**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q/A**

 

**(Amendment No. 1)**

 

**ý****        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES AND EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30,2001**

 

**OR**

 

**o****        TRANSITION REPORTPURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934**

 

**For the transition periodfrom        to        **

 

**Commission File No. 0-3930**

** **

| **FRIENDLY ICE CREAM CORPORATION**                                                                                          |
|-----------------------------------------------------------------------------------------------------------------------------|
| (Exact name of registrant as specified in its charter)                                                                      |
|                                                                                                                        |   |   |   |   |
| **Massachusetts**                                                                                                           |   | **5812** |   | **04-2053130** |
| (State of  Incorporation)                                                                                                   |   | (Primary Standard Industrial  Classification Code Number) |   | (I.R.S. Employer  Identification No.) |
|                                                                                                                        |   |   |   |   |
| **1855 Boston Road  Wilbraham, Massachusetts 01095  (413) 543-2400**                                                        |
| (Address, including zip code, and telephone number, including  area code, of registrant’s principal executive offices) |

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.  Yes  ý  No o

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date.

 

| **Class**                    |   | **Outstanding at October 19, 2001** |
|------------------------------|--------|-------------------------------------|
|                         |   |                                |
| Common Stock, $.01 par value |   | 7,352,710 shares                    |

 

 

----

 

**Introductory Note - Restatements**

 

Friendly Ice Cream Corporation (the“Company”) as a result of an extensive review of its accounting policiesdetermined that its policy for recording restaurant advertising expense,included in operating expenses, although proper for annual reporting, needed tobe revised for the Company’s quarterly reporting.  Accordingly, the accompanying financial statements and relateddisclosures have been restated to reflect this accounting change. This Form10-Q/A does not modify or update any disclosures except as required to reflectthe results of the restatement discussed above on current period and priorperiod financial information.

 

1

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**PARTI – FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**FRIENDLY ICE CREAMCORPORATION AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 

(In thousands)

 
|                                                            |   | **September  30,  2001** |    | **December  31,  2000** |   |
|-----------------------------------------------------------------|--------|--------------------------|---------|-------------------------|--------|
|                                                            |   | **(unaudited)**          |    |                    |   |
| ASSETS                                                          |   |                     |    |                    |   |
| CURRENT ASSETS:                                                 |   |                     |    |                    |   |
| Cash and cash equivalents                                       |   | $                        | 7,557   |                    | $      | 14,584 |   |
| Restricted cash                                                 |   | —                   |    | 1,737                   |   |
| Accounts receivable, net                                        |   | 8,494                    |    | 6,157                   |   |
| Inventories                                                     |   | 15,394                   |    | 11,570                  |   |
| Deferred income taxes                                           |   | 10,395                   |    | 10,395                  |   |
| Prepaid expenses and other current assets                       |   | 3,352                    |    | 2,799                   |   |
| TOTAL CURRENT ASSETS                                            |   | 45,192                   |    | 47,242                  |   |
|                                                            |   |                     |    |                    |   |
| PROPERTY AND EQUIPMENT, net                                     |   | 194,219                  |    | 226,865                 |   |
| INTANGIBLES AND DEFERRED COSTS, net                             |   | 19,783                   |    | 21,529                  |   |
| OTHER ASSETS                                                    |   | 10,261                   |    | 2,050                   |   |
|                                                            |   |                     |    |                    |   |
| TOTAL ASSETS                                                    |   | $                        | 269,455 |                    | $      | 297,686 |   |
|                                                            |   |                     |    |                    |   |
| LIABILITIES  AND STOCKHOLDERS’ DEFICIT                     |   |                     |    |                    |   |
|                                                            |   |                     |    |                    |   |
| CURRENT LIABILITIES:                                            |   |                     |    |                    |   |
| Current maturities of long-term debt                            |   | $                        | 3,990   |                    | $      | 13,029 |   |
| Current maturities of capital lease and  finance obligations    |   | 1,885                    |    | 2,143                   |   |
| Accounts payable                                                |   | 21,622                   |    | 20,100                  |   |
| Accrued salaries and benefits                                   |   | 10,242                   |    | 10,956                  |   |
| Accrued interest payable                                        |   | 7,103                    |    | 3,515                   |   |
| Insurance reserves                                              |   | 13,764                   |    | 13,095                  |   |
| Restructuring reserve                                           |   | 3,658                    |    | 5,571                   |   |
| Other accrued expenses                                          |   | 14,842                   |    | 14,262                  |   |
| TOTAL CURRENT LIABILITIES                                       |   | 77,106                   |    | 82,671                  |   |
|                                                            |   |                     |    |                    |   |
| DEFERRED INCOME TAXES                                           |   | 15,373                   |    | 13,276                  |   |
| CAPITAL LEASE AND FINANCE OBLIGATIONS, less  current maturities |   | 6,722                    |    | 8,223                   |   |
| LONG-TERM DEBT, less current maturities                         |   | 251,350                  |    | 275,435                 |   |
| OTHER LONG-TERM LIABILITIES                                     |   | 14,905                   |    | 18,064                  |   |
|                                                            |   |                     |    |                    |   |
| COMMITMENTS AND CONTINGENCIES                                   |   |                     |    |                    |   |
|                                                            |   |                     |    |                    |   |
| STOCKHOLDERS’ DEFICIT:                                     |   |                     |    |                    |   |
| Common stock                                                    |   | 74                       |    | 74                      |   |
| Additional paid-in capital                                      |   | 139,223                  |    | 138,988                 |   |
| Accumulated deficit                                             |   | (235,298                 | )       | (239,045                | )      |
| TOTAL STOCKHOLDERS’ DEFICIT                                |   | (96,001                  | )       | (99,983                 | )      |
|                                                            |   |                     |    |                    |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT                |   | $                        | 269,455 |                    | $      | 297,686 |   |

 

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

 

2

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**FRIENDLY ICE CREAM CORPORATION ANDSUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

(Unaudited)

(In thousands, except per share data)

 
|                                                                                   |   | **For the  Three Months Ended** |    | **For the  Nine Months Ended** |   |
|----------------------------------------------------------------------------------------|--------|---------------------------------|---------|--------------------------------|--------|
|                                                                                   |   | **September  30,  2001**        |    | **October 1,  2000**           |   | **September  30,  2001** |   | **October 1,  2000** |   |
|                                                                                   |   |                            |    |                           |   |   |   |   |   |
| REVENUES                                                                               |   | $                               | 151,373 |                           | $      | 161,605 |   | $ | 428,915 |   | $ | 464,742 |   |
|                                                                                   |   |                            |    |                           |   |   |   |   |   |
| COSTS AND EXPENSES:                                                                    |   |                            |    |                           |   |   |   |   |   |
| Cost of sales                                                                          |   | 54,840                          |    | 54,081                         |   | 149,757 |   | 149,146 |   |
| Labor and benefits                                                                     |   | 39,674                          |    | 47,822                         |   | 120,684 |   | 145,397 |   |
| Operating expenses                                                                     |   | 32,479                          |    | 32,375                         |   | 89,031 |   | 94,011 |   |
| General and administrative expenses                                                    |   | 8,393                           |    | 8,857                          |   | 27,070 |   | 30,424 |   |
| Restructuring costs                                                                    |   | —                          |    | —                         |   | — |   | 12,056 |   |
| Write-downs of property and equipment                                                  |   | 35                              |    | 664                            |   | 103 |   | 19,024 |   |
| Depreciation and amortization                                                          |   | 7,037                           |    | 7,426                          |   | 21,686 |   | 23,166 |   |
| (Gain) loss on franchise sales of  restaurant operations and properties                |   | (219                            | )       | 75                             |   | (4,042 | ) | (1,923 | ) |
| Gain on disposition of other property and  equipment                                   |   | (317                            | )       | (960                           | )      | (2,559 | ) | (1,005 | ) |
|                                                                                   |   |                            |    |                           |   |   |   |   |   |
| OPERATING INCOME (LOSS)                                                                |   | 9,451                           |    | 11,265                         |   | 27,185 |   | (5,554 | ) |
|                                                                                   |   |                            |    |                           |   |   |   |   |   |
| Interest expense, net                                                                  |   | 6,464                           |    | 7,594                          |   | 20,967 |   | 23,495 |   |
|                                                                                   |   |                            |    |                           |   |   |   |   |   |
| INCOME (LOSS) BEFORE (PROVISION FOR)  BENEFIT FROM INCOME TAXES AND EXTRAORDINARY ITEM |   | 2,987                           |    | 3,671                          |   | 6,218 |   | (29,049 | ) |
|                                                                                   |   |                            |    |                           |   |   |   |   |   |
| (Provision for) benefit from income taxes                                              |   | (1,125                          | )       | (425                           | )      | (2,250 | ) | 16,790 |   |
|                                                                                   |   |                            |    |                           |   |   |   |   |   |
| INCOME  (LOSS) BEFORE EXTRAORDINARY ITEM                                               |   | 1,862                           |    | 3,246                          |   | 3,968 |   | (12,259 | ) |
|                                                                                   |   |                            |    |                           |   |   |   |   |   |
| Extraordinary item, net of income tax  benefit of $153                                 |   | (221                            | )       | —                         |   | (221 | ) | — |   |
|                                                                                   |   |                            |    |                           |   |   |   |   |   |
| NET INCOME (LOSS) AND COMPREHENSIVE INCOME  (LOSS)                                     |   | $                               | 1,641   |                           | $      | 3,246 |   | $ | 3,747 |   | $ | (12,259 | ) |
|                                                                                   |   |                            |    |                           |   |   |   |   |   |
| BASIC NET INCOME (LOSS) PER SHARE:                                                     |   |                            |    |                           |   |   |   |   |   |
| Income (loss) before extraordinary item                                                |   | $                               | 0.25    |                           | $      | 0.44 |   | $ | 0.54 |   | $ | (1.65 | ) |
| Extraordinary item, net of income tax  benefit                                         |   | (0.03                           | )       | —                         |   | (0.03 | ) | — |   |
| Net income (loss)                                                                      |   | $                               | 0.22    |                           | $      | 0.44 |   | $ | 0.51 |   | $ | (1.65 | ) |
|                                                                                   |   |                            |    |                           |   |   |   |   |   |
| DILUTED NET INCOME (LOSS) PER SHARE:                                                   |   |                            |    |                           |   |   |   |   |   |
| Income (loss) before extraordinary item                                                |   | $                               | 0.25    |                           | $      | 0.44 |   | $ | 0.54 |   | $ | (1.65 | ) |
| Extraordinary item, net of income tax  benefit                                         |   | (0.03                           | )       | —                         |   | (0.03 | ) | — |   |
| Net income (loss)                                                                      |   | $                               | 0.22    |                           | $      | 0.44 |   | $ | 0.51 |   | $ | (1.65 | ) |
|                                                                                   |   |                            |    |                           |   |   |   |   |   |
| WEIGHTED AVERAGE SHARES:                                                               |   |                            |    |                           |   |   |   |   |   |
| Basic                                                                                  |   | 7,359                           |    | 7,409                          |   | 7,366 |   | 7,439 |   |
| Diluted                                                                                |   | 7,416                           |    | 7,437                          |   | 7,382 |   | 7,439 |   |

 

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

 

3

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**FRIENDLYICE CREAM CORPORATION AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

(Unaudited)

(In thousands)

** **
|                                                                                      |   | **For the Nine Months Ended** |   |
|-------------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                                      |   | **September  30,  2001**      |   | **October 1,  2000** |   |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                                    |   |                          |   |   |   |
| Net income (loss)                                                                         |   | $                             | 3,747  |   | $ | (12,259 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |   |                          |   |   |   |
| Extraordinary item, net of income tax  benefit                                            |   | 221                           |   | — |   |
| Stock compensation expense                                                                |   | 235                           |   | 429 |   |
| Depreciation and amortization                                                             |   | 21,686                        |   | 23,166 |   |
| Write-downs of property and equipment                                                     |   | 103                           |   | 19,024 |   |
| Deferred income tax expense (benefit)                                                     |   | 2,250                         |   | (16,790 | ) |
| Gain on asset retirements and sales                                                       |   | (6,710                        | )      | (3,562 | ) |
| Changes in operating assets and  liabilities:                                             |   |                          |   |   |   |
| Accounts receivable                                                                       |   | (2,337                        | )      | (1,940 | ) |
| Inventories                                                                               |   | (3,824                        | )      | (2,178 | ) |
| Other assets                                                                              |   | (3,204                        | )      | 2,608 |   |
| Accounts payable                                                                          |   | 1,522                         |   | 579 |   |
| Accrued expenses and other long-term  liabilities                                         |   | (1,119                        | )      | (2,883 | ) |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                                 |   | 12,570                        |   | 6,194 |   |
|                                                                                      |   |                          |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |   |                          |   |   |   |
| Purchases of property and equipment                                                       |   | (8,440                        | )      | (12,808 | ) |
| Proceeds from sales of property and  equipment                                            |   | 23,556                        |   | 32,594 |   |
| NET CASH PROVIDED BY INVESTING ACTIVITIES                                                 |   | 15,116                        |   | 19,786 |   |
|                                                                                      |   |                          |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |   |                          |   |   |   |
| Proceeds from borrowings                                                                  |   | 51,405                        |   | 74,000 |   |
| Repayments of debt                                                                        |   | (84,529                       | )      | (101,678 | ) |
| Repayments of capital lease and finance  obligations                                      |   | (1,589                        | )      | (1,344 | ) |
| NET CASH USED IN FINANCING ACTIVITIES                                                     |   | (34,713                       | )      | (29,022 | ) |
|                                                                                      |   |                          |   |   |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                                 |   | (7,027                        | )      | (3,042 | ) |
|                                                                                      |   |                          |   |   |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD                                           |   | 14,584                        |   | 12,062 |   |
|                                                                                      |   |                          |   |   |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                                  |   | $                             | 7,557  |   | $ | 9,020 |   |
|                                                                                      |   |                          |   |   |   |
| SUPPLEMENTAL DISCLOSURES:                                                                 |   |                          |   |   |   |
| Cash paid during the period for:                                                          |   |                          |   |   |   |
| Interest                                                                                  |   | $                             | 16,699 |   | $ | 18,101 |   |
| Income taxes                                                                              |   | 3                             |   | 62 |   |
| Capital lease obligations incurred                                                        |   | —                        |   | 2,891 |   |
| Capital lease obligations terminated                                                      |   | 170                           |   | 711 |   |
| Notes received from sales of property and  equipment                                      |   | 4,250                         |   | 577 |   |

 

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

 

4

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**FRIENDLY ICE CREAM CORPORATION ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

(Unaudited)

 

**1. BASIS OF PRESENTATION**

 

*Interim FinancialInformation –*

 

The accompanying condensed consolidated financial statements as ofSeptember 30, 2001 and for the third quarter and nine months ended September30, 2001 and October 1, 2000 are unaudited, but, in the opinion of management,include all adjustments which are necessary for a fair presentation of theconsolidated financial position, results of operations, cash flows andcomprehensive income (loss) of Friendly Ice Cream Corporation (“FICC”) andsubsidiaries (unless the context indicates otherwise, collectively, the“Company”).  Such adjustments consistsolely of normal recurring accruals. Operating results for the three and nine month periods ended September30, 2001 and October 1, 2000 are not necessarily indicative of the results thatmay be expected for the entire year due, in part, to the seasonality of theCompany’s business.  Historically, higherrevenues and operating income have been experienced during the second and thirdfiscal quarters.  The Company’sConsolidated Financial Statements, including the notes thereto, which arecontained in the 2000 Annual Report on Form 10-K should be read in conjunctionwith these Condensed Consolidated Financial Statements.

