**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

----

 

**FORM 10-Q**

** **

| **ý** |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**  |
|------------|--------|-----------------------------------------------------------------------------------------------------|
|       |   |                                                                                                |
|       |   | **For the quarterly period ended March 28, 2004**                                                   |
|       |   |                                                                                                |
|       |   | **OR**                                                                                              |
|       |   |                                                                                                |
| **o**      |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

 

**For the transition periodfrom                 to              **

 

**CommissionFile No. 001-13579**

 

----

 

**FRIENDLY ICE CREAM CORPORATION**

(Exact Name of Registrant as Specified in ItsCharter)

 

| **Massachusetts**                                               |   | **04-2053130**                     |
|-----------------------------------------------------------------|--------|------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |   | (IRS Employer  Identification No.) |
|                                                            |   |                               |
| **1855 Boston Road  Wilbraham, Massachusetts**                  |   | **01095**                          |
| (Address of Principal Executive Offices)                        |   | (Zip Code)                         |

 

**(413) 543-2400**

(Registrant’s Telephone Number, Including Area Code)

 

**Not Applicable**

(Former name, former address and former fiscal year, if changed sincelast report)

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý  No o

 

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

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock as of the latest practicable date.

 

| **Class**                    |   | **Outstanding  at April 16, 2004** |
|------------------------------|--------|------------------------------------|
|                         |   |                               |
| Common Stock, $.01 par value |   | 7,552,801 shares                   |

 

 

----

 

**PART I- FINANCIAL INFORMATION**

 

**Item1.   Financial Statements**

 

**FRIENDLYICE CREAM CORPORATION AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 

(Inthousands)

 
|                                                                      |   | **March 28,  2004** |    | **December  28,  2003** |   |
|---------------------------------------------------------------------------|--------|---------------------|---------|-------------------------|--------|
|                                                                      |   | **(unaudited)**     |    |                    |   |
| ASSETS                                                                    |   |                |    |                    |   |
| CURRENT ASSETS:                                                           |   |                |    |                    |   |
| Cash and cash equivalents                                                 |   | $                   | 56,650  |                    | $      | 25,631 |   |
| Restricted cash                                                           |   | 1,290               |    | 1,671                   |   |
| Accounts receivable, net                                                  |   | 12,406              |    | 10,384                  |   |
| Litigation settlement receivable                                          |   | 3,775               |    | —                  |   |
| Inventories                                                               |   | 16,815              |    | 15,669                  |   |
| Deferred income taxes                                                     |   | 6,647               |    | 6,647                   |   |
| Prepaid expenses and other current assets                                 |   | 4,901               |    | 1,539                   |   |
| TOTAL CURRENT ASSETS                                                      |   | 102,484             |    | 61,541                  |   |
| DEFERRED INCOME TAXES                                                     |   | 909                 |    | —                  |   |
| PROPERTY AND EQUIPMENT, net of accumulated  depreciation and amortization |   | 164,322             |    | 167,109                 |   |
| INTANGIBLE ASSETS AND DEFERRED COSTS, net  of accumulated amortization    |   | 22,281              |    | 17,890                  |   |
| OTHER ASSETS                                                              |   | 5,877               |    | 5,912                   |   |
| TOTAL ASSETS                                                              |   | $                   | 295,873 |                    | $      | 252,452 |   |
|                                                                      |   |                |    |                    |   |
| LIABILITIES  AND STOCKHOLDERS’ DEFICIT                               |   |                |    |                    |   |
| CURRENT LIABILITIES:                                                      |   |                |    |                    |   |
| Current maturities of long-term debt                                      |   | $                   | 49,312  |                    | $      | 1,127 |   |
| Current maturities of capital lease and  finance obligations              |   | 1,306               |    | 911                     |   |
| Accounts payable                                                          |   | 21,905              |    | 22,475                  |   |
| Accrued salaries and benefits                                             |   | 10,439              |    | 9,635                   |   |
| Accrued interest payable                                                  |   | 3,091               |    | 2,033                   |   |
| Insurance reserves                                                        |   | 10,769              |    | 10,041                  |   |
| Restructuring reserves                                                    |   | 2,666               |    | 441                     |   |
| Other accrued expenses                                                    |   | 15,532              |    | 19,055                  |   |
| TOTAL CURRENT LIABILITIES                                                 |   | 115,020             |    | 65,718                  |   |
| DEFERRED INCOME TAXES                                                     |   | —              |    | 1,289                   |   |
| CAPITAL LEASE AND FINANCE OBLIGATIONS, less  current maturities           |   | 7,428               |    | 5,773                   |   |
| LONG-TERM DEBT, less current maturities                                   |   | 226,640             |    | 227,937                 |   |
| ACCRUED PENSION COST                                                      |   | 15,576              |    | 16,127                  |   |
| OTHER LONG-TERM LIABILITIES                                               |   | 33,787              |    | 33,634                  |   |
| COMMITMENTS  AND CONTINGENCIES                                            |   |                |    |                    |   |
| STOCKHOLDERS’  DEFICIT:                                              |   |                |    |                    |   |
| Common stock                                                              |   | 75                  |    | 75                      |   |
| Additional paid-in capital                                                |   | 141,403             |    | 140,826                 |   |
| Accumulated other comprehensive loss                                      |   | (19,922             | )       | (19,922                 | )      |
| Accumulated deficit                                                       |   | (224,134            | )       | (219,005                | )      |
| TOTAL STOCKHOLDERS’ DEFICIT                                          |   | (102,578            | )       | (98,026                 | )      |
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT                          |   | $                   | 295,873 |                    | $      | 252,452 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

1

----

 

## **FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

(Unaudited)

(In thousands, except per share data)

 
|                                                             |   | **For the  Three Months Ended** |    |
|------------------------------------------------------------------|--------|---------------------------------|---------|
|                                                             |   | **March 28,  2004**             |    | **March 30,  2003** |   |
|                                                             |   |                            |    |   |   |
| REVENUES:                                                        |   |                            |    |   |   |
|  Restaurant                                                 |   | $                               | 104,353 |   | $ | 103,168 |   |
|  Foodservice                                                |   | 23,343                          |    | 23,267 |   |
|  Franchise                                                  |   | 3,058                           |    | 2,255 |   |
| TOTAL REVENUES                                                   |   | 130,754                         |    | 128,690 |   |
|                                                             |   |                            |    |   |   |
| COSTS AND EXPENSES:                                              |   |                            |    |   |   |
|  Cost of sales                                              |   | 45,588                          |    | 45,977 |   |
|  Labor and benefits                                         |   | 39,934                          |    | 38,128 |   |
|  Operating expenses                                         |   | 25,052                          |    | 24,288 |   |
|  General and administrative expenses                        |   | 10,697                          |    | 10,063 |   |
|  Restructuring expenses                                     |   | 2,627                           |    | — |   |
|  Gain on litigation settlement                              |   | (3,644                          | )       | — |   |
|  Depreciation and amortization                              |   | 5,606                           |    | 5,627 |   |
| Gain on franchise sales of restaurant  operations and properties |   | (906                            | )       | — |   |
| Loss on disposals of other property and  equipment, net          |   | 171                             |    | 573 |   |
|                                                             |   |                            |    |   |   |
| OPERATING INCOME                                                 |   | 5,629                           |    | 4,034 |   |
|                                                             |   |                            |    |   |   |
| OTHER EXPENSES:                                                  |   |                            |    |   |   |
| Interest expense, net                                            |   | 6,064                           |    | 6,102 |   |
| Other expenses, principally debt retirement  costs               |   | 6,892                           |    | — |   |
|                                                             |   |                            |    |   |   |
| LOSS BEFORE BENEFIT FROM INCOME TAXES                            |   | (7,327                          | )       | (2,068 | ) |
|                                                             |   |                            |    |   |   |
| Benefit from income taxes                                        |   | 2,198                           |    | 579 |   |
|                                                             |   |                            |    |   |   |
| NET LOSS                                                         |   | $                               | (5,129  | ) | $ | (1,489 | ) |
|                                                             |   |                            |    |   |   |
| BASIC AND DILUTED NET LOSS PER SHARE                             |   | $                               | (0.68   | ) | $ | (0.20 | ) |
|                                                             |   |                            |    |   |   |
| WEIGHTED AVERAGE BASIC AND DILUTED SHARES                        |   | 7,520                           |    | 7,415 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

2

----

 

**FRIENDLYICE CREAM CORPORATION AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(Unaudited)

(In thousands)

 
|                                                                                       |   | **For the  Three Months Ended** |   |
|--------------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                                       |   | **March 28,  2004**             |   | **March 30,  2003** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                      |   |                            |   |   |   |
| Net loss                                                                                   |   | $                               | (5,129 | ) | $ | (1,489 | ) |
| Adjustments to reconcile net loss to net  cash (used in) provided by operating activities: |   |                            |   |   |   |
| Stock compensation expense                                                                 |   | 333                             |   | 65 |   |
| Depreciation and amortization                                                              |   | 5,606                           |   | 5,627 |   |
| Write-offs of deferred financing costs                                                     |   | 1,788                           |   | — |   |
| Deferred income tax benefit                                                                |   | (2,198                          | )      | (579 | ) |
| (Gain) loss on disposals of other property  and equipment, net                             |   | (735                            | )      | 573 |   |
| Changes in operating assets and  liabilities:                                              |   |                            |   |   |   |
| Accounts receivable                                                                        |   | (5,797                          | )      | 1,200 |   |
| Inventories                                                                                |   | (1,146                          | )      | (74 | ) |
| Other assets                                                                               |   | (2,946                          | )      | (229 | ) |
| Accounts payable                                                                           |   | (570                            | )      | (1,204 | ) |
| Accrued expenses and other long-term  liabilities                                          |   | 894                             |   | (2,324 | ) |
| NET CASH (USED IN) PROVIDED BY OPERATING  ACTIVITIES                                       |   | (9,900                          | )      | 1,566 |   |
|                                                                                       |   |                            |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                      |   |                            |   |   |   |
| Purchases of property and equipment                                                        |   | (2,255                          | )      | (5,157 | ) |
| Proceeds from sales of property and  equipment                                             |   | 2,897                           |   | — |   |
| NET CASH PROVIDED BY (USED IN) INVESTING  ACTIVITIES                                       |   | 642                             |   | (5,157 | ) |
|                                                                                       |   |                            |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                      |   |                            |   |   |   |
| Proceeds from issuance of senior notes                                                     |   | 175,000                         |   | — |   |
| Repayments of debt                                                                         |   | (128,112                        | )      | (267 | ) |
| Payments related to deferred financing  costs                                              |   | (6,625                          | )      | — |   |
| Repayments of capital lease and finance  obligations                                       |   | (230                            | )      | (482 | ) |
| Stock options exercised                                                                    |   | 244                             |   | 127 |   |
| NET CASH PROVIDED BY (USED IN) FINANCING  ACTIVITIES                                       |   | 40,277                          |   | (622 | ) |
|                                                                                       |   |                            |   |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                      |   | 31,019                          |   | (4,213 | ) |
|                                                                                       |   |                            |   |   |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD                                            |   | 25,631                          |   | 34,341 |   |
|                                                                                       |   |                            |   |   |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                                   |   | $                               | 56,650 |   | $ | 30,128 |   |
|                                                                                       |   |                            |   |   |   |
| SUPPLEMENTAL DISCLOSURES:                                                                  |   |                            |   |   |   |
| Cash paid during the period for:                                                           |   |                            |   |   |   |
| Interest                                                                                   |   | $                               | 4,927  |   | $ | 1,325 |   |
| Income taxes                                                                               |   | 7                               |   | 686 |   |
| Capital lease obligations incurred                                                         |   | 2,280                           |   | — |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

3

----

 

**FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

 

**1. BASIS OF PRESENTATION ANDSIGNIFICANT ACCOUNTING POLICIES**

 

*Interim Financial Information -*

 

Theaccompanying condensed consolidated financial statements as of March 28, 2004and for the three months ended March 28, 2004 and March 30, 2003 are unaudited,but, in the opinion of management, include all adjustments which are necessaryfor a fair presentation of the consolidated financial position, results ofoperations, cash flows and comprehensive loss of Friendly Ice Cream Corporation(“FICC”) and subsidiaries (unless the context indicates otherwise,collectively, the “Company”). Such adjustments consist solely of normalrecurring accruals. Operating results for the three month periods ended March28, 2004 and March 30, 2003 are not necessarily indicative of the results thatmay be expected for the entire year due, in part, to the seasonality of theCompany’s business. Historically, higher revenues and operating income havebeen experienced during the second and third fiscal quarters. The Company’sconsolidated financial statements, including the notes thereto, which arecontained in the 2003 Annual Report on Form 10-K should be read in conjunctionwith these condensed consolidated financial statements. Capitalized terms nototherwise defined herein should be referenced to the 2003 Annual Report on Form10-K.

 

*Use of Estimates in the Preparation ofFinancial Statements -*

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities at the dates of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting periods. The critical accounting policies and most significantestimates and assumptions relate to revenue recognition, insurance reserves,recoverability of accounts receivable, valuation allowances and pension andother post-retirement benefits expense. Actual amounts could differsignificantly from the estimates.

 

*Revenue Recognition -*

 

TheCompany’s revenues are derived primarily from the operation of full-servicerestaurants, the distribution and sale of premium ice cream desserts throughretail and institutional locations and franchising. The Company recognizesrestaurant revenue upon receipt of payment from the customer and retailrevenue, net of discounts and allowances, upon delivery of product. Reservesfor discounts and allowances from retail sales are estimated and accrued whenrevenue is recorded. Actual amounts could differ materially from the estimates.Franchise royalty income, generally calculated as 4% of net sales offranchisees, is recorded monthly based upon the actual sales reported by eachfranchisee for the month just completed. Franchise fees are recorded as revenueupon completion of all significant services, generally upon opening of therestaurant.

 

*Shipping and Handling Costs -*

 

Costsrelated to shipping and handling are included in cost of sales in theaccompanying condensed consolidated statements of operations for all periodspresented.

 

4

----

 

*Insurance Reserves -*

 

TheCompany is self-insured through retentions or deductibles for the majority ofits workers’ compensation, automobile, general liability, employer’s liability,product liability and group health insurance programs. Self-insurance amountsvary up to $500,000 per occurrence. Insurance with third parties, some of whichis then reinsured through Restaurant Insurance Corporation (“RIC”), theCompany’s wholly owned subsidiary, is in place for claims in excess of theseself-insured amounts. RIC reinsures 100% of the risk from $500,000 to$1,000,000 per occurrence through September 2, 2000 for FICC’s workers’compensation, general liability, employer’s liability and product liabilityinsurance. Subsequent to September 2, 2000, the Company discontinued its use ofRIC as a captive insurer for new claims. FICC’s and RIC’s liabilities forestimated incurred losses are actuarially determined and recorded in the accompanyingcondensed consolidated financial statements on an undiscounted basis. Actualincurred losses may vary from the estimated incurred losses and could have amaterial effect on the Company’s insurance expense.

