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

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

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 1997

REGISTRATION NO. 333-34633
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------

AMENDMENT NO. 3
TO
FORM S-1

REGISTRATION STATEMENT

UNDER

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

FRIENDLY ICE CREAM CORPORATION

(Exact name of registrant as specified in its charter)

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

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

AARON B. PARKER
FRIENDLY ICE CREAM CORPORATION
1855 BOSTON ROAD
WILBRAHAM, MASSACHUSETTS 01095
(413) 543-2400
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
--------------------------

COPIES TO:

<TABLE>
<S> <C>
MICHAEL A. CAMPBELL JOHN B. TEHAN
MAYER, BROWN & PLATT SIMPSON THACHER & BARTLETT
190 SOUTH LASALLE STREET 425 LEXINGTON AVENUE
CHICAGO, ILLINOIS 60603-3441 NEW YORK, NEW YORK 10017
(312) 782-0600 (212) 455-2000
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
--------------------------

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462 (b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462 (c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PER MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED (1) UNIT(3) OFFERING PRICE (3) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, 5,750,000 shares $ 21.00 $ 120,750,000 $ 36,600 (4)
$.01 par value (1)(2).............
</TABLE>

(1) Includes 750,000 shares that may be purchased by the Underwriters to cover
over-allotments, if any.

(2) Includes associated rights (the "Rights") to purchase one one-thousandth of
a share of Series A Junior Preferred Stock, par value $0.01 per share.
Rights initially are attached to and trade with the Common Stock of the
Registrant. The value attributable to such Rights, if any, is reflected in
the offering price of the Common Stock.

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

(4) Previously paid.

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

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>

SUBJECT TO COMPLETION, DATED NOVEMBER 6, 1997

5,000,000 SHARES

[LOGO]

COMMON STOCK

ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY (THE "COMMON STOCK
OFFERING") ARE BEING SOLD BY FRIENDLY ICE CREAM CORPORATION (THE "COMPANY").
CONCURRENTLY WITH THE COMMON STOCK OFFERING, THE COMPANY IS OFFERING TO THE
PUBLIC $175 MILLION AGGREGATE PRINCIPAL AMOUNT OF SENIOR NOTES DUE 2007 (THE
"SENIOR NOTE OFFERING" AND, TOGETHER WITH THE COMMON STOCK OFFERING, THE
"OFFERINGS") AND, CONTINGENT UPON THE OFFERINGS, WILL ENTER INTO THE NEW CREDIT
FACILITY (AS DEFINED HEREIN). CONSUMMATION OF EACH OF THE COMMON STOCK OFFERING,
THE SENIOR NOTE OFFERING AND THE NEW CREDIT FACILITY IS CONTINGENT UPON
CONSUMMATION OF THE OTHER. PRIOR TO THE COMMON STOCK OFFERING, THERE HAS BEEN NO
PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED
THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $19.00 AND $21.00 PER
SHARE. SEE "UNDERWRITING" FOR A DISCUSSION OF FACTORS TO BE CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE. THE COMMON STOCK HAS BEEN
APPROVED FOR QUOTATION, SUBJECT TO NOTICE OF ISSUANCE, ON THE NASDAQ NATIONAL
MARKET UNDER THE SYMBOL "FRND."

AT THE COMPANY'S REQUEST, UP TO 250,000 SHARES OF COMMON STOCK OFFERED
HEREBY HAVE BEEN RESERVED FOR SALE TO CERTAIN INDIVIDUALS, INCLUDING DIRECTORS
AND EMPLOYEES OF THE COMPANY AND THEIR FAMILIES.

SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (A) COMPANY (B)
<S> <C> <C> <C>
PER SHARE............................. $ $ $
TOTAL (C)............................. $ $ $
</TABLE>

(A) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.

(B) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $427,000.

(C) THE COMPANY, CERTAIN LENDERS UNDER THE COMPANY'S OLD CREDIT FACILITY (AS
DEFINED HEREIN) THAT ARE STOCKHOLDERS AND CERTAIN OTHER STOCKHOLDERS OF THE
COMPANY HAVE GRANTED TO THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO
AN ADDITIONAL 750,000 SHARES OF COMMON STOCK, SOLELY TO COVER
OVER-ALLOTMENTS, IF ANY. IF THE UNDERWRITERS EXERCISE THIS OPTION IN FULL,
THE PRICE TO PUBLIC WILL TOTAL $ , THE UNDERWRITING DISCOUNT WILL
TOTAL $ , THE PROCEEDS TO COMPANY WILL TOTAL $ AND THE
PROCEEDS TO SUCH LENDERS AND OTHER STOCKHOLDERS WILL TOTAL $ AND
$ , RESPECTIVELY. SEE "OWNERSHIP OF COMMON STOCK" AND
"UNDERWRITING."

THE SHARES OF COMMON STOCK ARE OFFERED BY THE UNDERWRITERS NAMED HEREIN
WHEN, AS AND IF DELIVERED TO AND ACCEPTED BY THE UNDERWRITERS AND SUBJECT TO
THEIR RIGHT TO REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT
DELIVERY OF CERTIFICATES REPRESENTING THE SHARES WILL BE MADE AGAINST PAYMENT
THEREFOR AT THE OFFICE OF NATIONSBANC MONTGOMERY SECURITIES, INC. ON OR ABOUT
, 1997.
---------------------

NATIONSBANC MONTGOMERY SECURITIES, INC.

PIPER JAFFRAY INC.

TUCKER ANTHONY INCORPORATED

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

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

CERTAIN PERSONS PARTICIPATING IN THE COMMON STOCK OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE
IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE
"UNDERWRITING."

2
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
UNLESS THE CONTEXT INDICATES OTHERWISE, (I) REFERENCES TO "FRIENDLY'S" OR THE
"COMPANY" REFER TO FRIENDLY ICE CREAM CORPORATION, ITS PREDECESSORS AND ITS
CONSOLIDATED SUBSIDIARIES, (II) AS USED HEREIN, "NORTHEAST" REFERS TO THE
COMPANY'S CORE MARKETS WHICH INCLUDE CONNECTICUT, MAINE, MASSACHUSETTS, NEW
HAMPSHIRE, NEW JERSEY, NEW YORK, PENNSYLVANIA, RHODE ISLAND AND VERMONT, (III)
THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION
IN THE COMMON STOCK OFFERING AND (IV) THIS PROSPECTUS GIVES EFFECT TO THE
924-FOR-1 STOCK SPLIT WHICH WILL OCCUR PRIOR TO THE COMMON STOCK OFFERING. THE
COMPANY'S FISCAL YEARS ENDED DECEMBER 27, 1992, JANUARY 2, 1994, JANUARY 1,
1995, DECEMBER 31, 1995 AND DECEMBER 29, 1996 ARE REFERRED TO HEREIN AS 1992,
1993, 1994, 1995 AND 1996, RESPECTIVELY.

THE COMPANY

Friendly's is the leading full-service restaurant operator and has a leading
position in premium frozen dessert sales in the Northeast. The Company owns and
operates 662 and franchises 34 full-service restaurants and manufactures a
complete line of packaged frozen desserts distributed through more than 5,000
supermarkets and other retail locations in 15 states. Friendly's offers its
customers a unique dining experience by serving a variety of high-quality,
reasonably-priced breakfast, lunch and dinner items, as well as its signature
frozen desserts, in a fun and casual neighborhood setting. For the twelve-month
period ended September 28, 1997, Friendly's generated $667.0 million in total
revenues and $74.9 million in EBITDA (as defined herein) and incurred $44.0
million of interest expense. During the same period, management estimates that
over $230 million of total revenues were from the sale of approximately 21
million gallons of frozen desserts.

Friendly's restaurants target families with children and adults who desire a
reasonably-priced meal in a full-service setting. The Company's menu offers a
broad selection of freshly-prepared foods which appeal to customers throughout
all day-parts. Breakfast items include specialty omelettes and breakfast
combinations featuring eggs, pancakes and bacon or sausage. Lunch and dinner
items include a new line of wrap sandwiches, entree salads, soups, super-melts,
specialty burgers and new stir-fry, chicken, pot pie, tenderloin steak and
seafood entrees. Friendly's is also recognized for its extensive line of ice
cream shoppe treats, including proprietary products such as the
Fribble-Registered Trademark-, Candy Shoppe-Registered Trademark- Sundaes and
the Wattamelon Roll-Registered Trademark-.

The Company believes that one of its key strengths is the strong consumer
awareness of the Friendly's brand name, particularly as it relates to the
Company's signature frozen desserts. This strength and the Company's
vertically-integrated operations provide several competitive advantages,
including the ability to (i) utilize its broad, high-quality menu to attract
customer traffic across multiple day-parts, particularly the afternoon and
evening snack periods, (ii) generate incremental revenues through strong
restaurant and retail market penetration, (iii) promote menu enhancements and
extensions in combination with its unique frozen desserts and (iv) control
quality and maintain operational flexibility through all stages of the
production process.

3
<PAGE>
charges for each fiscal year since the TRC Acquisition except for the nine
months ended September 28, 1997. As a result of subsequent restructurings, and
upon completion of the Recapitalization and the Related Transactions (both as
defined herein), approximately 16.8% and 9.8% of the Common Stock will be owned
by the Company's employees and lenders under the Old Credit Facility,
respectively. See "Risk Factors," "Selected Consolidated Financial Information,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Ownership of Common Stock."

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

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

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

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

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

4
<PAGE>
RECENT DEVELOPMENTS

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

5
<PAGE>
THE RECAPITALIZATION

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

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

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

<TABLE>
<CAPTION>
AT CLOSING
---------------------
<S> <C>
(DOLLARS IN
THOUSANDS)
SOURCES OF FUNDS:
Term Loan Facility (a)................................................ $ 105,000
Senior Note Offering (b).............................................. 175,000
Common Stock Offering (c)............................................. 100,000
--------
Total Sources..................................................... $ 380,000
--------
--------
USES OF FUNDS:
Working capital....................................................... $ 4,732
Retirement of Old Credit Facility (d)................................. 348,042
Retirement of capital leases.......................................... 7,976
Estimated fees and expenses (e)....................................... 19,250
--------
Total Uses........................................................ $ 380,000
--------
--------
</TABLE>

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

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

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

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

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

6
<PAGE>
THE COMMON STOCK OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company... 5,000,000 shares (a)

Common Stock to be outstanding after
the Common Stock Offering............. 7,125,000 shares (a) (b)

Concurrent Senior Note Offering ...... Concurrently with the Common Stock Offering, the
Company is offering to the public $175 million
aggregate principal amount of Senior Notes due 2007.
Consummation of each of the Common Stock Offering
and the Senior Note Offering is contingent upon
consummation of the other. See "Description of
Senior Notes."

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

Proposed Nasdaq National Market
symbol................................ FRND

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

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

(a) Excludes up to an aggregate of 125,158 shares of Common Stock that the
Underwriters have the option to purchase from the Company to cover
over-allotments, if any. See "Underwriting."

(b) Excludes an aggregate of approximately 400,000 shares and 375,000 shares of
Common Stock reserved for issuance under the Stock Option Plan and the
Restricted Stock Plan, respectively. See "Management--Executive
Compensation--Stock Option Plan" and "--Restricted Stock Plan."

7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR (A) ----------------------------
------------------------------------------------ SEPTEMBER 29, SEPTEMBER 28,
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF RESTAURANTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant................................. $542,859 $580,161 $589,383 $593,570 $596,675 $ 452,373 $ 455,026
Retail, institutional and other............ 20,346 30,472 41,631 55,579 54,132 39,446 49,173
Franchise.................................. -- -- -- -- -- -- 3,834
-------- -------- -------- -------- -------- ------------- -------------
Total revenues............................... 563,205 610,633 631,014 649,149 650,807 491,819 508,033
-------- -------- -------- -------- -------- ------------- -------------
Non-cash write-downs (b)..................... -- 25,552 -- 7,352 227 -- 607
Depreciation and amortization................ 35,734 35,535 32,069 33,343 32,979 25,127 24,226
Operating income............................. 25,509 8,116 36,870 16,670 30,501 22,848 34,299
Interest expense, net (c).................... 37,630 38,786 45,467 41,904 44,141 33,084 32,972
Cumulative effect of changes in accounting
principles, net of income taxes (d)........ -- (42,248) -- -- -- -- 2,236
Net income (loss)............................ $(13,321) $(61,448) $ (3,936) $(58,653) $ (7,772) $ (5,794 ) $ 2,363
-------- -------- -------- -------- -------- ------------- -------------
-------- -------- -------- -------- -------- ------------- -------------

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

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

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

<CAPTION>
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Working capital (deficit)...................................................................................... $ (17,895)
Total assets................................................................................................... 362,914
Total long-term debt and capital lease obligations, excluding current maturities............................... 371,296
Total stockholders' equity (deficit)........................................................................... $ (170,684)

<S> <C>
AS ADJUSTED

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

<S> <C>
BALANCE SHEET DATA:
Working capital (deficit)...................................................................................... $ (10,949)(p)

Total assets................................................................................................... 358,348(q)

Total long-term debt and capital lease obligations, excluding current maturities............................... 288,585(r)

Total stockholders' equity (deficit)........................................................................... $ (73,471)(s)

</TABLE>

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

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

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

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

8
<PAGE>
(d) Includes non-cash items, net of related income taxes, as a result of
adoption of accounting pronouncements related to income taxes of $30,968,
post-retirement benefits other than pensions of $4,140 and post-employment
benefits of $7,140 in 1993 and pensions of $2,236 in 1997.

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

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

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

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

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

The following table represents changes to Interest expense, net on a pro
forma basis, resulting from the Recapitalization and the Related
Transactions:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ------------------
1996 SEPTEMBER 29, 1996
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
Elimination of interest on Old Credit Facility............................ $ (41,827) $ (31,337)
Reduction of interest on capital lease obligations........................ (774) (580)
Interest on Revolving Credit Facility..................................... 779 624
Interest on Letter of Credit Facility..................................... 268 134
Interest on Term Loan Facility............................................ 8,279 6,202
Interest on Senior Notes.................................................. 17,938 13,453
-------- --------
Decrease in Interest expense, net....................................... $ (15,337) $ (11,504)
-------- --------
-------- --------

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

<S> <C>
Elimination of interest on Old Credit Facility............................ $ (31,434)
Reduction of interest on capital lease obligations........................ (580)
Interest on Revolving Credit Facility..................................... 732
Interest on Letter of Credit Facility..................................... 134
Interest on Term Loan Facility............................................ 6,340
Interest on Senior Notes.................................................. 13,453
--------
Decrease in Interest expense, net....................................... $ (11,355)
--------
--------
</TABLE>

In calculating pro forma Interest expense, net, the assumed rates on the
Revolving Credit Facility, Letter of Credit Facility, Term Loan Facility and
Senior Notes were 7.67%, 2.25%, 7.88%, and 10.25% for 1996, respectively,
7.66%, 2.25%, 7.87% and 10.25% for the nine months ended September 29, 1996,
respectively and 7.84%, 2.25%, 8.09% and 10.25% for the nine months ended
September 28, 1997, respectively.

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

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

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

(m) The number at September 28, 1997 reflects the acquisition by DavCo of 34
restaurants pursuant to the DavCo Agreement. See "Recent Developments."

(n) Represents restaurant revenues divided by the weighted average number of
restaurants open during such period. Fiscal 1993 has been adjusted to
conform to a 52-week year. The number at September 28, 1997 represents data
for the twelve months then ended.

(o) When computing comparable restaurant revenues, restaurants open for at least
twelve months are compared from period to period.

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

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

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

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

9
<PAGE>
RISK FACTORS

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

SUBSTANTIAL LEVERAGE; STOCKHOLDERS' DEFICIT

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

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

HISTORY OF LOSSES

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

10
<PAGE>
RESTRICTIONS IMPOSED UNDER NEW CREDIT FACILITY; SECURITY INTEREST

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

RISKS RELATING TO THE IMPLEMENTATION OF NEW BUSINESS CONCEPTS AND STRATEGIES

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

RISKS ATTRIBUTABLE TO THE DEVELOPMENT OF A FRANCHISING PROGRAM

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

11
<PAGE>
RISKS ARISING OUT OF THE EXPANSION OF INTERNATIONAL OPERATIONS

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

GEOGRAPHIC CONCENTRATION

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

RELATIONSHIPS WITH PERKINS; POTENTIAL CONFLICTS OF INTEREST

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

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

DEPENDENCE ON SENIOR MANAGEMENT

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

HIGHLY COMPETITIVE BUSINESS ENVIRONMENT

12
<PAGE>
competitive factors in the industry are the quality and value of the food
products offered, quality and speed of service, attractiveness of facilities,
advertising, name brand awareness and image and restaurant location. Each of the
Company's restaurants competes directly or indirectly with locally-owned
restaurants as well as restaurants with national or regional images, and to a
limited extent, restaurants operated by its franchisees. A number of the
Company's significant competitors are larger or more diversified and have
substantially greater resources than the Company. The Company's retail
operations compete with national and regional manufacturers of frozen desserts,
many of which have greater financial resources and more established channels of
distribution than the Company. Key competitive factors in the retail food
business include brand awareness, access to retail locations, price and quality.

EXPOSURE TO COMMODITY PRICING AND AVAILABILITY RISKS

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

RISKS ASSOCIATED WITH THE FOOD SERVICE INDUSTRY

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

REGULATION

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

FRAUDULENT CONVEYANCE

The incurrence of indebtedness and other obligations in connection with the
Recapitalization, including the issuance of the Senior Notes, may be subject to
review by a court under federal bankruptcy law or comparable provisions of state
fraudulent transfer law. Generally, if a court or other trier of fact were to
find that the Company did not receive fair consideration or reasonably
equivalent value for incurring such indebtedness or obligation and, at the time
of such incurrence, the Company (i) was insolvent, (ii) was rendered insolvent
by reason of such incurrence, (iii) was engaged in a business or transaction for
which the assets remaining in the Company constituted unreasonably small capital
or (iv) intended to incur or believed it would incur debts beyond its ability to
pay such debts as they mature,

13
<PAGE>
such court, subject to applicable statutes of limitations, could determine to
invalidate, in whole or in part, such indebtedness and obligations as fraudulent
conveyances or subordinate such indebtedness and obligations to existing or
future creditors of the Company. The definition or measure of such matters as
fair consideration, reasonably equivalent value, insolvency or unreasonably
small capital for purposes of the foregoing will vary depending on the law of
the jurisdiction which is being applied. Generally, however, the Company would
be considered insolvent if, at the time it incurred indebtedness, either the
fair market value (or fair saleable value) of its assets was less than the
amount required to pay its total debts and liabilities (including contingent
liabilities) as they became absolute and matured or it had incurred debt beyond
its ability to repay such debt as it matures.

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

ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to the Common Stock Offering, there has been no public market for the
Common Stock. There can be no assurance that an active trading market will
develop for the Common Stock after the Common Stock Offering or, if developed,
that such market will be sustained. The initial public offering price of the
Common Stock will be based on negotiations between the Company and the
Underwriters and may bear no relationship to the price at which the Common Stock
will trade after the completion of the Common Stock Offering. See "Underwriting"
for factors to be considered in determining the initial public offering price.
In addition, quarterly operating results of the Company or other restaurant
companies, changes in general conditions in the economy, the financial markets
or the restaurant industry, natural disasters, changes in earnings estimates or
recommendations by research analysts, or other developments affecting the
Company or its competitors could cause the market price of the Common Stock to
fluctuate substantially. In recent years, the stock market and the restaurant
industry in particular have experienced extreme price and volume fluctuations.
This volatility has had a significant effect on the market prices of securities
issued by many companies for reasons unrelated to the operating performance of
these companies.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Common Stock Offering, the Company will have
7,125,000 shares of Common Stock outstanding. Of these shares, 5,000,000 shares
sold in the Common Stock Offering will be freely tradeable without restriction
under the Securities Act of 1933, as amended (the "Securities Act"), except any
shares purchased by persons deemed to be "affiliates" of the Company, as that
term is defined in Rule 144 under the Securities Act. The remaining 2,125,000
shares of Common Stock are deemed "restricted securities" (the "Restricted
Shares") under Rule 144 because they were originally issued and sold by the
Company in private transactions in reliance upon exemptions from the Securities
Act. Under Rule 144, substantially all of these remaining Restricted Shares may
become eligible for resale 90 days after the date the Company becomes subject to
the reporting requirements of the Securities and Exchange Act of 1934, as
amended (the "Exchange Act") (i.e., 90 days after the consummation of the Common
Stock Offering), and may be resold prior to such date only in compliance with
the registration requirements of the Securities Act or pursuant to a valid
exemption therefrom. Sales of substantial amounts of shares of

14
<PAGE>
Common Stock in the public market after the Common Stock Offering or the
perception that such sales could occur may adversely affect the market price of
the Common Stock.

All executive officers and directors and the existing shareholders of the
Company who, after the Common Stock Offering, will hold in the aggregate
approximately 2,125,000 shares of Common Stock (1,500,158 shares if the
Underwriters' over-allotment option is exercised in full), have agreed, pursuant
to lock-up agreements, that they will not, without the prior written consent of
NationsBanc Montgomery Securities, Inc., offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock beneficially owned by them for a
period of 360 days after the date of this Prospectus, except that the lenders
under the Old Credit Facility may sell (i) shares of Common Stock to other
stockholders of the Company existing prior to the Common Stock Offering and (ii)
any shares of Common Stock acquired by them in or after the Common Stock
Offering, which shares are not "restricted securities" pursuant to Rule 144
under the Securities Act.

The Company intends to file registration statements under the Securities Act
to register (i) all shares of Common Stock issuable pursuant to the Company's
Stock Option Plan and Restricted Stock Plan and (ii) certain shares of Common
Stock to be issued under the Company's Management Stock Plan and Limited Stock
Compensation Program (as defined herein). Subject to the completion of the
360-day period described above, shares of Common Stock issued under, or issued
upon the exercise of awards issued under, such plans and after the effective
date of such registration statements, generally will be eligible for sale in the
public market. See "Management--Executive Compensation" and "Ownership of Common
Stock."

The Company, its shareholders holding Class A and Class B common shares
prior to the Recapitalization and certain warrant holders have entered into an
amendment to an existing registration rights agreement providing that such
shareholders may demand registration under the Securities Act, at any time
within 18 months (the "Registration Period") after the end of the 360-day
lock-up period commencing with the date of this Prospectus, of shares of the
Company's Common Stock into which such Class A and Class B common shares are
converted in connection with the Recapitalization or for which such warrants are
exercised. The Company may postpone such a demand under certain circumstances.
In addition, such shareholders may request the Company to include such shares of
Common Stock in any registration by the Company of its capital stock under the
Securities Act during the Registration Period. In addition, prior to the
consummation of the Common Stock Offering, the Company and Mr. Smith intend to
enter into a registration rights agreement providing Mr. Smith with a demand
registration right covering his shares of Common Stock. See "Ownership of Common
Stock" and "Shares Eligible for Future Sale."

EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS

The Company's Restated Articles of Organization (the "Restated Articles")
and Restated By-Laws (the "Restated By-Laws") contain provisions that may make
it more difficult for a third party to acquire, or discourage acquisition bids
for, the Company. The Restated By-Laws provide that a stockholder seeking to
have business conducted at a meeting of stockholders must give advance notice to
the Company prior to the scheduled meeting. The Restated By-Laws further provide
that a special stockholders meeting may be called only by the Board of
Directors, Chairman of the Board of Directors, or President of the Company.
Massachusetts law, the Restated Articles and the Restated By-Laws provide for a
classified Board of Directors and for the removal of directors only for cause
upon the affirmative vote of (i) the holders of at least a majority of the
shares entitled to vote or (ii) a majority of the directors then in office.
Moreover, upon completion of the Common Stock Offering, the Company expects to
be subject to an anti-takeover provision of the Massachusetts General Laws which
prohibits, subject to certain exceptions, a holder of 5% or more of the
outstanding voting stock of a corporation from engaging in certain transactions
with the corporation, including a merger or stock or asset sale. While the
Company's Restated By-Laws exclude the applicability of another Massachusetts
anti-takeover statute which provides that any stockholder who acquires 20% or
more of the outstanding voting stock of a corporation subject to the statute may
not vote

15
<PAGE>
such stock unless the stockholders of the corporation so authorize, the Board of
Directors of the Company may amend the Restated By-Laws at any time to subject
the Company to this statute prospectively. These provisions could limit the
price that certain investors might be willing to pay in the future for shares of
the Common Stock and may have the effect of preventing changes in the management
of the Company.

