**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

| **(Mark One)**                                                                                                                            | ** ** | ** **                                                                                          |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**  |
| ** **                                                                                                                                |
| **For the  quarterly period ended April 2, 2006**                                                                                         |
| ** **                                                                                                                                |
| **OR**                                                                                                                                    |
| ** **                                                                                                                                |
| **o**                                                                                                                                     | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                |
| **For the  transition period from          to          ** |

 

**CommissionFile No. 001-13579**

 

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**FRIENDLY ICE CREAM CORPORATION**

(Exact Name of Registrant asSpecified in Its Charter)

 

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

 

**(413)731-4000**

(Registrant’s Telephone Number,Including Area Code)

 

**Not Applicable**

(Former name, former addressand former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90days. Yes  ý     No  o

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, or a non-accelerated filer.See definition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act.

| Large Accelerated Filer  o |   | Accelerated Filer  ý |   | Non-Accelerated Filer  o |
|--------------------------------------|--------|-------------------------------------|--------|------------------------------------|

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes  o     No  ý

** **

Indicate the number of shares outstanding of each of theissuer’s classes of common stock as of the latest practicable date.

 

| **Class**                     | ** ** | **Outstanding at April 28, 2006** |
|-------------------------------|------------|-----------------------------------|
|                          |       |                              |
| Common Stock, $.01 par  value |       | 7,902,298 shares                  |

 

 

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**PART I – FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**FRIENDLY ICE CREAM CORPORATIONAND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED BALANCESHEETS**

(Unaudited)

(In thousands)

 
| ** **                                                                | ** ** | **April 2,  2006** | ** ** | **January 1,  2006** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------|------------|----------------------|------------|
|                                                                      |       |               |       |                 |       |
| ASSETS                                                                    |       |               |       |                 |       |
| CURRENT  ASSETS:                                                          |       |               |       |                 |       |
| Cash and cash equivalents                                                 |       | $                  | 19,771     |                 | $          | 14,597 |   |
| Restricted cash                                                           |       | 1,927              |       | 2,549                |       |
| Accounts receivable, net                                                  |       | 11,788             |       | 10,757               |       |
| Inventories                                                               |       | 15,974             |       | 15,775               |       |
| Assets held for sale                                                      |       | 1,554              |       | 1,628                |       |
| Prepaid expenses and other current assets                                 |       | 4,740              |       | 5,044                |       |
| TOTAL  CURRENT ASSETS                                                     |       | 55,754             |       | 50,350               |       |
| DEFERRED  INCOME TAXES                                                    |       | —             |       | —               |       |
| PROPERTY AND  EQUIPMENT, net of accumulated depreciation and amortization |       | 137,631            |       | 142,819              |       |
| INTANGIBLE  ASSETS AND DEFERRED COSTS, net of accumulated amortization    |       | 18,781             |       | 19,063               |       |
| OTHER ASSETS                                                              |       | 5,465              |       | 6,010                |       |
| TOTAL ASSETS                                                              |       | $                  | 217,631    |                 | $          | 218,242 |   |
|                                                                      |       |               |       |                 |       |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                |       |               |       |                 |       |
| CURRENT  LIABILITIES:                                                     |       |               |       |                 |       |
| Current maturities of long-term debt                                      |       | $                  | 1,490      |                 | $          | 1,426 |   |
| Current maturities of capital lease and  finance obligations              |       | 1,392              |       | 1,419                |       |
| Accounts payable                                                          |       | 22,171             |       | 24,968               |       |
| Accrued salaries and benefits                                             |       | 9,778              |       | 8,212                |       |
| Accrued interest payable                                                  |       | 4,850              |       | 1,324                |       |
| Insurance reserves                                                        |       | 9,949              |       | 9,002                |       |
| Restructuring reserves                                                    |       | —             |       | 72                   |       |
| Other accrued expenses                                                    |       | 18,518             |       | 19,866               |       |
| TOTAL  CURRENT LIABILITIES                                                |       | 68,148             |       | 66,289               |       |
| CAPITAL  LEASE AND FINANCE OBLIGATIONS, less current maturities           |       | 5,810              |       | 6,173                |       |
| LONG-TERM  DEBT, less current maturities                                  |       | 224,491            |       | 224,894              |       |
| ACCRUED  PENSION COST                                                     |       | 29,374             |       | 28,904               |       |
| OTHER  LONG-TERM LIABILITIES                                              |       | 33,368             |       | 33,820               |       |
| COMMITMENTS  AND CONTINGENCIES                                            |       |               |       |                 |       |
| STOCKHOLDERS’  DEFICIT:                                              |       |               |       |                 |       |
| Common stock                                                              |       | 79                 |       | 79                   |       |
| Additional paid-in capital                                                |       | 144,773            |       | 144,675              |       |
| Accumulated other comprehensive loss                                      |       | (31,785            | )          | (31,785              | )          |
| Accumulated deficit                                                       |       | (256,627           | )          | (254,807             | )          |
| TOTAL  STOCKHOLDERS’ DEFICIT                                         |       | (143,560           | )          | (141,838             | )          |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ DEFICIT                         |       | $                  | 217,631    |                 | $          | 218,242 |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

 

1

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## **FRIENDLY ICE CREAM CORPORATIONAND SUBSIDIARIES**

##  

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

(Unaudited)

(In thousands, except per share data)

 
| ** **                                                                                                                                                     | ** ** | **For the Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                     | ** ** | **April 2,  2006**             | ** ** | **April 3,  2005** | ** ** |
|                                                                                                                                                           |       |                           |       |   |   |
| REVENUES:                                                                                                                                                      |       |                           |       |   |   |
| Restaurant                                                                                                                                                     |       | $                              | 95,276     |   | $ | 93,107 |   |
| Foodservice                                                                                                                                                    |       | 26,894                         |       | 25,306 |   |
| Franchise                                                                                                                                                      |       | 3,545                          |       | 3,250 |   |
| TOTAL  REVENUES                                                                                                                                                |       | 125,715                        |       | 121,663 |   |
|                                                                                                                                                           |       |                           |       |   |   |
| COSTS AND  EXPENSES:                                                                                                                                           |       |                           |       |   |   |
| Cost of sales                                                                                                                                                  |       | 48,385                         |       | 46,889 |   |
| Labor and benefits                                                                                                                                             |       | 36,012                         |       | 35,084 |   |
| Operating expenses                                                                                                                                             |       | 23,999                         |       | 23,401 |   |
| General and administrative expenses                                                                                                                            |       | 11,097                         |       | 9,449 |   |
| Write-downs of property and equipment                                                                                                                          |       | 215                            |       | — |   |
| Depreciation and amortization                                                                                                                                  |       | 5,780                          |       | 6,151 |   |
| Gain on  franchise sales of restaurant operations and properties                                                                                               |       | (866                           | )          | (1,309 | ) |
| Loss on  disposals of other property and equipment, net                                                                                                        |       | 109                            |       | 69 |   |
|                                                                                                                                                           |       |                           |       |   |   |
| OPERATING  INCOME                                                                                                                                              |       | 984                            |       | 1,929 |   |
|                                                                                                                                                           |       |                           |       |   |   |
| Interest  expense, net                                                                                                                                         |       | 5,420                          |       | 5,286 |   |
|                                                                                                                                                           |       |                           |       |   |   |
| LOSS FROM CONTINUING OPERATIONS BEFORE BENEFIT  FROM INCOME TAXES                                                                                              |       | (4,436                         | )          | (3,357 | ) |
|                                                                                                                                                           |       |                           |       |   |   |
| Benefit from  income taxes                                                                                                                                     |       | —                         |       | 739 |   |
|                                                                                                                                                           |       |                           |       |   |   |
| LOSS FROM  CONTINUING OPERATIONS                                                                                                                               |       | (4,436                         | )          | (2,618 | ) |
|                                                                                                                                                           |       |                           |       |   |   |
| INCOME (LOSS) FROM DISCONTINUED OPERATIONS,  net of income tax effect of $0 and $255 for the three months ended April 2,  2006 and April 3, 2005, respectively |       | 2,616                          |       | (368 | ) |
|                                                                                                                                                           |       |                           |       |   |   |
| NET LOSS                                                                                                                                                       |       | $                              | (1,820     | ) | $ | (2,986 | ) |
|                                                                                                                                                           |       |                           |       |   |   |
| BASIC AND  DILUTED NET LOSS PER SHARE:                                                                                                                         |       |                           |       |   |   |
| Loss from continuing operations                                                                                                                                |       | $                              | (0.56      | ) | $ | (0.34 | ) |
| Income (loss) from discontinued operations                                                                                                                     |       | 0.33                           |       | (0.05 | ) |
| Net loss                                                                                                                                                       |       | $                              | (0.23      | ) | $ | (0.39 | ) |
|                                                                                                                                                           |       |                           |       |   |   |
| WEIGHTED  AVERAGE BASIC AND DILUTED SHARES                                                                                                                     |       | 7,901                          |       | 7,717 |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

 

2

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**FRIENDLY ICE CREAM CORPORATIONAND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited)

