	(2,016		)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(2,790		)	24,203
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	34,341			16,342
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	31,551		$	40,545
SUPPLEMENTAL DISCLOSURES:
Cash paid (refunded) during the period for:
Interest	$	13,435		$	13,030
Income taxes	961			(9		)
Capital lease obligations incurred	680			—
Lease incentive equipment received	243			—

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

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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 September 28, 2003 and for the three months and nine months ended September 28, 2003 and September 29, 2002 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 nine month periods ended September 28, 2003 and September 29, 2002 are not necessarily indicative of the results that may be expected for the entire year due, in part, to the seasonality of the Company’s business. Historically, higher revenues and operating income have been experienced during the second and third fiscal quarters. The Company’s consolidated financial statements, including the notes thereto, which are contained in the 2002 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 2002 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, net of discounts and allowances, upon delivery 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.

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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 $500,000 per occurrence. Insurance with third parties, some of which is then reinsured through Restaurant Insurance Corporation (“RIC”), the Company’s wholly-owned subsidiary, is in place for claims in excess of these self-insured amounts. RIC reinsured 100% of the risk from $500,000 to $1,000,000 per occurrence through September 2, 2000 for FICC’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. FICC’s and RIC’s liabilities 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.

Concentration of Credit Risk -

Financial instruments, which potentially expose the Company to concentrations of credit risk, consist principally of accounts receivable. The Company performs ongoing credit evaluations of its customers and generally requires no collateral to secure accounts receivable. The credit review is based on both financial and non-financial factors. The Company maintains a reserve for potentially uncollectible accounts receivable based on its assessment of the collectibility of accounts receivable.

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 among 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 years ended December 29, 2002 and December 30, 2001, respectively, since the reserve exceeded estimated remaining payments.

As of September 28, 2003, the remaining restructuring reserve was $530,000. Based on information currently available, management believes that the restructuring reserve as of September 28, 2003 was adequate and not excessive.

5

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. Significant differences in actual experience or significant changes in the assumptions may materially affect the future pension and other post-retirement obligations and expense.

Restricted Cash -

Restaurant Insurance Corporation (“RIC”), an insurance subsidiary, is required to hold assets in trust whose value is at least equal to certain of RIC’s outstanding estimated insurance claim liabilities. Accordingly, as of September 28, 2003, cash of approximately $1,945,000 was restricted. There was no restricted cash as of December 29, 2002 as this requirement was satisfied with a letter of credit.

Inventories -

Inventories were stated at the lower of first-in, first-out cost or market. Inventories at September 28, 2003 and December 29, 2002 were (in thousands):

	September 28, 2003		December 29, 2002
Raw materials	$	1,240	$	801
Goods in process	79		203
Finished goods	14,074		16,274
Total	$	15,393	$	17,278

6

Long-Lived Assets -

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company reviews its Non-Friendly Marks, which were assigned to the Company by Hershey in September 2002, for impairment on a quarterly basis. The Company recognizes impairment has occurred when the carrying value of the Non-Friendly Marks exceeds the estimated future undiscounted cash flows of the trademarked products.

The Company reviews each restaurant property quarterly to determine which properties will be disposed of, if any. This determination is made based on poor operating results, deteriorating property values and other factors. In addition, the Company reviews all restaurants with negative cash flow for impairment on a quarterly basis. The Company recognizes an impairment has occurred when the carrying value of property reviewed exceeds its estimated fair value, which is estimated based on the Company’s experience selling similar properties and local market conditions, less costs to sell for properties to be disposed of.

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. 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. As of September 28, 2003 and December 29, 2002, a valuation allowance of $10,200,000 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.

Derivative Instruments and Hedging Agreements - -

The Company enters into commodity option contracts from time to time to manage dairy cost pressures. The Company’s commodity option contracts do not meet hedge accounting criteria as defined by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and, accordingly, are marked to market each period, with the resulting gains or losses recognized in cost of sales.

7

Earnings Per Share -

Basic earnings 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 158,236 and 50,960 for the three months ended September 28, 2003 and September 29, 2002, 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 195,626 and 84,514 for the nine months ended September 28, 2003 and September 29, 2002, respectively.

Presented below is the reconciliation between basic and diluted weighted average shares for the three and nine months ended September 28, 2003 and September 29, 2002 (in thousands):

	For the Three Months Ended
	Basic		Diluted
	September 28, 2003	September 29, 2002	September 28, 2003	September 29, 2002
Weighted average number of common shares outstanding during the period	7,452	7,379	7,452	7,379
Adjustments:
Assumed exercise of stock options	—	—	154	228
Weighted average number of shares outstanding	7,452	7,379	7,606	7,607

	For the Nine Months Ended
	Basic		Diluted
	September 28, 2003	September 29, 2002	September 28, 2003	September 29, 2002
Weighted average number of common shares outstanding during the period	7,436	7,366	7,436	7,366
Adjustments:
Assumed exercise of stock options	—	—	141	208
Weighted average number of shares outstanding	7,436	7,366	7,577	7,574

8

Stock-Based Compensation -

The Company accounts for stock-based compensation for employees under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and elected the disclosure-only alternative under SFAS No. 123, “Accounting for Stock-Based Compensation.”  No stock-based compensation cost is included in net income for the Company’s Stock Option Plan, as all options granted during periods presented had an exercise price equal to the market value of the stock on the date of grant.

In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock-Based Compensation–Transition and Disclosure,” which amends SFAS No. 123. SFAS No. 148 allows for three methods of transition for those companies that adopt SFAS No. 123’s provisions for fair value recognition. SFAS No. 148’s transition guidance and provisions for annual disclosures are effective for fiscal years ending after December 15, 2002. The Company did not adopt fair value accounting for employee stock options under SFAS No. 123 and SFAS No. 148, but will continue to disclose the required pro-forma information in the notes to the consolidated financial statements.

In accordance with SFAS No. 148, the following table presents the effect on net income and net income per share had compensation cost for the Company’s stock plans been determined consistent with SFAS No. 123:

	For the Three Months Ended						For the Nine Months Ended
	September 28, 2003			September 29, 2002			September 28, 2003			September 29, 2002
Net income, as reported	$	5,315,000		$	3,488,000		$	6,916,000		$	6,895,000
Less stock based compensation expense determined under fair value method for all stock options, net of related income tax benefit	(528,000		)	(236,000		)	(620,000		)	(329,000		)
Pro forma net income	$	4,787,000		$	3,252,000		$	6,296,000		$	6,566,000
Basic net income per share, as reported	$	0.71		$	0.47		$	0.93		$	0.94
Basic net income per share, pro forma	$	0.64		$	0.44		$	0.85		$	0.89
Diluted net income per share, as reported	$	0.70		$	0.46		$	0.91		$	0.91
Diluted net income per share, pro forma	$	0.63		$	0.43		$	0.83		$	0.87

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Fair value was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:

	2003			2002
Risk free interest rate	3.04		%	3.60		%
Expected life	5 years			5 years
Expected volatility	75.47		%	79.97		%
Dividend yield	0.00		%	0.00		%
Fair value	$	4.20		$	4.99

Reclassifications -

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

2.  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 Chief Executive Officer and President of the Company. The Company’s operating segments include restaurant, foodservice and franchise. The revenues from these segments include both sales to unaffiliated customers and intersegment sales, which generally are accounted for on a basis consistent with sales to unaffiliated customers. Intersegment sales and other intersegment transactions have been eliminated in the accompanying condensed consolidated financial statements.

The Company’s restaurants target families with children and adults who desire a reasonably priced meal in a full-service setting. The Company’s menu offers a broad selection of freshly-prepared foods which appeal to customers throughout all dayparts. The menu currently features over 100 items comprised of a broad selection of breakfast, lunch, dinner and afternoon and evening snack items. Foodservice operations manufactures frozen dessert products and distributes such manufactured products and purchased finished goods to the Company’s restaurants and franchised operations. Additionally, it sells frozen dessert products to distributors and retail and institutional locations. The Company’s franchise segment includes a royalty based on franchise restaurant revenue. In addition, the Company receives rental income from various franchised restaurants. The Company does not allocate general and administrative expenses associated with its headquarters operations to any business segment. These costs include expenses of the following functions: legal, accounting, personnel not directly related to a segment, information systems and other headquarters activities.

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. Using this approach, 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.

During the three and nine months ended September 28, 2003, the foodservice segment did not charge additional zone pricing to the restaurant and franchise segments. As a result, intercompany zone pricing of approximately $130,000 and $362,000 for the three and nine months ended September 29, 2002, respectively, was reclassified out of foodservice revenue, resulting in reduced cost of sales in the restaurant and franchise segments to conform with current year presentation. Additionally, ice cream promotion marketing costs of $471,000 and $1,200,000 that were funded by the foodservice segment in 2002 were reclassified to the restaurant segment for the three and nine months ended September 29, 2002, respectively.

EBITDA represents net income before (i) provision for 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

10

EBITDA in this Form 10-Q because the Company’s management incentive plan pays bonuses based on achieving EBITDA targets and the Company believes that such information is used by certain investors as one measure of a company’s historical ability to service debt. EBITDA should not be considered as an alternative to, or more meaningful than, earnings (loss) from operations or other traditional indications of a company’s operating performance.

	For the Three Months Ended						For the Nine Months Ended
	September 28, 2003			September 29, 2002			September 28, 2003			September 29, 2002
	(in thousands)
Revenues:
Restaurant	$	127,605		$	124,885		$	353,775		$	351,034
Foodservice	66,352			66,331			183,311			180,007
Franchise	2,571			2,663			7,536			7,342
Total	$	196,528		$	193,879		$	544,622		$	538,383
Intersegment revenues:
Restaurant	$	—		$	—		$	—		$	—
Foodservice	(36,178		)	(35,565		)	(99,934		)	(98,714		)
Franchise	—			—			—			—
Total	$	(36,178	)	$	(35,565	)	$	(99,934	)	$	(98,714	)
External revenues:
Restaurant	$	127,605		$	124,885		$	353,775		$	351,034
Foodservice	30,174			30,766			83,377			81,293
Franchise	2,571			2,663			7,536			7,342
Total	$	160,350		$	158,314		$	444,688		$	439,669

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	For the Three Months Ended						For the Nine Months Ended
	September 28, 2003			September 29, 2002			September 28, 2003			September 29, 2002
	(in thousands)
EBITDA:
Restaurant	$	17,308		$	15,088		$	41,791		$	42,356
Foodservice	5,573			5,439			14,020			14,403
Franchise	1,769			1,862			5,332			4,998
Corporate	(5,485		)	(4,771		)	(14,835		)	(13,154		)
(Loss) gain on property and equipment, net	(264		)	143			(1,487		)	110
Reduction of restructuring reserve	—			—			—			400
Total	$	18,901		$	17,761		$	44,821		$	49,113
Interest expense, net-Corporate	$	6,048		$	6,212		$	18,242		$	18,764
Depreciation and amortization:
Restaurant	$	3,648		$	4,019		$	11,412		$	12,006
Foodservice	770			798			2,253			2,469
Franchise	39			63			116			202
Corporate	934			1,217			2,983			4,493
Total	$	5,391		$	6,097		$	16,764		$	19,170
Other non-cash expenses:
Corporate	$	54		$	169		$	184		$	302
Write-downs of property and equipment	26			—			26			431
Total	$	80		$	169		$	210		$	733
Income (loss) before provision for income taxes:
Restaurant	$	13,660		$	11,069		$	30,379		$	30,350
Foodservice	4,803			4,641			11,767			11,934
Franchise	1,730			1,799			5,216			4,796
Corporate	(12,521		)	(12,369		)	(36,244		)	(36,713		)
(Loss) gain on property and equipment, net	(290		)	143			(1,513		)	(321		)
Reduction of restructuring reserve	—			—			—			400
Total	$	7,382		$	5,283		$	9,605		$	10,446