In addition, shares of the Company's Preferred Stock may be issued in the
future without further stockholder approval and upon such terms and conditions,
and have such rights, privileges and preferences, as the Board of Directors may
determine. The rights of the holders of Common Stock will be subject to, and may
be adversely affected by, the rights of any holders of Preferred Stock that may
be issued in the future. The issuance of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or discouraging a third party from acquiring, a majority
of the outstanding voting stock of the Company. The Company has no present plans
to issue any shares of Preferred Stock. See "Description of Capital
Stock--Preferred Stock."

EFFECT OF ADOPTION OF STOCKHOLDER RIGHTS PLAN

The Company's Board of Directors intends to enact a stockholder rights plan
(the "Rights Plan") designed to protect the interests of the Company's
stockholders in the event of a potential takeover in a manner or on terms not
approved by the Board of Directors as being in the best interests of the Company
and its stockholders. Pursuant to the Rights Plan, upon the filing of the
Restated Articles prior to the consummation of the Common Stock Offering, the
Board will declare a dividend distribution of one purchase right (a "Right") for
each outstanding share of Common Stock. The Rights Plan provides, in substance,
that should any person or group (other than Mr. Smith, Equitable, senior
management and their respective affiliates) acquire 15% or more of the Company's
Common Stock, each Right, other than Rights held by the acquiring person or
group, would entitle its holder to purchase a specified number of shares of
Common Stock for 50% of their then current market value. Unless a 15%
acquisition has occurred, the Rights may be redeemed by the Company at any time
prior to the termination date of the Rights Plan. The Rights Plan has certain
anti-takeover effects, in that it will cause substantial dilution to a person or
group that attempts to acquire a significant interest in the Company on terms
not approved by the Board of Directors. See "Description of Capital
Stock--Stockholder Rights Plan."

SUBSTANTIAL AND IMMEDIATE DILUTION

Purchasers of the Common Stock offered hereby will experience immediate and
significant dilution in net tangible book value per share of approximately
$33.93 per share of Common Stock (at an assumed initial public offering price of
$20.00 per share). See "Dilution."

16
<PAGE>
USE OF PROCEEDS

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

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

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

<TABLE>
<CAPTION>
AT CLOSING
--------------------
<S> <C>
(DOLLARS IN
THOUSANDS)
SOURCES OF FUNDS:
Term Loan Facility (a)................................................ $ 105,000
Senior Note Offering (b).............................................. 175,000
Common Stock Offering (c)............................................. 100,000
--------
Total Sources..................................................... $ 380,000
--------
--------
USES OF FUNDS:
Working capital....................................................... $ 4,732
Retirement of Old Credit Facility (d)................................. 348,042
Retirement of capital leases.......................................... 7,976
Estimated fees and expenses (e)....................................... 19,250
--------
Total Uses........................................................ $ 380,000
--------
--------
</TABLE>

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

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

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

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

17
<PAGE>
DIVIDEND POLICY

The Company currently intends to retain its earnings to finance future
growth and, therefore, does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. Any determination as to the payment of
dividends will depend upon the future results of operations, capital
requirements and financial condition of the Company and its subsidiaries and
such other facts as the Board of Directors of the Company may consider,
including any contractual or statutory restrictions on the Company's ability to
pay dividends. The New Credit Facility and the Indenture relating to the Senior
Notes will each limit the Company's ability to pay dividends on its Common
Stock. See "Description of New Credit Facility" and "Description of Senior
Notes."

DILUTION

The net tangible book value of the Company as of September 28, 1997 was
$(186,203,000), or $(75.30) per share. "Net tangible book value" per share is
determined by dividing the number of shares of Common Stock outstanding into the
net tangible book value of the Company (total tangible assets less total
liabilities). After giving effect to the Recapitalization and the Related
Transactions, the Company's pro forma net tangible book value as of September
28, 1997 would have been $(99,273,000), or $(13.93) per share. This represents
an immediate increase in net tangible book value of $61.37 per share to existing
stockholders and an immediate dilution of $33.93 per share to new investors
purchasing Common Stock in the Common Stock Offering. The following table
illustrates this dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price.............................. $ 20.00
Net tangible book value per share at September 28, 1997.......... $ (75.30)
Increase per share attributable to new investors in the
Common Stock Offering.......................................... 61.37
---------
Pro forma net tangible book value per share after the Common
Stock Offering................................................. (13.93)
---------
Dilution per share to new investors................................ $ 33.93
---------
---------
</TABLE>

The following table summarizes as of September 28, 1997, on a pro forma as
adjusted basis after giving effect to the Recapitalization and the Related
Transactions, the difference between existing stockholders and new investors
with respect to the number of shares of Common Stock purchased from the Company,
the total cash consideration paid to the Company, and the average price per
share paid by existing stockholders and by the purchasers of the shares offered
by the Company hereby (at an assumed initial public offering price of $20.00 per
share):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------------- --------------------------- PRICE
NUMBER (A) PERCENT AMOUNT PERCENT PER SHARE
-------------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......................... 2,125,000(b) 29.8% $ 46,875,000 31.9% $ 22.06
New investors.................................. 5,000,000 70.2 100,000,000 68.1 $ 20.00
-------------- ----- -------------- -----
Total...................................... 7,125,000 100.0% $ 146,875,000 100.0%
-------------- ----- -------------- -----
-------------- ----- -------------- -----
</TABLE>

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

(a) Excludes an aggregate of approximately 400,000 shares and 375,000 shares of
Common Stock reserved for issuance under the Stock Option Plan and the
Restricted Stock Plan, respectively. See "Management--Executive
Compensation--Stock Option Plan" and "--Restricted Stock Plan".

(b) Represents actual shares outstanding as of September 28, 1997, plus 27,113
shares to be issued upon consummation of the Common Stock Offering under the
Management Stock Plan, less 375,000 net shares to be returned to the Company
in connection with the Recapitalization. See "Ownership of Common Stock" and
Note 17 of Notes to Consolidated Financial Statements.

18
<PAGE>
CAPITALIZATION

The following table sets forth the balance of Cash and cash equivalents,
Current maturities of long-term debt and capital lease obligations and
capitalization of the Company (i) as of September 28, 1997 and (ii) as of
September 28, 1997, as adjusted to give effect to the Recapitalization and the
Related Transactions. This table should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AS OF SEPTEMBER 28, 1997
------------------------
ACTUAL AS ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.............................................................. $ 12,044 $ 10,102(a)
----------- -----------
----------- -----------
Current maturities of long-term debt and capital lease obligations..................... $ 7,739 $ 4,432
----------- -----------
----------- -----------

Long-term debt
Old Credit Facility.................................................................. $ 358,042 $ --(b)
Revolving Credit Facility............................................................ -- --(c)
Term Loan Facility................................................................... -- 105,000
Senior Notes......................................................................... -- 175,000
Capital lease obligations and other.................................................. 13,254 8,585
----------- -----------
Total long-term debt................................................................... 371,296 288,585
----------- -----------
Stockholders' equity (d)
Preferred Stock, $0.01 par value, 1,000 shares authorized and none outstanding, as
adjusted........................................................................... -- --
Common Stock, $0.01 par value, 7,389 shares authorized and 2,473 shares outstanding;
50,000 shares authorized and 7,125 shares outstanding, as adjusted................. 25 71(e)
Paid-in capital...................................................................... 46,905 148,214(e)
Unrealized gain on investment securities............................................. 130 130
Accumulated deficit.................................................................. (217,796) (221,938)(f)
Cumulative translation adjustment.................................................... 52 52
----------- -----------
Total stockholders' equity (deficit)................................................... (170,684) (73,471)
----------- -----------
Total capitalization................................................................... $ 200,612 $ 215,114
----------- -----------
----------- -----------
</TABLE>

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

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

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

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

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

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

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

19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION

The following table sets forth selected consolidated historical financial
information of the Company and its consolidated subsidiaries for each of the
periods presented below. This information should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein. The selected consolidated historical financial
information for each of 1994, 1995 and 1996, and as of December 31, 1995 and
December 29, 1996, has been derived from the Company's audited Consolidated
Financial Statements which are included elsewhere herein. The selected
consolidated historical financial information as of and for the nine months
ended September 29, 1996 and September 28, 1997 has been derived from the
Company's unaudited consolidated financial statements which, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
accruals) necessary to present fairly, in accordance with GAAP, the information
contained therein. See Note 3 of Notes to Consolidated Financial Statements for
a discussion of the basis of the presentation and significant accounting
policies of the consolidated historical financial information set forth below.
Results for interim periods are not necessarily indicative of full fiscal year
results. No stock dividends were declared or paid for any period presented.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FISCAL YEAR (A) -------------
----------------------------------------------------- SEPTEMBER 29,
1992 1993 1994 1995 1996 1996
--------- --------- --------- --------- --------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>

<CAPTION>
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Restaurant........................................ $ 542,859 $ 580,161 $ 589,383 $ 593,570 $ 596,675 $ 452,373
Retail, institutional and other................... 20,346 30,472 41,631 55,579 54,132 39,446
Franchise......................................... -- -- -- -- -- --
--------- --------- --------- --------- --------- -------------
Total revenues...................................... 563,205 610,633 631,014 649,149 650,807 491,819
--------- --------- --------- --------- --------- -------------
Costs and expenses:
Cost of sales..................................... 154,796 170,431 179,793 192,600 191,956 143,388
Labor and benefits................................ 201,431 209,522 211,838 214,625 209,260 159,502
Operating expenses................................ 108,363 120,626 132,010 143,854 143,163 109,006
General and administrative expenses............... 37,372 40,851 38,434 40,705 42,721 31,948
Non-cash write-downs (b).......................... -- 25,552 -- 7,352 227 --
Depreciation and amortization..................... 35,734 35,535 32,069 33,343 32,979 25,127
Gain on sale of restaurant operations............... -- -- -- -- -- --
--------- --------- --------- --------- --------- -------------
Operating income.................................... 25,509 8,116 36,870 16,670 30,501 22,848
Interest expense, net (c)........................... 37,630 38,786 45,467 41,904 44,141 33,084
Equity in net loss of joint venture................. -- -- -- -- -- --
--------- --------- --------- --------- --------- -------------
Income (loss) before (provision for) benefit from
income taxes and cumulative effect of changes in
accounting principles............................. (12,121) (30,670) (8,597) (25,234) (13,640) (10,236)
(Provision for) benefit from income taxes........... (1,200) 11,470 4,661 (33,419) 5,868 4,442
Cumulative effect of changes in accounting
principles, net of income taxes (d)............... -- (42,248) -- -- -- --
--------- --------- --------- --------- --------- -------------
Net income (loss)................................... $ (13,321) $ (61,448) $ (3,936) $ (58,653) $ (7,772) $ (5,794)
--------- --------- --------- --------- --------- -------------
--------- --------- --------- --------- --------- -------------

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

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

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

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

20
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR (A) AS OF AS OF
----------------------------------------------------- SEPTEMBER 29, SEPTEMBER 28,
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........ $ (28,451) $ (27,919) $ (35,856) $ (14,678) $ (20,700) $ (28,333) $ (17,895)
Total assets..................... 380,087 365,330 374,669 370,292 360,126 359,080 362,914
Total long-term debt and capital
lease obligations, excluding
current maturities............. 358,102 363,028 369,549 389,144 385,977 379,241 371,296
Total stockholders' equity
(deficit)...................... $ (43,993) $(102,965) $(106,901) $(165,534) $(173,156) $(171,306) $(170,684)

<CAPTION>
AS ADJUSTED
SEPTEMBER 28,
1997
-------------
<S> <C>
BALANCE SHEET DATA:
Working capital (deficit)........ $ (10,949)(m)
Total assets..................... 358,348(n)
Total long-term debt and capital
lease obligations, excluding
current maturities............. 288,585(o)
Total stockholders' equity
(deficit)...................... $ (73,471)(p)
</TABLE>

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

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

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

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

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

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

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

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

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

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

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

21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

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

OVERVIEW

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

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

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

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

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

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

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

22
<PAGE>
retail, institutional and other customers. Retail, institutional and other
revenues have higher food costs as a percentage of sales than Restaurant
revenues. Labor and benefits include labor and related payroll expenses for
restaurant employees. Operating expenses include all other restaurant-level
expenses including supplies, utilities, maintenance, insurance and
occupancy-related expenses, the costs associated with Retail, institutional and
other revenues and Franchise revenues including salaries for sales personnel and
other selling expenses and advertising costs.

General and administrative expenses include costs associated with restaurant
field supervision and the Company's headquarters personnel. Non-cash write-downs
include the write-downs of long-lived assets and certain intangible assets when
circumstances indicate that the carrying amount of an asset may not be
recoverable. See Notes 3 and 6 of Notes to Consolidated Financial Statements.
Interest expense, net is net of capitalized interest and interest income.

RESULTS OF OPERATIONS

The operating results of the Company expressed as a percentage of Total
revenues are set forth below.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ----------------------------------
-------------------------------- SEPTEMBER 29, SEPTEMBER 28,
1994 1995 1996 1996 1997
-------- -------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues:
Restaurant............................ 93.4% 91.4% 91.7% 92.0% 89.6%
Retail, institutional and other....... 6.6 8.6 8.3 8.0 9.7
Franchise............................. 0.0 0.0 0.0 0.0 0.7
-------- -------- -------- ----- -----
Total revenues.......................... 100.0 100.0 100.0 100.0 100.0
-------- -------- -------- ----- -----
Costs and expenses:
Cost of sales......................... 28.5 29.7 29.5 29.2 29.0
Labor and benefits.................... 33.6 33.1 32.2 32.4 31.4
Operating expenses.................... 20.9 22.2 22.0 22.2 22.0
General and administrative expenses... 6.1 6.2 6.5 6.5 6.4
Non-cash write-downs.................. 0.0 1.1 0.0 0.0 0.1
Depreciation and amortization......... 5.1 5.1 5.1 5.1 4.8
Gain on sale of restaurant operations... 0.0 0.0 0.0 0.0 0.4
-------- -------- -------- ----- -----
Operating income........................ 5.8 2.6 4.7 4.6 6.7
Interest expense, net................... 7.2 6.5 6.8 6.7 6.5
Equity in net loss of joint venture..... 0.0 0.0 0.0 0.0 0.2
-------- -------- -------- ----- -----
Income (loss) before benefit from
(provision for) income taxes and
cumulative effect of change in
accounting principle.................. (1.4) (3.9) (2.1) (2.1) 0.0
Benefit from (provision for) income
taxes................................. 0.8 (5.1) 0.9 0.9 0.0
Cumulative effect of change in
accounting principle, net of income
tax expense........................... 0.0 0.0 0.0 0.0 0.5
-------- -------- -------- ----- -----
Net income (loss)....................... (0.6)% (9.0)% (1.2)% (1.2)% 0.5%
-------- -------- -------- ----- -----
-------- -------- -------- ----- -----
</TABLE>

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

REVENUES--Total revenues increased $16.2 million, or 3.3%, to $508.0 million
for the nine months ended September 28, 1997 from $491.8 million for the nine
months ended September 29, 1996. Restaurant revenues increased $2.6 million, or
0.6%, to $455.0 million for the nine months ended September 28, 1997 from $452.4
million for the nine months ended September 29, 1996. Comparable restaurant
revenues increased 3.1%. The increase in Restaurant revenues and comparable
restaurant revenues was due to the introduction of higher-priced lunch and
dinner entrees, selected menu price increases, a shift in sales mix to
higher-priced items, the opening of three new restaurants, the re-imaging of
four restaurants under the Company's FOCUS 2000 program, the revitalization of
14 restaurants, building expansions at five restaurants

23
<PAGE>
and a milder winter in the 1997 period, which allowed for favorable traffic
comparisons. The increase was partially offset by the sale of 34 restaurants to
DavCo which resulted in a $7.2 million reduction in Restaurant revenues and the
closing of 17 under-performing restaurants. Retail, institutional and other
revenues increased by $9.8 million, or 24.9%, to $49.2 million for the nine
months ended September 28, 1997 from $39.4 million for the nine months ended
September 29, 1996. The increase was primarily due to a more effective sales
promotion program. Franchise revenue was $3.8 million for the nine months ended
September 28, 1997 compared to none for the nine months ended September 29,
1996. The increase is a result of the consummation of the DavCo Agreement on
July 14, 1997. See Note 16 of Notes to Consolidated Financial Statements.

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

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

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

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

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

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

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

DEPRECIATION AND AMORTIZATION--Depreciation and amortization decreased $0.9
million, or 3.6%, to $24.2 million for the nine months ended September 28, 1997
from $25.1 million for the nine months ended September 29, 1996. Depreciation
and amortization as a percentage of Total revenues decreased to 4.8% in the 1997
period from 5.1% in the 1996 period. The decrease was due to the closing of 17
units since the

24
<PAGE>
end of the 1996 period, partially offset by higher amortization of debt
restructuring costs incurred as a result of a debt restructuring which was
effective January 1, 1996.

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

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

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

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

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

1996 COMPARED TO 1995

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

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

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

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

25
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased $2.0 million, or 4.9%, to $42.7 million in 1996 from $40.7 million in
1995. General and administrative expenses as a percentage of Total revenues
increased to 6.5% in 1996 from 6.2% in 1995. This increase was due to an
increase in management bonuses and the annual merit-based salary increases,
partially offset by reductions in group medical insurance claims and the
elimination of field management positions associated with the closing of 31
restaurants in 1996. General and administrative expenses, exclusive of
management bonuses, increased $0.3 million in 1996.

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

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

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

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

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

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

1995 COMPARED TO 1994

REVENUES--Total revenues increased $18.1 million, or 2.9%, to $649.1 million
in 1995 from $631.0 million in 1994. Restaurant revenues increased $4.2 million,
or 0.7%, to $593.6 million in 1995 from $589.4 million in 1994. Comparable
restaurant revenues increased by 0.9%. The increase in Restaurant revenues and
comparable restaurant revenues was due to the introduction of frozen yogurt,
selected menu price increases, a shift in sales mix to higher-priced items, the
opening of one new restaurant, the revitalization of 14 restaurants and building
expansions at five existing restaurants. The increase was partially offset by
the closing of 16 restaurants in 1995. Retail, institutional and other revenues
increased $14.0 million, or

26
<PAGE>
33.7%, to $55.6 million in 1995 from $41.6 million in 1994. This increase was
due to a successful promotional campaign in existing markets and the
introduction of frozen yogurt into these markets.

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

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

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

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

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

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

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

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

BENEFIT FROM (PROVISION FOR) INCOME TAXES--The provision for income taxes
was $33.4 million as compared to the benefit from income taxes of $4.7 million
in 1994. The provision for income taxes of $33.4 million in 1995 was due to the
anticipated deconsolidation from TRC. As a result, the deferred tax asset of

27
<PAGE>
approximately $19 million related to the NOLs utilized by TRC as of December 31,
1995 was written off in 1995. Additionally, as a result of the anticipated
change in ownership and Section 382 limitation, a valuation allowance in 1995
was placed on all Federal NOL carryforwards generated through December 31, 1995.
See Note 9 of Notes to Consolidated Financial Statements. The benefit from
income taxes of $4.7 million in 1994 represented the statutory federal and state
tax benefit of the Company's loss partially offset by the impact of the state
tax valuation allowance.

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED
------------------------------------------------- SEPTEMBER 28,
1994 1995 1996 1997
--------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
Restaurants opened.......................................... 8 1 3 2
Restaurants closed.......................................... 15 16 31 13
Restaurants open (end of period)............................ 750 735 707 696

Restaurants expanded........................................ 7 5 4 5
Aggregate restaurants expanded.............................. 12 17 21 26

Restaurants revitalized..................................... 67 14 16 9
Aggregate restaurants revitalized........................... 594 608 624 633

Aggregate restaurants re-imaged............................. -- -- -- 4
</TABLE>

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

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

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

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

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

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

29
<PAGE>

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

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

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

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

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

OLD CREDIT FACILITY

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

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<PAGE>
Stock," "Shares Eligible for Future Sale," "Underwriting" and Note 7 of Notes to
Consolidated Financial Statements.

NET OPERATING LOSS CARRYFORWARDS

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

INFLATION

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

SEASONALITY

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

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<PAGE>
BUSINESS

GENERAL

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

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<PAGE>
capitalized upon the Company's strong brand name recognition by initiating the
sale of Friendly's unique line of packaged frozen desserts through retail
locations.

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

COMPETITIVE STRENGTHS

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

STRONG BRAND NAME RECOGNITION. During the past 60 years, management
believes the Friendly's brand name has become synonymous with high-quality food
and innovative frozen desserts. The Company believes that the brand name
awareness created by its premium frozen dessert heritage drives customer
traffic, particularly during the afternoon and evening snack periods, promotes
menu enhancement and extension and generates incremental revenues from the
Company's retail and non-traditional distribution channels. The Company's
independent surveys indicate that, in the Northeast, over 90% of all households
recognize the Friendly's brand and that over 30% of these households visit a
Friendly's restaurant every three months.

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

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

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

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

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

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

BUSINESS STRATEGIES

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

UPGRADE MENU AND SELECTIVELY INTRODUCE NEW PRODUCTS. Friendly's strategy is
to increase consumer awareness and restaurant patronage by continuously
upgrading its menu and introducing new products. As part of this strategy,
Friendly's dedicated research and development group regularly formulates
proprietary new menu items and frozen desserts to capitalize on the evolving
tastes and preferences of its customers. In the fall of 1996, the Company
introduced a new dinner line which includes a high-quality steak entree,
home-style chicken dinners, pot pies and stir-frys, as well as several premium
frozen desserts including the

34
<PAGE>
new Oreo-Registered Trademark- Brownie Sundae. Largely as a result of new
premium items, guest check averages have increased 7.4% during the first nine
months of 1997 as compared to the same period of 1996.

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

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

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

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

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

EXTEND THE FRIENDLY'S BRAND INTERNATIONALLY. The Company's long-term
international growth strategy is to utilize local partners and establish master
franchise or licensee agreements to extend the brand internationally and to
achieve profitable growth while minimizing capital investment. Currently, the
Company's Friendly's International, Inc. subsidiary ("FII") participates in a
licensing agreement with a South Korean enterprise to develop Friendly's "Great
American" ice cream shoppes in that country. As of

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September 28, 1997, the licensee and its sublicensees were operating 18 ice
cream shoppes, and the Company expects such parties to operate 28 ice cream
shoppes by the end of 1997. FII also sells the Company's frozen desserts in
several chain restaurants, theaters and food courts in the United Kingdom. The
Company selects its international markets based on the high quality of the
Company's frozen desserts relative to locally-produced frozen desserts and the
propensity of consumers in these regions to purchase American-branded products.

RESTAURANT OPERATIONS

Friendly's believes it provides significant value to consumers by offering a
wide variety of freshly-prepared, wholesome foods and frozen desserts at a
reasonable price. The menu currently features over 100 items comprised of a
broad selection of breakfast, lunch, dinner and afternoon and evening snack
items. Breakfast items include specialty omelettes and breakfast combinations
featuring eggs, pancakes and bacon or sausage. Breakfasts generally range from
$2.00 to $6.00 and account for approximately 12% of average restaurant revenues.
Lunch and dinner items include a new line of wrap sandwiches, entree salads,
soups, super-melts, specialty burgers, appetizers including quesadillas,
mozzarella cheese sticks and "Fronions," and stir-fry, chicken, pot pie,
tenderloin steak and seafood entrees. These lunch and dinner items generally
range from $4.00 to $9.00, and these day-parts account for approximately 53% of
average restaurant revenues. Entree selections are complemented by Friendly's
premium frozen desserts, including the Fribble-Registered Trademark-, the
Company's signature thick shake, Happy Ending-Registered Trademark- Sundaes and
fat-free Sorbet Smoothies. The Company's frozen desserts are an important
component of the success of the Company's snack day-part which accounts for 35%
of average restaurant revenues.

