**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

**FORM 10-Q/A**

** **

**(AmendmentNo. 1)**

 

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

 

**For thequarterly period ended July 1, 2001**

** **

**OR**

** **

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

** **

**For thetransition periodfrom           to          **

** **

**CommissionFile No. 0-3930**

** **

**FRIENDLY ICE CREAM CORPORATION**

(Exact name of registrantas 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 whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities and Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  ýNo  o

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 

| **Class**                     |   | **Outstanding  at July 20, 2001** |
|-------------------------------|--------|-----------------------------------|
|                          |   |                              |
| Common Stock, $.01 par  value |   | 7,361,865 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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**PART I – FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

**FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

(In thousands)

 
|                                                            |   | **July 1,  2001** |    | **December  31,  2000** |   |
|-----------------------------------------------------------------|--------|-------------------|---------|-------------------------|--------|
|                                                            |   | **(unaudited)**   |    |                    |   |
| ASSETS                                                          |   |              |    |                    |   |
|                                                            |   |              |    |                    |   |
| CURRENT ASSETS:                                                 |   |              |    |                    |   |
| Cash and cash  equivalents                                      |   | $                 | 10,346  |                    | $      | 14,584 |   |
| Restricted cash                                                 |   | 445               |    | 1,737                   |   |
| Accounts  receivable, net                                       |   | 11,813            |    | 6,157                   |   |
| Inventories                                                     |   | 15,445            |    | 11,570                  |   |
| Deferred income  taxes                                          |   | 10,395            |    | 10,395                  |   |
| Prepaid expenses  and other current assets                      |   | 2,054             |    | 2,799                   |   |
| TOTAL CURRENT  ASSETS                                           |   | 50,498            |    | 47,242                  |   |
|                                                            |   |              |    |                    |   |
| PROPERTY AND  EQUIPMENT, net                                    |   | 201,010           |    | 226,865                 |   |
| INTANGIBLES AND  DEFERRED COSTS, net                            |   | 20,569            |    | 21,529                  |   |
| OTHER ASSETS                                                    |   | 8,608             |    | 2,050                   |   |
|                                                            |   |              |    |                    |   |
| TOTAL ASSETS                                                    |   | $                 | 280,685 |                    | $      | 297,686 |   |
|                                                            |   |              |    |                    |   |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                      |   |              |    |                    |   |
|                                                            |   |              |    |                    |   |
| CURRENT  LIABILITIES:                                           |   |              |    |                    |   |
| Current  maturities of long-term debt                           |   | $                 | 3,816   |                    | $      | 13,029 |   |
| Current  maturities of capital lease and finance obligations    |   | 1,927             |    | 2,143                   |   |
| Accounts payable                                                |   | 24,723            |    | 20,100                  |   |
| Accrued salaries  and benefits                                  |   | 11,321            |    | 10,956                  |   |
| Accrued interest  payable                                       |   | 1,942             |    | 3,515                   |   |
| Insurance  reserves                                             |   | 13,873            |    | 13,095                  |   |
| Restructuring  reserve                                          |   | 3,952             |    | 5,571                   |   |
| Other accrued  expenses                                         |   | 14,839            |    | 14,262                  |   |
| TOTAL CURRENT  LIABILITIES                                      |   | 76,393            |    | 82,671                  |   |
|                                                            |   |              |    |                    |   |
| DEFERRED INCOME  TAXES                                          |   | 14,401            |    | 13,276                  |   |
| CAPITAL LEASE  AND FINANCE OBLIGATIONS, less current maturities |   | 7,190             |    | 8,223                   |   |
| LONG-TERM DEBT,  less current maturities                        |   | 264,243           |    | 275,435                 |   |
| OTHER LONG-TERM  LIABILITIES                                    |   | 16,167            |    | 18,064                  |   |
|                                                            |   |              |    |                    |   |
| COMMITMENTS AND  CONTINGENCIES                                  |   |              |    |                    |   |
|                                                            |   |              |    |                    |   |
| STOCKHOLDERS’  DEFICIT:                                    |   |              |    |                    |   |
| Common stock                                                    |   | 74                |    | 74                      |   |
| Additional  paid-in capital                                     |   | 139,156           |    | 138,988                 |   |
| Accumulated  deficit                                            |   | (236,939          | )       | (239,045                | )      |
| TOTAL  STOCKHOLDERS’ DEFICIT                               |   | (97,709           | )       | (99,983                 | )      |
|                                                            |   |              |    |                    |   |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ DEFICIT               |   | $                 | 280,685 |                    | $      | 297,686 |   |

 

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

 

2

----

 

**FRIENDLYICE CREAM CORPORATION AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

(Unaudited)

(In thousands, except pershare data)

 
|                                                                    |   | **For the  Three Months Ended** |    | **For the  Six Months Ended** |   |
|-------------------------------------------------------------------------|--------|---------------------------------|---------|-------------------------------|--------|
|                                                                    |   | **July 1,  2001**               |    | **July 2,  2000**             |   | **July 1,  2001** |   | **July 2,  2000** |   |
|                                                                    |   |                            |    |                          |   |   |   |   |   |
| REVENUES                                                                |   | $                               | 151,823 |                          | $      | 159,048 |   | $ | 277,542 |   | $ | 303,137 |   |
|                                                                    |   |                            |    |                          |   |   |   |   |   |
| COSTS AND  EXPENSES:                                                    |   |                            |    |                          |   |   |   |   |   |
| Cost of sales                                                           |   | 52,857                          |    | 50,243                        |   | 94,917 |   | 95,065 |   |
| Labor and  benefits                                                     |   | 41,334                          |    | 49,399                        |   | 81,010 |   | 97,575 |   |
| Operating  expenses                                                     |   | 31,608                          |    | 30,776                        |   | 56,552 |   | 61,636 |   |
| General and  administrative expenses                                    |   | 9,345                           |    | 10,191                        |   | 18,677 |   | 21,567 |   |
| Restructuring  costs                                                    |   | —                          |    | (1                            | )      | — |   | 12,056 |   |
| Write-downs of  property and equipment                                  |   | 68                              |    | 688                           |   | 68 |   | 18,360 |   |
| Depreciation and  amortization                                          |   | 7,097                           |    | 7,319                         |   | 14,649 |   | 15,740 |   |
| (Gain) loss on  franchise sales of restaurant operations and properties |   | (3,823                          | )       | 89                            |   | (3,823 | ) | (1,998 | ) |
| Gain on  disposition of other property and equipment                    |   | (261                            | )       | (509                          | )      | (2,242 | ) | (45 | ) |
|                                                                    |   |                            |    |                          |   |   |   |   |   |
| OPERATING INCOME  (LOSS)                                                |   | 13,598                          |    | 10,853                        |   | 17,734 |   | (16,819 | ) |
|                                                                    |   |                            |    |                          |   |   |   |   |   |
| Interest  expense, net                                                  |   | 6,918                           |    | 7,963                         |   | 14,503 |   | 15,901 |   |
|                                                                    |   |                            |    |                          |   |   |   |   |   |
| INCOME (LOSS)  BEFORE (PROVISION FOR) BENEFIT FROM INCOME TAXES         |   | 6,680                           |    | 2,890                         |   | 3,231 |   | (32,720 | ) |
|                                                                    |   |                            |    |                          |   |   |   |   |   |
| (Provision for)  benefit from income taxes                              |   | (2,639                          | )       | 115                           |   | (1,125 | ) | 17,215 |   |
|                                                                    |   |                            |    |                          |   |   |   |   |   |
| NET INCOME  (LOSS) AND COMPREHENSIVE INCOME (LOSS)                      |   | $                               | 4,041   |                          | $      | 3,005 |   | $ | 2,106 |   | $ | (15,505 | ) |
|                                                                    |   |                            |    |                          |   |   |   |   |   |
| BASIC NET INCOME  (LOSS) PER SHARE                                      |   | $                               | 0.55    |                          | $      | 0.40 |   | $ | 0.29 |   | $ | (2.08 | ) |
|                                                                    |   |                            |    |                          |   |   |   |   |   |
| DILUTED NET  INCOME (LOSS) PER SHARE                                    |   | $                               | 0.55    |                          | $      | 0.40 |   | $ | 0.29 |   | $ | (2.08 | ) |
|                                                                    |   |                            |    |                          |   |   |   |   |   |
| WEIGHTED AVERAGE  SHARES:                                               |   |                            |    |                          |   |   |   |   |   |
| Basic                                                                   |   | 7,364                           |    | 7,438                         |   | 7,370 |   | 7,454 |   |
| Diluted                                                                 |   | 7,370                           |    | 7,498                         |   | 7,377 |   | 7,454 |   |

 

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

 

3

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**FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 

(Unaudited)