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	For the Nine Months Ended September 28, 2003		For the Year Ended December 29, 2002
	(in thousands)
Capital expenditures, including assets acquired under capital leases:
Restaurant	$	17,882	$	15,386
Foodservice	3,280		1,667
Corporate	1,052		1,039
Total	$	22,214	$	18,092
	September 28, 2003		December 29, 2002
Total assets:
Restaurant	$	150,162	$	144,927
Foodservice	38,540		39,631
Franchise	9,632		9,062
Corporate	59,313		63,578
Total	$	257,647	$	257,198

13

3. NEW ACCOUNTING PRONOUNCEMENTS

In January 2003, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor,” which states that cash consideration received from a vendor is presumed to be a reduction of the prices of the vendor’s products or services and should, therefore, be characterized as a reduction of cost of sales when recognized in the statement of operations. That presumption is overcome when the consideration is either a reimbursement of specific, incremental, identifiable costs incurred to sell the vendor’s products, or a payment for assets or services delivered to the vendor. EITF Issue No. 02-16 is effective for arrangements entered into after November 21, 2002. The adoption of EITF Issue No. 02-16 had no material impact on the Company’s financial position or results of operations.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (“ARB”) No. 51” (“FIN 46”). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period ending after December 15, 2003. The Company is currently in the process of evaluating the impact of FIN 46 and has not yet determined the impact on the Company’s results of operations or financial position.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The principal difference between SFAS No. 146 and EITF Issue No. 94-3 relates to the timing of liability recognition. Under SFAS No. 146, a liability for a cost associated with an exit or disposal activity is recognized when the liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost was recognized at the dat e of an entity’s commitment to an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 had no material effect on the Company’s financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections.” SFAS No. 4 required all gains and losses from the extinguishment of debt to be reported as extraordinary items and SFAS No. 64 related to the same matter. SFAS No. 145 requires gains and losses from certain debt extinguishment not to be reported as extraordinary items when the use of debt extinguishment is part of a risk management strategy. SFAS No. 44 was issued to establish transitional requirements for motor carriers. Those transitions are completed, therefore SFAS No. 145 rescinds SFAS No. 44. SFAS No. 145 also amends SFAS No. 13 requiring sale-leaseback accounting for certain lease modifications. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The provisions relating to sale-leaseback accounting are effective for transactions occurring after May 15, 2002. The adoption of SFAS No. 145 had no material effect on the Company’s financial position or results of operations.

14

4. RESTRUCTURING RESERVES

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

	For the Nine Months Ended September 28, 2003
	Restructuring Reserves as of December 29, 2002		Costs Paid			Restructuring Reserves as of September 28, 2003
Rent	$	679	$	(216	)	$	463
Utilities and real estate taxes	121		(85		)	36
Equipment	77		(77		)	—
Other	60		(29		)	31
Total	$	937	$	(407	)	$	530

	For the Nine Months Ended September 29, 2002
	Restructuring Reserves as of December 30, 2001		Costs Paid			Reserve Reduction			Restructuring Reserves as of September 29, 2002
Severance pay	$	516	$	(473	)	$	(43	)	$	—
Rent	1,318		(320		)	(298		)	700
Utilities and real estate taxes	185		(89		)	(3		)	93
Equipment	480		(197		)	219			502
Outplacement services	6		(6		)	—			—
Other	551		(126		)	(275		)	150
Total	$	3,056	$	(1,211	)	$	(400	)	$	1,445

Based on information currently available, management believes that the restructuring reserve as of September 28, 2003 was adequate and not excessive.

15

5. RELATED PARTY TRANSACTIONS

In 1994, TRC Realty LLC (a subsidiary of TRC, whose majority equity owner is the Company’s Chairman) entered into a ten-year operating lease for an aircraft for use by both the Company and TRC (which operates restaurants using the trademark Perkins Restaurant and Bakery (“Perkins”)). In 1999, this lease was cancelled and TRC Realty LLC entered into a new ten-year operating lease for a new aircraft. The Company shared proportionately with Perkins in reimbursing TRC Realty LLC for leasing, tax and insurance expenses. In addition, the Company also incurred actual usage costs. During the year ended December 29, 2002, the Company expensed its share of the expected net loss on the termination of the cost sharing arrangement as TRC Realty LLC anticipated terminating the lease and disposing of the aircraft by May 2003. The Company’s share of the expected net loss was approximately $950,000 and was included in operating expenses in the consolidated statement of operations for the year ended December 29, 2002. At the Company’s July 23, 2003 Board of Directors meeting, the disinterested Board members approved a payment up to $1,000,000 to TRC Realty LLC and on August 26, 2003, a payment of approximately $868,000 was made to TRC Realty LLC that terminated the Company’s cost sharing arrangement with Perkins. The payment exceeded the remaining reserve for expected losses by approximately $86,000, which was reflected in operating expenses for the quarter ended September 28, 2003. Under the cost sharing arrangement, which would have expired in January 2010, the Company paid approximately $500,000 annually.

During August 2003, Friendly’s entered into a single restaurant franchise agreement with Treats of Huntersville LLC (“Treats”). The owner of Treats is a family member of the Company’s Chairman of the Board of Directors. The transaction was a standard agreement in compliance with the terms and conditions of the Uniform Franchise Offering Circular allowing Treats to operate one location. The location, which was initially opened by a former franchisee but closed in July 2002, was reopened by Treats in August 2003. Treats paid an initial franchise fee of $35,000, which was included in income during the quarter ended September 28, 2003.

6. FRANCHISE TRANSACTIONS

In 2000, the Company and its first franchisee, Friendco Restaurants Inc., a subsidiary of Davco Restaurants, Inc. (“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. At that time, Davco had the right to close up to 16 existing franchised locations and operate the remaining 32 locations under their respective existing franchise agreements until such time as a new franchisee was found for those locations. The existing franchise agreements for the 32 locations were modified as of December 29, 2001 to allow early termination subject, however, to liquidated damages on 22 of the 32 franchise agreements. During the year ended December 30, 2001, Davco transferred its rights to three franchised locations to a third party and closed two restaurants.  During the year ended December 29, 2002, Davco transferred its rights to 24 additional franchised locations to six separate third parties and closed six restaurants. During the nine months ended September 28, 2003, Davco closed four restaurants and transferred its rights to three additional franchised locations to two third parties. As of September 28, 2003, Friendco Restaurants Inc. owned six restaurants. During June 2003, the Company entered into a Settlement Agreement and Mutual General Release (the “Agreement”) with Davco. The Agreement released Davco from all obligations and guarantees related to certain leases associated with franchised locations. Proceeds received in connection with the Agreement were $250,000, which was recorded as revenue in the nine months ended September 28, 2003.

During July 2003, the Company entered into a development agreement granting Jax Family Rest., Inc. (“Jax”) certain limited exclusive rights to operate and develop Friendly’s full-service restaurants in designated areas within Baker, Clay, Nassau, Putnam and St. John’s counties, Florida (the “Jax Agreement”). Pursuant to the Jax Agreement, Jax agreed to open 10 new restaurants over the next seven years. The Company received development fees of $155,000, which represent one-half of the initial franchise fees. The $155,000 will be recognized into income as restaurants are opened.

16

8. 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, 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 were 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 September 28, 2003 and December 29, 2002 and for the nine months ended September 28, 2003 and September 29, 2002 were 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.

17

Supplemental Condensed Consolidating Balance Sheet

As of September 28, 2003

(In thousands)

	Parent Company			Guarantor Subsidiary		Non- guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	26,882		$	2,948	$	1,721		$	—		$	31,551
Restricted cash	—			—		1,945			—			1,945
Accounts receivable, net	9,059			1,393		—			—			10,452
Inventories	15,393			—		—			—			15,393
Deferred income taxes	7,718			18		—			35			7,771
Prepaid expenses and other current assets	8,202			1,151		7,780			(14,248		)	2,885
Total current assets	67,254			5,510		11,446			(14,213		)	69,997
Deferred income taxes	—			264		—			(264		)	—
Property and equipment, net	115,624			—		47,894			—			163,518
Intangibles and deferred costs, net	15,767			—		2,548			—			18,315
Investments in subsidiaries	5,183			—		—			(5,183		)	—
Other assets	4,902			8,141		915			(8,141		)	5,817
Total assets	$	208,730		$	13,915	$	62,803		$	(27,801	)	$	257,647
Liabilities and Stockholders’ (Deficit) Equity
Current liabilities:
Current maturities of long-term obligations	$	8,535		$	—	$	1,093		$	(7,776	)	$	1,852
Accounts payable	22,565			—		—			—			22,565
Accrued expenses	38,320			4,514		6,631			(6,280		)	43,185
Total current liabilities	69,420			4,514		7,724			(14,056		)	67,602
Deferred income taxes	4,085			—		—			(229		)	3,856
Long-term obligations, less current maturities	181,112			—		52,281			—			233,393
Other long-term liabilities	50,487			890		6,126			(8,333		)	49,170
Stockholders’ (deficit) equity	(96,374		)	8,511		(3,328		)	(5,183		)	(96,374		)
Total liabilities and stockholders’ (deficit) equity	$	208,730		$	13,915	$	62,803		$	(27,801	)	$	257,647

18

Supplemental Condensed Consolidating Statement of Operations

For the Three Months Ended September 28, 2003

(In thousands)

	Parent Company			Guarantor Subsidiary			Non- guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	158,083		$	2,267		$	—		$	—		$	160,350
Costs and expenses:
Cost of sales	56,561			—			—			—			56,561
Labor and benefits	45,402			—			—			—			45,402
Operating expenses and write-downs of property and equipment	31,276			—			(1,740		)	—			29,536
General and administrative expenses	8,781			1,158			—			—			9,939
Depreciation and amortization	4,821			—			570			—			5,391
Loss on disposals of other property and equipment, net	88			—			3			—			91
Interest expense, net	4,883			—			1,165			—			6,048
Income before provision for income taxes and equity in net income of consolidated subsidiaries	6,271			1,109			2			—			7,382
Provision for income taxes	(1,561		)	(455		)	(51		)	—			(2,067		)
Income (loss) before equity in net income of consolidated subsidiaries	4,710			654			(49		)	—			5,315
Equity in net income of consolidated subsidiaries	605			—			—			(605		)	—
Net income (loss)	$	5,315		$	654		$	(49	)	$	(605	)	$	5,315

19

Supplemental Condensed Consolidating Statement of Operations

For the Nine Months Ended September 28, 2003

(In thousands)

	Parent Company			Guarantor Subsidiary			Non- guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	438,247		$	6,441		$	—		$	—		$	444,688
Costs and expenses:
Cost of sales	157,717			—			—			—			157,717
Labor and benefits	127,326			—			—			—			127,326
Operating expenses and write-downs of property and equipment	90,337			—			(5,199		)	—			85,138
General and administrative expenses	24,921			3,476			—			—			28,397
Depreciation and amortization	15,046			—			1,718			—			16,764
Loss on disposals of other property and equipment, net	1,379			—			120			—			1,499
Interest expense, net	14,772			—			3,470			—			18,242
Income (loss) before provision for income taxes and equity in net income of consolidated subsidiaries	6,749			2,965			(109		)	—			9,605
Provision for income taxes	(1,329		)	(1,216		)	(144		)	—			(2,689		)
Income (loss) before equity in net income of consolidated subsidiaries	5,420			1,749			(253		)	—			6,916
Equity in net income of consolidated subsidiaries	1,496			—			—			(1,496		)	—
Net income (loss)	$	6,916		$	1,749		$	(253	)	$	(1,496	)	$	6,916

20

Supplemental Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended September 28, 2003

(In thousands)