RESTAURANT LOCATIONS AND PROPERTIES

The table below identifies the location of the 696 restaurants operating as
of September 28, 1997.

<TABLE>
<CAPTION>
COMPANY-OWNED/LEASED
------------------------------------
FREESTANDING OTHER FRANCHISED TOTAL
STATE RESTAURANTS RESTAURANTS (A) RESTAURANTS (B) RESTAURANTS
- ----------------------------------------------------- --------------- ------------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Connecticut.......................................... 49 20 -- 69
Delaware............................................. -- 1 6 7
Florida.............................................. 13 2 -- 15
Maine................................................ 10 -- -- 10
Maryland............................................. 3 7 22 32
Massachusetts........................................ 116 37 -- 153
Michigan............................................. 1 -- -- 1
New Hampshire........................................ 14 6 -- 20
New Jersey........................................... 47 18 -- 65
New York............................................. 130 34 -- 164
Ohio................................................. 57 3 -- 60
Pennsylvania......................................... 51 13 -- 64
Rhode Island......................................... 8 -- -- 8
Vermont.............................................. 7 3 -- 10
Virginia............................................. 10 2 6 18
--- --- --- ---
Total............................................ 516 146 34 696
</TABLE>

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

(a) Includes primarily malls and strip centers.

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

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

RESTAURANT ECONOMICS

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

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

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

CAPITAL INVESTMENT PROGRAM

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

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<PAGE>

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

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

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

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

FRANCHISING PROGRAM

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

QUALITY CONTROL PROGRAMS

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

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

CARRYOUT OPERATIONS

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

RETAIL AND RELATED OPERATIONS

RETAIL OPERATIONS

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

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

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

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

39
<PAGE>
market basis. In addition, the Company's retail marketing and sales departments
coordinate market development plans and key account management programs.

NON-TRADITIONAL LOCATIONS

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

INTERNATIONAL OPERATIONS

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

MARKETING

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

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

40
<PAGE>
promotional message. In addition, the Company supports certain of these
highly-penetrated markets (Albany, Boston, Hartford-Springfield and Providence)
during the peak summer season with additional television media focusing on
freshly-scooped and packaged frozen desserts. In its secondary markets, the
Company utilizes more cost-effective local store marketing initiatives such as
radio, direct mail and newspaper advertising. All of the Company's markets are
supported with an extensive promotional coupon program.

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

MANUFACTURING

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

PURCHASING AND DISTRIBUTION

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

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

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

HUMAN RESOURCES AND TRAINING

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

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

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

EMPLOYEES

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

HEADQUARTERS AND OTHER NON-RESTAURANT PROPERTIES

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

42
<PAGE>
maintenance service facility located in Wilbraham, Massachusetts. The Company
leases (i) an approximately 60,000 square foot distribution facility in
Chicopee, Masschusetts, (ii) an approximately 38,000 square foot restaurant
construction and maintenance support facility in Ludlow, Massachusetts and (iii)
on a short-term basis, space for its division and regional offices, its training
and development center and other support facilities.

LICENSES AND TRADEMARKS

The Company is the owner or licensee of the trademarks and service marks
(the "Marks") used in its business. The Marks "Friendly-Registered Trademark-"
and "Friendly's-Registered Trademark-" are owned by the Company pursuant to
registrations with the U.S. Patent and Trademark office.

Upon the sale of the Company by Hershey in 1988, all of the Marks used in
the Company's business at that time which did not contain the word "Friendly" as
a component of such Marks (the "1988 Non-Friendly Marks"), such as
Fribble-Registered Trademark-, Fishamajig-Registered Trademark- and
Clamboat-Registered Trademark- were licensed by Hershey to the Company. The 1988
Non-Friendly Marks license has a term of 40 years expiring on September 2, 2028.
Such license included a prepaid license fee for the term of the license which is
renewable at the Company's option for an additional term of 40 years and has a
license renewal fee of $20.0 million.

Hershey also entered into non-exclusive licenses with the Company for
certain candy trademarks used by the Company in its frozen dessert sundae cups
(the "Cup License") and pints (the "Pint License"). The Cup License and Pint
License automatically renew for unlimited one-year terms subject to certain
nonrenewal rights held by both parties. Hershey is subject to a noncompete
provision in the sundae cup business for a period of two years if the Cup
License is terminated by Hershey without cause, provided that the Company
maintains its current level of market penetration in the sundae cup business.
However, Hershey is not subject to a noncompete provision if it terminates the
Pint License without cause.

The Company also has a non-exclusive license agreement with Leaf, Inc.
("Leaf") for use of the Heath-Registered Trademark- Bar candy trademark. The
term of the royalty-free Leaf license continues indefinitely subject to
termination by Leaf upon 60 days notice. Excluding the Marks subject to the
licenses with Hershey and Leaf, the Company is the owner of its Marks.

COMPETITION

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

GOVERNMENT REGULATION

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

43
<PAGE>
particular area. The Company is also subject to Federal and state environmental
regulations, but these have not had a material adverse effect on the Company's
operations.

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

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

LEGAL PROCEEDINGS

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

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<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY

The executive officers and directors of the Company and their respective
ages and positions with the Company are as follows:

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

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

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

Joseph A. O'Shaughnessy 62 Senior Executive Vice President

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

Gerald E. Sinsigalli 59 President, Food Service Division

Dennis J. Roberts 48 Senior Vice President, Restaurant Operations

Scott D. Colwell 40 Vice President, Marketing

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

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

Garrett J. Ulrich 46 Vice President, Human Resources

Michael J. Daly* 55 Director

Steven L. Ezzes 50 Director

Barry Krantz* 53 Director

Charles A. Ledsinger, Jr. 47 Director

Burton J. Manning* 66 Director

Gregory L. Segall* 34 Director
</TABLE>

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

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

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

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<PAGE>
JOSEPH A. O'SHAUGHNESSY has been Senior Executive Vice President since
October 1988. Mr. O'Shaughnessy has been employed in various capacities with the
Company since 1957. Mr. O'Shaughnessy's duties have included District and
Division Manager, Director and Vice President of Operations and Executive Vice
President.

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

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

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

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

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

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

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

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

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

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

CHARLES A. LEDSINGER, JR. became a Director of the Company in October 1997
and had previously served as a Director of the Company from August 1992 to July
1997. Mr. Ledsinger is the Senior Vice President

46
<PAGE>

and Chief Financial Officer of St. Joe Corporation where he has been employed
since May 1997. Prior to joining St. Joe Corporation, he served as the Senior
Vice President and Chief Financial Officer of Harrah's Entertainment, Inc. where
he was employed since 1978. Mr. Ledsinger is a director of the general partner
of PFR.

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

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

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

INFORMATION REGARDING THE BOARD OF DIRECTORS AND COMMITTEES

CLASSES OF DIRECTORS

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

BOARD COMMITTEES

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

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

47
<PAGE>
Each Director of the Company who is not an employee of the Company will
receive a fee of $2,500 per month and $1,500 per Board of Directors and special
Board of Directors meeting attended, plus expenses.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

After consideration of the recommendations of Mr. Smith, compensation
matters of the Company are currently determined by Messrs. Ezzes, Segall, Krantz
and Ledsinger, members of the Company's Board of Directors.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The Summary Compensation Table below sets forth the annual base salary and
other annual compensation paid during the last three fiscal years to the
Company's chief executive officer and each of the other four most highly
compensated executive officers whose cash compensation exceeded $100,000 in a
combination of salary and bonus (the "named executive officers"). During 1994,
1995 and 1996, no long-term compensation was paid to the named executive
officers.

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

Donald N. Smith (b)............... 1996 $ 495,355 $ 150,000 $ 0 $ 0 $ 0
Chairman, Chief Executive 1995 472,640
Officer and President 1994 450,736

Larry W. Browne................... 1996 265,822 30,000 201 0 0
Executive Vice President, 1995 257,788
Corporate Finance, General 1994 249,619
Counsel and Secretary

Joseph A. O'Shaughnessy........... 1996 255,974 37,000 201 0 0
Senior Executive Vice President 1995 253,348
1994 245,720

Gerald E. Sinsigalli.............. 1996 249,552 40,000 201 0 0
President, Food Service Division 1995 239,646
1994 229,582

Paul J. McDonald.................. 1996 246,145 47,000 201 0 0
Senior Executive Vice President, 1995 236,780
Chief Administrative Officer and 1994 213,076
Assistant Secretary
</TABLE>

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

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

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

48
<PAGE>
PENSION PLAN TABLE

The following table sets forth the estimated annual benefits payable, based
on the indicated credited years of service and the indicated average annual
remuneration used in calculating benefits, under the Pension Plan (as defined
below).

<TABLE>
<CAPTION>
ESTIMATED BENEFIT BASED ON YEARS OF SERVICE (A)
----------------------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 125,000 $ 11,171 $ 17,544 $ 24,444 $ 31,475 $ 39,031
150,000 13,405 21,053 29,333 37,770 46,837
175,000 15,639 24,562 34,222 44,065 54,643
200,000 17,873 28,071 39,111 50,360 62,451
300,000 26,809 42,106 58,664 75,539 93,675
400,000 35,746 56,142 78,221 100,720 124,901
500,000 44,682 70,177 97,775 125,899 156,123
600,000 53,619 84,214 117,330 151,078 187,350
700,000 62,555 98,249 136,885 176,259 218,573
</TABLE>

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

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

LIMITED STOCK COMPENSATION PROGRAM

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

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

49
<PAGE>
RESTRICTED STOCK PLAN

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

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

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

STOCK OPTION PLAN

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

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

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

Stock options and stock appreciation rights shall become exercisable in
accordance with the terms established by the Board of Directors, which terms may
relate to continued service with the Company or attainment of performance goals.
Stock options awarded in connection with the Common Stock Offering will become
exercisable over a five-year period, subject to the optionee's continued
employment with the

50
<PAGE>
Company. All awards under the Stock Option Plan will become fully vested and
exercisable upon a change in control of the Company.

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

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

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

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

51
<PAGE>
OWNERSHIP OF COMMON STOCK

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

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

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

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

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

(b) In connection with the Recapitalization, each outstanding Class A common
share and Class B common share of the Company will be converted into one
share of Common Stock.
(c) Messrs. Krantz and Segall, currently on the Board of Directors as nominees
of the lenders under the Old Credit Facility, will be replaced as Directors
by Messrs. Daly and Manning upon consummation of the Recapitalization. See
"Management."
(d) Prior to the Recapitalization, the Bank of Boston, as agent for the lenders
under the Old Credit Facility, held the Class B common shares for the
benefit of the lenders under the Old Credit Facility, having received Class
B common shares of the Company in 1996 in connection with the restructuring
of the Old Credit Facility. In connection with the Recapitalization, these
shares will automatically convert into shares of Common Stock and will be
distributed to the then existing lenders under the Old Credit Facility pro
rata according to the respective amounts of indebtedness thereunder held by
them. See Note 7 of Notes to Consolidated Financial Statements.
(e) Foothill Capital Corporation, Baker Nye Special Credits, Inc., D K
Acquisition Partners, L.P., Contrarian Capital Advisors, L.L.C., CoMac
Partners L.P., CoMac International N.V., Tribeca Investments L.L.C., Carl
Marks Management Company, L.P., Sanwa Business Credit Corporation, Halcyon
Distressed Securities L.P., Bedrock Asset Trust I and Morgan Stanley & Co.
International Limited, each of which is a lender under the Old Credit
Facility, and Equitable, Quidnet Partners, BMA Limited Partnership, Mr.
Browne and Peter Joost, other stockholders of the Company, have granted to
the Underwriters a 30-day option to purchase 86,790, 11,680, 65,367, 8,970,
23,316, 8,970, 24,919, 57,286, 15,246, 48,409, 12,274, 15,066, 151,349,
46,893, 19,085, 21,130 and 8,092 shares of Common Stock beneficially owned
by such lenders and other stockholders, respectively, as part of the
Underwriters' over-allotment option. If such over-allotment option is
exercised in full, the lenders under the Old Credit Facility would
beneficially own 4.5%, and such other stockholders would no longer
beneficially own any, of the outstanding Common Stock. See "Underwriting."

52
<PAGE>
CERTAIN TRANSACTIONS

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

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

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

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

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

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

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

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

53
<PAGE>
The Company is a party to two agreements with TRC relating to taxes. In
connection with the distribution by TRC to its shareholders of the Common Stock
in the Company immediately prior to the 1996 bank restructuring, the Company
entered into a Tax Disaffiliation Agreement dated March 25, 1996. Under the Tax
Disaffiliation Agreement, TRC must indemnify the Company for all income taxes
during periods when the Company and its affiliates were includible in a
consolidated federal income tax return with TRC and for any income taxes due as
a result of the Company ceasing to be a member of the TRC consolidated group.
TRC does not retain any liability for periods when the Company and its
affiliates were not includible in the TRC consolidated federal income tax return
and the Company must indemnify TRC if any such income taxes are assessed against
TRC. TRC also does not indemnify the Company for a reduction of the Company's
existing NOLs or for NOLs previously utilized by TRC. The Tax Disaffiliation
Agreement terminates 90 days after the statute of limitations expires for each
tax covered by the agreement including unfiled returns as if such returns had
been filed by the appropriate due date.

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

DESCRIPTION OF NEW CREDIT FACILITY

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

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

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

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

54
<PAGE>

issuances, asset sales and insurance claims shall be applied to permanently
reduce the Revolving Credit Facility. At the Company's option, loans may be
prepaid at any time with certain notice and breakage cost provisions.

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

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

DESCRIPTION OF SENIOR NOTES

Concurrent with consummating the Common Stock Offering and entering into the
New Credit Facility, the Company is offering to the public $175 million
aggregate principal amount of its Senior Notes due 2007. The consummation of the
Common Stock Offering and the Senior Note Offering and the closing with respect
to the New Credit Facility are each contingent upon the others.

Interest on the Senior Notes will be payable semi-annually on and
of each year, commencing on , 1998. The Senior Notes will mature on
, 2007 unless previously redeemed. The Senior Notes will be redeemable, in
whole or in part, at the option of the Company, at any time on or after ,
2002, at specified declining redemption prices, plus accrued and unpaid interest
thereon, if any, to the date of redemption. In addition, on or prior to ,
2000, the Company may redeem, at any time and from time to time, up to $60
million of the aggregate principal amount of the Senior Notes at a redemption
price of % of the principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of redemption, with the net cash proceeds from one
or more qualified equity offerings; provided, however, that at least $115
million of the aggregate principal amount of the Senior Notes remains
outstanding following each such redemption.

Upon the occurrence of a change of control, each holder of Senior Notes may
require the Company to repurchase such holder's Senior Notes, in whole or in
part, at a repurchase price of 101% of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the repurchase date. The Company
will also be obligated in certain circumstances to offer to repurchase Senior
Notes at a purchase price of 100% of the principal amount thereof, plus accrued
interest, with the net available cash from certain asset sales and dispositions.

The Senior Notes will be unsecured, senior obligations of the Company, will
rank PARI PASSU in right of payment with all existing and future senior
indebtedness of the Company and will rank senior in right of

55
<PAGE>
payment to all existing and future subordinated indebtedness of the Company. The
Senior Notes will be effectively subordinated to all existing and future secured
indebtedness of the Company, including indebtedness under the New Credit
Facility. The Senior Notes will be unconditionally guaranteed on a senior
unsecured basis, by Friendly's Restaurants Franchise, Inc., the Company's
franchise subsidiary and may also be so guaranteed by certain subsidiaries of
the Company created or acquired after consummation of the Recapitalization.

The Indenture under which the Notes will be issued (the "Indenture") will
contain certain covenants pertaining to the Company and its Restricted
Subsidiaries (as defined in the Indenture), including but not limited to
covenants with respect to the following matters: (i) limitations on indebtedness
and preferred stock, (ii) limitations on restricted payments such as dividends,
repurchases of the Company's or subsidiaries' stock, repurchases of subordinated
obligations, and investments, (iii) limitations or restrictions on distributions
from restricted subsidiaries, (iv) limitations on sales of assets and,
subsidiary stock, (v) limitations on transactions with affiliates, (vi)
limitations on liens, (vii) limitations on sales of subsidiary capital stock and
(viii) limitations on mergers, consolidations and transfers of all or
substantially all assets. However, all of these covenants are subject to a
number of important qualifications and exceptions.

The Indenture will contain customary events of default, including a
cross-default provision triggered by the non-payment of outstanding indebtedness
at stated final maturity or by the acceleration of outstanding indebtedness, in
each case in excess of a specified amount. If an event of default occurs and is
continuing under the Indenture, the trustee or the holders of at least 25% in
aggregate principal amount of the outstanding Senior Notes may declare the
principal of and accrued but unpaid interest on all the Senior Notes to be due
and payable. If an event of default relating to certain events of bankruptcy,
insolvency or reorganization of the Company occurs and is continuing, the
principal of and accrued interest on all the Senior Notes will become
immediately due and payable. Under certain circumstances, the holders of a
majority in aggregate principal amount of the outstanding Senior Notes may
rescind any such acceleration with respect to the Senior Notes and its
consequences.

DESCRIPTION OF CAPITAL STOCK

Effective upon the filing of the Restated Articles prior to the consummation
of the Common Stock Offering, the authorized capital stock of the Company will
consist of 50,000,000 shares of Common Stock, $0.01 par value per share, and
1,000,000 shares of preferred stock, $0.01 par value per share (the "Preferred
Stock"), which may be issued in one or more series.

COMMON STOCK

Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding Preferred Stock.
Holders of the Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in the Common Stock Offering will be, when issued and
paid for, fully paid and nonassessable. The rights, preferences and privileges
of holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which the
Company may designate and issue in the future. Upon the closing of the Common
Stock Offering, there will be no shares of Preferred Stock outstanding.

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PREFERRED STOCK

Upon filing of the Restated Articles, the Board of Directors will be
authorized, subject to certain limitations prescribed by law, without further
stockholder approval, to issue from time to time up to an aggregate of 1,000,000
shares of Preferred Stock in one or more series and to fix or alter the
designations, preferences, rights and any qualifications, limitations or
restrictions of the shares of each such series thereof, including the dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption
(including sinking fund provisions), redemption price or prices, liquidation
preferences and the number of shares constituting any series or designations of
such series. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change of control of the Company. The Company has no
present plans to issue any shares of Preferred Stock. See "Risk Factors--Effect
of Certain Anti-Takeover Provisions."

MASSACHUSETTS LAW AND CERTAIN PROVISIONS OF THE COMPANY'S RESTATED ARTICLES OF
ORGANIZATION AND RESTATED BY-LAWS

Following the Common Stock Offering, the Company expects that it will be
subject to Chapter 110F of the Massachusetts General Laws, an anti-takeover law.
In general, this statute prohibits a publicly held Massachusetts corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
becomes an interested stockholder, unless (i) the interested stockholder obtains
the approval of the Board of Directors prior to becoming an interested
stockholder, (ii) the interested stockholder acquires 90% of the outstanding
voting stock of the corporation (excluding shares held by certain affiliates of
the corporation) at the time it becomes an interested stockholder, or (iii) the
business combination is approved by both the Board of Directors and the holders
of two-thirds of the outstanding voting stock of the corporation (excluding
shares held by the interested stockholder). An "interested stockholder" is a
person who, together with affiliates and associates, owns 5% or more of the
outstanding voting stock of the corporation or, if the person is an affiliate or
associate of the corporation, did own 5% or more of the outstanding voting stock
of the corporation at any time within the prior three years. A "business
combination" includes a merger, a stock or asset sale, and certain other
transactions resulting in a financial benefit to the interested stockholder.

The Company's Restated Articles and Restated By-Laws provide for a
classified board of directors consisting of three classes as nearly equal in
size as possible. In addition, the Restated Articles and Restated By-Laws
provide that directors may be removed only for cause by the affirmative vote of
(i) the holders of at least a majority of the shares issued outstanding and
entitled to vote or (ii) a majority of the directors then in office. Under the
Restated Articles and Restated By-Laws, the Board of Directors is empowered to
fix the exact number of directors and any vacancy, however occurring, including
a vacancy resulting from an enlargement of the Board, may only be filled by a
vote of a majority of the directors then in office. The classification of the
Board of Directors and the limitations on the removal of directors and filling
of vacancies could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from acquiring, control of the
Company. See "Management--Executive Officers and Directors of the Company."

The Restated By-Laws include a provision excluding the Company from the
applicability of Massachusetts General Laws Chapter 110D, entitled "Regulation
of Control Share Acquisitions." In general, this statute provides that any
stockholder of a corporation subject to this statute who acquires 20% or more of
the outstanding voting stock of a corporation may not vote such stock unless the
stockholders of the corporation so authorize. The Board of Directors may amend
the Company's Restated By-Laws at any time to subject the Company to this
statute prospectively.

The Restated By-Laws also require that a stockholder seeking to have any
business conducted at a meeting of stockholders give notice to the Company prior
to the scheduled meeting. The notice from the

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<PAGE>
stockholder must describe the proposed business to be brought before the meeting
and include information about the stockholder making the proposal, any
beneficial owner on whose behalf the proposal is made and any other stockholder
known to be supporting the proposal. The Restated By-Laws further provide that a
special stockholders meeting may be called only by the Board of Directors,
Chairman of the Board of Directors or President of the Company. These provisions
may discourage another person or entity from making a tender offer for the
Common Stock, because such person or entity, even if it acquired a majority of
the outstanding shares, would be able to take action as a stockholder (such as
electing new directors or approving a merger) only at a duly called stockholders
meeting.

The Massachusetts General Laws provide generally that an amendment to the
Articles of Organization which changes the authorized capital stock of a
corporation requires the affirmative vote of a majority of the shares entitled
to vote on any matter and any amendment which impairs or diminishes the rights
of stockholders or any other amendment to the Articles of Organization requires
the affirmative vote of two-thirds of the shares entitled to vote on any matter.
Under Massachusetts law and the Restated By-Laws, the Board of Directors, upon
the affirmative vote of a majority of the directors then in office, or the
stockholders, upon the affirmative vote of a majority of the shares entitled to
vote on any matter, may amend the Restated By-Laws, except that the Restated
By-Laws provide that the anti-takeover provisions (described in the preceding
three paragraphs) contained in the Restated By-Laws may not be amended by the
stockholders except upon the affirmative vote of two-thirds of the shares
entitled to vote on any matter.

The Restated Articles and Restated By-Laws contain provisions to indemnify
the Company's directors and officers to the fullest extent authorized by
Massachusetts law against all expenses and liabilities reasonably incurred in
connection with service for or on behalf of the Company. In addition, the
Restated Articles provide that the directors of the Company will not be
personally liable for monetary damages to the Company for breaches of their
fiduciary duty as directors, unless they violated their duty of loyalty to the
Company or its stockholders, acted in bad faith, knowingly or intentionally
violated the law, authorized illegal dividends or redemptions or derived an
improper personal benefit from their action as directors.

STOCKHOLDER RIGHTS PLAN

The Company's Board of Directors intends to enact a stockholder rights plan
(the "Rights Plan") designed to protect the interests of the Company's
stockholders in the event of a potential takeover for a price which does not
reflect the Company's full value or which is conducted in a manner or on terms
not approved by the Board of Directors as being in the best interests of the
Company and its stockholders. The Rights Plan has certain anti-takeover effects,
in that it will cause substantial dilution to a person or group that attempts to
acquire a significant interest in the Company on terms not approved by the Board
of Directors.

