**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q/A**

 

**(AmendmentNo. 1)**

 
| **ý**                                                                                                                                                                 | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES AND EXCHANGE ACT OF 1934**  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------|
|                                                                                                                                                                       |                                                                                               |   |
| **For  the quarterly period ended March 31, 2002**                                                                                                                         |
|                                                                                                                                                                       |                                                                                               |   |
| **OR**                                                                                                                                                                     |
|                                                                                                                                                                       |                                                                                               |   |
| **o**                                                                                                                                                                      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES AND EXCHANGE ACT OF 1934** |
|                                                                                                                                                                       |                                                                                               |   |
| **For  the transition period  from           to           ** |

 

**CommissionFile No. 0-3930**

 

**FRIENDLY ICE CREAM CORPORATION**

(Exact name of registrantas specified in its charter)

 

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

 

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

 

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

 

| **Class**                     |   | **Outstanding at April 8, 2002** |
|-------------------------------|--------|----------------------------------|
|                          |   |                             |
| Common Stock, $.01 par  value |   | 7,353,828 shares                 |

 

 

----

 

**Introductory Note - Restatements**

 

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

 

1

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**PART I - FINANCIAL INFORMATION**

 

**Item 1.      FinancialStatements**

 

**FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

(In thousands)

 
|                                                                      |   | **March 31,  2002** |       | **December  30,  2001** |       |
|---------------------------------------------------------------------------|--------|---------------------|------------|-------------------------|------------|
|                                                                      |   | **(unaudited)**     |       |                    |       |
| ASSETS                                                                    |   |                | ** ** |                    | ** ** |
| CURRENT  ASSETS:                                                          |   |                | ** ** |                    | ** ** |
| Cash  and cash equivalents                                                |   | $                   | 14,519     |                    | $          | 16,342 |   |
| Accounts  receivable                                                      |   | 10,745              |       | 9,969                   |       |
| Inventories                                                               |   | 16,903              |       | 12,987                  |       |
| Deferred  income taxes                                                    |   | 7,659               |       | 7,659                   |       |
| Prepaid  expenses and other current assets                                |   | 2,327               |       | 3,736                   |       |
| TOTAL  CURRENT ASSETS                                                     |   | 52,153              |       | 50,693                  |       |
| PROPERTY  AND EQUIPMENT, net of accumulated depreciation and amortization |   | 163,352             |       | 169,489                 |       |
| INTANGIBLE  ASSETS AND DEFERRED COSTS, net of accumulated amortization    |   | 20,763              |       | 21,208                  |       |
| OTHER  ASSETS                                                             |   | 12,263              |       | 11,172                  |       |
| TOTAL  ASSETS                                                             |   | $                   | 248,531    |                    | $          | 252,562 |   |
|                                                                      |   |                |       |                    |       |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                |   |                | ** ** |                    | ** ** |
| CURRENT  LIABILITIES:                                                     |   |                | ** ** |                    | ** ** |
| Current  maturities of long-term debt                                     |   | $                   | 951        |                    | $          | 1,068 |   |
| Current  maturities of capital lease and finance obligations              |   | 1,858               |       | 1,851                   |       |
| Accounts  payable                                                         |   | 21,232              |       | 20,505                  |       |
| Accrued  salaries and benefits                                            |   | 9,137               |       | 9,436                   |       |
| Accrued  interest payable                                                 |   | 6,238               |       | 1,543                   |       |
| Insurance  reserves                                                       |   | 12,950              |       | 13,333                  |       |
| Restructuring  reserves                                                   |   | 2,397               |       | 3,056                   |       |
| Other  accrued expenses                                                   |   | 12,636              |       | 19,260                  |       |
| TOTAL  CURRENT LIABILITIES                                                |   | 67,399              |       | 70,052                  |       |
| DEFERRED  INCOME TAXES                                                    |   | 10,244              |       | 10,584                  |       |
| CAPITAL  LEASE AND FINANCE OBLIGATIONS, less current maturities           |   | 5,796               |       | 6,267                   |       |
| LONG-TERM  DEBT, less current maturities                                  |   | 232,534             |       | 232,797                 |       |
| OTHER  LONG-TERM LIABILITIES                                              |   | 28,897              |       | 28,876                  |       |
| COMMITMENTS  AND CONTINGENCIES                                            |   |                |       |                    |       |
| STOCKHOLDERS’  DEFICIT:                                              |   |                |       |                    |       |
| Common  stock                                                             |   | 74                  |       | 74                      |       |
| Additional  paid-in capital                                               |   | 139,373             |       | 139,290                 |       |
| Accumulated  deficit                                                      |   | (235,786            | )          | (235,378                | )          |
| TOTAL  STOCKHOLDERS’ DEFICIT                                         |   | (96,339             | )          | (96,014                 | )          |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ DEFICIT                         |   | $                   | 248,531    |                    | $          | 252,562 |   |

 

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

 

2

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**FRIENDLYICE CREAM CORPORATION AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

(Unaudited)

(In thousands, except pershare data)

 
|                                                       |   | **For the Three Months Ended** |    |
|------------------------------------------------------------|--------|--------------------------------|---------|
|                                                       |   | **March 31,  2002**            |    | **April 1,  2001** |   |
|                                                       |   |                           |    |   |   |
| REVENUES                                                   |   | $                              | 131,486 |   | $ | 125,719 |   |
|                                                       |   |                           |    |   |   |
| COSTS AND  EXPENSES:                                       |   |                           |    |   |   |
| Cost of sales                                              |   | 45,994                         |    | 42,060 |   |
| Labor and  benefits                                        |   | 37,918                         |    | 39,676 |   |
| Operating  expenses                                        |   | 26,398                         |    | 24,944 |   |
| General and  administrative expenses                       |   | 8,599                          |    | 9,332 |   |
| Write-downs of  property and equipment                     |   | 120                            |    | — |   |
| Depreciation and  amortization                             |   | 6,686                          |    | 7,552 |   |
|                                                       |   |                           |    |   |   |
| Loss (gain) on  sales of other property and equipment, net |   | 512                            |    | (1,981 | ) |
|                                                       |   |                           |    |   |   |
| OPERATING INCOME                                           |   | 5,259                          |    | 4,136 |   |
|                                                       |   |                           |    |   |   |
| Interest  expense, net                                     |   | 6,337                          |    | 7,585 |   |
|                                                       |   |                           |    |   |   |
| LOSS BEFORE  BENEFIT FROM INCOME TAXES                     |   | (1,078                         | )       | (3,449 | ) |
|                                                       |   |                           |    |   |   |
| Benefit from  income taxes                                 |   | 670                            |    | 1,514 |   |
|                                                       |   |                           |    |   |   |
| NET LOSS AND  COMPREHENSIVE LOSS                           |   | $                              | (408    | ) | $ | (1,935 | ) |
|                                                       |   |                           |    |   |   |
| BASIC AND  DILUTED NET LOSS PER SHARE                      |   | $                              | (0.06   | ) | $ | (0.26 | ) |
|                                                       |   |                           |    |   |   |
| WEIGHTED AVERAGE  BASIC AND DILUTED SHARES                 |   | 7,353                          |    | 7,376 |   |

 

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

 

3

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**FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited)

(In thousands)

 
|                                                                                       |   | **For the Three Months Ended** |   |
|--------------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                                       |   | **March 31,  2002**            |   | **April 1,  2001** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                     |   |                           |   |   |   |
| Net loss                                                                                   |   | $                              | (408   | ) | $ | (1,935 | ) |
| Adjustments to  reconcile net loss to net cash (used in) provided by operating activities: |   |                           |   |   |   |
| Stock  compensation expense                                                                |   | 70                             |   | 93 |   |
| Depreciation and  amortization                                                             |   | 6,686                          |   | 7,552 |   |
| Write-downs of  property and equipment                                                     |   | 120                            |   | — |   |
| Deferred income  tax benefit                                                               |   | (340                           | )      | (1,514 | ) |
| Loss (gain) on  sales of other property and equipment, net                                 |   | 512                            |   | (1,981 | ) |
| Changes in  operating assets and liabilities:                                              |   |                           |   |   |   |
| Accounts  receivable                                                                       |   | (776                           | )      | 598 |   |
| Inventories                                                                                |   | (3,916                         | )      | (2,510 | ) |
| Other assets                                                                               |   | 318                            |   | 37 |   |
| Accounts payable                                                                           |   | 727                            |   | (467 | ) |
| Accrued expenses  and other long-term liabilities                                          |   | (3,386                         | )      | 2,291 |   |
| NET CASH (USED  IN) PROVIDED BY OPERATING ACTIVITIES                                       |   | (393                           | )      | 2,164 |   |
|                                                                                       |   |                           |   |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                     |   |                           |   |   |   |
| Purchases of  property and equipment                                                       |   | (1,563                         | )      | (2,026 | ) |
| Proceeds from  sales of property and equipment                                             |   | 964                            |   | 5,246 |   |
| NET CASH (USED  IN) PROVIDED BY INVESTING ACTIVITIES                                       |   | (599                           | )      | 3,220 |   |
|                                                                                       |   |                           |   |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                     |   |                           |   |   |   |
| Proceeds from  borrowings                                                                  |   | —                         |   | 8,000 |   |
| Repayments of  debt                                                                        |   | (380                           | )      | (18,627 | ) |
| Repayments of  capital lease and finance obligations                                       |   | (464                           | )      | (572 | ) |
| Stock options  exercised                                                                   |   | 13                             |   | — |   |
| NET CASH USED IN  FINANCING ACTIVITIES                                                     |   | (831                           | )      | (11,199 | ) |
|                                                                                       |   |                           |   |   |   |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                                 |   | (1,823                         | )      | (5,815 | ) |
|                                                                                       |   |                           |   |   |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                            |   | 16,342                         |   | 14,584 |   |
|                                                                                       |   |                           |   |   |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                                  |   | $                              | 14,519 |   | $ | 8,769 |   |
|                                                                                       |   |                           |   |   |   |
| SUPPLEMENTAL  DISCLOSURES:                                                                 |   |                           |   |   |   |
| Cash paid  (refunded) during the period for:                                               |   |                           |   |   |   |
| Interest                                                                                   |   | $                              | 1,343  |   | $ | 2,136 |   |
| Income taxes                                                                               |   | (3                             | )      | 2 |   |