 

*Accounts Receivable and Allowance for DoubtfulAccounts -*

 

AtMarch 28, 2004 and December 28, 2003, accounts receivable of $12,406,000 and$10,384,000 were net of allowances for doubtful accounts totaling $815,000 and$696,000, respectively. Accounts receivable consists primarily of amounts duefrom the sale of products to franchisees and supermarkets. Accounts receivablealso includes amounts related to franchise royalties, rents and othermiscellaneous items.

 

The Company recognizes allowances for doubtful accounts to ensurereceivables are not overstated due to uncollectibility. Bad debt reserves aremaintained for customers in the aggregate based on a variety of factors,including the length of time receivables are past due, significant one-timeevents and historical experience. An additional reserve for individual accountsis recorded when the Company becomes aware of a customer’s inability to meetits financial obligations, such as in the case of bankruptcy filings ordeterioration in the customer’s operating results or financial position. If circumstancesrelated to customers change, estimates of the recoverability of receivableswould be further adjusted.

 

*Pension and Other Post-Retirement Benefits -*

 

Thedetermination of the Company’s obligation and expense for pension and otherpost-retirement benefits is dependent upon the selection of certain assumptionsused by actuaries in calculating such amounts. Those assumptions include, amongother things, the discount rate, expected long-term rate of return on planassets and rates of increase in compensation and health care costs. Inaccordance with accounting principles generally accepted in the United States,actual results that differ from the assumptions are accumulated and amortizedover future periods and, therefore, generally affect the recognized expense andrecorded obligation in such future periods. Significant differences in actualexperience or significant changes in the assumptions may materially affect thefuture pension and other post-retirement obligations and expense.

 

*Cash and Cash Equivalents -*

 

TheCompany considers all investments with an original maturity of three months orless when purchased to be cash equivalents.

 

5

----

 

*Restricted Cash -*

 

RICis required to hold assets in trust whose value is at least equal to certain ofRIC’s outstanding estimated insurance claim liabilities. Accordingly, as ofMarch 28, 2004 and December 28, 2003, cash of $1,290,000 and $1,671,000,respectively, was restricted.

 

*Inventories -*

 

Inventoriesare stated at the lower of first-in, first-out cost or market and consisted ofthe following at March 28, 2004 and December 28, 2003 (in thousands):

 

|             |   | **March 28,  2004** |   | **December  28,  2003** |   |
|------------------|--------|---------------------|--------|-------------------------|--------|
|             |   |                |   |                    |   |
| Raw materials    |   | $                   | 2,200  |                    | $      | 1,557 |   |
| Goods in process |   | 153                 |   | 114                     |   |
| Finished goods   |   | 14,462              |   | 13,998                  |   |
| Total            |   | $                   | 16,815 |                    | $      | 15,669 |   |

 

*Long-Lived Assets -*

 

Inaccordance with Statement of Financial Accounting Standard (“SFAS”) No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” which wasadopted in 2002, the Company reviews its Non-Friendly Marks, which wereassigned to the Company by Hershey in September 2002, for impairment on aquarterly basis. The Company recognizes impairment has occurred when thecarrying value of the Non-Friendly Marks exceeds the estimated futureundiscounted cash flows of the trademarked products. Additionally, the Companyreviews long-lived assets related to each restaurant to be held and used in thebusiness quarterly for impairment, or whenever events or changes in circumstancesindicate that the carrying amount of a restaurant may not be recoverable. TheCompany evaluates restaurants using a “two-year history of cash flow” as theprimary indicator of potential impairment. Based on the best informationavailable, the Company writes down an impaired restaurant to its estimated fairmarket value, which becomes its new cost basis. Estimated fair market value isbased on the Company’s experience selling similar properties and local marketconditions, less costs to sell for properties to be disposed of. In addition,restaurants scheduled for closing are reviewed for impairment and depreciablelives are adjusted. The impairment evaluation is based on the estimated cashflows from continuing use through the expected disposal date and the expectedterminal value.

 

Storeclosure costs include costs of disposing of the assets as well as otherfacility-related expenses from previously closed stores. These store closurecosts are expensed as incurred. Additionally, at the date the closure occurs,the Company records a liability for the amount of any remaining operating leaseobligations subsequent to the expected closure date, net of estimated subleaseincome, if any.

 

6

----

 

SFASNo. 144 also requires the results of operations of a component entity that isclassified as held for sale or has been disposed of to be reported asdiscontinued operations in the statement of operations if certain conditionsare met. These conditions include commitment to a plan of disposal after theeffective date of this statement, elimination of the operations and cash flowsof the component entity from the ongoing operations of the company and nosignificant continuing involvement in the operations of the component entityafter the disposal transaction. The results of operations of stores meeting allof these conditions that were disposed of in 2004 or classified as held forsale at March 28, 2004 were not material for the quarters ended March 28, 2004and March 30, 2003.

 

Considerablemanagement judgment is necessary to estimate future cash flows, including cashflows from continuing use, terminal value, closure costs and sublease income.Accordingly, actual results could vary significantly from estimates.

 

*Other Assets* -

 

Otherassets included notes receivable of $4,610,000 and $4,638,000, which were netof allowances for doubtful accounts totaling $313,000, as of March 28, 2004 andDecember 28, 2003, respectively. Also included in other assets as of March 28,2004 and December 28, 2003 were payments made to fronting insurance carriers of$1,211,000 to establish loss escrow funds.

 

*Other Accrued Expenses-*

 

Other accrued expenses consisted of the following at March28, 2004 and December 28, 2003 (in thousands):

 

|                          |   | **March 28,  2004** |   | **December  28,  2003** |   |
|-------------------------------|--------|---------------------|--------|-------------------------|--------|
|                          |   |                |   |                    |   |
| Gift cards outstanding        |   | $                   | 2,034  |                    | $      | 3,975 |   |
| Accrued meals and other taxes |   | 3,217               |   | 2,947                   |   |
| Accrued bonus                 |   | 1,607               |   | 2,853                   |   |
| Accrued rent                  |   | 2,389               |   | 2,416                   |   |
| Accrued construction costs    |   | 632                 |   | 2,331                   |   |
| Accrued advertising           |   | 2,600               |   | 1,554                   |   |
| Unearned revenues             |   | 896                 |   | 894                     |   |
| All other                     |   | 2,157               |   | 2,085                   |   |
| Total                         |   | $                   | 15,532 |                    | $      | 19,055 |   |

 

7

----

 

*Income Taxes -*

 

TheCompany accounts for income taxes in accordance with SFAS No. 109, “Accountingfor Income Taxes,” which requires recognition of deferred tax assets andliabilities for the expected future tax consequences of events that have beenincluded in the financial statements or tax returns. A valuation allowance isrecorded for deferred tax assets whose realization is not likely. The Companyrecords income taxes based on the effective rate expected for the year with anychanges in the valuation allowance reflected in the period of change. As ofMarch 28, 2004 and December 28, 2003, a valuation allowance of $10,130,000existed related to state NOL carryforwards due to restrictions on the usage ofstate NOL carryforwards and short carryforward periods for certain states.Taxable income by state for future periods is difficult to estimate. The amountand timing of any future taxable income may affect the usage of suchcarryforwards, which could result in a material change in the valuationallowance.

 

*Derivative Instruments and Hedging Agreements-*

 

TheCompany enters into commodity option contracts from time to time to managedairy cost pressures. The Company’s commodity option contracts do not meethedge accounting criteria as defined by SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities,” and, accordingly, are marked tomarket each period, with the resulting gains or losses recognized in cost ofsales. For the quarters ended March 28, 2004 and March 30, 2003, gains ofapproximately $771,000 and losses of approximately $253,000, respectively, wereincluded in cost of sales related to these option contracts.

 

*Net Loss Per Share -*

 

Basicnet loss per share is calculated by dividing net loss by the weighted averagenumber of common shares outstanding during the period. Diluted net loss pershare is calculated by dividing net loss by the weighted average number ofshares of common stock and common stock equivalents outstanding during theperiod. Common stock equivalents are dilutive stock options and warrants thatare assumed exercised for calculation purposes. The number of common stockoptions which could dilute basic earnings per share in the future, that werenot included in the computation of diluted earnings per share because to do sowould have been antidilutive, was 328,000 and 332,000 for the three monthsended March 28, 2004 and March 30, 2003, respectively.

 

8

----

 

*Stock-Based Compensation -*

 

TheCompany accounts for stock-based compensation for employees under AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees,” and elected the disclosure-only alternative under SFAS No. 123,“Accounting for Stock-Based Compensation.” Stock-based compensation cost ofapproximately $222,000 related to modified option awards was included in net lossfor the three months ended March 28, 2004 for the Company’s Stock Option Planand the Company’s 2003 Incentive Plan. No stock-based compensation cost wasincluded in net loss for the three months ended March 30, 2003 for theCompany's Stock Option Plan or the Company's 2003 Incentive Plan, as alloptions granted during this period had an exercise price equal to the marketvalue of the stock on the date of grant.

 

InDecember 2002, the Financial Accounting Standards Board (“FASB”) issued SFASNo. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,”which amends SFAS No. 123. SFAS No. 148 allows for three methods of transitionfor those companies that adopt SFAS No. 123’s provisions for fair valuerecognition. SFAS No. 148’s transition guidance and provisions for annualdisclosures are effective for fiscal years ending after December 15, 2002. Inaccordance with SFAS No. 148, the Company will continue to disclose therequired pro-forma information in the notes to the consolidated financialstatements.

 

Inaccordance with SFAS No. 148, the following table presents the effect on netloss and net loss per share had compensation cost for the Company’s stock plansbeen determined consistent with SFAS No. 123 (in thousands, except per sharedata):

 
|                                                                                                                                |   | **For the  Three Months Ended** |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                                                                                |   | **March 28,  2004**             |   | **March 30,  2003** |   |
|                                                                                                                                |   |                            |   |   |   |
| Net loss as reported                                                                                                                |   | $                               | (5,129 | ) | $ | (1,489 | ) |
|                                                                                                                                |   |                            |   |   |   |
| Add stock-based compensation expense  included in reported net loss, net of related income tax benefit                              |   | 131                             |   | — |   |
| Less stock-based compensation expense  determined under fair value method for all stock options, net of related  income tax benefit |   | (105                            | )      | (101 | ) |
| Pro forma net loss                                                                                                                  |   | $                               | (5,103 | ) | $ | (1,590 | ) |
|                                                                                                                                |   |                            |   |   |   |
| Basic and diluted net loss per share:                                                                                               |   |                            |   |   |   |
| Basic and diluted net loss per share, as  reported                                                                                  |   | $                               | (0.68  | ) | $ | (0.20 | ) |
| Basic and diluted net loss per share, pro  forma                                                                                    |   | $                               | (0.68  | ) | $ | (0.21 | ) |

 

9

----

 

*Reclassifications -*

 

Certain prior year amounts have been reclassified to conform withcurrent year presentation, including $775,000 from operating expenses togeneral and administrative expenses for the quarter ended March 30, 2003.

 

*Recently Issued Accounting Pronouncements -*

 

InJanuary 2003, the FASB issued Interpretation No. 46, “Consolidation of VariableInterest Entities, an Interpretation of Accounting Research Bulletin (“ARB”)No. 51” (“FIN 46”). FIN 46 requires certain variable interest entities to beconsolidated by the primary beneficiary of the entity if the equity investorsin the entity do not have the characteristics of a controlling financialinterest or do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties. FIN 46 is effective for all entities subject to this interpretation nolater than the end of the first period that ends after March 15, 2004. Theadoption of FIN 46 in 2003 had no material impact on the Company’s results ofoperations or financial position.

 

**2. DEBT**

 

Debt at March28, 2004 and December 28, 2003 consisted of the following (in thousands):

 
|                                                       |   | **March 28,  2004** |    | **December  28,  2003** |   |
|------------------------------------------------------------|--------|---------------------|---------|-------------------------|--------|
|                                                       |   |                |    |                    |   |
| New Senior Notes, 8 3/8%, due June 15, 2012                |   | $                   | 175,000 |                    | $      | — |   |
| Senior Notes, 10 1/2%, originally due  December 1, 2007    |   | 48,144              |    | 175,977                 |   |
| Revolving credit loans, due June 30, 2007                  |   | —              |    | —                  |   |
| Mortgage loans, due April 1, 2004 through  January 1, 2022 |   | 52,808              |    | 53,087                  |   |
| Total debt                                                 |   | 275,952             |    | 229,064                 |   |
| Less: current portion                                      |   | (49,312             | )       | (1,127                  | )      |
| Total long-term debt                                       |   | $                   | 226,640 |                    | $      | 227,937 |   |

 

InNovember 1997, FICC entered into a credit facility that included revolvingcredit loans, term loans and letters of credit (the “Old CreditFacility”).  Also in November 1997, FICCcompleted a public offering of $200,000,000 of senior notes (the “SeniorNotes”).

 

10

----

 

InDecember 2001, the Company completed a financial restructuring plan (the“Refinancing Plan”) which included the repayment of the $64,545,000 outstandingunder the Old Credit Facility and the purchase of $21,273,000 in Senior Noteswith the proceeds from $55,000,000 in long-term mortgage financing (the“Mortgage Financing”) and a $33,700,000 sale and leaseback transaction (the“Sale/Leaseback Financing”). In addition, FICC secured a new $30,000,000revolving credit facility (the “New Credit Facility”) of which up to$20,000,000 is available to support letters of credit.  On July 3, 2003, FICC obtained a limitedwaiver to the New Credit Facility allowing the purchase of certain of the SeniorNotes in an amount up to $3,000,000, subject to certain conditions. In July2003, FICC purchased $2,750,000 in aggregate principal amount of the SeniorNotes for $2,826,000, the then current market value.

 

InFebruary 2004, the Company announced a cash tender offer and consentsolicitation for the $175,977,000 of Senior Notes to be financed with theproceeds from a private offering of new senior notes (the “New Senior Notes”),available cash and an amended New Credit Facility (the “2004 Refinancing”).  In March 2004, $127,357,000 of aggregateprincipal amount of Senior Notes were purchased at the tender offer and consentsolicitation price of 104% of the principal amount and $476,000 of aggregateprincipal amount of Senior Notes were purchased at the tender offer price of102% of the principal amount. In April 2004, the remaining $48,144,000 ofSenior Notes were redeemed in accordance with the Senior Notes indenture at103.5% of the principal amount.  TheSenior Notes would have matured on December 1, 2007.  Interest on the Senior Notes was payable at 10.5% per annumsemi-annually on June 1 and December 1 of each year.  In connection with the tender offer, the Company wrote offunamortized deferred financing costs of $1,788,000 and paid a premium of $5,104,000that were included in the accompanying condensed consolidated statement ofoperations for the first quarter ended March 28, 2004.  In April 2004, the Company wrote offunamortized deferred financing costs of $657,000 and paid a premium of$1,685,000 in connection with the redemption of the remaining Senior Notes. The$2,342,000 will be included in the condensed consolidated statement ofoperations for the second fiscal quarter ending June 27, 2004.