Pursuant to the Rights Plan, upon the filing of the Restated Articles prior
to the closing of the Common Stock Offering, the Board will declare a dividend
distribution of one purchase right ("Right") for every outstanding share of
Common Stock. The terms of the Rights are set forth in a Rights Agreement (the
"Rights Agreement") between the Company and The Bank of New York (the "Rights
Agent"). The Rights Agreement provides for the issuance of one Right for every
share of Common Stock issued and outstanding on the date the dividend is
declared (the "Dividend Record Date") and for each share of Common Stock which
is issued or sold after that date and prior to the Distribution Date (as defined
below).

Each Right entitles the holder to purchase from the Company one
one-thousandth of a share of Series A Junior Preferred Stock, $0.01 par value,
of the Company (the "Junior Preferred Stock"), at a price of $90.00 per one
one-thousandth of a share, subject to adjustments in certain events. The Rights
will expire on the date which is ten years from the Dividend Record Date (the
"Expiration Date"), or upon the earlier redemption of the Rights, and are not
exercisable until the Distribution Date.

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<PAGE>
No separate Rights certificates will be issued at the present time. Until
the Distribution Date (or earlier redemption or expiration of the Rights), (i)
the Rights will be evidenced by the outstanding Common Stock certificates and
will be transferred with and only with the Common Stock certificates, (ii) new
Common Stock certificates issued after the Dividend Record Date upon transfer or
new issuance of the Common Stock will contain a notation incorporating the
Rights Agreement by reference and (iii) the surrender for transfer of any Common
Stock certificate will also constitute the transfer of the Rights associated
with the Common Stock represented by such certificate.

The Rights will separate from the Common Stock on the Distribution Date.
Unless otherwise determined by a majority of the Continuing Directors (as
defined below) then in office, the Distribution Date (the "Distribution Date")
will occur on the earlier of (i) the tenth business day following the date of a
public announcement that a person, together with its affiliates and associates,
except as described below, has acquired or owns the rights to acquire beneficial
ownership of 15% or more of the outstanding shares of Common Stock
(collectively, an "Acquiring Person") (such date is referred to herein as the
"Shares Acquisition Date") or (ii) the tenth business day following commencement
of a tender offer or exchange offer that would result in any person, together
with its affiliates and associates, owning 15% or more of the outstanding Common
Stock. After the Distribution Date, separate certificates evidencing the Rights
("Rights Certificates") will be mailed to holders of record of the Common Stock
as of the close of business on the Distribution Date and thereafter such
separate Rights Certificates alone will evidence the Rights. The Board of
Directors, by action of the Continuing Directors, may delay the distribution of
the Certificates. The term "Continuing Directors" means (i) any member of the
Company's Board of Directors who is not an Acquiring Person, or an affiliate,
associate or representative of an Acquiring Person, or (ii) any person who
subsequently becomes a member of the Board, who is not an Acquiring Person or an
affiliate, associate or representative of an Acquiring Person, if such person's
nomination for election or election to the Board is recommended or approved by a
majority of Continuing Directors. The Rights Plan excludes Mr. Smith, Equitable,
the Company's senior management and their respective affiliates from the
definition of "Acquiring Person."

If, at any time after the Dividend Record Date, any person or group of
affiliated or associated persons (other than the Company and its affiliates)
shall become an Acquiring Person, each holder of a Right will have the right to
receive shares of Common Stock (or, in certain circumstances, cash, property or
other securities of the Company) having a market value of two times the exercise
price of the Right. Following the occurrence of any such event, any Rights that
are, or (under certain circumstances specified in the Rights Agreement) were,
beneficially owned by any Acquiring Person shall immediately become null and
void. Also, if the Company were acquired in a merger or other business
combination, or if more than 50% of its assets or earning power were sold, each
holder of a Right would have the right to exercise such Right and thereby
receive common stock of the acquiring company with a market value of two times
the exercise price of the Right.

The Board of Directors may, at its option, at any time after any person
becomes an Acquiring Person, exchange all or part of the then outstanding and
exercisable Rights for shares of Common Stock at an exchange ratio of one share
of Common Stock per Right, appropriately adjusted to reflect any stock split,
stock dividend or similar transaction occurring after the Dividend Record Date
(as the same may be adjusted, the "Exchange Ratio"). The Board of Directors
however, may not effect an exchange at any time after any person (other than (i)
the Company, (ii) any subsidiary of the Company, (ii) any employee benefit plan
of the Company or of any subsidiary of the Company or (iv) any entity holding
Common Stock for or pursuant to the terms of any such plan), together with all
affiliates of such person, becomes the beneficial owner of 50% or more of the
Common Stock then outstanding. Immediately upon the action of the Board of
Directors ordering the exchange of any Rights and without any further action and
without any notice, the right to exercise such Rights will terminate and the
only right thereafter of a holder of such Rights will be to receive that number
of shares of Common Stock equal to the number of such Rights held by the holder
multiplied by the Exchange Ratio.

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<PAGE>
The exercise price of the Rights, and the number of one one-thousandths of a
share of Junior Preferred Stock or other securities or property issuable upon
exercise of the Rights, are subject to adjustment from time to time to prevent
dilution (i) in the event of a stock dividend on, or a subdivision combination
or reclassification of, the Junior Preferred Stock, (ii) upon the grant to
holders of the Junior Preferred Stock of certain rights or warrants to subscribe
for shares of the Junior Preferred Stock or certain convertible securities at
less than the current market price of the Junior Preferred Stock, or (iii) upon
the distribution to holders of the Junior Preferred Stock of evidences of
indebtedness or assets (excluding cash dividends paid out of the earnings or
retained earnings of the Company and certain other distributions) or of
subscription rights, or warrants (other than those referred to above).

At any time prior to the tenth day (or such later date as may be determined
by a majority of the Continuing Directors) after the Shares Acquisition Date,
the Company, by a majority vote of the Continuing Directors, may redeem the
Rights at a redemption price of $0.01 per Right, subject to adjustment in
certain events (as the same may be adjusted, the "Redemption Price").
Immediately upon the action of the Continuing Directors electing to redeem the
rights, the right to exercise the Rights will terminate, and the only right of
the holders of Rights will be to receive the Redemption Price.

Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of the Company, including, without limitation, the right to
vote or to receive dividends.

The Rights Agreement may be amended by the Board of Directors at any time
prior to the Distribution Date without the approval of the holders of the
Rights. From and after the Distribution Date, the Rights Agreement may be
amended by the Board of Directors without the approval of the holders of the
Rights in order to cure any ambiguity, to correct any defective or inconsistent
provisions, to change any time period for redemption or any other time period
under the Rights Agreement or to make any other changes that do not adversely
affect the interests of the holders of the Rights (other than any Acquiring
Person or its affiliates and associates or their transferees).

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Company's Common Stock is The Bank
of New York.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to the Common Stock Offering, there has been no market for the Common
Stock of the Company. Future sales of substantial amounts of Common Stock in the
public market following the Common Stock Offering could adversely affect the
prevailing market price of the Common Stock.

Upon completion of the Common Stock Offering, the Company will have
7,125,000 shares of Common Stock outstanding. Of these shares, the 5,000,000
shares sold in the Common Stock Offering will be freely tradeable without
restriction under the Securities Act, except that any shares purchased by
persons deemed to be "affiliates" of the Company, as that term is defined in
Rule 144 ("Rule 144") under the Securities Act ("Affiliates"), generally may be
sold only in compliance with the limitations of Rule 144 described below.

The remaining 2,125,000 shares of Common Stock are deemed "restricted
securities" (the "Restricted Shares") under Rule 144 because they were
originally issued and sold by the Company in private transactions in reliance
upon exemptions from the Securities Act. Under Rule 144, substantially all of
these remaining Restricted Shares may become eligible for resale 90 days after
the date the Company becomes subject to the reporting requirements of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act") (i.e., 90
days after the consummation of the Common Stock Offering), and may be resold
prior to such date only in compliance with the registration requirements of the
Securities Act or pursuant to a valid exemption therefrom. However, the
2,125,000 shares are subject to the lock-up agreements described below.

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In general, under Rule 144, if a period of at least one year has elapsed
between the later of the date on which "restricted securities" were acquired
from the Company or an "affiliate" of the Company then the holder of such
restricted securities is entitled to sell a number of shares within any
three-month period that does not exceed the greater of (i) 1.0% (approximately
75,000 shares after the Common Stock Offering) of the then outstanding shares of
the Common Stock or (ii) the average weekly reported volume of trading of the
Common Stock during the four calendar weeks preceding such sale. Sales under
Rule 144 are also subject to certain requirements pertaining to the manner of
such sales, notices of such sales and the availability of current public
information concerning the Company. Affiliates of the Company may sell shares
not constituting restricted shares in accordance with the foregoing volume
limitations and other requirements but without regard to the one-year period.
Under Rule 144(k), if a period of at least two years has elapsed between the
later of the date on which restricted shares were acquired from the Company or
the date on which they were acquired from an affiliate of the Company, a holder
of such restricted shares who is not an affiliate of the Company at the time of
the sale and has not been an affiliate of the Company for at least three months
prior to the sale would be entitled to sell the shares immediately without
regard to the volume limitations and other conditions described above.

The Company intends to file registration statements under the Securities Act
to register (i) all shares of Common Stock issuable pursuant to the Company's
Stock Option Plan and Restricted Stock Plan and (ii) certain shares of Common
Stock to be issued under the Company's Management Stock Plan and Limited Stock
Compensation Program. Subject to the completion of the 360-day period described
above, shares of Common Stock issued under, or issued upon the exercise of
awards issued under such plans and after the effective date of such registration
statements, generally will be eligible for sale in the public market. See
"Management--Executive Compensation" and "Ownership of Common Stock."

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<PAGE>
UNDERWRITING

The underwriters named below, represented by NationsBanc Montgomery
Securities, Inc., Piper Jaffray Inc. and Tucker Anthony Incorporated (the
"Representatives"), have severally agreed, subject to the terms and conditions
contained in the underwriting agreement (the "Underwriting Agreement") by and
among the Company and the Underwriters, to purchase from the Company the number
of shares of Common Stock indicated below opposite their respective names at the
initial public offering price less the underwriting discount set forth on the
cover page of this Prospectus. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent and
that the Underwriters are committed to purchase all of such shares if they
purchase any.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------ ----------
<S> <C>
NationsBanc Montgomery Securities, Inc. ....................
Piper Jaffray Inc...........................................
Tucker Anthony Incorporated.................................

----------
Total................................................... 5,000,000
----------
----------
</TABLE>

The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow to
selected dealers a concession of not more than $ per share, and the
Underwriters may allow to selected dealers, and such dealers may reallow, a
concession of not more than $ per share to certain other dealers. After the
Common Stock Offering, the public offering price and other selling terms may be
changed by the Representatives. The Common Stock is offered subject to receipt
and acceptance by the Underwriters, and to certain other conditions, including
the right to reject an order in whole or in part.

The Company, certain lenders under the Old Credit Facility and certain other
stockholders of the Company have granted an option to the Underwriters,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to a maximum of 750,000 additional shares of Common Stock to cover
over-allotments, if any, at the same price per share as the initial 5,000,000
shares to be purchased by the Underwriters. To the extent that the Underwriters
exercise this option, the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with the Common Stock
Offering. To the extent that such over-allotment option is not exercised in
full, the Underwriters will purchase up to 125,158 of such shares of Common
Stock from the Company pursuant to such option only after all of the 624,842
shares of Common Stock subject to such

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<PAGE>
option purchasable from the lenders under the Old Credit Facility and such other
stockholders of the Company have been purchased. See "Ownership of Common
Stock."

The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, as amended, or will contribute to payments the Underwriters may
be required to make in respect thereof.

The Representatives have informed the Company that the Underwriters do not
expect to make sales of Common Stock offered by this Prospectus to accounts over
which they exercise discretionary authority.

Prior to the Common Stock Offering, there has been no public trading market
for the Common Stock. Consequently, the initial public offering price will be
determined by negotiations between the Representatives and the Company. Among
the factors to be considered in such negotiations are the history of, and the
prospects for, the Company and the industry in which it competes, an assessment
of the Company's management, its past and present earnings and the trend of such
earnings, the prospects for future earnings of the Company, the present state of
the Company's development, the general condition of securities markets at the
time of the Common Stock Offering and the market price of publicly traded stock
of comparable companies in recent periods.

The Company's executive officers, directors and certain principal
stockholders have agreed that, for a period of 360 days from the date of this
Prospectus, they will not offer, sell or otherwise dispose of any shares of
their Common Stock or options to acquire shares of Common Stock without the
prior written consent of NationsBanc Montgomery Securities, Inc. The Company has
agreed not to sell any shares of Common Stock for a period of 90 days from the
date of this Prospectus without the prior written consent of NationsBanc
Montgomery Securities, Inc., except for shares issued pursuant to the exercise
of options granted under employee stock option plans.

Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission (the "Commission") may limit the ability of
the Underwriters and certain selling group members to bid for and purchase the
Common Stock. As an exception to these rules, the Representatives are permitted
to engage in certain transactions that stabilize the price of the Common Stock.
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Common Stock. If the Underwriters create
a short position in the Common Stock in connection with the Common Stock
Offering, i.e., if they sell more shares of Common Stock than are set forth on
the cover page of this Prospectus, the Representatives may reduce that short
position by purchasing Common Stock in the open market. The Representatives may
also elect to reduce any short position by exercising all or part of the
over-allotment option described above. The Representatives may also impose a
penalty bid on certain Underwriters and selling group members. This means that
if the Representatives purchase shares of Common Stock in the open market to
reduce the Underwriters' short position or to stabilize the price of the Common
Stock, they may reclaim the amount of the selling concession from the
Underwriters and selling group members who sold those shares as part of the
Common Stock Offering.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security. Neither the Company nor any of the
Underwriters makes any representation or predictions as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Representatives will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.

Societe Generale Securities Corporation, the lead underwriter of the Senior
Note Offering, is providing certain advisory services in connection with the
Recapitalization, for which it is receiving a fee. Societe Generale, an
affiliate of Societe Generale Securities Corporation, is to be a lender under
the New

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Credit Facility and to act as arranger and administrative agent thereunder. See
"Description of New Credit Facility."

At the request of the Company, up to 250,000 shares of Common Stock offered
hereby have been reserved for sale to certain individuals, including directors
and employees of the Company and members of their families, and in management's
discretion, to others with whom the Company has maintained long-standing and
significant business relationships. The price of such shares to such parties
will be the initial public offering price set forth on the cover of this
Prospectus. The number of shares available to the general public will be reduced
to the extent those parties purchase reserved shares. Any shares not so
purchased will be offered hereby at the initial public offering price set forth
on the cover of this Prospectus.

The Equitable, which currently beneficially owns 10.4% of the outstanding
common shares, is an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation, a member of the National Association of Securities Dealers, Inc.
(the "NASD") and an underwriter in the Common Stock Offering. As a result of the
foregoing, the Common Stock Offering is subject to the provisions of Section
2720 of the Conduct Rules of the NASD (formerly Schedule E to the Bylaws of the
NASD) ("Section 2720"). Accordingly, the underwriting terms for the Common Stock
Offering will conform with the requirements set forth in Section 2720. In
particular, the price at which the Common Stock is to be distributed to the
public must be at a price no higher than that recommended by a "qualified
independent underwriter" who has also participated in the preparation of this
Prospectus and the Registration Statement of which this Prospectus is a part and
who meets certain standards. In accordance with this requirement, NationsBanc
Montgomery Securities, Inc. will serve in such role and will recommend the
public offering price in compliance with the requirements of Section 2720.
NationsBanc Montgomery Securities, Inc., in its role as qualified independent
underwriter, has performed the due diligence investigations and reviewed and
participated in the preparation of this Prospectus and the Registration
Statement of which this Prospectus is a part.

LEGAL MATTERS

The validity of the securities offered hereby will be passed upon for the
Company by Choate, Hall & Stewart, Boston, Massachusetts. Certain legal matters
with respect to the securities offered hereby will be passed upon for the
Underwriters by Simpson Thacher & Bartlett (a partnership which includes
professional corporations), New York, New York.

EXPERTS

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

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include any amendment
thereto) on Form S-1 under the Securities Act, for the registration of the
securities offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain items of which are omitted as permitted by the
rules and regulations of the Commission. For further information with respect to
the Company and the Common Stock, reference is hereby made to the Registration
Statement and the exhibits and schedules filed as a part thereof. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document are not necessarily complete and, in each instance, reference is made
to the copy of such document, filed as an exhibit to the Registration Statement,
for a more complete description of the matter involved and each such statement
shall be deemed qualified in its entirety by such reference. The Registration
Statement and the exhibits

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<PAGE>
and schedules thereto filed by the Company with the Commission may be inspected,
without charge, at the public reference facilities maintained by the Commission
at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549,
and at the following regional offices of the Commission: Seven World Trade
Center, New York, New York 10048 and 500 West Madison Street, Chicago, Illinois
60661-2511. Copies of all or any portion of the Registration Statement may be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees.

The Company is not currently subject to the informational requirements of
the Exchange Act. As a result of the Offerings, the Company will become subject
to the informational requirements of the Exchange Act. The Company intends to
furnish its stockholders with annual reports containing financial statements
audited by independent accountants and with quarterly reports containing interim
financial information for each of the first three quarters of each year.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Public Accountants................................................................... F-2

Consolidated Financial Statements

Consolidated Balance Sheets as of December 31, 1995, December 29, 1996 and September 28, 1997
(unaudited)......................................................................................... F-3

Consolidated Statements of Operations for the Years Ended January 1, 1995, December 31, 1995 and
December 29, 1996 and for the Nine Months Ended September 29, 1996 (unaudited) and September 28,
1997 (unaudited).................................................................................... F-4

Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended January 1,
1995, December 31, 1995 and December 29, 1996 and for the Nine Months Ended September 28, 1997
(unaudited)......................................................................................... F-5

Consolidated Statements of Cash Flows for the Years Ended January 1, 1995, December 31, 1995 and
December 29, 1996 and for the Nine Months Ended September 29, 1996 (unaudited) and September 28,
1997 (unaudited).................................................................................... F-6

Notes to Consolidated Financial Statements........................................................... F-7
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of Friendly Ice Cream Corporation:

We have audited the accompanying consolidated balance sheets of Friendly Ice
Cream Corporation and subsidiaries as of December 31, 1995 and December 29,
1996, and the related consolidated statements of operations, changes in
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 29, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Friendly Ice Cream
Corporation and subsidiaries as of December 31, 1995 and December 29, 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 29, 1996 in conformity with generally accepted
accounting principles.

ARTHUR ANDERSEN LLP

Hartford, Connecticut

February 14, 1997 (except with respect to the matter
discussed in Note 16, as to which
the date is July 14, 1997)

F-2
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands)

<TABLE>
<CAPTION>
SEPTEMBER 28,
1997
DECEMBER 31, DECEMBER 29, -------------
1995 1996
------------ ------------ (UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................................... $ 23,690 $ 18,626 $ 12,044
Restricted cash................................................................... -- -- 4,000
Trade accounts receivable......................................................... 5,233 4,992 7,863
Inventories....................................................................... 15,079 15,145 17,017
Deferred income taxes............................................................. 9,885 12,375 12,381
Prepaid expenses and other current assets......................................... 3,985 1,658 6,735
------------ ------------ -------------
TOTAL CURRENT ASSETS................................................................ 57,872 52,796 60,040
RESTRICTED CASH..................................................................... -- -- 8,907
INVESTMENT IN JOINT VENTURE......................................................... -- 4,500 3,388
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization............ 295,448 286,161 273,189
INTANGIBLES AND DEFERRED COSTS, net of accumulated amortization of $3,419, $4,790
and $5,858 (unaudited) at December 31, 1995, December 29, 1996 and September 28,
1997, respectively................................................................ 16,607 16,019 15,519
OTHER ASSETS........................................................................ 365 650 1,871
------------ ------------ -------------
TOTAL ASSETS........................................................................ $ 370,292 $ 360,126 $ 362,914
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt.............................................. $ 3,204 $ 1,289 $ 2,961
Current maturities of capital lease obligations................................... 6,466 6,353 4,778
Accounts payable.................................................................. 20,972 20,773 25,542
Accrued salaries and benefits..................................................... 13,525 13,855 14,130
Accrued interest payable.......................................................... 5,940 9,838 9,581
Insurance reserves................................................................ 6,605 3,973 6,773
Other accrued expenses............................................................ 15,838 17,415 14,170
------------ ------------ -------------
TOTAL CURRENT LIABILITIES........................................................... 72,550 73,496 77,935
------------ ------------ -------------
DEFERRED INCOME TAXES............................................................... 51,908 48,472 50,104
CAPITAL LEASE OBLIGATIONS, less current maturities.................................. 15,375 14,182 13,160
LONG-TERM DEBT, less current maturities............................................. 373,769 371,795 358,136
OTHER LONG-TERM LIABILITIES......................................................... 22,224 25,337 34,263
COMMITMENTS AND CONTINGENCIES (Notes 2, 6, 7, 8, 12, 15, 16 and 17)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value -
Class A, authorized 150,000, 150,000 and 4,000 shares at December 31, 1995,
December 29, 1996 and September 28, 1997, respectively; 1,090,969, 1,285,384
and 1,285,384 (unaudited) shares issued and outstanding at December 31, 1995,
December 29, 1996 and September 28, 1997, respectively......................... 11 13 13
Class B, authorized -0-, 2,000 and 2,000 shares at December 31, 1995, December
29, 1996 and September 28, 1997, respectively; -0-, 1,187,503 and 1,187,503
(unaudited) shares issued and outstanding at December 31, 1995, December 29,
1996 and September 28, 1997, respectively...................................... -- 12 12
Class C, authorized -0-, 2,000 and 2,000 shares at December 31, 1995, December
29, 1996 and September 28, 1997, respectively; -0- shares issued and
outstanding at December 31, 1995, December 29, 1996 and September 28, 1997..... -- -- --
Additional paid-in capital........................................................ 46,842 46,905 46,905
Unrealized gain on investment securities, net of taxes............................ -- -- 130
Accumulated deficit............................................................... (212,387) (220,159) (217,796)
Cumulative translation adjustment................................................. -- 73 52
------------ ------------ -------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)................................................ (165,534) (173,156) (170,684)
------------ ------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)................................ $ 370,292 $ 360,126 $ 362,914
------------ ------------ -------------
------------ ------------ -------------
</TABLE>