 

*Refinancing Status and Debt -*

 

The Company entered into its existing credit facility in November1997.  The credit facility includes therevolving credit loan, term loans and letters of credit.  Since 1997, the Company has executed severalamendments to the credit facility.  Themost recent amendment occurred on March 19, 2001.  All of the existing financial covenants were amended and a newfinancial covenant was added requiring minimum cumulative Consolidated EBITDA,as defined, on a monthly basis. Interest rates on term loans, borrowings under the revolving creditfacility and issued letters of credit increased 0.25%.  In addition, automatic increases in theinterest rates will occur on August 2, 2001, January 2, 2002, April 1, 2002,September 30, 2002 and October 1, 2002 of 0.25%, 0.50%, 0.25%, 0.25% and 0.25%,respectively.  Interest payments on allABR loans, Eurodollar loans and issued letters of credit are required on amonthly basis rather than quarterly.

 

Also due to the March 19, 2001 amendment, the maturity dates of TrancheB and Tranche C of the term loans were changed to November 15, 2002 from theiroriginal maturity dates of November 15, 2004 and November 15, 2005,respectively.  Annual scheduledprincipal payments due through October 15, 2002 did not change.  However, the amendment requires additionalminimum cumulative prepayments on the term loans, excluding prepayments madepursuant to the J&B Agreement, by the dates specified below as follows:

 

| October 15, 2001 |   | $          |  6,000,000 |   |
|------------------|--------|------------|-----------------|--------|
| January 15, 2002 |   | 7,500,000  |            |
| April 15, 2002   |   | 8,500,000  |            |
| July 15, 2002    |   | 10,000,000 |            |

 

As of October 15, 2001, the Company has paid additional minimumcumulative prepayments of $6,793,000 on the term loans, which exceeds theminimum cumulative prepayment requirement.

 

Tranche A of the term loans was prepaid and extinguished during thethird quarter ended September 30, 2001. Any remaining unpaid balances due on Tranches B and C of the term loanswill be paid on November 15, 2002.

 

FICC paid an amendment fee of approximately$256,000 to the lenders contemporaneous with the execution of the seventhamendment. FICC paid an additional amendment fee (the “Additional Fee”) of$441,459 on October 1, 2001 pursuant to the seventh amendment, which will beexpensed over the remaining term of the credit facility using the effectiveyield method.  If all obligations underthe credit facility were satisfied before September 30, 2001, the AdditionalFee would have been reduced to approximately $128,000.  The Company believes that based on the termsof the seventh amendment, the Company has adequate cash and availability on itsrevolving credit facility to meet its obligations through September 30,2002.  Additionally, the Companybelieves that it can comply with the revised covenant requirements under theamendment through December 30, 2001.

 

5

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The Company isundertaking a refinancing plan (collectively, the “Refinancing Plan”), whichhas the following three principal components:

 
| (i)   |   | obtaining a  new revolving credit facility from one or more financial institutions for $35  million;                                                                                                          |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (ii)  |   | obtaining  $55 million in loans from GE Capital Franchise Finance Corporation which will  be secured by first mortgage liens upon 75 of the Company’s restaurants; and                                   |
| (iii) |   | entering  into a sale and leaseback arrangement with one or more financial institutions  involving 45 of the Company’s restaurants that is expected to provide the  Company up to $37.5 million in cash. |

 

The Company would use the proceeds of these financings to repay theamounts outstanding on its existing credit facility ($55,114,000 as ofSeptember 30, 2001), to increase working capital and, to the extent theproceeds of the financings are sufficient, after giving effect to theforegoing, to finance a tender offer for a portion of the Company’s seniornotes (the “Notes”).  The Company hasobtained a commitment letter from GE Capital Franchise Finance Corporationrelating to the mortgage financing, but the Company does not have anycommitments or other agreements from any financial institutions relating to thenew revolving credit facility or the sale and leaseback arrangements describedabove.  The commitment letter receivedis contingent upon obtaining a new revolving credit facility.  The closing of each of the three financingsdescribed above will be subject, among other things, to the negotiation ofdefinitive agreements and other definitive documentation.  There can be no assurance that the Companywill be able to successfully implement any of the components of the RefinancingPlan. The availability of funds from the closing of these transactions will bea condition to the Company’s ability to purchase any Notes.

 

*Inventories -*

 

Inventories are stated at the lower of first-in, first-out cost ormarket.  Inventories as of September 30,2001 and December 31, 2000 were as follows (in thousands):

 

|             |   | **September  30,  2001** |   | **December  31,  2000** |   |
|------------------|--------|--------------------------|--------|-------------------------|--------|
|             |   |                     |   |                    |   |
| Raw materials    |   | $                        | 2,983  |                    | $      | 1,307 |   |
| Goods in process |   | 145                      |   | 66                      |   |
| Finished goods   |   | 12,266                   |   | 10,197                  |   |
| Total            |   | $                        | 15,394 |                    | $      | 11,570 |   |

 

*Reclassifications -*

 

Certain prior year amounts have been reclassified to conform withcurrent year presentation.

 

**2. EARNINGS PER SHARE**

 

Basic net income (loss) per share is calculated by dividing income(loss) available to common stockholders by the weighted average number ofcommon shares outstanding during the period. Diluted earnings per share is calculated by dividing earnings availableto common stockholders by the weighted average number of shares of common stockand common stock equivalents outstanding during the period.  Common stock equivalents are dilutive stockoptions that are assumed exercised for calculation purposes.  The number of common stock equivalents whichcould dilute basic earnings per share in the future, that were not included inthe computation of diluted earnings per share because to do so would have beenantidilutive, was 21,833 for the nine months ended October 1, 2000.

 

6

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Presented below is the reconciliation between basic and dilutedweighted average shares for the three and nine months ended September 30, 2001and October 1, 2000 (in thousands):

** **
|                                                                    |   | **For the  Three Months Ended** |   |
|-------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                    |   | **Basic**                       |   | **Diluted** |   |
|                                                                    |   | **September  30, 2001**         |   | **October 1,  2000** |   | **September  30, 2001** |   | **October 1,  2000** |   |
| Weighted average number of common shares  outstanding during the period |   | 7,359                           |   | 7,409 |   | 7,359 |   | 7,409 |   |
| Assumed exercise of stock options                                       |   | —                          |   | — |   | 57 |   | 28 |   |
| Weighted average number of shares outstanding                           |   | 7,359                           |   | 7,409 |   | 7,416 |   | 7,437 |   |

** **
|                                                                    |   | **For the Nine Months Ended** |   |
|-------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                    |   | **Basic**                     |   | **Diluted** |   |
|                                                                    |   | **September  30, 2001**       |   | **October 1,  2000** |   | **September  30, 2001** |   | **October 1,  2000** |   |
| Weighted average number of common shares  outstanding during the period |   | 7,366                         |   | 7,439 |   | 7,366 |   | 7,439 |   |
| Assumed exercise of stock options                                       |   | —                        |   | — |   | 16 |   | — |   |
| Weighted average number of shares  outstanding                          |   | 7,366                         |   | 7,439 |   | 7,382 |   | 7,439 |   |

 

**3. SEGMENT REPORTING**

 

Operating segments are components of anenterprise about which separate financial information is available that isevaluated regularly by the chief operating decision-maker, or decision-makinggroup, in deciding how to allocate resources and in assessing performance.  The Company’s chief operating decision-makeris the Chairman of the Board and Chief Executive Officer of the Company.  The Company’s operating segments includerestaurant, foodservice and franchise. The revenues from these segments include both sales to unaffiliatedcustomers and intersegment sales, which generally are accounted for on a basisconsistent with sales to unaffiliated customers.  Intersegment sales and other intersegment transactions have beeneliminated in the accompanying condensed consolidated financial statements.

 

The Company’s restaurants target families withchildren and adults who desire a reasonably-priced meal in a full-servicesetting. The Company’s menu offers a broad selection of freshly-prepared foodswhich appeal to customers throughout all dayparts. The menu currently featuresover 100 items comprised of a broad selection of breakfast, lunch, dinner andafternoon and evening snack items. Foodservice operations manufactures frozen dessert products anddistributes such manufactured products and purchased finished goods to theCompany’s restaurants and franchised operations.  Additionally, it sells frozen dessert products to distributorsand retail and institutional locations. The Company’s franchise segmentincludes a royalty based on franchise restaurant revenue. In addition, theCompany receives rental income from various franchised restaurants. The Companydoes not allocate general and administrative expenses associated with itsheadquarters operations to any business segment.  These costs include general and administrative expenses of thefollowing functions: legal, accounting, personnel not directly related to asegment, information systems and other headquarters activities.

 

On May 1, 2001, foodservice decreased its icecream pricing to all restaurants.  Thisresulted in decreased foodservice restaurant revenues of 4.7% and 3.0% for thethird quarter and nine months ended September 30, 2001, respectively.

 

7

----

 

The accounting policies of theoperating segments are the same as those described in the summary ofsignificant accounting policies except that the financial results for thefoodservice operating segment, prior to intersegment eliminations, have beenprepared using a management approach, which is consistent with the basis andmanner in which the Company’s management internally reviews financialinformation for the purpose of assisting in making internal operatingdecisions. The Company evaluates performance based on stand-alone operatingsegment income (loss) before income taxes and generally accounts forintersegment sales and transfers as if the sales or transfers were to thirdparties, that is, at current market prices.

 

EBITDA represents net income(loss) before (i) (provision for) benefit from income taxes, (ii) interestexpense, net, (iii) depreciation and amortization, (iv) extraordinary item and(v) write-downs and all other non-cash items plus cash distributions fromunconsolidated subsidiaries. TheCompany has included information concerning EBITDA in this Form 10-Q because itbelieves that such information is used by certain investors as one measure of acompany’s historical ability to service debt. EBITDA should not be consideredas an alternative to, or more meaningful than, earnings (loss) from operationsor other traditional indications of a company’s operating performance.