 

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

 

4

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**FRIENDLYICE CREAM CORPORATION AND SUBSIDIARIES**

** **

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

** **

(Unaudited)

 

**1.  BASIS OF PRESENTATION AND SIGNIFICANTACCOUNTING POLICIES**

 

*Interim Financial Information -*

 

The accompanyingcondensed consolidated financial statements as of March 31, 2002 and for thefirst quarters ended March 31, 2002 and April 1, 2001 are unaudited, but, inthe opinion of management, include all adjustments which are necessary for afair 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 period ended March 31,2002 are not necessarily indicative of the results that may be expected for theentire year due, in part, to the seasonality of the Company’s business.Historically, higher revenues and operating income have been experienced duringthe second and third fiscal quarters. The Company’s consolidated financialstatements, including the notes thereto, which are contained in the 2001 AnnualReport on Form 10-K should be read in conjunction with these condensedconsolidated financial statements. Capitalized terms not otherwise defined herein should be referenced tothe 2001 Annual Report on Form 10-K.

 

*Use ofEstimates in the Preparation of Financial 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,restructuring reserves, valuation allowances on net operating losses, pensionand other post-retirement benefits expense and the volatility of cream prices.Actual amounts could differ significantly from the estimates.

 

*RevenueRecognition -*

 

The Company’s revenuesare derived primarily from the operation of full-service restaurants, thedistribution and sale of frozen desserts through retail and institutionallocations and franchising. The Company recognizes restaurant revenue uponreceipt of payment from the customer and retail revenue upon shipment ofproduct. Reserves for discounts and allowances from retail sales are estimatedand accrued when revenue is recorded. Actual amounts could differ materiallyfrom the estimates. Franchise royalty income, based on net sales offranchisees, is payable monthly and is recorded on the accrual method. Initialfranchise fees are recorded as revenue upon completion of all significantservices, generally upon opening of the restaurant.

 

5

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*InsuranceReserves -*

 

The Company is self -insured through retentions or deductibles for the majority of its workers’compensation, automobile, general liability, employer’s liability, productliability and group health insurance programs. Self-insurance amounts vary upto $500,000 per occurrence. Insurance with third parties, some of which is thenreinsured through RIC, is in place for claims in excess of these self –insured amounts. RIC reinsured 100% of the risk from $500,000 to $1,000,000 peroccurrence through September 2, 2000 for the Company’s workers’ compensation,general liability, employer’s liability and product liability insurance.Subsequent to September 2, 2000, the Company discontinued its use of RIC as acaptive insurer for new claims. The Company’s and RIC’s liability for estimatedincurred 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 affect on the Company’s insurance expense.

 

*RestructuringReserves -*

 

On October 10, 2001, theCompany eliminated approximately 70 positions at corporate headquarters. Inaddition, approximately 30 positions in the restaurant construction andfabrication areas were eliminated by December 30, 2001. The purpose of thereduction was to streamline functions and reduce redundancy amongst itsbusiness segments. As a result of the elimination of the positions and theoutsourcing of certain functions, the Company reported a pre-tax restructuringcharge of approximately $2,536,000 for severance, rent and unusableconstruction supplies in the year ended December 30, 2001.

 

In March 2000, theCompany’s Board of Directors approved a restructuring plan that provided forthe immediate closing of 81 restaurants at the end of March 2000 and thedisposition of an additional 70 restaurants over the next 24 months. As aresult of this plan, the Company reported a pre-tax restructuring charge ofapproximately $12,100,000 for severance, rent, utilities and real estate taxes,demarking, lease termination costs and certain other costs associated with theclosing of the locations, along with a pre-tax write-down of property andequipment for these locations of approximately $17,000,000 in the year endedDecember 31, 2000. The Company reduced the restructuring reserve by $1,900,000during the year ended December 30, 2001 since the reserve exceeded estimatedremaining payments.

 

As of March 31, 2002, theremaining restructuring reserve was $2,397,000. The restructuring reserves maybe increased or decreased based upon remaining payments, which could varymaterially from the estimates depending upon the timing of store closings andother factors.

 

6

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*IncomeTaxes -*

 

The Company accounts forincome taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,”which requires recognition of deferred tax assets and liabilities for theexpected future tax consequences of events that have been included in thefinancial statements or tax returns. A valuation allowance is recorded fordeferred tax assets whose realization is not likely. As of December 30, 2001and March 31, 2002, a valuation allowance of $11,295,000 existed related tostate NOL carryforwards due to restrictions on the usage of state NOLcarryforwards and short carryforward periods for certain states. Taxable incomeby state for future periods is difficult to estimate. The amount and timing ofany future taxable income may affect the usage of such carryforwards, whichcould result in a material change in the valuation allowance.

 

*Pensionand Other Post-Retirement Benefits -*

 

The determination of theCompany’s obligation and expense for pension and other post-retirement benefitsis dependent upon the selection of certain assumptions used by actuaries incalculating such amounts. Those assumptions include, among other things, thediscount rate, expected long-term rate of return on plan assets and rates ofincrease in compensation and health care costs. In accordance with accountingprinciples generally accepted in the United States, actual results that differfrom the assumptions are accumulated and amortized over future periods and,therefore, generally affect the recognized expense and recorded obligation insuch future periods. While FICC believes that the assumptions used areappropriate, significant differences in actual experience or significantchanges in the assumptions may materially affect the future pension and otherpost-retirement obligations and expense.

 

*Volatilityof Cream Prices -*

 

The cost of cream, theprincipal ingredient used in making ice cream, affects cost of sales as apercentage of total revenues, especially in foodservice’s retail business. TheCompany believes that cream prices will be slightly higher in 2002 than in2001. A $0.10 increase in the cost of a pound of AA butter adversely affectsthe Company’s annual cost of sales by approximately $1,100,000. To minimizerisk, alternative supply sources continue to be pursued. However, no assurancecan be given that the Company will be able to offset any cost increases in thefuture and future increases in cream could have a material adverse effect onthe Company’s results of operations.

 

*Debt -*

 

In December 2001, theCompany completed a financial restructuring plan (the “Refinancing Plan”) whichincluded the repayment of $64,545,000 outstanding under the Old Credit Facilityand the repurchase of approximately $21,300,000 in Senior Notes for $17,000,000with 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 of which up to $20,000,000 is available to supportletters of credit. The $30,000,000 commitment less outstanding letters ofcredit is available for borrowing to provide working capital and for othercorporate needs (the “New Credit Facility”).

 

7

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Inventories -

 

Inventories are stated atthe lower of first-in, first-out cost or market.  Inventories as of March 31, 2002 and December 30, 2001 were asfollows (in thousands):

 

|              |   | **March 31,  2002** |   | **December  30,  2001** |   |
|-------------------|--------|---------------------|--------|-------------------------|--------|
|              |   |                |   |                    |   |
| Raw  materials    |   | $                   | 828    |                    | $      | 1,269 |   |
| Goods  in process |   | 142                 |   | 73                      |   |
| Finished  goods   |   | 15,933              |   | 11,645                  |   |
|              |   |                |   |                    |   |
| Total             |   | $                   | 16,903 |                    | $      | 12,987 |   |

 

*Reclassifications-*

 

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

 

**2. NET LOSS PER SHARE**

 

Basic loss per share iscalculated by dividing net loss by the weighted average number of common sharesoutstanding during the period. Diluted loss per share is calculated by dividingnet loss by the weighted average number of shares of common stock and common stockequivalents outstanding during the period. Common stock equivalents aredilutive stock options and warrants that are assumed exercised for calculationpurposes. The number of common stock options which could dilute basic earningsper share in the future, that were not included in the computation of dilutedloss per share because to do so would have been antidilutive, was 389,000 and650,000 for the three months ended March 31, 2002 and April 1, 2001,respectively.

 

8

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**3.  SEGMENT REPORTING**

 

Operating segments arecomponents of an enterprise about which separate financial information isavailable that is evaluated regularly by the chief operating decision-maker, ordecision-making group, in deciding how to allocate resources and in assessingperformance. The Company’s chief operating decision-maker is the Chairman ofthe Board and Chief Executive Officer of the Company. The Company’s operatingsegments include restaurant, foodservice and franchise. The revenues from thesesegments include both sales to unaffiliated customers and intersegment sales,which generally are accounted for on a basis consistent with sales tounaffiliated customers. Intersegment sales and other intersegment transactionshave been eliminated in the accompanying condensed consolidated financialstatements.

 

The Company’s restaurantstarget families with children and adults who desire a reasonably-priced meal ina full-service setting. The Company’s menu offers a broad selection of freshly-preparedfoods which appeal to customers throughout all dayparts. The menu currentlyfeatures over 100 items comprised of a broad selection of breakfast, lunch,dinner and afternoon and evening snack items. Foodservice operationsmanufactures frozen dessert products and distributes such manufactured productsand purchased finished goods to the Company’s restaurants and franchisedoperations. Additionally, it sells frozen dessert products to distributors andretail and institutional locations. The Company’s franchise segment includes aroyalty based on franchise restaurant revenue. In addition, the Companyreceives rental income from various franchised restaurants. The Company doesnot allocate general and administrative expenses associated with its headquartersoperations to any business segment. These costs include general andadministrative expenses of the following functions: legal, accounting,personnel not directly related to a segment, information systems and otherheadquarters activities.