(In thousands)

 
|                                                                                                 |   | **For the Six Months Ended** |   |
|------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                                 |   | **July 1,  2001**            |   | **July 2,  2000** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                               |   |                         |   |   |   |
| Net income  (loss)                                                                                   |   | $                            | 2,106  |   | $ | (15,505 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |   |                         |   |   |   |
| Stock  compensation expense                                                                          |   | 168                          |   | 286 |   |
| Depreciation and  amortization                                                                       |   | 14,649                       |   | 15,740 |   |
| Write-downs of  property and equipment                                                               |   | 68                           |   | 18,360 |   |
| Deferred income  tax benefit                                                                         |   | 1,125                        |   | (17,215 | ) |
| Gain on asset  retirements and sales                                                                 |   | (6,023                       | )      | (2,677 | ) |
| Changes in  operating assets and liabilities:                                                        |   |                         |   |   |   |
| Accounts  receivable                                                                                 |   | (5,656                       | )      | (1,886 | ) |
| Inventories                                                                                          |   | (3,875                       | )      | (4,833 | ) |
| Other assets                                                                                         |   | (542                         | )      | 4,186 |   |
| Accounts payable                                                                                     |   | 4,623                        |   | 348 |   |
| Accrued expenses  and other long-term liabilities                                                    |   | (3,520                       | )      | (4,440 | ) |
| NET CASH  PROVIDED BY (USED IN) OPERATING ACTIVITIES                                                 |   | 3,123                        |   | (7,636 | ) |
|                                                                                                 |   |                         |   |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                               |   |                         |   |   |   |
| Purchases of  property and equipment                                                                 |   | (5,726                       | )      | (8,261 | ) |
| Proceeds from  sales of property and equipment                                                       |   | 19,868                       |   | 25,919 |   |
| NET CASH  PROVIDED BY INVESTING ACTIVITIES                                                           |   | 14,142                       |   | 17,658 |   |
|                                                                                                 |   |                         |   |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                               |   |                         |   |   |   |
| Proceeds from  borrowings                                                                            |   | 34,000                       |   | 56,000 |   |
| Repayments of  debt                                                                                  |   | (54,404                      | )      | (65,536 | ) |
| Repayments of  capital lease and finance obligations                                                 |   | (1,099                       | )      | (876 | ) |
| NET CASH USED IN  FINANCING ACTIVITIES                                                               |   | (21,503                      | )      | (10,412 | ) |
|                                                                                                 |   |                         |   |   |   |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                                           |   | (4,238                       | )      | (390 | ) |
|                                                                                                 |   |                         |   |   |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                                      |   | 14,584                       |   | 12,062 |   |
|                                                                                                 |   |                         |   |   |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                                            |   | $                            | 10,346 |   | $ | 11,672 |   |
|                                                                                                 |   |                         |   |   |   |
| SUPPLEMENTAL  DISCLOSURES:                                                                           |   |                         |   |   |   |
| Cash paid during  the period for:                                                                    |   |                         |   |   |   |
| Interest                                                                                             |   | $                            | 15,498 |   | $ | 15,540 |   |
| Income taxes                                                                                         |   | 3                            |   | 9 |   |
| Capital lease  obligations incurred                                                                  |   | —                       |   | 909 |   |
| Capital lease  obligations terminated                                                                |   | 151                          |   | 711 |   |
| Note received  from sale of property and equipment                                                   |   | 4,250                        |   | 577 |   |

 

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

 

4

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**FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

(Unaudited)

**1.  BASIS OF PRESENTATION**

 

*Interim Financial Information -*

 

The accompanyingcondensed consolidated financial statements as of July 1, 2001 and for thesecond quarter and six months ended July 1, 2001 and July 2, 2000 areunaudited, but, in the opinion of management, include all adjustments which arenecessary for a fair presentation of the consolidated financial position,results of operations, cash flows and comprehensive income (loss) of FriendlyIce Cream Corporation (“FICC”) and subsidiaries (unless the context indicatesotherwise, collectively, the “Company”). Such adjustments consist solely of normal recurring accruals.  Operating results for the three and sixmonth periods ended July 1, 2001 and July 2, 2000 are not necessarilyindicative of the results that may be expected for the entire year due, inpart, to the seasonality of the Company’s business.  Historically, higher revenues and operating income have beenexperienced during the second and third fiscal quarters.  The Company’s Consolidated FinancialStatements, including the notes thereto, which are contained in the 2000 AnnualReport on Form 10-K should be read in conjunction with these CondensedConsolidated Financial Statements.

 

*Inventories -*

 

Inventories are stated at the lower of first-in,first-out cost or market.  Inventoriesas of July 1, 2001 and December 31, 2000 were as follows (in thousands):

 

|             |   | **July 1,  2001** |   | **December  31,  2000** |   |
|------------------|--------|-------------------|--------|-------------------------|--------|
|             |   |              |   |                    |   |
| Raw materials    |   | $                 | 3,398  |                    | $      | 1,307 |   |
| Goods in process |   | 204               |   | 66                      |   |
| Finished goods   |   | 11,843            |   | 10,197                  |   |
| Total            |   | $                 | 15,445 |                    | $      | 11,570 |   |

 

*Debt -*

 

Since1997, the Company has entered into several amendments related to covenantviolations on its credit facility, which expires in November 2002.  In March 2001, under the terms of theseventh amendment, covenant requirements, interest rates and principal paymentswere revised.  The Company is in theprocess of exploring various refinancing alternatives and has engaged Banc ofAmerica Securities LLC for assistance in this process.  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. There is no assurance that the Company will be able to comply with orrenegotiate such covenants for periods after December 30, 2001 or that theCompany will be able to refinance its existing debt facilities.

 

*Reclassifications-*

 

Certain prior year amounts have been reclassified to conformwith current year presentation.

 

5

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**2.  EARNINGS PER SHARE**

 

Basic net income (loss) per share is calculated bydividing income (loss) available to common stockholders by the weighted averagenumber of common shares outstanding during the period.  Diluted earnings per share is calculated bydividing earnings available to common stockholders by the weighted averagenumber of shares of common stock and common stock equivalents outstandingduring the period.  Common stockequivalents are dilutive stock options and warrants that are assumed exercisedfor calculation purposes.  The number ofcommon stock equivalents which could dilute basic earnings per share in thefuture, that were not included in the computation of diluted earnings per sharebecause to do so would have been antidilutive, was 17,406 for the six monthsended July 2, 2000.

 

Presented below is the reconciliation between basicand diluted weighted average shares for the three and six months ended July 1,2001 and July 2, 2000 (in thousands):

 
|                                                                    |   | **For the  Three Months Ended** |   |
|-------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                    |   | **Basic**                       |   | **Diluted** |   |
|                                                                    |   | **July 1,  2001**               |   | **July 2,  2000** |   | **July 1,  2001** |   | **July 2,  2000** |   |
| Weighted average  number of common shares outstanding during the period |   | 7,364                           |   | 7,438 |   | 7,364 |   | 7,438 |   |
| Adjustments:                                                            |   |                            |   |   |   |   |   |   |   |
| Assumed exercise  of stock options                                      |   | —                          |   | — |   | 6 |   | 60 |   |
| Weighted average  number of shares outstanding                          |   | 7,364                           |   | 7,438 |   | 7,370 |   | 7,498 |   |

 
|                                                                    |   | **For the  Six Months Ended** |   |
|-------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                    |   | **Basic**                     |   | **Diluted** |   |
|                                                                    |   | **July 1,  2001**             |   | **July 2,  2000** |   | **July 1, 2001** |   | **July 2,  2000** |   |
| Weighted average  number of common shares outstanding during the period |   | 7,370                         |   | 7,454 |   | 7,370 |   | 7,454 |   |
| Adjustments:                                                            |   |                          |   |   |   |   |   |   |   |
| Assumed exercise  of stock options                                      |   | —                        |   | — |   | 7 |   | — |   |
| Weighted average  number of shares outstanding                          |   | 7,370                         |   | 7,454 |   | 7,377 |   | 7,454 |   |

 

6

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**3.  SEGMENT REPORTING**

 

Operating segments are componentsof an enterprise about which separate financial information is available thatis evaluated regularly by the chief operating decision-maker, ordecision-making group, in deciding how to allocate resources and in assessingperformance.  The Company’s chiefoperating decision-maker is the Chairman of the Board and Chief Executive Officerof the Company.  The Company’s operatingsegments include restaurant, foodservice and franchise.  The revenues from these segments includeboth sales to unaffiliated customers and intersegment sales, which generallyare accounted for on a basis consistent with sales to unaffiliated customers.  Intersegment sales and other intersegmenttransactions have been eliminated in the accompanying condensed consolidatedfinancial statements.

 

The Company’s restaurants targetfamilies with children 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 a segment,information systems and other headquarters activities.

 

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.

 

7

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EBITDA represents net loss before(i) (provision for) benefit from income taxes, (ii) interest expense, net,(iii) depreciation and amortization and (iv) write-downs and all other non-cashitems plus cash distributions from unconsolidated subsidiaries. The Company has included information concerningEBITDA in this Form 10-Q because it believes that such information is used bycertain investors as one measure of a company’s historical ability to servicedebt. EBITDA should not be considered as an alternative to, or more meaningfulthan, earnings (loss) from operations or other traditional indications of acompany’s operating performance.