 
|                                                                                    |   | **For the  Three Months Ended** |       | **For the  Nine Months Ended** |       |
|-----------------------------------------------------------------------------------------|--------|---------------------------------|------------|--------------------------------|------------|
|                                                                                    |   | **September  30,  2001**        |       | **October 1,  2000**           |       | **September  30,  2001** |   | **October 1,  2000** |   |
|                                                                                    |   | **(in  thousands)**             |       |
| Revenues:                                                                               |   |                            |       |                           |       |   |   |   |   |
| Restaurant                                                                              |   | $                               | 118,931    |                           | $          | 137,462 |   | $ | 345,029 |   | $ | 399,685 |   |
| Foodservice                                                                             |   | 64,263                          |       | 65,265                         |       | 176,332 |   | 182,920 |   |
| Franchise                                                                               |   | 2,535                           |       | 1,763                          |       | 7,197 |   | 5,805 |   |
| Total                                                                                   |   | $                               | 185,729    |                           | $          | 204,490 |   | $ | 528,558 |   | $ | 588,410 |   |
|                                                                                    |   |                            |       |                           |       |   |   |   |   |
| Intersegment  revenues:                                                                 |   |                            |       |                           |       |   |   |   |   |
| Restaurant                                                                              |   | $                               | —     |                           | $          | — |   | $ | — |   | $ | — |   |
| Foodservice                                                                             |   | (34,356                         | )          | (42,885                        | )          | (99,643 | ) | (123,668 | ) |
| Franchise                                                                               |   | —                          |       | —                         |       | — |   | — |   |
| Total                                                                                   |   | $                               | (34,356    | )                              | $          | (42,885 | ) | $ | (99,643 | ) | $ | (123,668 | ) |
|                                                                                    |   |                            |       |                           |       |   |   |   |   |
| External  revenues:                                                                     |   |                            |       |                           |       |   |   |   |   |
| Restaurant                                                                              |   | $                               | 118,931    |                           | $          | 137,462 |   | $ | 345,029 |   | $ | 399,685 |   |
| Foodservice                                                                             |   | 29,907                          |       | 22,380                         |       | 76,689 |   | 59,252 |   |
| Franchise                                                                               |   | 2,535                           |       | 1,763                          |       | 7,197 |   | 5,805 |   |
| Total                                                                                   |   | $                               | 151,373    |                           | $          | 161,605 |   | $ | 428,915 |   | $ | 464,742 |   |
|                                                                                    |   |                            |       |                           |       |   |   |   |   |
| EBITDA:                                                                                 |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Restaurant                                                                              |   | $                               | 15,425     |                           | $          | 16,129 |   | $ | 40,626 |   | $ | 39,835 |   |
| Foodservice                                                                             |   | 2,616                           |       | 6,407                          |       | 10,505 |   | 18,991 |   |
| Franchise                                                                               |   | 1,482                           |       | 581                            |       | 3,903 |   | 2,099 |   |
| Corporate                                                                               |   | (2,878                          | )          | (4,505                         | )          | (11,834 | ) | (14,822 | ) |
| (Loss) gain on  property and equipment, net                                             |   | (55                             | )          | 885                            |       | 6,009 |   | 3,017 |   |
| Restructuring  costs                                                                    |   | —                          |       | —                         |       | — |   | (12,056 | ) |
| Total                                                                                   |   | $                               | 16,590     |                           | $          | 19,497 |   | $ | 49,209 |   | $ | 37,064 |   |
|                                                                                    |   |                            |       |                           |       |   |   |   |   |
| Interest  expense, net                                                                  |   | $                               | 6,464      |                           | $          | 7,594 |   | $ | 20,967 |   | $ | 23,495 |   |
|                                                                                    |   |                            |       |                           |       |   |   |   |   |
| Depreciation  and amortization:                                                         |   |                            |       |                           |       |   |   |   |   |
| Restaurant                                                                              |   | $                               | 4,618      |                           | $          | 5,052 |   | $ | 14,277 |   | $ | 15,982 |   |
| Foodservice                                                                             |   | 834                             |       | 825                            |       | 2,529 |   | 2,540 |   |
| Franchise                                                                               |   | 62                              |       | 90                             |       | 183 |   | 273 |   |
| Corporate                                                                               |   | 1,523                           |       | 1,459                          |       | 4,697 |   | 4,371 |   |
| Total                                                                                   |   | $                               | 7,037      |                           | $          | 7,426 |   | $ | 21,686 |   | $ | 23,166 |   |
|                                                                                    |   |                            |       |                           |       |   |   |   |   |
| Other non-cash  expenses:                                                               |   |                            |       |                           |       |   |   |   |   |
| Corporate                                                                               |   | $                               | 67         |                           | $          | 142 |   | $ | 235 |   | $ | 428 |   |
| Write-downs of  property and equipment                                                  |   | 35                              |       | 664                            |       | 103 |   | 19,024 |   |
| Total                                                                                   |   | $                               | 102        |                           | $          | 806 |   | $ | 338 |   | $ | 19,452 |   |
|                                                                                    |   |                            |       |                           |       |   |   |   |   |
| Income (loss)  before (provision for) benefit from income taxes and extraordinary item: |   |                            |       |                           |       |   |   |   |   |
| Restaurant                                                                              |   | $                               | 10,807     |                           | $          | 11,077 |   | $ | 26,349 |   | $ | 23,853 |   |
| Foodservice                                                                             |   | 1,782                           |       | 5,582                          |       | 7,976 |   | 16,451 |   |
| Franchise                                                                               |   | 1,420                           |       | 491                            |       | 3,720 |   | 1,826 |   |
| Corporate                                                                               |   | (10,932                         | )          | (13,700                        | )          | (37,733 | ) | (43,116 | ) |
| (Loss) gain on  property and equipment, net                                             |   | (90                             | )          | 221                            |       | 5,906 |   | (16,007 | ) |
| Restructuring  Costs                                                                    |   | —                          |       | —                         |       | — |   | (12,056 | ) |
| Total                                                                                   |   | $                               | 2,987      |                           | $          | 3,671 |   | $ | 6,218 |   | $ | (29,049 | ) |
|                                                                                    |   |                            |       |                           |       |   |   |   |   |
| Capital  expenditures, including capitalized leases:                                    |   |                            |       |                           |       |   |   |   |   |
| Restaurant                                                                              |   | $                               | 2,198      |                           | $          | 5,824 |   | $ | 6,215 |   | $ | 12,662 |   |
| Foodservice                                                                             |   | 268                             |       | 44                             |       | 1,483 |   | 1,841 |   |
| Corporate                                                                               |   | 248                             |       | 659                            |       | 742 |   | 1,195 |   |
| Total                                                                                   |   | $                               | 2,714      |                           | $          | 6,527 |   | $ | 8,440 |   | $ | 15,698 |   |

 

8

----

 
|           |   | **September 30,  2001** |    | **December 31,  2000** |   |
|----------------|--------|-------------------------|---------|------------------------|--------|
| Total  assets: |   |                    |    |                   |   |
| Restaurant     |   | $                       | 171,257 |                   | $      | 199,223 |   |
| Foodservice    |   | 40,468                  |    | 33,880                 |   |
| Franchise      |   | 6,196                   |    | 3,745                  |   |
| Corporate      |   | 51,534                  |    | 60,838                 |   |
| Total          |   | $                       | 269,455 |                   | $      | 297,686 |   |

 

9

----

 

**4. NEW ACCOUNTING PRONOUNCEMENTS**

 

In September2001, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 01-10,“Accounting for the Impact of the September 11, 2001 Terrorist Acts,” whichprovides guidance on how the costs related to the terrorist acts should beclassified,  how to determine whether anasset impairment should be recognized and how liabilities for losses and othercosts should be recognized.  The impactof adopting EITF Issue No. 01-10 did not have any effect on the Company’sconsolidated financial statements.

 

In August2001, the Financial Accounting Standards Board (“FASB”) issued Statement ofFinancial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets.”  SFASNo. 144 modifies the rules for accounting for the impairment or disposal oflong-lived assets.  The new rules becomeeffective for fiscal years beginning after December 15, 2001, with earlierapplication encouraged.  The Company hasnot yet quantified the impact of implementing SFAS No. 144 on the Company’sconsolidated financial statements.

 

In June 2001,the FASB issued SFAS No. 142, “Goodwill and Other Intangibles.”  SFAS No. 142 modifies the rules foraccounting for goodwill and other intangible assets.  The new rules become effective on January 1, 2002.  The impact of adopting SFAS No. 142 will nothave a material effect on the Company’s consolidated financial statements andthe Company will continue to amortize its license agreement related to certaintrademarked products.

 

In April 2001,the FASB reached consensus on EITF Issue No. 00-25, “Accounting forConsideration from a Vendor to a Retailer in Connection with the Purchase orPromotion of the Vendor’s Products,” which is effective for quarters beginningafter December 15, 2001, with prior financial statements restated ifpracticable.  EITF Issue No. 00-25requires that consideration from a vendor to a retailer be recorded as areduction in revenue unless certain criteria are met.  Arrangements within the scope of this Issue include slottingfees, cooperative advertising arrangements and buy-downs.  As a result of EITF Issue No. 00-25, certaincosts previously recorded as expense will be reclassified and offset againstrevenue.  The Company’s consolidatedfinancial statements will be reclassified to conform with the consensus in thefourth quarter of 2001.

 

In May 2000, the Emerging Issues Task Force issued EITF Issue No.00-14, “Accounting for Certain Sales Incentives,” which provides guidance onthe recognition, measurement and income statement classification for salesincentives offered voluntarily by a vendor without charge to customers that canbe used in, or that are exercisable by a customer as a result of, a singleexchange transaction. The Company adopted EITF Issue No. 00-14 on July 3,2000.  As a result, the Company has reclassifiedcertain retail selling expenses against retail revenue for the three and ninemonths ended October 1, 2000 to conform with the current period presentation.

 

In June 1998,the FASB issued SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities.”  SFAS No. 133established accounting and reporting standards requiring that each derivativeinstrument (including certain derivative instruments embedded in othercontracts) be recorded in the balance sheet as either an asset or liabilitymeasured at its fair value.  The statementrequires that changes in the derivative’s fair value be recognized currently inearnings unless specific hedge accounting criteria are met. Special accountingfor qualifying hedges allows a derivative’s gains and losses to offset relatedresults on the hedged item in the statement of operations, and requires that acompany formally document, designate and assess the effectiveness oftransactions that receive hedge accounting. Since the Company’s commodity option contracts do not meet the criteriafor hedge accounting, changes in the value of the commodity option contractsare recognized monthly in earnings.  Thecumulative effect upon adoption of approximately $77,000 has been recorded asincome in the accompanying Condensed Consolidated Statement of Operations.  It is not separately reported as acumulative effect since the amount is not significant.  Additionally, net losses of approximately$113,000 were recorded during the nine months ended September 30, 2001 relatedto the change in fair value for the period. The fair market value of derivatives at September 30, 2001 wasapproximately $19,000.

 

10

----

 

**5. RESTRUCTURING PLAN**

 

In March 2000, the Company’s Board of Directors approved arestructuring plan that provided for the immediate closing of 81 restaurants atthe end of March 2000 and the disposition of an additional 70 restaurants overthe following 24 months.  The 70locations will remain in operation until they are sold, subleased orclosed.  In connection with therestructuring plan, the Company eliminated approximately 150 management andadministrative positions in the field organization and at corporateheadquarters.  As a result of this plan,the Company reported a pre-tax restructuring charge of approximately$12,056,000 for severance pay, rent, utilities and real estate taxes,demarking, lease termination costs and certain other costs associated with theclosing of the locations, along with a pre-tax write-down of property andequipment for these locations of approximately $17,008,000 in the first quarterended April 2, 2000.

 

The followingrepresents the restructuring reserve activity (in thousands):

 

|                             |   | **Balance as of  December 31, 2000** |   | **Costs Paid  During the Nine  Months Ended****September 30, 2001** |   | **Balance as  of  September 30, 2001** |   |
|----------------------------------|--------|--------------------------------------|--------|---------------------------------------------------------------------|--------|----------------------------------------|--------|
| Severance pay                    |   | $                                    | 74     |                                                                | $      | (74                                    | )      | $ | — |   |
| Rent                             |   | 3,585                                |   | (900                                                                | )      | 2,685                                  |   |
| Utilities and  real estate taxes |   | 1,105                                |   | (519                                                                | )      | 586                                    |   |
| Demarking                        |   | 138                                  |   | (126                                                                | )      | 12                                     |   |
| Lease  termination costs         |   | 120                                  |   | (120                                                                | )      | —                                 |   |
| Inventory                        |   | 5                                    |   | (5                                                                  | )      | —                                 |   |
| Other                            |   | 544                                  |   | (169                                                                | )      | 375                                    |   |
| Total                            |   | $                                    | 5,571  |                                                                | $      | (1,913                                 | )      | $ | 3,658 |   |

 

The write-down of property and equipment consisted of $7.8 million forthe 81 locations closed at the end of March 2000 and $9.2 million for the 70locations to be disposed of over the following 24 months.  As of September 30, 2001, the Company hadsold 60 of the 151 restructuring properties, of which 36 were included in the81 restaurants that were closed in March 2000. The Company had also terminated its lease obligations at 49 restructuringproperties, of which 33 were included in the list of 81 restaurants that wereclosed in March 2000.  In addition, theCompany has made a decision to continue to operate 25 of the 70 properties thatwere originally listed as locations to be disposed of.  No amounts were included in therestructuring reserve related to these properties.  These 25 properties are no longer being marketed and are nowbeing depreciated.  At September 30,2001, the aggregate carrying amount of the remaining two operating restaurantsand 15 closed properties to be disposed of was $1.3 million.  At December 31, 2000, the aggregate carryingvalue of the 73 properties to be disposed of was $7.0 million.  The amounts related to properties held forsale are reflected in the condensed consolidated balance sheets as property andequipment, net.

 

**6.  SALES OF RESTAURANT OPERATIONS ANDPROPERTIES TO FRANCHISEES**

 

On September 14, 2001, the Company enteredinto an agreement granting Revere Restaurant Group, Inc. (“Revere”) certainlimited exclusive rights to operate and develop Friendly’s full-servicerestaurants in designated areas within Lehigh and Northampton counties,Pennsylvania (the “Revere Agreement”). Pursuant to the Revere Agreement, Revere purchased certain assets andrights in six existing Friendly’s restaurants and committed to open anadditional four restaurants over the next seven years. The president of Revereis a former employee of the Company. Gross proceeds from the sale were approximately $3.4 million of whichapproximately $0.2 million was for franchise fees for the initial sixrestaurants.  The $0.2 million wasrecorded as revenue in the third quarter ended September 30, 2001.  The Company also recognized a gain ofapproximately $0.3 million related to the sale of the assets for the sixlocations in the third quarter ended September 30, 2001.