	Parent Company			Guarantor Subsidiary		Non- guarantor Subsidiaries			Eliminations			Consolidated
Net cash provided by (used in) operating activities	$	21,572		$	1,004	$	(592	)	$	928		$	22,912
Cash flows from investing activities:
Purchases of property and equipment	(21,291		)	—		—			—			(21,291		)
Proceeds from sales of property and equipment	63			—		—			—			63
Return of investment in subsidiary	535			—		—			(535		)	—
Net cash used in investing activities	(20,693		)	—		—			(535		)	(21,228		)
Cash flows from financing activities:
Repayments of obligations	(3,942		)	—		(760		)	—			(4,702		)
Stock options exercised	228			—		—			—			228
Reinsurance deposits received	—			—		2,207			(2,207		)	—
Reinsurance payments made from deposits	—			—		(1,279		)	1,279			—
Dividends paid	—			—		(535		)	535			—
Net cash used in financing activities	(3,714		)	—		(367		)	(393		)	(4,474		)
Net (decrease) increase in cash and cash equivalents	(2,835		)	1,004		(959		)	—			(2,790		)
Cash and cash equivalents, beginning of period	29,717			1,944		2,680			—			34,341
Cash and cash equivalents, end of period	$	26,882		$	2,948	$	1,721		$	—		$	31,551
Supplemental disclosures:
Interest paid	$	9,945		$	—	$	3,490		$	—		$	13,435
Income taxes (refunded) paid	(653		)	1,251		363			—			961
Capital lease obligations incurred	680			—		—			—			680
Lease incentive equipment received	243			—		—			—			243

21

Supplemental Condensed Consolidating Balance Sheet

As of December 29, 2002

(In thousands)

	Parent Company			Guarantor Subsidiary		Non- guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	29,717		$	1,944	$	2,680		$	—		$	34,341
Accounts receivable, net	9,695			1,158		—			—			10,853
Inventories	17,278			—		—			—			17,278
Deferred income taxes	7,718			18		—			35			7,771
Prepaid expenses and other current assets	8,624			1,175		7,778			(14,515		)	3,062
Total current assets	73,032			4,295		10,458			(14,480		)	73,305
Deferred income taxes	—			264		—			(264		)	—
Property and equipment, net	108,805			—		49,568			—			158,373
Intangibles and deferred costs, net	16,930			—		2,712			—			19,642
Investments in subsidiaries	4,222			—		—			(4,222		)	—
Other assets	4,963			6,742		915			(6,742		)	5,878
Total assets	$	207,952		$	11,301	$	63,653		$	(25,708	)	$	257,198
Liabilities and Stockholders’ (Deficit) Equity
Current liabilities:
Current maturities of long-term obligations	$	9,138		$	—	$	1,031		$	(7,776	)	$	2,393
Accounts payable	23,902			—		—			—			23,902
Accrued expenses	42,581			3,654		6,861			(6,654		)	46,442
Total current liabilities	75,621			3,654		7,892			(14,430		)	72,737
Deferred income taxes	1,762			—		—			(229		)	1,533
Long-term obligations, less current maturities	183,771			—		53,103			—			236,874
Other long-term liabilities	50,500			885		5,198			(6,827		)	49,756
Stockholders’ (deficit) equity	(103,702		)	6,762		(2,540		)	(4,222		)	(103,702		)
Total liabilities and stockholders’ (deficit) equity	$	207,952		$	11,301	$	63,653		$	(25,708	)	$	257,198

22

Supplemental Condensed Consolidating Statement of Operations

For the Three Months Ended September 29, 2002

(In thousands)

	Parent Company			Guarantor Subsidiary			Non- guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	156,103		$	2,211		$	—		$	—		$	158,314
Costs and expenses:
Cost of sales	57,079			—			—			—			57,079
Labor and benefits	43,457			—			—			—			43,457
Operating expenses and write-downs of property and equipment	32,680			—			(1,734		)	—			30,946
General and administrative expenses	8,204			1,165			—			—			9,369
Depreciation and amortization	5,515			—			582			—			6,097
Loss on franchise sales of restaurant operations and properties	21			—			—			—			21
(Gain) loss on disposals of other property and equipment, net	(219		)	—			69			—			(150		)
Interest expense, net	5,027			—			1,185			—			6,212
Income (loss) before provision for income taxes and equity in net income of consolidated subsidiaries	4,339			1,046			(102		)	—			5,283
Provision for income taxes	(1,312		)	(429		)	(54		)	—			(1,795		)
Income (loss) before equity in net income of consolidated subsidiaries	3,027			617			(156		)	—			3,488
Equity in net income of consolidated subsidiaries	461			—			—			(461		)	—
Net income (loss)	$	3,488		$	617		$	(156	)	$	(461	)	$	3,488

23

Supplemental Condensed Consolidating Statement of Operations

For the Nine Months Ended September 29, 2002

(In thousands)

	Parent Company			Guarantor Subsidiary			Non- guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	433,469		$	6,200		$	—		$	—		$	439,669
Costs and expenses:
Cost of sales	156,071			—			—			—			156,071
Labor and benefits	123,618			—			—			—			123,618
Operating expenses and write-downs of property and equipment	90,063			—			(5,224		)	—			84,839
General and administrative expenses	23,156			3,493			—			—			26,649
Reduction of restructuring reserve	(400		)	—			—			—			(400		)
Depreciation and amortization	17,417			—			1,753			—			19,170
Loss on franchise sales of restaurant operations and properties	21			—			—			—			21
Loss on disposals of other property and equipment, net	422			—			69			—			491
Interest expense, net	15,244			—			3,520			—			18,764
Income (loss) before provision for income taxes and equity in net income of consolidated subsidiaries	7,857			2,707			(118		)	—			10,446
Provision for income taxes	(2,210		)	(1,110		)	(231		)	—			(3,551		)
Income (loss) before equity in net income of consolidated subsidiaries	5,647			1,597			(349		)	—			6,895
Equity in net income of consolidated subsidiaries	1,248			—			—			(1,248		)	—
Net income (loss)	$	6,895		$	1,597		$	(349	)	$	(1,248	)	$	6,895

24

Supplemental Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended September 29, 2002

(In thousands)

	Parent Company			Guarantor Subsidiary		Non- guarantor Subsidiaries			Eliminations			Consolidated
Net cash provided by operating activities	$	29,482		$	965	$	2,559		$	(1,209	)	$	31,797
Cash flows from investing activities:
Purchases of property and equipment	(9,004		)	—		—			—			(9,004		)
Proceeds from sales of property and equipment	3,426			—		—			—			3,426
Return of investment in subsidiary	450			—		—			(450		)	—
Net cash used in investing activities	(5,128		)	—		—			(450		)	(5,578		)
Cash flows from financing activities:
Repayments of obligations	(2,572		)	—		(615		)	1,038			(2,149		)
Stock options exercised	133			—		—			—			133
Reinsurance deposits received	—			—		2,024			(2,024		)	—
Reinsurance payments made from deposits	—			—		(2,195		)	2,195			—
Dividends paid	—			—		(450		)	450			—
Net cash used in financing activities	(2,439		)	—		(1,236		)	1,659			(2,016		)
Net increase in cash and cash equivalents	21,915			965		1,323			—			24,203
Cash and cash equivalents, beginning of period	15,116			104		1,122			—			16,342
Cash and cash equivalents, end of period	$	37,031		$	1,069	$	2,445		$	—		$	40,545
Supplemental disclosures:
Interest paid	$	9,780		$	—	$	3,250		$	—		$	13,030
Income taxes (refunded) paid	(1,029		)	1,020		—			—			(9		)

25

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 costs 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

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. Friendly’s owns and operates 380 full-service restaurants, franchises 155 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 14 states.

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

	For the Three Months Ended				For the Nine Months Ended
	September 28, 2003		September 29, 2002		September 28, 2003		September 29, 2002
Company Units:
Beginning of period	382		390		387		393
Openings	—		—		1		—
Closings	(2	)	(1	)	(8	)	(4	)
End of period	380		389		380		389
Franchised Units:
Beginning of period	162		165		162		167
Openings	1		1		3		4
Closings	(2	)	(4	)	(4	)	(9	)
End of period	161		162		161		162

26

Following is a summary of systemwide restaurant sales (dollars in thousands):

	For the Three Months Ended						For the Nine months Ended
	September 28, 2003			September 29, 2002			September 28, 2003			September 29, 2002
Systemwide sales:
Company restaurants	$	127,605		$	124,885		$	353,775		$	351,034
Franchise restaurants	56,129			53,626			157,336			150,102
Total restaurant sales	$	183,734		$	178,511		$	511,111		$	501,136
Increase in comparable restaurant sales:
Company restaurants	2.9		%	7.0		%	1.9		%	7.3		%
Franchise restaurants	5.1		%	9.2		%	4.9		%	10.4		%
Systemwide	3.5		%	7.6		%	2.8		%	8.2		%

Three months ended September 28, 2003 compared with three months ended September 29, 2002

Revenues:

Total revenues increased $2.1 million, or 1.3%, to $160.4 million for the third quarter ended September 28, 2003 from $158.3 million for the same quarter in 2002. Restaurant revenues increased $2.7 million, or 2.2%, to $127.6 million for the third quarter of 2003 from $124.9 million for the same quarter in 2002. Comparable company-owned restaurant revenues increased 2.9% from the 2002 quarter to the 2003 quarter as increases occurred in all dayparts except breakfast, which decreased. Two locations were re-imaged during the third quarter ended September 28, 2003. The operating days lost during the re-imaging construction period for these locations were negligible. The opening of one new restaurant in June 2003 increased restaurant revenues by $0.5 million. The closing of ten locations over the past 15 months resulted in a $1.4 million decline in restaurant revenues in the 2003 period as compared to the 2002 period. Foodservice (product sales to franchisees and retail customers) revenues decreased by $0.6 million, or 1.9%, to $30.2 million for the third quarter ended September 28, 2003 from $30.8 million for the same quarter in 2002. Franchised restaurant product revenues increased by $0.3 million while sales to foodservice retail supermarket customers declined by $0.9 million. Case volume in the Company’s retail supermarket business decreased by 7.6% for the quarter ended September 28, 2003 when compared to the same quarter in 2002. Franchise royalty and fee revenues decreased $0.1 million, or 3.5%, to $2.6 million for the third quarter ended September 28, 2003 compared to $2.7 million for the same quarter in 2002. The closings of subleased franchised locations reduced franchised rental income by $0.1 million. Initial franchise fees associated with transfers of exiting franchised locations were also lower by $0.1 million in the 2003 period when compared to the 2002 period. Partially offsetting the declines was a $0.1 million, or 6.3%, increase in royalties on franchisee sales. Comparable franchised restaurant revenues increased 5.1% from the 2002 quarter to the 2003 quarter. There were 161 and 162 franchise units open at September 28, 2003 and September 29, 2002, respectively.

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Cost of sales:

Cost of sales decreased $0.5 million, or 0.9% to $56.6 million for the three months ended September 28, 2003 from $57.1 million for the same period in 2002. Cost of sales as a percentage of total revenues decreased to 35.3% for the quarter ended September 28, 2003 from 36.1% for the same period in 2002. The lower food cost as a percentage of total revenue was due to a shift in sales mix from foodservice sales to Company-owned restaurant sales. Foodservice sales to franchisees and retail supermarket customers have a higher food cost as a percentage of revenue than sales in Company-owned restaurants to restaurant patrons. Increased manufactured volumes of ice cream and related products and efficiencies in the Company’s manufacturing facilities more than offset the higher cost of cream in the 2003 period when compared to the 2002 period. A decline in foodservice retail sales promotional allowances, recorded as offsets to revenues, also had a favorable impact on total cost of sales as a percentage of total revenues. As a percentage of restaurant revenues, cost of sales decreased to 26.9% in the 2003 period as compared to 27.3% in the 2002 period, in part due to an improvement in food cost controls in the current period.

Labor and benefits:

Labor and benefits increased $1.9 million, or 4.5%, to $45.4 million for the third quarter ended September 28, 2003 from $43.5 million for the same quarter in 2002. Labor and benefits as a percentage of total revenues increased to 28.3% for the third quarter ended September 28, 2003 from 27.4% for the same quarter in 2002. As a percentage of restaurant revenues, labor and benefits increased to 35.6% for the 2003 period from 34.8% in the 2002 period. The increase in labor and benefits as a percentage of restaurant revenue resulted from an increase in restaurant general manager bonuses as restaurant level profitability improved, the expansion of operating hours at some restaurants and an overall decline in staffing efficiencies during the breakfast daypart as breakfast sales have declined when compared to the same period in 2002. A continued emphasis on guest satisfaction also resulted in an increase in costs. Additionally, higher workers compensation costs, increased payroll taxes and a reduced restaurant pension benefit in the 2003 period when compared to the 2002 period contributed to the increase. Revenue increases derived from franchised locations and retail supermarket customers, which do not have any associated restaurant labor and benefits, reduced the impact of the higher restaurant labor and benefits as a percentage of total revenues.