 

The $175,000,000 of New Senior Notes issued in March 2004 are unsecuredsenior obligations of FICC, guaranteed on an unsecured senior basis by FICC’sFriendly’s Restaurants Franchise, Inc. subsidiary, but are effectivelysubordinated to all secured indebtedness of FICC, including the indebtednessincurred under the New Credit Facility. The New Senior Notes mature on June 15,2012. Interest on the New Senior Notes is payable at 8.375% per annum semi-annuallyon June 15 and December 15 of each year commencing June 15,2004.  The New Senior Notes are redeemable,in whole or in part, at any time on or after June 15, 2008 at FICC’s option atredemption prices from 104.188% to 100.00%, based on the redemption date.  In addition, at any time prior to June 15,2007, FICC may redeem, subject to certain conditions, up to 35% of theaggregate principal amount of the New Senior Notes with the proceeds of one ormore qualified equity offerings, as defined, at a redemption price of 108.375%of the principal amount, plus accrued interest.

 

In connection with the 2004 Refinancing, the New Credit Facility wasamended in March 2004.  The totalcommitment amount was increased from $30,000,000 to $35,000,000 and thematurity date was extended from December 17, 2005 to June 30, 2007, in additionto other changes.

 

TheNew Credit Facility is secured by substantially all of the assets of FICC andtwo of its six subsidiaries, Friendly’s Restaurants Franchise Inc. andFriendly’s

 

11

----

 

International Inc. These two subsidiaries also guaranteeFICC’s obligations under the New Credit Facility.

 

TheNew Credit Facility includes certain restrictive covenants includinglimitations on indebtedness, restricted payments such as dividends and stockrepurchases and sales of assets and of subsidiary stock. Additionally, the NewCredit Facility limits the amount which the Company may spend on capitalexpenditures, restricts the use of proceeds, as defined, from asset sales andrequires the Company to comply with certain financial covenants. The Company isin compliance with these covenants.

 

TheNew Credit Facility has an annual “clean-up” provision, commencing in 2005,which obligates the Company to repay in full all revolving credit loans on orbefore September 30 (or, if September 30 is not a business day, as defined,then the next business day) of each year and maintain a zero balance on suchrevolving credit for at least 30 consecutive days, to include September 30,immediately following the date of such repayment.

 

The$35,000,000 revolving credit commitment less outstanding letters of credit isavailable for borrowing to provide working capital and for other corporateneeds. As of March 28, 2004 and December 28, 2003, total letters of creditoutstanding were $14,012,000 and $13,550,000, respectively. During the firstquarters ended March 28, 2004 and March 30, 2003, there were no drawingsagainst the letters of credit.

 

Therevolving credit loans bear interest at the Company’s option at either (a) theBase Rate plus the applicable margin as in effect from time to time (the “BaseRate”) (6.50% at March 28, 2004) or (b) the Eurodollar rate plus the applicablemargin as in effect from time to time (the “Eurodollar Rate”) (5.52% at March28, 2004).  As of March 28, 2004 andDecember 28, 2003, there were no revolving credit loans outstanding and$20,988,000 and $16,450,000, respectively, was available for borrowing.

 

Inconnection with the Mortgage Financing in December 2001, three new limitedliability corporations (“LLCs”) were organized.  Friendly Ice Cream Corporation is the sole member of each LLC.FICC sold 75 of its operating Friendly’s restaurants to the LLCs in exchangefor the proceeds from the Mortgage Financing. Promissory notes were issued foreach of the 75 properties. Each LLC is a separate entity with separatecreditors who will be entitled to be satisfied out of such LLC’s assets. EachLLC is a borrower under the Mortgage Financing.

 

TheMortgage Financing has a maturity date of January 1, 2022 and is amortized over20 years. Interest on $10,000,000 of the original $55,000,000 from the MortgageFinancing is variable and is the sum of the 30-day LIBOR rate in effect (1.09%at March 28, 2004) plus 6% on an annual basis. Changes in the interest rate arecalculated monthly and recognized annually when the monthly payment amount isadjusted. Changes in the monthly payment amounts owed due to interest ratechanges are reflected in the principal balances, which are re-amortized overthe remaining life of the mortgages. The remaining $45,000,000 of the original$55,000,000 from the Mortgage Financing bears interest at a fixed annual rateof 10.16%. Each promissory note may be prepaid in full. The variable rate notesare subject to prepayment penalties during the first five years. The fixed ratenotes may not be prepaid without the Company providing the note holders with ayield maintenance premium.

 

12

----

 

The Mortgage Financing requires the Company to maintain a fixed chargecoverage ratio, as defined, of at least 1.10 to 1 and each LLC to maintain afixed charge coverage ratio, as defined, on an aggregate restaurant basis of atleast 1.25 to 1, in each case calculated as of the last day of each fiscalyear. The Company is in compliance with these covenants.

 

**3. INTANGIBLE ASSETSAND DEFERRED COSTS**

 

Intangibleassets and deferred costs as of March 28, 2004 and December 28, 2003 were (inthousands):

 
|                                                                                                |   | **March 28,  2004** |   | **December  28,  2003** |   |
|-----------------------------------------------------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
|                                                                                                |   |                |   |                    |   |
| 1988 Non-Friendly Marks amortized over 40  years on a straight-line basis                           |   | $                   | 18,650 |                    | $      | 18,650 |   |
| Deferred financing costs amortized over the  terms of the related loans on an effective yield basis |   | 11,927              |   | 10,486                  |   |
| Other                                                                                               |   | 876                 |   | 876                     |   |
| Intangible assets                                                                                   |   | 31,453              |   | 30,012                  |   |
| Less: accumulated amortization                                                                      |   | (9,172              | )      | (12,122                 | )      |
| Net                                                                                                 |   | $                   | 22,281 |                    | $      | 17,890 |   |

 

Inconnection with the 2004 Refinancing, the Company wrote off unamortizeddeferred financing costs related to the tender offer for the Senior Notes inMarch 2004 and the redemption of the remaining Senior Notes in April 2004 of$1,788,000 and $657,000, respectively. The $1,788,000 was included in otherexpenses, principally debt retirement costs in the accompanying condensedconsolidated statement of operations for the quarter ended March 28, 2004 andthe $657,000 will be included in the condensed consolidated statement ofoperations for the second fiscal quarter ending June 27, 2004. Additionally,the Company incurred $6,550,000 of costs associated with the issuance of theNew Senior Notes and the amendment to the New Credit Facility, which wereincluded in intangible assets and deferred costs in the accompanying condensedconsolidated balance sheet as of March 28, 2004. These costs will be amortizedover the terms of the New Senior Notes and the amended New Credit Facility.

 

Amortizationexpense was $446,000 and $428,000 for the quarters ended March 28, 2004 andMarch 30, 2003, respectively.

 

13

----

 

Futureamortization expense related to these intangible assets and deferred costs asof March 28, 2004 was (in thousands):

 

| **Year**   |   | **Amount** |   |
|------------|--------|------------|--------|
|       |   |       |   |
| 2004       |   | $          | 1,367  |   |
| 2005       |   | 1,783      |   |
| 2006       |   | 1,778      |   |
| 2007       |   | 1,608      |   |
| 2008       |   | 1,441      |   |
| Thereafter |   | 13,647     |   |
| Total      |   | $          | 21,624 |   |

 

 

**4. EMPLOYEE BENEFITPLANS**

 

Thecomponents of net periodic pension benefit for the three months ended March 28,2004 and March 30, 2003 were (in thousands):

 
|                               |   | **March 28,  2004** |   | **March 30,  2003** |   |
|------------------------------------|--------|---------------------|--------|---------------------|--------|
|                               |   |                |   |                |   |
| Service cost                       |   | $                   | — |                | $      | 552 |   |
| Interest cost                      |   | 1,627               |   | 1,606               |   |
| Expected return on assets          |   | (2,331              | )      | (2,275              | )      |
| Net amortization:                  |   |                |   |                |   |
| Unrecognized prior service benefit |   | —              |   | (320                | )      |
| Unrecognized net actuarial loss    |   | 154                 |   | 151                 |   |
|                               |   |                |   |                |   |
| Net periodic pension benefit       |   | $                   | (550   | )                   | $      | (286 | ) |

 

14

----

 

Thecomponents of the net postretirement benefit cost for the three months endedMarch 28, 2004 and March 30, 2003 were (in thousands):

 
|                                                    |   | **March 28,  2004** |   | **March 30,  2003** |   |
|---------------------------------------------------------|--------|---------------------|--------|---------------------|--------|
|                                                    |   |                |   |                |   |
| Service cost                                            |   | $                   | 28     |                | $      | 25 |   |
| Interest cost                                           |   | 116                 |   | 117                 |   |
| Recognized actuarial loss                               |   | 23                  |   | 16                  |   |
| Net amortization of unrecognized prior  service benefit |   | (36                 | )      | (36                 | )      |
|                                                    |   |                |   |                |   |
| Net postretirement benefit cost                         |   | $                   | 131    |                | $      | 122 |   |

 

During January 2004, the FASB issued FASBStaff Position (“FSP”) 106-1, “Accounting and Disclosure Requirements Relatedto the Medicare Prescription Drug, Improvement and Modernization Act of 2003(the “Act”)”, which permits a sponsor of a postretirement health care plan thatprovides a prescription drug benefit to make a one-time election to deferaccounting for the effects of the Act. The guidance in this FSP is effectivefor interim or annual financial statements of fiscal years ending afterDecember 7, 2003. The election to defer accounting for the Act is a one-timeelection that must be made before net periodic postretirement benefit costs forthe period that includes the Act’s enactment date are first included inreported financial information pursuant to the requirements of SFAS No. 106,“Employers’ Accounting for Postretirement Benefits Other than Pensions.”  In accordance with FSP 106-1, the Companyhas elected to defer accounting for the effects of the Act and accordingly, themeasures of the accumulated postretirement benefit obligation and the netpostretirement benefit cost do not reflect the effects of the Act.

 

The Company’s election to defer accounting for the effects of the Act may not bechanged and the deferral will continue to apply until authoritative guidance onthe accounting for the federal subsidy is issued, or until the guidance in thefollowing sentence applies. The election to defer expires if, subsequent toJanuary 31, 2004, but prior to the issuance of additional authoritativeguidance, a significant event occurs that ordinarily would call forremeasurement of a plan’s assets and obligations—for example, a plan amendment,settlement, or curtailment. Upon the occurrence of such an event, the Companywould be required to account for that event pursuant to the guidance in SFASNo. 106 and also reflect in its accounting for postretirement benefits otherthan pensions its best estimate of the effects of the Act, including thefederal subsidy (if applicable based on the terms of the plan and the sponsor’sanalysis of generally accepted accounting principles) and any effects onparticipation rates and health care cost estimates.

 

Authoritativeguidance on accounting for the federal subsidy is pending. The expected effectsof the Act will be factored into the Company’s year-end measurement ofpostretirement benefits for fiscal 2004. If the final authoritative accountingguidance is issued after the provisions of the Act are reflected in theyear-end measurement of the obligation and net postretirement benefit costsestimate for fiscal 2004, the guidance could require the Company to changepreviously reported information. The Company has not yet determined the impact of the Acton these benefits.

 

15

----

 

**5. SEGMENT REPORTING**

 

Operatingsegments are components of an enterprise about which separate financialinformation is available that is evaluated regularly by the chief operatingdecision-maker, or decision-making group, in deciding how to allocate resourcesand in assessing performance. The Company’s chief operating decision-maker isthe Chief Executive Officer and President of the Company. The Company’soperating segments include restaurant, foodservice and franchise. The revenuesfrom these segments include both sales to unaffiliated customers andintersegment sales, which generally are accounted for on a basis consistentwith sales to unaffiliated customers. Intersegment sales and other intersegmenttransactions have been eliminated in the accompanying condensed consolidatedfinancial statements.

 

The Company’srestaurants target families with children and adults who desire a reasonablypriced meal in a full-service setting. The Company’s menu offers a broadselection of freshly-prepared foods, which appeal to customers throughoutall dayparts. The menu currently features over 100 items comprised of a broadselection of breakfast, lunch, dinner and afternoon and evening snack items.Foodservice operations manufactures frozen dessert products and distributessuch manufactured products and purchased finished goods to the Company’srestaurants and franchised operations. Additionally, it sells frozen dessertproducts to distributors and retail and institutional locations. The Company’sfranchise segment includes a royalty based on franchise restaurant revenue. Inaddition, the Company receives rental income from various franchisedrestaurants. The Company does not allocate general and administrative expensesassociated with its headquarters operations to any business segment. Thesecosts include expenses of the following functions: legal, accounting, personnelnot directly related to a segment, information systems and other headquartersactivities.

 

The accountingpolicies of the operating segments are the same as those described in thesummary of significant accounting policies except that the financial resultsfor the foodservice operating segment, prior to intersegment eliminations, havebeen prepared using a management approach, which is consistent with the basisand manner in which the Company’s management internally reviews financialinformation for the purpose of assisting in making internal operatingdecisions. Using this approach, the Company evaluates performance based onstand-alone operating segment income (loss) before income taxes and generallyaccounts for intersegment sales and transfers as if the sales or transfers wereto third parties, that is, at current market prices.

 

16

----

 

EBITDA represents netloss before (i) benefit from income taxes, (ii) other expenses,principally debt retirement costs, (iii) interest expense, net,(iv) depreciation and amortization, (v) write-downs of property andequipment, (vi) net periodic pension benefit and (vii) other non-cash items.The Company has included information concerning EBITDA in this Form 10-Qbecause the Company’s management incentive plan pays bonuses based on achievingEBITDA targets and the Company 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 meaningful than,earnings (loss) from operations or other traditional indications of a company’soperating performance.