(In thousands)

 
| ** **                                                                       | ** ** | **For the Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                       | ** ** | **April 2,  2006**             | ** ** | **April 3,  2005** | ** ** |
| CASH FLOWS  FROM OPERATING ACTIVITIES:                                           |       |                           |       |   |   |
| Net loss                                                                         |       | $                              | (1,820     | ) | $ | (2,986 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |                           |       |   |   |
| Stock compensation expense                                                       |       | 79                             |       | — |   |
| Depreciation and amortization                                                    |       | 5,780                          |       | 6,151 |   |
| Non-cash (income) loss from discontinued  operations                             |       | (2,864                         | )          | 174 |   |
| Write-downs of property and equipment                                            |       | 215                            |       | — |   |
| Deferred income tax benefit                                                      |       | —                         |       | (995 | ) |
| Gain on disposals of other property and  equipment, net                          |       | (772                           | )          | (1,244 | ) |
| Changes in operating assets and  liabilities:                                    |       |                           |       |   |   |
| Accounts receivable                                                              |       | (1,031                         | )          | (1,958 | ) |
| Inventories                                                                      |       | (199                           | )          | 1,679 |   |
| Other assets                                                                     |       | 1,471                          |       | 92 |   |
| Accounts payable                                                                 |       | (2,797                         | )          | (222 | ) |
| Accrued expenses and other long-term  liabilities                                |       | 4,637                          |       | 2,555 |   |
| NET CASH  PROVIDED BY OPERATING ACTIVITIES                                       |       | 2,699                          |       | 3,246 |   |
|                                                                             |       |                           |       |   |   |
| CASH FLOWS  FROM INVESTING ACTIVITIES:                                           |       |                           |       |   |   |
| Purchases of property and equipment                                              |       | (2,404                         | )          | (2,408 | ) |
| Proceeds from sales of property and  equipment                                   |       | 5,794                          |       | 1,706 |   |
| Purchases of marketable securities                                               |       | —                         |       | (183 | ) |
| Proceeds from sales of marketable  securities                                    |       | —                         |       | 42 |   |
| NET CASH  PROVIDED BY (USED IN) INVESTING ACTIVITIES                             |       | 3,390                          |       | (843 | ) |
|                                                                             |       |                           |       |   |   |
| CASH FLOWS  FROM FINANCING ACTIVITIES:                                           |       |                           |       |   |   |
| Proceeds from revolving credit facility                                          |       | 8,000                          |       | 15,250 |   |
| Repayments of debt                                                               |       | (8,338                         | )          | (19,656 | ) |
| Payments related to deferred financing  costs                                    |       | (205                           | )          | (11 | ) |
| Repayments of capital lease and finance  obligations                             |       | (391                           | )          | (377 | ) |
| Stock options exercised                                                          |       | 19                             |       | 136 |   |
| NET CASH USED IN FINANCING ACTIVITIES                                            |       | (915                           | )          | (4,658 | ) |
|                                                                             |       |                           |       |   |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                            |       | 5,174                          |       | (2,255 | ) |
|                                                                             |       |                           |       |   |   |
| CASH AND  CASH EQUIVALENTS, BEGINNING OF PERIOD                                  |       | 14,597                         |       | 13,405 |   |
|                                                                             |       |                           |       |   |   |
| CASH AND  CASH EQUIVALENTS, END OF PERIOD                                        |       | $                              | 19,771     |   | $ | 11,150 |   |
|                                                                             |       |                           |       |   |   |
| SUPPLEMENTAL  DISCLOSURES:                                                       |       |                           |       |   |   |
| Cash paid  (refunded) during the period for:                                     |       |                           |       |   |   |
| Interest                                                                         |       | $                              | 1,528      |   | $ | 1,755 |   |
| Income taxes                                                                     |       | (503                           | )          | (5 | ) |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

 

3

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**FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

(Unaudited)

 

**1. NATURE OF OPERATIONS**

 

As ofApril 2, 2006, Friendly’s operated 312 full-service restaurants and franchised207 full-service restaurants and seven non-traditional units. The Companymanufactures and distributes a full line of premium ice cream dessert products.These products are distributed to Friendly’s restaurants, supermarkets andother retail locations in 13 states. The restaurants offer a wide variety ofbreakfast, lunch and dinner menu items as well as premium ice cream dessertproducts.

 

Referencesherein to “Friendly’s” or the “Company” refer to Friendly Ice CreamCorporation, its predecessor and its consolidated subsidiaries; referencesherein to “FICC” refer to Friendly Ice Cream Corporation and not itssubsidiaries; and as used herein, “Northeast” refers to the Company’s coremarkets, which include Connecticut, Maine, Massachusetts, New Hampshire, NewJersey, New York, Pennsylvania, Rhode Island and Vermont.

 

Followingis a summary of the Company-operated and franchised units:

 

| ** **             | ** ** | **For the Three Months Ended** | ** ** |
|------------------------|------------|--------------------------------|------------|
| ** **             | ** ** | **April 2,  2006**             | ** ** | **April 3,  2005** | ** ** |
|                   |       |                           |       |   |   |
| Company  Units:        |       |                           |       |   |   |
| Beginning of  period   |       | 314                            |       | 347 |   |
| Openings               |       | 1                              |       | — |   |
| Refranchised  closings |       | (1                             | )          | (7 | ) |
| Closings               |       | (2                             | )          | (3 | ) |
| End of  period         |       | 312                            |       | 337 |   |
|                   |       |                           |       |   |   |
| Franchised  Units:     |       |                           |       |   |   |
| Beginning of  period   |       | 213                            |       | 195 |   |
| Refranchised  openings |       | 1                              |       | 7 |   |
| Closings               |       | —                         |       | (1 | ) |
| End of  period         |       | 214                            |       | 201 |   |

 

**2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES**

 

*Interim Financial Information –*

 

The accompanying condensed consolidated financialstatements as of April 2, 2006 and for the three months ended April 2, 2006 andApril 3, 2005 are unaudited, but have been prepared in accordance withgenerally accepted accounting principles (“GAAP”) for interim financialinformation and with the instructions to Form 10-Q and Article 10 of RegulationS-X. Accordingly, they do not include all of the information and footnotesrequired by GAAP for complete financial statements. In the opinion ofmanagement, all adjustments which are necessary for a fair presentation of theconsolidated financial position, results of operations, cash flows andcomprehensive loss of Friendly Ice Cream Corporation (“FICC”) and subsidiaries(unless the context indicates otherwise, collectively, the “Company”) have beenincluded. Such adjustments consist solely of normal recurring accruals.Operating results for the three month periods ended April 2, 2006 and April 3,2005 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 2005 AnnualReport on Form 10-K for the fiscal year ended January 1, 2006 (“2005 AnnualReport on Form 10-K”) should be read in conjunction with these condensed,consolidated financial statements. Capitalized terms not otherwise definedherein should be referenced to the 2005 Annual Report on Form 10-K.

 

4

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*Use of Estimates in the Preparation ofFinancial Statements -*

 

The preparation of financial statements in conformity withaccounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and the disclosure of contingent assets andliabilities at the dates of the financial statements and the reported amountsof revenues and expenses during the reporting periods. The critical accountingpolicies and most significant estimates and assumptions relate to revenuerecognition, insurance reserves, recoverability of accounts receivable, pensionand post-retirement medical and life insurance benefits expense, assetimpairment analysis, stock compensation expense and income tax valuationallowances and tax contingency reserves. Actual amounts could differsignificantly from the estimates.

 

*Inventories -*

 

Inventoriesare stated at the lower of first-in, first-out cost or market and consisted ofthe following at April 2, 2006 and January 1, 2006 (in thousands):

 

| ** **        | ** ** | **April 2,  2006** | ** ** | **January 1,  2006** | ** ** |
|-------------------|------------|--------------------|------------|----------------------|------------|
|              |       |               |       |                 |       |
| Raw  materials    |       | $                  | 1,015      |                 | $          | 1,657 |   |
| Goods in  process |       | 190                |       | 106                  |       |
| Finished  goods   |       | 14,769             |       | 14,012               |       |
| Total             |       | $                  | 15,974     |                 | $          | 15,775 |   |

 

*Other Accrued Expenses-*

 

Other accrued expenses consisted of the following at April2, 2006 and January 1, 2006 (in thousands):

 

| ** **                         | ** ** | **April 2,  2006** | ** ** | **January 1,  2006** | ** ** |
|------------------------------------|------------|--------------------|------------|----------------------|------------|
|                               |       |               |       |                 |       |
| Accrued rent                       |       | $                  | 4,615      |                 | $          | 4,739 |   |
| Gift cards  outstanding            |       | 2,858              |       | 4,280                |       |
| Accrued  meals and other taxes     |       | 2,474              |       | 2,219                |       |
| Income taxes  payable              |       | 2,034              |       | 2,761                |       |
| Unearned  revenues                 |       | 1,179              |       | 1,205                |       |
| Accrued  bonus                     |       | 1,106              |       | 58                   |       |
| Accrued  advertising               |       | 1,063              |       | 1,211                |       |
| Current  portion of deferred gains |       | 638                |       | 638                  |       |
| Accrued  construction costs        |       | 578                |       | 1,335                |       |
| All other                          |       | 1,973              |       | 1,420                |       |
| Total                              |       | $                  | 18,518     |                 | $          | 19,866 |   |

 

5

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*Income Taxes -*

 

TheCompany accounts for income taxes in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes,” whichrequires recognition of deferred tax assets and liabilities for the expectedfuture tax consequences of events that have been included in the financialstatements or tax returns. The Company records deferred tax assets to theextent it believes there will be sufficient future taxable income to utilizethose assets prior to their expiration. To the extent deferred tax assets maybe unable to be utilized, the Company records a valuation allowance against thepotentially unrealizable amount and records a charge against earnings. Thecalculation of the Company’s tax liabilities involves uncertainties in theapplication of complex tax regulations in several different tax jurisdictions.The Company is periodically reviewed by tax authorities. These reviews includequestions regarding the timing and amount of deductions. In evaluating theexposure associated with various filing positions, the Company recordsestimated reserves for probable exposures.