 
|                                                             |   | **For the  Three Months Ended** |    | **For the Six  Months Ended** |   |
|------------------------------------------------------------------|--------|---------------------------------|---------|-------------------------------|--------|
|                                                             |   | **July 1,  2001**               |    | **July 2,  2000**             |   | **July 1,  2001** |   | **July 2,  2000** |   |
|                                                             |   | **(in  thousands)**             |    |
| Revenues:                                                        |   |                            |    |                          |   |   |   |   |   |
| Restaurant                                                       |   | $                               | 118,953 |                          | $      | 136,800 |   | $ | 226,098 |   | $ | 262,223 |   |
| Foodservice                                                      |   | 64,548                          |    | 62,754                        |   | 112,069 |   | 117,657 |   |
| Franchise                                                        |   | 3,101                           |    | 1,766                         |   | 4,662 |   | 4,042 |   |
| Total                                                            |   | $                               | 186,302 |                          | $      | 201,320 |   | $ | 342,829 |   | $ | 383,922 |   |
|                                                             |   |                            |    |                          |   |   |   |   |   |
| Intersegment revenues:                                           |   |                            |    |                          |   |   |   |   |   |
| Restaurant                                                       |   | $                               | —  |                          | $      | — |   | $ | — |   | $ | — |   |
| Foodservice                                                      |   | (34,479                         | )       | (42,272                       | )      | (65,287 | ) | (80,785 | ) |
| Franchise                                                        |   | —                          |    | —                        |   | — |   | — |   |
| Total                                                            |   | $                               | (34,479 | )                             | $      | (42,272 | ) | $ | (65,287 | ) | $ | (80,785 | ) |
|                                                             |   |                            |    |                          |   |   |   |   |   |
| External revenues:                                               |   |                            |    |                          |   |   |   |   |   |
| Restaurant                                                       |   | $                               | 118,953 |                          | $      | 136,800 |   | $ | 226,098 |   | $ | 262,223 |   |
| Foodservice                                                      |   | 29,769                          |    | 20,482                        |   | 46,782 |   | 36,872 |   |
| Franchise                                                        |   | 3,101                           |    | 1,766                         |   | 4,662 |   | 4,042 |   |
| Total                                                            |   | $                               | 151,823 |                          | $      | 159,048 |   | $ | 277,542 |   | $ | 303,137 |   |
|                                                             |   |                            |    |
| EBITDA:                                                          |   |                            |    |                          |   |   |   |   |   |
| Restaurant                                                       |   | $                               | 14,356  |                          | $      | 16,212 |   | $ | 25,201 |   | $ | 23,706 |   |
| Foodservice                                                      |   | 4,809                           |    | 7,065                         |   | 7,888 |   | 12,584 |   |
| Franchise                                                        |   | 1,927                           |    | 580                           |   | 2,422 |   | 1,518 |   |
| Corporate                                                        |   | (4,435                          | )       | (5,362                        | )      | (8,956 | ) | (10,317 | ) |
| Gains on property and equipment, net                             |   | 4,181                           |    | 509                           |   | 6,064 |   | 2,132 |   |
| Restructuring costs                                              |   | —                          |    | 1                             |   | — |   | (12,056 | ) |
| Total                                                            |   | $                               | 20,838  |                          | $      | 19,005 |   | $ | 32,619 |   | $ | 17,567 |   |
|                                                             |   |                            |    |                          |   |   |   |   |   |
| Interest expense, net                                            |   | $                               | 6,918   |                          | $      | 7,963 |   | $ | 14,503 |   | $ | 15,901 |   |
|                                                             |   |                            |    |                          |   |   |   |   |   |
| Depreciation and amortization:                                   |   |                            |    |                          |   |   |   |   |   |
| Restaurant                                                       |   | $                               | 4,613   |                          | $      | 4,895 |   | $ | 9,659 |   | $ | 10,930 |   |
| Foodservice                                                      |   | 841                             |    | 856                           |   | 1,695 |   | 1,715 |   |
| Franchise                                                        |   | 61                              |    | 100                           |   | 121 |   | 183 |   |
| Corporate                                                        |   | 1,582                           |    | 1,468                         |   | 3,174 |   | 2,912 |   |
| Total                                                            |   | $                               | 7,097   |                          | $      | 7,319 |   | $ | 14,649 |   | $ | 15,740 |   |
|                                                             |   |                            |    |                          |   |   |   |   |   |
| Other non-cash expenses:                                         |   |                            |    |                          |   |   |   |   |   |
| Corporate                                                        |   | $                               | 75      |                          | $      | 145 |   | $ | 168 |   | $ | 286 |   |
| Write-downs of property and equipment                            |   | 68                              |    | 688                           |   | 68 |   | 18,360 |   |
| Total                                                            |   | $                               | 143     |                          | $      | 833 |   | $ | 236 |   | $ | 18,646 |   |
|                                                             |   |                            |    |                          |   |   |   |   |   |
| Income (loss) before (provision for) benefit from  income taxes: |   |                            |    |                          |   |   |   |   |   |
| Restaurant                                                       |   | $                               | 9,743   |                          | $      | 11,317 |   | $ | 15,542 |   | $ | 12,776 |   |
| Foodservice                                                      |   | 3,968                           |    | 6,209                         |   | 6,193 |   | 10,869 |   |
| Franchise                                                        |   | 1,866                           |    | 480                           |   | 2,301 |   | 1,335 |   |
| Corporate                                                        |   | (13,010                         | )       | (14,938                       | )      | (26,801 | ) | (29,416 | ) |
| Gains (loss) on property and equipment, net                      |   | 4,113                           |    | (179                          | )      | 5,996 |   | (16,228 | ) |
| Restructuring Costs                                              |   | —                          |    | 1                             |   | — |   | (12,056 | ) |
| Total                                                            |   | $                               | 6,680   |                          | $      | 2,890 |   | $ | 3,231 |   | $ | (32,720 | ) |
|                                                             |   |                            |    |                          |   |   |   |   |   |
| Capital expenditures, including capitalized leases:              |   |                            |    |                          |   |   |   |   |   |
| Restaurant                                                       |   | $                               | 2,716   |                          | $      | 5,830 |   | $ | 4,017 |   | $ | 6,837 |   |
| Foodservice                                                      |   | 725                             |    | 908                           |   | 1,215 |   | 1,797 |   |
| Corporate                                                        |   | 259                             |    | 205                           |   | 494 |   | 536 |   |
| Total                                                            |   | $                               | 3,700   |                          | $      | 6,943 |   | $ | 5,726 |   | $ | 9,170 |   |

 

8

----

 
|          |   |   |   |   |   | **July 1,  2001** |    | **December 31,  2000** |   |
|---------------|--------|--------|--------|--------|--------|-------------------|---------|------------------------|--------|
| Total assets: |   |   |   |   |   |              |    |                   |   |
| Restaurant    |   |   |   |   |   | $                 | 176,939 |                   | $      | 199,223 |   |
| Foodservice   |   |   |   |   |   | 42,867            |    | 33,880                 |   |
| Franchise     |   |   |   |   |   | 6,574             |    | 3,745                  |   |
| Corporate     |   |   |   |   |   | 54,305            |    | 60,838                 |   |
| Total         |   |   |   |   |   | $                 | 280,685 |                   | $      | 297,686 |   |

 

9

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**4.  NEW ACCOUNTING PRONOUNCEMENTS**

 

In June 2001, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142,“Goodwill and Other Intangibles.”  SFASNo. 142 modifies the rules for accounting for goodwill and other intangibleassets.  The new rules become effectiveon January 1, 2002.  The Company doesnot believe the impact of adopting SFAS No. 142 will have a material effect onthe Company’s consolidated financial statements.  The Company will continue to amortize its license agreementrelated to certain trademarked products under the new rules.

 

In April 2001, the Financial Accounting StandardsBoard reached consensus on Emerging Issues Task Force (“EITF”) Issue No. 00-25,“Accounting for Consideration from a Vendor to a Retailer in Connection withthe Purchase or Promotion of the Vendor’s Products,” which is effective forquarters beginning after December 15, 2001, with prior financial statementsrestated if practicable.  This Issuerequires 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.  The Company is required to adopt EITF No.00-25 for periods beginning after December 15, 2001.  Management has not yet quantified the impact of implementingIssue No. 00-25 on the Company’s financial statements.

 

In May 2000, the Emerging Issues Task Force issuedEITF No. 00-14, “Accounting for Certain Sales Incentives,” which providesguidance on the recognition, measurement and income statement classificationfor sales incentives offered voluntarily by a vendor without charge tocustomers that can be used in, or that are exercisable by a customer as aresult of, a single exchange transaction. The Company adopted EITF No. 00-14 onJuly 3, 2000.   As a result, the Companyhas reclassified certain retail selling expenses against retail revenue for thethree and six months ended July 2, 2000 to conform with the current periodpresentation.

 

In June 1998, the FASB issued SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities.”  SFAS No. 133 establishes accounting andreporting standards requiring that each derivative instrument (includingcertain derivative instruments embedded in other contracts) be recorded in thebalance sheet as either an asset or liability measured at its fair value.  The statement requires that changes in thederivative’s fair value be recognized currently in earnings unless specifichedge accounting criteria are met. Special accounting for qualifying hedgesallows a derivative’s gains and losses to offset related results on the hedgeditem in the statement of operations, and requires that a Company formallydocument, designate and assess the effectiveness of transactions that receivehedge accounting.  Since the Company’scommodity option contracts do not meet the criteria for hedge accounting,changes in the value of the commodity option contracts are recognized monthlyin earnings.  The cumulative effect uponadoption of approximately $77,000 has been recorded as income in theaccompanying Condensed Consolidated Statement of Operations.  It is not separately reported as acumulative effect since the amount is not significant.  Additionally, losses totaling $147,000 wererecorded during the six months ended July 1, 2001.  The fair market value of derivatives at July 1, 2001 wasapproximately $89,000.

 

**5.  RESTRUCTURING PLAN**

 

In March 2000, the Company’s Board of Directorsapproved a restructuring plan that provided for the immediate closing of 81restaurants at the end of March 2000 and the disposition of an additional 70restaurants over the next 24 months.  The70 locations 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 corporate headquarters.  As a result of this plan, the Companyreported a pre-tax restructuring charge of approximately $12,056,000 forseverance pay, rent, utilities and real estate taxes, demarking, leasetermination costs and certain other costs associated with the closing of thelocations, along with a pre-tax write-down of property and equipment for theselocations of approximately $17,008,000 in the first quarter ended April 2,2000.

 

10

----

 

The following representsthe restructuring reserve activity (in thousands):

 

 
|                            |   | **Balance as of  December 31, 2000** |   | **Costs Paid  During the Six  Months Ended  July 1, 2001** |   | **Balance as of  July 1, 2001** |   |
|---------------------------------|--------|--------------------------------------|--------|------------------------------------------------------------|--------|---------------------------------|--------|
| Severance pay                   |   | $                                    | 74     |                                                       | $      | (74                             | )      | $ | — |   |
| Rent                            |   | 3,585                                |   | (643                                                       | )      | 2,942                           |   |
| Utilities and real estate taxes |   | 1,105                                |   | (403                                                       | )      | 702                             |   |
| Demarking                       |   | 138                                  |   | (30                                                        | )      | 108                             |   |
| Lease termination costs         |   | 120                                  |   | (120                                                       | )      | —                          |   |
| Inventory                       |   | 5                                    |   | (5                                                         | )      | —                          |   |
| Other                           |   | 544                                  |   | (344                                                       | )      | 200                             |   |
| Total                           |   | $                                    | 5,571  |                                                       | $      | (1,619                          | )      | $ | 3,952 |   |

 

The write-down of property and equipment consisted of$7.8 million for the 81 locations closed at the end of March 2000 and $9.2million for the 70 locations to be disposed of over the following 24months.  At July 1, 2001, the aggregatecarrying amount of the remaining 29 operating restaurants and 19 closed propertiesto be disposed of was $4.6 million.   AtDecember 31, 2000, the aggregate carrying value of the 73 properties to bedisposed of was $7.0 million.  Theseamounts are reflected in the condensed consolidated balance sheets as propertyand equipment, net.