 

On May 1, 2001,foodservice decreased its ice cream pricing to all restaurants. This resultedin decreased foodservice revenues of 3.9% for the three months ended March 31,2002.

 

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

 

EBITDA represents netincome (loss) before (i) benefit from income taxes, (ii) interestexpense, net, (iii) depreciation and amortization, (iv) write-downsof property and equipment and (v) other non-cash items. The Company hasincluded information concerning EBITDA in this Form 10-Q because it believesthat such information is used by certain investors as one measure of acompany’s historical ability to service debt. EBITDA should not be consideredas an alternative to, or more meaningful than, earnings (loss) from operationsor other traditional indications of a company’s operating performance.

 

9

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|                                        |   | **For the Three Months Ended** |    |
|---------------------------------------------|--------|--------------------------------|---------|
|                                        |   | **March 31,  2002**            |    | **April 1,  2001** |   |
|                                        |   | **(in thousands)**             |    |
| Revenues:                                   |   |                           |    |   |   |
| Restaurant                                  |   | $                              | 104,256 |   | $ | 107,145 |   |
| Foodservice                                 |   | 54,133                         |    | 47,822 |   |
| Franchise                                   |   | 2,129                          |    | 1,561 |   |
| Total                                       |   | $                              | 160,518 |   | $ | 156,528 |   |
|                                        |   |                           |    |   |   |
| Intersegment  revenues:                     |   |                           |    |   |   |
| Restaurant                                  |   | $                              | —  |   | $ | — |   |
| Foodservice                                 |   | (29,032                        | )       | (30,809 | ) |
| Franchise                                   |   | —                         |    | — |   |
| Total                                       |   | $                              | (29,032 | ) | $ | (30,809 | ) |
|                                        |   |                           |    |   |   |
| External  revenues:                         |   |                           |    |   |   |
| Restaurant                                  |   | $                              | 104,256 |   | $ | 107,145 |   |
| Foodservice                                 |   | 25,101                         |    | 17,013 |   |
| Franchise                                   |   | 2,129                          |    | 1,561 |   |
| Total                                       |   | $                              | 131,486 |   | $ | 125,719 |   |
|                                        |   |                           |    |
| EBITDA:                                     |   |                           |    |   |   |
| Restaurant                                  |   | $                              | 12,051  |   | $ | 10,845 |   |
| Foodservice                                 |   | 3,674                          |    | 3,078 |   |
| Franchise                                   |   | 1,327                          |    | 494 |   |
| Corporate                                   |   | (4,402                         | )       | (4,520 | ) |
| (Loss)  gain on property and equipment, net |   | (515                           | )       | 1,884 |   |
| Total                                       |   | $                              | 12,135  |   | $ | 11,781 |   |
|                                        |   |                           |    |   |   |
| Interest  expense, net-Corporate            |   | $                              | 6,337   |   | $ | 7,585 |   |
|                                        |   |                           |    |   |   |
| Depreciation  and amortization:             |   |                           |    |   |   |
| Restaurant                                  |   | $                              | 4,626   |   | $ | 5,046 |   |
| Foodservice                                 |   | 671                            |    | 854 |   |
| Franchise                                   |   | 74                             |    | 60 |   |
| Corporate                                   |   | 1,315                          |    | 1,592 |   |
| Total                                       |   | $                              | 6,686   |   | $ | 7,552 |   |
|                                        |   |                           |    |   |   |
| Other  non-cash expenses:                   |   |                           |    |   |   |
| Corporate                                   |   | $                              | 70      |   | $ | 93 |   |
| Write-downs  of property and equipment      |   | 120                            |    | — |   |
| Total                                       |   | $                              | 190     |   | $ | 93 |   |
|                                        |   |                           |    |   |   |
| Income  (loss) before income taxes:         |   |                           |    |   |   |
| Restaurant                                  |   | $                              | 7,425   |   | $ | 5,799 |   |
| Foodservice                                 |   | 3,003                          |    | 2,224 |   |
| Franchise                                   |   | 1,253                          |    | 434 |   |
| Corporate                                   |   | (12,124                        | )       | (13,790 | ) |
| (Loss)  gain on property and equipment, net |   | (635                           | )       | 1,884 |   |
| Total                                       |   | $                              | (1,078  | ) | $ | (3,449 | ) |
|                                             |        |                                |         |  |  |  |  |  |  |  |  |  |

 

10

----

 

|                                                                   |   | **March 31,  2002** |    | **December 30,  2001** |   |
|------------------------------------------------------------------------|--------|---------------------|---------|------------------------|--------|
| Capital  expenditures, including assets acquired under capital leases: |   |                |    |                   |   |
| Restaurant                                                             |   | $                   | 1,200   |                   | $      | 10,821 |   |
| Foodservice                                                            |   | 368                 |    | 2,090                  |   |
| Corporate                                                              |   | (5                  | )       | 1,011                  |   |
| Total                                                                  |   | $                   | 1,563   |                   | $      | 13,922 |   |
|                                                                   |   |                |    |                   |   |
| Total  assets:                                                         |   |                |    |                   |   |
| Restaurant                                                             |   | $                   | 144,443 |                   | $      | 148,475 |   |
| Foodservice                                                            |   | 41,636              |    | 38,474                 |   |
| Franchise                                                              |   | 6,384               |    | 7,076                  |   |
| Corporate                                                              |   | 56,068              |    | 58,537                 |   |
| Total                                                                  |   | $                   | 248,531 |                   | $      | 252,562 |   |

 

**4.  NEW ACCOUNTING PRONOUNCEMENTS**

 

In August 2001, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets.” SFAS No. 144 modifies the rules for accountingfor the impairment or disposal of long-lived assets. The impact of adoptingSFAS No. 144 on December 31, 2001 had no material effect on the Company’sfinancial condition or results of operations.

 

In June 2001, the FASBissued SFAS No. 142, “Goodwill and Other Intangibles.”  SFAS No. 142 modifies the rules foraccounting for goodwill and other intangible assets. The new rules becameeffective for the Company on December 31, 2001. The impact of adopting SFAS No.142 on December 31, 2001 had no effect on the Company’s financial condition orresults of operations and the Company is continuing to amortize its licenseagreement related to certain trademarked products over the term of the licenseagreement.

 

In April 2001, the FASBreached consensus on Emerging Issues Task Force (“EITF”) Issue No. 00-25,“Accounting for Consideration from a Vendor to a Retailer in Connection withthe Purchase or Promotion of the Vendor’s Products.” EITF Issue No. 00-25 waseffective for quarters beginning after December 15, 2001, with prior financialstatements restated if practicable. EITF Issue No. 00-25 requires thatconsideration from a vendor to a retailer be recorded as a reduction in revenueunless certain criteria are met. Arrangements within the scope of this Issueinclude slotting fees, cooperative advertising arrangements and buy-downs. As aresult of EITF Issue No. 00-25, certain costs previously recorded as expensehave been reclassified and offset against revenue for the quarter ended April1, 2001.

 

11

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**5. RESTRUCTURING RESERVES**

 

The following representsthe reserve and activity associated with the March 2000 and October 2001restructurings (in thousands):

 
|                             |   | **For the Three Months Ended April 1, 2001**         |   |
|----------------------------------|--------|------------------------------------------------------|--------|
|                             |   | **Restructuring  Reserves as of  December 31, 2000** |   | **Costs Paid** |   | **Restructuring  Reserves as of  April 1, 2001** |   |
| Severance  pay                   |   | $                                                    | 74     |   | $ | (74 | ) | $ | — |   |
| Rent                             |   | 3,585                                                |   | (278 | ) | 3,307 |   |
| Utilities  and real estate taxes |   | 1,105                                                |   | (210 | ) | 895 |   |
| Demarking                        |   | 138                                                  |   | (12 | ) | 126 |   |
| Lease  termination costs         |   | 120                                                  |   | — |   | 120 |   |
| Inventory                        |   | 5                                                    |   | (5 | ) | — |   |
| Other                            |   | 544                                                  |   | (148 | ) | 396 |   |
| Total                            |   | $                                                    | 5,571  |   | $ | (727 | ) | $ | 4,844 |   |

 
|                             |   | **For the Three Months Ended March 31, 2002**        |   |
|----------------------------------|--------|------------------------------------------------------|--------|
|                             |   | **Restructuring  Reserves as of  December 30, 2001** |   | **Expense** |   | **Costs Paid** |   | **Restructuring  Reserves as of  March 31, 2002** |   |
| Severance  pay                   |   | $                                                    | 516    |   | $ | — |   | $ | (408 | ) | $ | 108 |   |
| Rent                             |   | 1,318                                                |   | — |   | (136 | ) | 1,182 |   |
| Utilities  and real estate taxes |   | 185                                                  |   | 91 |   | (78 | ) | 198 |   |
| Equipment                        |   | 480                                                  |   | — |   | — |   | 480 |   |
| Outplacement  services           |   | 6                                                    |   | — |   | (1 | ) | 5 |   |
| Other                            |   | 551                                                  |   | (91 | ) | (36 | ) | 424 |   |
| Total                            |   | $                                                    | 3,056  |   | $ | — |   | $ | (659 | ) | $ | 2,397 |   |

 

Based on information currently available, managementbelieves that the restructuring reserve as of March 31, 2002 is adequate andnot excessive.