 

Due toever-changing tax laws and income tax rates, significant judgment is requiredto estimate the effective tax rate expected to apply to tax differences thatare expected to reverse in the future. The Company must also make estimatesabout the sufficiency of taxable income in future periods to offset anydeductions related to deferred tax assets currently recorded. Accordingly, theCompany believes estimates related to income taxes are critical.

 

During the fourth quarter of 2005, the Company entered a three-yearcumulative loss position and revised its projections of the amount and timingof profitability in future periods. As a result, the Company increased thevaluation allowance during the fourth quarter of 2005 by approximately $26.7million ($22.2 million to income tax expense and $4.5 million to stockholders’deficit) to reduce the carrying value of deferred tax assets to zero. TheCompany expects to record a full valuation allowance on tax benefits until itcan sustain an appropriate level of profitability.

 

*Lease Guarantees and Contingencies –*

 

Primarily as aresult of the Company’s re-franchising efforts, the Company remains liable forcertain lease assignments and guarantees. These leases have varying terms, thelatest of which expires in 2020. As of April 2, 2006, the potential amount ofundiscounted payments the Company could be required to make in the event ofnon-payment by the primary lessees was $7,896,500. The present value of thesepotential payments discounted at the Company’s pre-tax cost of debt at April 2,2006 was $5,982,400. The Company generally has cross-default provisions withfranchisees that would put them in default of their franchise agreement in theevent of non-payment under the lease. The Company believes these cross-defaultprovisions significantly reduce the risk that the Company will be required tomake payments under these leases and, historically, the Company has not beenrequired to make such payments. However, as of April 2, 2006, the Company believesthat one franchisee may be unable to fulfill its lease obligations during 2006.Under the terms of the assignment of the leases to this franchisee, the Companyhas the right to recover possession of the premises before lease default. TheCompany believes that it has the management resources to assume operation ofthe restaurants if it were to take back possession of this franchisee’slocations. Accordingly, no liability has been recorded for exposure under suchleases at April 2, 2006 and January 1, 2006.

 

*Net Loss Per Share –*

 

Basicnet loss per share is calculated by dividing net loss by the weighted averagenumber of common shares outstanding during the period. Diluted net loss pershare is calculated by dividing net loss by the weighted average number ofshares of common stock and common stock equivalents outstanding during theperiod. Common stock equivalents are dilutive stock options and warrants thatare assumed exercised for calculation purposes. There were no common stockequivalents included in diluted net loss per share for the three months endedApril 2, 2006 and April 3, 2005. The number of common stock options which coulddilute basic earnings per share in the future, that were not included in thecomputation of diluted earnings per share because to do so would have beenantidilutive, was 316,000 and 376,000 for the three months ended April 2, 2006and April 3, 2005, respectively.

 

6

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*Stock-Based Compensation –*

 

Priorto January 2, 2006, the Company accounted for stock-based compensation foremployees under Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations. The Company hadadopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation” and the disclosures required by SFAS No. 148, “Accounting forStock-Based Compensation—Transition and Disclosure.”  In accordance with APB Opinion No. 25, nostock-based compensation cost was included in net loss for the three monthsended April 3, 2005 for the Company’s Stock Option Plan or the Company’s 2003Incentive Plan, as all options granted during that period had an exercise priceequal to the market value of the stock on the date of grant.

 

On December 16, 2004, the Financial Accounting Standards Board issuedSFAS No. 123 (revised 2004), “*Share-BasedPayment”*(“SFAS No. 123R”). SFAS No. 123R supersedes APB Opinion No.25, “*Accounting for Stock Issued toEmployees*,” and amends SFAS No. 95, “*Statement of Cash Flows*.” Generally, the approach in SFASNo. 123R is similar to the approach described in SFAS No. 123. However, SFASNo. 123R requires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the income statement based on theirfair values at the date of grant. Pro forma disclosure is no longer analternative.

 

On January 2, 2006 (the first day of its 2006 fiscal year), the Companyadopted SFAS No. 123R using the modified prospective method as permitted underSFAS No. 123R. Under this transition method, compensation cost recognized inthe first quarter of fiscal 2006 included: (a) compensation cost for allshare-based payments granted prior to but not yet vested as of January 1, 2006,based on the grant-date fair value estimated in accordance with the provisionsof SFAS No. 123, and (b) compensation cost for all share-based payments grantedsubsequent to January 1, 2006, based on the grant-date fair value estimated inaccordance with the provisions of SFAS No. 123R. In accordance with themodified prospective method of adoption, the Company’s results of operationsand financial position for prior periods have not been restated.

 

**3. STOCK BASED COMPENSATION**

 

*Equity Compensation Plans*-

 

The Company currently grants stock awards under the following equitycompensation plans:

 

*1997 Stock OptionPlan (“1997 Plan”)*- The 1997 Plan was adopted by theCompany’s Board of Directors in November 1997 and subsequently amended on March27, 2000 and October 24, 2001. Under the 1997 Plan, the Company’s Board ofDirectors may grant options to purchase up to 1,034,970 shares of common stockto employees, executive officers and directors. The 1997 Plan provides for theissuance of nonqualified stock options and incentive stock options (which areintended to satisfy the requirements of Section 422 of the Internal RevenueCode) and stock appreciation rights (“SARs”). The Compensation Committee of theBoard of Directors determines the employees who will receive awards under the1997 Plan and the terms of such awards. The exercise price of a stock option orSAR shall not be less than the fair market value of one share of common stockon the date the stock option or SAR is granted.

 

7

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*The 2003 Long-TermIncentive Plan (the “2003 Incentive Plan”)*- On April9, 2003, the Board of Directors adopted a long-term incentive plan (the “2003Incentive Plan”), subject to approval by the Company’s shareholders. On May 14,2003, the shareholders approved the 2003 Incentive Plan, which became effectiveas of March 30, 2003. The 2003 Incentive Plan provides for the issuance ofnonqualified stock options and incentive stock options (which are intended tosatisfy the requirements of Section 422 of the Internal Revenue Code), SARs,bonus stock, stock units, performance shares, performance units, restrictedstock and restricted stock units. No more than 307,000 shares of common stockmay be delivered to participants and their beneficiaries under the 2003 IncentivePlan. The Compensation Committee of the Board of Directors determines theemployees who will receive awards under the 2003 Incentive Plan and the termsof such awards. The exercise price of a stock option or SAR shall not be lessthan the fair market value of one share of common stock on the date the stockoption or SAR is granted.

 

OnDecember 20, 2004, the Company’s Board of Directors approved the vesting of alloutstanding and unvested options for the Company’s 1997 Plan and the 2003Incentive Plan. This action was taken to reduce, or eliminate to the extentpermitted, the transition expense related to outstanding stock option awardsunder SFAS No. 123R. The 259,850 options that were vested included 145,239options with exercise prices greater than the Company’s closing stock price onthe modification date. Under the accounting guidance of APB Opinion No. 25, theaccelerated vesting resulted in stock-based compensation cost of $9,400 (net ofrelated income tax benefit of $6,600), which was included in net loss for theyear ended January 2, 2005. Additionally, the effect of the accelerated vestingin the Company’s pro-forma disclosure was incremental stock-based compensationof approximately $666,000 (net of related income tax benefit of $463,000). Stock-basedcompensation expense of $434,000 and $96,000 would otherwise have beenrecognized in accordance with SFAS No. 123R in the Company’s consolidatedstatements of operations during the 2006 and 2007 fiscal years, respectively.

 

Optionsissued subsequent to December 20, 2004 vest over three years. Options issuedprior to July 24, 2002 expire 10 years from the date of grant. Options issuedsubsequent to that date have a five-year expiration date.

 

*Grant-Date Fair Value*-

 

The Company uses the Black-Scholes option pricing model to calculatethe grant-date fair value of an award. The fair value of options granted duringthe first quarter of fiscal 2006 and the first quarter of fiscal 2005 werecalculated using the following estimated weighted average assumptions:

 
| ** **                              | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **April 2, 2006**      | ** ** | **April 3, 2005** | ** ** |
| Options  granted                        |       | 145,409                |       | 113,953 |   |
| Weighted-average  exercise price        |       | $                      | 8.10       |   | $ | 8.86 |   |
| Weighted-average  grant date fair value |       | $                      | 3.82       |   | $ | 4.70 |   |
| Assumptions:                            |       |                   |       |   |   |
| Risk free  interest rate                |       | 4.68                   | %          | 3.58%-4.50 | % |
| Expected  life (in years)               |       | 4                      |       | 4-5 |   |
| Expected  volatility                    |       | 54.86                  | %          | 55.98%-58.16 | % |
| Expected  dividend yield                |       | 0.00                   | %          | 0.00 | % |

 

8

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Risk-free interest rate – the yield on zero-coupon U.S. Treasurysecurities for a period that is commensurate with the expected term assumptionis used as the risk-free interest rate.

 

Expected life – the Company uses historical employee exercise andoption expiration data to estimate the expected life assumption for theBlack-Scholes grant-date valuation. The Company believes that this historicaldata is currently the best estimate of the expected life of a new option.

 

Expected volatility – the Company is responsible for estimatingvolatility and has used historical volatility to estimate the grant-date fairvalue of stock options. Management considered the guidance in SFAS No. 123R andbelieves that the historical estimated volatility is materially indicative ofexpectations about future volatility.

 

Expected dividend yield – the Company has not paid anydividends in the last five years and currently intends to retain any earningsto finance future growth and, therefore, does not anticipate paying any cashdividends on its common stock in the foreseeable future.