Operating expenses:

Operating expenses decreased $1.4 million, or 4.6%, to $29.5 million for the third quarter ended September 28, 2003 from $30.9 million for the same quarter in 2002. Operating expenses as a percentage of total revenues were 18.4% and 19.5% for the third quarters ended September 28, 2003 and September 29, 2002, respectively. The decrease as a percentage of total revenues resulted from lower restaurant maintenance and restaurant advertising costs in the 2003 period when compared to the 2002 period.

General and administrative expenses:

General and administrative expenses were $9.9 million and $9.4 million for the third quarters ended September 28, 2003 and September 29, 2002, respectively. General and administrative expenses as a percentage of total revenues increased to 6.2% for the third quarter ended September 28, 2003 from 5.9% for the same period in 2002. The increase is primarily the result of salary merit increases, higher employment recruitment costs at the Company’s headquarters, increases in legal fees, higher severance costs and a reduction in the pension benefit.  Bonus expense was lower in the 2003 period when compared to the same period in 2002.

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Reduction of restructuring reserve:

Reduction of restructuring reserve was $0.4 million for the three month period ended September 29, 2002. The Company reduced the restructuring reserve by $0.4 million during 2002 since the reserve exceeded estimated remaining payments.

Write-downs of property and equipment:

Write-downs of property and equipment were $26 thousand for the three month period ended September 28, 2003 as a result of a write-down of a vacant land parcel.

Depreciation and amortization:

Depreciation and amortization decreased $0.7 million, or 11.6%, to $5.4 million for the third quarter ended September 28, 2003 from $6.1 million for the same quarter in 2002. Depreciation and amortization as a percentage of total revenues was 3.4% and 3.9% in the 2003 and 2002 quarters, respectively. The reduction reflects the decline in depreciation expense associated with certain purchased software at the Company’s headquarters and fully depreciated restaurant equipment.

Loss (gain) on disposals of other property and equipment, net:

The loss on disposals of other property and equipment, net, was $0.1 million for the quarter ended September 28, 2003 compared to a gain on disposals of other property and equipment, net, of $0.2 million for the quarter ended September 29, 2002. The loss in the 2003 quarter primarily resulted from disposals related to the replacement of inoperative equipment. The gain during 2002 primarily resulted from the sale of one restaurant location, which was partially offset by fire losses incurred during the period.

Interest expense, net:

Interest expense, net of capitalized interest and interest income, decreased by $0.2 million, or 2.6%, to $6.0 million for the third quarter ended September 28, 2003 from $6.2 million for the same period in 2002. The decrease was primarily the result of the decrease in the average outstanding debt in the 2003 quarter compared to the 2002 quarter and lower interest rates.

Provision for income taxes:

The provision for income taxes was $2.1 million, or 28.0%, and $1.8 million, or 34.0%, for the third quarters ended September 28, 2003 and September 29, 2002, respectively. The rate in 2002 was reduced in the subsequent quarter as tax credits and changes to state valuation allowances reduced the rate.

Net income:

Net income was $5.3 million and $3.5 million for the third quarters ended September 28, 2003 and September 29, 2002, respectively, for the reasons discussed above.

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Nine months ended September 28, 2003 compared with nine months ended September 29, 2002

Revenues:

Total revenues increased $5.0 million, or 1.1%, to $444.7 million for the nine months ended September 28, 2003 from $439.7 million for the same period in 2002. Restaurant revenues increased $2.8 million, or 0.8%, to $353.8 million for the nine months ended September 28, 2003 from $351.0 million for the same period in 2002. Record snowfall during the first quarter of the current year and increased rainfall during the second and third quarters of the current year had an unfavorable impact on restaurant revenues when compared to the prior year. Comparable company-owned restaurant revenues increased 1.9% from the 2002 period to the 2003 period as increases occurred in all dayparts except breakfast, which decreased. Operating days in comparable operating units during the 2003 period were reduced by 0.2% due to construction period closings associated with the Company’s re-imaging program.  Twenty-six locations were re-imaged during the nine months ended September 28, 2003.  The opening of one new restaurant in June 2003 increased restaurant revenues by $0.6 million. The closing of 14 locations over the past 21 months resulted in a $3.6 million decline in restaurant revenues in the 2003 period as compared to the 2002 period. Foodservice (product sales to franchisees and retail customers) revenues increased by $2.1 million, or 2.6%, to $83.4 million for the nine months ended September 28, 2003 from $81.3 million for the same period in 2002. Franchised restaurant product revenues and sales to foodservice retail supermarket customers increased by $0.4 million and $1.7 million, respectively. Case volume in the Company’s retail supermarket business increased by 3.6% for the nine-months ended September 28, 2003 when compared to the same period in 2002. Franchise royalty and fee revenues increased $0.2 million, or 2.6%, to $7.5 million for the nine months ended September 28, 2003 compared to $7.3 million for the same period in 2002. Royalties on franchised sales increased $0.4 million, or 6.9%, as comparable franchised restaurant revenues grew 4.9% from the 2002 period to the 2003 period. Initial franchise fees associated with transfers of existing franchised locations and forfeited development fees were lower by $0.2 million in the 2003 period when compared to the 2002 period. Declines in rental income for subleased locations were offset by $0.3 million received in the 2003 period pursuant to an agreement releasing Davco from all obligations and guarantees related to certain leases associated with franchised locations. There were 161 and 162 franchise units open at September 28, 2003 and September 29, 2002, respectively.

Cost of sales:

Cost of sales increased $1.6 million, or 1.1% to $157.7 million for the nine months ended September 28, 2003 from $156.1 million for the nine months ended September 29, 2002. Cost of sales as a percentage of total revenues was 35.5% for the nine months ended September 28, 2003 and September 29, 2002. Higher cream prices in the 2003 period when compared to the 2002 period and a shift in sales mix from Company-owned restaurant sales to foodservice sales were offset by an improvement in restaurant food cost controls and efficiencies in the Company’s manufacturing facility. Foodservice sales to franchisees and retail supermarket customers have a higher food cost as a percentage of revenue than sales in Company-owned restaurants to restaurant patrons. Foodservice retail sales promotional allowances, recorded as offsets to revenues, were approximately the same percentage of gross retail sales in both periods. The Company expects that cream prices will be higher in the fourth quarter of 2003 when compared to the same period in 2002. Restaurant cost of sales as a percentage of restaurant revenues decreased to 26.8% for the nine months ended September 28, 2003 from 27.2% for the same period in 2002. The decrease in the 2003 period when compared to the 2002 period was in part due to an improvement in food cost controls in the current period.

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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. 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, which may be offset by a price increase or other factors. 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 $3.7 million, or 3.0%, to $127.3 million for the nine months ended September 28, 2003 from $123.6 million for the same period in 2002. Labor and benefits as a percentage of total revenues increased to 28.6% for the nine months ended September 28, 2003 from 28.1% for the same period in 2002. As a percentage of restaurant revenues, labor and benefits increased to 36.0% for the 2003 period from 35.3% in the 2002 period. The increase in labor and benefits as a percentage of restaurant revenue was primarily due to higher workers compensation costs, increased payroll taxes and a reduced restaurant pension benefit in the 2003 period when compared to the 2002 period. Minimum staffing requirements during the breakfast daypart have also had an adverse impact on labor costs in the current period when compared to the same period in 2002. Revenue increases derived from franchised locations and retail supermarket customers, which do not have any associated restaurant labor and benefits, reduced the impact of the higher restaurant benefits as a percentage of total revenues.

Operating expenses:

Operating expenses increased $0.7 million, or 0.8%, to $85.1 million for the nine months ended September 28, 2003 from $84.4 million for the same period in 2002. Operating expenses as a percentage of total revenues were 19.1% and 19.2% for the nine months ended September 28, 2003 and September 29, 2002, respectively. The increase in dollars resulted from higher restaurant costs for snow removal, natural gas and advertising in the 2003 period when compared to the 2002 period.

General and administrative expenses:

General and administrative expenses were $28.4 million and $26.6 million for the nine months ended September 28, 2003 and September 29, 2002, respectively. General and administrative expenses as a percentage of total revenues increased to 6.4% for the nine months ended September 28, 2003 from 6.1% for the same period in 2002. The increase is primarily the result of salary merit increases, higher employment recruitment costs for field management and headquarters positions, increases in legal fees, higher severance costs and a reduction in the pension benefit. Bonus expense was lower in the 2003 period when compared to the same period in 2002.

Reduction of restructuring reserve:

Reduction of restructuring reserve was $0.4 million for the nine month period ended September 29, 2002. The Company reduced the restructuring reserve by $0.4 million during 2002 since the reserve exceeded estimated remaining payments.

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Write-downs of property and equipment:

Write-downs of property and equipment were $26 thousand and $0.4 million for the nine month periods ended September 28, 2003 and September 29, 2002, respectively, primarily as a result of write-downs of a vacant land parcel in both periods.

Depreciation and amortization:

Depreciation and amortization decreased $2.4 million, or 12.6%, to $16.8 million for the nine months ended September 28, 2003 from $19.2 million for the same period in 2002. Depreciation and amortization as a percentage of total revenues was 3.8% and 4.4% in the 2003 and 2002 periods, respectively. The reduction reflects the decline in depreciation expense associated with certain purchased software at the Company’s headquarters and fully depreciated restaurant equipment.

Loss (gain) on disposals of other property and equipment, net:

The loss on disposals of other property and equipment, net, was $1.5 million and $0.5 million for the nine months ended September 28, 2003 and September 29, 2002, respectively.  The loss in the nine month period in 2003 primarily resulted from disposals related to the remodeling of restaurants and the replacement of inoperative equipment. The loss during the nine month period in 2002 primarily resulted from the sale of idle land and four closed locations.

Interest expense, net:

Interest expense, net of capitalized interest and interest income, decreased by $0.6 million, or 2.8%, to $18.2 million for the nine months ended September 28, 2003 from $18.8 million for the same period in 2002. The decrease was primarily the result of the decrease in the average outstanding debt in the 2003 period compared to the 2002 period and lower interest rates. Total outstanding debt, including capital lease and finance obligations, was reduced from $239.3 million at September 29, 2002 to $235.2 million at September 28, 2003.

Provision for income taxes:

The provision for income taxes was $2.7 million, or 28.0%, for the nine months ended September 28, 2003. At this time, the Company estimates that the effective tax rate for 2003 will be 28.0%. The provision for income taxes was $3.6 million, or 34.0%, for the nine months ended September 29, 2002. The rate in 2002 was reduced in the subsequent quarter as tax credits and changes to state valuation allowances reduced the rate. The tax rate for the 2002 fiscal year was 24.0%.

Net income:

Net income was $6.9 million for the nine months ended September 28, 2003 and September 29, 2002 for the reasons discussed above.

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Liquidity and Capital Resources

The Company’s primary sources of liquidity and capital resources are cash generated from operations and, if needed, borrowings under its revolving credit facility. Net cash provided by operating activities was $22.9 million for the nine months ended September 28, 2003. During the nine months ended September 28, 2003, inventory decreased by $1.9 million primarily due to high quantities of purchased frozen goods on hand in December 2002 in preparation for the January 2003 marketing event. Other assets increased $1.7 million primarily as a result of restricted cash of $1.9 million. There was no restricted cash as of December 29, 2002 as this requirement was satisfied with a letter of credit. Accounts payable, trade decreased by $1.3 million primarily as a result of decreased inventory purchases and the timing of rent payments. Accrued expenses and other long-term liabilities decreased $4.1 million as a result of $3.7 million of payments made for accrued construction costs, $4.3 million of corporate and restaurant bonus payments and a reduction of $0.9 million in the gift card liability as a result of redemptions of holiday gift cards sold. These decreases were partially offset by higher accrued interest of $4.7 million due to the timing of interest payment dates.