 

On April 13, 2001, the Company entered intoan agreement granting J&B Restaurants Partners of Long Island Holding Co.,LLC (“J&B”) certain limited exclusive rights to operate and developFriendly’s full-service restaurants in the franchising regions of Nassau andSuffolk Counties in Long Island, New York (the “J&B Agreement”).  Pursuant to the J&B Agreement, J&Bpurchased

 

11

----

 

certain assets and rights in 31 existingFriendly’s restaurants and committed to open an additional 29 restaurants overthe next 12 years.  Gross proceeds fromthe sale were approximately $19,950,000, of which approximately $4,250,000 wasreceived in a note and $940,000 was for franchise fees for the initial 31restaurants.  The $940,000 was recordedas revenue in the second quarter ended July 1, 2001.  The Company recognized a gain of approximately $3,955,000 relatedto the sale of the assets for the 31 locations in the second quarter ended July1, 2001.  The cash proceeds were used toprepay approximately $4,711,000 on the term loans with the remaining balancebeing applied to the revolving credit facility.  The 5-year note bears interest at an annual rate of 11% using a20-year amortization schedule.  Payments are due monthly through the fiveyears with a balloon payment due at the end of five years.  TheCompany also sold certain assets and rights in two other restaurants to anadditional franchisee resulting in a loss of $16,000.

 

On January 19, 2000, the Companyentered into an agreement granting Kessler Family LLC (“Kessler”) non-exclusiverights to operate and develop Friendly’s full-service restaurants in thefranchising region of Rochester, Buffalo and Syracuse, New York (the “KesslerAgreement”).  Pursuant to the KesslerAgreement, Kessler purchased certain assets and rights in 29 existingFriendly’s restaurants and committed to open an additional 15 restaurants overthe next seven years.  Gross proceeds fromthe sale were approximately $13,300,000 of which $735,000 was for franchisefees for the initial 29 restaurants. The $735,000 was recorded as revenue in the first quarter ended April 2,2000. The Company recognized a gain of approximately $1,400,000 related to thesale of the assets for the 29 locations in the first quarter ended April 2,2000.  The Company also sold certainassets and rights in six other restaurants to two additional franchiseesresulting in a gain of $687,000.

 

Effective August 6, 2001, theCompany’s largest franchisee, Davco Restaurants, Inc. (“Davco”) refranchisedthree Newark, Delaware units, transferring it’s rights to R.R.C. Restaurants,Inc.  In addition, Davco closed twounits during the quarter ended September 30, 2001. Currently, Davco is seekingto refranchise an additional 25 to 28 units.

 

**7. EXTRAORDINARY ITEM**

 

The Company recognized $0.2 million ofexpense, net of the related income tax benefit of $0.2 million, in 2001 relatedto previously deferred financing costs associated with Tranche A of the termloans, which was prepaid and extinguished in full during the quarter endedSeptember 30, 2001.

 

**8. SUBSEQUENT EVENT**

 

On October 10, 2001, the Company eliminated approximately 70 positionsat corporate headquarters.  The purposeof the reduction was to streamline functions and reduce redundancy amongst itsbusiness segments.  In addition,approximately 30 positions in the restaurant construction and fabrication areaswill be eliminated by December 30, 2001. The Company believes the outsourcing of such activities will be morecost effective in the future.  Annualsalaries and fringe benefits associated with these 100 positions isapproximately $5.6 million.  As a resultof the elimination of the positions and the outsourcing of certain functions,the Company will be reporting a pre-tax restructuring charge of approximately$2.5 - $3.0 million for severance pay, rent and inventory in the fourth quarterending December 30, 2001.

 

**9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION**

 

FICC’s obligation related to the$200 million Senior Notes is guaranteed fully and unconditionally by one ofFICC’s wholly- owned subsidiaries. There are no restrictions on FICC’s abilityto obtain dividends or other distributions of funds from this subsidiary,except those imposed by applicable law. The following supplemental financialinformation sets forth, on a condensed consolidating basis, balance sheets,statements of operations and statements of cash flows for Friendly Ice CreamCorporation (the “Parent Company”), Friendly’s Restaurants Franchise, Inc. (the“Guarantor Subsidiary”) and Friendly’s International, Inc. and RestaurantInsurance Corporation (together, the “Non–guarantor Subsidiaries”).Separate complete financial statements and other disclosures of the GuarantorSubsidiary as of September 30, 2001 and October 1, 2000, and for the periodsended September 30, 2001 and October 1, 2000, are not presented becausemanagement has determined that such information is not material to investors.

 

Investments insubsidiaries are accounted for by the Parent Company on the equity method forpurposes of the supplemental consolidating presentation. Earnings of thesubsidiaries are, therefore, reflected in the Parent Company’s investment accountsand earnings. The principal elimination entries eliminate the Parent Company’sinvestments in subsidiaries and intercompany balances and transactions.

 

12

----

 

**SupplementalCondensed Consolidating Balance Sheet**

**Asof September 30, 2001**

(Unaudited)

(In thousands)

 
|                                                       |   | **Parent   Company** |    | **Guarantor  Subsidiary** |   | **Non-guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|------------------------------------------------------------|--------|----------------------|---------|---------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
|                                                       |   |                 |    |                      |   |                            |   |             |   |             |   |
| Assets                                                     |   |                 |    |                      |   |                            |   |             |   |             |   |
|                                                       |   |                 |    |                      |   |                            |   |             |   |             |   |
| Current assets:                                            |   |                 |    |                      |   |                            |   |             |   |             |   |
| Cash and cash equivalents                                  |   | $                    | 6,661   |                      | $      | 18                              |   | $                | 878    |             | $      | — |   | $ | 7,557 |   |
| Restricted cash                                            |   | —               |    | —                    |   | —                          |   | —           |   | —           |   |
| Accounts receivable, net                                   |   | 7,848                |    | 646                       |   | —                          |   | —           |   | 8,494            |   |
| Inventories                                                |   | 15,394               |    | —                    |   | —                          |   | —           |   | 15,394           |   |
| Deferred income taxes                                      |   | 10,258               |    | 43                        |   | —                          |   | 94               |   | 10,395           |   |
| Prepaid expenses and other current assets                  |   | 8,537                |    | 983                       |   | 3,504                           |   | (9,672           | )      | 3,352            |   |
| Total current assets                                       |   | 48,698               |    | 1,690                     |   | 4,382                           |   | (9,578           | )      | 45,192           |   |
| Deferred income taxes                                      |   | —               |    | 506                       |   | 1,327                           |   | (1,833           | )      | —           |   |
| Property and equipment, net                                |   | 194,219              |    | —                    |   | —                          |   | —           |   | 194,219          |   |
| Intangibles and deferred costs, net                        |   | 19,783               |    | —                    |   | —                          |   | —           |   | 19,783           |   |
| Investments in subsidiaries                                |   | 5,327                |    | —                    |   | —                          |   | (5,327           | )      | —           |   |
| Other assets                                               |   | 9,347                |    | 4,520                     |   | 6,229                           |   | (9,835           | )      | 10,261           |   |
|                                                       |   |                 |    |                      |   |                            |   |             |   |             |   |
| Total assets                                               |   | $                    | 277,374 |                      | $      | 6,716                           |   | $                | 11,938 |             | $      | (26,573 | ) | $ | 269,455 |   |
|                                                       |   |                 |    |                      |   |                            |   |             |   |             |   |
| Liabilities  and Stockholders’ Equity (Deficit)       |   |                 |    |                      |   |                            |   |             |   |             |   |
|                                                       |   |                 |    |                      |   |                            |   |             |   |             |   |
| Current liabilities:                                       |   |                 |    |                      |   |                            |   |             |   |             |   |
| Current maturities of long-term obligations                |   | $                    | 9,375   |                      | $      | —                          |   | $                | — |             | $      | (3,500 | ) | $ | 5,875 |   |
| Accounts payable                                           |   | 21,622               |    | —                    |   | —                          |   | —           |   | 21,622           |   |
| Accrued expenses                                           |   | 46,888               |    | 1,026                     |   | 7,682                           |   | (5,987           | )      | 49,609           |   |
| Total current liabilities                                  |   | 77,885               |    | 1,026                     |   | 7,682                           |   | (9,487           | )      | 77,106           |   |
| Deferred income taxes                                      |   | 17,112               |    | —                    |   | —                          |   | (1,739           | )      | 15,373           |   |
| Long-term obligations, less current  maturities            |   | 263,386              |    | —                    |   | —                          |   | (5,314           | )      | 258,072          |   |
| Other long-term liabilities                                |   | 14,992               |    | 1,080                     |   | 3,539                           |   | (4,706           | )      | 14,905           |   |
| Stockholders’ (deficit) equity                        |   | (96,001              | )       | 4,610                     |   | 717                             |   | (5,327           | )      | (96,001          | )      |
| Total liabilities and stockholders’ (deficit)  equity |   | $                    | 277,374 |                      | $      | 6,716                           |   | $                | 11,938 |             | $      | (26,573 | ) | $ | 269,455 |   |

 

13

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**SupplementalCondensed Consolidating Statement of Operations**

**Forthe Three Months Ended September 30, 2001**

(Unaudited)

(In thousands)

 
|                                                                                                                |   | **Parent   Company** |    | **Guarantor Subsidiary** |   | **Non-guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|---------------------------------------------------------------------------------------------------------------------|--------|----------------------|---------|-------------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                                                |   |                 |    |                          |   |                            |   |             |   |             |   |
| Revenues                                                                                                            |   | $                    | 149,299 |                          | $      | 2,074                           |   | $                | — |             | $      | — |   | $ | 151,373 |   |
| Costs and expenses:                                                                                                 |   |                 |    |                          |   |                            |   |             |   |             |   |
| Cost of sales                                                                                                       |   | 54,840               |    | —                        |   | —                          |   | —           |   | 54,840           |   |
| Labor and benefits                                                                                                  |   | 39,674               |    | —                        |   | —                          |   | —           |   | 39,674           |   |
| Operating expenses and write-downs of  property and equipment                                                       |   | 32,513               |    | —                        |   | 1                               |   | —           |   | 32,514           |   |
| General and administrative expenses                                                                                 |   | 7,224                |    | 1,169                         |   | —                          |   | —           |   | 8,393            |   |
| Depreciation and amortization                                                                                       |   | 7,037                |    | —                        |   | —                          |   | —           |   | 7,037            |   |
| Gain on franchise sales of restaurant  operations and properties                                                    |   | (219                 | )       | —                        |   | —                          |   | —           |   | (219             | )      |
| Gain on dispositions of other property and  equipment                                                               |   | (317                 | )       | —                        |   | —                          |   | —           |   | (317             | )      |
| Interest expense (income)                                                                                           |   | 6,640                |    | —                        |   | (176                            | )      | —           |   | 6,464            |   |
|                                                                                                                |   |                 |    |                          |   |                            |   |             |   |             |   |
| Income before provision for income taxes,  extraordinary item and equity in net income of consolidated subsidiaries |   | 1,907                |    | 905                           |   | 175                             |   | —           |   | 2,987            |   |
|                                                                                                                |   |                 |    |                          |   |                            |   |             |   |             |   |
| Provision for income taxes                                                                                          |   | (692                 | )       | (372                          | )      | (61                             | )      | —           |   | (1,125           | )      |
|                                                                                                                |   |                 |    |                          |   |                            |   |             |   |             |   |
| Income before extraordinary item and equity  in net income of consolidated subsidiaries                             |   | 1,215                |    | 533                           |   | 114                             |   | —           |   | 1,862            |   |
|                                                                                                                |   |                 |    |                          |   |                            |   |             |   |             |   |
| Extraordinary item, net of income tax  benefit                                                                      |   | (221                 | )       | —                        |   | —                          |   | —           |   | (221             | )      |
|                                                                                                                |   |                 |    |                          |   |                            |   |             |   |             |   |
| Income before equity in net income of  consolidated subsidiaries                                                    |   | 994                  |    | 533                           |   | 114                             |   | —           |   | 1,641            |   |
|                                                                                                                |   |                 |    |                          |   |                            |   |             |   |             |   |
| Equity in net income of consolidated  subsidiaries                                                                  |   | 647                  |    | —                        |   | —                          |   | (647             | )      | —           |   |
|                                                                                                                |   |                 |    |                          |   |                            |   |             |   |             |   |
| Net income                                                                                                          |   | $                    | 1,641   |                          | $      | 533                             |   | $                | 114    |             | $      | (647 | ) | $ | 1,641 |   |

 

14

----

 

**SupplementalCondensed Consolidating Statement of Operations**

**Forthe Nine Months Ended September 30, 2001**

(Unaudited)