 

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

 

On April 13, 2001, the Company entered into 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 and committedto open an additional 29 restaurants over the next 12 years. Gross proceedsfrom the sale were approximately $19,950,000, of which approximately $4,250,000was received in a note and $940,000 was for franchise fees for the initial 31restaurants.  The $940,000 was recordedas revenue in the second quarter ending July 1, 2001.  The Company recognized a gain of approximately $3,935,000 relatedto the sale of the assets for the 31 locations in the second quarter endingJuly 1, 2001.  The cash proceeds wereused to prepay approximately $4,711,000 on the term loans with the remainingbalance 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.  The Company also sold certain assets and rights intwo other restaurants to an additional 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 proceedsfrom the sale were approximately $13,300,000 of which $735,000 was forfranchise fees for the initial 29 restaurants. The $735,000 was recorded as revenue in the first quarter ending April2, 2000. The Company recognized a gain of approximately $1,400,000 related tothe sale of the assets for the 29 locations in the first quarter ending April2, 2000.  The Company also sold certainassets and rights in six other restaurants to two additional franchiseesresulting in a gain of $687,000.

 

11

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**7.  SUPPLEMENTAL CONDENSED CONSOLIDATINGFINANCIAL 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., Friendly Holding(UK) Limited, Friendly Ice Cream (UK) Limited and Restaurant InsuranceCorporation (collectively, the “Non-guarantor Subsidiaries”). Separate completefinancial statements and other disclosures of the Guarantor Subsidiary as ofJuly 1, 2001 and July 2, 2000, and for the periods ended July 1, 2001 and July2, 2000, are not presented because management has determined that suchinformation is not material to investors.

 

Investments in subsidiaries are accounted for by theParent Company on the equity method for purposes of the supplementalconsolidating presentation. Earnings of the subsidiaries are, therefore,reflected in the Parent Company’s investment accounts and earnings. Theprincipal elimination entries eliminate the Parent Company’s investments insubsidiaries and intercompany balances and transactions.

 

12

----

 

**Supplemental Condensed Consolidating Balance SheetAs of July 1, 2001**

(Unaudited)

(In thousands)

 
|                                                       |   | **Parent  Company** |    | **Guarantor  Subsidiary** |   | **Non-guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|------------------------------------------------------------|--------|---------------------|---------|---------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
|                                                       |   |                |    |                      |   |                            |   |             |   |             |   |
| Assets                                                     |   |                |    |                      |   |                            |   |             |   |             |   |
|                                                       |   |                |    |                      |   |                            |   |             |   |             |   |
| Current assets:                                            |   |                |    |                      |   |                            |   |             |   |             |   |
| Cash and cash  equivalents                                 |   | $                   | 9,008   |                      | $      | 9                               |   | $                | 1,329  |             | $      | — |   | $ | 10,346 |   |
| Restricted cash                                            |   | —              |    | —                    |   | 445                             |   | —           |   | 445              |   |
| Accounts  receivable, net                                  |   | 10,896              |    | 917                       |   | —                          |   | —           |   | 11,813           |   |
| Inventories                                                |   | 15,445              |    | —                    |   | —                          |   | —           |   | 15,445           |   |
| Deferred income  taxes                                     |   | 10,258              |    | 43                        |   | —                          |   | 94               |   | 10,395           |   |
| Prepaid expenses  and other current assets                 |   | 6,871               |    | 610                       |   | 3,505                           |   | (8,932           | )      | 2,054            |   |
| Total current  assets                                      |   | 52,478              |    | 1,579                     |   | 5,279                           |   | (8,838           | )      | 50,498           |   |
|                                                       |   |                |    |                      |   |                            |   |             |   |             |   |
| Deferred income  taxes                                     |   | —              |    | 506                       |   | 1,327                           |   | (1,833           | )      | —           |   |
| Property and  equipment, net                               |   | 201,010             |    | —                    |   | —                          |   | —           |   | 201,010          |   |
| Intangibles and  deferred costs, net                       |   | 20,569              |    | —                    |   | —                          |   | —           |   | 20,569           |   |
| Investments in  subsidiaries                               |   | 4,680               |    | —                    |   | —                          |   | (4,680           | )      | —           |   |
| Other assets                                               |   | 7,692               |    | 3,689                     |   | 6,229                           |   | (9,002           | )      | 8,608            |   |
|                                                       |   |                |    |                      |   |                            |   |             |   |             |   |
| Total assets                                               |   | $                   | 286,429 |                      | $      | 5,774                           |   | $                | 12,835 |             | $      | (24,353 | ) | $ | 280,685 |   |
|                                                       |   |                |    |                      |   |                            |   |             |   |             |   |
| Liabilities and  Stockholders’ Equity (Deficit)       |   |                |    |                      |   |                            |   |             |   |             |   |
|                                                       |   |                |    |                      |   |                            |   |             |   |             |   |
| Current  liabilities:                                      |   |                |    |                      |   |                            |   |             |   |             |   |
| Current  maturities of long-term obligations               |   | $                   | 9,243   |                      | $      | —                          |   | $                | — |             | $      | (3,500 | ) | $ | 5,743 |   |
| Accounts payable                                           |   | 24,723              |    | —                    |   | —                          |   | —           |   | 24,723           |   |
| Accrued expenses                                           |   | 42,847              |    | 637                       |   | 7,690                           |   | (5,247           | )      | 45,927           |   |
| Total current  liabilities                                 |   | 76,813              |    | 637                       |   | 7,690                           |   | (8,747           | )      | 76,393           |   |
| Deferred income  taxes                                     |   | 16,140              |    | —                    |   | —                          |   | (1,739           | )      | 14,401           |   |
| Long-term  obligations, less current maturities            |   | 276,747             |    | —                    |   | —                          |   | (5,314           | )      | 271,433          |   |
| Other long-term  liabilities                               |   | 14,438              |    | 1,061                     |   | 4,541                           |   | (3,873           | )      | 16,167           |   |
| Stockholders’  (deficit) equity                       |   | (97,709             | )       | 4,076                     |   | 604                             |   | (4,680           | )      | (97,709          | )      |
| Total  liabilities and stockholders’ equity (deficit) |   | $                   | 286,429 |                      | $      | 5,774                           |   | $                | 12,835 |             | $      | (24,353 | ) | $ | 280,685 |   |

 

13

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**Supplemental Condensed Consolidating Statement of Operations**

**For the Three Months Ended July 1, 2001**

(Unaudited)

(In thousands)

 
|                                                                                             |   | **Parent  Company** |    | **Guarantor  Subsidiary** |   | **Non-guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|--------------------------------------------------------------------------------------------------|--------|---------------------|---------|---------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                             |   |                |    |                      |   |                            |   |             |   |             |   |
| Revenues                                                                                         |   | $                   | 149,099 |                      | $      | 2,724                           |   | $                | — |             | $      | — |   | $ | 151,823 |   |
| Costs and  expenses:                                                                             |   |                |    |                      |   |                            |   |             |   |             |   |
| Cost of sales                                                                                    |   | 52,857              |    | —                    |   | —                          |   | —           |   | 52,857           |   |
| Labor and  benefits                                                                              |   | 41,334              |    | —                    |   | —                          |   | —           |   | 41,334           |   |
| Operating  expenses and write-downs of property and equipment                                    |   | 31,678              |    | —                    |   | (2                              | )      | —           |   | 31,676           |   |
| General and  administrative expenses                                                             |   | 8,188               |    | 1,157                     |   | —                          |   | —           |   | 9,345            |   |
| Depreciation and  amortization                                                                   |   | 7,097               |    | —                    |   | —                          |   | —           |   | 7,097            |   |
| Gain on  franchise sales of restaurant operations and properties                                 |   | (3,823              | )       | —                    |   | —                          |   | —           |   | (3,823           | )      |
| Gain on  dispositions of other property and equipment                                            |   | (261                | )       | —                    |   | —                          |   | —           |   | (261             | )      |
| Interest expense  (income)                                                                       |   | 7,094               |    | —                    |   | (176                            | )      | —           |   | 6,918            |   |
|                                                                                             |   |                |    |                      |   |                            |   |             |   |             |   |
| Income before  provision for income taxes and equity in net income of consolidated  subsidiaries |   | 4,935               |    | 1,567                     |   | 178                             |   | —           |   | 6,680            |   |
|                                                                                             |   |                |    |                      |   |                            |   |             |   |             |   |
| Provision for  income taxes                                                                      |   | (1,934              | )       | (642                      | )      | (63                             | )      | —           |   | (2,639           | )      |
|                                                                                             |   |                |    |                      |   |                            |   |             |   |             |   |
| Income before  equity in net income of consolidated subsidiaries                                 |   | 3,001               |    | 925                       |   | 115                             |   | —           |   | 4,041            |   |
|                                                                                             |   |                |    |                      |   |                            |   |             |   |             |   |
| Equity in net  income of consolidated subsidiaries                                               |   | 1,040               |    | —                    |   | —                          |   | (1,040           | )      | —           |   |
|                                                                                             |   |                |    |                      |   |                            |   |             |   |             |   |
| Net income                                                                                       |   | $                   | 4,041   |                      | $      | 925                             |   | $                | 115    |             | $      | (1,040 | ) | $ | 4,041 |   |

 

14

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**Supplemental Condensed Consolidating Statement of Operations**

**For the Six Months Ended July 1, 2001**

(Unaudited)