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 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 Indenture.

Net cash used in investing activities was $21.2 million for the nine months ended September 28, 2003. Capital expenditures for restaurant operations were approximately $17.9 million for the nine months ended September 28, 2003.

The Company had working capital of $2.4 million as of September 28, 2003. The working capital needs of companies engaged in the restaurant industry are generally low and as a result, restaurants are frequently able to operate with a 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 (the “New 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. As of September 28, 2003, $16.9 million was available for additional borrowings under the New Credit Facility, total letters of credit outstanding were approximately $13.1 million and there were no revolving credit loans outstanding.

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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 million of the original $55 million from the Mortgage Financing is variable and is the sum of the 30-day LIBOR rate in effect (1.12% at September 28, 2003) 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 re-amortized over the remaining life of the mortgages. The remaining $45 million of the original $55 million from 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 a 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, in each case calculated as of the last day of each fiscal year. The Company is in compliance with these covenants.

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 was amended on December 27, 2002 to extend the maturity date to December 17, 2005. As of September 28, 2003, 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”) (6.50% at September 28, 2003) or (b) the Eurodollar rate plus the applicable margin as in effect from time to time (the “Eurodollar Rate”) (5.55% at September 28, 2003).

As of September 28, 2003 and December 29, 2002, total letters of credit outstanding were approximately $13.1 million and $14.6 million, respectively. During the nine months ended September 28, 2003 and September 29, 2002, there were no drawings against the letters of credit.

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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, restricted payments such as dividends and stock repurchases and 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. The Company is in compliance with these 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. 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.

The $200 million Senior Notes issued in November 1997 (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. On July 3, 2003, the Company obtained a limited waiver to the New Credit Facility to allow the Company to repurchase certain of the Senior Notes in an amount up to $3.0 million, subject to certain conditions. In July 2003, FICC repurchased approximately $2.7 million in aggregate principal amount of the Senior Notes for approximately $2.8 million, the then current market value. The remaining $176.0 million of the Senior Notes are redeemable, in whole or in part, at FICC’s option 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 the remaining three months of 2003 are anticipated to be $9.8 million in the aggregate, of which $6.5 million is expected to be spent on restaurant operations. The Company’s actual 2003 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.

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The following represents the contractual obligations and commercial commitments of the Company as of September 28, 2003 (in thousands):

	Payments due by Period
Contractual Obligations:	Total		Remainder of Fiscal 2003		Fiscal Years 2004 & 2005		Fiscal Years 2006 & 2007		Fiscal Years Beyond 2007
Short-term and long-term debt	$	229,351	$	270	$	2,368	$	178,866	$	47,847
Capital lease and finance obligations	8,928		350		2,505		1,829		4,244
Operating leases	143,689		6,156		32,908		25,024		79,601
Purchase commitments	38,289		33,921		4,287		81		—

	Amount of Commitment Expiration by Period
Other Commercial Commitments:	Total		Remainder of Fiscal 2003		Fiscal Years 2004 & 2005		Fiscal Years 2006 & 2007		Fiscal Years Beyond 2007
Letters of credit	$	13,089	$	—	$	13,089	$	—	$	—

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 operating income are typically higher in its second and third 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.

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Significant Known Events, Trends or Uncertainties

Pension Plan Funded Status

Certain of the Company’s employees are covered under a noncontributory defined benefit pension plan. As disclosed in the Company’s 2002 Form 10-K, as of the 2002 measurement date (i.e., the Company’s fiscal 2002 year end), this plan had a projected benefit obligation of $98.9 million and a fair value of plan assets of $81.9 million. The Company recognized an additional minimum liability in accordance with SFAS No. 87 during the year ended December 29, 2002. Since the additional minimum liability exceeded unrecognized prior service cost, the excess of $24.7 million, net of the income tax benefit of $10.1 million, was reported as a charge to stockholders’ deficit in 2002. As a result of the overall decline in market interest rates, the Company will use a lower discount rate to measure the projected benefit obligation as of the 2003 measurement date, which will result in an increase to the projected benefit obligation. As a result of the increased unfunded accumulated benefit obligation, the Company will likely be required to record an additional charge to stockholders’ deficit. Although the Company has not yet determined the exact amount of the charge, the Company currently estimates the increased amount of the unfunded accumulated benefit obligation to be approximately $3.0 million and the charge to stockholders’ deficit to be less than the amount of the underfunding.

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 2002 Annual Report on Form 10-K should be read in conjunction with this discussion.

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, net of discounts and allowances, upon delivery 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.

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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 Restaurant Insurance Corporation (“RIC”), the Company’s wholly-owned subsidiary, 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 FICC’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. FICC’s and RIC’s liabilities for estimated incurred losses are actuarially determined and recorded in the accompanying condensed consolidated financial statements on an undiscounted basis. Actual incurred losses may vary from the estimated incurred losses and could have a material affect on the Company’s insurance expense.

Concentration of Credit Risk -

Financial instruments, which potentially expose the Company to concentrations of credit risk, consist principally of accounts receivable. The Company performs ongoing credit evaluations of its customers and generally requires no collateral to secure accounts receivable. The credit review is based on both financial and non-financial factors. The Company maintains a reserve for potentially uncollectible accounts receivable based on its assessment of the collectibility of accounts receivable.

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 among 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 years ended December 29, 2002 and December 30, 2001, respectively, since the reserve exceeded estimated remaining payments.

As of September 28, 2003, the remaining restructuring reserve was $0.5 million. The restructuring reserve 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.

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Pension and Other Post-Retirement Benefits -

Certain of the Company’s employees are covered under a noncontributory defined benefit pension plan. 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. Significant differences in actual experience or significant changes in the assumptions may materially affect the future pension and other post-retirement obligations and expense.

Long-Lived Assets -

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company reviews its 1988 Non-Friendly Marks, which were assigned to the Company by Hershey in September 2002, for impairment on a quarterly basis. The Company recognizes impairment has occurred when the carrying value of the 1988 Non-Friendly Marks exceeds the estimated future undiscounted cash flows of the trademarked products.

The Company reviews each restaurant property quarterly to determine which properties will be disposed of, if any. This determination is made based on poor operating results, deteriorating property values and other factors. In addition, the Company reviews all restaurants with negative cash flow for impairment on a quarterly basis. The Company recognizes an impairment has occurred when the carrying value of property reviewed exceeds its estimated fair value, which is estimated based on the Company’s experience selling similar properties and local market conditions, less costs to sell for properties to be disposed of.

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. 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. As of September 28, 2003 and December 29, 2002, a valuation allowance of $10.2 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.

Stock-Based Compensation -

The Company accounts for stock-based compensation for employees under APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and elected the disclosure-only alternative under SFAS No. 123, “Accounting for Stock-Based Compensation.”  No stock-based compensation cost is included in net income for the Company’s Stock Option Plan, as all options granted during periods presented had an exercise price equal to the market value of the stock on the date of grant. In accordance with SFAS No. 148, “Accounting for Stock Based Compensation-Transition and Disclosure,” the Company will continue to disclose the required pro-forma information in the notes to the consolidated financial statements.

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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 2002 Annual Report on Form 10-K.

Item 4. Controls and Procedures

As of September 28, 2003, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of September 28, 2003.

During the quarter ended September 28, 2003, there was no change in the Company's internal control over financial reporting (as defined in Rule 13a-15(e) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 6.  Exhibits and reports on Form 8-K

(a) Exhibits

The exhibit index is incorporated by reference herein.

(b) Reports on Form 8-K

Date Filed	Event Reported
September 2, 2003	Item 5 – Other Events
	Item 7 – Financial Statements and Exhibits

SIGNATURES

Pursuant to the requirements of the Securities 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: Executive Vice President of Administration and Chief Financial Officer
Date:	October 23, 2003

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EXHIBIT INDEX

3.1	Restated Articles of Organization of Friendly Ice Cream Corporation (the “Company”)  (Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, Reg. No. 333-34633).
3.2	Amended and Restated By-laws of the Company (Incorporated by reference to Exhibit 3(II) to the Registrant’s current report on Form 8-K filed September 2, 2003, File No. 0-3930).
4.1	Credit Agreement among the Company, Fleet Bank, N.A and certain other banks and financial institutions (“Credit Agreement”) dated as of December 17, 2001 (Incorporated by reference to Exhibit 4.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 30, 2001, File No. 0-3930).
4.1(a)	Consent, Limited Waiver and Amendment No. 1 to Revolving Credit Agreement dated as of February 15, 2002. (Incorporated by reference to Exhibit 4.1(a) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 29, 2002, File No. 0-3930).
4.1(b)	Limited Waiver and Amendment No. 2 to Revolving Credit Agreement dated as of December 27, 2002. (Incorporated by reference to Exhibit 4.1(b) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 29, 2002, File No. 0-3930).
4.2	Loan Agreement between the Company’s subsidiary, Friendly’s Realty I, LLC and GE Capital Franchise Finance Corporation dated as of December 17, 2001 (Incorporated by reference to Exhibit 4.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 30, 2001, File No. 0-3930).
4.3	Loan Agreement between the Company’s subsidiary, Friendly’s Realty II, LLC and GE Capital Franchise Finance Corporation dated as of December 17, 2001 (Incorporated by reference to Exhibit 4.3 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 30, 2001, File No. 0-3930).
4.4	Loan Agreement between the Company’s subsidiary, Friendly’s Realty III, LLC and GE Capital Franchise Finance Corporation dated as of December 17, 2001 (Incorporated by reference to Exhibit 4.4 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 30, 2001, File No. 0-3930).
4.5	Senior Note Indenture between Friendly Ice Cream Corporation, Friendly’s Restaurants Franchise, Inc. and The Bank of New York, as Trustee (Incorporated by reference to Exhibit 4.5 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 27, 1998, File No. 0-3930).
4.6	Rights Agreement between the Company and The Bank of New York, a Rights Agent (Incorporated by reference to Exhibit 4.6 to the Company’s Registration Statement on Form S-1, Reg. No. 333-34633).
10.1	The Company’s 2003 Incentive Plan (as amended on July 23, 2003).*
10.2	Agreement dated as of August 27, 2003 terminating the Aircraft Reimbursement Agreement between the Company and TRC Realty Co.
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed by John. L. Cutter.
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed by Paul V. Hoagland.
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by John L. Cutter.
32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Paul V. Hoagland.

* - Management Contract or Compensatory Plan or Arrangement

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EX-10.1

Exhibit 10.1

FRIENDLY ICE CREAM CORPORATION

2003 INCENTIVE PLAN

As Amended on July 23, 2003

FRIENDLY ICE CREAM CORPORATION
2003 INCENTIVE PLAN

SECTION 1

GENERAL

1.1Purpose.  The Friendly Ice Cream Corporation 2003 Incentive Plan (the “Plan”) has been established by Friendly Ice Cream Corporation (the “Company”) to (i) attract and retain persons eligible to participate in the Plan; (ii) motivate Participants, by means of appropriate incentives, to achieve long-range goals; (iii) provide incentive compensation opportunities that are competitive with those of other similar companies; and (iv) further align Participants’ interests with those of the Company’s other shareholders through compensation that is based on the growth in value of the Company’s equity and achievement of factors that contribute to the enhancement of long-term shareholder return.

1.2Participation.  Subject to the terms and conditions of the Plan, the Committee shall determine and designate, from time to time, from among the Eligible Individuals (including transferees of Eligible Individuals to the extent the transfer is permitted by the Plan and the applicable Award Agreement), those persons who will be granted one or more Awards under the Plan, and thereby become “Participants” in the Plan.

1.3Operation, Administration, and Definitions.  The operation and administration of the Plan, including the Awards made under the Plan, shall be subject to the provisions of Section 5 (relating to operation and administration). Capitalized terms in the Plan shall be defined as set forth in the Plan (including the definition provisions of Section 8).

SECTION 2

OPTIONS AND SARS

2.1Definitions.