(In thousands)

 
|                                                                                                                |   | **Parent   Company** |    | **Guarantor   Subsidiary** |   | **Non-guarantor    Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|---------------------------------------------------------------------------------------------------------------------|--------|----------------------|---------|----------------------------|--------|-----------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                                                |   |                 |    |                       |   |                              |   |             |   |             |   |
| Revenues                                                                                                            |   | $                    | 422,924 |                       | $      | 5,991                             |   | $                | — |             | $      | — |   | $ | 428,915 |   |
| Costs and expenses:                                                                                                 |   |                 |    |                       |   |                              |   |             |   |             |   |
| Cost of sales                                                                                                       |   | 149,757              |    | —                     |   | —                            |   | —           |   | 149,757          |   |
| Labor and benefits                                                                                                  |   | 120,684              |    | —                     |   | —                            |   | —           |   | 120,684          |   |
| Operating expenses and write-downs of  property and equipment                                                       |   | 89,144               |    | —                     |   | (10                               | )      | —           |   | 89,134           |   |
| General and administrative expenses                                                                                 |   | 23,585               |    | 3,485                      |   | —                            |   | —           |   | 27,070           |   |
| Depreciation and amortization                                                                                       |   | 21,686               |    | —                     |   | —                            |   | —           |   | 21,686           |   |
| Gain on franchise sales of restaurant operations  and properties                                                    |   | (4,042               | )       | —                     |   | —                            |   | —           |   | (4,042           | )      |
| Gain on dispositions of other property and  equipment                                                               |   | (2,559               | )       | —                     |   | —                            |   | —           |   | (2,559           | )      |
| Interest expense (income)                                                                                           |   | 21,540               |    | —                     |   | (573                              | )      | —           |   | 20,967           |   |
|                                                                                                                |   |                 |    |                       |   |                              |   |             |   |             |   |
| Income before provision for income taxes,  extraordinary item and equity in net income of consolidated subsidiaries |   | 3,129                |    | 2,506                      |   | 583                               |   | —           |   | 6,218            |   |
|                                                                                                                |   |                 |    |                       |   |                              |   |             |   |             |   |
| Provision for income taxes                                                                                          |   | (1,017               | )       | (1,028                     | )      | (205                              | )      | —           |   | (2,250           | )      |
|                                                                                                                |   |                 |    |                       |   |                              |   |             |   |             |   |
| Income before extraordinary item and equity  in net income of consolidated subsidiaries                             |   | 2,112                |    | 1,478                      |   | 378                               |   | —           |   | 3,968            |   |
|                                                                                                                |   |                 |    |                       |   |                              |   |             |   |             |   |
| Extraordinary item, net of income tax  benefit                                                                      |   | (221                 | )       | —                     |   | —                            |   | —           |   | (221             | )      |
|                                                                                                                |   |                 |    |                       |   |                              |   |             |   |             |   |
| Income before equity in net income of  consolidated subsidiaries                                                    |   | 1,891                |    | 1,478                      |   | 378                               |   | —           |   | 3,747            |   |
|                                                                                                                |   |                 |    |                       |   |                              |   |             |   |             |   |
| Equity in net income of consolidated  subsidiaries                                                                  |   | 1,856                |    | —                     |   | —                            |   | (1,856           | )      | —           |   |
|                                                                                                                |   |                 |    |                       |   |                              |   |             |   |             |   |
| Net income                                                                                                          |   | $                    | 3,747   |                       | $      | 1,478                             |   | $                | 378    |             | $      | (1,856 | ) | $ | 3,747 |   |

 

15

----

 

**SupplementalCondensed Consolidating Statement of Cash Flows**

**Forthe Nine Months Ended September 30, 2001**

(Unaudited)

(In thousands)

 
|                                                   |   | **Parent   Company** |   | **Guarantor   Subsidiary** |   | **Non-guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|--------------------------------------------------------|--------|----------------------|--------|----------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
| Net cash provided by (used in) operating  activities   |   | $                    | 12,639 |                       | $      | (15                             | )      | $                | 2,240  |             | $      | (2,294 | ) | $ | 12,570 |   |
|                                                   |   |                 |   |                       |   |                            |   |             |   |             |   |
| Cash flows from investing activities:                  |   |                 |   |                       |   |                            |   |             |   |             |   |
| Purchases of property and equipment                    |   | (8,440               | )      | —                     |   | —                          |   | —           |   | (8,440           | )      |
| Proceeds from sales of property and  equipment         |   | 23,556               |   | —                     |   | —                          |   | —           |   | 23,556           |   |
| Net cash provided by investing activities              |   | 15,116               |   | —                     |   | —                          |   | —           |   | 15,116           |   |
|                                                   |   |                 |   |                       |   |                            |   |             |   |             |   |
| Cash flows from financing activities:                  |   |                 |   |                       |   |                            |   |             |   |             |   |
| Proceeds from borrowings                               |   | 51,405               |   | —                     |   | —                          |   | —           |   | 51,405           |   |
| Repayments of obligations                              |   | (86,118              | )      | —                     |   | —                          |   | —           |   | (86,118          | )      |
| Reinsurance deposits received                          |   | —               |   | —                     |   | 505                             |   | (505             | )      | —           |   |
| Reinsurance payments made from deposits                |   | —               |   | —                     |   | (2,799                          | )      | 2,799            |   | —           |   |
| Net cash used in financing activities                  |   | (34,713              | )      | —                     |   | (2,294                          | )      | 2,294            |   | (34,713          | )      |
|                                                   |   |                 |   |                       |   |                            |   |             |   |             |   |
| Net decrease in cash and cash equivalents              |   | (6,958               | )      | (15                        | )      | (54                             | )      | —           |   | (7,027           | )      |
|                                                   |   |                 |   |                       |   |                            |   |             |   |             |   |
| Cash and cash equivalents, beginning of  period        |   | 13,619               |   | 33                         |   | 932                             |   | —           |   | 14,584           |   |
|                                                   |   |                 |   |                       |   |                            |   |             |   |             |   |
| Cash and cash equivalents, end of period               |   | $                    | 6,661  |                       | $      | 18                              |   | $                | 878    |             | $      | — |   | $ | 7,557 |   |
|                                                   |   |                 |   |                       |   |                            |   |             |   |             |   |
| Supplemental disclosures:                              |   |                 |   |                       |   |                            |   |             |   |             |   |
| Interest paid (received)                               |   | $                    | 17,273 |                       | $      | —                          |   | $                | (574   | )                | $      | — |   | $ | 16,699 |   |
| Income taxes paid                                      |   | 1                    |   | 2                          |   | —                          |   | —           |   | 3                |   |
| Capital lease obligations terminated                   |   | 170                  |   | —                     |   | —                          |   | —           |   | 170              |   |
| Note received from the sale of property and  equipment |   | 4,250                |   | —                     |   | —                          |   | —           |   | 4,250            |   |

 

16

----

 

**SupplementalCondensed Consolidating Balance Sheet**

**As of December 31,2000**

 

(In thousands)

** **
|                                                       |   | **Parent****Company** |    | **Guarantor****Subsidiary** |   | **Non-guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|------------------------------------------------------------|--------|-----------------------|---------|-----------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
|                                                       |   |                  |    |                        |   |                            |   |             |   |             |   |
| Assets                                                     |   |                  |    |                        |   |                            |   |             |   |             |   |
|                                                       |   |                  |    |                        |   |                            |   |             |   |             |   |
| Current assets:                                            |   |                  |    |                        |   |                            |   |             |   |             |   |
| Cash and cash  equivalents                                 |   | $                     | 13,619  |                        | $      | 33                              |   | $                | 932    |             | $      | — |   | $ | 14,584 |   |
| Restricted cash                                            |   | —                |    | —                      |   | 1,737                           |   | —           |   | 1,737            |   |
| Accounts  receivable, net                                  |   | 5,649                 |    | 508                         |   | —                          |   | —           |   | 6,157            |   |
| Inventories                                                |   | 11,570                |    | —                      |   | —                          |   | —           |   | 11,570           |   |
| Deferred income  taxes                                     |   | 10,258                |    | 43                          |   | —                          |   | 94               |   | 10,395           |   |
| Prepaid  expenses and other current assets                 |   | 7,435                 |    | 551                         |   | 4,057                           |   | (9,244           | )      | 2,799            |   |
| Total current  assets                                      |   | 48,531                |    | 1,135                       |   | 6,726                           |   | (9,150           | )      | 47,242           |   |
| Deferred income  taxes                                     |   | —                |    | 506                         |   | 1,327                           |   | (1,833           | )      | —           |   |
| Property and  equipment, net                               |   | 226,865               |    | —                      |   | —                          |   | —           |   | 226,865          |   |
| Intangible  assets and deferred costs, net                 |   | 21,529                |    | —                      |   | —                          |   | —           |   | 21,529           |   |
| Investments in  subsidiaries                               |   | 3,500                 |    | —                      |   | —                          |   | (3,500           | )      | —           |   |
| Other assets                                               |   | 1,135                 |    | 3,614                       |   | 5,729                           |   | (8,428           | )      | 2,050            |   |
| Total assets                                               |   | $                     | 301,560 |                        | $      | 5,255                           |   | $                | 13,782 |             | $      | (22,911 | ) | $ | 297,686 |   |
|                                                       |   |                  |    |                        |   |                            |   |             |   |             |   |   |   |   |   |
| Liabilities and  Stockholders’ (Deficit) Equity       |   |                  |    |                        |   |                            |   |             |   |             |   |
|                                                       |   |                  |    |                        |   |                            |   |             |   |             |   |
| Current  liabilities:                                      |   |                  |    |                        |   |                            |   |             |   |             |   |
| Current  maturities of long-term obligations               |   | $                     | 19,172  |                        | $      | —                          |   | $                | — |             | $      | (4,000 | ) | $ | 15,172 |   |
| Accounts  payable                                          |   | 20,100                |    | —                      |   | —                          |   | —           |   | 20,100           |   |
| Accrued  expenses                                          |   | 43,683                |    | 648                         |   | 8,082                           |   | (5,014           | )      | 47,399           |   |
| Total current  liabilities                                 |   | 82,955                |    | 648                         |   | 8,082                           |   | (9,014           | )      | 82,671           |   |
| Deferred income  taxes                                     |   | 15,015                |    | —                      |   | —                          |   | (1,739           | )      | 13,276           |   |
| Long-term  obligations, less current maturities            |   | 288,472               |    | —                      |   | —                          |   | (4,814           | )      | 283,658          |   |
| Other  liabilities                                         |   | 15,101                |    | 1,475                       |   | 5,332                           |   | (3,844           | )      | 18,064           |   |
| Stockholders’  (deficit) equity                       |   | (99,983               | )       | 3,132                       |   | 368                             |   | (3,500           | )      | (99,983          | )      |
| Total  liabilities and stockholders’ (deficit) equity |   | $                     | 301,560 |                        | $      | 5,255                           |   | $                | 13,782 |             | $      | (22,911 | ) | $ | 297,686 |   |

 

17

----

 

**SupplementalCondensed Consolidating Statement of Operations**

**Forthe Three Months Ended October 1, 2000**

(Unaudited)

(In thousands)

 
|                                                                                                                |   | **Parent   Company** |    | **Guarantor   Subsidiary** |   | **Non-guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|---------------------------------------------------------------------------------------------------------------------|--------|----------------------|---------|----------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                                                |   |                 |    |                       |   |                            |   |             |   |             |   |
| Revenues                                                                                                            |   | $                    | 160,275 |                       | $      | 1,330                           |   | $                | — |             | $      | — |   | $ | 161,605 |   |
| Costs and expenses:                                                                                                 |   |                 |    |                       |   |                            |   |             |   |             |   |
| Cost of sales                                                                                                       |   | 54,081               |    | —                     |   | —                          |   | —           |   | 54,081           |   |
| Labor and benefits                                                                                                  |   | 47,822               |    | —                     |   | —                          |   | —           |   | 47,822           |   |
| Operating expenses and write-downs of  property and equipment                                                       |   | 33,083               |    | —                     |   | (44                             | )      | —           |   | 33,039           |   |
| General and administrative expenses                                                                                 |   | 7,177                |    | 1,680                      |   | —                          |   | —           |   | 8,857            |   |
| Depreciation and amortization                                                                                       |   | 7,426                |    | —                     |   | —                          |   | —           |   | 7,426            |   |
| Loss on franchise sales of restaurant  operations and properties                                                    |   | 75                   |    | —                     |   | —                          |   | —           |   | 75               |   |
| Gain on dispositions of other property and  equipment                                                               |   | (960                 | )       | —                     |   | —                          |   | —           |   | (960             | )      |
| Interest expense (income)                                                                                           |   | 7,768                |    | —                     |   | (174                            | )      | —           |   | 7,594            |   |
|                                                                                                                |   |                 |    |                       |   |                            |   |             |   |             |   |
| Income (loss) before (provision for) benefit  from income taxes and equity in net loss of consolidated subsidiaries |   | 3,803                |    | (350                       | )      | 218                             |   | —           |   | 3,671            |   |
|                                                                                                                |   |                 |    |                       |   |                            |   |             |   |             |   |
| (Provision for) benefit from income taxes                                                                           |   | (493                 | )       | 144                        |   | (76                             | )      | —           |   | (425             | )      |
|                                                                                                                |   |                 |    |                       |   |                            |   |             |   |             |   |
| Income (loss) before equity in net loss of  consolidated subsidiaries                                               |   | 3,310                |    | (206                       | )      | 142                             |   | —           |   | 3,246            |   |
|                                                                                                                |   |                 |    |                       |   |                            |   |             |   |             |   |
| Equity in net loss of consolidated  subsidiaries                                                                    |   | (64                  | )       | —                     |   | —                          |   | 64               |   | —           |   |
|                                                                                                                |   |                 |    |                       |   |                            |   |             |   |             |   |
| Net income (loss)                                                                                                   |   | $                    | 3,246   |                       | $      | (206                            | )      | $                | 142    |             | $      | 64 |   | $ | 3,246 |   |

 

18

----

 

**SupplementalCondensed Consolidating Statement of Operations**

**Forthe Nine Months Ended October 1, 2000**

(Unaudited)