(In thousands)

 
|                                                                                             |   | **Parent  Company** |    | **Guarantor  Subsidiary** |   | **Non-guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|--------------------------------------------------------------------------------------------------|--------|---------------------|---------|---------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                             |   |                |    |                      |   |                            |   |             |   |             |   |
| Revenues                                                                                         |   | $                   | 273,625 |                      | $      | 3,917                           |   | $                | — |             | $      | — |   | $ | 277,542 |   |
| Costs and  expenses:                                                                             |   |                |    |                      |   |                            |   |             |   |             |   |
| Cost of sales                                                                                    |   | 94,917              |    | —                    |   | —                          |   | —           |   | 94,917           |   |
| Labor and  benefits                                                                              |   | 81,010              |    | —                    |   | —                          |   | —           |   | 81,010           |   |
| Operating  expenses and write-downs of property and equipment                                    |   | 56,631              |    | —                    |   | (11                             | )      | —           |   | 56,620           |   |
| General and  administrative expenses                                                             |   | 16,361              |    | 2,316                     |   | —                          |   | —           |   | 18,677           |   |
| Depreciation and  amortization                                                                   |   | 14,649              |    | —                    |   | —                          |   | —           |   | 14,649           |   |
| Gain on  franchise sales of restaurant operations and properties                                 |   | (3,823              | )       | —                    |   | —                          |   | —           |   | (3,823           | )      |
| Gain on  dispositions of other property and equipment                                            |   | (2,242              | )       | —                    |   | —                          |   | —           |   | (2,242           | )      |
| Interest expense  (income)                                                                       |   | 14,900              |    | —                    |   | (397                            | )      | —           |   | 14,503           |   |
|                                                                                             |   |                |    |                      |   |                            |   |             |   |             |   |
| Income before  provision for income taxes and equity in net income of consolidated  subsidiaries |   | 1,222               |    | 1,601                     |   | 408                             |   | —           |   | 3,231            |   |
|                                                                                             |   |                |    |                      |   |                            |   |             |   |             |   |
| Provision for  income taxes                                                                      |   | (325                | )       | (656                      | )      | (144                            | )      | —           |   | (1,125           | )      |
|                                                                                             |   |                |    |                      |   |                            |   |             |   |             |   |
| Income before  equity in net income of consolidated subsidiaries                                 |   | 897                 |    | 945                       |   | 264                             |   | —           |   | 2,106            |   |
|                                                                                             |   |                |    |                      |   |                            |   |             |   |             |   |
| Equity in net  income of consolidated subsidiaries                                               |   | 1,209               |    | —                    |   | —                          |   | (1,209           | )      | —           |   |
|                                                                                             |   |                |    |                      |   |                            |   |             |   |             |   |
| Net income                                                                                       |   | $                   | 2,106   |                      | $      | 945                             |   | $                | 264    |             | $      | (1,209 | ) | $ | 2,106 |   |

 

15

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**Supplemental Condensed Consolidating Statement of Cash Flows**

**For the Six Months Ended July 1, 2001**

(Unaudited)

(In thousands)

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

 

16

----

 

**SupplementalCondensed Consolidating Balance Sheet**

**As of December31, 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’ equity (deficit) |   | $                   | 301,560 |                      | $      | 5,255                           |   | $                | 13,782 |             | $      | (22,911 | ) | $ | 297,686 |   |

 

17

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**Supplemental Condensed Consolidating Statement of Operations**

**For the Three Months Ended July 2, 2000**

(Unaudited)

(In thousands)

 
|                                                                                                            |   | **Parent  Company** |    | **Guarantor  Subsidiary** |   | **Non-guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|---------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                                            |   |                |    |                      |   |                            |   |             |   |             |   |
| Revenues                                                                                                        |   | $                   | 157,742 |                      | $      | 1,306                           |   | $                | — |             | $      | — |   | $ | 159,048 |   |
| Costs and  expenses:                                                                                            |   |                |    |                      |   |                            |   |             |   |             |   |
| Cost of sales                                                                                                   |   | 50,243              |    | —                    |   | —                          |   | —           |   | 50,243           |   |
| Labor and  benefits                                                                                             |   | 49,399              |    | —                    |   | —                          |   | —           |   | 49,399           |   |
| Operating  expenses and write-downs of property and equipment                                                   |   | 31,519              |    | —                    |   | (55                             | )      | —           |   | 31,464           |   |
| General and  administrative expenses                                                                            |   | 9,345               |    | 845                       |   | —                          |   | —           |   | 10,190           |   |
| Depreciation and  amortization                                                                                  |   | 7,319               |    | —                    |   | —                          |   | —           |   | 7,319            |   |
| Loss on  franchise sales of restaurant operations and properties                                                |   | 89                  |    | —                    |   | —                          |   | —           |   | 89               |   |
| Gain on  dispositions of other property and equipment                                                           |   | (509                | )       | —                    |   | —                          |   | —           |   | (509             | )      |
| Interest expense  (income)                                                                                      |   | 8,136               |    | —                    |   | (173                            | )      | —           |   | 7,963            |   |
|                                                                                                            |   |                |    |                      |   |                            |   |             |   |             |   |
| Income before  benefit from (provision for) income taxes and equity in net income of  consolidated subsidiaries |   | 2,201               |    | 461                       |   | 228                             |   | —           |   | 2,890            |   |
|                                                                                                            |   |                |    |                      |   |                            |   |             |   |             |   |
| Benefit from  (provision for) income taxes                                                                      |   | 385                 |    | (190                      | )      | (80                             | )      | —           |   | 115              |   |
|                                                                                                            |   |                |    |                      |   |                            |   |             |   |             |   |
| Income before  equity in net income of consolidated subsidiaries                                                |   | 2,586               |    | 271                       |   | 148                             |   | —           |   | 3,005            |   |
|                                                                                                            |   |                |    |                      |   |                            |   |             |   |             |   |
| Equity in net  income of consolidated subsidiaries                                                              |   | 419                 |    | —                    |   | —                          |   | (419             | )      | —           |   |
|                                                                                                            |   |                |    |                      |   |                            |   |             |   |             |   |
| Net income                                                                                                      |   | $                   | 3,005   |                      | $      | 271                             |   | $                | 148    |             | $      | (419 | ) | $ | 3,005 |   |

 

18

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**Supplemental Condensed Consolidating Statement of Operations**

**For the Six Months Ended July 2, 2000**

(Unaudited)

(In thousands)

 
|                                                                                                                   |   | **Parent  Company** |    | **Guarantor  Subsidiary** |   | **Non-guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|---------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                                                   |   |                |    |                      |   |                            |   |             |   |             |   |
| Revenues                                                                                                               |   | $                   | 299,957 |                      | $      | 3,180                           |   | $                | — |             | $      | — |   | $ | 303,137 |   |
| Costs and  expenses:                                                                                                   |   |                |    |                      |   |                            |   |             |   |             |   |
| Cost of sales                                                                                                          |   | 95,065              |    | —                    |   | —                          |   | —           |   | 95,065           |   |
| Labor and  benefits                                                                                                    |   | 97,575              |    | —                    |   | —                          |   | —           |   | 97,575           |   |
| Operating  expenses and write-downs of property and equipment                                                          |   | 80,111              |    | —                    |   | (115                            | )      | —           |   | 79,996           |   |
| General and  administrative expenses                                                                                   |   | 20,296              |    | 1,271                     |   | —                          |   | —           |   | 21,567           |   |
| Restructuring  costs                                                                                                   |   | 12,056              |    | —                    |   | —                          |   | —           |   | 12,056           |   |
| Depreciation and  amortization                                                                                         |   | 15,740              |    | —                    |   | —                          |   | —           |   | 15,740           |   |
| Gain on  franchise sales of restaurant operations and properties                                                       |   | (1,998              | )       | —                    |   | —                          |   | —           |   | (1,998           | )      |
| Gain on  dispositions of other property and equipment                                                                  |   | (45                 | )       | —                    |   | —                          |   | —           |   | (45              | )      |
| Interest expense  (income)                                                                                             |   | 16,246              |    | —                    |   | (345                            | )      | —           |   | 15,901           |   |
|                                                                                                                   |   |                |    |                      |   |                            |   |             |   |             |   |
| (Loss) income  before benefit from (provision for) income taxes and equity in net income of  consolidated subsidiaries |   | (35,089             | )       | 1,909                     |   | 460                             |   | —           |   | (32,720          | )      |
|                                                                                                                   |   |                |    |                      |   |                            |   |             |   |             |   |
| Benefit from  (provision for) income taxes                                                                             |   | 18,159              |    | (783                      | )      | (161                            | )      | —           |   | 17,215           |   |
|                                                                                                                   |   |                |    |                      |   |                            |   |             |   |             |   |
| (Loss) income  before equity in net income of consolidated subsidiaries                                                |   | (16,930             | )       | 1,126                     |   | 299                             |   | —           |   | (15,505          | )      |
|                                                                                                                   |   |                |    |                      |   |                            |   |             |   |             |   |
| Equity in net  income of consolidated subsidiaries                                                                     |   | 1,425               |    | —                    |   | —                          |   | (1,425           | )      | —           |   |
|                                                                                                                   |   |                |    |                      |   |                            |   |             |   |             |   |
| Net (loss)  income                                                                                                     |   | $                   | (15,505 | )                         | $      | 1,126                           |   | $                | 299    |             | $      | (1,425 | ) | $ | (15,505 | ) |

 

19

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**Supplemental Condensed Consolidating Statement of Cash Flows**

**For the Six Months Ended July 2, 2000**

(Unaudited)