 

*Expense* -

 

The Company used the straight-line attribution method to recognizeexpense for all options granted.

 

The amount of stock-based compensation recognized during a period isbased on the value of the portion of the awards that are ultimately expected tovest. SFAS No. 123R requires forfeitures to be estimated at the time of grantand revised, if necessary, in subsequent periods if actual forfeitures differfrom those estimates. The term “forfeitures” is distinct from “cancellations”or “expirations” and represents only the unvested portion of the surrenderedoption. The Company currently expects, based on an analysis of its historicalforfeitures that approximately 97% of its options will actually vest, andtherefore has applied an annual forfeiture rate of 3% to unvested options as ofApril 2, 2006. This analysis will be re-evaluated quarterly and the forfeiturerate will be adjusted as necessary. Ultimately, the actual expense recognizedover the vesting period will only be for those shares that vest.

 

The adoption of SFAS No. 123R on January 2, 2006 resulted in loweroperating profit before tax and higher net loss of $79,300 for the three monthsended April 2, 2006.

 

9

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The following table details the effect on net loss and loss per sharehad stock-based compensation expense been recorded for the first three monthsof fiscal 2005 based on the fair-value method under SFAS No. 123, “*Accounting for Stock-Based Compensation” (inthousands, except per share data).*The reported and pro forma netloss and loss per share for the first quarter of fiscal 2006 are the same sincestock-based compensation expense was calculated under the provisions of SFASNo. 123R.

 
| ** **                                                                                                                                       | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                                       | ** ** | **April 3, 2005**      | ** ** |
|                                                                                                                                             |       |                   |       |
| Net loss as  reported                                                                                                                            |       | $                      | (2,986     | ) |
|                                                                                                                                             |       |                   |       |
| Add stock-based compensation expense  included in  reported net loss, net of  related income tax benefit                                    |       | —                 |       |
| Less stock-based compensation expense  determined  under fair value method for  all stock options, net of  related  income tax benefit |       | (14                    | )          |
| Pro forma  net loss                                                                                                                              |       | $                      | (3,000     | ) |
|                                                                                                                                             |       |                   |       |
| Basic and  diluted net loss per share:                                                                                                           |       |                   |       |
| Basic and  diluted net loss per share, as reported                                                                                               |       | $                      | (0.39      | ) |
| Basic and  diluted net loss per share, pro forma                                                                                                 |       | $                      | (0.39      | ) |

 

*Option Activity* -

 

A summary of the activity under the Company’s stock option plans as ofApril 2, 2006 and changes during the three-month period then ended is presentedbelow:

 
| ** **                                             | ** ** | **Options  Outstanding** | ** ** | **Weighted-  Average  Remaining  Contractual  Life in Years** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|--------------------------------------------------------|------------|--------------------------|------------|---------------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------|------------|
|                                                   |       |                     |       |                                                          |       |                                   |       |                            |       |
| Options  outstanding at January 1, 2006                |       | 621,450                  |       |                                                          |       | $                                      | 7.82       |                            |       |   |
| Granted                                                |       | 145,409                  |       |                                                          |       | $                                      | 8.10       |                            |       |   |
| Cancelled                                              |       | (11,140                  | )          |                                                          |       | $                                      | 13.12      |                            |       |   |
| Exercised                                              |       | (3,707                   | )          |                                                          |       | $                                      | 5.15       |                            |       |   |
| Options  outstanding at April 2, 2006                  |       | 752,012                  |       | 3.83                                                          |       | $                                      | 7.81       |                            | $          | 895,771 |   |
|                                                   |       |                     |       |                                                          |       |                                   |       |                            |       |
| Options fully vested and exercisable at  April 2, 2006 |       | 509,106                  |       | 3.46                                                          |       | $                                      | 7.48       |                            | $          | 895,771 |   |

 

During the three months ended April 2, 2006, the total intrinsic valueof options exercised (i.e. the difference between the market price at exerciseand the price paid by the employee to exercise the options) was $14,648 and thetotal amount of cash received from exercise of stock options was $19,090.

 

As of April 2, 2006, there was $873,000 of average unrecognizedcompensation cost related to unvested stock options. That cost is expected tobe recognized over a weighted-average period of 2.66 years.

 

10

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*Restricted Stock Unit Activity*-

 

On December 2, 2005, 30,000restricted stock units were issued with a weighted average fair value of $8.90at grant date. During the three months ended April 2, 2006, stock-basedcompensation cost of $21,894 was recorded related to these units. No additionalunits were granted or forfeited during the three months ended April 2, 2006.

 

As of April 2, 2006, there was $248,000 of total unrecognizedcompensation cost related to unvested restricted stock units. That cost isexpected to be recognized over a weighted-average period of 2.67 years.

 

**4. EMPLOYEE BENEFIT PLANS**

 

Thecomponents of net periodic pension cost (benefit) for the three months endedApril 2, 2006 and April 3, 2005 were (in thousands):

 
| ** **                                           | ** ** | **For the Three Months Ended** | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                           | ** ** | **April 2,  2006**             | ** ** | **April 3,  2005** | ** ** |
|                                                 |       |                           |       |   |   |
| Interest  cost                                       |       | $                              | 1,720      |   | $ | 1,627 |   |
| Expected  return on assets                           |       | (1,969                         | )          | (2,097 | ) |
| Net  amortization of unrecognized net actuarial loss |       | 719                            |       | 414 |   |
|                                                 |       |                           |       |   |   |
| Net periodic  pension cost (benefit)                 |       | $                              | 470        |   | $ | (56 | ) |

 

Thecomponents of the net postretirement medical and life insurance benefit costfor the three months ended April 2, 2006 and April 3, 2005 were (in thousands):

 
| ** **                                              | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                              | ** ** | **April 2,  2006**             | ** ** | **April 3,  2005** | ** ** |
|                                                    |       |                           |       |   |   |
| Service cost                                            |       | $                              | 41         |   | $ | 40 |   |
| Interest  cost                                          |       | 95                             |       | 115 |   |
| Recognized  actuarial loss                              |       | 4                              |       | 21 |   |
| Net  amortization of unrecognized prior service benefit |       | (36                            | )          | (36 | ) |
|                                                    |       |                           |       |   |   |
| Net  postretirement benefit cost                        |       | $                              | 104        |   | $ | 140 |   |

 

11

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**5. ASSET IMPAIRMENT AND DISCONTINUED OPERATIONS**

 

As of January 1, 2006, the Company had 11restaurants that were reported as “held for sale” in accordance with SFAS No.144, “Accounting for the Impairment or Disposal of Long-LivedAssets.” During the three months endedApril 2, 2006, the Company sold five of these restaurants. Grossproceeds from these transactions were $5,093,000. The Company recognized a netgain related to the sales of the assets of $2,864,000. At April 2, 2006, the remaining six properties, and one additionalproperty that closed during the three months ended April 2, 2006, met thecriteria for “held for sale” as defined in SFAS No. 144. The carryingvalues of these seven properties of $1,554,000 and $1,628,000 as of April 2,2006 and January 1, 2006, respectively, were reported as assets held for salein the accompanying condensed consolidated balance sheets. The carrying valuesof these properties were not adjusted since the carrying values were less thanthe estimated fair market values less costs to sell.

 

Thetable below identifies the components of the “Loss on disposals of otherproperty and equipment, net” as shown in the accompanying condensedconsolidated statements of operations (in thousands):

 
| ** **                                              | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                              | ** ** | **April 2,  2006**             | ** ** | **April 3,  2005** | ** ** |
| ** **                                              | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Restaurant  equipment assets retired due to replacement |       | $                              | 75         |   | $ | 52 |   |
| Loss due to  restaurant fire                            |       | 30                             |       | — |   |
| All other                                               |       | 4                              |       | 17 |   |
| Loss on  disposals of other property and equipment, net |       | $                              | 109        |   | $ | 69 |   |

 

SFASNo. 144 also requires the results of operations of a component of an entitythat is classified as held for sale or that has been disposed of to be reportedas discontinued operations in the statement of operations if certain conditionsare met. These conditions include commitment to a plan of disposal after theeffective date of this statement, elimination of the operations and cash flowsof the entity component from the ongoing operations of the company and nosignificant continuing involvement in the operations of the entity componentafter the disposal transaction.

 

Inaccordance with SFAS No. 144, the results of operations of the five propertiesthat were disposed of during the three months ended April 2, 2006 and therelated net gain on the disposals, as well as the results of operations of theproperties held for sale at April 2, 2006, were reported separately asdiscontinued operations in the accompanying condensed consolidated statementsof operations for all periods presented. Operating results for the three monthsended April 2, 2006 and the net gain on disposals of the properties as well asoperating results that were included in the restaurant segment in thepreviously issued Quarterly Report on Form 10-Q for the three months endedApril 3, 2005 are summarized below (in thousands):

 
| ** **                                   | ** ** | **For the Three Months Ended** | ** ** |
|----------------------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **April 2,  2006**             | ** ** | **April 3,  2005** | ** ** |
| ** **                                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net sales                                    |       | $                              | —     |   | $ | 2,985 |   |
|                                         |       |                           |       |   |   |
| Operating  loss                              |       | (248                           | )          | (623 | ) |
| Gain on  disposals of property and equipment |       | 2,864                          |       | — |   |
| Income tax  benefit                          |       | —                         |       | 255 |   |
| Income  (loss) from discontinued operations  |       | $                              | 2,616      |   | $ | (368 | ) |

 

12

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Duringthe three months ended April 2, 2006, the Company determined that the carryingvalue of one operating restaurant property exceeded its estimated fair valueless costs to sell and the carrying value was reduced by $215,000 accordingly.