(In thousands)

 
|                                                                                                                   |   | **Parent   Company** |    | **Guarantor   Subsidiary** |   | **Non-guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|----------------------|---------|----------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                                                   |   |                 |    |                       |   |                            |   |             |   |             |   |
| Revenues                                                                                                               |   | $                    | 460,232 |                       | $      | 4,510                           |   | $                | — |             | $      | — |   | $ | 464,742 |   |
| Costs and expenses:                                                                                                    |   |                 |    |                       |   |                            |   |             |   |             |   |
| Cost of sales                                                                                                          |   | 149,146              |    | —                     |   | —                          |   | —           |   | 149,146          |   |
| Labor and benefits                                                                                                     |   | 145,397              |    | —                     |   | —                          |   | —           |   | 145,397          |   |
| Operating expenses and write-downs of  property and equipment                                                          |   | 113,194              |    | —                     |   | (159                            | )      | —           |   | 113,035          |   |
| General and administrative expenses                                                                                    |   | 27,473               |    | 2,951                      |   | —                          |   | —           |   | 30,424           |   |
| Restructuring costs                                                                                                    |   | 12,056               |    | —                     |   | —                          |   | —           |   | 12,056           |   |
| Depreciation and amortization                                                                                          |   | 23,166               |    | —                     |   | —                          |   | —           |   | 23,166           |   |
| Gain on franchise sales of restaurant  operations and properties                                                       |   | (1,923               | )       | —                     |   | —                          |   | —           |   | (1,923           | )      |
| Gain on dispositions of other property and  equipment                                                                  |   | (1,005               | )       | —                     |   | —                          |   | —           |   | (1,005           | )      |
| Interest expense (income)                                                                                              |   | 24,014               |    | —                     |   | (519                            | )      | —           |   | 23,495           |   |
|                                                                                                                   |   |                 |    |                       |   |                            |   |             |   |             |   |
| (Loss) income before benefit from  (provision for) income taxes and equity in net income of consolidated  subsidiaries |   | (31,286              | )       | 1,559                      |   | 678                             |   | —           |   | (29,049          | )      |
|                                                                                                                   |   |                 |    |                       |   |                            |   |             |   |             |   |
| Benefit from (provision for) income taxes                                                                              |   | 17,666               |    | (639                       | )      | (237                            | )      | —           |   | 16,790           |   |
|                                                                                                                   |   |                 |    |                       |   |                            |   |             |   |             |   |
| (Loss) income before equity in net income  of consolidated subsidiaries                                                |   | (13,620              | )       | 920                        |   | 441                             |   | —           |   | (12,259          | )      |
|                                                                                                                   |   |                 |    |                       |   |                            |   |             |   |             |   |
| Equity in net income of consolidated  subsidiaries                                                                     |   | 1,361                |    | —                     |   | —                          |   | (1,361           | )      | —           |   |
|                                                                                                                   |   |                 |    |                       |   |                            |   |             |   |             |   |
| Net (loss) income                                                                                                      |   | $                    | (12,259 | )                          | $      | 920                             |   | $                | 441    |             | $      | (1,361 | ) | $ | (12,259 | ) |

 

19

----

 

**SupplementalCondensed Consolidating Statement of Cash Flows**

**Forthe Nine Months Ended October 1, 2000**

(Unaudited)

(In thousands)

 
|                                                   |   | **Parent   Company** |   | **Guarantor   Subsidiary** |   | **Non-guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|--------------------------------------------------------|--------|----------------------|--------|----------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
|                                                   |   |                 |   |                       |   |                            |   |             |   |             |   |
| Net cash provided by (used in) operating  activities   |   | $                    | 7,780  |                       | $      | (3                              | )      | $                | (105   | )                | $      | (1,478 | ) | $ | 6,194 |   |
|                                                   |   |                 |   |                       |   |                            |   |             |   |             |   |
| Cash flows from investing activities:                  |   |                 |   |                       |   |                            |   |             |   |             |   |
| Purchases of property and equipment                    |   | (12,808              | )      | —                     |   | —                          |   | —           |   | (12,808          | )      |
| Proceeds from sales of property and  equipment         |   | 32,594               |   | —                     |   | —                          |   | —           |   | 32,594           |   |
| Net cash provided by investing activities              |   | 19,786               |   | —                     |   | —                          |   | —           |   | 19,786           |   |
|                                                   |   |                 |   |                       |   |                            |   |             |   |             |   |
| Cash flows from financing activities:                  |   |                 |   |                       |   |                            |   |             |   |             |   |
| Proceeds from borrowings                               |   | 74,000               |   | —                     |   | —                          |   | —           |   | 74,000           |   |
| Repayments of obligations                              |   | (103,022             | )      | —                     |   | —                          |   | —           |   | (103,022         | )      |
| Reinsurance deposits received                          |   | —               |   | —                     |   | 2,133                           |   | (2,133           | )      | —           |   |
| Reinsurance payments made from deposits                |   | —               |   | —                     |   | (3,611                          | )      | 3,611            |   | —           |   |
| Net cash used in financing activities                  |   | (29,022              | )      | —                     |   | (1,478                          | )      | 1,478            |   | (29,022          | )      |
|                                                   |   |                 |   |                       |   |                            |   |             |   |             |   |
| Net decrease in cash and cash equivalents              |   | (1,456               | )      | (3                         | )      | (1,583                          | )      | —           |   | (3,042           | )      |
|                                                   |   |                 |   |                       |   |                            |   |             |   |             |   |
| Cash and cash equivalents, beginning of  period        |   | 9,674                |   | 14                         |   | 2,374                           |   | —           |   | 12,062           |   |
|                                                   |   |                 |   |                       |   |                            |   |             |   |             |   |
| Cash and cash equivalents, end of period               |   | $                    | 8,218  |                       | $      | 11                              |   | $                | 791    |             | $      | — |   | $ | 9,020 |   |
|                                                   |   |                 |   |                       |   |                            |   |             |   |             |   |
| Supplemental disclosures:                              |   |                 |   |                       |   |                            |   |             |   |             |   |
| Interest paid (received)                               |   | $                    | 18,805 |                       | $      | —                          |   | $                | (704   | )                | $      | — |   | $ | 18,101 |   |
| Income taxes (refunded) paid                           |   | (1,075               | )      | 891                        |   | 246                             |   | —           |   | 62               |   |
| Capital lease obligations incurred                     |   | 2,891                |   | —                     |   | —                          |   | —           |   | 2,891            |   |
| Capital lease obligations terminated                   |   | 711                  |   | —                     |   | —                          |   | —           |   | 711              |   |
| Note received from the sale of property and  equipment |   | 577                  |   | —                     |   | —                          |   | —           |   | 577              |   |

 

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**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

*The followingdiscussion should be read in conjunction with the Condensed ConsolidatedFinancial Statements of the Company and the notes thereto included elsewhereherein.*

 

**Forward Looking Statements**

 

Statements contained herein thatare not historical facts constitute “forward looking statements” as that termis defined in the Private Securities Litigation Reform Act of 1995. All forwardlooking statements are subject to risks and uncertainties which could causeresults to differ materially from those anticipated. These factors include the Company’shighly competitive business environment, uncertainty with respect to theCompany’s ongoing compliance with covenants in its existing debt facilities andits ability to refinance its existing debt facilities, exposure to commodityprices, risks associated with the foodservice industry, the ability to retainand attract new employees, government regulations, the Company’s highgeographic concentration in the Northeast and its attendant weather patterns,conditions needed to meet re-imaging and new opening and franchising targetsand risks associated with improved service and other initiatives. Other factorsthat may cause actual results to differ from the forward looking statementscontained herein and that may affect the Company’s prospects in general areincluded in the Company’s other filings with the Securities and ExchangeCommission.

 

**Overview**

 

As of September 30, 2001, the Company owned and operated 394restaurants and franchised 160 restaurants and 6 cafes.  The Company manufactures and distributes afull line of frozen dessert products, which are distributed to Friendly’srestaurants and through more than 3,500 supermarkets and other retail locationsin 17 states.  The restaurants offer awide variety of reasonably- priced breakfast, lunch and dinner menu items aswell as the frozen dessert products.

* *

|                   |   | **For the Three Months Ended** |   | **For the Nine Months Ended** |   |
|------------------------|--------|--------------------------------|--------|-------------------------------|--------|
|                   |   | **September  30,  2001**       |   | **October 1,  2000**          |   | **September  30,  2001** |   | **October 1,  2000** |   |
| Company Units:         |   |                           |   |                          |   |   |   |   |   |
| Beginning of period    |   | 403                            |   | 486                           |   | 449 |   | 618 |   |
| Openings               |   | —                         |   | —                        |   | — |   | 2 |   |
| Re-franchised closings |   | (6                             | )      | —                        |   | (39 | ) | (37 | ) |
| Closings               |   | (3                             | )      | (15                           | )      | (16 | ) | (112 | ) |
| End of period          |   | 394                            |   | 471                           |   | 394 |   | 471 |   |
|                   |   |                           |   |                          |   |   |   |   |   |
| Franchised Units:      |   |                           |   |                          |   |   |   |   |   |
| Beginning of period    |   | 163                            |   | 113                           |   | 127 |   | 69 |   |
| Re-franchised openings |   | 6                              |   | —                        |   | 39 |   | 37 |   |
| Openings               |   | 1                              |   | 3                             |   | 4 |   | 13 |   |
| Closings               |   | (4                             | )      | (1                            | )      | (4 | ) | (4 | ) |
| End of period          |   | 166                            |   | 115                           |   | 166 |   | 115 |   |

 

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*Revenues:*

 

Total revenuesdecreased $10.2 million, or 6.3%, to $151.4 million for the third quarter endedSeptember 30, 2001 from $161.6 million for the same quarter in 2000.  Restaurant revenues decreased $18.6 million,or 13.5%, to $118.9 million for the third quarter of 2001 from $137.5 millionfor the same quarter in 2000. Restaurant revenues decreased by $19.8 million due to the closing of 41under-performing restaurants and the re-franchising of 51 additional locationsover the past 15 months.  Closing ofrestaurants accounted for $5.6 million of the restaurant revenue decline andre-franchising reduced restaurant revenues by an additional $14.2 million.Partially offsetting this decrease was a 1.5% increase in comparable restaurantrevenues.  Foodservice (product sales tofranchisees, retail and institutional) revenues increased by $7.5 million, or33.5%, to $29.9 million for the third quarter of 2001 from $22.4 million forthe same quarter in 2000.  The increasein the number of franchised units accounted for $4.1 million of the increase,sales to foodservice retail supermarket customers increased by $3.5 million andsales to outside distributors increased by $0.3 million.  On May 1, 2001, foodservice decreased itsice cream pricing to all restaurants. This resulted in decreased foodservice revenues of 4.7% for the thirdquarter ended September 30, 2001.  TheCompany’s foodservice division sells a variety of products to the Company’sfranchisees and ice cream products to supermarkets and other retail locations.  Franchise revenues increased $0.7 million,or 38.9%, to $2.5 million for the three months ended September 30, 2001compared to $1.8 million for the three months ended October 1, 2000.  The increase is largely the result of thedifference in the number of franchised locations operating during both periods.There were 166 franchise units open at the end of the third quarter endedSeptember 30, 2001 compared to 115 franchise units open at the end of the thirdquarter ended October 1, 2000.

 

Total revenuesdecreased $35.8 million, or 7.7%, to $428.9 million for the nine months endedSeptember 30, 2001 from $464.7 million for the same period in 2000.  Restaurant revenues decreased $54.7 million,or 13.7%, to $345.0 million for the first nine months of 2001 from $399.7 millionfor the same period in 2000.  Restaurantrevenues decreased by $59.1 million due to the closing of 138 under-performingrestaurants and the re-franchising of 88 additional locations over the past 21months.  Closing of restaurantsaccounted for $27.0 million of the restaurant revenue decline andre-franchising reduced restaurant revenues by an additional $32.1 million.Partially offsetting this decrease was a 1.3% increase in comparable restaurantrevenues.  Revenues from the onelocation open less than one year were $0.5 million.  Foodservice (product sales to franchisees, retail andinstitutional) and other revenues increased by $17.4 million, or 29.3%, to$76.7 million for the nine months ended September 30, 2001 from $59.3 millionfor the same period in 2000.  Theincrease in the number of franchised units accounted for $9.6 million of theincrease, sales to foodservice retail supermarket customers increased by $7.6million and sales to outside distributors increased by $1.1 million.  On May 1, 2001, foodservice decreased itsice cream pricing to all restaurants. This resulted in decreased foodservice revenues of 3.0% for the ninemonths ended September 30, 2001. Franchise revenue increased $1.4 million, or 24.1%, to $7.2 million forthe nine months ended September 30, 2001 compared to $5.8 million for the ninemonths ended October 1, 2000.  Theincrease is largely the result of the difference in the number of franchisedlocations operating during both periods. There were 166 franchise units open atthe end of the nine months ended September 30, 2001 compared to 115 franchiseunits open at the end of the nine months ended October 1, 2000.

 

*Cost of sales:*

 

Cost of sales increased $0.7 million, or 1.4%, to $54.8 million for thethird quarter ended September 30, 2001 from $54.1 million for the same quarterin 2000.  Cost of sales as a percentageof total revenues increased to 36.1% for the third quarter of 2001 from 33.4%for the third quarter of 2000.  Thehigher food cost as a percentage of total revenue was mainly due to a shift insales mix from Company-owned restaurant sales to foodservice sales.  Foodservice sales to franchisees and retailcustomers have a higher food cost as a percentage of revenue than sales inCompany-owned restaurants to restaurant patrons.  The cost of cream, the principal ingredient used in making icecream, was higher in the third quarter of 2001 when compared to the thirdquarter of 2000 and partially contributed to the rise in cost of sales as apercentage of total revenues, especially in foodservice’s retail supermarketbusiness.  The Company believes thatcream prices will be higher in the fourth quarter of 2001 when compared tothose prices experienced during the fourth quarter of 2000.  To minimize risk, alternative supply sourcescontinue to be pursued.

 

Cost of sales increased $0.6 million, or 0.4%, to $149.7 million forthe nine months ended September 30, 2001 from $149.1 million for the sameperiod in 2000.  Cost of sales as apercentage of total revenues increased to 34.8% for the nine months in 2001from 32.0% for the same period in 2000. The higher food cost as a percentage oftotal revenue was partially due to a shift in sales mix from Company-ownedrestaurant sales to foodservice sales. Foodservice sales to franchisees and retail customers have a higher foodcost as a percentage of revenue than sales in Company-owned restaurants torestaurant patrons.  The cost of cream,the principal ingredient used in making ice cream, was higher in the first ninemonths of 2001 when compared to the first nine months of 2000 and contributedto the rise in cost of sales as a percentage of total revenues, especially infoodservice’s retail supermarket business. In May 2001, the Company raised prices to its retail customers.