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

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

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands except per share data)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------------------------------- FOR THE NINE MONTHS ENDED
JANUARY 1, DECEMBER 31, DECEMBER 29, --------------------------------
1995 1995 1996 SEPTEMBER 29, SEPTEMBER 28,
------------ -------------- -------------- 1996 1997
--------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................................... $ 631,014 $ 649,149 $ 650,807 $ 491,819 $ 508,033
COSTS AND EXPENSES:
Cost of sales.......................... 179,793 192,600 191,956 143,388 147,105
Labor and benefits..................... 211,838 214,625 209,260 159,502 159,315
Operating expenses..................... 132,010 143,854 143,163 109,006 112,009
General and administrative expenses.... 38,434 40,705 42,721 31,948 32,775
Debt restructuring expenses (Note 5)... -- 3,346 -- -- --
Write-down of property and equipment
(Note 6)............................. -- 4,006 227 -- 607
Depreciation and amortization.......... 32,069 33,343 32,979 25,127 24,226
GAIN ON SALE OF RESTAURANT OPERATIONS (NOTE
16)...................................... -- -- -- -- 2,303
------------ -------------- -------------- --------------- ---------------
OPERATING INCOME........................... 36,870 16,670 30,501 22,848 34,299
Interest expense, net of capitalized
interest of $176, $62, $49, $44
(unaudited) and $27 (unaudited) and
interest income of $187, $390, $318, $273
(unaudited) and $239 (unaudited) for the
years ended January 1, 1995, December 31,
1995 and December 29, 1996 and the nine
months ended September 29, 1996 and
September 28, 1997, respectively......... 45,467 41,904 44,141 33,084 32,972
Equity in net loss of joint venture........ -- -- -- -- 1,112
------------ -------------- -------------- --------------- ---------------
INCOME (LOSS) BEFORE BENEFIT FROM
(PROVISION FOR) INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................ (8,597 ) (25,234 ) (13,640 ) (10,236 ) 215
Benefit from (provision for) income
taxes.................................... 4,661 (33,419 ) 5,868 4,442 (88 )
------------ -------------- -------------- --------------- ---------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE........... (3,936 ) (58,653 ) (7,772 ) (5,794 ) 127
Cumulative effect of change in accounting
principle, net of income tax expense of
$1,554 (Note 10)......................... -- -- -- -- 2,236
------------ -------------- -------------- --------------- ---------------
NET INCOME (LOSS).......................... $ (3,936 ) $ (58,653 ) $ (7,772 ) $ (5,794 ) $ 2,363
------------ -------------- -------------- --------------- ---------------
------------ -------------- -------------- --------------- ---------------
PRO FORMA NET INCOME (LOSS) PER SHARE (NOTE
17) (UNAUDITED):
Income (loss) before cumulative effect
of change in accounting principle.... $ (1.09 ) $ (0.81 ) $ 0.02
Cumulative effect of change in
accounting principle, net of income
tax expense.......................... -- -- 0.31
-------------- --------------- ---------------
Net income (loss)...................... $ (1.09 ) $ (0.81 ) $ 0.33
-------------- --------------- ---------------
-------------- --------------- ---------------
PRO FORMA AMOUNTS ASSUMING NEW PENSION
METHOD IS RETROACTIVELY APPLIED:
Net income (loss) (Note 10)............ $ (3,506 ) $ (58,134 ) $ (7,214 ) $ (5,375 ) $ 127
------------ -------------- -------------- --------------- ---------------
------------ -------------- -------------- --------------- ---------------
Net income (loss) per share
(unaudited).......................... $ (1.01 ) $ (0.75 ) $ 0.02
-------------- --------------- ---------------
-------------- --------------- ---------------
PRO FORMA SHARES USED IN NET INCOME (LOSS)
PER SHARE CALCULATION (NOTE 17)
(UNAUDITED).............................. 7,125 7,125 7,125
-------------- --------------- ---------------
-------------- --------------- ---------------
</TABLE>

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

F-4
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------------------------------------
CLASS A CLASS B CLASS C ADDITIONAL
---------------------- ---------------------- -------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ----------- --------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 2, 1994...... 1,090,969 $ 11 -- $ -- -- $ -- $ 46,822
Net loss.................... -- -- -- -- -- -- --
--
--------- --- --------- --- --- -------
BALANCE, JANUARY 1, 1995...... 1,090,969 11 -- -- -- -- 46,822
Net loss.................... -- -- -- -- -- -- --
Contribution of capital..... -- -- -- -- -- -- 20
--
--------- --- --------- --- --- -------
BALANCE, DECEMBER 31, 1995.... 1,090,969 11 -- -- -- -- 46,842
Net loss.................... -- -- -- -- -- -- --
Issuance of common stock to
lenders................... -- -- 1,187,503 12 -- -- 38
Proceeds from exercise of
warrants.................. 71,527 1 -- -- -- -- 21
Compensation expense
associated with management
stock plan................ 122,888 1 -- -- -- -- 4
Translation adjustment...... -- -- -- -- -- -- --
--
--------- --- --------- --- --- -------
BALANCE, DECEMBER 29, 1996.... 1,285,384 13 1,187,503 12 -- -- 46,905
Net income (unaudited)...... -- -- -- -- -- -- --
Change in unrealized gain on
investment securities, net
of tax (unaudited)........ -- -- -- -- -- -- --
Translation adjustment
(unaudited)............... -- -- -- -- -- -- --
--
--------- --- --------- --- --- -------
BALANCE, SEPTEMBER 28, 1997
(unaudited).................. 1,285,384 $ 13 1,187,503 $ 12 -- $ -- $ 46,905
--
--
--------- --- --------- --- --- -------
--------- --- --------- --- --- -------

UNREALIZED
GAIN ON
INVESTMENT CUMULATIVE
SECURITIES, ACCUMULATED TRANSLATION
NET OF TAXES DEFICIT ADJUSTMENT TOTAL
------------------- ----------------- ------------------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 2, 1994...... $ -- $ (149,798) $ -- $(102,965)
Net loss.................... -- (3,936) -- (3,936)

--- ----------------- --- ---------
BALANCE, JANUARY 1, 1995...... -- (153,734) -- (106,901)
Net loss.................... -- (58,653) -- (58,653)
Contribution of capital..... -- -- -- 20

--- ----------------- --- ---------
BALANCE, DECEMBER 31, 1995.... -- (212,387) -- (165,534)
Net loss.................... -- (7,772) -- (7,772)
Issuance of common stock to
lenders................... -- -- -- 50
Proceeds from exercise of
warrants.................. -- -- -- 22
Compensation expense
associated with management
stock plan................ -- -- -- 5
Translation adjustment...... -- -- 73 73

--- ----------------- --- ---------
BALANCE, DECEMBER 29, 1996.... -- (220,159) 73 (173,156)
Net income (unaudited)...... -- 2,363 -- 2,363
Change in unrealized gain on
investment securities, net
of tax (unaudited)........ 130 -- -- 130
Translation adjustment
(unaudited)............... -- -- (21) (21)

--- ----------------- --- ---------
BALANCE, SEPTEMBER 28, 1997
(unaudited).................. $ 130 $ (217,796) $ 52 $(170,684)

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

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

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEARS ENDED MONTHS ENDED
----------------------------------------- -------------
JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29,
1995 1995 1996 1996
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ (3,936) $ (58,653) $ (7,772) $ (5,794)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of change in accounting principle...... -- -- -- --
Depreciation and amortization............................ 32,069 33,343 32,979 25,127
Write-down of property and equipment..................... -- 4,006 227 --
Deferred income tax (benefit) expense.................... (4,207) 33,419 (5,926) (4,442)
(Gain) loss on asset retirements......................... (259) 595 (916) (303)
Equity in net loss of joint venture...................... -- -- -- --
Changes in operating assets and liabilities:
Receivables............................................ (2,071) 679 241 480
Inventories............................................ 1,635 (1,044) (66) (2,183)
Other assets........................................... (1,603) 587 1,309 247
Accounts payable....................................... 2,333 (1,714) (199) 5,127
Accrued expenses and other long-term liabilities....... 14,420 16,572 6,286 5,378
----------- ------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 38,381 27,790 26,163 23,637
----------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................ (29,507) (19,092) (24,217) (18,547)
Proceeds from sales of property and equipment.............. 1,475 926 8,409 5,107
Purchases of investment securities......................... -- -- -- --
Proceeds from sales and maturities of investment
securities............................................... -- -- -- --
Acquisition of Restaurant Insurance Corporation, net of
cash acquired............................................ -- -- -- --
Advances to or investments in joint venture................ -- -- (4,500) (4,500)
----------- ------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES...................... (28,032) (18,166) (20,308) (17,940)
----------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution of capital.................................... -- 20 -- --
Proceeds from exercise of stock purchase warrants.......... -- -- 22 22
Proceeds from borrowings................................... 67,629 80,162 48,196 32,196
Repayments of debt......................................... (69,338) (72,713) (52,084) (41,658)
Repayments of capital lease obligations.................... (6,190) (7,293) (7,131) (5,484)
----------- ------------- ------------- -------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES........ (7,899) 176 (10,997) (14,924)
----------- ------------- ------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH...................... -- -- 78 --
----------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... 2,450 9,800 (5,064) (9,227)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............... 11,440 13,890 23,690 23,690
----------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................... $ 13,890 $ 23,690 $ 18,626 $ 14,463
----------- ------------- ------------- -------------
----------- ------------- ------------- -------------
SUPPLEMENTAL DISCLOSURES
Interest paid.............................................. $ 29,430 $ 25,881 $ 36,000 $ 26,042
Capital lease obligations incurred......................... 7,767 3,305 5,951 3,570
Capital lease obligations terminated....................... 391 288 128 126
Conversion of accrued interest payable to debt............. 11,217 14,503 -- --
Issuance of common stock to lenders........................ -- -- 50 --

SEPTEMBER 28,
1997
-------------
<S> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ 2,363
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of change in accounting principle...... (2,236)
Depreciation and amortization............................ 24,226
Write-down of property and equipment..................... 607
Deferred income tax (benefit) expense.................... 78
(Gain) loss on asset retirements......................... 1,077
Equity in net loss of joint venture...................... 1,112
Changes in operating assets and liabilities:
Receivables............................................ (1,122)
Inventories............................................ (1,872)
Other assets........................................... 3,049
Accounts payable....................................... 4,769
Accrued expenses and other long-term liabilities....... (2,827)
-------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 29,224
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................ (14,656)
Proceeds from sales of property and equipment.............. 4,842
Purchases of investment securities......................... (8,181)
Proceeds from sales and maturities of investment
securities............................................... 316
Acquisition of Restaurant Insurance Corporation, net of
cash acquired............................................ (35)
Advances to or investments in joint venture................ (1,400)
-------------
NET CASH USED IN INVESTING ACTIVITIES...................... (19,114)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution of capital.................................... --
Proceeds from exercise of stock purchase warrants.......... --
Proceeds from borrowings................................... 44,211
Repayments of debt......................................... (56,199)
Repayments of capital lease obligations.................... (4,683)
-------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES........ (16,671)
-------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH...................... (21)
-------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... (6,582)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............... 18,626
-------------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................... $ 12,044
-------------
-------------
SUPPLEMENTAL DISCLOSURES
Interest paid.............................................. $ 30,236
Capital lease obligations incurred......................... 2,227
Capital lease obligations terminated....................... 141
Conversion of accrued interest payable to debt............. --
Issuance of common stock to lenders........................ --
</TABLE>

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

1. ORGANIZATION

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

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

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

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

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

2. NATURE OF OPERATIONS

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

F-7
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION --

The consolidated financial statements include the accounts of FICC and its
subsidiaries after elimination of intercompany accounts and transactions.

FISCAL YEAR --

FICC's fiscal year ends on the last Sunday in December, unless that day is
earlier than December 27 in which case the fiscal year ends on the following
Sunday.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS --

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Future facts
and circumstances could alter management's estimates with respect to the
carrying value of long-lived assets and the adequacy of insurance reserves.

REVENUE RECOGNITION --

FICC recognizes restaurant revenue upon receipt of payment from the customer
and retail revenue upon shipment of product. Franchise royalty income, based on
gross sales of franchisees, is payable monthly and is recorded on the accrual
method as earned. Initial franchise fees are recorded upon completion of all
significant services, generally upon opening of the restaurant.

CASH AND CASH EQUIVALENTS --

FICC considers all investments with an original maturity of three months or
less when purchased to be cash equivalents.

INVENTORIES --

Inventories are stated at the lower of first-in, first-out cost or market.
Inventories at December 31, 1995, December 29, 1996 and September 28, 1997 were
(in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Raw Materials.................................... $ 2,129 $ 1,436 $ 2,191
Goods In Process................................. 114 58 207
Finished Goods................................... 12,836 13,651 14,619
------------ ------------ -------------
Total...................................... $ 15,079 $ 15,145 $ 17,017
------------ ------------ -------------
------------ ------------ -------------
</TABLE>

INVESTMENT IN JOINT VENTURE --

In February 1996, FICC and another entity entered into a joint venture,
Shanghai Friendly Food Co., Ltd., a Chinese corporation. FICC has a 50%
ownership interest in the venture. Operations commenced in April 1997. FICC
accounts for the investment using the equity method. As of September 28, 1997,
FICC

F-8
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
had a receivable for approximately $1.4 million from the joint venture related
to advances made to the venture in 1997 and net accounts receivable of
approximately $956,000.

INVESTMENTS --

FICC, through its wholly-owned subsidiary Restaurant Insurance Corporation
("RIC") (see Note 4), invests in equity securities ($576,000 fair market value
at September 28, 1997) which are included in other assets in the accompanying
consolidated balance sheet. FICC classifies all of these investments as
available for sale. Accordingly, these investments are reported at estimated
fair market value with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity, net of related income
taxes.

RESTRICTED CASH --

RIC is required by the third party insurer of FICC to hold assets in trust
whose value is at least equal to certain of RIC's outstanding estimated
insurance claim liabilities. As of September 28, 1997, cash of $12,907,000 was
restricted.

PROPERTY AND EQUIPMENT --

Property and equipment are carried at cost except for impaired assets which
are carried at fair value less cost to sell (see Note 6). Depreciation of
property and equipment is computed using the straight-line method over the
following estimated useful lives:

Buildings--30 years
Building improvements and leasehold improvements--20 years
Equipment--3 to 10 years

At December 31, 1995, December 29, 1996 and September 28, 1997, property and
equipment included (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Land............................................. $ 77,765 $ 75,004 $ 74,022
Buildings and Improvements....................... 110,231 112,359 113,347
Leasehold Improvements........................... 37,703 39,120 38,850
Assets Under Capital Leases...................... 37,307 42,893 41,642
Equipment........................................ 206,266 216,536 209,269
Construction In Progress......................... 6,147 6,424 13,941
------------ ------------ -------------
Property and Equipment........................... 475,419 492,336 491,071
Less: Accumulated Depreciation and
Amortization................................... (179,971) (206,175) (217,882)
------------ ------------ -------------
Property and Equipment--Net...................... $ 295,448 $ 286,161 $ 273,189
------------ ------------ -------------
</TABLE>

Major renewals and betterments are capitalized. Replacements and maintenance
and repairs which do not extend the lives of the assets are charged to
operations as incurred.

F-9
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

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

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

RESTAURANT CLOSURE COSTS --

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

INSURANCE RESERVES --

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

INCOME TAXES --

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

ADVERTISING --

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

F-10
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS --

Effective December 30, 1996, FICC adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
which had no effect. This statement requires that after a transfer of financial
assets, an entity should recognize all financial assets and servicing assets it
controls and liabilities it has incurred, derecognize financial assets when
control has been surrendered, and derecognize liabilities when extinguished.
This statement also provides standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings and is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996.

In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share", which establishes new standards for
computing and presenting earnings per share. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997 and
earlier application is not permitted. Upon adoption, all prior period earnings
per share data presented will be restated.

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of comprehensive
income (net income (loss) together with other non-owner changes in equity) and
its components in a full set of general purpose financial statements. SFAS No.
130 is effective for financial statements issued for periods ending after
December 15, 1997 and earlier application is permitted. Comprehensive income is
not materially different than net income (loss) for all periods presented.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which requires disclosures for each
segment of an enterprise that are similar to those required under current
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. SFAS No. 131 is effective for financial
statements issued for periods ending after December 15, 1997 and earlier
application is encouraged. Under the terms of the new standard, FICC will report
segment information for restaurant and retail operations when material.

RECLASSIFICATIONS --

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

INTERIM FINANCIAL INFORMATION --

The accompanying financial statements as of September 28, 1997 and for the
nine months ended September 29, 1996 and September 28, 1997 are unaudited, but,
in the opinion of management, include all adjustments which are necessary for a
fair presentation of the financial position and the results of operations and
cash flows of FICC. Such adjustments consist solely of normal recurring
accruals. Operating results for the nine months ended September 29, 1996 and
September 28, 1997 are not necessarily indicative of the results that may be
expected for the entire year due to the seasonality of the business.
Historically, higher revenues and profits are experienced during the second and
third fiscal quarters.

F-11
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. ACQUISITION OF RESTAURANT INSURANCE CORPORATION

On March 19, 1997, FICC acquired all of the outstanding shares of common
stock of Restaurant Insurance Corporation ("RIC"), a Vermont corporation, from
TRC for cash of $1,300,000 and a $1,000,000 promissory note payable to TRC
bearing interest at an annual rate of 8.25%. The promissory note and accrued
interest of approximately $1,024,000 was paid on June 30, 1997. RIC, which was
formed in 1993, reinsures certain FICC risks (i.e. workers' compensation,
employer's liability, general liability and product liability) from a third
party insurer (see Note 12).

The acquisition was accounted for as a purchase. Accordingly, the results of
operations for RIC for the period subsequent to March 20, 1997 are included in
the accompanying consolidated financial statements. No pro forma information is
included since the effect of the acquisition is not material. The purchase price
was allocated to net assets acquired based on the estimated fair market values
at the date of acquisition. The purchase price was allocated as follows (in
thousands):

<TABLE>
<S> <C>
Cash and Cash Equivalents......................................... $ 2,265
Restricted Cash and Investments................................... 12,061
Receivables and Other Assets...................................... 3,090
Loss Reserves..................................................... (13,231)
Other Liabilities................................................. (1,885)
---------
$ 2,300
---------
---------
</TABLE>

5. INTANGIBLE ASSETS AND DEFERRED COSTS

Intangible assets and deferred costs net of accumulated amortization as of
December 31, 1995, December 29, 1996 and September 28, 1997 were (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
License agreement for the right to use
various trademarks and tradenames amortized
over a 40 year life on a straight line basis... $ 15,231 $ 14,764 $ 14,415
Deferred financing costs amortized over
the terms of the loans on an effective yield
basis.......................................... 1,376 1,255 540
Deferred financing costs related to pending
registration statement (see Note 17)........... -- -- 564
------------ ------------ -------------
$ 16,607 $ 16,019 $ 15,519
------------ ------------ -------------
------------ ------------ -------------
</TABLE>

In November 1994, FHC filed a Form S-1 Registration Statement and in 1995
elected not to proceed with the registration. Accordingly, previously deferred
costs totaling $3,346,000 related to this registration were expensed during the
year ended December 31, 1995.

6. WRITE-DOWN OF PROPERTY AND EQUIPMENT

At December 31, 1995, December 29, 1996 and September 28, 1997, there were
81, 50 and 41 restaurant properties held for disposition, respectively. The
restaurants held for disposition generally have

F-12
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. WRITE-DOWN OF PROPERTY AND EQUIPMENT (CONTINUED)
poor operating results, deteriorating property values or other adverse factors.
FICC determined that the carrying values of certain of these properties exceeded
their estimated fair values less costs to sell. Accordingly, during the year
ended December 31, 1995, the carrying values of 51 properties were reduced by an
aggregate of $4,006,000; during the year ended December 29, 1996, the carrying
values of 6 properties were reduced by an aggregate of $227,000 and during the
nine months ended September 28, 1997, the carrying values of 10 properties were
reduced by an aggregate of $607,000. FICC plans to dispose of the 41 properties
by December 31, 1998. The operating loss, prior to depreciation expense which is
not reported at the restaurant level, for the properties held for disposition
was $1,972,000, $1,129,000 and $769,000 for the years ended December 31, 1995
and December 29, 1996 and the nine months ended September 28, 1997,
respectively. The carrying value of the properties held for disposition at
December 31, 1995, December 29, 1996 and September 28, 1997 was approximately
$7,491,000, $4,642,000 and $3,308,000, respectively.

7. DEBT

Effective January 1, 1991, FICC and its lenders entered into an Amended and
Restated Revolving Credit and Term Loan Agreement (the "Credit Agreement"), and
effective January 1, 1996, the Credit Agreement was again amended and restated.
In connection with the January 1, 1996 amendment (the "Amendment"), revolving
credit loans and term loans totaling $373,622,000 at December 31, 1995 were
converted to revolving credit loans of $38,549,000 and term loans of
$335,073,000. For the year ended December 29, 1996 and the nine months ended
September 28, 1997, interest was accrued on the revolving credit and term loans
at an annual rate of 11%, with .5% of the accrued interest which is not
currently payable being accrued and classified as other long-term liabilities in
the accompanying consolidated balance sheet. The deferred interest will be
waived if the revolving credit and term loans are repaid in full in cash on or
before the due date. The deferred interest as of September 28, 1997 was
approximately $3,302,000.

Under the terms of the Amendment, as of December 29, 1996, principal of
$371,678,000 is due on May 1, 1998. FICC may extend the due date to May 1, 1999
by paying a fee equal to 1% of the aggregate of the revolver commitment of
$50,000,000, the letters of credit commitment (see below) and the principal
amount of the term loan. FICC does not expect to generate sufficient cash flow
to make all of the principal payments required by May 1, 1998; therefore, FICC
will exercise its option to extend the due date to May 1, 1999 if the pending
recapitalization is not consummated (see Note 17). Accordingly, these loans are
classified as long-term in the accompanying consolidated financial statements.

In connection with the Amendment, in March 1996 the lenders received
1,090,972 shares of FICC's Class B Common Stock, which represented 50% of the
issued and outstanding equity of FICC. As a result of the issuance of stock
under the Management Stock Plan (see Note 13) and the exercise of certain
warrants (see Note 1), additional shares of FICC's Class B Common Stock were
issued to the lenders in 1996 to maintain their minimum equity interest in FICC
of 47.50% on a fully diluted basis in accordance with the Amendment. Total
shares issued to the lenders as of December 29, 1996 were 1,187,503. The
estimated fair market value of the shares issued of $50,000 was recorded as a
deferred financing cost during the year ended December 29, 1996. Prior to the
occurrence of a Special Rights Default (see below), lenders with limited voting
stock may elect two of the five members to FICC's board of directors. In the
event of a Special Rights Default, lenders with limited voting stock may appoint
two additional directors to FICC's board. Additionally, in the event of a
Special Rights Default, the lenders are entitled to receive

F-13
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. DEBT (CONTINUED)
additional shares of FICC's limited voting common stock thereby increasing their
equity interest in FICC by 5% initially, with additional shares of limited
voting common stock issued quarterly thereafter for a maximum of eight quarters.
Each quarterly issuance of limited voting common stock would increase the
lenders' equity interest in FICC by 2.5%. A Special Rights Default occurs if (i)
FICC files for bankruptcy or enters into any insolvency proceeding, (ii) FICC
fails to pay principal or interest on the revolving credit and term loans when
due, (iii) FICC fails to comply with financial covenants for two consecutive
quarters, or (iv) certain other conditions relating to ownership of FICC's
subsidiaries and ownership of FICC are not met. As of September 28, 1997, a
Special Rights Default had not occurred.

Covenant violations prior to December 31, 1995 were waived by the lenders.
The Amendment provided for new covenant requirements effective December 31, 1995
(see below). Under the terms of the Amendment, covenants require attainment of
minimum earnings, as defined, debt service coverage ratios, as defined, and
minimum net worth, as defined. Restrictions also have been placed on capital
expenditures, asset dispositions, proceeds from asset dispositions, investments,
pledging of assets, sale and leasebacks and the incurrence of additional
indebtedness. The covenant requirements, as defined under the Amendment, and
actual ratios/amounts as of and for the twelve months ended December 31, 1995
and December 29, 1996 and as of and for the twelve months ended September 28,
1997 were:

<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 29, 1996 SEPTEMBER 28, 1997
-------------------------- -------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
REQUIREMENT ACTUAL REQUIREMENT ACTUAL REQUIREMENT ACTUAL
------------ ------------ ------------ ------------ ------------ -------------
Consolidated Earnings Before
Interest, Taxes, Depreciation
and Amortization, as defined.... $ 55,000,000 $ 58,094,000 $ 58,000,000 $ 64,001,000 $ 63,000,000 $ 73,352,000
Ratio of Consolidated Adjusted
EBITDA to Consolidated Debt
Service Payments................ .95 to 1 1.11 to 1 .73 to 1 .99 to 1 .82 to 1 1.25 to 1
Consolidated Net Worth............ $(168,000,000) $(165,534,000) $(181,000,000) $(173,156,000) $(186,000,000) $(170,684,000)
</TABLE>

FICC has a commitment from a bank to issue letters of credit totaling
$5,815,000 through May 1, 1998, or through May 1, 1999 if the Credit Agreement
is extended. As of December 31, 1995, December 29, 1996 and September 28, 1997,
total letters of credit issued were $5,815,000, $4,390,000 and $3,695,000,
respectively. An annual fee of 2% is charged on the maximum drawing amount of
each letter of credit issued. During the years ended January 1, 1995, December
31, 1995 and December 29, 1996 and the nine months ended September 29, 1996 and
September 28, 1997, there were no drawings against the letters of credit. Under
the terms of the Amendment, interest will be charged at 13.5%, compounded
monthly, on drawings against letters of credit issued.