 

|                   |   | **For the  Three Months Ended** |    |
|------------------------|--------|---------------------------------|---------|
|                   |   | **March 28,  2004**             |    | **March 30,  2003** |   |
|                   |   | **(in  thousands)**             |    |
| Revenues:              |   |                            |    |   |   |
| Restaurant             |   | $                               | 104,353 |   | $ | 103,168 |   |
| Foodservice            |   | 53,362                          |    | 52,326 |   |
| Franchise              |   | 3,058                           |    | 2,255 |   |
| Total                  |   | $                               | 160,773 |   | $ | 157,749 |   |
|                   |   |                            |    |   |   |
| Intersegment revenues: |   |                            |    |   |   |
| Restaurant             |   | $                               | —  |   | $ | — |   |
| Foodservice            |   | (30,019                         | )       | (29,059 | ) |
| Franchise              |   | —                          |    | — |   |
| Total                  |   | $                               | (30,019 | ) | $ | (29,059 | ) |
|                   |   |                            |    |   |   |
| External revenues:     |   |                            |    |   |   |
| Restaurant             |   | $                               | 104,353 |   | $ | 103,168 |   |
| Foodservice            |   | 23,343                          |    | 23,267 |   |
| Franchise              |   | 3,058                           |    | 2,255 |   |
| Total                  |   | $                               | 130,754 |   | $ | 128,690 |   |

 

17

----

 
|                                                 |   | **For the  Three Months Ended** |   |
|------------------------------------------------------|--------|---------------------------------|--------|
|                                                 |   | **March 28,  2004**             |   | **March 30,  2003** |   |
|                                                 |   | **(in  thousands)**             |   |
|                                                 |   |                            |   |   |   |
| EBITDA:                                              |   |                            |   |   |   |
| Restaurant                                           |   | $                               | 9,333  |   | $ | 10,081 |   |
| Foodservice                                          |   | 3,532                           |   | 3,189 |   |
| Franchise                                            |   | 2,091                           |   | 1,561 |   |
| Corporate                                            |   | (5,412                          | )      | (4,829 | ) |
| Gain (loss) on property and equipment, net           |   | 674                             |   | (341 | ) |
| Restructuring expenses                               |   | (2,627                          | )      | — |   |
| Gain on litigation settlement                        |   | 3,644                           |   | — |   |
| Less pension benefit included in reporting  segments |   | (550                            | )      | (286 | ) |
| Total                                                |   | $                               | 10,685 |   | $ | 9,375 |   |
|                                                 |   |                            |   |   |   |
| Interest expense, net-Corporate                      |   | $                               | 6,064  |   | $ | 6,102 |   |
|                                                 |   |                            |   |   |   |
| Other expenses, principally debt retirement  costs   |   | $                               | 6,892  |   | $ | — |   |
|                                                 |   |                            |   |   |   |
| Depreciation and amortization:                       |   |                            |   |   |   |
| Restaurant                                           |   | $                               | 3,851  |   | $ | 3,799 |   |
| Foodservice                                          |   | 856                             |   | 736 |   |
| Franchise                                            |   | 47                              |   | 39 |   |
| Corporate                                            |   | 852                             |   | 1,053 |   |
| Total                                                |   | $                               | 5,606  |   | $ | 5,627 |   |
|                                                 |   |                            |   |   |   |
| Net periodic pension benefit                         |   | $                               | (550   | ) | $ | (286 | ) |
|                                                 |   |                            |   |   |   |
| Income (loss) before benefit from income  taxes:     |   |                            |   |   |   |
| Restaurant                                           |   | $                               | 5,482  |   | $ | 6,282 |   |
| Foodservice                                          |   | 2,676                           |   | 2,453 |   |
| Franchise                                            |   | 2,044                           |   | 1,522 |   |
| Corporate                                            |   | (19,220                         | )      | (11,984 | ) |
| Gain (loss) on property and equipment, net           |   | 674                             |   | (341 | ) |
| Restructuring expenses                               |   | (2,627                          | )      | — |   |
| Gain on litigation settlement                        |   | 3,644                           |   | — |   |
| Total                                                |   | $                               | (7,327 | ) | $ | (2,068 | ) |

 

18

----

 
|                                                                   |   | **For the  Three  Months Ended  March 28,  2004** |   | **For the  Year  Ended  December 28,  2003** |   |
|------------------------------------------------------------------------|--------|---------------------------------------------------|--------|----------------------------------------------|--------|
|                                                                   |   | **(in  thousands)**                               |   |
| Capital expenditures, including assets  acquired under capital leases: |   |                                              |   |                                         |   |
| Restaurant                                                             |   | $                                                 | 3,939  |                                         | $      | 25,024 |   |
| Foodservice                                                            |   | 518                                               |   | 4,862                                        |   |
| Corporate                                                              |   | 78                                                |   | 1,830                                        |   |
| Total                                                                  |   | $                                                 | 4,535  |                                         | $      | 31,716 |   |

 
|          |   | **March 28,  2004** |    | **December  28,  2003** |   |
|---------------|--------|---------------------|---------|-------------------------|--------|
|          |   | **(in  thousands)** |    |
| Total assets: |   |                |    |                    |   |
| Restaurant    |   | $                   | 151,298 |                    | $      | 152,228 |   |
| Foodservice   |   | 44,146              |    | 39,404                  |   |
| Franchise     |   | 7,673               |    | 8,644                   |   |
| Corporate     |   | 92,756              |    | 52,176                  |   |
| Total         |   | $                   | 295,873 |                    | $      | 252,452 |   |

 

19

----

 

**6. RESTRUCTURING RESERVES**

 

Duringthe quarter ended March 28, 2004, the Company recorded a pre-tax restructuringcharge of $2,627,000 for severance and outplacement services associated withreduction in force actions taken during the first quarter of 2004 that reducedheadcount by approximately 20 permanent positions.

 

On October 10, 2001, the Company eliminated approximately 70 positionsat corporate headquarters. In addition, approximately 30 positions in therestaurant construction and fabrication areas were eliminated by December 30,2001. The purpose of the reduction was to streamline functions and reduceredundancy among its business segments. As a result of the elimination of thepositions and the outsourcing of certain functions, the Company reported apre-tax restructuring charge of $2,536,000 for severance, rent and unusableconstruction supplies in the year ended December 30, 2001.

 

InMarch 2000, the Company’s Board of Directors approved a restructuring plan thatprovided for the immediate closing of 81 restaurants at the end of March 2000and the disposition of an additional 70 restaurants over the next 24 months. Asa result of this plan, the Company reported a pre-tax restructuring charge of$12,056,000 for severance, rent, utilities and real estate taxes, demarking,lease termination costs and certain other costs associated with the closing ofthe locations, along with a pre-tax write-down of property and equipment forthese locations of approximately $17,000,000 in the year ended December 31,2000. The Company reduced the restructuring reserve by $400,000 and $1,900,000during the years ended December 29, 2002 and December 30, 2001, respectively,since the reserve exceeded estimated remaining payments.

 

20

----

 

The following represents the reserve and activity associated with theMarch 2004, October 2001 and March 2000 restructurings (in thousands):

 
|                            |   | **For the  Three Months Ended March 28, 2004**       |   |
|---------------------------------|--------|------------------------------------------------------|--------|
|                            |   | **Restructuring  Reserves as of  December 28, 2003** |   | **Expense** |   | **Costs Paid** |   | **Restructuring  Reserves as of  March 28, 2004** |   |
|                            |   |                                                 |   |   |   |   |   |   |   |
| Rent                            |   | $                                                    | 319    |   | $ | — |   | $ | (65 | ) | $ | 254 |   |
| Utilities and real estate taxes |   | 40                                                   |   | — |   | (14 | ) | 26 |   |
| Severence pay                   |   | —                                               |   | 2,549 |   | (295 | ) | 2,254 |   |
| Outplacement services           |   | —                                               |   | 78 |   | (13 | ) | 65 |   |
| Other                           |   | 82                                                   |   | — |   | (15 | ) | 67 |   |
| Total                           |   | $                                                    | 441    |   | $ | 2,627 |   | $ | (402 | ) | $ | 2,666 |   |

 
|                            |   | **For the  Three Months Ended March 30, 2003**       |   |
|---------------------------------|--------|------------------------------------------------------|--------|
|                            |   | **Restructuring  Reserves as of  December 29, 2002** |   | **Expense** |   | **Costs Paid** |   | **Restructuring  Reserves as of  March 30, 2003** |   |
|                            |   |                                                 |   |   |   |   |   |   |   |
| Rent                            |   | $                                                    | 679    |   | $ | — |   | $ | (64 | ) | $ | 615 |   |
| Utilities and real estate taxes |   | 121                                                  |   | — |   | (23 | ) | 98 |   |
| Equipment                       |   | 77                                                   |   | — |   | (31 | ) | 46 |   |
| Other                           |   | 60                                                   |   | — |   | (1 | ) | 59 |   |
| Total                           |   | $                                                    | 937    |   | $ | — |   | $ | (119 | ) | $ | 818 |   |

 

Basedon information currently available, management believes that the restructuringreserves as of March 28, 2004 were adequate and not excessive.

 

**7. GAIN ON LITIGATION SETTLEMENT**

 

In January 2004, a settlement was reached in a lawsuit filed by theCompany against a former administrator of one of the Company’s benefit plans.  The settlement was based on theadministrator’s alleged failure to adhere to the terms of a contract andresulted in a one-time payment to the Company of $3,775,000, which was receivedon April 2, 2004. As a result of this lawsuit, the Company incurredprofessional fees of approximately $500,000 which were included in theconsolidated statement of operations for the year ended December 28, 2003 andan additional $131,000 in professional fees, which were offset against thepayment in the accompanying condensed consolidated statement of operations forthe three months ended March 28, 2004.

 

21

----

 

**8.FRANCHISE TRANSACTIONS**

 

On March 5,2004, the Company sold the real property and equipment for one franchised locationand assigned the lease and sold the equipment for a second franchised locationto the existing franchisee. Gross proceeds from the sale were approximately$485,000, of which $70,000 was for franchise fees and $415,000 was for the saleof assets and lease assignment. In March 2004, the Company recorded $70,000 asfranchise fee revenue and recognized a gain of approximately $248,000 relatedto the sale of assets.

 

OnJanuary 15, 2004, the Company entered into an agreement granting CentralFlorida Restaurants LLC (“Central Florida”) certain limited exclusive rights tooperate and develop Friendly’s full-service restaurants in designated areaswithin the Orlando, Florida market (the “Central Florida Agreement”).  Pursuant to the Central Florida Agreement,Central Florida purchased certain equipment assets, lease and sublease rightsand franchise rights in 10 existing Friendly’s restaurants and committed toopen an additional 10 restaurants over the next six years with an option for 15more restaurants in the following five years. Gross proceeds from the sale wereapproximately $3,150,000 of which $310,000 was for franchise fees for theinitial 10 restaurants. In January 2004, the Company recorded $310,000 asfranchise fee revenue and recognized a gain of approximately $658,000 relatedto the sale of the assets for the 10 locations.

 

DuringJuly 2003, the Company entered into a development agreement granting Jax FamilyRest., Inc. (“Jax”) certain limited exclusive rights to operate and developFriendly’s full-service restaurants in designated areas within Baker, Clay,Nassau, Putnam and St. John’s counties, Florida (the “Jax Agreement”). Pursuantto the Jax Agreement, Jax agreed to open 10 new restaurants over the next sevenyears. The Company received development fees of $155,000, which representone-half of the initial franchise fees. The $155,000 will be recognized intoincome as restaurants are opened.

 

In December 2000, the Company and its first franchisee, FriendcoRestaurants Inc. (“Friendco”), a subsidiary of Davco Restaurants, Inc.(“Davco”), agreed to terminate Friendco’s rights as the exclusive developer ofnew Friendly’s restaurants in Maryland, Delaware, the District of Columbia andnorthern Virginia. Friendco also obtained the right to close existingfranchised locations subject, however, to liquidated damages on 22 of its 48franchise agreements. During the year ended December 30, 2001, Friendcotransferred its rights to three franchised locations to a third party andclosed two restaurants.  During the yearended December 29, 2002, Friendco transferred its rights to 24 additionalfranchised locations to six separate third parties and closed six restaurants.During the year ended December 28, 2003, Friendco closed five restaurants,transferred its rights to three additional franchised locations to two thirdparties and at March 28, 2004, retained five franchised restaurants. DuringJune 2003, the Company entered into a Settlement Agreement and Mutual GeneralRelease with Davco releasing Davco from all obligations and guarantees relatedto leases associated with the franchised locations and providing for a paymentof $250,000 to the Company, which was recorded as revenue in the year endedDecember 28, 2003.

 

22

----

 

**9.SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION**

 

FICC’s obligations related to the New SeniorNotes are guaranteed fully and unconditionally by one of FICC’s wholly ownedsubsidiaries. There are no restrictions on FICC’s ability to obtain dividendsor other distributions of funds from this subsidiary, except those imposed byapplicable law. The following supplemental financial information sets forth, ona condensed consolidating basis, balance sheets, statements of operations andstatements of cash flows for FICC (the “Parent Company”), Friendly’sRestaurants Franchise, Inc. (the “Guarantor Subsidiary”) and Friendly’sInternational, Inc., Restaurant Insurance Corporation, Friendly’s Realty I,LLC, Friendly’s Realty II, LLC and Friendly’s Realty III, LLC (collectively,the “Non-guarantor Subsidiaries”). All of the LLCs’ assets were owned by theLLCs, which are separate entities with separate creditors which will beentitled to be satisfied out of the LLCs’ assets. Separate complete financial statementsand other disclosures of the Guarantor Subsidiary as of March 28, 2004 andDecember 28, 2003 and for the three months ended March 28, 2004 and March 30,2003 were not presented because management has determined that such informationis not material to investors.

 

Investments in subsidiaries are accountedfor by the Parent 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.