(a)The grant of an “Option” entitles the Participant to purchase shares of Stock at an Exercise Price established by the Committee. Any Option granted under this Section 2 may be either an incentive stock option (an “ISO”) or a non-qualified option (an “NQO”), as determined in the discretion of the Committee. An “ISO” is an Option that is intended to satisfy the requirements applicable to an “incentive stock option” described in section 422(b) of the Code. An ISO may only be granted to an Employee. An “NQO” is an Option that is not intended to be an “incentive stock option” as that term is described in section 422(b) of the Code.

(b)A stock appreciation right (an “SAR”) entitles the Participant to receive, in cash or Stock (as determined in accordance with subsection 2.5), value equal to (or otherwise based on) the excess of: (a) the Fair Market Value of a specified number of shares of Stock at the time of exercise; over (b) an Exercise Price established by the Committee.

2.2Exercise Price.  The “Exercise Price” of each Option and SAR granted under this Section 2 shall be established by the Committee or shall be determined by a method established by the Committee at the time the Option or SAR is granted; provided that the Exercise Price shall not be less than 100% of the Fair Market Value of a share of Stock on the date of grant (or, if greater, the par value of a share of Stock).

2.3Exercise.  An Option and an SAR shall be exercisable in accordance with such terms and conditions and during such periods as may be established by the Committee.

2.4Payment of Option Exercise Price.  The payment of the Exercise Price of an Option granted under this Section 2 shall be subject to the following:

(a)Subject to the following provisions of this subsection 2.4, the full Exercise Price for shares of Stock purchased upon the exercise of any Option shall be paid at the time of such exercise (except that, in the case of an exercise arrangement approved by the Committee and described in paragraph 2.4(c), payment may be made as soon as practicable after the exercise).

(b)The Exercise Price shall be payable in cash, by promissory note (if permitted by law), or by tendering, by either actual delivery of shares or by attestation, shares of Stock acceptable to the Committee, and valued at Fair Market Value as of the day of exercise, or in any combination thereof, as determined by the Committee.

(c)The Committee may permit a Participant to elect to pay the Exercise Price upon the exercise of an Option by irrevocably authorizing a third party to sell shares of Stock (or a sufficient portion of the shares) acquired upon exercise of the Option and remit to the Company a sufficient portion of the sale proceeds to pay the entire Exercise Price and any tax withholding resulting from such exercise.

2.5Settlement of Award.  Settlement of Options and SARs is subject to subsection 5.7.

2.6Repricing.  Except for either adjustments pursuant to paragraph 5.2(f) (relating to the adjustment of shares), or decreases approved by the Company’s stockholders, the Exercise Price for any outstanding Option granted under the Plan may not be decreased after the date of grant nor may an outstanding Option granted under the Plan be surrendered to the Company as consideration for the grant of a new Option with a lower exercise price in a transaction which would constitute a repricing for accounting purposes.

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SECTION 3

OTHER AWARDS

3.1Definitions.

(a)A “Bonus Stock” Award is a grant of shares of Stock in return for previously performed services, or in return for the Participant surrendering rights to other compensation that may be due.

(b)A “Stock Unit” Award is the grant of a right to receive shares of Stock in the future.

(c)A “Performance Share” Award is a grant of a right to receive shares of Stock or Stock Units which is contingent on the achievement of performance or other objectives during a specified period.

(d)A “Performance Unit” Award is a grant of a right to receive a designated dollar value which is contingent on the achievement of performance or other objectives during a specified period, the settlement of which may be in the form of cash, Stock or any combination thereof.

(e)A “Restricted Stock” Award is a grant of shares of Stock, and a “Restricted Stock Unit” Award is the grant of a right to receive shares of Stock in the future, with such shares of Stock or right to future delivery of such shares of Stock subject to a risk of forfeiture or other restrictions that will lapse upon the achievement of one or more goals relating to completion of service by the Participant, or achievement of performance or other objectives, as determined by the Committee.

3.2Restrictions on Awards.  Each Bonus Stock Award, Stock Unit Award, Restricted Stock Award, Restricted Stock Unit Award, Performance Share Award, and Performance Unit Award shall be subject to the following:

(a)Any such Award shall be subject to such conditions, restrictions and contingencies as the Committee shall determine.

(b)The Committee may designate whether any such Award being granted to any Participant is intended to be “performance-based compensation” as that term is used in section 162(m) of the Code. Any such Awards designated as intended to be “performance-based compensation” shall be conditioned on the achievement of one or more Performance Measures, to the extent required by Code section 162(m). The Performance Measures shall be established in writing by the Committee not later than 90 days after the beginning of the performance period (but in no event after 25% of the performance period has elapsed), and while the outcome as to the performance goals is substantially uncertain. The performance goals established by the Committee may be with respect to corporate performance, operating group or sub-group performance, individual company performance, other group or individual performance, or division performance,

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shall be based on one or more of the Performance Measures, may be measured gross or net and may be on a total or per share basis.  The “Performance Measures” that may be used by the Committee for such Awards shall be based on any one or more of the following, as selected by the Committee: earnings (e.g., earnings before income taxes, or “EBIT”; earnings before income taxes, depreciation and amortization, or “EBITDA”; earnings per share, or “EPS”), financial return ratios (e.g., return on investment, or “ROI”; return on invested capital, or “ROIC”; return on equity, or “ROE”), revenue, operating or net cash flows, total shareholder return, market share, operating income or net income, debt load reduction, expense management, stock price and strategic business objectives, consisting of one or more objectives based on meeting specific cost targets, business expansion goals and goals relating to acquisitions or divestitures.

(c)For Awards under this Section 3 which are intended to be “performance-based compensation,” the grant of the Awards and the establishment of the Performance Measures shall be made during the period required under Code section 162(m).

(d)If the right to become vested in a Restricted Stock Award or Restricted Stock Unit Award granted under this Section 3 is conditioned on the completion of a specified period of service with the Company or the Subsidiaries, without achievement of Performance Measures or other performance objectives being required as a condition of vesting, and without it being granted in lieu of other compensation, then the required period of service for full vesting shall be not less than three years (subject to acceleration of vesting, to the extent permitted by the Committee, in the event of a change in control or the Participant’s death, disability, retirement, or involuntary termination).

(e)Upon the occurrence of significant events or changes that occur during the performance period, the Committee shall have the sole discretion to determine whether any revision to the Performance Measures should be made; provided, however, that if the Award is intended to satisfy the requirements for “performance-based compensation,” any such revisions occurring after the establishment of the Performance Measures may not result in an increase in the amount of settlement of the Award.

(f)Except as otherwise provided by the Committee, if a Participant’s employment terminates because of death or disability, or if a Change in Control occurs prior to the Participant’s termination of employment, the Participant’s Performance Unit Award shall become vested without regard to whether such Award would be performance-based compensation, based on a target level performance, or as otherwise provided by the Committee in the Award Agreement.

(g)Nothing in this Section 3 shall preclude the Committee, the Company, or any Subsidiary from granting performance Awards that are not intended to be “performance-based compensation”; provided, however, that, at the time of grant of performance Awards by the Committee, the Committee shall designate whether such amounts are intended to constitute “performance-based compensation.” To

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the extent that the provisions of this Section 3 reflect the requirements applicable to performance-based compensation, such provisions shall not apply to the portion of the award, if any, which is not intended to satisfy the performance-based compensation requirements.

SECTION 4

OPERATION AND ADMINISTRATION

4.1Effective Date.  Subject to the approval of the shareholders of the Company at the Company’s 2003 annual meeting of its shareholders, the Plan shall be effective as of March 30, 2003 (the “Effective Date”); provided, however, that to the extent that Awards are granted under the Plan prior to its approval by shareholders, the Awards shall be contingent on approval of the Plan by the shareholders of the Company at such annual meeting. The Plan shall be unlimited in duration and, in the event of Plan termination, shall remain in effect as long as any Awards under it are outstanding; provided, however, that no Awards may be granted under the Plan after the ten-year anniversary of the Effective Date (except for Awards granted pursuant to commitments entered into prior to such ten-year anniversary).

4.2Shares Subject to Plan.  The shares of Stock for which Awards may be granted under the Plan shall be subject to the following:

(a)The shares of Stock with respect to which Awards may be made under the Plan shall be shares currently authorized but unissued or currently held or, to the extent permitted by applicable law, subsequently acquired by the Company as treasury shares, including shares purchased in the open market or in private transactions.

(b)Subject to the following provisions of this subsection 4.2, the maximum number of shares of Stock that may be delivered to Participants and their beneficiaries under the Plan shall be 307,000 shares of Stock.

(c)To the extent provided by the Committee, any Award may be settled in cash rather than Stock. To the extent any shares of Stock covered by an Award are not delivered to a Participant or beneficiary because the Award is forfeited or canceled, or the shares of Stock are not delivered because the Award is settled in cash or used to satisfy the applicable tax withholding obligation, such shares shall not be deemed to have been delivered for purposes of determining the maximum number of shares of Stock available for delivery under the Plan.

(d)If the exercise price of any stock option granted under the Plan is satisfied by tendering shares of Stock to the Company (by either actual delivery or by attestation), only the number of shares of Stock issued net of the shares of Stock tendered shall be deemed delivered for purposes of determining the maximum number of shares of Stock available for delivery under the Plan.

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(e)Subject to paragraph 4.2(f), the following additional maximums are imposed under the Plan.

(i)The maximum number of shares of Stock that may be issued pursuant to Options intended to be ISOs shall be 307,000shares.

(ii)The maximum number of shares that may be covered by Awards granted to any one individual pursuant to Section 2 (relating to Options and SARs) shall be150,000 shares during any calendar year. If an Option is in tandem with an SAR, such that the exercise of the Option or SAR with respect to a share of Stock cancels the tandem SAR or Option right, respectively, with respect to such share, the tandem Option and SAR rights with respect to each share of Stock shall be counted as covering but one share of Stock for purposes of applying the limitations of this paragraph (ii).

(iii)The maximum number of shares of Stock that may be issued in conjunction with Awards granted pursuant to Section 3 (relating to Other Stock Awards) shall be 150,000 shares.

(iv)For Bonus Stock Awards, Stock Unit Awards, Restricted Stock Awards, Restricted Stock Unit Awards and Performance Share Awards that are intended to be “performance-based compensation” (as that term is used for purposes of Code section 162(m)), no more than 75,000 shares of stock may be subject to such Awards granted to any one individual during any calendar year.  If, after shares have been earned, the delivery is deferred, any additional shares attributable to dividends during the deferral period shall be disregarded.

(v)For Performance Unit Awards that are intended to be “performance-based compensation” (as that term is used for purposes of Code section 162(m)), no more than $3,000,000 may be subject to such Awards granted to any one individual during any calendar year. If, after amounts have been earned with respect to Performance Unit Awards, the delivery of such amounts is deferred, any additional amounts attributable to earnings on deferred amounts during the deferral period shall be disregarded

(vi)The maximum number of shares that may be covered by Awards granted to any one individual non-employee director pursuant to Section 2 (relating to Options and SARs) shall be 75,000 shares during any calendar year and the maximum number of shares that may be covered by Awards granted to any one individual non-employee director pursuant to Section 3 (relating to Other Stock Awards) shall be 37,500 shares during any calendar year.

(f)In the event of a corporate transaction involving the Company (including, without limitation, any stock dividend, stock split, reverse stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off,

6

combination or exchange of shares), the Committee may adjust Awards to preserve the benefits or potential benefits of the Awards. Action by the Committee may include: (i) adjustment of the number and kind of shares which may be delivered under the Plan; (ii) adjustment of the number and kind of shares subject to outstanding Awards; (iii) adjustment of the Exercise Price of outstanding Options and SARs; and (iv) any other adjustments that the Committee determines to be equitable (which may include, without limitation, (I) replacement of Awards with other Awards which the Committee determines have comparable value and which are based on stock of a company resulting from the transaction, and (II) cancellation of the vested and unvested portion of such Award in return for cash payment of the current value of Award, determined as though the Award is fully vested at the time of payment, provided that in the case of an Option, the amount of such payment may be the excess of value of the Stock subject to the Option at the time of the transaction over the exercise price).