(In thousands)

 
|                                                        |   | **Parent  Company** |   | **Guarantor  Subsidiary** |   | **Non-guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|-------------------------------------------------------------|--------|---------------------|--------|---------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
|                                                        |   |                |   |                      |   |                            |   |             |   |             |   |
| Net cash  (used in) provided by operating activities   |   | $                   | (8,133 | )                         | $      | 37                              |   | $                | 1,420  |             | $      | (960 | ) | $ | (7,636 | ) |
|                                                        |   |                |   |                      |   |                            |   |             |   |             |   |
| Cash flows from  investing activities:                      |   |                |   |                      |   |                            |   |             |   |             |   |
| Purchases of  property and equipment                        |   | (8,261              | )      | —                    |   | —                          |   | —           |   | (8,261           | )      |
| Proceeds from  sales of property and equipment              |   | 25,919              |   | —                    |   | —                          |   | —           |   | 25,919           |   |
| Net cash  provided by investing activities                  |   | 17,658              |   | —                    |   | —                          |   | —           |   | 17,658           |   |
|                                                        |   |                |   |                      |   |                            |   |             |   |             |   |
| Cash flows from  financing activities:                      |   |                |   |                      |   |                            |   |             |   |             |   |
| Proceeds from  borrowings                                   |   | 56,000              |   | —                    |   | —                          |   | —           |   | 56,000           |   |
| Repayments of  obligations                                  |   | (66,412             | )      | —                    |   | —                          |   | —           |   | (66,412          | )      |
| Reinsurance  deposits received                              |   | —              |   | —                    |   | 1,600                           |   | (1,600           | )      | —           |   |
| Reinsurance  payments made from deposits                    |   | —              |   | —                    |   | (2,560                          | )      | 2,560            |   | —           |   |
| Net cash used in  financing activities                      |   | (10,412             | )      | —                    |   | (960                            | )      | 960              |   | (10,412          | )      |
|                                                        |   |                |   |                      |   |                            |   |             |   |             |   |
| Net  (decrease) increase in cash and cash  equivalents |   | (887                | )      | 37                        |   | 460                             |   | —           |   | (390             | )      |
|                                                        |   |                |   |                      |   |                            |   |             |   |             |   |
| Cash and cash  equivalents, beginning of period             |   | 9,674               |   | 14                        |   | 2,374                           |   | —           |   | 12,062           |   |
|                                                        |   |                |   |                      |   |                            |   |             |   |             |   |
| Cash and cash  equivalents, end of period                   |   | $                   | 8,787  |                      | $      | 51                              |   | $                | 2,834  |             | $      | — |   | $ | 11,672 |   |
|                                                        |   |                |   |                      |   |                            |   |             |   |             |   |
| Supplemental  disclosures:                                  |   |                |   |                      |   |                            |   |             |   |             |   |
| Interest paid  (received)                                   |   | $                   | 16,069 |                      | $      | —                          |   | $                | (529   | )                | $      | — |   | $ | 15,540 |   |
| Income taxes  (refunded) paid                               |   | (1,022              | )      | 866                       |   | 165                             |   | —           |   | 9                |   |
| Capital lease  obligations incurred                         |   | 909                 |   | —                    |   | —                          |   | —           |   | 909              |   |
| Capital lease  obligations terminated                       |   | 711                 |   | —                    |   | —                          |   | —           |   | 711              |   |
| Note received  from the sale of property and equipment      |   | 577                 |   | —                    |   | —                          |   | —           |   | 577              |   |

 

20

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**Item 2.  Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

*Thefollowing discussion should be read in conjunction with the CondensedConsolidated Financial Statements of the Company and the notes thereto includedelsewhere herein.*

 

**Forward LookingStatements**

 

Statementscontained herein that are not historical facts, constitute “forward lookingstatements” as that term is defined in the Private Securities Litigation ReformAct of 1995. All forward looking statements are subject to risks anduncertainties, which could cause results to differ materially from thoseanticipated. These factors include the Company’s highly competitive businessenvironment, uncertainty with respect to the Company’s ongoing compliance withcovenants and its existing debt facilities and its ability to refinance itsexisting debt facilities, exposure to commodity prices, risks associated withthe foodservice industry, the ability to retain and attract new employees,government regulations, the Company’s high geographic concentration in theNortheast and its attendant weather patterns, conditions needed to meet re–imagingand new opening and franchising targets and risks associated with improvedservice and other initiatives. Other factors that may cause actual results todiffer from the forward looking statements contained herein and that may affectthe Company’s prospects in general are included in the Company’s other filingswith the Securities and Exchange Commission.

 

**Overview**

 

As of July 1, 2001, the Company owns and operates 403restaurants, franchises 158 restaurants and 5 cafes and manufactures anddistributes a full line of frozen dessert products.  These products are distributed to Friendly’s restaurants andthrough more than 3,500 supermarkets and other retail locations in 15 states.  The restaurants offer a wide variety ofreasonably priced breakfast, lunch and dinner menu items as well as the frozendessert products.

* *

|                    |   | **For the Three Months Ended** |   | **For the Six Months Ended** |   |
|-------------------------|--------|--------------------------------|--------|------------------------------|--------|
|                    |   | **July 1,  2001**              |   | **July 2,  2000**            |   | **July 1,  2001** |   | **July 2,  2000** |   |
| Company Units:          |   |                           |   |                         |   |   |   |   |   |
| Beginning of  period    |   | 438                            |   | 502                          |   | 449 |   | 618 |   |
| Openings                |   |                           |   | 1                            |   | — |   | 2 |   |
| Re-franchised           |   | (33                            | )      | (2                           | )      | (33 | ) | (37 | ) |
| Closings                |   | (2                             | )      | (15                          | )      | (13 | ) | (97 | ) |
| End of period           |   | 403                            |   | 486                          |   | 403 |   | 486 |   |
|                    |   |                           |   |                         |   |   |   |   |   |
| Franchised  Units:      |   |                           |   |                         |   |   |   |   |   |
| Beginning of  period    |   | 128                            |   | 109                          |   | 127 |   | 69 |   |
| Re-franchised  openings |   | 33                             |   | 2                            |   | 33 |   | 37 |   |
| Openings                |   | 2                              |   | 4                            |   | 3 |   | 10 |   |
| Closings                |   | —                         |   | (1                           | )      | — |   | (2 | ) |
| End of period           |   | 163                            |   | 114                          |   | 163 |   | 114 |   |

 

21

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*Revenues:*

 

Total revenues decreased $7.2 million, or 4.5%, to$151.8 million for the second quarter ended July 1, 2001 from $159.0 millionfor the same quarter in 2000. Restaurant revenues decreased $17.8 million, or 13.0%, to $119.0 millionfor the second quarter of 2001 from $136.8 million for the same quarter in2000.  Restaurant revenues decreasedby  $19.7 million due to the closing of53 under-performing restaurants and the re-franchising of 47 additionallocations over the past 15 months. Closing of restaurants accounted for $7.3 million of the restaurant revenuedecline and re-franchising reduced restaurant revenues by an additional $12.4million. Partially offsetting this decrease was a 1.4% increase in comparablerestaurant revenues.  Revenues from theone location open less than one year were $0.2 million.  Foodservice (product sales to franchisees,retail and institutional) revenues increased by $9.3 million, or 45.4%, to$29.8 million for the second quarter of 2001 from $20.5 million for the samequarter in 2000.  The increase was dueto the increase in the number of franchised units and higher sales tofoodservice retail supermarket customers. The Company’s foodservice divisionsells a variety of products to the Company’s franchisees and ice cream productsto supermarkets and other retail locations. Franchise revenues increased $1.3 million, or 72.2%, to $3.1 million forthe three months ended July 1, 2001 compared to $1.8 million for the threemonths ended July 2, 2000.  The increaseis primarily due to an increase of $0.9 million in initial fees as 35 newlocations were added in the second quarter of 2001 and only six locations wereadded in the same period in 2000.

 

Total revenues decreased $25.6 million, or 8.4%, to$277.5 million for the six months ended July 1, 2001 from $303.1 million forthe same period in 2000.  Restaurantrevenues decreased $36.1 million, or 13.8%, to $226.1 million for the sixmonths of 2001 from $262.2 million for the same period in 2000.   Restaurant revenues decreased by $39.3million due to the closing of 135 under-performing restaurants and there-franchising of 82 additional locations over the past 18 months.  Closing of restaurants accounted for $21.4million of the restaurant revenue decline and re-franchising reduced restaurantrevenues by an additional $17.9 million. Partially offsetting this decrease wasa 1.2% increase in comparable restaurant revenues.  Revenues from the one location open less than one year were $0.5million.  Foodservice (product sales tofranchisees, retail and institutional) and other revenues increased by $9.9million, or 26.8%, to $46.8 million for the six months ended July 2, 2001 from$36.9 million for the same period in 2000. The increase was due to the increase in the number of franchised unitsand higher sales to foodservice retail supermarket customers.  Franchise revenue increased $0.6 million, or14.6%, to $4.7 million for the six months ended July 1, 2001 compared to $4.1million for the six months ended July 2, 2000. The increase is primarily the result of the fact that there are 163 franchiseunits open at the end of the second quarter ended July 1, 2001 compared to 114franchise units open at the end of the second quarter ended July 2, 2000.

 

*Cost ofsales:*

 

Cost of sales increased $2.7 million, or 5.4%, to$52.9 million for the second quarter ended July 1, 2001 from $50.2 million forthe same quarter in 2000.  Cost of salesas a percentage of total revenues increased to 34.8% for the second quarter of2001 from 31.6% for the second quarter of 2000.  The higher food cost as a percentage of total revenue waspartially due to a shift in sales mix from Company-owned restaurant sales tofoodservice sales.  Foodservice sales tofranchisees and retail customers have a higher food cost as a percentage ofrevenue than sales in Company-owned restaurants to restaurant patrons.  The cost of cream, the principal ingredientused in making ice cream, was higher in the second quarter of 2001 whencompared to the second quarter of 2000 and contributed to the rise in cost ofsales as a percentage of total revenues, especially in foodservice’s retailsupermarket business.  The Companybelieves that cream prices will continue to rise and will peak during thesummer months.  To minimize risk,alternative supply sources continue to be pursued.  Additionally in May 2001, the Company raised prices to its retailcustomers.