 

12

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**6.  FRANCHISE TRANSACTIONS**

 

In 2000, the Company andits first franchisee, Davco, agreed to terminate Davco’s rights as theexclusive developer of new Friendly’s restaurants in Maryland, Delaware, theDistrict of Columbia and northern Virginia, effective December 28, 2000. Davcohas the right to close up to 16 existing franchised locations and will operatethe remaining 32 locations under their respective existing franchise agreementsuntil such time as a new franchisee is found for those locations. The existingfranchise agreements for the 32 locations were modified as of December 29, 2001to allow early termination subject to liquidated damages on 22 of the 32franchise agreements. Effective August 6, 2001, Davco transferred its rights tothree franchised locations to a third party. Davco closed two units during theyear ended December 30, 2001. During the quarter ended March 31, 2002, Davcotransferred its rights to eight additional franchised locations to threeseparate third parties.

 

**7.  SUPPLEMENTAL CONDENSED CONSOLIDATINGFINANCIAL INFORMATION**

 

FICC’s obligation relatedto the Senior Notes are guaranteed fully and unconditionally by one of FICC’swholly owned subsidiaries. There are no restrictions on FICC’s ability toobtain dividends or other distributions of funds from this subsidiary, exceptthose imposed by applicable law. The following supplemental financialinformation sets forth, on a condensed consolidating basis, balance sheets,statements of operations and statements of cash flows for FICC (the “ParentCompany”), Friendly’s Restaurants Franchise, Inc. (the “Guarantor Subsidiary”)and Friendly’s International, Inc., Restaurant Insurance Corporation, and thethree LLC subsidiaries created in 2001, Friendly’s Realty I, LLC, Friendly’sRealty II, LLC and Friendly’s Realty III, LLC (collectively, the “Non-guarantorSubsidiaries”). All of the LLCs’ assets are owned by the LLCs, which areseparate entities with separate creditors which will be entitled to besatisfied out of the LLCs’ assets. Separate complete financial statements andother disclosures of the Guarantor Subsidiary as of March 31, 2002 and April 1,2001 and for the three months ended March 31, 2002 and April 1, 2001 are notpresented because management has determined that such information is notmaterial to investors.

 

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

 

13

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**Supplemental Condensed Consolidating Balance Sheet**

**As of March 31, 2002**

(In thousands)

 
|                                                       |   | **Parent  Company** |    | **Guarantor  Subsidiary** |   | **Non-  guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|------------------------------------------------------------|--------|---------------------|---------|---------------------------|--------|-----------------------------------|--------|------------------|--------|------------------|--------|
|                                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Assets                                                     |   |                |    |                      |   |                              |   |             |   |             |   |
|                                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Current assets:                                            |   |                |    |                      |   |                              |   |             |   |             |   |
| Cash and cash  equivalents                                 |   | $                   | 12,449  |                      | $      | 16                                |   | $                | 2,054  |             | $      | — |   | $ | 14,519 |   |
| Accounts  receivable, net                                  |   | 10,087              |    | 658                       |   | —                            |   | —           |   | 10,745           |   |
| Inventories                                                |   | 16,903              |    | —                    |   | —                            |   | —           |   | 16,903           |   |
| Deferred income  taxes                                     |   | 7,448               |    | 99                        |   | —                            |   | 112              |   | 7,659            |   |
| Prepaid expenses  and other current assets                 |   | 6,606               |    | 255                       |   | 3,503                             |   | (8,037           | )      | 2,327            |   |
| Total current  assets                                      |   | 53,493              |    | 1,028                     |   | 5,557                             |   | (7,925           | )      | 52,153           |   |
| Deferred income  taxes                                     |   | —              |    | 350                       |   | 1,327                             |   | (1,677           | )      | —           |   |
| Property and  equipment, net                               |   | 111,956             |    | —                    |   | 51,396                            |   | —           |   | 163,352          |   |
| Intangibles and  deferred costs, net                       |   | 17,884              |    | —                    |   | 2,879                             |   | —           |   | 20,763           |   |
| Investments in  subsidiaries                               |   | 5,254               |    | —                    |   | —                            |   | (5,254           | )      | —           |   |
| Other assets                                               |   | 11,348              |    | 5,100                     |   | 6,229                             |   | (10,414          | )      | 12,263           |   |
|                                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Total assets                                               |   | $                   | 199,935 |                      | $      | 6,478                             |   | $                | 67,388 |             | $      | (25,270 | ) | $ | 248,531 |   |
|                                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Liabilities and Stockholders’ (Deficit) Equity        |   |                |    |                      |   |                              |   |             |   |             |   |
|                                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Current  liabilities:                                      |   |                |    |                      |   |                              |   |             |   |             |   |
| Current  maturities of long-term obligations               |   | $                   | 5,358   |                      | $      | —                            |   | $                | 951    |             | $      | (3,500 | ) | $ | 2,809 |   |
| Accounts payable                                           |   | 21,232              |    | —                    |   | —                            |   | —           |   | 21,232           |   |
| Accrued expenses                                           |   | 39,313              |    | 271                       |   | 8,076                             |   | (4,302           | )      | 43,358           |   |
| Total current  liabilities                                 |   | 65,903              |    | 271                       |   | 9,027                             |   | (7,802           | )      | 67,399           |   |
| Deferred income  taxes                                     |   | 11,809              |    | —                    |   | —                            |   | (1,565           | )      | 10,244           |   |
| Long-term  obligations, less current maturities            |   | 189,837             |    | —                    |   | 53,807                            |   | (5,314           | )      | 238,330          |   |
| Other long-term  liabilities                               |   | 28,725              |    | 1,057                     |   | 4,450                             |   | (5,335           | )      | 28,897           |   |
| Stockholders’  (deficit) equity                       |   | (96,339             | )       | 5,150                     |   | 104                               |   | (5,254           | )      | (96,339          | )      |
| Total  liabilities and stockholders’ (deficit) equity |   | $                   | 199,935 |                      | $      | 6,478                             |   | $                | 67,388 |             | $      | (25,270 | ) | $ | 248,531 |   |

 

14

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**Supplemental Condensed ConsolidatingStatement of Operations**

**For the Three Months Ended March 31,2002**

(In thousands)

 
|                                                                                                                   |   | **Parent  Company** |    | **Guarantor  Subsidiary** |   | **Non-  Guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|---------------------------|--------|-----------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Revenues                                                                                                               |   | $                   | 129,699 |                      | $      | 1,787                             |   | $                | — |             | $      | — |   | $ | 131,486 |   |
| Costs and  expenses:                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Cost of sales                                                                                                          |   | 45,994              |    | —                    |   | —                            |   | —           |   | 45,994           |   |
| Labor and  benefits                                                                                                    |   | 37,918              |    | —                    |   | —                            |   | —           |   | 37,918           |   |
| Operating  expenses and write-downs of property and equipment                                                          |   | 28,267              |    | —                    |   | (1,749                            | )      | —           |   | 26,518           |   |
| General and  administrative expenses                                                                                   |   | 7,435               |    | 1,164                     |   | —                            |   | —           |   | 8,599            |   |
| Depreciation and  amortization                                                                                         |   | 6,099               |    | —                    |   | 587                               |   | —           |   | 6,686            |   |
| Loss on sales of  other property and equipment, net                                                                    |   | 512                 |    | —                    |   | —                            |   | —           |   | 512              |   |
| Interest expense                                                                                                       |   | 5,174               |    | —                    |   | 1,163                             |   | —           |   | 6,337            |   |
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| (Loss) income  before benefit from (provision for) income taxes and equity in net income of  consolidated subsidiaries |   | (1,700              | )       | 623                       |   | (1                                | )      | —           |   | (1,078           | )      |
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Benefit from  (provision for) income taxes                                                                             |   | 1,044               |    | (255                      | )      | (119                              | )      | —           |   | 670              |   |
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| (Loss) income  before equity in net income of consolidated subsidiaries                                                |   | (656                | )       | 368                       |   | (120                              | )      | —           |   | (408             | )      |
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Equity in net  income of consolidated subsidiaries                                                                     |   | 248                 |    | —                    |   | —                            |   | (248             | )      | —           |   |
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Net (loss)  income                                                                                                     |   | $                   | (408    | )                         | $      | 368                               |   | $                | (120   | )                | $      | (248 | ) | $ | (408 | ) |

 

15

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**Supplemental Condensed ConsolidatingStatement of Cash Flows**

**For the Three Months Ended March 31,2002**

(In thousands)

 
|                                                  |   | **Parent  Company** |   | **Guarantor  Subsidiary** |   | **Non-  Guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|-------------------------------------------------------|--------|---------------------|--------|---------------------------|--------|-----------------------------------|--------|------------------|--------|------------------|--------|
| Net cash (used  in) provided by operating activities  |   | $                   | (1,479 | )                         | $      | (88                               | )      | $                | 1,054  |             | $      | 120 |   | $ | (393 | ) |
|                                                  |   |                |   |                      |   |                              |   |             |   |             |   |
| Cash flows from  investing activities:                |   |                |   |                      |   |                              |   |             |   |             |   |
| Purchases of  property and equipment                  |   | (1,563              | )      | —                    |   | —                            |   | —           |   | (1,563           | )      |
| Proceeds from  sales of property and equipment        |   | 964                 |   | —                    |   | —                            |   | —           |   | 964              |   |
| Net cash used in  investing activities                |   | (599                | )      | —                    |   | —                            |   | —           |   | (599             | )      |
|                                                  |   |                |   |                      |   |                              |   |             |   |             |   |
| Cash flows from financing  activities:                |   |                |   |                      |   |                              |   |             |   |             |   |
| Repayments of  obligations                            |   | (602                | )      | —                    |   | (242                              | )      | —           |   | (844             | )      |
| Stock options  exercised                              |   | 13                  |   |                      |   |                              |   |             |   | 13               |   |
| Reinsurance  deposits received                        |   | —              |   | —                    |   | 1,000                             |   | (1,000           | )      | —           |   |
| Reinsurance  payments made from deposits              |   | —              |   | —                    |   | (880                              | )      | 880              |   | —           |   |
| Net cash used in  financing activities                |   | (589                | )      | —                    |   | (122                              | )      | (120             | )      | (831             | )      |
|                                                  |   |                |   |                      |   |                              |   |             |   |             |   |
| Net (decrease)  increase in cash and cash equivalents |   | (2,667              | )      | (88                       | )      | 932                               |   | —           |   | (1,823           | )      |
|                                                  |   |                |   |                      |   |                              |   |             |   |             |   |
| Cash and cash  equivalents, beginning of period       |   | 15,116              |   | 104                       |   | 1,122                             |   | —           |   | 16,342           |   |
|                                                  |   |                |   |                      |   |                              |   |             |   |             |   |
| Cash and cash  equivalents, end of period             |   | $                   | 12,449 |                      | $      | 16                                |   | $                | 2,054  |             | $      | — |   | $ | 14,519 |   |
|                                                  |   |                |   |                      |   |                              |   |             |   |             |   |
| Supplemental  disclosures:                            |   |                |   |                      |   |                              |   |             |   |             |   |
| Interest paid                                         |   | $                   | 180    |                      | $      | —                            |   | $                | 1,163  |             | $      | — |   | $ | 1,343 |   |
| Income taxes  (refunded) paid                         |   | (5                  | )      | 2                         |   | —                            |   | —           |   | (3               | )      |