 

23

----

 

**SupplementalCondensed Consolidating Balance Sheet**

**As ofMarch 28, 2004**

(Inthousands)

 
|                                                       |   | **Parent  Company** |    | **Guarantor  Subsidiary** |   | **Non-  guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|------------------------------------------------------------|--------|---------------------|---------|---------------------------|--------|-----------------------------------|--------|------------------|--------|------------------|--------|
|                                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Assets                                                     |   |                |    |                      |   |                              |   |             |   |             |   |
|                                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Current assets:                                            |   |                |    |                      |   |                              |   |             |   |             |   |
| Cash and cash equivalents                                  |   | $                   | 53,659  |                      | $      | 1,071                             |   | $                | 1,920  |             | $      | — |   | $ | 56,650 |   |
| Restricted cash                                            |   | —              |    | —                    |   | 1,290                             |   | —           |   | 1,290            |   |
| Accounts receivable, net                                   |   | 14,590              |    | 1,591                     |   | —                            |   | —           |   | 16,181           |   |
| Inventories                                                |   | 16,815              |    | —                    |   | —                            |   | —           |   | 16,815           |   |
| Deferred income taxes                                      |   | 6,559               |    | 18                        |   | —                            |   | 70               |   | 6,647            |   |
| Prepaid expenses and other current assets                  |   | 9,628               |    | 598                       |   | 7,777                             |   | (13,102          | )      | 4,901            |   |
| Total current assets                                       |   | 101,251             |    | 3,278                     |   | 10,987                            |   | (13,032          | )      | 102,484          |   |
| Deferred income taxes                                      |   | 774                 |    | 205                       |   | —                            |   | (70              | )      | 909              |   |
| Property and equipment, net                                |   | 117,485             |    | —                    |   | 46,837                            |   | —           |   | 164,322          |   |
| Intangibles and deferred costs, net                        |   | 19,841              |    | —                    |   | 2,440                             |   | —           |   | 22,281           |   |
| Investments in subsidiaries                                |   | 5,824               |    | —                    |   | —                            |   | (5,824           | )      | —           |   |
| Other assets                                               |   | 4,962               |    | 9,601                     |   | 915                               |   | (9,601           | )      | 5,877            |   |
|                                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Total assets                                               |   | $                   | 250,137 |                      | $      | 13,084                            |   | $                | 61,179 |             | $      | (28,527 | ) | $ | 295,873 |   |
|                                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Liabilities  and Stockholders’ (Deficit) Equity       |   |                |    |                      |   |                              |   |             |   |             |   |
|                                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Current liabilities:                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Current maturities of long-term obligations                |   | $                   | 57,227  |                      | $      | —                            |   | $                | 1,167  |             | $      | (7,776 | ) | $ | 50,618 |   |
| Accounts payable                                           |   | 21,905              |    | —                    |   | —                            |   | —           |   | 21,905           |   |
| Accrued expenses                                           |   | 39,161              |    | 2,398                     |   | 6,153                             |   | (5,215           | )      | 42,497           |   |
| Total current liabilities                                  |   | 118,293             |    | 2,398                     |   | 7,320                             |   | (12,991          | )      | 115,020          |   |
| Long-term obligations, less current  maturities            |   | 182,428             |    | —                    |   | 51,640                            |   | —           |   | 234,068          |   |
| Other long-term liabilities                                |   | 51,994              |    | 823                       |   | 6,258                             |   | (9,712           | )      | 49,363           |   |
| Stockholders’ (deficit) equity                        |   | (102,578            | )       | 9,863                     |   | (4,039                            | )      | (5,824           | )      | (102,578         | )      |
|                                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Total liabilities and stockholders’  (deficit) equity |   | $                   | 250,137 |                      | $      | 13,084                            |   | $                | 61,179 |             | $      | (28,527 | ) | $ | 295,873 |   |

 

24

----

 

**SupplementalCondensed Consolidating Statement of Operations**

**For theThree Months Ended March 28, 2004**

(Inthousands)

 
|                                                                                                                   |   | **Parent  Company** |    | **Guarantor  Subsidiary** |   | **Non-  guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|---------------------------|--------|-----------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Revenues                                                                                                               |   | $                   | 128,190 |                      | $      | 2,564                             |   | $                | — |             | $      | — |   | $ | 130,754 |   |
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Costs and expenses:                                                                                                    |   |                |    |                      |   |                              |   |             |   |             |   |
| Cost of sales                                                                                                          |   | 45,588              |    | —                    |   | —                            |   | —           |   | 45,588           |   |
| Labor and benefits                                                                                                     |   | 39,934              |    | —                    |   | —                            |   | —           |   | 39,934           |   |
| Operating expenses                                                                                                     |   | 26,788              |    | —                    |   | (1,736                            | )      | —           |   | 25,052           |   |
| General and administrative expenses                                                                                    |   | 9,542               |    | 1,155                     |   | —                            |   | —           |   | 10,697           |   |
| Restructuring expenses                                                                                                 |   | 2,627               |    | —                    |   | —                            |   | —           |   | 2,627            |   |
| Gain on litigation settlement                                                                                          |   | (3,644              | )       | —                    |   | —                            |   | —           |   | (3,644           | )      |
| Depreciation and amortization                                                                                          |   | 5,043               |    | —                    |   | 563                               |   | —           |   | 5,606            |   |
| Gain on franchise sales of restaurant  operations and properties                                                       |   | (906                | )       | —                    |   | —                            |   | —           |   | (906             | )      |
| Loss on disposals of other property and  equipment, net                                                                |   | 168                 |    | —                    |   | 3                                 |   | —           |   | 171              |   |
| Interest expense, net                                                                                                  |   | 4,933               |    | —                    |   | 1,131                             |   | —           |   | 6,064            |   |
| Other expenses, principally debt retirement  costs                                                                     |   | 6,892               |    | —                    |   | —                            |   | —           |   | 6,892            |   |
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| (Loss) income before benefit from  (provision for) income taxes and equity in net income of consolidated  subsidiaries |   | (8,775              | )       | 1,409                     |   | 39                                |   | —           |   | (7,327           | )      |
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Benefit from (provision for) income taxes                                                                              |   | 2,825               |    | (578                      | )      | (49                               | )      | —           |   | 2,198            |   |
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| (Loss) income before equity in net income  of consolidated subsidiaries                                                |   | (5,950              | )       | 831                       |   | (10                               | )      | —           |   | (5,129           | )      |
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Equity in net income of consolidated  subsidiaries                                                                     |   | 821                 |    | —                    |   | —                            |   | (821             | )      | —           |   |
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Net (loss) income                                                                                                      |   | $                   | (5,129  | )                         | $      | 831                               |   | $                | (10    | )                | $      | (821 | ) | $ | (5,129 | ) |

 

25

----

 

**SupplementalCondensed Consolidating Statement of Cash Flows**

**For theThree Months Ended March 28, 2004**

(Inthousands)

 
|                                                  |   | **Parent  Company** |   | **Guarantor  Subsidiary** |   | **Non-  guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|-------------------------------------------------------|--------|---------------------|--------|---------------------------|--------|-----------------------------------|--------|------------------|--------|------------------|--------|
|                                                  |   |                |   |                      |   |                              |   |             |   |             |   |
| Net cash (used in) provided by operating  activities  |   | $                   | (9,362 | )                         | $      | (1,102                            | )      | $                | 945    |             | $      | (381 | ) | $ | (9,900 | ) |
|                                                  |   |                |   |                      |   |                              |   |             |   |             |   |
| Cash flows from investing activities:                 |   |                |   |                      |   |                              |   |             |   |             |   |
| Purchases of property and equipment                   |   | (2,255              | )      | —                    |   | —                            |   | —           |   | (2,255           | )      |
| Proceeds from sales of property and  equipment        |   | 2,897               |   | —                    |   | —                            |   | —           |   | 2,897            |   |
| Return of investment in subsidiary                    |   | 183                 |   | —                    |   | —                            |   | (183             | )      | —           |   |
| Net cash provided by investing activities             |   | 825                 |   | —                    |   | —                            |   | (183             | )      | 642              |   |
|                                                  |   |                |   |                      |   |                              |   |             |   |             |   |
| Cash flows from financing activities:                 |   |                |   |                      |   |                              |   |             |   |             |   |
| Proceeds from issuance of senior notes                |   | 175,000             |   | —                    |   | —                            |   | —           |   | 175,000          |   |
| Repayments of obligations                             |   | (128,063            | )      | —                    |   | (279                              | )      | —           |   | (128,342         | )      |
| Payments related to deferred financing  costs         |   | (6,625              | )      | —                    |   | —                            |   | —           |   | (6,625           | )      |
| Stock options exercised                               |   | 244                 |   | —                    |   | —                            |   | —           |   | 244              |   |
| Reinsurance payments made from deposits               |   | —              |   | —                    |   | (381                              | )      | 381              |   | —           |   |
| Dividends paid                                        |   | —              |   | —                    |   | (183                              | )      | 183              |   | —           |   |
| Net cash provided by (used in) financing  activities  |   | 40,556              |   | —                    |   | (843                              | )      | 564              |   | 40,277           |   |
|                                                  |   |                |   |                      |   |                              |   |             |   |             |   |
| Net increase (decrease) in cash and cash  equivalents |   | 32,019              |   | (1,102                    | )      | 102                               |   | —           |   | 31,019           |   |
|                                                  |   |                |   |                      |   |                              |   |             |   |             |   |
| Cash and cash equivalents, beginning of  period       |   | 21,640              |   | 2,173                     |   | 1,818                             |   | —           |   | 25,631           |   |
|                                                  |   |                |   |                      |   |                              |   |             |   |             |   |
| Cash and cash equivalents, end of period              |   | $                   | 53,659 |                      | $      | 1,071                             |   | $                | 1,920  |             | $      | — |   | $ | 56,650 |   |
|                                                  |   |                |   |                      |   |                              |   |             |   |             |   |
| Supplemental disclosures:                             |   |                |   |                      |   |                              |   |             |   |             |   |
| Interest paid                                         |   | $                   | 3,794  |                      | $      | —                            |   | $                | 1,133  |             | $      | — |   | $ | 4,927 |   |
| Income taxes (refunded) paid                          |   | (1,502              | )      | 1,460                     |   | 49                                |   | —           |   | 7                |   |
| Capital lease obligations incurred                    |   | 2,280               |   | —                    |   | —                            |   | —           |   | 2,280            |   |

 

26

----

 

**Supplemental Condensed Consolidating BalanceSheet**

**As of December 28, 2003**

(In thousands)

 
|                                                       |   | **Parent  Company** |    | **Guarantor  Subsidiary** |   | **Non-  guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|------------------------------------------------------------|--------|---------------------|---------|---------------------------|--------|-----------------------------------|--------|------------------|--------|------------------|--------|
|                                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Assets                                                     |   |                |    |                      |   |                              |   |             |   |             |   |
|                                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Current assets:                                            |   |                |    |                      |   |                              |   |             |   |             |   |
| Cash and cash equivalents                                  |   | $                   | 21,640  |                      | $      | 2,173                             |   | $                | 1,818  |             | $      | — |   | $ | 25,631 |   |
| Restricted cash                                            |   | —              |    | —                    |   | 1,671                             |   | —           |   | 1,671            |   |
| Accounts receivable, net                                   |   | 9,163               |    | 1,221                     |   | —                            |   | —           |   | 10,384           |   |
| Inventories                                                |   | 15,669              |    | —                    |   | —                            |   | —           |   | 15,669           |   |
| Deferred income taxes                                      |   | 6,559               |    | 18                        |   | —                            |   | 70               |   | 6,647            |   |
| Prepaid expenses and other current assets                  |   | 7,148               |    | 1,469                     |   | 7,778                             |   | (14,856          | )      | 1,539            |   |
| Total current assets                                       |   | 60,179              |    | 4,881                     |   | 11,267                            |   | (14,786          | )      | 61,541           |   |
| Deferred income taxes                                      |   | —              |    | 205                       |   | —                            |   | (205             | )      | —           |   |
| Property and equipment, net                                |   | 119,759             |    | —                    |   | 47,350                            |   | —           |   | 167,109          |   |
| Intangibles and deferred costs, net                        |   | 15,396              |    | —                    |   | 2,494                             |   | —           |   | 17,890           |   |
| Investments in subsidiaries                                |   | 5,187               |    | —                    |   | —                            |   | (5,187           | )      | —           |   |
| Other assets                                               |   | 4,997               |    | 8,582                     |   | 915                               |   | (8,582           | )      | 5,912            |   |
|                                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Total assets                                               |   | $                   | 205,518 |                      | $      | 13,668                            |   | $                | 62,026 |             | $      | (28,760 | ) | $ | 252,452 |   |
|                                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Liabilities  and Stockholders’ (Deficit) Equity       |   |                |    |                      |   |                              |   |             |   |             |   |
|                                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Current liabilities:                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Current maturities of long-term obligations                |   | $                   | 8,687   |                      | $      | —                            |   | $                | 1,127  |             | $      | (7,776 | ) | $ | 2,038 |   |
| Accounts payable                                           |   | 22,475              |    | —                    |   | —                            |   | —           |   | 22,475           |   |
| Accrued expenses                                           |   | 38,076              |    | 3,893                     |   | 6,146                             |   | (6,910           | )      | 41,205           |   |
| Total current liabilities                                  |   | 69,238              |    | 3,893                     |   | 7,273                             |   | (14,686          | )      | 65,718           |   |
| Deferred income taxes                                      |   | 1,424               |    | —                    |   | —                            |   | (135             | )      | 1,289            |   |
| Long-term obligations, less current  maturities            |   | 181,750             |    | —                    |   | 51,960                            |   | —           |   | 233,710          |   |
| Other long-term liabilities                                |   | 51,132              |    | 743                       |   | 6,638                             |   | (8,752           | )      | 49,761           |   |
| Stockholders’ (deficit) equity                        |   | (98,026             | )       | 9,032                     |   | (3,845                            | )      | (5,187           | )      | (98,026          | )      |
|                                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Total liabilities and stockholders’  (deficit) equity |   | $                   | 205,518 |                      | $      | 13,668                            |   | $                | 62,026 |             | $      | (28,760 | ) | $ | 252,452 |   |

 

27

----

 

**SupplementalCondensed Consolidating Statement of Operations**

**For theThree Months Ended March 30, 2003**

(Inthousands)

 
|                                                                                                                   |   | **Parent  Company** |    | **Guarantor  Subsidiary** |   | **Non-  guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|---------------------------|--------|-----------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Revenues                                                                                                               |   | $                   | 126,700 |                      | $      | 1,990                             |   | $                | — |             | $      | — |   | $ | 128,690 |   |
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Costs and expenses:                                                                                                    |   |                |    |                      |   |                              |   |             |   |             |   |
| Cost of sales                                                                                                          |   | 45,977              |    | —                    |   | —                            |   | —           |   | 45,977           |   |
| Labor and benefits                                                                                                     |   | 38,128              |    | —                    |   | —                            |   | —           |   | 38,128           |   |
| Operating expenses and write-downs of  property and equipment                                                          |   | 26,037              |    | —                    |   | (1,749                            | )      | —           |   | 24,288           |   |
| General and administrative expenses                                                                                    |   | 8,904               |    | 1,159                     |   | —                            |   | —           |   | 10,063           |   |
| Depreciation and amortization                                                                                          |   | 5,052               |    | —                    |   | 575                               |   | —           |   | 5,627            |   |
| Loss on disposals of other property and  equipment, net                                                                |   | 511                 |    | —                    |   | 62                                |   | —           |   | 573              |   |
| Interest expense, net                                                                                                  |   | 4,954               |    | —                    |   | 1,148                             |   | —           |   | 6,102            |   |
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| (Loss) income before benefit from  (provision for) income taxes and equity in net income of consolidated  subsidiaries |   | (2,863              | )       | 831                       |   | (36                               | )      | —           |   | (2,068           | )      |
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Benefit from (provision for) income taxes                                                                              |   | 969                 |    | (341                      | )      | (49                               | )      | —           |   | 579              |   |
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| (Loss) income before equity in net income  of consolidated subsidiaries                                                |   | (1,894              | )       | 490                       |   | (85                               | )      | —           |   | (1,489           | )      |
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Equity in net income of consolidated  subsidiaries                                                                     |   | 405                 |    | —                    |   | —                            |   | (405             | )      | —           |   |
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Net (loss) income                                                                                                      |   | $                   | (1,489  | )                         | $      | 490                               |   | $                | (85    | )                | $      | (405 | ) | $ | (1,489 | ) |

 

28

----

 