 

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*Labor and benefits:*

 

Labor and benefits decreased $8.1 million, or 17.0%, to $39.7 millionfor the third quarter ended September 30, 2001 from $47.8 million for the samequarter in 2000.  Labor and benefits asa percentage of total revenues decreased to 26.1% for the third quarter of 2001from 29.5% for the same quarter in 2000. The lower labor cost as a percentage of total revenue is partially theresult of revenue increases derived from additional franchised locations andhigher sales to foodservice retail supermarket customers, which do not have anyassociated restaurant labor and benefits. In addition, the closing of 41 under-performing Company-owned units overthe past 15 months improved the relationship of restaurant labor and benefitsto restaurant sales as well as to total revenues.

 

Labor and benefits decreased $24.7 million, or 17.0%, to $120.7 millionfor the nine months ended September 30, 2001 from $145.4 million for the sameperiod in 2000.  Labor and benefits as apercentage of total revenues decreased to 28.0% for the nine months of 2001from 31.3% for the same period in 2000. The lower labor cost as a percentage oftotal revenue is partially the result of revenue increases derived fromadditional franchised locations and higher sales to foodservice retailsupermarket customers, which do not have any associated restaurant labor andbenefits.  In addition, the closing of138 under-performing Company-owned units over the past 21 months improved the relationshipof restaurant labor and benefits to restaurant sales as well as to totalrevenues.

 

*Operating expenses:*

 

Operating expenses increased $0.1 million, or 0.3%, to $32.5 millionfor the third quarter ended September 30, 2001 from $32.4 million for the samequarter in 2000.  Operating expenses asa percentage of total revenues were 21.5% and 20.0% for the third quartersended September 30, 2001 and October 1, 2000, respectively.  The increase as a percentage of totalrevenues resulted from higher costs for foodservice retail promotions and restaurantutilities in the 2001 quarter when compared to the 2000 quarter.

 

Operating expenses decreased $5.0 million, or 5.3%, to $89.0 millionfor the nine months ended September 30, 2001 from $94.0 million for the sameperiod in 2000.  Operating expenses as apercentage of total revenues were 20.8% and 20.2% for the nine months endedSeptember 30, 2001 and October 1, 2000, respectively.  The increase as a percentage of total revenues resulted fromhigher costs for foodservice retail promotions and restaurant advertising andutilities in the 2001 period when compared to the 2000 period.

 

*General and administrative expenses:*

 

General and administrative expenses were $8.4 million for the thirdquarter ended September 30, 2001 and $8.9 million for the same period in2000.  General and administrativeexpenses as a percentage of total revenues were 5.5% in the third quarters of2001 and 2000.  In the 2001 period,bonus expense increased $1.1 million when compared to the same period in 2000.

 

General and administrative expenses were $27.1 million and $30.4million for the nine months ended September 30, 2001 and October 1, 2000,respectively.  General andadministrative expenses as a percentage of total revenues decreased to 6.3% inthe nine months ended September 30, 2001 from 6.5% for the same period in 2000.The decrease is primarily the result of the elimination of certain managementand administrative positions associated with the Company’s announcement of theimmediate closing of 81 restaurants and the planned closing of 70 additionalrestaurants in March 2000 and an on-going hiring freeze.  In the 2001 period, bonus expense increased$0.8 million when compared to the same period in 2000.

 

*EBITDA:*

 

As a result of the above, EBITDA (EBITDArepresents net income (loss) before (i) benefit from (provision for) incometaxes,  (ii) interest expense, net,(iii) depreciation and amortization, (iv) extraordinary item and (v)write-downs and all other non-cash items plus cash distributions fromunconsolidated subsidiaries) decreased $2.9 million, or 14.9%, to $16.6million for the third quarter ended September 30, 2001 from $19.5 million forthe same quarter in 2000.  EBITDA as apercentage of total revenues was 11.0% and 12.1% for the third quarters of 2001and 2000, respectively.

 

EBITDA increased $12.1 million, or 32.8%, to $49.2 million for the ninemonths ended September 30, 2001 from $37.1 million for the same period in2000.  EBITDA as a percentage of totalrevenues was 11.5% and 8.0% for the nine months ended September 30, 2001 andOctober 1, 2000, respectively.

 

*Restructuring costs:*

 

Restructuring costs were $12.1 million for the nine months endedOctober 1, 2000 as a result of the costs associated with the Company’s decisionto reorganize its restaurant field and headquarters organizations inconjunction with the closing of 81 under-performing restaurants and the plannedclosing of an additional 70 restaurants over the following 24 months.  Included in these costs are severance, renton closed units until lease termination, utilities and real estate taxes,demarking, lease termination, environmental and other miscellaneous costs.

 

23

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*W**rite-downsof property and equipment:*

 

Write-downs of property and equipment were $0.7 million for the threemonths ended October 1, 2000. Write-downs of property and equipment were $0.1million and $19.0 million for the nine months ended September 30, 2001 andOctober 1, 2000, respectively.  Thedecrease in write-downs is primarily the result of the non-cash write-down ofthe 81 under-performing restaurants which were closed at the end of March 2000and the non-cash write-down of the additional 70 restaurants which were to beclosed over the following 24 months to their estimated net realizablevalue.  During the nine months endedSeptember 30, 2001, the Company made the decision to continue to operate 25 ofthese properties.  As of September 30,2001, 27 of these 70 restaurants are still operating.

 

*Depreciation and amortization:*

 

Depreciation and amortization decreased $0.4 million, or 5.2%, to $7.0million for the third quarter ended September 30, 2001 from $7.4 million forthe same quarter in 2000.  Depreciationand amortization as a percentage of total revenues was 4.6% for the thirdquarters of 2001 and 2000.

 

Depreciation and amortization decreased $1.5 million, or 6.4%, to $21.7million for the nine months ended September 30, 2001 from $23.2 million for thesame period in 2000.  Depreciation andamortization as a percentage of total revenues was 5.0% for the nine monthsended September 30, 2001 and October 1, 2000.

 

*(Gain) loss on franchise sales of restaurant operations and properties:*

 

Gain on franchise sales ofrestaurant operations and properties was $0.2 million for the third quarterended September 30, 2001 compared to a loss of $0.1 million for the thirdquarter ended October 1, 2000.  The gainon franchise sales of restaurant operations and properties was $4.0 million and$1.9 million for the nine months ended September 30, 2001 and October 1, 2000,respectively.  The increase wasprimarily the result of the gain of $4.3 million associated with the sale of 37 restaurants to a franchisee during thenine months ended September 30, 2001 as compared to the gain of $1.4 millionassociated with the sale of 29 restaurants to a franchisee on January 19,2000.  The Company also sold certainassets and rights in eight other restaurants to three additional franchiseesresulting in a gain of $0.7 million during the nine months ended October 1,2000.

 

*Gain on disposition of other property and equipment:*

 

The gain on disposition of other property andequipment for the quarters ended September 30, 2001 and October 1, 2000was  $0.3 million and $1.0 million,respectively.  The gain on dispositionof other property and equipment was $2.6 million and $1.0 million for the ninemonths ended September 30, 2001 and October 1, 2000, respectively.  The gain in the 2001 period resulted fromthe sale of 21 closed locations during the nine month period ended September30, 2001 compared to the sale of 20 closed locations during the nine monthperiod ended October 1, 2000.

 

*Interest expense, net:*

 

Interest expense, net of capitalized interest and interest income,decreased by $1.1 million, or 14.9%, to $6.5 million for the third quarterended September 30, 2001 from $7.6 million for the same quarter in 2000. Thedecrease is primarily due to a reduction in the average outstanding debt.

 

Interest expense, net of capitalized interest and interest income,decreased by $2.5 million, or 10.8%, to $21.0 million for the nine months endedSeptember 30, 2001 from $23.5 million for the same period in 2000. The decreaseis primarily impacted by the decrease in the average outstanding balance on theterm loans for the nine months ended September 30, 2001 compared to the ninemonths ended October 1, 2000.  Totaloutstanding debt, including capital lease obligations, was reduced from $288.9million at October 1, 2000 to $263.9 million at September 30, 2001.

 

*(Provision for) benefit from income taxes:*

 

The provision for income taxes was $1.1 million, or 37.7%, for thethird quarter ended September 30, 2001 compared to $0.4 million, or 11.6%, forthe third quarter ended October 1, 2000. The provision for income taxes was$2.3 million, or 36.2%, for the nine months ended September 30, 2001 comparedto a benefit from taxes of $16.8 million, or 57.8%, for the nine months endedOctober 1, 2000.  The Company recordsincome taxes based on the effective rate expected for the year with any changesin the valuation allowance reflected in the period of change.  The sales of the land and buildings tofranchisees during the nine months ended October 1, 2000 favorably impacted theprovision for income taxes as it triggered built-in gains, which allowed for areduction in the valuation allowance on certain net operating losscarryforwards.

 

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*Extraordinary item:*

 

The Company recognized $0.2 million ofexpense, net of the related income tax benefit of $0.2 million, in 2001 relatedto previously deferred financing costs associated with Tranche A of the termloans, which was prepaid and extinguished during the quarter ended September30, 2001.

 

*Net income (loss):*

 

Net income was $1.6 million and $3.2 million for the third quartersended September 30, 2001 and October 1, 2000, respectively.  Net income was $3.7 million for the ninemonths ended September 30, 2001 compared to a net loss of $12.3 million for thenine months ended October 1, 2000.

 

**Liquidity and CapitalResources**

 

The Company’s primary sources of liquidity and capital resources arecash generated from operations and borrowings under its revolving creditfacility.  Net cash provided byoperating activities was $12.6 million and $6.2 million for the nine monthsended September 30, 2001 and October 1, 2000, respectively.  During the nine months ended September 30,2001, inventories increased $3.8 million as a result of increased retailpromotional activity expected for the fourth quarter.  Accounts payable increased $1.5 million primarily as a result ofincreased inventory purchases. Accounts receivable increased $2.3 millionprimarily due to increased retail supermarket sales along with the increase involume of foodservice product sales to franchisees. Accrued expenses and otherlong- term liabilities decreased $1.1 million as a result of $2.3 million ofpayments made against the captive insurance company’s reserves for workerscompensation claims and $1.9 million of payments made against the restructuringreserve.  These decreases were offset byan increase in accrued interest of $3.6 million related to the timing ofinterest payment dates.  Availableborrowings under the revolving credit facility were $18 million as of September30, 2001.

 

Additional sources of liquidity consist of capital and operating leasesfor financing leased restaurant locations (in malls and shopping centers andland or building leases), restaurant equipment, manufacturing equipment,distribution vehicles and computer equipment. Additionally, sales of under-performing existing restaurant propertiesand other assets (to the extent the Company’s and its subsidiaries’ debtinstruments, if any, permit) are sources of cash.  The amounts of debt financing that the Company will be able toincur under capital leases and for property and casualty insurance financingand the amount of asset sales by the Company are limited by the terms of itscredit facility and Senior Notes.

 

Net cash provided by investing activities was $15.1 million and $19.8million in the nine months ended September 30, 2001 and October 1, 2000,respectively.  Capital expenditures forrestaurant operations were approximately $5.8 million and $12.7 million for thenine months ended September 30, 2001 and October 1, 2000, respectively.  Other capital expenditures were $2.6 millionand $3.0 million for the nine months ended September 30, 2001 and October 1,2000, respectively.  The decrease incapital expenditures was primarily due to the reduction in new units, replacementsand re-imaging projects.  Cash proceedsfrom the sale of property and equipment were $23.6 million and $32.6 million inthe nine months ended September 30, 2001 and October 1, 2000, respectively.  The decrease in proceeds was primarily dueto the receipt of $7.4 million in 2001 compared to $15.2 million in 2000related to the disposal of properties in connection with the March 2000restructuring.

 

Net cash used in financing activities was $34.7 million and $29.0million in the nine months ended September 30, 2001 and October 1, 2000,respectively.

 

The Company had a working capital deficit of $31.9 million as ofSeptember 30, 2001.  The Company is ableto operate with a substantial working capital deficit because: (i) restaurantoperations are conducted primarily on a cash (and cash equivalent) basis with alow level of accounts receivable; (ii) rapid turnover allows a limitedinvestment in inventories and (iii) cash from sales is usually received beforerelated expenses for food, supplies and payroll are paid.

 

The Company’s credit facility imposes significant operating andfinancial restrictions on the Company’s ability to, among other things, incurindebtedness, create liens, sell assets, engage in mergers or consolidations,pay dividends and engage in certain transactions with affiliates.  The credit facility limits the amount whichthe Company may spend on capital expenditures and requires the Company tocomply with certain financial covenants. The Company’s credit facility also restricts the use of proceeds fromasset sales.  Proceeds, as defined inthe credit agreement and subject to certain exceptions, in excess of statedmaximum allowable amounts must be used to permanently reduce outstandingobligations under the credit facility. During the nine months ended September 30, 2001, the Company received$11.5 million of asset sale proceeds which were used to reduce the amountoutstanding on the term loans.

 

The Company entered into its existing credit facility in November1997.  The credit facility includes therevolving credit loan and term loans. Since 1997, the Company has executed several amendments to the creditfacility.  The most recent amendmentoccurred on March 19, 2001.  All of theexisting financial covenants were amended and a new financial covenant wasadded requiring 

 

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minimumcumulative Consolidated EBITDA, as defined, on a monthly basis.  Interest rates on term loans, borrowingsunder the revolving credit facility and issued letters of credit increased0.25%.  In addition, automatic increasesin the interest rates will occur on August 2, 2001, January 2, 2002, April 1,2002, September 30, 2002 and October 1, 2002 of 0.25%, 0.50%, 0.25%, 0.25% and0.25%, respectively.  Interest paymentson all ABR loans, Eurodollar loans and issued letters of credit are required ona monthly basis rather than quarterly.