 

**6. SEGMENT REPORTING**

 

Operating segments are components of anenterprise about which separate financial information is available that isevaluated regularly by the chief operating decision-maker, or decision-makinggroup, in deciding how to allocate resources and in assessing performance. TheCompany’s chief operating decision-maker is the Chief Executive Officer andPresident of the Company. The Company’s operating segments include restaurant,foodservice and franchise. The revenues from these segments include both salesto unaffiliated customers and inter-segment sales, which generally areaccounted for on a basis consistent with sales to unaffiliated customers.Intersegment sales and other inter-segment transactions have been eliminated inthe accompanying condensed consolidated financial statements.

 

The Company’s restaurants target familieswith kids and adults who desire a reasonably-priced meal in a full-servicesetting. The Company’s menu offers a broad selection of freshly-prepared foodswhich appeal to customers throughout all dayparts. The menu currently featuresover 100 items comprised of a broad selection of breakfast, lunch, dinner andafternoon and evening snack items. Foodservice operations manufactures premiumice cream dessert products and distributes such manufactured products andpurchased finished goods to Company-operated and franchised restaurants.Additionally, it sells premium ice cream dessert products to distributors andretail locations. The Company’s franchise segment includes a royalty based onfranchise restaurant revenue. In addition, the Company receives rental incomefrom various franchised restaurants. The Company does not allocate general andadministrative expenses associated with its headquarters operations to anybusiness segment. These costs include expenses of the following functions:legal, accounting, personnel not directly related to a segment, informationsystems and other headquarter activities.

 

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

 

13

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AdjustedEBITDA represents net income (loss) before (i) (provision for) benefit fromincome taxes, (ii) interest expense, net, (iii) depreciation andamortization, (iv) write-downs of property and equipment, (v) net periodicpension cost (benefit) and (vi) other non-cash items. The Company has includedinformation concerning adjusted EBITDA in this Form 10-Q because the Company’smanagement incentive plan pays bonuses based on achieving adjusted EBITDAtargets and the Company believes that such information is used by certaininvestors as one measure of a company’s historical ability to service debt.Adjusted EBITDA should not be considered as an alternative to, or moremeaningful than, earnings (loss) from operations or other traditionalindications of a company’s operating performance.

 

| ** **              | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **April 2,  2006**             | ** ** | **April 3,  2005** | ** ** |
| ** **              | ** ** | **(in thousands)**             | ** ** |
| Revenues:               |       |                           |       |   |   |
| Restaurant              |       | $                              | 95,276     |   | $ | 93,107 |   |
| Foodservice             |       | 54,958                         |       | 54,163 |   |
| Franchise               |       | 3,545                          |       | 3,250 |   |
| Total                   |       | $                              | 153,779    |   | $ | 150,520 |   |
|                    |       |                           |       |   |   |
| Intersegment  revenues: |       |                           |       |   |   |
| Restaurant              |       | $                              | —     |   | $ | — |   |
| Foodservice             |       | (28,064                        | )          | (28,857 | ) |
| Franchise               |       | —                         |       | — |   |
| Total                   |       | $                              | (28,064    | ) | $ | (28,857 | ) |
|                    |       |                           |       |   |   |
| External  revenues:     |       |                           |       |   |   |
| Restaurant              |       | $                              | 95,276     |   | $ | 93,107 |   |
| Foodservice             |       | 26,894                         |       | 25,306 |   |
| Franchise               |       | 3,545                          |       | 3,250 |   |
| Total                   |       | $                              | 125,715    |   | $ | 121,663 |   |

 

14

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| ** **                                                                  | ** ** | **For the Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                  | ** ** | **April 2,  2006**             | ** ** | **April 3,  2005** | ** ** |
| ** **                                                                  | ** ** | **(in thousands)**             | ** ** |
|                                                                        |       |                           |       |   |   |
| Adjusted  EBITDA:                                                           |       |                           |       |   |   |
| Restaurant                                                                  |       | $                              | 6,834      |   | $ | 7,276 |   |
| Foodservice                                                                 |       | 2,547                          |       | 2,148 |   |
| Franchise                                                                   |       | 2,418                          |       | 2,266 |   |
| Corporate                                                                   |       | (5,578                         | )          | (4,844 | ) |
| Gain on property and equipment, net                                         |       | 758                            |       | 1,234 |   |
| Pension cost (benefit) included in  reporting segments                      |       | 470                            |       | (56 | ) |
| Total                                                                       |       | $                              | 7,449      |   | $ | 8,024 |   |
|                                                                        |       |                           |       |   |   |
| Interest  expense, net-Corporate                                            |       | $                              | 5,420      |   | $ |  5,286 |   |
|                                                                        |       |                           |       |   |   |
| Depreciation  and amortization:                                             |       |                           |       |   |   |
| Restaurant                                                                  |       | $                              | 4,143      |   | $ | 4,470 |   |
| Foodservice                                                                 |       | 736                            |       | 823 |   |
| Franchise                                                                   |       | 68                             |       | 40 |   |
| Corporate                                                                   |       | 833                            |       | 818 |   |
| Total                                                                       |       | $                              | 5,780      |   | $ | 6,151 |   |
|                                                                        |       |                           |       |   |   |
| Other  non-cash expenses (income):                                          |       |                           |       |   |   |
| Net periodic pension cost (benefit)                                         |       | $                              | 470        |   | $ | (56 | ) |
| Write-downs of property and equipment                                       |       | 215                            |       | — |   |
| Total                                                                       |       | $                              | 685        |   | $ | (56 | ) |
|                                                                        |       |                           |       |   |   |
| Income (loss) from continuing operations  before benefit from income taxes: |       |                           |       |   |   |
| Restaurant                                                                  |       | $                              | 2,691      |   | $ | 2,806 |   |
| Foodservice                                                                 |       | 1,811                          |       | 1,325 |   |
| Franchise                                                                   |       | 2,350                          |       | 2,226 |   |
| Corporate                                                                   |       | (11,831                        | )          | (10,948 | ) |
| Gain on property and equipment, net                                         |       | 543                            |       | 1,234 |   |
| Total                                                                       |       | $                              | (4,436     | ) | $ | (3,357 | ) |

 

15

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| ** **                                                                  | ** ** | **For the Three  Months Ended  April 2, 2006** | ** ** | **For the Year  Ended  January 1, 2006** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                  | ** ** | **(in thousands)**                             | ** ** |
| Capital expenditures, including assets  acquired under capital leases: |       |                                           |       |                                     |       |
| Restaurant                                                                  |       | $                                              | 2,215      |                                     | $          | 14,674 |   |
| Foodservice                                                                 |       | 68                                             |       | 1,516                                    |       |
| Corporate                                                                   |       | 121                                            |       | 968                                      |       |
| Total                                                                       |       | $                                              | 2,404      |                                     | $          | 17,158 |   |

 

| ** **     | ** ** | **April 2, 2006**  | ** ** | **January 1, 2006** | ** ** |
|----------------|------------|--------------------|------------|---------------------|------------|
| ** **     | ** ** | **(in thousands)** | ** ** |
| Total  assets: |       |               |       |                |       |
| Restaurant     |       | $                  | 128,276    |                | $          | 131,810 |   |
| Foodservice    |       | 34,214             |       | 38,609              |       |
| Franchise      |       | 11,909             |       | 7,634               |       |
| Corporate      |       | 43,232             |       | 40,189              |       |
| Total          |       | $                  | 217,631    |                | $          | 218,242 |   |

 

**7. RELATED PARTY TRANSACTIONS**

 

The Ice CreamCompany (“TICC”) operates three Friendly’s restaurants under franchiseagreements with Friendly’s Restaurants Franchise, Inc. (“FRFI”), a subsidiaryof Friendly’s. The owners of TICC are family members of the Company’s Chairmanof the Board of Directors. The franchise agreement terms with TICC areidentical in all material respects to the terms generally offered to unrelatedfranchisees of FRFI in the ordinary course of Friendly’s business. TICCpurchases certain food products used in the normal course of its franchisebusiness from Friendly’s. For the year ended January 1, 2006, TICC paidFriendly’s approximately  $2,110,122 for franchise royalty fees, marketing fees, food purchases andmiscellaneous other products and services.

 

On March 20,2006, Friendly’s and TICC entered into a preliminary agreement whereby TICCwould purchase three existing Company-operated restaurants and develop six newrestaurants, all in the Lancaster and York, Pennsylvania areas. The transactionis dependent on approval by the Company’s Board of Directors, which isconducting a transaction value appraisal through an independent appraiser.

 

16

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**8. SUPPLEMENTAL CONDENSED CONSOLIDATINGFINANCIAL INFORMATION**

 

FICC’s obligation related to its $175,000,0008.375% senior notes (the “Senior Notes”) issued in March 2004 is guaranteedfully and unconditionally by one of FICC’s wholly owned subsidiaries. There areno restrictions on FICC’s ability to obtain dividends or other distributions offunds from this subsidiary, except those imposed by applicable law. Thefollowing supplemental financial information sets forth, on a condensedconsolidating basis, balance sheets, statements of operations and statements ofcash flows for FICC (the “Parent Company”), Friendly’s Restaurants Franchise,Inc. (the “Guarantor Subsidiary”) and Friendly’s International, Inc.,Restaurant Insurance Corporation, Friendly’s Realty I, LLC, Friendly’s RealtyII, LLC and Friendly’s Realty III, LLC (collectively, the “Non-guarantorSubsidiaries”). All of the LLCs’ assets were owned by the LLCs, which areseparate entities with separate creditors which will be entitled to be satisfiedout of the LLCs’ assets. Separate complete financial statements and otherdisclosures of the Guarantor Subsidiary as of April 2, 2006 and January 1, 2006and for the three months ended April 2, 2006 and April 3, 2005 were notpresented because management has determined that such information is notmaterial to investors.