**SupplementalCondensed Consolidating Statement of Cash Flows**

**For theThree Months Ended March 30, 2003**

(Inthousands)

 
|                                                 |   | **Parent  Company** |   | **Guarantor  Subsidiary** |   | **Non-  guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|------------------------------------------------------|--------|---------------------|--------|---------------------------|--------|-----------------------------------|--------|------------------|--------|------------------|--------|
|                                                 |   |                |   |                      |   |                              |   |             |   |             |   |
| Net cash provided by (used in) operating  activities |   | $                   | 2,029  |                      | $      | (533                              | )      | $                | 605    |             | $      | (535 | ) | $ | 1,566 |   |
|                                                 |   |                |   |                      |   |                              |   |             |   |             |   |
| Cash flows from investing activities:                |   |                |   |                      |   |                              |   |             |   |             |   |
| Purchases of property and equipment                  |   | (5,157              | )      | —                    |   | —                            |   | —           |   | (5,157           | )      |
| Return of investment in subsidiary                   |   | 179                 |   | —                    |   | —                            |   | (179             | )      | —           |   |
| Net cash used in investing activities                |   | (4,978              | )      | —                    |   | —                            |   | (179             | )      | (5,157           | )      |
|                                                 |   |                |   |                      |   |                              |   |             |   |             |   |
| Cash flows from financing activities:                |   |                |   |                      |   |                              |   |             |   |             |   |
| Repayments of obligations                            |   | (482                | )      | —                    |   | (267                              | )      | —           |   | (749             | )      |
| Stock options exercised                              |   | 127                 |   | —                    |   | —                            |   | —           |   | 127              |   |
| Reinsurance payments made from deposits              |   | —              |   | —                    |   | (535                              | )      | 535              |   | —           |   |
| Dividends paid                                       |   | —              |   | —                    |   | (179                              | )      | 179              |   | —           |   |
| Net cash used in financing activities                |   | (355                | )      | —                    |   | (981                              | )      | 714              |   | (622             | )      |
|                                                 |   |                |   |                      |   |                              |   |             |   |             |   |
| Net decrease in cash and cash equivalents            |   | (3,304              | )      | (533                      | )      | (376                              | )      | —           |   | (4,213           | )      |
|                                                 |   |                |   |                      |   |                              |   |             |   |             |   |
| Cash and cash equivalents, beginning of  period      |   | 29,717              |   | 1,944                     |   | 2,680                             |   | —           |   | 34,341           |   |
|                                                 |   |                |   |                      |   |                              |   |             |   |             |   |
| Cash and cash equivalents, end of period             |   | $                   | 26,413 |                      | $      | 1,411                             |   | $                | 2,304  |             | $      | — |   | $ | 30,128 |   |
|                                                 |   |                |   |                      |   |                              |   |             |   |             |   |
| Supplemental disclosures:                            |   |                |   |                      |   |                              |   |             |   |             |   |
| Interest paid                                        |   | $                   | 175    |                      | $      | —                            |   | $                | 1,150  |             | $      | — |   | $ | 1,325 |   |
| Income taxes paid                                    |   | 675                 |   | 11                        |   | —                            |   | —           |   | 686              |   |

 

29

----

 

**Item2.  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.*

 

**ForwardLooking Statements**

 

Statements contained herein that are nothistorical facts constitute “forward looking statements” as that term isdefined in the Private Securities Litigation Reform Act of 1995. All forwardlooking statements are subject to risks and uncertainties which could causeresults to differ materially from those anticipated. These factors include theCompany’s highly competitive business environment, exposure to commodityprices, risks associated with the foodservice industry, the ability to retainand attract new employees, government regulations, the Company’s highgeographic concentration in the Northeast and its attendant weather patterns,conditions needed to meet restaurant re-imaging and new opening targets andcosts associated with improved service and other initiatives. Other factorsthat may cause actual results to differ from the forward looking statementscontained herein and that may affect the Company’s prospects in general areincluded in the Company’s other filings with the Securities and ExchangeCommission.

 

**Overview**

 

TheCompany’s revenues are derived primarily from the operation of full-servicerestaurants, the distribution and sale of premium ice cream desserts throughretail and institutional locations and franchising. As of March 28, 2004,Friendly’s operated 362   full-servicerestaurants, franchised 176 full-service restaurants and six non-traditionalunits and manufactured a full line of premium ice cream desserts distributedthrough more than 4,500 supermarkets and other retail locations in 13 states.

 

Following is a summary of theCompany-operated and franchised units:

 
|                  |   | **For the  Three Months Ended** |   |
|-----------------------|--------|---------------------------------|--------|
|                  |   | **March 28,  2004**             |   | **March 30,  2003** |   |
|                  |   |                            |   |   |   |
| Company Units:        |   |                            |   |   |   |
| Beginning of period   |   | 380                             |   | 387 |   |
| Openings              |   | —                          |   | — |   |
| Refranchised closings |   | (17                             | )      | — |   |
| Closings              |   | (1                              | )      | (2 | ) |
| End of period         |   | 362                             |   | 385 |   |
|                  |   |                            |   |   |   |
| Franchised Units:     |   |                            |   |   |   |
| Beginning of period   |   | 163                             |   | 162 |   |
| Refranchised openings |   | 17                              |   | — |   |
| Openings              |   | 2                               |   | 2 |   |
| Closings              |   | —                          |   | — |   |
| End of period         |   | 182                             |   | 164 |   |

 

30

----

 

***Three months ended March 28, 2004 compared with three monthsended March 30, 2003***

 

*Revenues:*

 

Total revenues increased $2.1 million, or1.6%, to $130.8 million for the first quarter ended March 28, 2004 from $128.7million for the same quarter in 2003. Restaurant revenues increased $1.2million, or 1.1%, to $104.4 million for the three months ended March 28, 2004from $103.2 million for the same period in 2003. Comparable company-operated restaurant revenues increased 4.2% from the2003 quarter to the 2004 quarter as increases occurred in all dayparts. Recordsnowfall during the first quarter of 2003 had a favorable impact on restaurantrevenues when compared to the current year, as operating days lost due toweather closings were minimal in 2004. Eleven locations were re-imaged duringthe quarter ended March 30, 2003 while no locations were re-imaged during thequarter ended March 28, 2004.  Theopening of three new restaurants over the past 15 months increased restaurantrevenues by $1.1 million. The closing of 11 locations and the re-franchising of17 locations over the past 15 months resulted in declines of $1.7 million and$2.9 million, respectively, in restaurant revenues in the first quarter of 2004as compared to the same period in 2003. Foodservice (product sales tofranchisees and retail customers) revenues were $23.3 million for the quartersended March 28, 2004 and March 30, 2003. Franchised restaurant product revenuesincreased by $1.5 million while sales to foodservice retail supermarketcustomers declined by $1.5 million. During the quarter ended March 28, 2004,the Company reduced the size of its retail supermarket ice cream container to a56-ounce product from a 64-ounce product. Case volume in the Company’s retail supermarket business fell by 10.2%for the quarter ended March 28, 2004 when compared to the quarter ended March30, 2003. Franchise royalty and fee revenues increased $0.9 million, or 35.6%,to $3.1 million for the three months ended March 28, 2004 compared to $2.2million for the same period in 2003. Royalties on franchised sales increased$0.3 million as comparable franchised revenues grew 6.5% from the quarter endedMarch 30, 2003 to the quarter ended March 28, 2004. The opening of eight newfranchise restaurants and 17 re-franchised restaurants during the last 15months increased royalty revenues by $0.1 million each while the closing offive under-performing locations during the same period had little impact.  Initial franchise feeswere higher by $0.3 million during the three months ended March 28, 2004 whencompared to the same period in 2003 due to the refranchising of 17company-operated locations and the opening of one new location during thequarter ended March 28, 2004 versus two new openings during the quarter endedMarch 30, 2003. Additionally, an increase in rental income for leased andsubleased franchise locations of $0.2 million contributed to the higherrevenues. There were 182 and 164 franchise units open at March 28, 2004 andMarch 30, 2003, respectively.

 

31

----

 

*Cost of sales:*

 

Cost of sales decreased $0.4 million, or0.8%, to $45.6 million for the first quarter ended March 28, 2004 from $46.0million for the same period in 2003. Cost of sales as a percentage of totalrevenues was 34.9% and 35.7% for the quarters ended March 28, 2004 and March30, 2003, respectively. A shift in sales mixto company-operated restaurant sales from foodservice sales and the growth infranchise royalty and fee revenues were largely responsible for the favorabledecline in cost of sales as a percentage of total revenues. Foodservice salesto franchisees and retail supermarket customers (17.9% and 18.1% of totalrevenues for the three months ended March 28, 2004 and March 30, 2003,respectively) have a higher food cost as a percentage of revenue than sales incompany-operated restaurants to restaurant patrons. Foodservice retail salespromotional allowances, recorded as offsets to revenues, were increased by 1.9%in the 2004 quarter as a percentage of gross retail sales when compared to the2003 quarter as a result of a change in mix of promotional activities. Thisincrease had an unfavorable impact on the overall cost of sales as a percentageof total revenues. Distribution costs were higher in the quarter ended March28, 2004 when compared to the same quarter in 2003 as a result of theunfavorable impact of new federal restrictions imposed on driver hours, higherfuel costs and increases in liability insurance. Restaurant cost of sales as apercentage of restaurant revenues increased to 27.0% in the first quarter of2004 from 26.9% in the first quarter of 2003. The increase in the 2004 quarterwhen compared to the 2003 quarter was in part due to stronger lunch and dinnersales when compared to breakfast in the current period. Breakfast products havea lower food cost than lunch and dinner products. Cream prices in the firstquarter of 2004 were higher than the first quarter of 2003. The conversionduring the first quarter of 2004  from a64-ounce container to a 56-ounce container and market gains realized due tofavorable positions on options for butter futures contracts more than offsethigher prices for cream and other commodities. The Company expects that creamprices will continue to increase and exceed prices experienced in 2003.  Additionally, the benefits derived fromoptions for butter futures contracts are likely not to continue.

 

The table below showsthe average monthly price of a pound of AA butter. The prices represented wereobtained from market quotes provided by the USDA’s Agricultural MarketingService.

 
| **Month:**       |   | **2004** |   | **2003** |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
| January          |   | $        | 1.4320 |     | $      | 1.0815   |   | $        | 1.3454 |     | $      | 1.2531   |   | $ | 0.9090 |   | $ | 1.4222 |   |
| February         |   | 1.7132   |   | 1.0405   |   | 1.2427   |   | 1.3852   |   | 0.9245   |   | 1.3153   |   |
| March            |   | 2.1350   |   | 1.0915   |   | 1.2473   |   | 1.5708   |   | 1.0200   |   | 1.2927   |   |
| April            |   |     |   | 1.0906   |   | 1.1712   |   | 1.8217   |   | 1.0691   |   | 1.0298   |   |
| May              |   |     |   | 1.0919   |   | 1.0590   |   | 1.8713   |   | 1.2450   |   | 1.1289   |   |
| June             |   |     |   | 1.1142   |   | 1.0427   |   | 1.9783   |   | 1.2440   |   | 1.4931   |   |
| July             |   |     |   | 1.1985   |   | 1.0302   |   | 1.8971   |   | 1.1790   |   | 1.3444   |   |
| August           |   |     |   | 1.1708   |   | 0.9752   |   | 2.0880   |   | 1.1933   |   | 1.3963   |   |
| September        |   |     |   | 1.1731   |   | 0.9635   |   | 2.0563   |   | 1.1727   |   | 1.3393   |   |
| October          |   |     |   | 1.1846   |   | 1.0315   |   | 1.4070   |   | 1.1462   |   | 1.1248   |   |
| November         |   |     |   | 1.2057   |   | 1.0425   |   | 1.3481   |   | 1.6490   |   | 1.0675   |   |
| December         |   |     |   | 1.2969   |   | 1.1198   |   | 1.2793   |   | 1.3700   |   | 0.9163   |   |
| Mathematical Avg |   |     |   | $        | 1.1450 |     | $      | 1.1059   |   | $        | 1.6630 |     | $      | 1.1768 |   | $ | 1.2392 |   |
|                  |        |          |        |          |        |          |        |          |        |          |        |          |        |  |  |  |  |  |  |

 

The cost ofcream, the principal ingredient used in making ice cream, affects cost of salesas a percentage of total revenues, especially in foodservice’s retail business.A $0.10 increase in the cost of a pound of AA butter adversely affects theCompany’s annual cost of sales by approximately $1.1 million. This adverseimpact may be offset by price increases or other factors. However, no assurancecan be given that the Company will be able to offset any cost increases in thefuture and future increases in cream prices could have a material adverseeffect on the Company’s results of operations. To minimize risk, alternativesupply sources continue to be pursued.

 

The Companypurchases butter option contracts to minimize the impact of increases in thecost of cream. When available, options on butter futures are purchased to coverup to 50% of the cream needs of the manufacturing plant.  Option contracts are offered in the monthsof March, May, July, September, October and December; however, there is oftennot enough open interest in them to allow the Company to buy even very limitedcoverage without paying an exorbitant premium.

 

32

----

 

*Labor and benefits:*

 

Labor and benefits increased $1.8million, or 4.7%, to $39.9 million for the three months ended March 28, 2004from $38.1 million for the three months ended March 30, 2003. Labor andbenefits as a percentage of total revenues increased to 30.5% in the 2004quarter from 29.6% in the 2003 quarter. As a percentage of restaurant revenues,labor and benefits increased to 38.3% in the 2004 quarter from 37.0% in the2003 quarter. The increase in laborand benefits was due to training costs associated with the rollout of a newpoint of sale register system in 142 restaurants during the quarter anddeclines in labor scheduling efficiencies, especially during off meal periods.Day to day weather changes, particularly in the winter months, can result inover scheduling labor when daypart sales fall short of expectations. In April2004, the Company initiated a program to reinforce proper labor schedulingtechniques. Payroll taxes and group insurances costs also increased in the 2004period when compared to the 2003 period. Revenue increases derived fromfranchised locations and retail supermarket customers, which do not have anyassociated restaurant labor and benefits, reduced the impact of the higherrestaurant labor and benefits as a percentage of total revenues.

 

*Operating expenses:*

 

Operating expenses increased $0.8million, or 3.1%, to $25.1 million in the three months ended March 28, 2004from $24.3 million for the three months ended March 30, 2003. Operatingexpenses as a percentage of total revenues were 19.2% and 18.9% in the 2004 and2003 periods, respectively. The increase in dollarsresulted from higher general liability insurance, restaurant supply costs andutility costs in the 2004 period when compared to the 2003 period.

 

*General and administrative expenses:*

 

General and administrative expenses were$10.7 million and $10.1 million for the quarters ended March 28, 2004 and March30, 2003, respectively. General and administrative expenses as a percentage oftotal revenues increased to 8.2% in the 2004 period from 7.8% in the 2003period. The dollar increase is primarily theresult of higher costs for computer equipment rentals and legal andprofessional fees. The 2004 period also included a charge for future rentsassociated with a vacated training facility.

 

*Restructuring expenses:*

 

Restructuring expensesof $2.6 million related to severance and other benefits associated withreduction in force actions taken during the first quarter of 2004 that reducedheadcount by approximately 20 permanent positions.