 

16

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**SupplementalCondensed Consolidating Balance Sheet**

**As ofDecember 30, 2001**

 

(In thousands)

 
|                                                       |   | **Parent  Company** |    | **Guarantor  Subsidiary** |   | **Non-  Guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|------------------------------------------------------------|--------|---------------------|---------|---------------------------|--------|-----------------------------------|--------|------------------|--------|------------------|--------|
|                                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Assets                                                     |   |                |    |                      |   |                              |   |             |   |             |   |
|                                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Current assets:                                            |   |                |    |                      |   |                              |   |             |   |             |   |
| Cash and cash  equivalents                                 |   | $                   | 15,116  |                      | $      | 104                               |   | $                | 1,122  |             | $      | — |   | $ | 16,342 |   |
| Accounts  receivable, net                                  |   | 9,468               |    | 501                       |   | —                            |   | —           |   | 9,969            |   |
| Inventories                                                |   | 12,987              |    | —                    |   | —                            |   | —           |   | 12,987           |   |
| Deferred income  taxes                                     |   | 7,448               |    | 99                        |   | —                            |   | 112              |   | 7,659            |   |
| Prepaid expenses  and other current assets                 |   | 8,704               |    | 1,002                     |   | 3,560                             |   | (9,530           | )      | 3,736            |   |
| Total current  assets                                      |   | 53,723              |    | 1,706                     |   | 4,682                             |   | (9,418           | )      | 50,693           |   |
| Deferred income  taxes                                     |   | —              |    | 350                       |   | 1,327                             |   | (1,677           | )      | —           |   |
| Property and  equipment, net                               |   | 117,564             |    | —                    |   | 51,925                            |   | —           |   | 169,489          |   |
| Intangibles and  deferred costs, net                       |   | 18,271              |    | —                    |   | 2,937                             |   | —           |   | 21,208           |   |
| Investments in  subsidiaries                               |   | 5,061               |    | —                    |   | —                            |   | (5,061           | )      | —           |   |
| Other assets                                               |   | 10,258              |    | 4,863                     |   | 6,229                             |   | (10,178          | )      | 11,172           |   |
|                                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Total assets                                               |   | $                   | 204,877 |                      | $      | 6,919                             |   | $                | 67,100 |             | $      | (26,334 | ) | $ | 252,562 |   |
|                                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Liabilities and Stockholders’ (Deficit) Equity        |   |                |    |                      |   |                              |   |             |   |             |   |
|                                                       |   |                |    |                      |   |                              |   |             |   |             |   |
| Current  liabilities:                                      |   |                |    |                      |   |                              |   |             |   |             |   |
| Current  maturities of long-term obligations               |   | $                   | 5,489   |                      | $      | —                            |   | $                | 930    |             | $      | (3,500 | ) | $ | 2,919 |   |
| Accounts payable                                           |   | 20,505              |    | —                    |   | —                            |   | —           |   | 20,505           |   |
| Accrued expenses                                           |   | 43,853              |    | 1,042                     |   | 7,491                             |   | (5,758           | )      | 46,628           |   |
| Total current  liabilities                                 |   | 69,847              |    | 1,042                     |   | 8,421                             |   | (9,258           | )      | 70,052           |   |
| Deferred income  taxes                                     |   | 12,149              |    | —                    |   | —                            |   | (1,565           | )      | 10,584           |   |
| Long-term  obligations, less current maturities            |   | 190,308             |    | —                    |   | 54,070                            |   | (5,314           | )      | 239,064          |   |
| Other long-term  liabilities                               |   | 28,587              |    | 1,095                     |   | 4,330                             |   | (5,136           | )      | 28,876           |   |
| Stockholders’  (deficit) equity                       |   | (96,014             | )       | 4,782                     |   | 279                               |   | (5,061           | )      | (96,014          | )      |
| Total  liabilities and stockholders’ (deficit) equity |   | $                   | 204,877 |                      | $      | 6,919                             |   | $                | 67,100 |             | $      | (26,334 | ) | $ | 252,562 |   |

 

17

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**Supplemental Condensed ConsolidatingStatement of Operations**

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

(In thousands)

 
|                                                                                                                   |   | **Parent  Company** |    | **Guarantor  Subsidiary** |   | **Non-  Guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|---------------------------|--------|-----------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Revenues                                                                                                               |   | $                   | 124,526 |                      | $      | 1,193                             |   | $                | — |             | $      | — |   | $ | 125,719 |   |
| Costs and  expenses:                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Cost of sales                                                                                                          |   | 42,060              |    | —                    |   | —                            |   | —           |   | 42,060           |   |
| Labor and  benefits                                                                                                    |   | 39,676              |    | —                    |   | —                            |   | —           |   | 39,676           |   |
| Operating  expenses and write-downs of property and equipment                                                          |   | 24,953              |    | —                    |   | (9                                | )      | —           |   | 24,944           |   |
| General and  administrative expenses                                                                                   |   | 8,173               |    | 1,159                     |   | —                            |   | —           |   | 9,332            |   |
| Depreciation and  amortization                                                                                         |   | 7,552               |    | —                    |   | —                            |   | —           |   | 7,552            |   |
| Gain on sales of  other property and equipment, net                                                                    |   | (1,981              | )       | —                    |   | —                            |   | —           |   | (1,981           | )      |
| Interest expense  (income)                                                                                             |   | 7,806               |    | —                    |   | (221                              | )      | —           |   | 7,585            |   |
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| (Loss) income  before benefit from (provision for) income taxes and equity in net income of  consolidated subsidiaries |   | (3,713              | )       | 34                        |   | 230                               |   | —           |   | (3,449           | )      |
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Benefit from  (provision for) income taxes                                                                             |   | 1,609               |    | (14                       | )      | (81                               | )      | —           |   | 1,514            |   |
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| (Loss) income  before equity in net income of consolidated subsidiaries                                                |   | (2,104              | )       | 20                        |   | 149                               |   | —           |   | (1,935           | )      |
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Equity in net  income of consolidated subsidiaries                                                                     |   | 169                 |    | —                    |   | —                            |   | (169             | )      | —           |   |
|                                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Net (loss)  income                                                                                                     |   | $                   | (1,935  | )                         | $      | 20                                |   | $                | 149    |             | $      | (169 | ) | $ | (1,935 | ) |

 

18

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**Supplemental Condensed ConsolidatingStatement of Cash Flows**

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

(In thousands)

 
|                                                  |   | **Parent  Company** |   | **Guarantor  Subsidiary** |   | **Non-  Guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|-------------------------------------------------------|--------|---------------------|--------|---------------------------|--------|-----------------------------------|--------|------------------|--------|------------------|--------|
| Net cash  provided by (used in) operating activities  |   | $                   | 1,986  |                      | $      | (21                               | )      | $                | 1,184  |             | $      | (985 | ) | $ | 2,164 |   |
|                                                  |   |                |   |                      |   |                              |   |             |   |             |   |
| Cash flows from  investing activities:                |   |                |   |                      |   |                              |   |             |   |             |   |
| Purchases of  property and equipment                  |   | (2,026              | )      | —                    |   | —                            |   | —           |   | (2,026           | )      |
| Proceeds from  sales of property and equipment        |   | 5,246               |   | —                    |   | —                            |   | —           |   | 5,246            |   |
| Net cash  provided by investing activities            |   | 3,220               |   | —                    |   | —                            |   | —           |   | 3,220            |   |
|                                                  |   |                |   |                      |   |                              |   |             |   |             |   |
| Cash flows from  financing activities:                |   |                |   |                      |   |                              |   |             |   |             |   |
| Proceeds from  borrowings                             |   | 8,000               |   | —                    |   | —                            |   | —           |   | 8,000            |   |
| Repayments of  obligations                            |   | (19,199             | )      | —                    |   | —                            |   | —           |   | (19,199          | )      |
| Reinsurance  payments made from deposits              |   | —              |   | —                    |   | (962                              | )      | 962              |   | —           |   |
| Net cash used in  financing activities                |   | (11,199             | )      | —                    |   | (962                              | )      | 962              |   | (11,199          | )      |
|                                                  |   |                |   |                      |   |                              |   |             |   |             |   |
| Net (decrease)  increase in cash and cash equivalents |   | (5,993              | )      | (21                       | )      | 222                               |   | (23              | )      | (5,815           | )      |
|                                                  |   |                |   |                      |   |                              |   |             |   |             |   |
| Cash and cash  equivalents, beginning of period       |   | 13,619              |   | 33                        |   | 932                               |   | —           |   | 14,584           |   |
|                                                  |   |                |   |                      |   |                              |   |             |   |             |   |
| Cash and cash  equivalents, end of period             |   | $                   | 7,626  |                      | $      | 12                                |   | $                | 1,154  |             | $      | (23 | ) | $ | 8,769 |   |
|                                                  |   |                |   |                      |   |                              |   |             |   |             |   |
| Supplemental  disclosures:                            |   |                |   |                      |   |                              |   |             |   |             |   |
| Interest paid  (received)                             |   | $                   | 2,357  |                      | $      | —                            |   | $                | (221   | )                | $      | — |   | $ | 2,136 |   |
| Income taxes paid                                     |   | —              |   | 2                         |   | —                            |   | —           |   | 2                |   |