 

Investmentsin subsidiaries are accounted for by the Parent Company on the equity methodfor purposes 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.

 

17

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**FRIENDLY ICE CREAM CORPORATIONAND SUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

(Unaudited)

 

**Supplemental CondensedConsolidating Balance Sheet**

**As of April 2, 2006**

(In thousands)

 
| ** **                                                 | ** ** | ** **  | ** ** | ** **     | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------|------------|-------------|------------|----------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **Parent**  | ** ** | **Guarantor**  | ** ** | **guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                 | ** ** | **Company** | ** ** | **Subsidiary** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                       |       |        |       |           |       |             |       |             |       |             |       |
| Assets                                                     |       |        |       |           |       |             |       |             |       |             |       |
|                                                       |       |        |       |           |       |             |       |             |       |             |       |
| Current assets:                                            |       |        |       |           |       |             |       |             |       |             |       |
| Cash and cash equivalents                                  |       | $           | 16,625     |           | $          | 790              |       | $                | 2,356      |             | $          | — |   | $ | 19,771 |   |
| Restricted cash                                            |       | —      |       | —         |       | 1,927            |       | —           |       | 1,927            |       |
| Accounts receivable, net                                   |       | 9,774       |       | 2,014          |       | —           |       | —           |       | 11,788           |       |
| Inventories                                                |       | 15,974      |       | —         |       | —           |       | —           |       | 15,974           |       |
| Assets held for sale                                       |       | 1,554       |       | —         |       | —           |       | —           |       | 1,554            |       |
| Deferred income taxes                                      |       | —      |       | 26             |       | —           |       | (26              | )          | —           |       |
| Prepaid expenses and other current assets                  |       | 5,374       |       | 656            |       | 7,785            |       | (9,075           | )          | 4,740            |       |
| Total current assets                                       |       | 49,301      |       | 3,486          |       | 12,068           |       | (9,101           | )          | 55,754           |       |
| Deferred income taxes                                      |       | —      |       | 381            |       | —           |       | (381             | )          | —           |       |
| Property and equipment, net                                |       | 95,606      |       | —         |       | 42,025           |       | —           |       | 137,631          |       |
| Intangibles and deferred costs, net                        |       | 16,584      |       | —         |       | 2,197            |       | —           |       | 18,781           |       |
| Investments in subsidiaries                                |       | 5,795       |       | —         |       | —           |       | (5,795           | )          | —           |       |
| Other assets                                               |       | 4,550       |       | 5,856          |       | 915              |       | (5,856           | )          | 5,465            |       |
|                                                       |       |        |       |           |       |             |       |             |       |             |       |
| Total assets                                               |       | $           | 171,836    |           | $          | 9,723            |       | $                | 57,205     |             | $          | (21,133 | ) | $ | 217,631 |   |
|                                                       |       |        |       |           |       |             |       |             |       |             |       |
| Liabilities and Stockholders’ (Deficit)  Equity       |       |        |       |           |       |             |       |             |       |             |       |
|                                                       |       |        |       |           |       |             |       |             |       |             |       |
| Current liabilities:                                       |       |        |       |           |       |             |       |             |       |             |       |
| Current maturities of long-term obligations                |       | $           | 9,229      |           | $          | —           |       | $                | 1,429      |             | $          | (7,776 | ) | $ | 2,882 |   |
| Accounts payable                                           |       | 22,171      |       | —         |       | —           |       | —           |       | 22,171           |       |
| Deferred income taxes                                      |       | 131         |       | —         |       | —           |       | (131             | )          | —           |       |
| Accrued expenses                                           |       | 40,111      |       | 2,488          |       | 1,560            |       | (1,064           | )          | 43,095           |       |
| Total current liabilities                                  |       | 71,642      |       | 2,488          |       | 2,989            |       | (8,971           | )          | 68,148           |       |
| Deferred income taxes                                      |       | 276         |       | —         |       | —           |       | (276             | )          | —           |       |
| Long-term obligations, less current  maturities            |       | 181,841     |       | —         |       | 48,460           |       | —           |       | 230,301          |       |
| Other long-term liabilities                                |       | 61,637      |       | 970            |       | 6,226            |       | (6,091           | )          | 62,742           |       |
| Stockholders’ (deficit) equity                        |       | (143,560    | )          | 6,265          |       | (470             | )          | (5,795           | )          | (143,560         | )          |
|                                                       |       |        |       |           |       |             |       |             |       |             |       |
| Total liabilities and stockholders’  (deficit) equity |       | $           | 171,836    |           | $          | 9,723            |       | $                | 57,205     |             | $          | (21,133 | ) | $ | 217,631 |   |

 

18

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**FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

(Unaudited)

 

**Supplemental CondensedConsolidating Statement of Operations**

**For the Three Months Ended April2, 2006**

(In thousands)

 
| ** **                                                                                                            | ** ** | ** **  | ** ** | ** **     | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|----------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                                            | ** ** | **Parent**  | ** ** | **Guarantor**  | ** ** | **guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                                                            | ** ** | **Company** | ** ** | **Subsidiary** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                                                                  |       |        |       |           |       |             |       |             |       |             |       |
| Revenues                                                                                                              |       | $           | 123,097    |           | $          | 2,618            |       | $                | —     |             | $          | — |   | $ | 125,715 |   |
|                                                                                                                  |       |        |       |           |       |             |       |             |       |             |       |
| Costs and expenses:                                                                                                   |       |        |       |           |       |             |       |             |       |             |       |
| Cost of sales                                                                                                         |       | 48,385      |       | —         |       | —           |       | —           |       | 48,385           |       |
| Labor and benefits                                                                                                    |       | 36,012      |       | —         |       | —           |       | —           |       | 36,012           |       |
| Operating expenses and write- downs of  property and equipment                                                        |       | 25,920      |       | —         |       | (1,706           | )          | —           |       | 24,214           |       |
| General and administrative expenses                                                                                   |       | 9,942       |       | 1,155          |       | —           |       | —           |       | 11,097           |       |
| Depreciation and amortization                                                                                         |       | 5,237       |       | —         |       | 543              |       | —           |       | 5,780            |       |
| Gain on franchise sales of restaurant  operations and properties                                                      |       | (866        | )          | —         |       | —           |       | —           |       | (866             | )          |
| Loss on disposals of other property and  equipment, net                                                               |       | 109         |       | —         |       | —           |       | —           |       | 109              |       |
| Interest expense, net                                                                                                 |       | 4,337       |       | —         |       | 1,083            |       | —           |       | 5,420            |       |
|                                                                                                                  |       |        |       |           |       |             |       |             |       |             |       |
| (Loss) income before benefit from (provision  for) income taxes and equity in net income of consolidated subsidiaries |       | (5,979      | )          | 1,463          |       | 80               |       | —           |       | (4,436           | )          |
|                                                                                                                  |       |        |       |           |       |             |       |             |       |             |       |
| Benefit from (provision for) income taxes                                                                             |       | 654         |       | (600           | )          | (54              | )          | —           |       | —           |       |
|                                                                                                                  |       |        |       |           |       |             |       |             |       |             |       |
| (Loss) income from continuing operations                                                                              |       | (5,325      | )          | 863            |       | 26               |       | —           |       | (4,436           | )          |
|                                                                                                                  |       |        |       |           |       |             |       |             |       |             |       |
| Income from discontinued operations                                                                                   |       | 2,616       |       | —         |       | —           |       | —           |       | 2,616            |       |
|                                                                                                                  |       |        |       |           |       |             |       |             |       |             |       |
| (Loss) income before equity in net income  of consolidated subsidiaries                                               |       | (2,709      | )          | 863            |       | 26               |       | —           |       | (1,820           | )          |
|                                                                                                                  |       |        |       |           |       |             |       |             |       |             |       |
| Equity in net income of consolidated  subsidiaries                                                                    |       | 889         |       | —         |       | —           |       | (889             | )          | —           |       |
|                                                                                                                  |       |        |       |           |       |             |       |             |       |             |       |
| Net (loss) income                                                                                                     |       | $           | (1,820     | )              | $          | 863              |       | $                | 26         |             | $          | (889 | ) | $ | (1,820 | ) |

 

19

----

 

**FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

(Unaudited)

 