F-14
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. DEBT (CONTINUED)
Debt at December 31, 1995, December 29, 1996 and September 28, 1997
consisted of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Revolving Credit Loan, 12% through December 31,
1995 and 11% thereafter; due May 1, 1998 unless
FICC extends to May 1, 1999.................... $ 210,984 $ 36,605 $ 22,969
Term Loan, 8.5% compounded monthly through
December 31, 1995 and 11% thereafter; due May
1, 1998 unless FICC extends to May 1, 1999..... 162,638 335,073 335,073
Insurance Premium Finance Loans, 5.55%-8.75%; due
July 10, 1998-November 2, 1998................. 3,177 1,259 2,930
Other............................................ 174 147 125
------------ ------------ -------------
376,973 373,084 361,097
Less: Current Portion............................ 3,204 1,289 2,961
------------ ------------ -------------
Total Long-Term Debt............................. $ 373,769 $ 371,795 $ 358,136
------------ ------------ -------------
------------ ------------ -------------
</TABLE>

The revolving credit and term loans are collateralized by a lien on
substantially all of FICC's assets and by a pledge of FICC's shares of its
subsidiaries' stock.

At December 29, 1996, aggregate future annual principal payments of debt,
exclusive of capitalized leases (see Note 8), were: 1997, $1,289,000; 1998,
$33,000; 1999, $371,715,000; and 2000, $47,000. The payments for the revolving
credit and term loans are reflected in 1999, since, as discussed above, FICC
will not repay the loans in 1998.

At December 31, 1995, December 29, 1996 and September 28, 1997, the unused
portion of the revolving credit loan was $11,451,000, $13,395,000 and
$27,031,000, respectively. A 0.5% annual commitment fee was charged on the
unused portions of the revolver and letters of credit commitments. The total
average unused portions of the revolver and letters of credit commitments was
$10,685,000, $12,796,000 and $13,359,000 for the years ended December 31, 1995
and December 29, 1996 and the nine months ended September 28, 1997,
respectively.

In October 1994, FICC paid a fee of approximately $3,582,000 to the lenders
to facilitate a refinancing of the obligations under the Credit Agreement. This
amount was included in interest expense for the year ended January 1, 1995
since, under the proposed refinancing, the Credit Agreement would have been
repaid.

FICC's revolving credit and term loans are not publicly traded and prices
and terms of the few transactions which were completed are not available to
FICC. Since no information is available on prices of completed transactions, the
terms of the loans are complex and the relative risk involved is difficult to
evaluate, management believes it is not practicable to estimate the fair value
of the revolving credit and term loans without incurring excessive costs.
Additionally, since the letters of credit are associated with the

F-15
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. DEBT (CONTINUED)
revolving credit and term loan agreement, management believes it is also not
practicable to estimate the fair value of the letters of credit without
incurring excessive costs.

8. LEASES

As of December 31, 1995, December 29, 1996 and September 28, 1997, FICC
operated 735, 707 and 662 restaurants, respectively. These operations were
conducted in premises owned or leased as follows:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1996 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Land and Building Owned.......................... 313 296 279
Land Leased and Building Owned................... 164 161 145
Land Leased and Building Leased.................. 258 250 238
--- --- ---
735 707 662
--- --- ---
--- --- ---
</TABLE>

Restaurants in shopping centers are generally leased for a term of 10 to 20
years. Leases of freestanding restaurants generally are for a 15 or 20 year
lease term and provide for renewal options for three or four five-year renewals.
Most leases provide for minimum payments plus a percentage of sales in excess of
stipulated amounts. Additionally, FICC leases certain restaurant equipment over
lease terms from three to seven years.

Future minimum lease payments under non-cancellable leases with an original
term in excess of one year as of December 29, 1996 were (in thousands):

<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR LEASES LEASES
- ------------------------------------------------------------------------ ----------- ---------
<S> <C> <C>
1997.................................................................... $ 13,366 $ 8,446
1998.................................................................... 12,524 6,445
1999.................................................................... 11,635 3,429
2000.................................................................... 10,277 2,354
2001.................................................................... 8,401 1,815
2002 and thereafter..................................................... 26,096 7,163
----------- ---------
Total Minimum Lease Payments............................................ $ 82,299 29,652
-----------
Less: Amounts Representing Interest..................................... 9,117
---------
Present Value of Minimum Lease Payments................................. $ 20,535
---------
---------
</TABLE>

F-16
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. LEASES (CONTINUED)
Capital lease obligations reflected in the accompanying consolidated balance
sheets have effective rates ranging from 8% to 12% and are payable in monthly
installments through 2016. Maturities of such obligations at December 29, 1996
were (in thousands):

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

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

<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, SEPTEMBER 28,
1995 1995 1996 1996 1997
----------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Minimum Rentals....... $ 14,767 $ 15,175 $ 16,051 $ 12,229 $ 12,456
Contingent Rentals.... 2,003 2,012 1,918 1,292 1,164
----------- ------------ ------------ ------------- -------------
Total........... $ 16,770 $ 17,187 $ 17,969 $ 13,521 $ 13,620
----------- ------------ ------------ ------------- -------------
----------- ------------ ------------ ------------- -------------
</TABLE>

9. INCOME TAXES

Prior to March 23, 1996 (see below), FICC and its subsidiaries were included
in the consolidated Federal income tax return of TRC. Under a tax sharing
agreement between TRC and FICC (formerly FHC) (the "TRC/FICC Agreement"), FICC
and its subsidiaries (the "FICC Group") were obligated to pay TRC its allocable
share of the TRC group tax liability, determined as if the FICC Group were
filing a separate consolidated income tax return.

On March 23, 1996, TRC distributed its shares of FICC's voting common stock
to TRC's shareholders (see Note 1), the FICC Group deconsolidated from the TRC
group and the TRC/FICC Agreement expired. In addition, on March 26, 1996, shares
of Class B Common Stock were issued to FICC's lenders which resulted in an
ownership change pursuant to Internal Revenue Code Section 382.

As a result of the deconsolidation from TRC, the FICC Group is required to
file two short year Federal income tax returns for 1996. For the period from
January 1, 1996 through March 23, 1996, the FICC Group was included in the
consolidated Federal income tax return of TRC and for the period from March 24,
1996 through December 29, 1996, the FICC Group filed a consolidated return for
its group only.

Under the TRC/FICC Agreement, NOLs generated by the FICC Group and utilized
or allocated to TRC were available to the FICC Group on a separate company basis
to carryforward. Pursuant to the TRC/FICC Agreement, as of March 23, 1996,
$99,321,000 of carryforwards would have been available to the FICC Group to
offset future taxable income of the FICC Group. However, as a result of the
deconsolidation from TRC, the deferred tax asset of approximately $23 million
related to the $65,034,000 of NOLs utilized by TRC was written off.
Approximately $19.0 million of the write-off was recorded in

F-17
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. INCOME TAXES (CONTINUED)
fiscal 1995, which amount approximated the benefit of NOLs utilized by TRC as of
December 31, 1995, and the balance was recorded in fiscal 1996, which amount
approximated the benefit of the NOLs utilized by TRC for the period from January
1, 1996 to the deconsolidation. Additionally, as a result of the change in
ownership and Section 382 limitation, a valuation allowance of approximately $10
million has been placed on $29,686,000 of the $34,287,000 remaining Federal NOL
carryforwards generated for the period prior to March 23, 1996. The amount of
pre-change NOLs not reserved for represents the amount of NOLs which have become
available as a result of FICC realizing gains which were unrealized as of the
date of the ownership change. FICC will reduce the valuation allowance on
pre-change NOLs if they become available to FICC via realization of additional
unrealized gains. FICC does not believe that it is more likely than not that
such NOLs will become available, and therefore the valuation allowance is
appropriate. For the period from March 23, 1996 to December 29, 1996, FICC
generated a net operating loss carryforward of $5,765,000. Due to restrictions
similar to Section 382 in most of the states FICC operates in and short
carryforward periods, FICC has fully reserved for all state NOL carryforwards
generated through March 26, 1996 as of December 29, 1996.

The benefit from (provision for) income taxes for the years ended January 1,
1995, December 31, 1995 and December 29, 1996 and the nine months ended
September 29, 1996 and September 28, 1997 was as follows (in thousands):

<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, SEPTEMBER 28,
1995 1995 1996 1996 1997
----------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Current Benefit (Provision)
Federal.............................. $ 454 $ -- $ -- $ -- $ --
State................................ -- -- -- -- --
Foreign.............................. -- -- (58) -- (10)
----------- ------------ ------ ------ ------
Total Current Benefit (Provision)...... 454 -- (58) -- (10)
----------- ------------ ------ ------ ------
Deferred Benefit (Provision)
Federal.............................. 3,608 (27,465) 5,126 3,848 (78)
State................................ 599 (5,954) 800 594 --
Foreign.............................. -- -- -- -- --
----------- ------------ ------ ------ ------
Total Deferred Benefit (Provision)..... 4,207 (33,419) 5,926 4,442 (78)
----------- ------------ ------ ------ ------
Total Benefit From (Provision For)
Income Taxes......................... $ 4,661 $ (33,419) $ 5,868 $ 4,442 $ (88)
----------- ------------ ------ ------ ------
----------- ------------ ------ ------ ------
</TABLE>

F-18
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. INCOME TAXES (CONTINUED)
A reconciliation of the differences between the statutory Federal income tax
rate and the effective income tax rates follows:

<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
------------- --------------- -----------------
<S> <C> <C> <C>
Statutory Federal Income Tax Rate.................... 35% 35 % 35 %
State Income Taxes Net of Federal Benefit............ 17 11 14
Write-off of Intercompany NOL Carryforwards and Tax
Credits............................................ -- (85 ) (13 )
Increase (Decrease) in Federal NOL Valuation
Allowance.......................................... -- (57 ) 10
Increase in State NOL Valuation Allowance............ (4 ) (30 ) (8 )
Tax Credits.......................................... 8 3 3
Nondeductible Expenses............................... (2 ) (1 ) (1 )
Other................................................ -- (8 ) 3
-- --
---
Effective Tax Rate................................... 54 % (132 )% 43%
-- --
-- --
---
---
</TABLE>

Deferred tax assets and liabilities are determined as the difference between
the financial statement and tax bases of the assets and liabilities multiplied
by the enacted tax rates in effect for the year in which the differences are
expected to reverse. Significant deferred tax assets (liabilities) at December
31, 1995 and December 29, 1996 were as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
<S> <C> <C>
Property and Equipment........................................... $ (51,903) $ (50,866)
Federal and State NOL Carryforwards (net of valuation allowance
of $23,026 and $21,220 at December 31, 1995 and December 29,
1996, respectively)............................................ -- 4,355
Insurance Reserves............................................... 6,311 5,788
Inventories...................................................... 2,450 1,862
Accrued Pension.................................................. 3,272 4,388
Intangible Assets................................................ (3,600) (6,037)
Tax Credit Carryforwards......................................... -- 1,001
Other............................................................ 1,447 3,412
------------ ------------
Net Deferred Tax Liability....................................... $ (42,023) $ (36,097)
------------ ------------
------------ ------------
</TABLE>

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

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

F-19
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. EMPLOYEE BENEFIT PLANS

Substantially all of the employees of FICC are covered by a non-contributory
defined benefit pension plan. Effective January 1, 1992, the plan was changed to
a defined benefit cash balance plan. Plan benefits are based on years of service
and participant compensation during their years of employment. FICC accrues the
cost of its pension plan over its employees' service lives.

Under the cash balance plan, a nominal account for each participant is
established. The plan administrator makes an annual contribution to each account
based on current wages and years of service. Each account earns a specified rate
of interest which is adjusted annually.

FICC's policy is to make contributions to the plan which provide for
benefits and pay plan expenses. Contributions are intended to provide not only
for benefits attributable to service to date, but also for those benefits
expected to be earned in the future.

For the years ended January 1, 1995, December 31, 1995 and December 29,
1996, net pension expense was (in thousands):

<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Service Cost......................................... $ 4,011 $ 3,877 $ 4,202
Interest Cost........................................ 5,106 5,420 5,781
Actual Loss (Gain) on Plan Assets.................... 5,180 (17,438) (9,428)
Deferral of Asset (Loss) Gain........................ (11,725) 10,850 2,377
Net Amortization of Deferral of Asset Gain........... (548) (770) (651)
----------- ------------ ------------
Net Pension Expense.................................. $ 2,024 $ 1,939 $ 2,281
----------- ------------ ------------
----------- ------------ ------------
</TABLE>

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

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
<S> <C> <C>
Actuarial Present Value of Benefit Obligations:
Vested......................................................... $ 49,581 $ 56,752
Non-vested..................................................... 1,081 1,316
------------ ------------
Accumulated Benefit Obligations.................................. $ 50,662 $ 58,068
------------ ------------
------------ ------------

Projected Benefit Obligations.................................... $ 69,188 $ 76,768
Plan Assets at Market Value...................................... 86,477 90,626
------------ ------------
Plan Assets in Excess of Projected Benefit Obligation............ 17,289 13,858
Unrecognized Prior Service Costs................................. (3,486) (3,077)
Unrecognized Net Gain............................................ (21,785) (21,044)
------------ ------------
Accrued Pension Liability........................................ $ (7,982) $ (10,263)
------------ ------------
------------ ------------
</TABLE>

For the years ended January 1, 1995, December 31, 1995 and December 29,
1996, the weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 8.50%, 8.00% and 7.75%,
respectively. The rate of annual increase in future compensation levels used
ranged from 5.0% to 6.5% for the year ended January 1, 1995, from 4.5% to 6.0%
for the year ended

F-20
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. EMPLOYEE BENEFIT PLANS (CONTINUED)
December 31, 1995 and 4.0% to 5.5% for the year ended December 29, 1996,
depending on the employee group. The expected long-term rate of return on plan
assets was 9.5% for each of the three years.

Effective December 30, 1996, FICC changed its method of calculating the
market-related value of plan assets used in determining the return-on-asset
component of annual pension expense and the cumulative net unrecognized gain or
loss subject to amortization. Under the previous accounting method, the
calculation of the market-related value of assets reflected amortization of the
actual realized and unrealized capital return on assets on a straight-line basis
over a five-year period. Under the new method, the calculation of the
market-related value of assets reflects the long-term rate of return expected by
FICC and amortization of the difference between the actual return (including
capital, dividends and interest) and the expected return over a five-year
period. FICC believes the new method is widely used in practice and preferable
because it results in calculated plan asset values that more closely approximate
fair value, while still mitigating the effect of annual market-value
fluctuations. Under both methods, only the cumulative net unrecognized gain or
loss which exceeds 10% of the greater of the projected benefit obligation or the
market-related value of plan assets is subject to amortization. This change
resulted in a noncash benefit for the nine months ended September 28, 1997 of
$2,236,000 (net of taxes of $1,554,000) which represents the cumulative effect
of the change related to years prior to fiscal 1997 and $455,000 (net of taxes
of $316,000) in lower pension expense related to the nine months ended September
28, 1997 as compared to the previous accounting method. Had this change been
applied retroactively, pension expense would have been reduced by $729,000,
$879,000 and $946,000 for the years ended January 1, 1995, December 31, 1995 and
December 29, 1996, respectively.

FICC's Employee Savings and Investment Plan (the "Plan") covers all eligible
employees and is qualified under Section 401(k) of the Internal Revenue Code.
For the years ended January 1, 1995, December 31, 1995 and December 29, 1996,
FICC made discretionary matching contributions at the rate of 75% of a
participant's first 2% of his/her contributions and 50% of a participant's next
2% of his/her contributions. All employee contributions are fully vested.
Employer contributions are vested at the completion of five years of service or
at retirement, death, disability or termination at age 65 or over, as defined by
the Plan. Contribution and administrative expenses for the Plan were
approximately $1,032,000, $1,086,000 and $1,002,000 for the years ended January
1, 1995, December 31, 1995 and December 29, 1996, respectively.

11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

FICC provides health care and life insurance benefits to certain groups of
employees upon retirement. Eligible employees may continue their coverages if
they are receiving a pension benefit, are 55 years of age, and have completed 10
years of service. The plan requires contributions for health care coverage from
participants who retired after September 1, 1989. Life insurance benefits are
non-contributory. The plan is not funded.

F-21
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
FICC accrues the cost of postretirement benefits over the years employees
provide services to the date of their full eligibility for such benefits. The
components of the net postretirement benefit cost for the years ended January 1,
1995, December 31, 1995 and December 29, 1996 were (in thousands):

<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
------------- --------------- ---------------
<S> <C> <C> <C>
Service Cost of Benefits Earned...................... $ 108 $ 105 $ 125
Interest Cost on Accumulated Postretirement Benefit
Obligation, net of Amortization.................... 405 478 374
----- ----- -----
Net Postretirement Benefit Expense................... $ 513 $ 583 $ 499
----- ----- -----
----- ----- -----
</TABLE>

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

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------- -------------
<S> <C> <C>
Actuarial Present Value of Postretirement Benefit Obligation:
Retirees..................................................... $ 4,267 $ 3,837
Other fully eligible plan participants....................... 428 358
Other active plan participants............................... 1,480 1,514
------ ------
Accumulated Postretirement Benefit Obligation.................... 6,175 5,709
Plan Changes..................................................... 1,175 1,113
Unrecognized Net (Loss) Gain..................................... (293) 328
------ ------
Postretirement Benefit Liability................................. $ 7,057 $ 7,150
------ ------
------ ------
</TABLE>

The discount rate used to determine the accumulated postretirement benefit
obligation was 8.50%, 8.00% and 7.75% for the years ended January 1, 1995,
December 31, 1995 and December 29, 1996, respectively. The assumed health care
cost trend rate used to measure the accumulated postretirement benefit
obligation was 14% gradually declining to 6% in 2000 and thereafter for the year
ended January 1, 1995, 11.5% gradually declining to 5.5% in 2000 and thereafter
for the year ended December 31, 1995 and 9.25% gradually declining to 5.25% in
2000 and thereafter for the year ended December 29, 1996. A one-percentage-point
increase in the assumed health care cost trend rate would have increased the
postretirement benefit expense by approximately $56,000, $55,000 and $49,000,
and would have increased the accumulated postretirement benefit obligation by
approximately $484,000, $478,000 and $411,000 for the years ended January 1,
1995, December 31, 1995 and December 29, 1996, respectively.

FICC increased the required contributions from participants who retired
after July 31, 1994, for health coverage. This and other plan changes are being
amortized over the expected remaining employee service period of active plan
participants.

12. INSURANCE RESERVES

At December 31, 1995, December 29, 1996 and September 28, 1997, insurance
reserves of approximately $20,847,000, $16,940,000 and $29,306,000,
respectively, had been recorded. Insurance reserves at

F-22
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. INSURANCE RESERVES (CONTINUED)
September 28, 1997 included RIC's reserve for FICC's insurance liabilities of
approximately $13,625,000. Reserves at December 31, 1995, December 29, 1996 and
September 28, 1997 also included accruals related to postemployment benefits and
postretirement benefits other than pensions. While management believes these
reserves are adequate, it is reasonably possible that the ultimate liabilities
will exceed such estimates.

Classification of the reserves was as follows (in thousands):

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

Following is a summary of the activity in the insurance reserves for the
years ended January 1, 1995, December 31, 1995 and December 29, 1996 and for the
nine months ended September 28, 1997 (in thousands):

<TABLE>
<CAPTION>
JANUARY 1,
1995 DECEMBER 31, 1995 DECEMBER 29, 1996 SEPTEMBER 28, 1997
-------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Beginning balance..................... $ 24,977 $ 23,216 $ 20,847 $ 16,940
Provision............................. 11,727 11,336 8,363 8,948
Payments.............................. (13,488) (13,705) (12,270) (9,813)
Acquisition of RIC.................... -- -- -- 13,231
------- ------- ------- -------
Ending balance........................ $ 23,216 $ 20,847 $ 16,940 $ 29,306
------- ------- ------- -------
------- ------- ------- -------
</TABLE>

13. STOCK PLANS

A Stock Rights Plan ("SRP") was adopted by FICC in 1991. Under the SRP,
certain eligible individuals were granted rights to purchase shares of voting
common stock of FICC for $.01 per share, subject to certain vesting,
anti-dilution and exercise requirements. As of December 31, 1995, the aggregate
number of shares which could have been issued under the SRP was 88,801 of which
41,316 rights were issued and vested. The estimated fair value of the rights
vested was not material and no compensation expense was recorded. On March 25,
1996, FICC established the Management Stock Plan ("MSP"). The MSP provided for
persons with rights granted under the SRP to waive their rights under such plan
and receive shares of FICC's Class A Common Stock. Accordingly, in April 1996,
all of the participants in the SRP made this election and the SRP rights then
outstanding were cancelled and 122,888 shares of Class A Common Stock were
issued, of which 61,650 were vested as of December 29, 1996. In April 1996, the
fair value of the 122,888 shares of Class A Common Stock issued was
approximately $30,700, or $0.25 per share. The estimated fair value of the
20,334 additional shares vested in 1996 of $5,000 was recorded as compensation
expense in the year ended December 29, 1996. The remaining issued, non-vested
shares of 61,238 will vest based on the Company achieving certain performance
measurements. As of September 28, 1997, 27,113 additional shares are available
for grant under the MSP (see Note 17). Net loss and net loss per share (see Note
17) for the year ended December 29, 1996 would have been $7,786,000 and $1.09,
respectively had FICC used the fair value based method prescribed by SFAS No.
123 to account for the restricted stock issued in 1996.