 

19

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

 

*The following discussion should be read in conjunction withthe Condensed Consolidated Financial Statements of the Company and the notesthereto included elsewhere herein.*

 

**Forward Looking Statements**

 

Statements containedherein that are not historical facts constitute “forward looking statements” asthat term is defined in the Private Securities Litigation Reform Act of 1995.All forward looking statements are subject to risks and uncertainties whichcould cause results to differ materially from those anticipated. These factorsinclude the Company’s highly competitive business environment, exposure tocommodity prices, risks associated with the foodservice industry, the abilityto retain and attract new employees, government regulations, the Company’s highgeographic concentration in the Northeast and its attendant weather patterns, conditionsneeded to meet restaurant re-imaging and new opening targets and risksassociated with improved service and other initiatives. Other factors that maycause actual results to differ from the forward looking statements containedherein and that may affect the Company’s prospects in general are included inthe Company’s other filings with the Securities and Exchange Commission.

 

**Overview**

 

Friendly’s owns andoperates 390 restaurants, franchises 160 full-service restaurants and sixnon-traditional units and manufactures a full line of frozen dessertsdistributed through more than 3,500 supermarkets and other retail locations in17 states. The restaurants offer a wide variety of reasonably priced breakfast,lunch and dinner menu items as well as the frozen dessert products.

 

Following is a summary ofthe Company-owned and franchised units:

 

|                 |   | **For the Three Months Ended** |       |
|----------------------|--------|--------------------------------|------------|
|                 |   | **March 31,  2002**            |       | **April 1,  2001** |   |
|                 |   |                           | ** ** |   | ** ** |
| Company Units:       |   |                           |       |   |   |
| Beginning of  period |   | 393                            |       | 449 |   |
| Closings             |   | (3                             | )          | (11 | ) |
| End of Period        |   | 390                            |       | 438 |   |
|                 |   |                           |       |   |   |
| Franchised  Units:   |   |                           |       |   |   |
| Beginning of  period |   | 167                            |       | 127 |   |
| Openings             |   | 2                              |       | 1 |   |
| Closings             |   | (3                             | )          | — |   |
| End of Period        |   | 166                            |       | 128 |   |

 

20

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*Revenues:*

 

Total revenues increased$5.8 million, or 4.6%, to $131.5 million for the first quarter ended March 31,2002 from $125.7 million for the same quarter in 2001. Restaurant revenuesdecreased $2.8 million, or 2.7%, to $104.3 million for the first quarter of2002 from $107.1 million for the same quarter in 2001. Restaurant revenuesdecreased by $11.9 million in the 2002 period as compared to the 2001 perioddue to the closing of 19 under-performing restaurants and the re-franchising of57 additional locations over the past 15 months. Closing of restaurantsaccounted for $1.5 million of the restaurant revenue decline in the 2002 periodas compared to the 2001 period and re-franchising reduced restaurant revenuesby an additional $10.4 million in the 2002 period as compared to the 2001period. Partially offsetting these decreases was an 8.8% increase in comparablerestaurant revenues from the 2001 quarter to the 2002 quarter. Revenues fromthe one location open less than one year were $0.3 million. Foodservice(product sales to franchisees, retail and institutional) revenues increased by$8.1 million, or 47.5%, to $25.1 million for the first quarter ended March 31,2002 from $17.0 million for the same quarter in 2001. The increase in thenumber of franchised units and increases in comparable franchised restaurantrevenues accounted for $4.7 million of the increase, sales to foodserviceretail supermarket customers increased by $3.6 million and sales to outsidedistributors decreased by $0.2 million. On May 1, 2001, foodservice decreasedits ice cream pricing to all restaurants. This resulted in decreasedfoodservice revenues of 3.9% for the three months ended March 31, 2002.Franchise revenue increased $0.5 million, or 36.4%, to $2.1 million for thefirst quarter ended March 31, 2002 compared to $1.6 million for the samequarter in 2001. The increase is largely the result of the difference in thenumber of franchised locations operating during each period. Comparablefranchised restaurant revenues also rose in the 2002 period when compared tothe same period in 2001. There were 166 franchise units open at March 31, 2002compared to 128 franchise units open at April 1, 2001.

 

*Cost of sales:*

 

Costof sales increased $3.9 million, or 9.3%, to $46.0 million for the three monthsended March 31, 2002 from $42.1 million for the same period in 2001. Cost ofsales as a percentage of total revenues increased to 35.0% for the quarterended March 31, 2002 from 33.5% for the same period in 2001. The higher foodcost as a percentage of total revenue was partially due to a shift in sales mixfrom Company-owned restaurant sales to foodservice sales and a shift inrestaurant sales to entrees with a higher food cost as a percentage ofrevenues. Foodservice sales to franchisees and retail customers have a higherfood cost as a percentage of revenue than sales in Company-owned restaurants torestaurant patrons. The cost of cream, the principal ingredient used in makingice cream, was lower in 2002 when compared to 2001; however, the Companyexpects that cream prices will increase during the remainder of 2002. In May2001, the Company raised prices to its retail customers, which decreased costof sales as a percentage of revenues. To minimize risk, alternative supplysources continue to be pursued.

 

*Labor and benefits:*

 

Labor and benefitsdecreased $1.8 million, or 4.5%, to $37.9 million for the first quarter endedMarch 31, 2002 from $39.7 million for the same quarter in 2001. Labor andbenefits as a percentage of total revenues decreased to 28.8% for the firstquarter ended March 31, 2002 from 31.6% for the same quarter in 2001. The lower labor cost as a percentage of totalrevenue is partially the result of revenue increases derived from additionalfranchised locations and higher sales to foodservice retail supermarketcustomers, which do not have any associated restaurant labor and benefits. Inaddition, the closing of 19 under-performing Company-owned units over the past15 months improved the relationship of restaurant labor and benefits torestaurant sales as well as to total revenues.

 

21

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*Operating expenses:*

 

Operatingexpenses increased $1.5 million, or 6.0%, to $26.4 million for the firstquarter ended March 31, 2002 from $24.9 million for the same quarter in 2001.Operating expenses as a percentage of total revenues were 20.1% and 19.8% forthe first quarters ended March 31, 2002 and April 1, 2001, respectively. Theincrease as a percentage of total revenues resulted from higher costs forrestaurant rent associated with the December 2001 sale/leaseback transactionand higher costs for foodservice retail selling expense in the 2002 period whencompared to the 2001 period.

 

*General and administrative expenses:*

 

Generaland administrative expenses were $8.6 million and $9.3 million for the firstquarters ended March 31, 2002 and April 1, 2001, respectively. General andadministrative expenses as a percentage of total revenues decreased to 6.5% forthe first quarter ended March 31, 2002 from 7.4% for the same period in 2001.The decrease is primarily the result of the elimination of certain managementand administrative positions associated with the Company’s closing of 19locations and the re-franchising of 57 locations over the past 15 months. InOctober 2001, the Company eliminated approximately 70 positions at corporateheadquarters. The Company has a hiring freeze at its corporate headquarters.

 

*EBITDA:*

 

As a result of the above,EBITDA (EBITDA represents net income (loss) before (i) benefit from incometaxes, (ii) interest expense, net, (iii) depreciation andamortization, (iv) write-downs of property and equipment and (v) othernon-cash items) increased $0.4 million, or 3.0%, to $12.1 million for thequarter ended March 31, 2002 from $11.8 million for the same quarter in 2001.EBITDA as a percentage of total revenues was 9.3% and 9.4% for the 2002 and2001 periods, respectively.

 

*Depreciation and amortization:*

 

Depreciationand amortization decreased $0.9 million, or 11.5%, to $6.7 million for thefirst quarter ended March 31, 2002 from $7.6 million for the same quarter in2001. Depreciation and amortization as a percentage of total revenues was 5.1%and 6.0% in the 2002 and 2001 quarters, respectively. The reduction reflectsthe impact on depreciation associated with the Company’s closing of 19locations and the re-franchising of 57 locations over the past 15 months.

 

*(Loss) gain on sales of other property and equipment, net:*

 

The loss on sales ofother property and equipment, net was $0.5 million for the quarter ended March31, 2002 as compared to a gain of $2.0 million for the quarter ended April 1,2001. The loss in the 2002 quarter primarily resulted from the sale of idleland and two closed locations. The gain in the 2001 quarter primarily resultedfrom the sale of 11 closed locations.

 

W*rite-downs of property and equipment:*

 

Write-downs of propertyand equipment were $0.1 million for the three months ended March 31, 2002 as aresult of a write down of a vacant land parcel.

 

22

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*Interest expense, net:*

 

Interestexpense, net of capitalized interest and interest income, decreased by $1.3million, or 16.5%, to $6.3 million for the first quarter ended March 31, 2002from $7.6 million for the same period in 2001. The decrease is primarily impactedby the decrease in the average outstanding debt in the 2002 quarter compared tothe 2001 quarter as a result of the Refinancing Plan. Total outstanding debt,including capital lease obligations, was reduced from $287.6 million at April1, 2001 to $241.1 million at March 31, 2002.