**Supplemental CondensedConsolidating Statement of Cash Flows**

**For the Three Months Ended April2, 2006**

(In thousands)

 
| ** **                                     | ** ** | ** **  | ** **   | ** **     | ** ** | **Non-**         | ** ** | ** **       | ** **  | ** **       | ** ** |
|------------------------------------------------|------------|-------------|--------------|----------------|------------|------------------|------------|------------------|-------------|------------------|------------|
| ** **                                     | ** ** | **Parent**  | ** **   | **Guarantor**  | ** ** | **guarantor**    | ** ** | ** **       | ** **  | ** **       | ** ** |
| ** **                                     | ** ** | **Company** | ** **   | **Subsidiary** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** **  | **Consolidated** | ** ** |
|                                           |       |        |         |           |       |             |       |             |        |             |       |
| Net cash provided by operating activities      |       | $           | 1,998        |           | $          | 10               |       | $                | 926         |             | $          | (235 | ) | $ | 2,699 |   |
|                                           |       |        |         |           |       |             |       |             |        |             |       |
| Cash flows from investing activities:          |       |        |         |           |       |             |       |             |        |             |       |
| Purchases of property and equipment            |       | (2,404      | )            | —         |       | —           |       | —           |        | (2,404           | )          |
| Proceeds from sales of property and  equipment |       | 5,794       |         | —         |       | —           |       | —           |        | 5,794            |       |
| Return of investment in subsidiary             |       | 282         |         | —         |       | —           |       | (282             | )           | —           |       |
| Net cash provided by investing activities      |       | 3,672       |         | —         |       | —           |       | (282             | )           | 3,390            |       |
|                                           |       |        |         |           |       |             |       |             |        |             |       |
| Cash flows from financing activities:          |       |        |         |           |       |             |       |             |        |             |       |
| Proceeds from revolving credit facility        |       | 8,000       |         | —         |       | —           |       | —           |        | 8,000            |       |
| Repayments of obligations                      |       | (8,405      | )            | —         |       | (324             | )          | —           |        | (8,729           | )          |
| Payments of deferred financing costs           |       | (205        | )            | —         |       | —           |       | —           |        | (205             | )          |
| Stock options exercised                        |       | 19          |         | —         |       | —           |       | —           |        | 19               |       |
| Reinsurance payments made from deposits        |       | —      |         | —         |       | (235             | )          | 235              |        | —           |       |
| Dividends paid                                 |       | —      |         | —         |       | (282             | )          | 282              |        | —           |       |
| Net cash used in financing activities          |       | (591        | )            | —         |       | (841             | )          | 517              |        | (915             | )          |
|                                           |       |        |         |           |       |             |       |             |        |             |       |
| Net increase in cash and cash equivalents      |       | 5,079       |         | 10             |       | 85               |       | —           |        | 5,174            |       |
|                                           |       |        |         |           |       |             |       |             |        |             |       |
| Cash and cash equivalents, beginning of  year  |       | 11,546      |         | 780            |       | 2,271            |       | —           |        | 14,597           |       |
|                                           |       |        |         |           |       |             |       |             |        |             |       |
| Cash and cash equivalents, end of year         |       | $           |  16,625 |           | $          |  790        |       | $                |  2,356 |             | $          |  — |   | $ |  19,771 |   |
|                                           |       |        |         |           |       |             |       |             |        |             |       |
| Supplemental disclosures:                      |       |        |         |           |       |             |       |             |        |             |       |
| Interest paid                                  |       | $           | 505          |           | $          | —           |       | $                | 1,023       |             | $          | — |   | $ | 1,528 |   |
| Income taxes (refunded) paid                   |       | (3,094      | )            | 2,534          |       | 57               |       | —           |        | (503             | )          |

 

20

----

 

**FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

(Unaudited)

 

**SupplementalCondensed Consolidating Balance Sheet**

**As ofJanuary 1, 2006**

(In thousands)

 
| ** **                                                 | ** ** | ** **  | ** ** | ** **     | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------|------------|-------------|------------|----------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **Parent**  | ** ** | **Guarantor**  | ** ** | **guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                 | ** ** | **Company** | ** ** | **Subsidiary** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                       |       |        |       |           |       |             |       |             |       |             |       |
| Assets                                                     |       |        |       |           |       |             |       |             |       |             |       |
|                                                       |       |        |       |           |       |             |       |             |       |             |       |
| Current assets:                                            |       |        |       |           |       |             |       |             |       |             |       |
| Cash and cash equivalents                                  |       | $           | 11,546     |           | $          | 780              |       | $                | 2,271      |             | $          | — |   | $ | 14,597 |   |
| Restricted cash                                            |       | —      |       | —         |       | 2,549            |       | —           |       | 2,549            |       |
| Accounts receivable, net                                   |       | 9,036       |       | 1,721          |       | —           |       | —           |       | 10,757           |       |
| Inventories                                                |       | 15,775      |       | —         |       | —           |       | —           |       | 15,775           |       |
| Assets held for sale                                       |       | 1,628       |       | —         |       | —           |       | —           |       | 1,628            |       |
| Deferred income taxes                                      |       | (131        | )          | 26             |       | —           |       | 105              |       | —           |       |
| Prepaid expenses and other current assets                  |       | 7,571       |       | 2,565          |       | 7,785            |       | (12,877          | )          | 5,044            |       |
| Total current assets                                       |       | 45,425      |       | 5,092          |       | 12,605           |       | (12,772          | )          | 50,350           |       |
| Deferred income taxes                                      |       | (276        | )          | 381            |       | —           |       | (105             | )          | —           |       |
| Property and equipment, net                                |       | 100,309     |       | —         |       | 42,510           |       | —           |       | 142,819          |       |
| Intangibles and deferred costs, net                        |       | 16,808      |       | —         |       | 2,255            |       | —           |       | 19,063           |       |
| Investments in subsidiaries                                |       | 5,188       |       | —         |       | —           |       | (5,188           | )          | —           |       |
| Other assets                                               |       | 5,095       |       | 5,118          |       | 915              |       | (5,118           | )          | 6,010            |       |
|                                                       |       |        |       |           |       |             |       |             |       |             |       |
| Total assets                                               |       | $           | 172,549    |           | $          | 10,591           |       | $                | 58,285     |             | $          | (23,183 | ) | $ | 218,242 |   |
|                                                       |       |        |       |           |       |             |       |             |       |             |       |
| Liabilities and Stockholders’ (Deficit)  Equity       |       |        |       |           |       |             |       |             |       |             |       |
|                                                       |       |        |       |           |       |             |       |             |       |             |       |
| Current liabilities:                                       |       |        |       |           |       |             |       |             |       |             |       |
| Current maturities of long-term obligations                |       | $           | 9,253      |           | $          | —           |       | $                | 1,368      |             | $          | (7,776 | ) | $ | 2,845 |   |
| Accounts payable                                           |       | 24,968      |       | —         |       | —           |       | —           |       | 24,968           |       |
| Accrued expenses                                           |       | 37,237      |       | 4,258          |       | 1,825            |       | (4,844           | )          | 38,476           |       |
| Total current liabilities                                  |       | 71,458      |       | 4,258          |       | 3,193            |       | (12,620          | )          | 66,289           |       |
| Long-term obligations, less current  maturities            |       | 182,221     |       | —         |       | 48,846           |       | —           |       | 231,067          |       |
| Other long-term liabilities                                |       | 60,708      |       | 930            |       | 6,461            |       | (5,375           | )          | 62,724           |       |
| Stockholders’ (deficit) equity                        |       | (141,838    | )          | 5,403          |       | (215             | )          | (5,188           | )          | (141,838         | )          |
|                                                       |       |        |       |           |       |             |       |             |       |             |       |
| Total liabilities and stockholders’  (deficit) equity |       | $           | 172,549    |           | $          | 10,591           |       | $                | 58,285     |             | $          | (23,183 | ) | $ | 218,242 |   |

 

21

----

 

**FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

(Unaudited)

 

**Supplemental CondensedConsolidating Statement of Operations**

**For the Three Months Ended April3, 2005**

(In thousands)

 
| ** **                                                                                                             | ** ** | ** **  | ** ** | ** **     | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|----------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                                             | ** ** | **Parent**  | ** ** | **Guarantor**  | ** ** | **guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                                                             | ** ** | **Company** | ** ** | **Subsidiary** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                                                                   |       |        |       |           |       |             |       |             |       |             |       |
| Revenues                                                                                                               |       | $           | 119,191    |           | $          | 2,472            |       | $                | —     |             | $          | — |   | $ | 121,663 |   |
|                                                                                                                   |       |        |       |           |       |             |       |             |       |             |       |
| Costs and expenses:                                                                                                    |       |        |       |           |       |             |       |             |       |             |       |
| Cost of sales                                                                                                          |       | 46,889      |       | —         |       | —           |       | —           |       | 46,889           |       |
| Labor and benefits                                                                                                     |       | 35,084      |       | —         |       | —           |       | —           |       | 35,084           |       |
| Operating expenses                                                                                                     |       | 25,140      |       | —         |       | (1,739           | )          | —           |       | 23,401           |       |
| General and administrative expenses                                                                                    |       | 8,293       |       | 1,156          |       | —           |       | —           |       | 9,449            |       |
| Depreciation and amortization                                                                                          |       | 5,593       |       | —         |       | 558              |       | —           |       | 6,151            |       |
| Gain on franchise sales of restaurant  operations and properties                                                       |       | (1,309      | )          | —         |       | —           |       | —           |       | (1,309           | )          |
| Loss on disposals of other property and  equipment, net                                                                |       | 69          |       | —         |       | —           |       | —           |       | 69               |       |
| Interest expense, net                                                                                                  |       | 4,167       |       | —         |       | 1,119            |       | —           |       | 5,286            |       |
|                                                                                                                   |       |        |       |           |       |             |       |             |       |             |       |
| (Loss) income before benefit from  (provision for) income taxes and equity in net income of consolidated  subsidiaries |       | (4,735      | )          | 1,316          |       | 62               |       | —           |       | (3,357           | )          |
|                                                                                                                   |       |        |       |           |       |             |       |             |       |             |       |
| Benefit from (provision for) income taxes                                                                              |       | 1,330       |       | (540           | )          | (51              | )          | —           |       | 739              |       |
|                                                                                                                   |       |        |       |           |       |             |       |             |       |             |       |
| (Loss) income from continuing operations                                                                               |       | (3,405      | )          | 776            |       | 11               |       | —           |       | (2,618           | )          |
|                                                                                                                   |       |        |       |           |       |             |       |             |       |             |       |
| Loss from discontinued operations, net of  income taxes                                                                |       | (368        | )          | —         |       | —           |       | —           |       | (368             | )          |
|                                                                                                                   |       |        |       |           |       |             |       |             |       |             |       |
| (Loss) income before equity in net income  of consolidated subsidiaries                                                |       | (3,773      | )          | 776            |       | 11               |       | —           |       | (2,986           | )          |
|                                                                                                                   |       |        |       |           |       |             |       |             |       |             |       |
| Equity in net income of consolidated  subsidiaries                                                                     |       | 787         |       | —         |       | —           |       | (787             | )          | —           |       |
|                                                                                                                   |       |        |       |           |       |             |       |             |       |             |       |
| Net (loss) income                                                                                                      |       | $           | (2,986     | )              | $          | 776              |       | $                | 11         |             | $          | (787 | ) | $ | (2,986 | ) |