F-23
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

14. RELATED PARTY TRANSACTIONS

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

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

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

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

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

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

15. COMMITMENTS AND CONTINGENCIES

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

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

16. FRANCHISE AGREEMENT

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

17. PROPOSED INITIAL PUBLIC OFFERING (UNAUDITED)

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

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

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

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

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

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

F-27
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 29, 1996
(In thousands)

<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues.................................... $ 650,024 $ 145 $ 638 $ -- $ 650,807
Costs and expenses:
Cost of sales............................. 191,578 51 327 -- 191,956
Labor and benefits........................ 209,145 115 -- -- 209,260
Operating expenses and write-down of
property and equipment.................. 143,046 -- 344 -- 143,390
General and administrative expenses....... 41,061 106 1,554 -- 42,721
Depreciation and amortization............. 32,953 6 20 -- 32,979
Interest expense.......................... 44,141 -- -- -- 44,141
---------- ----------- ------------- ------ ------------
Loss before benefit from (provision for)
income taxes and equity in net loss of
consolidated subsidiaries................. (11,900) (133) (1,607) -- (13,640)
Benefit from (provision for) income taxes... 5,594 (2) 276 -- 5,868
---------- ----------- ------------- ------ ------------
Loss before equity in net loss of
consolidated subsidiaries................. (6,306) (135) (1,331) -- (7,772)
Equity in net loss of consolidated
subsidiaries.............................. (1,466) -- -- 1,466 --
---------- ----------- ------------- ------ ------------
Net loss.................................... $ (7,772) $ (135) $ (1,331) $ 1,466 $ (7,772)
---------- ----------- ------------- ------ ------------
---------- ----------- ------------- ------ ------------
</TABLE>

F-28
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 29, 1996
(In thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>

<CAPTION>
Assets
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 17,754 $ 268 $ 604 $ -- $ 18,626
Trade accounts receivable.................. 4,765 -- 227 -- 4,992
Inventories................................ 14,796 24 325 -- 15,145
Deferred income taxes...................... 12,366 9 -- -- 12,375
Prepaid expenses and other current
assets................................... 4,805 -- 517 (3,664) 1,658
---------- ----- ------ ------------ ------------
Total current assets......................... 54,486 301 1,673 (3,664) 52,796
Investment in joint venture.................. -- -- 4,500 -- 4,500
Property and equipment, net.................. 285,460 522 179 -- 286,161
Intangibles and deferred costs, net.......... 16,019 -- -- -- 16,019
Investments in subsidiaries.................. 3,531 -- -- (3,531) --
Other assets................................. 650 -- -- -- 650
---------- ----- ------ ------------ ------------
Total assets................................. $ 360,146 $ 823 $ 6,352 $ (7,195) $ 360,126
---------- ----- ------ ------------ ------------
---------- ----- ------ ------------ ------------
<CAPTION>
Liabilities and Stockholders' Equity
(Deficit)
<S> <C> <C> <C> <C> <C>
Current liabilities:
Current maturities of long-term
obligations.............................. $ 7,642 $ -- $ -- $ -- $ 7,642
Accounts payable........................... 20,773 -- -- -- 20,773
Accrued expenses........................... 44,780 141 3,824 (3,664) 45,081
---------- ----- ------ ------------ ------------
Total current liabilities.................... 73,195 141 3,824 (3,664) 73,496
Deferred income taxes........................ 48,793 11 (332) -- 48,472
Long-term obligations, less current
maturities................................. 385,977 -- -- -- 385,977
Other liabilities............................ 25,337 -- -- -- 25,337
Stockholders' equity (deficit)............... (173,156) 671 2,860 (3,531) (173,156)
---------- ----- ------ ------------ ------------
Total liabilities and stockholders' equity
(deficit).................................. $ 360,146 $ 823 $ 6,352 $ (7,195) $ 360,126
---------- ----- ------ ------------ ------------
---------- ----- ------ ------------ ------------
</TABLE>

F-29
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 29, 1996
(In thousands)

<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities.................................. $ 25,519 $ (38) $ 682 $ -- $ 26,163
---------- ----------- ------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment......... (24,043) -- (174) -- (24,217)
Proceeds from sales of property and
equipment................................. 8,409 -- -- -- 8,409
Investments in joint venture................ (4,500) -- -- -- (4,500)
Investments in consolidated subsidiaries.... (306) -- -- 306 --
---------- ----------- ------ ------------ ------------
Net cash used in investing activities......... (20,440) -- (174) 306 (20,308)
---------- ----------- ------ ------------ ------------
Cash flows from financing activities:
Contribution of capital..................... -- 306 -- (306) --
Proceeds from exercise of stock purchase
warrants.................................. 22 -- -- -- 22
Proceeds from borrowings.................... 48,196 -- -- -- 48,196
Repayments of long-term obligations......... (59,215) -- -- -- (59,215)
---------- ----------- ------ ------------ ------------
Net cash (used in) provided by financing
activities.................................. (10,997) 306 -- (306) (10,997)
---------- ----------- ------ ------------ ------------
Effect of exchange rate changes on cash....... 5 -- 73 -- 78
---------- ----------- ------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents................................. (5,913) 268 581 -- (5,064)
Cash and cash equivalents, beginning of
period...................................... 23,667 -- 23 -- 23,690
---------- ----------- ------ ------------ ------------
Cash and cash equivalents, end of period...... $ 17,754 $ 268 $ 604 $ -- $ 18,626
---------- ----------- ------ ------------ ------------
---------- ----------- ------ ------------ ------------
Supplemental disclosures:
Interest paid............................... $ 36,000 $ -- $ -- $ -- $ 36,000
Capital lease obligations incurred.......... 5,923 28 -- -- 5,951
Capital lease obligations terminated........ 128 -- -- -- 128
Issuance of common stock to lenders......... 50 -- -- -- 50
</TABLE>

F-30
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1997
(In thousands)

<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues..................................... $ 506,407 $ 1,146 $ 480 $ -- $ 508,033
Costs and expenses:
Cost of sales.............................. 146,674 -- 431 -- 147,105
Labor and benefits......................... 159,315 -- -- -- 159,315
Operating expenses and write-down of
property and equipment................... 113,009 -- (393) -- 112,616
General and administrative expenses........ 31,908 158 709 -- 32,775
Depreciation and amortization.............. 24,226 -- -- -- 24,226
Interest expense (income).................. 33,029 -- (57) -- 32,972
Gain on sale of restaurant operations........ 2,303 -- -- -- 2,303
Equity in net loss of joint venture.......... -- -- 1,112 -- 1,112
---------- ----------- ------------- ------------ ------------
Income (loss) before (provision for) benefit
from income taxes, cumulative effect of
change in accounting principle and equity
in net loss of consolidated subsidiaries... 549 988 (1,322) -- 215
(Provision for) benefit from income taxes.... (225) (405) 542 -- (88)
---------- ----------- ------------- ------------ ------------
Income (loss) before cumulative
effect of change in accounting
principle and equity in net loss of
consolidated subsidiaries.................. 324 583 (780) -- 127
Cumulative effect of change in accounting
principle.................................. 2,236 -- -- -- 2,236
---------- ----------- ------------- ------------ ------------
Income (loss) before equity in net loss of
consolidated subsidiaries.................. 2,560 583 (780) -- 2,363
Equity in net loss of consolidated
subsidiaries............................... (197) -- -- 197 --
---------- ----------- ------------- ------------ ------------
Net income (loss)............................ $ 2,363 $ 583 $ (780) $ 197 $ 2,363
---------- ----------- ------------- ------------ ------------
---------- ----------- ------------- ------------ ------------
</TABLE>

F-31
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 28, 1997
(In thousands)

<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents................. $ 10,976 $ 248 $ 820 $ -- $ 12,044
Restricted cash........................... -- -- 4,000 -- 4,000
Trade accounts receivable................. 7,105 277 481 -- 7,863
Inventories............................... 16,573 -- 444 -- 17,017
Deferred income taxes..................... 12,375 -- 6 -- 12,381
Prepaid expenses and other current
assets.................................. 10,896 2,274 219 (6,654) 6,735
----------- ----------- ------------- ------------ ------------
Total current assets........................ 57,925 2,799 5,970 (6,654) 60,040
Restricted cash............................. -- -- 8,907 -- 8,907
Investment in joint venture................. -- -- 3,388 -- 3,388
Property and equipment, net................. 272,950 -- 239 -- 273,189
Intangibles and deferred costs, net......... 15,519 -- -- -- 15,519
Investments in subsidiaries................. 4,970 -- -- (4,970) --
Other assets................................ 412 -- 2,359 (900) 1,871
----------- ----------- ------------- ------------ ------------
Total assets................................ $ 351,776 $ 2,799 $ 20,863 $ (12,524) $ 362,914
----------- ----------- ------------- ------------ ------------
----------- ----------- ------------- ------------ ------------
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Current maturities of long-term
obligations............................. $ 8,139 $ -- $ -- $ (400) $ 7,739
Accounts payable.......................... 25,542 -- -- -- 25,542
Accrued expenses.......................... 43,126 47 7,735 (6,254) 44,654
----------- ----------- ------------- ------------ ------------
Total current liabilities................... 76,807 47 7,735 (6,654) 77,935
Deferred income taxes....................... 50,240 -- (136) -- 50,104
Long-term obligations, less current
maturities................................ 372,196 -- -- (900) 371,296
Other liabilities........................... 23,217 1,422 9,624 -- 34,263
Stockholders' equity (deficit).............. (170,684) 1,330 3,640 (4,970) (170,684)
----------- ----------- ------------- ------------ ------------
Total liabilities and stockholders' equity
(deficit)................................. $ 351,776 $ 2,799 $ 20,863 $ (12,524) $ 362,914
----------- ----------- ------------- ------------ ------------
----------- ----------- ------------- ------------ ------------
</TABLE>

F-32
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1997
(In thousands)

<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities.................................. $ 22,188 $ (162) $ 7,198 $ -- $ 29,224
---------- ----------- ------------- ----- ------------
Cash flows from investing activities:
Purchases of property and equipment......... (14,595) -- (61) -- (14,656)
Proceeds from sales of property and
equipment................................. 4,842 -- -- -- 4,842
Purchases of investment securities.......... -- -- (8,181) -- (8,181)
Proceeds from sales and maturities of
investment securities..................... -- -- 316 -- 316
Cash (paid) received in acquisition of
Restaurant Insurance Corporation.......... (2,300) -- 2,265 -- (35)
Advances to joint venture................... (1,400) -- -- -- (1,400)
Investments in consolidated subsidiaries.... (142) -- -- 142 --
---------- ----------- ------------- ----- ------------
Net cash (used in) provided by investing
activities.................................. (13,595) -- (5,661) 142 (19,114)
---------- ----------- ------------- ----- ------------
Cash flows from financing activities:
Contribution of capital..................... -- 142 -- (142) --
Proceeds from borrowings (advances to
parent)................................... 45,511 -- (1,300) -- 44,211
Repayments of long-term obligations......... (60,882) -- -- -- (60,882)
---------- ----------- ------------- ----- ------------
Net cash (used in) provided by financing
activities.................................. (15,371) 142 (1,300) (142) (16,671)
---------- ----------- ------------- ----- ------------
Effect of exchange rate changes on cash....... -- -- (21) -- (21)
---------- ----------- ------------- ----- ------------
Net (decrease) increase in cash and cash
equivalents................................. (6,778) (20) 216 -- (6,582)
Cash and cash equivalents, beginning of
period...................................... 17,754 268 604 -- 18,626
---------- ----------- ------------- ----- ------------
Cash and cash equivalents, end of period...... $ 10,976 $ 248 $ 820 $ -- $ 12,044
---------- ----------- ------------- ----- ------------
---------- ----------- ------------- ----- ------------
Supplemental disclosures:
Interest paid............................... $ 30,236 $ -- $ -- $ -- $ 30,236
Capital lease obligations incurred.......... 2,227 -- -- -- 2,227
Capital lease obligations terminated........ 141 -- -- -- 141
</TABLE>

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

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THIS OFFERING AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN
SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.

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

TABLE OF CONTENTS

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

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PROSPECTUS SUMMARY................................ 3
RISK FACTORS...................................... 10
USE OF PROCEEDS................................... 17
DIVIDEND POLICY................................... 18
DILUTION.......................................... 18
CAPITALIZATION.................................... 19
SELECTED CONSOLIDATED FINANCIAL INFORMATION....... 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...................................... 22
BUSINESS.......................................... 32
MANAGEMENT........................................ 45
OWNERSHIP OF COMMON STOCK......................... 52
CERTAIN TRANSACTIONS.............................. 53
DESCRIPTION OF NEW CREDIT FACILITY................ 54
DESCRIPTION OF SENIOR NOTES....................... 55
DESCRIPTION OF CAPITAL STOCK...................... 56
SHARES ELIGIBLE FOR FUTURE SALE................... 60
UNDERWRITING...................................... 62
LEGAL MATTERS..................................... 64
EXPERTS........................................... 64
AVAILABLE INFORMATION............................. 64
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS........ F-1
</TABLE>

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

UNTIL , 1997 (25 DAYS AFTER THE DATE OF THE COMMON STOCK OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

5,000,000 SHARES

[LOGO]

COMMON STOCK

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

PROSPECTUS
-----------------

NATIONSBANC MONTGOMERY
SECURITIES, INC.
PIPER JAFFRAY INC.
TUCKER ANTHONY
INCORPORATED

, 1997

INFORMATION NOT REQUIRED IN THE PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following is a statement of the expenses payable by the Company in
connection with issuance and distribution of the securities being registered
hereby. All amounts shown are estimates, except the SEC registration fee and the
NASD filing fee.

<TABLE>
<S> <C>
SEC registration fee.............................................. $ 36,600
NASD filing fee................................................... 12,575
Nasdaq filing fee................................................. 36,250
Printing and engraving............................................ 39,500
Legal fees and expenses........................................... 197,400
Accounting fees and expenses...................................... 39,500
Transfer Agent and Registrar fees and expenses.................... 10,000
Blue sky fees and expenses........................................ 7,500
Miscellaneous..................................................... 47,675
---------
Total............................................................. $ 427,000
---------
---------
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 67 of Chapter 156B of the Massachusetts General Laws provides that a
corporation may indemnify its directors and officers to the extent specified in
or authorized by (i) the articles of organization, (ii) a by-law adopted by the
stockholders, or (iii) a vote adopted by the holders of a majority of the shares
of stock entitled to vote on the election of directors. In all instances, the
extent to which a corporation provides indemnification to its directors and
officers under Section 67 is optional. In its Restated Articles of Organization,
the Registrant has elected to provide indemnification to its directors and
officers in appropriate circumstances. Generally, the Restated Articles of
Organization provide that the Registrant shall indemnify directors and officers
of the Registrant against liabilities and expenses arising out of legal
proceedings brought against them by reason of their status as directors or
officers of the Registrant or by reason of their agreeing to serve, at the
request of the Registrant, as a director or officer of another organization.
Under this provision, a director or officer of the Registrant shall be
indemnified by the Registrant for all costs and expenses (including attorneys'
fees), judgments, liabilities and amounts paid in settlement of such
proceedings, unless he is adjudicated in such proceedings not to have acted in
good faith and in the reasonable belief that his action was in the best interest
of the Registrant or, to the extent such matter relates to service with respect
to an employee benefit plan, in the best interest of the participants or
beneficiaries of such benefit plan. Any indemnification shall be made by the
Registrant unless a court of competent jurisdiction holds that the director or
officer did not meet the standard of conduct set forth above or the Registrant
determines, by clear and convincing evidence, that the director or officer did
not meet such standard. Such determination shall be made by the Board of
Directors of the Registrant, based on advice of independent legal counsel. The
Registrant shall advance litigation expenses to a director or officer at his
request upon receipt of an undertaking by any such director or officer to repay
such expenses if it is ultimately determined that he is not entitled to
indemnification for such expenses. The Registrant may, to the extent authorized
from time to time by the Board of Directors, grant indemnification rights to
employees, agents or other persons serving the Registrant.

Article VI of the Registrant's Restated Articles of Organization eliminates
the personal liability of the Registrant's directors to the Registrant or its
stockholders for monetary damages for breach of a director's

II-1
<PAGE>
fiduciary duty, except that such Article VI does not eliminate or limit any
liability of a director (i) for any breach of a director's duty of loyalty to
the Registrant or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Section 61 or 62 of Chapter 156B of the Massachusetts General Laws, or
(iv) with respect to any transaction from which the directors derived an
improper personal benefit.

Section 8 of the Underwriting Agreement provides that the Underwriters are
obligated, under certain circumstances, to indemnify the Company, directors,
officers and controlling persons of the Company against certain liabilities,
including liabilities under the Securities Act. Reference is made to the form of
Underwriting Agreement filed as Exhibit 1.1 hereto.

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

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

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

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

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

II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits.

<TABLE>
<CAPTION>
**1.1 Form of Underwriting Agreement.
<C> <S>
**3.1 Restated Articles of Organization of Friendly Ice Cream Corporation (the
"Company").
**3.2 Amended and Restated By-laws of the Company.
**4.1 Stockholder and Registration Rights Agreement of the Company, as amended.
4.2 Registration Rights Agreement between the Company and Donald N. Smith.
**4.3 Rights Agreement between the Company and The Bank of New York, a Rights
Agent.
4.4 Form of Common Stock Certificate.
5.1 Opinion and consent of Choate, Hall & Stewart, counsel for the Company
regarding the validity of the offered securities.
10.1 Form of Credit Agreement to be entered into among the Company, Societe
Generale, New York Branch and certain other banks and financial institutions.
(Incorporated by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1, No. 333-34635.)
**10.2 Form of Senior Note Indenture between Friendly Ice Cream Corporation,
Friendly's Restaurants Franchise, Inc. and The Bank of New York, as Trustee.
(Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1, No. 333-34635.)
**10.3 The Company's Stock Option Plan.
**10.4 The Company's Restricted Stock Plan.
**10.5 Form of Agreement relating to the Company's Limited Stock Compensation
Program.
**10.6 Development Agreement between Friendly Ice Cream Corporation and FriendCo
Restaurants, Inc.
**10.7 Franchise Agreement between Friendly's Restaurants Franchise, Inc. and
FriendCo Restaurants, Inc.
**10.8 Management Agreement between Friendly Ice Cream Corporation and FriendCo
Restaurants, Inc.
**10.9 Purchase and Sale Agreement between Friendly Ice Cream Corporation and
FriendCo Restaurants, Inc.
**10.10 Software License Agreement between Friendly's Restaurants Franchise, Inc. and
FriendCo Restaurants, Inc. (Exhibits 10.6 through 10.10, collectively, the
"DavCo Agreement")
**10.11 Sublease between SSP Company, Inc. and the Company, as amended, for the
Chicopee, Massachusetts Distribution Center.
**10.12 Master License and Distribution Agreement for the Territory of Korea between
Friendly's International, Inc. and Hansung Enterprise Co., Ltd.
**10.13 TRC Management Contract between the Company and The Restaurant Company.
**10.14 License Agreement between the Company and Hershey Foods Corporation for 1988
Non-Friendly Marks.
**12.1 Schedule of Computation of Ratio of Earnings to Fixed Charges.
**21.1 Subsidiaries of the Company.
23.1 Consent of Choate, Hall & Stewart (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
**24.1 Power of attorney (included on Registration Statement signature page).
**24.2 Power of Attorney of Charles A. Ledsinger, Jr.
**99.1 Consent of Michael J. Daly, as a person about to become a director.
**99.2 Consent of Burton J. Manning, as a person about to become a director.
</TABLE>

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

** Previously filed.

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

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

ITEM 17. UNDERTAKINGS.

The undersigned Registrants hereby undertake that:

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

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

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

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

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

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

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

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

(5) To provide to the underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.

II-4
<PAGE>
SIGNATURES

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

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

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

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

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

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

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

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

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

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

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

*/s/ GEORGE G. ROLLER
-------------------------
George G. Roller
ATTORNEY-IN-FACT

II-5
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- --------- -------------------------------------------------------------------------------------- ---------
<C> <S> <C>
**1.1 Form of Underwriting Agreement.
**3.1 Restated Articles of Organization of Friendly Ice Cream Corporation (the "Company").
**3.2 Amended and Restated By-laws of the Company.
**4.1 Stockholder and Registration Rights Agreement of the Company, as amended.
4.2 Registration Rights Agreement between the Company and Donald N. Smith.
**4.3 Rights Agreement between the Company and The Bank of New York, a Rights Agent.
4.4 Form of Common Stock Certificate.
5.1 Opinion and consent of Choate, Hall & Stewart, counsel for the Company regarding the
validity of the offered securities.
10.1 Form of Credit Agreement to be entered into among the Company, Societe Generale, New
York Branch and certain other banks and financial institutions. (Incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1, No.
333-34635.)
**10.2 Form of Senior Note Indenture between Friendly Ice Cream Corporation, Friendly's
Restaurants Franchise, Inc. and The Bank of New York, as Trustee. (Incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1, No.
333-34635.)
**10.3 The Company's Stock Option Plan.
**10.4 The Company's Restricted Stock Plan.
**10.5 Form of Agreement relating to the Company's Limited Stock Compensation Program.
**10.6 Development Agreement between Friendly Ice Cream Corporation and FriendCo Restaurants,
Inc.
**10.7 Franchise Agreement between Friendly's Restaurants Franchise, Inc. and FriendCo
Restaurants, Inc.
**10.8 Management Agreement between Friendly Ice Cream Corporation and FriendCo Restaurants,
Inc.
**10.9 Purchase and Sale Agreement between Friendly Ice Cream Corporation and FriendCo
Restaurants, Inc.
**10.10 Software License Agreement between Friendly's Restaurants Franchise, Inc. and FriendCo
Restaurants, Inc. (Exhibits 10.6 through 10.10, collectively, the "DavCo Agreement")
**10.11 Sublease between SSP Company, Inc. and the Company, as amended, for the Chicopee,
Massachusetts Distribution Center.
**10.12 Master License and Distribution Agreement for the Territory of Korea between
Friendly's International, Inc. and Hansung Enterprise Co., Ltd.
**10.13 TRC Management Contract between the Company and The Restaurant Company.
**10.14 License Agreement between the Company and Hershey Foods Corporation for 1988
Non-Friendly Marks.
**12.1 Schedule of Computation of Ratio of Earnings to Fixed Charges.
**21.1 Subsidiaries of the Company.
23.1 Consent of Choate, Hall & Stewart (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
**24.1 Power of attorney (included on Registration Statement signature page).
**24.2 Power of Attorney of Charles A. Ledsinger, Jr.
**99.1 Consent of Michael J. Daly, as a person about to become a director.
**99.2 Consent of Burton J. Manning, as a person about to become a director.
</TABLE>

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

** Previously filed.

<PAGE>

Exhibit 4.2

REGISTRATION RIGHTS AGREEMENT
------------------------------

This REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT") dated as of November
___, 1997 is among Friendly Ice Cream Corporation, a Massachusetts corporation
(the "COMPANY") and Donald N. Smith (the "STOCKHOLDER").

This Agreement is made in connection with the registration for sale to the
public of shares of common stock, $0.01 par value, of the Company (the "Common
Stock") pursuant to a registration statement on Form S-1 and any amendments
thereto originally filed with the Securities and Exchange Commission (the
"Commission") on August 29, 1997 (File No. 333-34633) (the "Initial Public
Offering").

Prior to the Initial Public Offering, the Stockholder owned approximately
____% of the issued and outstanding shares of Class A Common Stock of the
Company, and upon consummation of the Company's Initial Public Offering, the
Stockholder will own approximately ____% of the outstanding Common Stock.

The parties hereto agree as follows:

SECTION 1. DEFINITIONS. For purposes of this Agreement, the following
terms shall have the meanings set forth below:

AFFILIATE means with respect to the Company, any Person directly or
indirectly controlling, controlled by or under direct or indirect common control
with the Company and shall include (a) any Person who is a director or
beneficial holder of at least 10% of the then outstanding capital stock of the
Company, (b) any Person of which the Company or an Affiliate (as defined in
clause (a) above) of the Company directly or indirectly, either beneficially
owns at least 10% of the then outstanding capital stock (or partnership
interests or other shares of beneficial interest) or constitutes at least a 10%
equity participant, and (c) any Person of which an Affiliate (as defined in
clause (a) above) of the Company is a partner, director, officer or executive
employee.

COMMISSION means the Securities and Exchange Commission.

DEMAND is defined in Section 2(a) hereof.

HOLDER means the Stockholder and any Person to whom he has assigned rights
hereunder as permitted by Section 11.

<PAGE>

LOCKUP PERIOD means the period of time the Stockholder has agreed not to
sell stock of the Company pursuant to lockup agreements entered into in
connection with the Company's Initial Public Offering.

PERSON means an individual, partnership, corporation, limited liability
company, association, trust, joint venture, unincorporated organization, or any
government, government department or agency or political subdivision thereof.

PUBLIC OFFERING means any sale of Common Stock pursuant to a public
offering registered under the Securities Act.

REGISTRABLE SECURITIES means the Common Stock owned by the Stockholder on
the date hereof, Common Stock issuable to the Stockholder upon conversion of the
Company's outstanding shares of Class A Common Stock and any Common Stock or
other securities which may be issued or distributed in respect thereof by way of
or in connection with a stock dividend or stock split or other distribution,
recapitalization, reclassification, combination of shares, merger, consolidation
or other reorganization. As to any particular Registrable Securities, such
Registrable Securities shall cease to be Registrable Securities when they cease
to be owned by a Holder.

REGISTRATION RIGHTS AGREEMENT means the Stockholder and Registration Rights
Agreement, dated as of March 25, 1996, as amended, among the Company, the
lenders and certain other stockholders.