 

*B**enefit fromincome taxes:*

 

Thebenefit from income taxes was $0.7 million, an effective tax rate of 62.2%, forthe first quarter ended March 31, 2002 compared to a benefit from taxes of $1.5million, or 43.9%, for the 2001 quarter. The Company records income taxes basedon the effective rate expected for the year with any changes in the valuationallowance reflected in the period of change.

 

*Net loss:*

 

Netloss was $0.4 million and $1.9 million for the first quarters ended March 31,2002 and April 1, 2001, respectively, for the reasons discussed above.

 

**Liquidity and Capital Resources**

 

The Company’s primarysources of liquidity and capital resources are cash generated from operationsand borrowings under its revolving credit facility. Net cash used in operatingactivities was $0.4 million for the first quarter ended March 31, 2002 comparedto net cash provided by operations of $2.2 million for the same quarter of2001. During the three months ended March 31, 2002, inventories increased $3.9million in an effort to build manufactured inventory to take advantage of lowercream prices. Accrued expenses and other long-term liabilities decreased $3.4million as a result of $3.9 million of payments made for corporate and restaurantbonuses, $0.7 million of payments made against the restructuring reserve and$1.2 million of payments made for accrued construction costs. These decreaseswere offset by an increase in accrued interest of $4.7 million related to thetiming of interest payment dates and decreased accrued payroll costs. Duringthe 2001 quarter, inventory increased $2.5 million as a result of anticipatedincreases in retail sales. Accrued expenses and other long-term liabilitiesincreased $2.3 million from December 31, 2000 to April 1, 2001 primarily due toa $5.2 million increase in accrued interest on the Senior Notes due to fourmonths accrued at April 1, 2001 compared to one month accrued at December 31,2000. This increase was offset by $1.0 million of payments made against thecaptive insurance company’s reserves for workers compensation claims. Availableborrowings under the revolving credit facility were $17.1 million as of March31, 2002. Total letters of credit issued and outstanding were approximately$12.9 million and there were no revolving credit loans outstanding.

 

Additional sources ofliquidity consist of capital and operating leases for financing leasedrestaurant locations (in malls and shopping centers and land or buildingleases), restaurant equipment, manufacturing equipment, distribution vehiclesand computer equipment. Additionally, sales of under-performing existingrestaurant properties and other assets (to the extent FICC’s and itssubsidiaries’ debt instruments, if any, permit) are sources of cash. The amountof debt financing that FICC will be able to incur is limited by the terms ofits New Credit Facility and Senior Notes.

 

23

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Net cash (used in)provided by investing activities was ($0.6 million) and $3.2 million for thethree months ended March 31, 2002 and April 1, 2001, respectively. Capitalexpenditures for restaurant operations were approximately $1.2 million and $1.3million for the quarters ended March 31, 2002 and April 1, 2001, respectively. Capitalexpenditures were offset by proceeds from the sales of property and equipmentof $1.0 million and $5.2 million in the 2002 quarter and the 2001 quarter,respectively.

 

The Company had a workingcapital deficit of $15.2 million as of March 31, 2002. The Company is able tooperate with a substantial working capital deficit because: (i) restaurantoperations are conducted primarily on a cash (and cash equivalent) basis with alow level of accounts receivable; (ii) rapid turnover allows a limited investmentin inventories and (iii) cash from sales is usually received before relatedexpenses for food, supplies and payroll are paid.

 

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 repurchase 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 of which up to $20.0 million is available to supportletters of credit. The $30.0 million commitment less outstanding letters of creditis available for borrowing to provide working capital and for other corporateneeds (the “New Credit Facility”). As of March 31, 2002, $17.1 million wasavailable for additional borrowings under the New Credit Facility. Therefinancing improved the Company’s financial condition by reducing total debtby approximately $30.8 million and by extending the average life of theCompany’s debt.

 

Three new limitedliability corporations (“LLCs”) were organized in connection with the MortgageFinancing. Friendly Ice Cream Corporation is the sole member of each LLC. FICCsold 75 of its operating Friendly’s restaurants to the LLCs in exchange for theproceeds from the Mortgage Financing. Promissory notes were issued for each ofthe 75 properties. Each LLC is a separate entity with separate creditors whichwill be entitled to be satisfied out of such LLC’s assets. Each LLC is aborrower under the Mortgage Financing.

 

The Mortgage Financinghas a maturity date of January 1, 2022 and is amortized over 20 years. Intereston $10.0 million of the Mortgage Financing is variable and is the sum of the30-day LIBOR rate in effect (1.87875% at March 31, 2002) plus 6% on an annualbasis. Changes in the interest rate are calculated monthly and recognizedannually when the monthly payment amount is adjusted. Changes in the monthlypayment amounts owed due to interest rate changes are reflected in theprincipal balances which are reamortized over the remaining life of themortgages. The remaining $45.0 million of the Mortgage Financing bears interestat a fixed annual rate of 10.16%. Each promissory note may be prepaid in full.The variable rate notes are subject to prepayment penalties during the firstfive years. The fixed rate notes may not be prepaid without the Company providingthe note holders with a yield maintenance premium.

 

The Mortgage Financingrequires the Company to maintain an annual fixed charge coverage ratio, asdefined, of at least 1.10 to 1 and each LLC to maintain a fixed charge coverageratio, as defined, on an aggregate restaurant basis of at least 1.25 to 1.

 

The New Credit Facilityis secured by substantially all of the assets of FICC and two of its sixsubsidiaries, Friendly’s Restaurants Franchise Inc. and Friendly’sInternational Inc. These two subsidiaries also guaranty FICC’s obligationsunder the New Credit Facility. The New Credit Facility expires on December 17,2004. As of March 31, 2002, there were no revolving credit loans outstanding.

 

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”) (7.25%at March 31, 2002) or (b) the Eurodollar rate plus the applicable margin as ineffect from time to time (the “Eurodollar Rate”) (6.33% at March 31, 2002).

 

As of March 31, 2002 andDecember 30, 2001, total letters of credit issued and outstanding wereapproximately $12.9 million and $14.6 million, respectively.

 

The New Credit Facilityhas an annual “clean-up” provision which obligates the Company to repay in fullall revolving credit loans on or before September 30 (or, if September 30 isnot a business day, as defined, then the next business day) of each year andmaintain a zero balance on such revolving credit for at least 30 consecutivedays, to include September 30, immediately following the date of suchrepayment.

 

24

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The New Credit Facilityincludes certain restrictive covenants including limitations on indebtedness,limitations on restricted payments such as dividends and stock repurchases andlimitations on 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.

 

In connection with theRefinancing Plan, in December 2001, the Company entered into and accounted forthe Sale/Leaseback Financing, which provided approximately $33.7 million ofproceeds to the Company. The Company sold 44 properties operating as Friendly’sRestaurants and entered into a master lease with the buyer to lease the 44properties for an initial term of 20 years under a triple net lease. There arefour five-year renewal options and lease payments are subject to escalatorprovisions every five years based upon increases in the Consumer Price Index. Again of $11.3 million was deferred and was included in other accrued expensesand other long-term liabilities in the accompanying condensed consolidatedbalance sheets. The deferred gain is being amortized in proportion to the rentcharged to expense over the initial lease term.

 

The $200 million SeniorNotes issued in connection with the November 1997 Recapitalization (the“Senior Notes”) are unsecured senior obligations of FICC, guaranteed on anunsecured senior basis by FICC’s Friendly’s Restaurants Franchise, Inc.subsidiary, but are effectively subordinated to all secured indebtedness ofFICC, including the indebtedness incurred under the New Credit Facility. TheSenior Notes mature on December 1, 2007. Interest on the Senior Notes ispayable at 10.50% per annum semi-annually on June 1 and December 1 ofeach year. In connection with the Refinancing Plan, FICC repurchasedapproximately $21.3 million in aggregate principal amount of the Senior Notesfor $17.0 million. The gain of $4.3 million ($2.5 million net of tax) wasrecorded as an extraordinary item in the consolidated statement of operationsfor the year ended December 30, 2001. The remaining Senior Notes areredeemable, in whole or in part, at FICC’s option any time on or afterDecember 1, 2002 at redemption prices from 105.25% to 100.00%, based onthe redemption date.

 

25

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The Company anticipatesrequiring capital in the future principally to maintain existing restaurant andplant facilities and to continue to renovate and re-image existing restaurants.Capital expenditures for 2002 are anticipated to be $16.0 million in theaggregate, of which $13.0 million is expected to be spent on restaurantoperations. The Company’s actual 2002 capital expenditures may vary from theseestimated amounts. The Company believes that the combination of the fundsanticipated to be generated from operating activities and borrowingavailability under the New Credit Facility will be sufficient to meet theCompany’s anticipated operating requirements, capital requirements andobligations associated with the restructuring.

 

The following representsthe contractual obligations and commercial commitments of the Company as ofMarch 31, 2002 (in thousands):

 
|                           |   |      |       | **Payments due by Period**                    |       |
|--------------------------------|--------|-----------|------------|-----------------------------------------------|------------|
|                           |   | **Total** |       | **2002**                                      |       | **2003-2004** |   | **2005-2006** |   | **Thereafter** |   |
| Contractual  Obligations:      |   |      |       |                                          |       |   |   |   |   |   |   |
| Long-term debt                 |   | $         | 233,485    |                                          | $          | 688 |   | $ | 2,124 |   | $ | 2,605 |   | $ | 228,068 |   |
| Capital lease  obligations     |   | 11,564    |       | 1,941                                         |       | 2,940 |   | 1,817 |   | 4,866 |   |
| Operating leases               |   | 158,333   |       | 16,869                                        |       | 30,175 |   | 24,503 |   | 86,786 |   |
| Purchase  commitments          |   | 86,218    |       | 78,200                                        |       | 7,945 |   | 65 |   | 8 |   |
|                           |   |      |       |                                          |       |   |   |   |   |   |   |
|                           |   |      | ** ** | **Amount of Commitment Expiration by Period** | ** ** |
|                           |   | **Total** |       | **2002**                                      |       | **2003-2004** |   | **2005-2006** |   | **Thereafter** |   |
| Other Commercial  Commitments: |   |      |       |                                          |       |   |   |   |   |   |   |
| Revolving credit  facility     |   | $         | 17,089     |                                          | $          | — |   | $ | 17,089 |   | $ | — |   | $ | — |   |
| Letters of  credit             |   | 12,911    |       | —                                        |       | 12,911 |   | — |   | — |   |

 

**Seasonality**

 

Due to the seasonality offrozen dessert consumption, and the effect from time to time of weather onpatronage of the restaurants, the Company’s revenues and EBITDA are typicallyhigher in its second and third fiscal quarters.