 

Also due tothe March 19, 2001 amendment, the maturity dates of Tranche B and Tranche C ofthe term loans were changed to November 15, 2002 from their original maturitydates of November 15, 2004 and November 15, 2005, respectively.  Annual scheduled principal payments duethrough October 15, 2002 did not change. However, the amendment requires additional minimum cumulative prepaymentson the term loans, excluding prepayments made pursuant to the J&Bagreement, by the dates specified below as follows:

 

| October 15,  2001 |   | $          | 6,000,000 |   |
|-------------------|--------|------------|-----------|--------|
| January 15,  2002 |   | 7,500,000  |      |
| April 15, 2002    |   | 8,500,000  |      |
| July 15, 2002     |   | 10,000,000 |      |

 

As of October 15, 2001, the Company has paid additional minimumcumulative prepayments of $6,793,000 on the term loans, which exceed theminimum cumulative prepayment requirement.

 

Tranche A of the term loans was prepaid and extinguished during thethird quarter ended September 30, 2001. Any remaining unpaid balances due on Tranches B and C of the term loanswill be paid on November 15, 2002.

 

FICC paid an amendment fee of approximately$256,000 to the lenders contemporaneous with the execution of the seventh amendment.FICC paid an additional amendment fee (the “Additional Fee”) of $441,459 onOctober 1, 2001 pursuant to the seventh amendment, which will be expensed overthe remaining term of the credit facility using the effective yield method.  If all obligations under the credit facilitywere satisfied before September 30, 2001, the Additional Fee would have beenreduced to approximately $128,000.  TheCompany believes that based on the terms of the seventh amendment, the Companyhas adequate cash and availability on its revolving credit facility to meet itsobligations through September 30, 2002. Additionally, the Company believes that it can comply with the revisedcovenant requirements under the amendment through December 30, 2001.

 

The Company isundertaking a refinancing plan (collectively, the “Refinancing Plan”), whichhas the following three principal components:

 
| (i)   |   | obtaining a new revolving credit facility from one or more financial  institutions for $35 million;                                                                                                          |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (ii)  |   | obtaining $55 million in loans from GE Capital Franchise Finance  Corporation which will be secured by first mortgage liens upon 75 of the  Company’s restaurants; and                                  |
| (iii) |   | entering into a sale and leaseback arrangement with one or more  financial institutions involving 45 of the Company’s restaurants that is  expected to provide the Company up to $37.5 million in cash. |

 

The Company would use the proceeds of these financings to repay theamounts outstanding on its existing credit facility ($55,114,000 as ofSeptember 30, 2001), to increase working capital and, to the extent theproceeds of the financings are sufficient, after giving effect to theforegoing, to finance a tender offer for a portion of the Company’s seniornotes (the “Notes”).  The Company hasobtained a commitment letter from GE Capital Franchise Finance Corporationrelating to the mortgage financing, but the Company does not have anycommitments or other agreements from any financial institutions relating to thenew revolving credit facility or the sale and leaseback arrangements describedabove.  The commitment letter receivedis contingent upon obtaining a new revolving credit facility.  The closing of each of the three financingsdescribed above will be subject, among other things, to the negotiation ofdefinitive agreements and other definitive documentation.  There can be no assurance that the Companywill be able to successfully implement any of the components of the RefinancingPlan. The availability of funds from the closing of these transactions will bea condition to the Company’s ability to purchase any Notes.

 

The Company anticipates requiring capital in the future principally tomaintain existing restaurant and plant facilities and to continue to renovateand re-image existing restaurants. Capital expenditures for 2001 are anticipated to be $13.5 million in theaggregate, of which $10.0 million is expected to be spent on restaurantoperations.  The Company’s actual 2001capital expenditures may vary from these estimated amounts. The Company believes that the combination of thefunds anticipated to be generated from operating activities and borrowingavailability under the credit facility will be sufficient to meet the Company’santicipated operating requirements, capital requirements and obligationsassociated with the restructuring.

 

On September 14, 2001, the Company entered into an agreement grantingRevere Restaurant Group, Inc. (“Revere”) certain limited exclusive rights tooperate and develop Friendly’s full-service restaurants in designated areaswithin Lehigh and Northampton 

 

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counties,Pennsylvania (the “Revere Agreement”). Pursuant to the Revere Agreement, Revere purchased certain assets andrights in six existing Friendly’s restaurants and committed to open anadditional four restaurants over the next seven years. Gross proceeds from thesale were approximately $3.4 million of which approximately $0.2 million wasfor franchise fees for the initial six restaurants.  The cash proceeds were used to fund operating activities of theCompany.

 

On April 13, 2001, the Company executed anagreement granting J&B Restaurants Partners of Long Island Holding Co., LLC(“J&B”) certain limited exclusive rights to operate and develop Friendly’sfull-service restaurants in the franchising regions of Nassau and SuffolkCounties in Long Island, New York (the “J&B Agreement”).  Pursuant to the J&B Agreement, J&Bpurchased certain assets and rights in 31 existing Friendly’s restaurants andcommitted to open an additional 29 restaurants over the next 12 years. Thetransaction price was approximately $19,950,000, of which approximately$4,250,000 was received in a note.  Thecash proceeds were used to prepay approximately $4.7 million on the term loanswith the remaining balance being applied to the revolving credit facility.  The 5-year note bears interest at an annualrate of 11% using a 20-year amortization schedule.  Payments are due monthly through the five years with a balloonpayment due at the end of five years.

 

**Recent Developments**

 

Effective August 6, 2001, the Company’slargest franchisee, Davco Restaurants, Inc. (“Davco”) refranchised threeNewark, DE units, transferring it’s rights to R.R.C. Restaurants, Inc.  In addition, Davco closed two units duringthe quarter ended September 30, 2001. Currently, Davco is seeking torefranchise an additional 25 to 28 units.

 

**Seasonality**

 

Due to the seasonality of frozen dessert consumption and the effectfrom time to time of weather on patronage in its restaurants, the Company’srevenues and EBITDA are typically higher in its second and third quarters.

 

**GeographicConcentration**

 

Approximately 89% of the Company-owned restaurants are located, andsubstantially all of its retail sales are generated, in the Northeast.  As a result, a severe or prolonged economicrecession or changes in demographic mix, employment levels, population density,weather, real estate market conditions or other factors specific to thisgeographic region may adversely affect the Company more than certain of its competitorswhich are more geographically diverse.

 

**Recently Issued Accounting Pronouncements**

 

In September2001, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 01-10,“Accounting for the Impact of the September 11, 2001 Terrorist Acts,” which providesguidance on how the costs related to the terrorist acts should beclassified,  how to determine whether anasset impairment should be recognized and how liabilities for losses and othercosts should be recognized.  The impactof adopting EITF Issue No. 01-10 did not have any effect on the Company’sconsolidated financial statements.

 

In August2001, the Financial Accounting Standards Board (“FASB”) issued Statement ofFinancial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets.”  SFASNo. 144 modifies the rules for accounting for the impairment or disposal oflong-lived assets.  The new rules becomeeffective for fiscal years beginning after December 15, 2001, with earlierapplication encouraged.  The Company hasnot yet quantified the impact of implementing SFAS No. 144 on the Company’sconsolidated financial statements.

 

In June 2001,the FASB issued SFAS No. 142, “Goodwill and Other Intangibles.”  SFAS No. 142 modifies the rules foraccounting for goodwill and other intangible assets.  The new rules become effective on January 1, 2002.  The impact of adopting SFAS No. 142 will nothave a material effect on the Company’s consolidated financial statements andthe Company will continue to amortize its license agreement related to certaintrademarked products.

 

In April 2001,the FASB reached consensus on EITF Issue No. 00-25, “Accounting forConsideration from a Vendor to a Retailer in Connection with the Purchase orPromotion of the Vendor’s Products,” which is effective for quarters beginningafter December 15, 2001, with prior financial statements restated ifpracticable.  EITF Issue No. 00-25requires that consideration from a vendor to a retailer be recorded as areduction in revenue unless certain criteria are met.  Arrangements within the scope of this Issue include slottingfees, cooperative advertising arrangements and buy-downs.  As a result of EITF Issue No. 00-25, certaincosts previously recorded as expense will be reclassified and offset againstrevenue.  The Company’s consolidatedfinancial statements will be reclassified to conform with the consensus in thefourth quarter of 2001.

 

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In May 2000, the Emerging Issues Task Force issued EITF Issue No.00-14, “Accounting for Certain Sales Incentives,” which provides guidance onthe recognition, measurement and income statement classification for salesincentives offered voluntarily by a vendor without charge to customers that canbe used in, or that are exercisable by a customer as a result of, a singleexchange transaction. The Company adopted EITF Issue No. 00-14 on July 3,2000.  As a result, the Company hasreclassified certain retail selling expenses against retail revenue for thethree and nine months ended October 1, 2000 to conform with the current periodpresentation.

 

In June 1998,the FASB issued SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities.”  SFAS No. 133established accounting and reporting standards requiring that each derivativeinstrument (including certain derivative instruments embedded in othercontracts) be recorded in the balance sheet as either an asset or liabilitymeasured at its fair value.  The statementrequires that changes in the derivative’s fair value be recognized currently inearnings unless specific hedge accounting criteria are met. Special accountingfor qualifying hedges allows a derivative’s gains and losses to offset relatedresults on the hedged item in the statement of operations, and requires that acompany formally document, designate and assess the effectiveness oftransactions that receive hedge accounting. Since the Company’s commodity option contracts do not meet the criteriafor hedge accounting, changes in the value of the commodity option contractsare recognized monthly in earnings.  Thecumulative effect upon adoption of approximately $77,000 has been recorded asincome in the accompanying Condensed Consolidated Statement of Operations.  It is not separately reported as acumulative effect since the amount is not significant.  Additionally, net losses of approximately$113,000 were recorded during the nine months ended September 30, 2001 relatedto the change in fair value for the period. The fair market value of derivatives at September 30, 2001 wasapproximately $19,000.

 

**Item 3. Quantitative and QualitativeDisclosures About Market Risk**

 

There has been no material change in the Company’s market risk exposuresince the filing of the Annual Report on Form 10K.

 

**Item 4.Controls and Procedures**

 

As of September 30, 2001,an evaluation was performed under the supervision and with the participation ofthe Company’s management, including the CEO and CFO, of the effectiveness ofthe design and operation of the Company’s disclosure controls andprocedures.  Based on that evaluation,the Company’s management, including the CEO and CFO, concluded that theCompany’s disclosure controls and procedures were effective as of September 30,2001.  There have been no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect internal controls subsequent to September 30, 2001.

 

 

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**PARTII – OTHER INFORMATION**

 

**Item 4. Submission of matters to a vote of security holders**

 

(a) An annualmeeting of the Company’s shareholders was held on May 16, 2001.

 

(b) Notapplicable.

 

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

 

| **Nominee**       |   | **Affirmative  Votes** |   | **Votes  Withheld** |   |
|-------------------|--------|------------------------|--------|---------------------|--------|
| Michael J. Daly   |   | 5,521,075              |   | 1,356,041           |   |
| Burton J. Manning |   | 5,531,600              |   | 1,345,516           |   |

 

The results of the voting to approve the appointment of Arthur AndersenLLP to audit the accounts of the Company and its subsidiaries for 2001 were asfollows:

 

| **For**   |   | **Against** |   | **Abstain** |   |
|-----------|--------|-------------|--------|-------------|--------|
| 6,767,341 |   | 104,375     |   | 5,400       |   |

 

There were no matters voted upon at the Company’s annual meeting towhich broker non-votes applied.

 

**Item 6. Exhibits and reports on Form 8-K**

 

(a)  Exhibits

 

None

 

(b)  No report on Form 8-K was filed during thethree months and nine months ended September 30, 2001.

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities and Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

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

 

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**Certifications**

I,  Donald N. Smith, certifythat:

 

1.               I have reviewed this quarterly report on Form10-Q/A of Friendly Ice Cream Corporation;

 

2.               Based on my knowledge, this quarterly report doesnot contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

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

 

4.               The registrant’s other certifying officers and Iare responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and have:

 

a)              designed such disclosure controls and proceduresto ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

 

b)             evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this quarterly report (the “Evaluation Date”); and

 

c)              presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officers and Ihave disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent functions):

 

a)              all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)             any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6.               The registrant’s other certifying officers and Ihave indicated in this quarterly report whether there were significant changesin internal controls or in other factors that could significantly affectinternal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

Date:October 30, 2002 

 
|   | /s/  Donald  N. Smith |
|--------|---------------------------------|
|   | *Chief Executive Officer*       |

 

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I,  Paul V. Hoagland, certifythat:

 

1.               I have reviewed this quarterly report on Form10-Q/A of Friendly Ice Cream Corporation;

 

2.               Based on my knowledge, this quarterly report doesnot contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

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

 

4.               The registrant’s other certifying officers and Iare responsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant andhave:

 

a)              designed such disclosure controls and proceduresto ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

 

b)             evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to the filingdate of this quarterly report (the “Evaluation Date”); and

 

c)              presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officers and Ihave disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent functions):

 

a)              all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)             any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6.               The registrant’s other certifying officers and Ihave indicated in this quarterly report whether there were significant changesin internal controls or in other factors that could significantly affectinternal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

Date:October 30, 2002

 
|   | /s/  Paul  V. Hoagland                    |
|--------|----------------------------------------------------------|
|   | *Chief Financial Officer, Treasurer and Assistant Clerk* |

 

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