REGISTRATION SHARES is defined in Section 2(a) hereof.

REGISTRATION STATEMENT means a registration statement on the appropriate
form in order to register Shares of Common Stock under the Securities Act.

SECURITIES ACT means the Securities Act of 1933, as amended.

UNDERWRITER means, in the case of a Public Offering initiated under Section
2 hereunder, an underwriter selected by the Company and approved by Holders
owning a majority of the Registration Shares to be included in such registration
(which approval shall not be unreasonably withheld).

UNDERWRITERS' MAXIMUM NUMBER means, for any registration which is an
underwritten registration, that number of securities to which such registration
should, in the written opinion of the managing Underwriters of such registration
in the light of marketing factors, be limited.

SECTION 2. REGISTRATION RIGHTS.

2
<PAGE>

(a) At any time after the end of the Lockup Period, the Holder or Holders
of a majority of the aggregate number of all outstanding Registrable Securities
may by written notice (a "DEMAND") request the Company to file a Registration
Statement in order to register all (or any portion as determined by such
Holders) of the Registrable Securities owned by such Holder or Holders. In the
event that the Company receives a Demand, the Company will give prompt written
notice thereof to all other Holders. At the written request of any Holder
delivered to the Company within fifteen (15) days after the receipt of such
notice from the Company, which request shall state the number of shares of
Common Stock held by such Holder that such Holder wishes to sell under the
Registration Statement (shares of Common Stock held by any Holder that are
requested to be offered and sold pursuant to this Section 2 are herein referred
to as "REGISTRATION SHARES"), the Company agrees, subject to Section 2(b), to
use its best efforts to cause all of the Registration Shares to be registered
under the Securities Act on such Registration Statement to the extent and under
the conditions such registration is permissible under the Securities Act and the
rules and regulations of the Commission thereunder.

(b) The number of Registration Shares to be registered pursuant to Section
2(a) for the benefit of any particular Holder is subject to mandatory reduction,
in the event that the managing Underwriter(s) advise the Company of an
Underwriter's Maximum Number, as follows: the Company will include in such
registration:

(i) first, the total number of Registration Shares up to the
Underwriter's Maximum Number, with the amount to be registered
for the account of any Holder not to exceed such Holder's PRO
RATA portion of the Underwriter's Maximum Number; and

(ii) in the event the number of shares to be registered pursuant to
clause (i) above is less than the Underwriter's Maximum Number,
the number of shares, if any, the Company wishes to register for
its own account.

(c) Upon receipt of a Demand, the Company shall promptly (and in any event
within ninety (90) days) use its best efforts to file such Registration
Statement under the Securities Act with respect to the Registration Shares
subject to the following

(i) If the Company has commenced taking action with respect to any
financing, acquisition, reorganization or other transaction or
development material to the Company, and in the reasonable and
good faith opinion of the Company's Board of Directors, filing a
Registration Statement would not be in the best interests of the
Company, the Company may delay filing the Registration Statement
until the earlier of (A) the termination of activities with
respect to any such transaction or development, (B) the
consummation or abandonment of any agreement with respect to such
transaction or development or (C) one

3
<PAGE>

hundred eighty (180) days following the Company's receipt of the
Holder's notice of a Demand pursuant to this Section 2.

(ii) If filing a Registration Statement could require the Company to
undergo a special interim audit, and in the reasonable and good
faith opinion of the Board of Directors, the cost of such special
interim audit would exceed $50,000, the Company may delay filing
a Registration Statement until ninety (90) days after the close
of the fiscal year in which the request by the applicable Holder
for registration of shares of Common Stock is made, unless the
Holder or Holders making such Demand agree to reimburse the
Company for the cost of such special interim audit.

In the event that the Company elects to delay filing a Registration
Statement in accordance with this Section 2(c), it will promptly notify the
demanding Holder or Holders thereof. The demanding Holder or Holders may,
within twenty (20) days following receipt of such notice, decide to withdraw its
or their request that the Company file a Registration Statement, in which case
the withdrawn request will not count as an exercise of any of such Holders'
right to request the Company to file a Registration Statement pursuant to this
Agreement. The Company may only exercise its right to postpone the filing of a
Registration Statement under this Section 2(c) once in any calender year.

(d) If the Company so requests, it shall not be required to effect a
Public Offering under this Section 2 for a period not to exceed six (6) months
immediately following the date any other Public Offering was commenced and
consummated.

(e) No more than one (1) Demand to the Company shall be made pursuant
to this Agreement. A Holder or Holders may not require the Company to file
any Registration Statement on Form S-1 (or other comparable form adopted by
the Commission) unless Form S-3 (or any comparable form adopted by the
Commission) is not available for such filing. Any registration initiated by
a Holder or Holders pursuant to a Demand pursuant to this Agreement shall
not, for purposes of this Agreement, count as a Demand unless and until such
registration shall have become effective and, if such registration is an
underwritten offering, at least 80% of the Registration Shares included in
such registration (other than any Registration Shares included in any
over-allotment option granted to the underwriters) shall have been actually
sold. A Holder or Holders may not require the Company to file a Registration
Statement pursuant to a Demand unless the Registration Statement is one for
the registration of Registration Shares having an expected price to the
public (determined in accordance with Rule 457 promulgated under the
Securities Act) of at least $3,000,000.

(f) Any registration initiated by a Holder or Holders pursuant to a Demand
may be revoked by such Holder or Holders by giving written notice thereof to the
Company at any time before such registration shall have become effective;
PROVIDED, HOWEVER, that in the event of such

4
<PAGE>

a revocation, either the demanding Holder or Holders shall pay all expenses of
such registration required to be paid by the Company pursuant to Section 5, in
which case such registration shall not, for purposes of this Agreement, count as
a Demand, or if the demanding Holder or Holders fail to pay such expenses within
a reasonable period of time after receipt of appropriate documentation for such
expenses, such registration shall count as a Demand for purposes of this
Agreement.

(g) A request for registration under this Agreement shall not be counted
as a Demand (i) unless a Registration Statement has become effective and has
been kept continuously effective for the period required under Section 3(b),
(ii) if after it has become effective, use of such Registration Statement is
suspended by any stop order, injunction or other order or requirement of the
Commission or other governmental agency or court, (iii) if no Registrable Shares
are sold within the period during which the Registration Statement has been kept
continuously effective as required under Section 3(b).

SECTION 3. PROCEDURES. Whenever the Company shall include Registrable
Shares owned by any Holder or Holders in a Registration Statement, the Company
shall:

(a) prepare and file with the Commission a Registration Statement with
respect to such Registrable Shares and use its best efforts to cause such
Registration Statement to become promptly effective and furnish to the demanding
Holder or Holders copies of the Registration Statement and any amendments or
supplements thereto and any prospectus included therein prior to filing;

(b) prepare and file with the Commission such amendments and supplements
to such Registration Statement and the prospectus used in connection therewith
as may be necessary to keep such Registration Statement effective for the lesser
of (A) a period of time necessary to permit the demanding Holder or Holders to
dispose of all of the Registration Shares and (B) six (6) months (as
appropriately extended to reflect any periods when any Holder is not permitted
to sell Registration Shares pursuant to such Registration Statement), and comply
with the provisions of the Securities Act with respect to the disposition of all
securities covered by such Registration Statement during such effective period
in accordance with the intended methods of disposition by the demanding Holder
or Holders set forth in such Registration Statement and cause the prospectus to
be supplemented by any required prospectus supplement, and as so supplemented to
be filed pursuant to Rule 424 under the Securities Act;

(c) Upon request, furnish to the demanding Holder or Holders such number
of copies of such Registration Statement, each amendment and supplement thereto,
the prospectus included in such Registration Statement (including each
preliminary prospectus and each prospectus filed under Rule 424 of the
Securities Act) and such other documents as each such Holder or Holders may
reasonably request in order to facilitate the disposition of the Registration
Shares owned by such Holder or Holders (it being understood that the Company
consents to the use of the prospectus and any amendment or supplement thereto by
such Holder or Holders in connection with the offering

5
<PAGE>

and sale of the Registration Shares covered by the prospectus or any amendment
or supplement thereto):

(d) use its best efforts to register or quality such Registration Shares
under such other securities or blue sky laws of such jurisdictions as determined
by the managing Underwriter after consultation with the Company (or, if there is
no managing Underwriter, as determined by the Company), use its best efforts to
keep such registration or qualification effective, including through new
filings, amendments or renewals, during the period such Registration Statement
is required to be kept effective, and do any and all other acts and things which
may be reasonably necessary or advisable to enable the demanding Holder or
Holders to consummate the disposition in such jurisdictions of the Registration
Shares; PROVIDED that the Company will not be required (A) to qualify generally
to do business in any jurisdiction where it would not otherwise be required to
qualify but for this Section 3(d), (B) to subject itself to taxation in any such
jurisdiction, (C) to consent to general service of process in any such
jurisdiction, (D) to register or qualify as a broker-dealer in any such
jurisdiction or (E) to qualify or register in any particular state if such state
refuses to permit such registration or qualification because of the expense
allocation provisions set forth in Section 5;

(e) notify the demanding Holder or Holders, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, of the
happening of any event as a result of which the prospectus included in such
Registration Statement contains an untrue statement of a material fact or omits
any fact necessary to make the statements therein not misleading, and, at the
request of the demanding Holder or Holders, the Company will promptly prepare
(and, when completed, give notice to such Holder or Holders) a supplement or
amendment to such prospectus so that, as thereafter delivered to the purchasers
of such Registration Shares, such prospectus will not contain an untrue
statement of a material fact or omit to state any fact necessary to make the
statements therein not misleading; PROVIDED that upon such notification by the
Company, such Holder or Holders will not offer to sell such Registration Shares
until the Company has notified such Holder or Holders that it has prepared a
supplement or amendment to such prospectus and delivered copies of such
supplement or amendment to such Holder or Holders;

(f) use its best efforts to cause all such Registration Shares to be
listed, prior to the date of the first sale of such Registration Shares pursuant
to such registration, on each securities exchange on which similar securities
issued by the Company are then listed, and, if not so listed, to be listed with
The NASDAQ Stock Market;

(g) enter into all such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the demanding
Holder or the Holders of a majority of the Registration Shares being sold or the
Underwriters, if any, reasonably request in order to expedite or facilitate the
disposition of such Registration Shares;

6
<PAGE>

(h) make available for inspection on a confidential basis by the demanding
Holder or Holders, any Underwriter participating in any disposition pursuant to
such Registration Statement, and any attorney, accountant or other agent
retained by any such Holder, Holders or Underwriter (in each case after
reasonable prior notice), all financial and other records, pertinent corporate
documents and properties of the Company, and cause the Company's officers,
directors, employees and independent accountants to supply on a confidential
basis all information reasonably requested by such Holder, Holders, Underwriter,
attorney, accountant or agent in connection with such Registration Statement;

(i) use its best efforts to cause the Registration Shares to be registered
with or approved by such other governmental agencies or authorities within the
United States and having jurisdiction over the Company as may reasonably be
necessary to enable the demanding Holder or Holders or the Underwriter or
Underwriters, if any, to consummate the disposition of such Registration Shares;

(j) obtain a cold comfort letter from the Company's independent public
accountants in customary form and covering such matters of the type customarily
covered by cold comfort letters;

(k) cause the Company's counsel to provide customary legal opinions in
connection with such Registration Statement; and

(l) provide a transfer agent and registrar for all such Registration
Shares not later than the effective date of such Registration Statement.

SECTION 4. INDEMNIFICATION.

(a) The Company will indemnify and hold harmless the demanding Holder or
Holders and each Underwriter of shares of Common Stock sold pursuant to this
Agreement (and any person who controls such Holder or Holders or any such
Underwriter within the meaning of Section 15 of the Securities Act) against all
claims, losses, damages, liabilities and expenses resulting from any untrue
statement or alleged untrue statement of a material fact contained in a
Registration Statement or in any related prospectus, notification or the like
and from any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar (i) as the same may have been based on information
furnished in writing to the Company by the demanding Holder or Holders or such
Underwriter expressly for use therein and used in accordance with such writing
or (ii) as such claims, losses, damages, liabilities and expenses result from a
breach by the Holder of its obligations under Section 3(e) hereof.

(b) The demanding Holder or Holders, by acceptance of the registration
provisions provided herein, agree to furnish to the Company such information
concerning such Holder or Holders and the proposed sale or distribution as
shall, in the opinion of counsel for the Company, be necessary in connection
with any such registration or qualification of any shares of stock proposed to
be made pursuant to this Agreement and to indemnify and hold harmless the
Company,

7
<PAGE>

its officers and directors, and each of its Underwriters (and any person who
controls the Company or such Underwriters within the meaning of Section 15 of
the Securities Act) against all claims, losses, damages, liabilities and
expenses resulting from any untrue statement or alleged untrue statement of a
material fact furnished in writing to the Company by the demanding Holder or
Holders expressly for use in connection with such registration or qualification
and used in accordance with such writing and from any omission therefrom or
alleged omission therefrom of a material fact needed to be furnished or
necessary to make the information furnished not misleading; PROVIDED, HOWEVER,
that no Holder shall have liability under this Section 4(b) in excess of the net
proceeds received by such Holder from the sale of Registration Shares.

(c) If any party (the "INDEMNITEE") receives notice of any claim or the
commencement of any action or proceeding with respect to which any other party
(or parties) is obligated to provide indemnification (the "INDEMNIFYING PARTY")
pursuant to this Section 4, the Indemnitee shall promptly give the Indemnifying
Party notice thereof. If the Indemnitee does not promptly give this notice, the
Indemnifying Party shall not be obligated to provide indemnification hereunder
to the extent that the liability for which such indemnification is claimed could
have been avoided or mitigated if the Indemnitee had promptly given notice to
the Indemnifying Party. The Indemnifying Party may compromise, defend or
settle, at such Indemnifying Party's own expense and by such Indemnifying
Party's own counsel, any such matter involving the asserted liability of the
Indemnitee. If the Indemnifying Party chooses to defend any claim, the
Indemnitee shall make available to the Indemnifying Party any books, records or
other documents within its control that are necessary or appropriate for such
defense.

SECTION 5. EXPENSES. Subject to Section 2(f), the Company shall pay all
of the expenses in connection with a Public Offering pursuant to a Demand by a
Holder or Holders in accordance with this Agreement, including, without
limitation, costs of complying with federal and state securities laws and
regulations, attorneys' and accounting fees of the Company, printing expenses
and federal and state filing fees, except that transfer taxes, underwriting
commissions, fees and expenses incurred by any demanding Holder or Holders and
fees and disbursements of counsel (if any) to such Holders will be borne by such
Holders.

SECTION 6. RESTRICTIONS ON PUBLIC SALE BY HOLDERS OF REGISTRATION SHARES.
The demanding Holder or Holders, if the Company or the managing Underwriters so
request in connection with any underwritten Public Offering subject to the
provisions of this Agreement, will not, without the prior written consent of the
Company or such underwriters, effect any public sale or other distribution of
any equity securities of the Company, including any sale pursuant to Rule 144,
during the seven (7) days prior to, and during the ninety-day period commencing
on, the effective date of such underwritten Public Offering, except in
connection with such underwritten Public Offering; PROVIDED, that the

8
<PAGE>

demanding Holder or Holders is or are permitted to include in such registration
at least 80% of the Registrable Shares requested to be included in such
registration by such Holder or Holders.

SECTION 7. REGISTRATION RIGHTS AGREEMENT. Notwithstanding anything
contained herein to the contrary the exercise of any right by any Holder
pursuant to the Registration Rights Agreement, including but not limited to
the delivery of a notice of demand to the Company or participation in a
Public Offering, shall not limit such Holder's ability to exercise any right
hereunder, including but not limited to such Holder's right to make a Demand
hereunder, or the Company's obligation to register shares of Common Stock
pursuant to this Agreement.

SECTION 8. NO INCONSISTENT AGREEMENTS. The Company will not enter into
any registration rights or other agreement that conflicts with its obligations
under this Agreement.

SECTION 9. SEVERABILITY. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.

SECTION 10. ENTIRE AGREEMENT. Except as otherwise expressly set forth
herein, this document embodies the complete agreement and understanding among
the parties hereto with respect to the subject matter hereof and thereof and
supersedes and preempts any prior understandings, agreements or representations
by or among the parties, written or oral, which may have related to the subject
matter hereof in any way.

SECTION 11. SUCCESSORS AND ASSIGNS. This Agreement will bind and inure to
the benefit of and be enforceable by the Company and each of the Holders and
their respective successors and assigns. A Holder shall be permitted to assign
its rights hereunder to any Person to whom it transfers any Registrable
Securities in a transaction not involving any public offering, provided that
(A) the number of Registrable Securities so transferred is not less than 300,000
shares (adjusted for any stock split, reverse stock split or combination of
shares) and the assignee agrees with the Company in writing to be bound by the
provisions of this Agreement or (B) such Person is an Affiliate of
Stockholder; provided, however, that the 300,000 share limit in clause (A)
shall not apply to transferees who are immediate family members of the
Stockholder.

SECTION 12. COUNTERPARTS. This Agreement may be executed in separate
counterparts each of which will be an original and all of which taken together
will constitute one and the same agreement.

SECTION 13. REMEDIES. Each of the Holders will be entitled to enforce its
rights under this Agreement specifically (without posting a bond or other
security), to recover damages by reason

9
<PAGE>

of any breach of any provision of this Agreement and to exercise all other
rights existing in their favor. The parties hereto agree and acknowledge that
money damages may not be an adequate remedy for any breach of the provisions of
this Agreement and that each of the Holders may in its sole discretion apply to
any court of law or equity of competent jurisdiction for specific performance
and/or injunctive relief in order to enforce or prevent any violation of the
provisions of this Agreement. In the event of any dispute involving the terms
of this Agreement, the prevailing party shall be entitled to collect reasonable
fees and expenses incurred by the prevailing party in connection with such
dispute from the other parties to such dispute.

SECTION 14. NOTICES. Any notice provided for in this Agreement will be
in writing and will be deemed properly delivered if either personally
delivered or sent by telecopier, overnight courier or mailed certified or
registered mail, return receipt requested, postage prepaid to a recipient (a)
if to a Holder, to Donald N. Smith, c/o The Restaurant Comapany, 1 Pierce
Place, Suite 100 East, Itasca, IL 60143 and (b) if to the Company, to 1855
Boston Road, Wilbraham, Massachusetts 01095, Attention: Aaron B. Parker. Any
such notice shall be effective (i) if delivered personally or by telecopier,
when received, (ii) if sent by overnight courier, when receipted for, and
(iii) if mailed, 3 days after being mailed as described above. The Company
agrees to make available to any Holder upon request an address list of all
holders of the Common Stock to ensure correct delivery of all notices
hereunder.

SECTION 15. AMENDMENT AND WAIVER. No modification, amendment or waiver of
any provision of this Agreement will be effective against the Company or any
Holder unless such modification, amendment or waiver is approved in writing by
the parties. The failure of any party to enforce any of the provisions of this
Agreement will in no way be construed as a waiver of such provisions and will
not affect the right of such party thereafter to enforce each and every
provision of this Agreement in accordance with its terms.

SECTION 16. TERMINATION. The provisions of this Agreement (except for
Sections 4, 5 and 6 hereof) will terminate upon the earliest to occur of (a) the
completion of any voluntary or involuntary liquidation or dissolution of the
Company or (b) the completion of a Public Offering pursuant to Section 2 hereof.

SECTION 17. GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION,
VALIDITY AND INTERPRETATION OF THIS AGREEMENT WILL BE GOVERNED BY THE LAWS OF
THE COMMONWEALTH OF MASSACHUSETTS, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAW.

SECTION 18. DESCRIPTIVE HEADINGS. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.

SECTION 19. CONSTRUCTION. The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rule of strict construction will be applied against any party.

10
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.

FRIENDLY ICE CREAM CORPORATION

By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------

By:
--------------------------------------
Donald N. Smith

<PAGE>
Exhibit 4.4

NUMBER
F SHARES

_________________ [LOGO] ___________________

FRIENDLY ICE CREAM CORPORATION
Incorporated under the Laws of the Commonwealth of Massachusetts

COMMON STOCK SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 358497 10 5

THIS CERTIFIES THAT [Name]

is the owner of [Amount]

FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK,
PAR VALUE $.01 PER SHARE, OF

FRIENDLY ICE CREAM CORPORATION

transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney, on surrender of this certificate properly endorsed.

This certificate is not valid until countersigned and registered by the Transfer
Agent and Registrar.

Witness the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.

[SEAL]
Dated:

Treasurer President

<PAGE>

FRIENDLY ICE CREAM CORPORATION

THE CORPORATION IS AUTHORIZED TO ISSUE MORE THAN ONE CLASS AND SERIES OF
STOCK. THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO
SO REQUESTS A COPY OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR
SERIES THEREOF, WHICH THE CORPORATION IS AUTHORIZED TO ISSUE, AND THE
QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR
RIGHTS. ANY SUCH REQUEST MAY BE MADE TO THE CORPORATION OR THE TRANSFER AGENT.

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

KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN OR DESTROYED
THE COMPANY WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE
OF A REPLACEMENT CERTIFICATE.

The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

<S> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT ________ Custodian_______
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as Act_____________
tenants in common (State)

</TABLE>

Additional abbreviations may also be used though not in the above list.

For value received, ____________ hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE

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

- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)

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

___________ shares of the capital stock represented by the within Certificate
and do hereby irrevocably constitute and appoint _____________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.

Dated __________________

---------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATSOEVER
Signature(s) Guaranteed:

- --------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.

<PAGE>

Exhibit 5.1

[Choate, Hall & Stewart Letterhead]

November 5, 1997

Friendly Ice Cream Corporation
1855 Boston Road
Wilbraham, MA 01095

RE: Friendly Ice Cream Corporation Registration Statement on Form S-1
-----------------------------------------------------------------

Dear Ladies and Gentlemen:

We have served as special Massachusetts counsel to Friendly Ice Cream
Corporation, a Massachusetts corporation (the "Company"), in connection with the
registration of 5,750,000 shares of Common Stock, par value $0.01 per share, of
the Company (the "Shares") and the sale of such Shares to the public pursuant to
an underwriting agreement (the "Underwriting Agreement") to be entered into
between the Company and the underwriters party thereto.

In connection with our representation, we have examined the corporate
records of the Company, including its Articles of Organization, its By-Laws, and
other corporate records and documents and have made such other examinations as
we consider necessary to render this opinion. For purposes of our opinion set
forth in paragraphs (ii) and (iii) below, we have assumed (a) the filing with
the Secretary of the Commonwealth of Massachusetts of Restated Articles of
Organization of the Company which, among other things, increase the number of
authorized shares of Common Stock, par value $0.01 per share, of the Company to
50,000,000 shares and (b) the effectiveness of the 923.6442 for one stock split
described under "Prospectus Summary" in the prospectus included in the
registration statement, which will occur contemporaneously with the execution
and delivery of the Underwriting Agreement. Based upon the foregoing, it is our
opinion that:

(i) the Company is a corporation duly organized and validly existing in
good standing under the laws of the Commonwealth of Massachusetts;

<PAGE>

Friendly Ice Cream Corporation
November 5, 1997
Page 2

(ii) the Shares to be sold by the certain selling stockholders pursuant
to the Underwriting Agreement have been validly issued and are fully
paid and non-assessable; and

(iii) the Shares to be sold by the Company will be validly issued and,
assuming such Shares are sold pursuant to the terms of the
Underwriting Agreement, fully paid and non-assessable.

We consent to the filing of this opinion as an exhibit to the registration
statement referred to above and to all references to this firm in such
registration statement.

Sincerely,

/s/ Choate, Hall & Stewart
------------------------------
Choate, Hall & Stewart

<PAGE>
EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
report (and to all reference to our Firm) included in or made a part of this
Registration Statement.

ARTHUR ANDERSEN LLP

Hartford, Connecticut
November 5, 1997