 

*Gain on litigation settlement:*

 

In January2004, a settlement was reached in a lawsuit filed by the Company against aformer administrator of one of the Company’s benefit plans.  The settlement was based on theadministrator’s alleged failure to adhere to the terms of a contract andresulted in a one-time payment to the Company of approximately $3.8 million,which was received on April 2, 2004. As a result of this lawsuit, the Companyincurred professional fees of approximately $0.5 million which were included inthe consolidated statement of operations for the year ended December 28, 2003and an additional $0.2 million in professional fees, which were offset againstthe payment in the accompanying condensed consolidated statement of operationsfor the three months ended March 28, 2004.

 

33

----

 

*Depreciation and amortization:*

 

Depreciationand amortization was $5.6 million for the quarters ended March 28, 2004 andMarch 30, 2003. Depreciation and amortization as a percentage of total revenueswas 4.3% and 4.4% in the 2004 and 2003 quarters, respectively.

 

*Gain on franchise sales of restaurantoperations and properties:*

 

Gain onfranchise sales of restaurant operations and properties was $0.9 million in thequarter ended March 28, 2004. During the first quarter ended March 28, 2004,the Company recognized a gain of approximately $0.7 million associated with thesale of certain equipment assets, lease and sublease rights and franchiserights in 10 existing Friendly’s restaurants. Additionally, the Company sold the real property and equipment for onefranchised location and assigned the lease and sold the equipment for a secondfranchised location to the existing franchisee, resulting in a gain ofapproximately $0.2 million.

 

*Loss on disposals of other property andequipment, net:*

 

The loss ondisposals of other property and equipment, net, was $0.2 million and $0.6million for the quarters ended March 28, 2004 and March 30, 2003,respectively.  The table belowidentifies the components of the loss on disposals of other property andequipment, net as shown on the accompanying condensed consolidated statementsof operations (in thousands):

 
|                                                    |   | **For the  Three Months Ended** |   |
|---------------------------------------------------------|--------|---------------------------------|--------|
|                                                    |   | **March 28,  2004**             |   | **March 30,  2003** |   |
|                                                    |   |                            |   |   |   |
| Restaurant assets retired due to remodeling             |   | $                               | — |   | $ | (442 | ) |
| Restaurant equipment assets retired due to  replacement |   | (72                             | )      | (107 | ) |
| Loss due to restaurant fire                             |   | (14                             | )      | — |   |
| All other                                               |   | (85                             | )      | (24 | ) |
| Loss on disposals of other property and  equipment, net |   | $                               | (171   | ) | $ | (573 | ) |

 

*Other expenses, principally debt retirementcosts:*

 

Otherexpenses, principally debt retirement costs representsthe $5.1 million premium and the write off ofunamortized deferred financing costs of approximately $1.8 million in connectionwith the cash tender offer for the $176.0 million of Senior Notes. In March2004, $127.8 million of aggregate principal amount of Senior Notes werepurchased pursuant to the tender offer and in April 2004, the remaining $48.2million of Senior Notes were redeemed in accordance with the Senior Notesindenture at 103.5% of the principal amount.

 

34

----

 

*Interest expense, net:*

 

Interest expense, net of capitalizedinterest and interest income was $6.1 million for the quarters ended March 28,2004 and March 30, 2003. Total outstanding debt, including capital lease andfinance obligations, increased from $238.5 million at March 30, 2003 to $284.7million at March 28, 2004. The increase in the total outstanding debt isrelated to the refinancing of $176.0 million of Senior Notes. In March 2004,$127.8 million of aggregate principal amount of Senior Notes were purchased ina cash tender offer with the proceeds from the issuance of $175.0 million ofNew Senior Notes with a lower interest rate and in April 2004, the remaining$48.2 million of Senior Notes were redeemed in accordance with the Senior Notesindenture at 103.5% of the principal amount.

 

*Benefit from income taxes:*

 

The benefit from income taxes was $2.2million, or 30.0%, for the three months ended March 28, 2004. At this time, theCompany estimates that the effective tax rate for 2004 will be 30.0%. The Company records income taxes based on the effective rate expected forthe year with any changes in the valuation allowance reflected in the period ofchange. The benefit from income taxes was $0.6 million, or 28.0%,for the three months ended March 30, 2003. The rate in 2003 was increased inthe fourth quarter due to a one-time pension curtailment gain of $8.1 millionin 2003. The tax rate for the 2003 fiscal year was 32.5%.

 

*Net loss:*

 

Net loss was $5.1million and $1.5 million for the first quarters ended March 28, 2004 and March30, 2003, respectively, for the reasons discussed above.

 

**Liquidityand Capital Resources**

 

The Company’s primarysources of liquidity and capital resources are cash generated from operationsand, if needed, borrowings under its revolving credit facility. Net cash usedin operating activities was $9.9 million for the three months ended March 28,2004 as compared to net cash provided by operating activities of $1.6 millionfor the three months ended March 30, 2003. Additional sources of liquidity consist of capital and operating leasesfor financing leased restaurant locations (in malls and shopping centers andland or building leases), restaurant equipment, manufacturing equipment,distribution vehicles and computer equipment. Additionally, sales ofunder-performing existing restaurant properties and other assets (to the extentFICC’s and its subsidiaries’ debt instruments permit) are sources of cash. Theamount of debt financing that FICC will be able to incur is limited by theterms of its New Credit Facility and New Senior Notes Indenture. Below wasthe financing status of the Company’s operating restaurants at March 28, 2004:

 
| Owned and mortgaged                |   | 72  |   |
|------------------------------------|--------|-----|--------|
| Sold and leased back               |   | 61  |   |
| Owned land and building            |   | 36  |   |
| Leased land, owned building        |   | 82  |   |
| Leased land and building           |   | 111 |   |
| Total Company-operated restaurants |   | 362 |   |

 

35

----

 

Therestaurants above not identified as owned and mortgaged or sold and leased backsecure the Company’s obligations under the New Credit Facility. In addition tothe 72 properties identified as owned and mortgaged, the Company owns anadditional three properties in this category that are now operated by afranchisee. Of the 36 restaurant properties identified as owned land andbuilding, seven were available to be sold, if necessary, and of the 82restaurant properties identified as leased land, owned building, one wasavailable to be mortgaged, if necessary.

 

The Company’s cashflows were used primarily to pay expenses associated with the cash tender offerfor the Senior Notes, to maintain existing restaurant and plant facilities, tocontinue to renovate and re-image existing restaurants and for generalcorporate purposes. During the three months ended March 28, 2004 and March 30,2003, the Company spent $2.3 million and $5.2 million, respectively, on capitalexpenditures, of which $0.1 million and $1.5 million was for the renovation ofrestaurants under its revitalization and re-imaging programs. Capitalexpenditures were offset by proceeds from the sales of property and equipmentof $2.9 million for the quarter ended March 28, 2004.  There were no proceeds from the sales of property and equipmentduring the quarter ended March 30, 2003.

 

The Company had aworking capital deficit of $12.5 million and $4.2 million as of March 28, 2004and December 28, 2003, respectively. The working capital needs of companiesengaged in the restaurant industry are generally low and as a result,restaurants are frequently able to operate with a working capital deficitbecause: (i) restaurant operations are conducted primarily on a cash (and cashequivalent) basis with a low level of accounts receivable; (ii) rapid turnoverallows a limited investment in inventories; and (iii) cash from sales isusually received before related expenses for food, supplies and payroll arepaid.

 

Net cash provided byfinancing activities was $40.2 million for the first quarter ended March 28,2004 as compared to net cash used in financing activities of $0.6 million forthe first quarter ended March 30, 2003.

 

In November 1997, FICC entered into acredit facility that included revolving credit loans, term loans and letters ofcredit (the “Old Credit Facility”). Also in November 1997, FICC completed a public offering of $200 millionof senior notes (the “Senior Notes”). In December 2001, theCompany completed a financial restructuring plan (the “Refinancing Plan”) whichincluded the repayment of the $64.5 million outstanding under the Old CreditFacility and the purchase of approximately $21.3 million in Senior Notes withthe proceeds from $55.0 million in long-term mortgage financing (the “MortgageFinancing”) and a $33.7 million sale and leaseback transaction (the“Sale/Leaseback Financing”). In addition, FICC secured a new $30.0 millionrevolving credit facility (the “New Credit Facility”) of which up to $20.0 millionis available to support letters of credit. On July 3, 2003, FICC obtained a limited waiver to the NewCredit Facility allowing the purchase of certain of the Senior Notes in anamount up to $3.0 million, subject to certain conditions. In July 2003, FICCpurchased approximately $2.7 million in aggregate principal amount of theSenior Notes for approximately $2.8 million, the then current market value.

 

36

----

 

In February 2004, theCompany announced a cash tender offer and consent solicitation for the $176.0million of Senior Notes to be financed with the proceeds from a privateoffering of new senior notes (the “New Senior Notes”), available cash and anamended New Credit Facility (the “2004 Refinancing”).  In March 2004, $127.4 million of aggregate principal amount ofSenior Notes were purchased at the tender offer and consent solicitation priceof 104% of the principal amount and $0.4 million of aggregate principal amountof Senior Notes were purchased at the tender offer price of 102% of theprincipal amount. In April 2004, the remaining $48.2 million of Senior Noteswere redeemed in accordance with the Senior Notes indenture at 103.5% of theprincipal amount.  The Senior Noteswould have matured on December 1, 2007. Interest on the Senior Notes was payable at 10.5% per annumsemi-annually on June 1 and December 1 of each year.  In connection with the tender offer, the Company wrote offunamortized deferred financing costs and incurred other direct expenses of $6.9million that were included in the accompanying condensed consolidated statementof operations for the first quarter ended March 28, 2004.  In April 2004, the Company wrote offunamortized deferred financing costs and incurred other direct expenses of $2.3million that will be included in the results for the second fiscal quarterending June 27, 2004.

 

The $175million of New Senior Notes issued in March 2004 are unsecured seniorobligations of FICC, guaranteed on an unsecured senior basis by FICC’s Friendly’sRestaurants Franchise, Inc. subsidiary, but are effectively subordinated to allsecured indebtedness of FICC, including the indebtedness incurred under the NewCredit Facility. The New Senior Notes mature on June 15, 2012. Interest on theNew Senior Notes is payable at 8.375% per annum semi-annually on June 15and December 15 of each year commencing June 15, 2004.  The New Senior Notes are redeemable, inwhole or in part, at any time on or after June 15, 2008 at FICC’s option atredemption prices from 104.188% to 100.00%, based on the redemption date.  In addition, at any time prior to June 15,2007, FICC may redeem, subject to certain conditions, up to 35% of theaggregate principal amount of the New Senior Notes with the proceeds of one ormore qualified equity offerings, as defined, at a redemption price of 108.375%of the principal amount, plus accrued interest.

 

In connectionwith the 2004 Refinancing, the New Credit Facility was amended in March2004.  The total commitment amount wasincreased from $30.0 million to $35.0 million and the maturity date wasextended from December 17, 2005 to June 30, 2007, in addition to other changes.

 

The New CreditFacility is secured by substantially all of the assets of FICC and two of itssix subsidiaries, Friendly’s Restaurants Franchise Inc. and Friendly’sInternational Inc. These two subsidiaries also guarantee FICC’s obligationsunder the New Credit Facility.

 

The New CreditFacility includes certain restrictive covenants including limitations onindebtedness, restricted payments such as dividends and stock repurchases andsales of assets and of subsidiary stock. Additionally, the New Credit Facilitylimits the amount which the Company may spend on capital expenditures,restricts the use of proceeds, as defined, from asset sales and requires theCompany to comply with certain financial covenants. The Company is incompliance with these covenants.

 

The New CreditFacility has an annual “clean-up” provision, commencing in 2005, whichobligates the Company to repay in full all revolving credit loans on or beforeSeptember 30 (or, if September 30 is not a business day, as defined, then thenext business day) of each year and maintain a zero balance on such revolvingcredit for at least 30 consecutive days, to include September 30, immediatelyfollowing the date of such repayment.

 

37

----

 

The $35.0million revolving credit commitment less outstanding letters of credit isavailable for borrowing to provide working capital and for other corporateneeds. As of March 28, 2004 and December 28, 2003, total letters of creditoutstanding were approximately $14.0 million and $13.6 million, respectively.During the first quarters ended March 28, 2004 and March 30, 2003, there wereno drawings against the letters of credit.

 

The revolving creditloans bear interest at the Company’s option at either (a) the Base Rate plusthe applicable margin as in effect from time to time (the “Base Rate”) (6.50%at March 28, 2004) or (b) the Eurodollar rate plus the applicable margin as ineffect from time to time (the “Eurodollar Rate”) (5.52% at March 28,2004).  As of March 28, 2004 andDecember 28, 2003, there were no revolving credit loans outstanding and $21.0million and $16.4 million, respectively, was available for borrowing.

 

The Companyanticipates requiring capital in the future principally to maintain existingrestaurant and plant facilities and to continue to renovate and re-imageexisting restaurants. Capital expenditures for 2004, including assets to beacquired under capital leases, are anticipated to be between $30.0 million and$35.0 million in the aggregate, of which $25.0 million to $30.0 million isexpected to be spent on restaurant operations. The Company’s actual 2004 capitalexpenditures may vary from these estimated amounts. The Company believes thatthe combination of the funds anticipated to be generated from operatingactivities and borrowing availability under the New Credit Facility will besufficient to meet the Company’s anticipated operating requirements, capitalrequirements and obligations associated with the restructurings.

 

In January2004, a settlement was reached in a lawsuit filed by the Company against aformer administrator of one of the Company’s benefit plans.  The settlement was based on theadministrator’s alleged failure to adhere to the terms of a contract andresulted in a one-time payment to the Company of approximately $3.8 million,which was received on April 2, 2004. As a result of this lawsuit, the Companyincurred professional fees of approximately $0.5 million which were included inthe consolidated statement of operations for the year ended December 28, 2003and an additional $0.2 million in professional fees, which were offset againstthe payment in the accompanying condensed consolidated statement of operationsfor the three months ended March 28, 2004. The net cash proceeds were used inApril 2004 in connection with the redemption of the remaining $48.2 million ofSenior Notes.

 

On March 5, 2004, the Company sold thereal property and equipment for one franchised location and assigned the leaseand sold the equipment for a second franchised location to the existingfranchisee. Gross proceeds from the sale wereapproximately $0.5 million, of which $0.1 million was for franchise fees and$0.4 million was for the sale of assets and lease assignment.

 

On January 15, 2004,the Company entered into an agreement granting Central Florida Restaurants LLC(“Central Florida”) certain limited exclusive rights to operate and developFriendly’s full-service restaurants in designated areas within the Orlando,Florida market (the “Central Florida Agreement”).  Pursuant to the Central Florida Agreement, Central Florida purchasedcertain equipment assets, lease and sublease rights and franchise rights in 10existing Friendly’s restaurants and committed to open an additional 10restaurants over the next six years with an option for 15 more restaurants inthe following five years. Gross proceeds from the sale were approximately $3.2million of which approximately $0.3 million was for franchise fees for theinitial 10 restaurants.