4.3General Restrictions.  Delivery of shares of Stock or other amounts under the Plan shall be subject to the following:

(a)Notwithstanding any other provision of the Plan, the Company shall have no liability to deliver any shares of Stock under the Plan or make any other distribution of benefits under the Plan unless such delivery or distribution would comply with all applicable laws (including, without limitation, the requirements of the Securities Act of 1933), and the applicable requirements of any securities exchange or similar entity.

(b)To the extent that the Plan provides for issuance of stock certificates to reflect the issuance of shares of Stock, the issuance may be effected on a non-certificated basis, to the extent not prohibited by applicable law or the applicable rules of any stock exchange.

4.4Tax Withholding.  All distributions under the Plan are subject to withholding of all applicable taxes, and the Committee may condition the delivery of any shares or other benefits under the Plan on satisfaction of the applicable withholding obligations. Except as otherwise provided by the Committee, such withholding obligations may be satisfied (i) through cash payment by the Participant (or by such third party as may be permitted in Section 2.4(c)); (ii) through the surrender of shares of Stock which the Participant already owns (provided, however, that to the extent shares described in this clause (ii) are used to satisfy more than the minimum statutory withholding obligation, as described below, then, except as otherwise provided by the Committee, payments made with shares of Stock in accordance with this clause (ii) above shall be limited to shares held by the Participant for not less than six months prior to the payment date); or (iii) through the surrender of shares of Stock to which the Participant is otherwise entitled under the Plan; provided, however, that such shares under this clause (iii) may be used to satisfy not more than the Company’s minimum statutory withholding obligation (based on minimum statutory withholding rates for Federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income).

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4.5Grant and Use of Awards.  In the discretion of the Committee, a Participant may be granted any Award permitted under the provisions of the Plan, and more than one Award may be granted to a Participant. Awards may be granted as alternatives to or replacement of awards granted or outstanding under the Plan, or any other plan or arrangement of the Company or a Subsidiary (including a plan or arrangement of a business or entity, all or a portion of which is acquired by the Company or a Subsidiary). Subject to the overall limitation on the number of shares of Stock that may be delivered under the Plan, the Committee may use available shares of Stock as the form of payment for compensation, grants or rights earned or due under any other compensation plans or arrangements of the Company or a Subsidiary, including the plans and arrangements of the Company or a Subsidiary assumed in business combinations.

4.6Dividends and Dividend Equivalents.  An Award (including without limitation an Option or SAR Award) may provide the Participant with the right to receive dividend payments or dividend equivalent payments with respect to Stock subject to the Award (both before and after the Stock subject to the Award is earned, vested, or acquired), which payments may be either made currently or credited to an account for the Participant, and may be settled in cash or Stock, as determined by the Committee. Any such settlements, and any such crediting of dividends or dividend equivalents or reinvestment in shares of Stock, may be subject to such conditions, restrictions and contingencies as the Committee shall establish, including the reinvestment of such credited amounts in Stock equivalents.

4.7Settlement of Awards.  The obligation to make payments and distributions with respect to Awards may be satisfied through cash payments, the delivery of shares of Stock, the granting of replacement Awards, or any combination thereof as the Committee shall determine. Satisfaction of any such obligations under an Award, which is sometimes referred to as “settlement” of the Award, may be subject to such conditions, restrictions and contingencies as the Committee shall determine. The Committee may permit or require the deferral of any Award payment, subject to such rules and procedures as it may establish, which may include provisions for the payment or crediting of interest or dividend equivalents, and may include converting such credits into deferred Stock equivalents. Each Subsidiary shall be liable for payment of cash due under the Plan with respect to any Participant to the extent that such benefits are attributable to the services rendered for that Subsidiary by the Participant. Any disputes relating to liability of a Subsidiary for cash payments shall be resolved by the Committee.

4.8Transferability.  Except as otherwise provided by the Committee, Awards under the Plan are not transferable except as designated by the Participant by will or by the laws of descent and distribution.

4.9Form and Time of Elections.  Unless otherwise specified herein, each election required or permitted to be made by any Participant or other person entitled to benefits under the Plan, and any permitted modification, or revocation thereof, shall be in writing filed with the Committee at such times, in such form, and subject to such restrictions and limitations, not inconsistent with the terms of the Plan, as the Committee shall require.

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4.10Agreement With Company.  An Award under the Plan shall be subject to such terms and conditions, not inconsistent with the Plan, as the Committee shall, in its sole discretion, prescribe. The terms and conditions of any Award to any Participant shall be reflected in such form of written document as is determined by the Committee. A copy of such document shall be provided to the Participant, and the Committee may, but need not, require that the Participant sign a copy of such document. Such document is referred to in the Plan as an “Award Agreement” regardless of whether any Participant signature is required.

4.11Action by Company or Subsidiary.  Any action required or permitted to be taken by the Company or any Subsidiary shall be by resolution of its board of directors, or by action of one or more members of the board (including a committee of the board) who are duly authorized to act for the board, or (except to the extent prohibited by applicable law or applicable rules of any stock exchange) by a duly authorized officer of such company.

4.12Gender and Number.  Where the context admits, words in any gender shall include any other gender, words in the singular shall include the plural and the plural shall include the singular.

4.13Limitation of Implied Rights.

(a)Neither a Participant nor any other person shall, by reason of participation in the Plan, acquire any right in or title to any assets, funds or property of the Company or any Subsidiary whatsoever, including, without limitation, any specific funds, assets, or other property which the Company or any Subsidiary, in its sole discretion, may set aside in anticipation of a liability under the Plan. A Participant shall have only a contractual right to the Stock or amounts, if any, payable under the Plan, unsecured by any assets of the Company or any Subsidiary, and nothing contained in the Plan shall constitute a guarantee that the assets of the Company or any Subsidiary shall be sufficient to pay any benefits to any person.

(b)The Plan does not constitute a contract of employment, and selection as a Participant will not give any participating employee the right to be retained in the employ of the Company or any Subsidiary, nor any right or claim to any benefit under the Plan, unless such right or claim has specifically accrued under the terms of the Plan. Except as otherwise provided in the Plan, no Award under the Plan shall confer upon the holder thereof any rights as a shareholder of the Company prior to the date on which the individual fulfills all conditions for receipt of such rights and is issued shares.

4.14Evidence.  Evidence required of anyone under the Plan may be by certificate, affidavit, document or other information which the person acting on it considers pertinent and reliable, and signed, made or presented by the proper party or parties.

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SECTION 5

CHANGE IN CONTROL

Subject to the provisions of paragraph 4.2(f) (relating to the adjustment of shares), and except as otherwise provided in the Plan or the Award Agreement reflecting the applicable Award:

(a)If a Participant who is employed by the Company or an Affiliate at the time of a Change in Control then holds one or more outstanding Options, all such Options (regardless of whether in tandem with SARs) then held by the Participant shall become fully exercisable on and after the date of the Change in Control (subject to the expiration provisions otherwise applicable to the Options), and any Stock purchased by the Participant under such Option following such Change in Control shall be fully vested upon exercise.

(b)If a Participant who is employed by the Company or an Affiliate at the time of a Change in Control then holds one or more outstanding SARs, all such SARs (regardless of whether in tandem with Options) then held by the Participant shall become fully exercisable on and after the date of the Change in Control (subject to the expiration provisions otherwise applicable to the SARs), and any cash or stock acquired by the Participant under such SAR following such Change in Control shall be fully vested upon exercise.

(c)If a Participant who is employed by the Company or an Affiliate at the time of a Change in Control then holds one or more shares of Bonus Stock, Stock Units, Restricted Stock, Restricted Stock Units, Performance Shares, or Performance Units, all such Bonus Stock, Restricted Stock, Performance Shares, and units shall become fully vested on the date of the Change in Control; provided that, if the amount of the award or the vesting is to be determined based on the level of performance achieved, the target level of performance shall be deemed to have been achieved.

SECTION 6

COMMITTEE

6.1Administration.  The authority to control and manage the operation and administration of the Plan shall be vested in a committee (the “Committee”) in accordance with this Section 6. The Committee shall be selected by the Board, and shall consist solely of two or more members of the Board who are not employees of the Company or any Subsidiary. If the Committee does not exist, or for any other reason determined by the Board, the Board may take any action under the Plan that would otherwise be the responsibility of the Committee.

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6.2Powers of Committee.  The Committee’s administration of the Plan shall be subject to the following:

(a)Subject to the provisions of the Plan, the Committee will have the authority and discretion to select from among the Eligible Individuals those persons who shall receive Awards, to determine the time or times of receipt, to determine the types of Awards and the number of shares covered by the Awards, to establish the terms, conditions, performance criteria, restrictions, and other provisions of such Awards, and (subject to the restrictions imposed by Section 7) to cancel or suspend Awards.

(b)To the extent that the Committee determines that the restrictions imposed by the Plan preclude the achievement of the material purposes of the Awards in jurisdictions outside the United States, the Committee will have the authority and discretion to modify those restrictions as the Committee determines to be necessary or appropriate to conform to applicable requirements or practices of jurisdictions outside of the United States.

(c)The Committee will have the authority and discretion to interpret the Plan, to establish, amend, and rescind any rules and regulations relating to the Plan, to determine the terms and provisions of any Award Agreement made pursuant to the Plan, and to make all other determinations that may be necessary or advisable for the administration of the Plan.

(d)Any interpretation of the Plan by the Committee and any decision made by it under the Plan is final and binding on all persons.

(e)In controlling and managing the operation and administration of the Plan, the Committee shall take action in a manner that conforms to the articles and by-laws of the Company, applicable state corporate law and applicable stock exchange requirements.

6.3Delegation by Committee.  Except to the extent prohibited by applicable law or the applicable rules of a stock exchange, the Committee may allocate all or any portion of its responsibilities and powers to any one or more of its members and may delegate all or any part of its responsibilities and powers to any person or persons selected by it. Any such allocation or delegation may be revoked by the Committee at any time.

6.4Information to be Furnished to Committee.  The Company and Subsidiaries shall furnish the Committee with such data and information as it determines may be required for it to discharge its duties. The records of the Company and Subsidiaries as to an employee’s or Participant’s employment, termination of employment, leave of absence, reemployment and compensation shall be conclusive on all persons unless determined to be incorrect.  Participants and other persons entitled to benefits under the Plan must furnish the Committee such evidence, data or information as the Committee considers desirable to carry out the terms of the Plan.

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SECTION 7

AMENDMENT AND TERMINATION

The Board may, at any time, amend or terminate the Plan, and may amend any Award Agreement, provided, that no amendment or termination may, in the absence of written consent to the change by the affected Participant (or, if the Participant is not then living, the affected beneficiary), adversely affect the rights of any Participant or beneficiary under any Award granted under the Plan prior to the date such amendment is adopted by the Board; further provided, that adjustments pursuant to paragraph 4.2(f) shall not be subject to the foregoing limitations of this Section 7; and further provided, that no amendment may (i) remove the provisions of subsection 2.6 (relating to Option repricing), (ii) materially increase the benefits accruing to Participants under the Plan, (iii) materially increase the number of securities which may be issued under the Plan, or (iv) materially modify the requirements for participation in the Plan, unless the amendment is approved by the Company’s stockholders.

SECTION 8

DEFINED TERMS

In addition to the other definitions contained herein, the following definitions shall apply:

(a)Award.  The term “Award” means any award or benefit granted under the Plan, including, without limitation, the grant of Options, SARs, Bonus Stock Awards, Stock Unit Awards, Restricted Stock Awards, Restricted Stock Unit Awards, Performance Unit Awards and Performance Share Awards.

(b)Board.  The term “Board” means the Board of Directors of the Company.