 

Cost of sales decreased $0.2 million, or 0.2%, to$94.9 million for the six months ended July 1, 2001 from $95.1 million for thesame period in 2000.  Cost of sales as apercentage of total revenues increased to 34.1% for the six months in 2001 from31.3% 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 sixmonths of 2001 when compared to the first six months of 2000 and contributed tothe rise in cost of sales as a percentage of total revenues, especially infoodservice’s retail supermarket business. The Company believes that cream prices will continue to rise and willpeak during the summer months.  Tominimize risk, alternative supply sources will continue to be pursued.  Additionally in May 2001, the Company raisedprices to its retail customers.

 

*Laborand benefits:*

 

Labor and benefits decreased $8.1 million, or 16.4%,to $41.3 million for the second quarter ended July 1, 2001 from $49.4 millionfor the same quarter in 2000.  Labor andbenefits as a percentage of total revenues decreased to 27.2% for the second quarterof 2001 from 31.0% for the same quarter in 2000.  The lower labor cost as a percentage of total revenue ispartially the result of revenue increases derived from additional franchisedlocations and higher sales to foodservice retail supermarket customers, whichdo not have any associated restaurant labor and benefits.  In addition, the closing of 38under-performing Company-owned units over the past 15 months improved therelationship of restaurant labor and benefits to restaurant sales as well as tototal revenues.

 

22

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Labor and benefits decreased $16.6 million, or 17.0%,to $81.0 million for the six months ended July 1, 2001 from $97.6 million forthe same period in 2000.  Labor andbenefits as a percentage of total revenues decreased to 29.1% for the sixmonths of 2001 from 32.2% for the same period in 2000. The lower labor cost asa percentage of total revenue is partially the result of revenue increasesderived from additional franchised locations and higher sales to foodserviceretail supermarket customers, which do not have any associated restaurant laborand benefits.  In addition, the closingof 135 under-performing Company-owned units over the past 18 months improvedthe relationship of restaurant labor and benefits to restaurant sales as wellas to total revenues.   Partiallyoffsetting the decreases were higher group insurance costs in 2001 whencompared to the same period in 2000.

 

*Operatingexpenses:*

 

Operating expenses increased $0.8 million, or 2.6%, to$31.6 million for the second quarter ended July 1, 2001 from $30.8 million forthe same quarter in 2000.  Operatingexpenses as a percentage of total revenues were 20.8% and 19.4% for the secondquarters ended July 1, 2001 and July 2, 2000, respectively.  The increase as a percentage of totalrevenues resulted from higher costs for foodservice retail promotions,restaurant maintenance and utilities in the 2001 quarter when compared to the2000 quarter.

 

Operating expenses decreased $5.0 million, or 8.1%, to$56.6 million for the six months ended July 1, 2001 from $61.6 million for thesame period in 2000.  Operating expensesas a percentage of total revenues were 20.4% and 20.3% for the six months endedJuly 1, 2001 and July 2, 2000, respectively. The increase as a percentage of total revenues resulted from highercosts for restaurant advertising, foodservice retail promotions, utilities andrestaurant maintenance including snowplowing in the 2001 period when comparedto the 2000 period.

 

*Generaland administrative expenses:*

 

General and administrative expenses were $9.3 millionfor the second quarter ended July 1, 2001 and $10.2 million for the same periodin 2000.  General and administrativeexpenses as a percentage of total revenues decreased to 6.1% in the secondquarter of 2001 from 6.4% for the same period in 2000.  The decrease is primarily the result of ahiring freeze that was implemented after the Company’s announcement of theimmediate closing of 81 restaurants and the planned closing of 70 additionalrestaurants in March 2000.

 

General and administrative expenses were $18.7 millionand $21.6 million for the six months ended July 1, 2001 and July 2, 2000,respectively.  General andadministrative expenses as a percentage of total revenues decreased to 6.7% inthe six months ended July 1, 2001 from 7.1% for the same period in 2000. Thedecrease is primarily the result of the elimination of certain management andadministrative 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.

 

*EBITDA:*

 

As a result of the above, EBITDA (EBITDA represents net income (loss) before (i)benefit from (provision for) income taxes, (ii) interest expense, net, (iii) depreciation and amortization and (iv)write-downs and all other non-cash items plus cash distributions fromunconsolidated subsidiaries) increased $1.8 million, or 9.5%, to $20.8million for the second quarter ended July 1, 2001 from $19.0 million for thesame quarter in 2000.  EBITDA as apercentage of total revenues was 13.7% and 11.9% for the second quarters of2001 and 2000, respectively.

 

EBITDA increased $15.0 million, or 85.2%, to $32.6million for the six months ended July 1, 2001 from $17.6 million for the sameperiod in 2000.  EBITDA as a percentageof total revenues was 11.8% and 5.8% for the six months ended July 1, 2001 andJuly 2, 2000, respectively.

 

*Restructuringcosts:*

 

Restructuring costs were $12.1 million for the sixmonths ended July 2, 2000 as a result of the costs associated with theCompany’s decision to reorganize its restaurant field and headquartersorganizations in conjunction with the closing of 81 under-performingrestaurants and the planned closing of an additional 70 restaurants over thenext 24 months.  Included in these costsare severance, rent on closed units until lease termination, utilities and realestate taxes, demarking, lease termination, environmental and other miscellaneouscosts.

 

W*rite-downs of property and equipment:*

 

Write-downs of property and equipment were $0.1million and $0.7 million for the three months ended July 1, 2001 and July 2,2000, respectively. Write-downs of property and equipment were $0.1 million and$18.4 million for the six months ended July 1, 2001 and July 2, 2000,respectively.  The decrease inwrite-downs is primarily the result of the non-cash write-down of the 81under-performing restaurants which were closed at the end of March 2000 and thenon-cash write-down of the additional 70 restaurants

 

23

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which will beclosed over the next 24 months to their estimated net realizable value.  As of July 1, 2001, 29 of these 70restaurants are still operating.

 

*Depreciationand amortization:*

 

Depreciation and amortization decreased $0.2 million,or 2.7%, to $7.1 million for the second quarter ended July 1, 2001 from $7.3million for the same quarter in 2000. Depreciation and amortization as a percentage of total revenues was 4.7%and 4.6% for the second quarters of 2001 and 2000, respectively.

 

Depreciation and amortization decreased $1.1 million,or 7.0%, to $14.6 million for the six months ended July 1, 2001 from $15.7million for the same period in 2000. Depreciation and amortization as a percentage of total revenues was 5.3%and 5.2% for the six months ended July 1, 2001 and July 2, 2000, respectively.

 

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

 

Gain on franchisesales of restaurant operations and properties for the second quarter ended July1, 2001 was $3.8 million compared to a loss on sales of restaurant operationsand properties of $0.1 million for the second quarter ended July 2, 2000.   The increase was the result of the gain of$3.9 million associated with the sale of 31restaurants to a franchisee during the second quarter ended July 1,2001.  The gain on sales of restaurantoperations and properties was $3.8 million and $2.0 million for the six monthsended July 1, 2001 and July 2, 2000, respectively.  The increase was primarily the result of the gain of $3.9 millionassociated with the sale of 31 restaurantsto a franchisee during the second quarter ended July 1, 2001 as comparedto the gain of $1.4 million associated with the sale of 29 restaurants to a franchiseeon January 19, 2000.  The Company alsosold certain assets and rights in eight other restaurants to three additionalfranchisees resulting in a gain of $0.7 million during the six months endedJuly 2, 2000.

 

*Gain ondisposition of other property and equipment:*

 

The gain on disposition of otherproperty and equipment was $0.3 million and $0.5 million for the quarters endedJuly 1, 2001 and July 2, 2000, respectively. The gain on disposition of other property and equipment was $2.2 millionfor the six months ended July 1, 2001. The gain in 2001 resulted from the sale of 17 closed locations duringthe six month period ended July 1, 2001 compared to the sale of 10 closedlocations during the six month period ended July 2, 2000.

 

*Interestexpense, net:*

 

Interest expense, net of capitalized interest andinterest income, decreased by $1.1 million, or 13.1%, to $6.9 million for thesecond quarter ended July 1, 2001 from $8.0 million for the same quarter in2000. The decrease is primarily due to a reduction in the average outstandingdebt.

 

Interest expense, net of capitalized interest andinterest income, decreased by $1.4 million, or 8.8%, to $14.5 million for thesix months ended July 1, 2001 from $15.9 million for the same period in 2000.The decrease is primarily impacted by the decrease in the average outstandingbalance on the term loans for the six months ended July 1, 2001 compared to thesix months ended July 2, 2000.  Totaloutstanding debt, including capital leases, was reduced from $305.5 million atJuly 2, 2000 to $277.2 million at July 1, 2001.

 

*(Provisionfor) benefit from income taxes:*

 

The provision for income taxes was $2.6 million, or39.5%, for the second quarter ended July 1, 2001 compared to a benefit fromincome taxes of $0.1 million, or 4.0%, for the second quarter ended July 2,2000. The provision for income taxes was $1.1    million, or 34.8%, for the six months ended July 1, 2001compared to a benefit from taxes of $17.2 million, or 52.6%, for the six monthsended July 2, 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 six months ended July 2, 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.

 

*Netincome (loss):*

 

Net income was $4.0 million and $3.0 million for thesecond quarters ended July 1, 2001 and July 2, 2000, respectively.  Net income was $2.1 million for the sixmonths ended July 1, 2001 compared to a net loss of $15.5 million for the sixmonths ended July 2, 2000.