 

**Geographic Concentration**

 

Approximately 89% of theCompany-owned restaurants are located, and substantially all of its retailsales are generated, in the Northeast. As a result, a severe or prolongedeconomic recession or changes in demographic mix, employment levels, populationdensity, weather, real estate market conditions or other factors specific tothis geographic region may adversely affect the Company more than certain ofits competitors which are more geographically diverse.

 

**Significant Accounting 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 consolidated financial statements, including the notesthereto, which are contained in the 2001 Annual Report on Form 10-K should beread in conjunction with this discussion.

 

26

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*Use ofEstimates in the Preparation of Financial 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,restructuring reserves, valuation allowances on net operating losses, pensionand other post-retirement benefits expense and the volatility of cream prices.Actual amounts could differ significantly from the estimates.

 

*RevenueRecognition -*

 

The Company’s revenuesare derived primarily from the operation of full-service restaurants, the distributionand sale of frozen desserts through retail and institutional locations andfranchising. The Company recognizes restaurant revenue upon receipt of paymentfrom the customer and retail revenue upon shipment of product. Reserves fordiscounts and allowances from retail sales are estimated and accrued whenrevenue is recorded. Actual amounts could differ materially from the estimates.Franchise royalty income, based on net sales of franchisees, is payable monthlyand is recorded on the accrual method. Initial franchise fees are recorded asrevenue upon completion of all significant services, generally upon opening ofthe restaurant.

 

*InsuranceReserves -*

 

The Company isself-insured through retentions or deductibles for the majority of its workers’compensation, automobile, general liability, employer’s liability, productliability and group health insurance programs. Self-insurance amounts vary upto $0.5 million per occurrence. Insurance with third parties, some of which isthen reinsured through RIC, is in place for claims in excess of theseself-insured amounts. RIC reinsured 100% of the risk from $0.5 million to $1.0million per occurrence through September 2, 2000 for the Company’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. The Company’s and RIC’s liability 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 affect on the Company’s insurance expense.

 

*RestructuringReserves -*

 

On October 10, 2001, theCompany eliminated approximately 70 positions at corporate headquarters. Inaddition, approximately 30 positions in the restaurant construction andfabrication areas were eliminated by December 30, 2001. The purpose of thereduction was to streamline functions and reduce redundancy amongst itsbusiness segments. As a result of the elimination of the positions and theoutsourcing of certain functions, the Company reported a pre-tax restructuringcharge of approximately $2.5 million for severance, rent and unusableconstruction supplies in the year ended December 30, 2001.

 

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In March 2000, theCompany’s Board of Directors approved a restructuring plan that provided forthe immediate closing of 81 restaurants at the end of March 2000 and thedisposition of an additional 70 restaurants over the next 24 months. As aresult of this plan, the Company reported a pre-tax restructuring charge ofapproximately $12.1 million for severance, rent, utilities and real estatetaxes, demarking, lease termination costs and certain other costs associatedwith the closing of the locations, along with a pre-tax write-down of propertyand equipment for these locations of approximately $17.0 million in the yearended December 31, 2000. The Company reduced the restructuring reserve by $1.9million during the year ended December 30, 2001 since the reserve exceededestimated remaining payments.

 

As of March 31, 2002, theremaining restructuring reserve was $2.4 million. The restructuring reservesmay be increased or decreased based upon remaining payments, which could varymaterially from the estimates depending upon the timing of store closings andother factors.

 

*IncomeTaxes -*

 

The Company accounts forincome taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,”which requires recognition of deferred tax assets and liabilities for theexpected future tax consequences of events that have been included in thefinancial statements or tax returns. A valuation allowance is recorded fordeferred tax assets whose realization is not likely. As of December 30, 2001and March 31, 2002, a valuation allowance of $11.3 million existed related tostate NOL carryforwards due to restrictions on the usage of state NOL carryforwardsand short carryforward periods for certain states. Taxable income by state forfuture periods is difficult to estimate. The amount and timing of any futuretaxable income may affect the usage of such carryforwards, which could resultin a material change in the valuation allowance.

 

*Pensionand Other Post-Retirement Benefits -*

 

The determination of theCompany’s obligation and expense for pension and other post-retirement benefitsis dependent upon the selection of certain assumptions used by actuaries incalculating such amounts. Those assumptions include, among other things, thediscount rate, expected long-term rate of return on plan assets and rates ofincrease in compensation and health care costs. In accordance with accountingprinciples generally accepted in the United States, actual results that differfrom the assumptions are accumulated and amortized over future periods and,therefore, generally affect the recognized expense and recorded obligation insuch future periods. While FICC believes that the assumptions used areappropriate, significant differences in actual experience or significantchanges in the assumptions may materially affect the future pension and otherpost-retirement obligations and expense.

 

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*Volatilityof Cream Prices -*

 

The cost of cream, theprincipal ingredient used in making ice cream, affects cost of sales as apercentage of total revenues, especially in foodservice’s retail business. TheCompany believes that cream prices will be slightly higher in 2002 than in2001. A $0.10 increase in the cost of a pound of AA butter adversely affectsthe Company’s annual cost of sales by approximately $1.1 million. To minimizerisk, alternative supply sources continue to be pursued. However, no assurancecan be given that the Company will be able to offset any cost increases in thefuture and future increases in cream could have a material adverse effect onthe Company’s results of operations.

 

**Recently Issued Accounting Pronouncements**

 

In August 2001, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets.” SFAS No. 144 modifies the rules for accountingfor the impairment or disposal of long-lived assets. The impact of adoptingSFAS No. 144 on December 31, 2001 had no material effect on the Company’sfinancial condition or results of operations.

 

In June 2001, the FASBissued SFAS No. 142, “Goodwill and Other Intangibles.” SFAS No. 142 modifiesthe rules for accounting for goodwill and other intangible assets. The newrules became effective for the Company on December 31, 2001. The impact ofadopting SFAS No. 142 on December 31, 2001 had no effect on the Company’sfinancial condition or results of operations and the Company is continuing toamortize its license agreement related to certain trademarked products over theterm of the license agreement.

 

In April 2001, the FASBreached consensus on Emerging Issues Task Force (“EITF”) Issue No. 00-25,“Accounting for Consideration from a Vendor to a Retailer in Connection withthe Purchase or Promotion of the Vendor’s Products.” EITF Issue No. 00-25 waseffective for quarters beginning after December 15, 2001, with prior financialstatements restated if practicable. EITF Issue No. 00-25 requires thatconsideration from a vendor to a retailer be recorded as a reduction in revenueunless certain criteria are met. Arrangements within the scope of this Issueinclude slotting fees, cooperative advertising arrangements and buy-downs. As aresult of EITF Issue No. 00-25, certain costs previously recorded as expensehave been reclassified and offset against revenue for the quarter ended April1, 2001.

 

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

 

There has been nomaterial change in the Company’s market risk exposure since the filing of theAnnual Report on Form 10-K.

 

**Item 4.Controls and Procedures**

 

As of March 31, 2002, anevaluation was performed under the supervision and with the participation ofthe Company’s management, including the CEO and CFO, of the effectiveness ofthe design and operation of the Company’s disclosure controls andprocedures.  Based on that evaluation,the Company’s management, including the CEO and CFO, concluded that theCompany’s disclosure controls and procedures were effective as of March 31,2002.  There have been no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect internal controls subsequent to March 31, 2002.

 

 

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**PART II - OTHER INFORMATION**

 

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

 

(a)  Exhibits

 

None

 

(b)  No reporton Form 8-K was filed during the three months ended March 31, 2002.

 

**SIGNATURES**

 

Pursuant to therequirements of the Securities and Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

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

 

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**Certifications**

 

I,  Donald N. Smith, certifythat:

 

1.      I have reviewed thisquarterly report on Form 10-Q/A of Friendly Ice Cream Corporation;

 

2.      Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.      Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.      The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosure controlsand procedures based on our evaluation as of the Evaluation Date;

 

5.      The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent functions):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.      The registrant’s othercertifying officers and I have indicated in this quarterly report whether therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our most recentevaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

Date: October 30, 2002 
|   | /s/  Donald N. Smith  |
|--------|--------------------------------------|
|   | *Chief Executive Officer*            |

 

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I,  Paul V. Hoagland, certifythat:

 

1.      I have reviewed thisquarterly report on Form 10-Q/A of Friendly Ice Cream Corporation;

 

2.      Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.      Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.      The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             evaluated the effectivenessof the registrant’s disclosure controls and procedures as of a date within 90days prior to the filing date of this quarterly report (the “Evaluation Date”);and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.      The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent functions):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.      The registrant’s othercertifying officers and I have indicated in this quarterly report whether therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

Date: October 30, 2002
|   | /s/  Paul V. Hoagland                      |
|--------|-----------------------------------------------------------|
|   | *Chief Financial Officer, Treasurer  and Assistant Clerk* |

 

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