(c)Change in Control.  A “Change in Control” shall be deemed to occur on the earliest of the existence of one of the following events:

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

(ii)individuals who, as of the date hereof, constitute the Board (as of the date hereof the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board, provided that any individual becoming a director subsequent to the date hereof whose election, or nomination for election

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by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company; or

(iii)approval by the Company’s shareholders of a reorganization, merger or consolidation of the Company, in each case, with respect to which all or substantially all of the individuals and entities who were the respective beneficial owners of the common stock and voting securities of the Company immediately prior to such reorganization, merger or consolidation do not, following such reorganization, merger or consolidation, beneficially own, directly and indirectly, more than 70% of the then outstanding shares of common stock or the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the corporation resulting from such reorganization, merger or consolidation, or of a complete liquidation or dissolution of the Company or of the sale or other disposition of all or substantially all of the assets of the Company.

For purposes of this subparagraph (c), the term “Permitted Holders” means Donald N. Smith and/or the Company’s then existing senior management and their respective Affiliates (as defined under the Exchange Act). The term “Voting Stock” of the Company means all classes of capital stock of the Company then outstanding and normally entitled to vote in the election of directors.

(d)Code.  The term “Code” means the Internal Revenue Code of 1986, as amended. A reference to any provision of the Code shall include reference to any successor provision of the Code.

(e)Eligible Individual.  The term “Eligible Individual” means any employee of the Company or a Subsidiary and any consultant, director or other person providing bona fide services to the Company or a Subsidiary. An Award may be granted to an employee, in connection with hiring, retention or otherwise, prior to the date the employee first performs services for the Company or the Subsidiaries, provided that such Awards shall not become vested prior to the date the employee first performs such services.

(f)Exchange Act.  The term “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(g)Fair Market Value.  For purposes of determining the “Fair Market Value” of a share of Stock as of any date, the following rules shall apply:

(i)If the principal market for the Stock is a national securities exchange or the Nasdaq stock market, then the “Fair Market Value” as of that date shall be

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the reported closing price of the Stock on that date on the principal exchange or market on which the Stock is then listed or admitted to trading.

(ii)If closing prices are not available or if the principal market for the Stock is not a national securities exchange and the Stock is not quoted on the Nasdaq stock market, then the “Fair Market Value” as of that date shall be the mean of the highest bid and lowest asked prices for the Stock on such day as reported on the Nasdaq OTC Bulletin Board Service or by the National Quotation Bureau, Incorporated or a comparable service.

(iii)If the day is not a business day and, as a result, paragraphs (i) and (ii) next above are inapplicable, the Fair Market Value of the Stock shall be determined as of the next earlier business day. If paragraphs (i) and (ii) next above are otherwise inapplicable, then the Fair Market Value of the Stock shall be determined in good faith by the Committee.

(h)Subsidiary.  The term “Subsidiary” means any company during any period in which it is a “subsidiary corporation” (as that term is defined in Code section 424(f)) with respect to the Company.

(i)Stock.  The term “Stock” means shares of common stock of the Company.

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SUPPLEMENT A
ELECTIVE DEFERRAL

SECTION 1

DEFERRAL ELECTION

1.1General.  A Participant who is otherwise entitled to receive shares of Stock or a cash payment in settlement of an Award under the terms of the Plan may elect to defer delivery of all or a portion of such shares of Stock or such cash, subject to the following terms of this Supplement A.

1.2Deferral Election.  An election to defer the receipt of shares of Stock or a cash payment shall be filed prior to the first day of the calendar year in which the Stock or cash would otherwise have been delivered (or the year of vesting of  a restricted stock Award) to the Participant. The election to defer the delivery of shares of Stock or a cash payment shall be made on a form as may be determined by the Committee (the Deferral Election”).

SECTION 2

ACCOUNTS

2.1Stock Account.  A Stock Account shall be maintained on behalf of each Participant who elects to defer the distribution of shares of Stock under this Supplement A, for the period during which delivery of shares of Stock is deferred. A Participant’s Stock Account shall be subject to the following adjustments:

(a)The Stock Account will be credited with Share Units equal to the number of shares of Stock as to which the Participant has elected deferred receipt, with such Share Units to be credited as of the date on which the shares would otherwise have been delivered to him in the absence of the deferral.

(b)As of each dividend record date for the Stock following the date any Share Units are credited to the Participant’s Stock Account, and prior to the date of distribution of shares of Stock with respect to those Share Units, the Participant’s Stock Account shall be credited with additional Share Units (including fractional Share Units) equal to (i) the amount of the dividend that would be payable with respect to the number of shares of Stock equal to the number of Share Units credited to the Participant’s Stock Account on the dividend record date, divided by (ii) the Fair Market Value of a share of Stock on the date of payment of the dividend.

(c)As of the date of any distribution of shares of Stock with respect to a Participant’s Stock Account under Section 3 of this Supplement, the Share Units credited to a

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Participant’s Stock Account shall be reduced by the number of Shares so distributed to the Participant.

2.2Cash Account.  A Cash Account shall be maintained on behalf of each Participant who elects to defer the distribution of cash under this Supplement A, for the period during which delivery of cash is deferred. A Participant’s Cash Account shall be credited with a notional rate of return based upon investment(s) selected by the Committee in its sole discretion. As of the date of any distribution with respect to a Participant’s Account under Section 3 of this Supplement, the balance credited to a Participant’s Account shall be reduced by the amount of the distribution to the Participant.

2.3Statement of Accounts.  As soon as practicable after the end of each Plan Year, the Company shall provide each Participant having one or more Accounts under the Plan with a statement of the transactions in his Accounts during that year and his Account balances as of the end of the year.

SECTION 3

DISTRIBUTIONS

3.1General.

(a)Subject to the terms of this Section 3, a Participant shall specify, as part of his Deferral Election with respect to Stock Awards, and as part of his Deferral Election with respect to cash payments, the time of distribution of the amounts deferred pursuant to such election; provided, however, that distribution of shares of Stock, and of cash, shall be made in a lump sum not later than the first anniversary of the date on which the individual ceases to be an Eligible Individual; and further provided, that, unless otherwise provided for by the Committee, a Participant may elect only a single date for distribution of all of his Stock Account and only a single date for distribution of all of his Cash Account under the Plan, provided that the distribution date for the Participant’s Stock Account and Cash Account may differ.

(b)At the time of distribution of deferred shares in accordance with the Participant’s Deferral Election, the Participant shall receive a distribution of shares of Stock equal to the number of share units credited to his Stock Account immediately prior to such distribution. If the scheduled distribution date would otherwise occur after a dividend record date but before the payment of the dividend, distribution shall be deferred (not more than 30 days) until the dividend is paid.

(c)At the time of distribution of the Cash Account in accordance with the Participant’s Deferral Election, the Participant shall receive the amount then credited to the Participant’s Cash Account as of the date of distribution.

(d)In determining a Participant’s right to distributions of stock under this Section 3, the vesting provisions of subsection 2.3 of the Plan shall apply to the share units

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credited to the Participant’s Stock Account as though each unit represented one share of Stock, and with all units attributable to payment of dividends being fully vested as of the date they are credited to the Participant’s Stock Account.

(e)Notwithstanding the foregoing provisions of this Section 3, if any share units are credited to a Participant’s Stock Account as of the date of a Change in Control, the Participant shall receive a distribution of shares of Stock equal to the number of such share units. Such distribution shall be in settlement of the Participant’s rights to a distribution under this Section 3, provided that if the record date for a dividend is prior to a Change in Control, but the dividend payment is to occur after such Change in Control, the additional shares attributable to such dividends shall be distributed as soon as practicable thereafter.

3.2Limitation of Implied Rights.  Neither the Participant nor any other person shall, by reason of deferral of shares of Stock or the deferral of a cash payment, under this Supplement A, acquire any right in or title to any assets, funds or property of the Company whatsoever prior to the date such shares or cash are distributed. A Participant shall have only a contractual right to the shares and cash, if any, distributable under the Plan, unsecured by any assets of the Company. Nothing contained in the Plan shall constitute a guarantee by the Company that the assets of the Company shall be sufficient to provide any benefits to any person. The Company may, but shall not be obligated to, establish a trust to hold assets for the purpose of satisfying obligations under this Supplement A. The Board shall retain the right to terminate, at any time, for any reason, or no reason, the deferral provisions under this Supplement A (which may, but need not, be in conjunction with a termination of the Plan), and shall immediately distribute all, but not less than all, of the Stock Accounts and Cash Accounts as of the date of such termination.

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EX-10.2

Exhibit 10.2

AGREEMENT

This agreement (“Agreement”) is entered as of the 27th day August, 2003 (the “Termination Date”) between Friendly Ice Cream Corporation (“FICC”) and TRC Realty LLC (“TRC Realty”).

Whereas on April 14, 1994 FICC and TRC Realty entered into an Aircraft Reimbursement Agreement (a copy of which is attached as EXHIBIT A) to accommodate the projected use of and shared expenses for a private aircraft between the parties (or their respective affiliates),

Whereas the Aircraft Reimbursement Agreement was amended from time to time, by a course of dealing between the parties, including an amendment in 1999 to substitute the “Aircraft” (as defined under the Aircraft Reimbursement Agreement) and extend the term of the Aircraft Reimbursement Agreement for an additional 10 years (the Aircraft Reimbursement Agreement, as amended, being referred to hereafter as the “ARA”),

Whereas FICC seeks to terminate all of its future obligations under the ARA, and

Whereas TRC Realty has agreed to terminate the ARA pursuant to the terms and conditions set forth in this Agreement.

Now Therefore the parties agree as follows:

1.FICC agrees to pay TRC Realty the sum of $868,440 (the “Termination Payment”) contemporaneous with the full execution of this Agreement, it being understood that such events shall occur on or before the Termination Date.

2.In consideration of the Termination Payment by FICC, TRC Realty hereby agrees to terminate the ARA as of the Termination Date. The parties agree that such Termination Payment shall extinguish any obligations by FICC under the ARA to pay any monies or perform any actions on and after the Termination Date, excluding FICC’s obligations pursuant to Section 3 of this Agreement.

3.The parties agree to perform their respective obligations under the ARA arising prior to the Termination Date, including without limitation FICC’s payment of its reimbursement obligations, as adjusted for any credits including pre-paid expenses such as aviation insurance, all of the foregoing items to be pro rated as of the Termination Date.

4.TRC Realty and FICC hereby remise, release and forever discharge each other, their officers, directors, employees, representatives or assigns, of and from all debts, demands, actions, causes of actions, suits, accounts, covenants, contracts, agreements, demands, and any and all claims, demands and liabilities, whatsoever of every name and nature, both in law and equity, which such parties now have or ever had arising under the ARA.  Notwithstanding the forgoing provisions of this Section 4, the parties’ rights to enforce

the terms of this Agreement shall survive the Termination Date. Each party warrants that it has not assigned any of the claims hereby released to any third party.

5.All terms and provisions of this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns.

AGREED AND CONSENTED TO:

Friendly Ice Cream Corporation

By:	/s/ Aaron B. Parker
	Aaron B. Parker
TRC Realty LLC
By:	/s/ Michael P. Donahoe
	Michael P. Donahoe

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EXHIBIT A

Aircraft Reimbursement Agreement between the Company and TRC Realty Co.

(Incorporated by reference to Exhibit 10.11 to the Registrant’s Annual Report
on Form 10-K for the fiscal year ended December 27, 1998, File No. 0-3930).

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EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, John L. Cutter, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Friendly Ice Cream Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 23, 2003
	/s/  JOHN L. CUTTER
	Chief Executive Officer and President

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EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Paul V. Hoagland, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Friendly Ice Cream Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 23, 2003
	/s/  PAUL V. HOAGLAND
	Executive Vice President of Administration and Chief Financial Officer

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EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report on Form 10-Q of Friendly Ice Cream Corporation (the “Company”) for the period ended September 28, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John L. Cutter, as Chief Executive Officer and President of the Company, hereby certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By:	/s/ JOHN L. CUTTER
Name:		John L. Cutter
Title:		Chief Executive Officer and President
Date: October 23, 2003

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report on Form 10-Q of Friendly Ice Cream Corporation (the “Company”) for the period ended September 28, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Paul V. Hoagland, as Executive Vice President of Administration and Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By:	/s/ PAUL V. HOAGLAND
Name:			Paul V. Hoagland
Title:			Executive Vice President of Administration and Chief Financial Officer
Date:		October 23, 2003

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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