 

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**Liquidityand Capital Resources**

 

The Company’s primary sources of liquidity and capitalresources are cash generated from operations and borrowings under its revolvingcredit facility.  Net cash provided byoperating activities was $3.1 million for the six months ended July 1, 2001compared to net cash used in operating activities of $7.6 million in the sixmonths ended July 2, 2000.  During thesix months ended July 1, 2001, inventories increased $3.9 million as a resultof increased retail and restaurant promotional activity during the summermonths.  Accounts Payable increased $4.6million primarily as a result of increased inventory purchases. AccountsReceivable increased $5.7 million primarily due to increased retail supermarketsales along with the increase in volume of Foodservice product sales tofranchisees. Accrued expenses and other long term-liabilities decreased $3.5million primarily as a result of a $1.5 million reduction in accrued intereston the revolver and term loans due to the timing of interest payments and $1million of payments made against the captive insurance company’s reserves forworkers compensation claims. Available borrowings under the revolving creditfacility were $11.7 million as of July 1, 2001.

 

Additional sources of liquidity consist of capital andoperating leases for financing leased restaurant locations (in malls andshopping centers and land or building leases), restaurant equipment,manufacturing equipment, distribution vehicles and computer equipment.  Additionally, sales of under-performingexisting restaurant properties and other assets (to the extent the Company’sand its subsidiaries’ debt instruments, if any, permit) are sources ofcash.  The amounts of debt financingthat the Company will be able to incur under capital leases and for propertyand casualty insurance financing and the amount of asset sales by the Companyare limited by the terms of its credit facility and Senior Notes.

 

Net cash provided by investing activities was $14.1million and $17.7 million in the six months ended July 1, 2001 and July 2,2000, respectively.  Capitalexpenditures for restaurant operations were approximately $4.0 million and $5.9million for the six months ended July 1, 2001 and July 2, 2000,respectively.  Other capitalexpenditures were $1.7 million and $2.3 million for the six months ended July1, 2001 and July 2, 2000, respectively. The decrease in capital expenditures was primarily due to the reductionin new units, replacements and re-imaging projects.  Proceeds from the sale of property and equipment were $19.9million and $25.9 million in the six months ended July 1, 2001 and July 2,2000, respectively.  The decrease inproceeds was primarily due to the receipt of $12.9 million in 2001 compared to $17.1 million in 2000 related to salesof restaurants to franchisees.

 

Net cash used in financing activities was $21.5million and $10.4 million in the six months ended July 1, 2001 and July 2,2000, respectively.

 

The Company had a working capital deficit of $25.9 millionas of July 1, 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 significantoperating and financial restrictions on the Company’s ability to, among otherthings, incur indebtedness, create liens, sell assets, engage in mergers orconsolidations, pay dividends and engage in certain transactions withaffiliates.  The credit facility limits theamount which the Company may spend on capital expenditures and requires theCompany to comply with certain financial covenants.  The Company’s credit facility also restricts the use of proceedsfrom asset sales.  Proceeds, as definedin the 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 six months ended July 1, 2001, the Company received $10.6million of asset sale proceeds which were used to reduce the amount outstandingon the term loans.

 

The Company entered into its existing credit facilityin November 1997.  Since 1997, theCompany has executed several amendments to the credit facility.  The most recent amendment occurred on March19, 2001.  All of the existing financialcovenants were amended and a new financial covenant was added requiring minimumcumulative Consolidated EBITDA, as defined, on a monthly basis.  Interest rates on term loans, borrowings underthe 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, July 1, 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.

 

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Also due to the March 19, 2001 amendment, the maturitydates of Tranche B and Tranche C of the term loans were changed to November 15,2002 from their original 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 by the dates specified belowas 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 |      |

 

Any remaining unpaid balances due on Tranches B and C of the term loanswill be paid on November 15, 2002.

 

FICC paid a fee of approximately $256,000 to thelenders in connection with this amendment. Also, unless all obligations under the credit facility are satisfiedprior to September 30, 2001, FICC will pay an additional fee of approximately$512,000 on that date.  If allobligations under the credit facility are satisfied prior to September 30,2001, the additional fee will be payable at that time and will be reduced toapproximately $128,000.

 

The Company is in the process of exploring variousrefinancing alternatives and has engaged Banc of America Securities LLC forassistance in this process.  The Companybelieves that based on the terms of the seventh amendment, the Company hasadequate 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.  There is no assurance that the Company willbe able to comply with or renegotiate such covenants for periods after December30, 2001 or that the Company will be able to refinance its existing debtfacilities.

 

The Company anticipates requiring capital in thefuture principally to maintain existing restaurant and plant facilities and tocontinue to renovate and re-image existing restaurants.  Capital expenditures for 2001 areanticipated to be $12.0 million in the aggregate, of which $8.8 million isexpected to be spent on restaurant operations. The Company’s actual 2001 capital expenditures may vary from theseestimated amounts. The Company believes thatthe combination of the funds anticipated to be generated from operatingactivities and borrowing availability under the credit facility will besufficient to meet the Company’s anticipated operating requirements, capitalrequirements and obligations associated with the restructuring.

 

On April 13, 2001, the Companyexecuted an agreement granting J&B Restaurants Partners of Long IslandHolding Co., LLC (“J&B”) certain limited exclusive rights to operate anddevelop Friendly’s full-service restaurants in the franchising regions ofNassau and Suffolk Counties in Long Island, New York (the “J&BAgreement”).  Pursuant to the J&BAgreement, J&B purchased certain assets and rights in 31 existingFriendly’s restaurants and committed to open an additional 29 restaurants overthe next 12 years. The transaction price was approximately $19,950,000, ofwhich approximately $4,250,000 was received in a note.  The cash proceeds were used to prepayapproximately $4.7 million on the term loans with the remaining balance beingapplied to the revolving credit facility. The 5-year note bears interest at an annual rate of 11% using a 20-yearamortization schedule.  Payments are duemonthly through the five years with a balloon payment due at the end of fiveyears.

 

**Seasonality**

 

Due to the seasonality of frozen dessert consumptionand the effect from time to time of weather on patronage in its restaurants,the Company’s revenues and EBITDA are typically higher in its second and thirdquarters.

 

**GeographicConcentration**

 

Approximately 89% of the Company owned restaurants arelocated, and substantially all of its retail sales are generated, in theNortheast.  As a result, a severe orprolonged economic recession or changes in demographic mix, employment levels,population density, weather, real estate market conditions or other factorsspecific to this geographic region may adversely affect the Company more thancertain of its competitors which are more geographically diverse.

 

**Recently Issued AccountingPronouncements**

 

In June 2001, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142,“Goodwill and Other Intangibles.”  SFASNo. 142 modifies the rules for accounting for goodwill and other intangibleassets.  The new rules become effectiveon January 1, 2002.  The Company doesnot believe the impact of adopting SFAS No. 142 will have a material effect onthe Company’s consolidated financial statements.  The Company will continue to amortize its license agreementrelated to certain trademarked products under the new rules.

 

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In April 2001, the Financial Accounting StandardsBoard reached consensus on Emerging Issues Task Force (“EITF”) Issue No. 00-25,“Accounting for Consideration from a Vendor to a Retailer in Connection withthe Purchase or Promotion of the Vendor’s Products,” which is effective forquarters beginning after December 15, 2001, with prior financial statementsrestated if practicable.  This Issuerequires 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.  The Company is required to adopt EITF No.00-25 for periods beginning after December 15, 2001.  Management has not yet quantified the impact of implementingIssue No. 00-25 on the Company’s financial statements.

 

In May 2000, the Emerging Issues Task Force issuedEITF No. 00-14, “Accounting for Certain Sales Incentives,” which providesguidance on the recognition, measurement and income statement classificationfor sales incentives offered voluntarily by a vendor without charge tocustomers that can be used in, or that are exercisable by a customer as aresult of, a single exchange transaction. The Company adopted EITF No. 00-14 onJuly 3, 2000.   As a result, the Companyhas reclassified certain retail selling expenses against retail revenue for thethree and six months ended July 2, 2000 to conform with the current periodpresentation.

 

In June 1998, the FASB issued SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities.”  SFAS No. 133 establishes accounting andreporting standards requiring that each derivative instrument (includingcertain derivative instruments embedded in other contracts) be recorded in thebalance sheet as either an asset or liability measured at its fair value.  The statement requires that changes in thederivative’s fair value be recognized currently in earnings unless specifichedge accounting criteria are met. Special accounting for qualifying hedgesallows a derivative’s gains and losses to offset related results on the hedgeditem in the statement of operations, and requires that a Company formallydocument, designate and assess the effectiveness of transactions that receivehedge accounting.  Since the Company’scommodity option contracts do not meet the criteria for hedge accounting,changes in the value of the commodity option contracts are recognized monthlyin earnings.  The cumulative effect uponadoption of approximately $77,000 has been recorded as income in theaccompanying Condensed Consolidated Statement of Operations.  It is not separately reported as acumulative effect since the amount is not significant.  Additionally, losses totaling $147,000 wererecorded during the six months ended July 1, 2001.  The fair market value of derivatives at July 1, 2001 wasapproximately $89,000.

 

**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

There has been no material change in the Company’smarket risk exposure since the filing of the Annual Report on Form 10K.

 

**Item 4.Controls and Procedures**

 

As of July 1, 2001, anevaluation 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 July 1,2001.  There have been no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect internal controls subsequent to July 1, 2001.

 

 

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**PART II – OTHER INFORMATION**

 

**Item4.  Submission of matters to a vote ofsecurity holders**

 

(a)  An annual meeting ofCompany’s shareholders was held on May 16, 2001.

 

(b)  Not applicable.

 

(c)  The election of two nominees for directorsof the Company was voted upon at the meeting. The number of affirmative votes and the number of votes withheld withrespect to such approvals are 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 votingto approve the appointment of Arthur Andersen LLP to audit the accounts of theCompany and its subsidiaries for 2001 are as follows:

 

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

 

There were no mattersvoted upon at the Company’s annual meeting to which broker non-votes applied.

 

**Item6.  Exhibits and reports on Form 8-K**

 

(a)  Exhibits

 

None

 

(b)  No report on Form 8-K wasfiled during the three months and six months ended July 1, 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, certify that:

 

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, fairly presentin all material respects the financial condition, results of operations andcash 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, certify that:

 

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 our evaluationas 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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