 

38

----

 

During July2003, the Company entered into a development agreement granting Jax Family Rest.,Inc. (“Jax”) certain limited exclusive rights to operate and develop Friendly’sfull-service restaurants in designated areas within Baker, Clay, Nassau, Putnamand St. John’s counties, Florida (the “Jax Agreement”). Pursuant to the JaxAgreement, Jax agreed to open 10 new restaurants over the next seven years. TheCompany received development fees of $0.2 million, which represent one-half ofthe initial franchise fees. The development fees will be recognized into incomeas restaurants are opened.

 

The followingrepresents the contractual obligations and commercial commitments of theCompany as of March 28, 2004 (in thousands):

 
|                                  |   | **Payments  due by Period** |    |
|---------------------------------------|--------|-----------------------------|---------|
|                                  |   |                        |    |   |   |   |   |   |   | **Fiscal  Years** |   |
|                                  |   |                        |    | **Remainder  of** |   | **Fiscal  Years** |   | **Fiscal  Years** |   | **Beyond** |   |
| **Contractual Obligations:**          |   | **Total**                   |    | **2004** |   | **2005 &  2006** |   | **2007 &  2008** |   | **2008** |   |
| Short-term and long-term debt         |   | $                           | 275,952 |   | $ | 48,992 |   | $ | 2,636 |   | $ | 3,179 |   | $ | 221,145 |   |
| Capital lease and finance obligations |   | 12,329                      |    | 1,568 |   | 3,834 |   | 3,359 |   | 3,568 |   |
| Operating leases                      |   | 146,604                     |    | 13,157 |   | 31,257 |   | 23,598 |   | 78,592 |   |
| Purchase commitments                  |   | 90,308                      |    | 90,235 |   | 65 |   | 8 |   | — |   |
|                                       |        |                             |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                              |   | **Amount of Commitment Expiration by Period** | ** ** |
|-----------------------------------|--------|-----------------------------------------------|------------|
|                              |   |                                          | ** ** |   | ** ** |   | ** ** |   | ** ** | **Fiscal Years** | ** ** |
|                              |   |                                          | ** ** | **Remainder of** |   | **Fiscal Years** |   | **Fiscal Years** |   | **Beyond** | ** ** |
| **Other Commercial Commitments:** |   | **Total**                                     |       | **2004** |   | **2005 & 2006** |   | **2007 & 2008** |   | **2008** |   |
| Letters of credit                 |   | $                                             | 14,012     |   | $ | — |   | $ | — |   | $ | 14,012 |   | $ | — |   |
|                                   |        |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Seasonality**

 

Due to the seasonality of ice creamconsumption, and the effect from time to time of weather on patronage of therestaurants, the Company’s revenues and operating income are typically higherin its second and third quarters.

 

**Geographic Concentration**

 

Approximately 93% ofthe company-operated restaurants are located, and substantially all of itsretail sales are generated, in the Northeast. 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 than certainof its competitors which are more geographically diverse.

 

39

----

 

**SignificantAccounting Policies**

 

Financial ReportingRelease No. 60 issued by the Securities and Exchange Commission requires allcompanies to include a discussion of critical accounting policies or methodsused in the preparation of financial statements. The following is a briefdiscussion of the more significant accounting policies and methods used by theCompany. The Company’s condensed consolidated financial statements, includingthe notes thereto, which are included elsewhere herein, should be read inconjunction with this discussion.

 

*Use of Estimates in the Preparation ofFinancial Statements -*

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the dates of the financialstatements and the reported amounts of revenues and expenses during thereporting periods. The critical accounting policies and most significantestimates and assumptions relate to revenue recognition, insurance reserves,recoverability of accounts receivable, valuation allowances and pension andother post-retirement benefits expense. Actual amounts could differsignificantly from the estimates.

 

*Revenue Recognition -*

 

The Company’s revenues are derivedprimarily from the operation of full-service restaurants, the distribution andsale of premium ice cream desserts through retail and institutional locationsand franchising. The Company recognizes restaurant revenue upon receipt ofpayment from the customer and retail revenue, net of discounts and allowances,upon delivery of product. Reserves for discounts and allowances from retailsales are estimated and accrued when revenue is recorded based on promotionalplanners prepared by the Company’s retail sales force. Actual amounts could differmaterially from the estimates. Franchise royaltyincome, generally calculated as 4% of net sales of franchisees, is recordedmonthly based upon the actual sales reported by each franchisee for the monthjust completed. Franchise fees are recorded as revenue upon completion of allsignificant services, generally upon opening of the restaurant.

 

*Insurance Reserves -*

 

The Company is self-insured through retentions ordeductibles for the majority of its workers’ compensation, automobile, generalliability, employer’s liability, product liability and group health insuranceprograms. Self-insurance amounts vary up to $0.5 million per occurrence.Insurance with third parties, some of which is then reinsured throughRestaurant Insurance Corporation (“RIC”), the Company’s wholly ownedsubsidiary, is in place for claims in excess of these self-insured amounts. RICreinsures 100% of the risk from $0.5 million to $1.0 million per occurrencethrough September 2, 2000 for FICC’s workers’ compensation, general liability,employer’s liability and product liability insurance. Subsequent to September2, 2000, the Company discontinued its use of RIC as a captive insurer for newclaims.

 

40

----

 

The Company’s liabilities for estimated ultimate losses forworkers’ compensation, automobile, general liability, employer’s liability andproduct liability are actuarially determined and recorded in the accompanyingcondensed consolidated financial statements on an undiscounted basis. Theprojections of estimated ultimate losses are based on commonly used actuarialprocedures.  These procedures take intoconsideration certain actuarial assumptions or management judgments regardingeconomic conditions, the frequency and severity of claims and claim settlementpractices.  While the estimated ultimatelosses are reasonable, any actuarial estimate is subject to uncertainty due tothe volatility inherent in casualty exposures and changes in the assumptions.  The Company’s provision for insuranceexpense reflects estimated amounts for the current year as well as revisions inestimates to prior years.  Actual lossescould vary significantly from the estimated losses and would have a materialaffect on the Company’s insurance expense.

 

The Company records a liability for its group healthinsurance programs for all estimated unpaid claims based primarily upon lossdevelopment analyses derived from actual claim payment experience provided bythe Company’s third party administrators.

 

*Concentration of Credit Risk -*

 

Financial instruments,which potentially expose the Company to concentrations of credit risk, consistprincipally of accounts receivable. The Company performs ongoing creditevaluations of its customers and generally requires no collateral to secureaccounts receivable. The credit review is based on both financial andnon-financial factors. The Company maintains a reserve for potentiallyuncollectible accounts receivable based on its assessment of the collectibilityof accounts receivable.

 

*Pension and Other Post-Retirement Benefits -*

 

Certain of the Company’s employees arecovered under a noncontributory defined benefit pension plan. The determinationof the Company’s obligation and expense for pension and other post-retirementbenefits is dependent upon the selection of certain assumptions used byactuaries in calculating such amounts. Those assumptions include, among otherthings, the discount rate, expected long-term rate of return on plan assets andrates of increase in compensation and health care costs. In accordance withaccounting principles generally accepted in the United States, actual resultsthat differ from the assumptions are accumulated and amortized over futureperiods and, therefore, generally affect the recognized expense and recordedobligation in such future periods. Significant differences in actual experienceor significant changes in the assumptions may materially affect the futurepension and other post-retirement obligations and expense.

 

41

----

 

*Long-Lived Assets -*

 

In accordance withSFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”the Company reviews its Non-Friendly Marks, which were assigned to the Companyby Hershey in September 2002, for impairment on a quarterly basis. The Companyrecognizes impairment has occurred when the carrying value of the Non-FriendlyMarks exceeds the estimated future undiscounted cash flows of the trademarkedproducts. Additionally, the Company reviews long-lived assets related to eachrestaurant to be held and used in the business quarterly for impairment orwhenever events or changes in circumstances indicate that the carrying amountof a restaurant may not be recoverable. The Company evaluates restaurants usinga “two-year history of cash flow” as the primary indicator of potentialimpairment. Based on the best information available, the Company writes down animpaired restaurant to its estimated fair market value, which becomes its newcost basis. Estimated fair market value is based on the Company’s experienceselling similar properties and local market conditions, less costs to sell forproperties to be disposed of. In addition, restaurants scheduled for closingare reviewed for impairment and depreciable lives are adjusted. The impairmentevaluation is based on the estimated cash flows from continuing use through theexpected disposal date and the expected terminal value.

 

Considerablemanagement judgment is necessary to estimate future cash flows, including cashflows from continuing use, terminal value, closure costs and sublease income.Accordingly, actual results could vary significantly from these estimates.

 

*Income Taxes -*

 

The Companyaccounts for income taxes in accordance with SFAS No. 109, “Accounting forIncome Taxes,” which requires recognition of deferred tax assets andliabilities for the expected future tax consequences of events that have beenincluded in the financial statements or tax returns. Management recordsdeferred tax assets to the extent it believes there will be sufficient futuretaxable income to utilize those assets prior to their expiration. To the extentdeferred tax assets may be unable to be utilized, the Company records avaluation allowance against the unrealizable amount and records a chargeagainst earnings.

 

The Companyrecords income taxes based on the effective rate expected for the year with anychanges in the valuation allowance reflected in the period of change. As ofMarch 28, 2004 and December 28, 2003, a valuation allowance of $10.1 millionexisted related to state NOL carryforwards due to restrictions on the usage ofstate NOL carryforwards and short carryforward periods for certain states. Dueto ever-changing tax laws and income tax rates, significant judgment is requiredto estimate the effective tax rate expected to apply to tax differences thatare expected to reverse in the future. Management must also make estimatesabout the sufficiency of taxable income in future periods to offset anydeductions related to deferred tax assets currently recorded. Accordingly,management believes estimates related to income taxes are critical.

 

*Derivative Instruments and Hedging Agreements-*

 

The Companypurchases butter option contracts to minimize the impact of increases in the costof cream. When available, options on butter futures are purchased to cover upto 50% of the cream needs of the manufacturing plant.  Option contracts are offered in the months of March, May, July,September, October and December; however, there is often not enough openinterest in them to allow the Company to buy even very limited coverage withoutpaying an exorbitant premium.

 

42

----

 

In addition tohedging, the Company pursues fixed price cream contracts to manage dairy costpressures. The Company was unable to find a supplier interested in an agreementfor a fixed-price load of cream for part of the year or the full year of 2003or 2004. The situation surrounding the supply of cream (which depends on milk production,milk per cow, number of cows, butter inventories, etc.) is very uncertain inthe wake of the National Milk Producers Federation’s “Cooperatives WorkingTogether” program.

 

The Company’s commodity option contracts do not meet hedgeaccounting criteria as defined by SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” and, accordingly, are marked to marketeach period, with the resulting gains or losses recognized in cost of sales.For the quarters ended March 28, 2004 and March 30, 2003, gains ofapproximately $0.8 million and losses of approximately $0.3 million,respectively, were included in cost of sales related to these option contracts.

 

*Contingencies -*

 

From time to time theCompany is named as a defendant in legal actions arising in the ordinary courseof its business. The Company does not believe that the resolutions of theseclaims will have a material adverse effect on the Company’s consolidatedfinancial condition or consolidated results of operations.

 

*Stock-Based Compensation -*

 

The Company accountsfor stock-based compensation for employees under Accounting Principles Board(“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and electedthe disclosure-only alternative under SFAS No. 123, “Accounting for Stock-BasedCompensation.”  Stock-based compensationcost of approximately $0.2 million related to modified option awards wasincluded in net loss for the three months ended March 28, 2004 for theCompany’s Stock Option Plan and the Company’s 2003 Incentive Plan. Nostock-based compensation cost was included in net loss for the three monthsended March 30, 2003 for the Company's Stock Option Plan or the Company's 2003Incentive Plan, as all options granted during this period had an exercise priceequal to the market value of the stock on the date of grant. In accordance withSFAS No. 148, “Accounting for Stock Based Compensation-Transition andDisclosure,” the Company will continue to disclose the required pro-formainformation in the notes to the consolidated financial statements.

 

**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

Therehas been no material change in the Company’s market risk exposure since thefiling of the 2003 Annual Report on Form 10-K.

 

**Item 4.  Controls and Procedures**

 

As of March 28, 2004,an evaluation was performed under the supervision and with the participation ofthe Company’s management, including the Chief Executive Officer (“CEO”) andChief Financial Officer (“CFO”), of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures (as defined inRule 13a-15(e) under the Exchange Act). Based on that evaluation, the Company’s CEO and CFO concluded that theCompany’s disclosure controls and procedures were effective as of March 28,2004.

 

43

----

 

**PART II- OTHER INFORMATION**

 

**Item 6.  Exhibits andreports on Form 8-K**

 

(a) Exhibits

 

Theexhibit index is incorporated by reference herein.

 

(b) Reports on Form 8-K

 
| **Date Filed**    |   | **Event Reported**                                                                            |
|-------------------|--------|-----------------------------------------------------------------------------------------------|
| March 8, 2004     |   | Item 5. Other Events  and Regulation FD Disclosure  Item 7. Financial Statements and Exhibits |
| March 2, 2004     |   | Item 9. Regulation FD  Disclosure                                                             |
| February 24, 2004 |   | Item 9. Regulation FD  Disclosure                                                             |
| February 24, 2004 |   | Item 5. Other Events  and Regulation FD Disclosure  Item 7. Financial Statements and Exhibits |

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|   | Friendly Ice Cream Corporation |
|--------|--------------------------------|
|   |                           |   |
|   |                           |   |
|   | By:                            | /s/PAUL V. HOAGLAND |   |
|   |                           | Name:   Paul V. Hoagland |
|   |                           | Title:     Executive Vice President of  Administration  and Chief Financial Officer |
|   |                           |   |
|   | Date:                          | April 26, 2004 |

 

44

----

 

**EXHIBIT INDEX**

 
| 4.1  |   | Amended and Restated Amendment No. 4 to Revolving Credit Agreement  among the Company, Fleet National Bank and certain other banks and financial  institutions (“Credit Agreement”) dated as of December 17, 2001. |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.2  |   | Indenture Dated as of March 8, 2004, among Friendly Ice Cream  Corporation, Friendly’s Restaurants Franchise, Inc. and The Bank of New York,  as Trustee.                                                               |
| 10.1 |   | Memorandum of Agreement Between Michael A. Maglioli and Friendly Ice  Cream Corporation effective March 25, 2004.*                                                                                                           |
| 31.1 |   | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 signed by John L. Cutter.                                                                                                                           |
| 31.2 |   | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 signed by Paul V. Hoagland.                                                                                                                         |
| 32.1 |   | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 signed by John L. Cutter and  Paul V. Hoagland.                                                      |

 

----

 

* - Management Contract or Compensatory Planor Arrangement

 

45

----