Friendly Ice Cream Corporation Reports Strong Fourth Quarter and Full-Year 2006 Results

Friendly Ice Cream Corporation (AMEX: FRN) today reported financial results for the fourth quarter and year ended December 31, 2006. Financial and performance highlights include:

• Net income in the fourth quarter of 2006 was $0.1 million, or $0.02 per share, compared to a net loss of $30.2 million, or $3.82 per share, reported for the fourth quarter of 2005. The net loss in the fourth quarter of 2005 included $22.2 million, or $2.84 per share, in additional non-cash tax valuation allowance. Total revenues were $122.4 million compared to total revenues of $123.5 million for the prior year. Comparable restaurant sales increased 1.8% for company-operated restaurants and 0.5% for franchised restaurants.

• For the full-year, net income was $4.9 million in 2006, or $0.61 per share, compared to a net loss of $27.3 million, or $3.49 per share, reported for the prior year. The net loss in fiscal 2005 included $22.2 million, or $2.84 per share, in additional non-cash tax valuation allowance. Total revenues were $531.5 million compared to total revenues of $531.3 million for the prior year. Comparable restaurant sales for 2006 increased 1.4% for company-operated restaurants and decreased 0.9% for franchised restaurants.

• Adjusted EBITDA was $10.2 million in the fourth quarter of 2006, an increase of $7.4 million, as compared to adjusted EBITDA of $2.8 million in the fourth quarter of 2005. For the year, adjusted EBITDA was $47.1 million as compared to adjusted EBITDA of $39.4 million reported for fiscal 2005. An explanation of the use of non-GAAP financial measures is explained in the note below and in the supplemental disclosure attached to this press release.

• Two new franchise restaurants were opened during the fourth quarter of 2006.

• In the fourth quarter of 2006, two existing franchisees exercised their purchase options on seven restaurants, resulting in a gain on franchise sales of restaurant operations and properties of $1.6 million.

• Eight company-operated restaurants were remodeled during the fourth quarter.

George Condos, President and CEO, said, 'We are pleased with our results and the positive momentum established this quarter. Since my appointment as President and CEO in January 2007, I have had a first-hand opportunity to review and observe many improvements and initiatives being undertaken by the Company. I believe there are opportunities to improve our performance, increase our bottom line and build long-term shareholder value. We will continue to leverage the value of the Friendly's brand by improving the quality of our menu and overall guest experience and by creating a more contemporary environment within our restaurants.'

Fourth Quarter Results

Restaurant revenues were $90.6 million in the fourth quarter of 2006, a decrease of $1.0 million, as compared to restaurant revenues of $91.6 million for the prior year fourth quarter. Comparable restaurant sales increased 1.8%, or $1.2 million. Increases in comparable sales occurred in all dayparts, with the largest growth occurring during the dinner and afternoon snack periods. These increases were offset by a $2.4 million decline in restaurant revenue from 11 company-operated restaurants that were acquired by franchisees over the past 15 months.

Adjusted restaurant EBITDA was $7.9 million, or 8.7% of restaurant revenues, in the fourth quarter of 2006 compared to $5.5 million, or 6.0% of restaurant revenues, in the prior year. Cost of sales, as a percentage of restaurant revenues, improved by 0.7% as compared to the prior year due to increased menu prices and product re-formulations, as overall commodity prices were slightly unfavorable. Labor and benefits, as a percentage of restaurant revenues, decreased by 0.6% as a result of menu price increases, improved labor productivity levels and a reduction in health insurance costs. These reduced expenses offset higher crew level wages, increased general manager bonus expense and higher non-cash pension costs. Operating expenses of $23.3 million were $1.6 million lower than in the prior year fourth quarter mainly due to favorable maintenance, utility and advertising costs.

In the fourth quarter of 2006, Foodservice revenues of $28.2 million were unchanged from the fourth quarter of 2005. Franchise restaurant product revenues increased by $1.0 million due to a higher average number of operating franchise restaurants during the quarter and from the increase in franchise comparable sales of 0.5%. Sales to retail supermarket customers decreased by $1.0 million primarily due to a reduction in retail supermarket case volume of 14.6% which was partially offset by favorable trade spending and sales allowances. Adjusted Foodservice EBITDA increased by $1.8 million from the prior year to $2.7 million due to lower cream prices and distribution costs, mainly as a result of product handling and warehousing efficiencies.

In December 2006, Central Florida Restaurants LLC, the Company's franchisee in the Orlando, FL market, defaulted under its leases and franchise agreements and surrendered 11 restaurants to the Company and closed one restaurant. The Company is operating the 11 restaurants while undertaking a workout with Central Florida, its lender and other creditors.

Franchise revenues of $3.6 million in the fourth quarter of 2006 were unchanged from the fourth quarter of 2005. Comparable franchise sales increased by 0.5%. Franchise royalties were flat versus the prior year as increased royalties from the opening of four new franchised restaurants and the 11 restaurants acquired by franchisees over the past 15 months were offset by the closing of five under-performing restaurants and the 11 Orlando, FL restaurants acquired from Central Florida. Franchise fees and other franchise income were also unchanged versus the prior year mainly due to the forfeitures and penalties related to the eleven restaurants acquired from franchisees. Adjusted franchise EBITDA was $2.0 million as compared to $2.4 million in the prior year.

Corporate expenses of $4.8 million in the fourth quarter of 2006 were favorable by $0.9 million as compared to the fourth quarter of 2005 primarily due to decreases in legal fees, salaries and other professional services. These reduced expenses were partially offset by increased bonus expense.



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