 

22

----

 

**FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

(Unaudited)

 

**Supplemental CondensedConsolidating Statement of Cash Flows**

**For the Three Months Ended April3, 2005**

(In thousands)

 
| ** **                                           | ** ** | ** **  | ** ** | ** **     | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------|------------|-------------|------------|----------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **Parent**  | ** ** | **Guarantor**  | ** ** | **guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                           | ** ** | **Company** | ** ** | **Subsidiary** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                 |       |        |       |           |       |             |       |             |       |             |       |
| Net cash provided by (used in) operating  activities |       | $           | 3,638      |           | $          | (534             | )          | $                | 383        |             | $          | (241 | ) | $ | 3,246 |   |
|                                                 |       |        |       |           |       |             |       |             |       |             |       |
| Cash flows from investing activities:                |       |        |       |           |       |             |       |             |       |             |       |
| Purchases of property and equipment                  |       | (2,408      | )          | —         |       | —           |       | —           |       | (2,408           | )          |
| Proceeds from sales of property and  equipment       |       | 1,706       |       | —         |       | —           |       | —           |       | 1,706            |       |
| Purchases of marketable securities                   |       | (183        | )          | —         |       | —           |       | —           |       | (183             | )          |
| Proceeds from sales of marketable  securities        |       | 42          |       | —         |       | —           |       | —           |       | 42               |       |
| Return of investment in subsidiary                   |       | 162         |       | —         |       | —           |       | (162             | )          | —           |       |
| Net cash used in investing activities                |       | (681        | )          | —         |       | —           |       | (162             | )          | (843             | )          |
|                                                 |       |        |       |           |       |             |       |             |       |             |       |
| Cash flows from financing activities:                |       |        |       |           |       |             |       |             |       |             |       |
| Proceeds from revolving credit facility              |       | 15,250      |       | —         |       | —           |       | —           |       | 15,250           |       |
| Repayments of obligations                            |       | (19,627     | )          | —         |       | (406             | )          | —           |       | (20,033          | )          |
| Payments related to deferred financing  costs        |       | (11         | )          | —         |       | —           |       | —           |       | (11              | )          |
| Stock options exercised                              |       | 136         |       | —         |       | —           |       | —           |       | 136              |       |
| Reinsurance payments made from deposits              |       | —      |       | —         |       | (241             | )          | 241              |       | —           |       |
| Dividends paid                                       |       | —      |       | —         |       | (162             | )          | 162              |       | —           |       |
| Net cash used in financing activities                |       | (4,252      | )          | —         |       | (809             | )          | 403              |       | (4,658           | )          |
|                                                 |       |        |       |           |       |             |       |             |       |             |       |
| Net decrease in cash and cash equivalents            |       | (1,295      | )          | (534           | )          | (426             | )          | —           |       | (2,255           | )          |
|                                                 |       |        |       |           |       |             |       |             |       |             |       |
| Cash and cash equivalents, beginning of  period      |       | 9,873       |       | 1,360          |       | 2,172            |       | —           |       | 13,405           |       |
|                                                 |       |        |       |           |       |             |       |             |       |             |       |
| Cash and cash equivalents, end of period             |       | $           | 8,578      |           | $          | 826              |       | $                | 1,746      |             | $          | — |   | $ | 11,150 |   |
|                                                 |       |        |       |           |       |             |       |             |       |             |       |
| Supplemental disclosures:                            |       |        |       |           |       |             |       |             |       |             |       |
| Interest paid                                        |       | $           | 198        |           | $          | —           |       | $                | 1,557      |             | $          | — |   | $ | 1,755 |   |
| Income taxes (refunded) paid                         |       | (2,552      | )          | 2,495          |       | 52               |       | —           |       | (5               | )          |

 

23

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**Item 2. Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

*The following discussion shouldbe read in conjunction with the Condensed Consolidated Financial Statements ofthe Company and the notes thereto included elsewhere herein.*

 

**Forward Looking Statements**

 

Statementscontained herein that are not historical facts constitute “forward lookingstatements” as that term is defined in the Private Securities Litigation ReformAct of 1995. Words such as “believes,” “plans,” “anticipates,” “expects,”“will” and similar expressions are intended to identify forward lookingstatements.  Forward looking statements include, but are not limited to,statements relating to the sufficiency of our capital resources, changes incommodity prices, anticipated capital expenditures and our plans with respectto restaurant openings, closings, re-imagings and re-franchisings.  Allforward looking statements are subject to known and unknown risks,uncertainties and other factors which could cause actual results to differmaterially from those anticipated. These factors include: our highlycompetitive business environment; exposure to fluctuating commodity prices; risksassociated with the foodservice industry, such as changes in consumer tastesand adverse publicity resulting from food quality, illness, injury or otherhealth concerns; the ability to retain and attract new employees; governmentregulations; high geographic concentration in the Northeast and its attendantweather patterns; conditions needed to meet restaurant re-imaging and newopening targets; risks and uncertainties arising out of accounting adjustments;our ability to service our debt and other obligations; our ability to meetongoing financial covenants contained in our debt instruments, loan agreements,leases and other long-term commitments; and costs associated with improvedservice and other initiatives. Other factors that may cause actual results todiffer from the forward looking statements contained herein and that may affectour prospects in general are included in our other filings with the Securitiesand Exchange Commission. We are not obligated to update any forward lookingstatements, whether as a result of new information, future events or otherwise.

 

**Overview**

 

Our revenues are derived primarily from the operation offull-service restaurants, the distribution and sale of premium ice creamdesserts through retail locations and franchising. As of April 2, 2006, weoperated 312 full-service restaurants, franchised 207 full-service restaurantsand seven non-traditional units and manufactured a full line of premium icecream desserts distributed through more than 4,500 supermarkets and other retaillocations in 13 states.

 

24

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Followingis a summary of the Company-operated and franchised units:

 
| ** **            | ** ** | **For the Three Months Ended** | ** ** |
|-----------------------|------------|----------------------------------------------------|------------|
| ** **            | ** ** | **April 2,**                                  | ** ** | **April 3,** | ** ** |
| ** **            | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
|                  |       |                                               |       |   |   |
| Company Units:        |       |                                               |       |   |   |
| Beginning of period   |       | 314                                                |       | 347 |   |
| Openings              |       | 1                                                  |       | — |   |
| Refranchised closings |       | (1                                                 | )          | (7 | ) |
| Closings              |       | (2                                                 | )          | (3 | ) |
| End of period         |       | 312                                                |       | 337 |   |
|                  |       |                                               |       |   |   |
| Franchised Units:     |       |                                               |       |   |   |
| Beginning of period   |       | 213                                                |       | 195 |   |
| Refranchised openings |       | 1                                                  |       | 7 |   |
| Closings              |       | —                                             |       | (1 | ) |
| End of period         |       | 214                                                |       | 201 |   |

 

***Discontinued Operations***

 

During December 2005, we closed seven restaurantsand committed to a plan to sell the seven restaurants as well as fourrestaurants that were closed in 2004. During the three months ended April 2,2006, we sold five of these restaurants. At April 2, 2006, the remaining sixproperties and one additional property closed during the three months endedApril 2, 2006 met the criteria for “held for sale” as defined in SFAS No. 144.

 

In accordance with SFAS No. 144, the results ofoperations of the five properties that were disposed of during the three monthsended April 2, 2006 and the related net gain on the disposals, as well as theresults of operations of the properties held for sale at April 2, 2006, werereported separately as discontinued operations.

 

***Three Months Ended April 2, 2006 ComparedWith Three Months Ended April 3, 2005***

 

*Revenues:*

 

*Total revenues -* Total revenues increased $4.0 million, or 3.3%, to $125.7 million for thefirst quarter ended April 2, 2006 from $121.7 million for the same quarter in2005.

 

*Restaurant revenues -* Restaurant revenues increased $2.2 million, or 2.3%, to $95.3 million forthe three months ended April 2, 2006 from $93.1 million for the same period in2005. Comparable Company-operated restaurant revenues increased 4.8% from the2005 quarter to the 2006 quarter as increases occurred in all dayparts with thelargest occurring during the dinner and afternoon snack periods. Operating dayslost due to weather closings were lower in 2006 when compared to 2005 as mostmarkets in New England recorded higher than normal snowfall during 2005.Additionally, the opening of three new restaurants over the past 15 monthsincreased revenues by $1.1 million. These increases were partially offset bythe closing of two locations and the re-franchising of 16 locations over thepast 15 months resulting in declines of $0.2 million and $3.2 million,respectively, in restaurant revenues in the first quarter of 2006 as comparedto the same period in 2005.

 

Therewas one new restaurant opened during the first three months of 2006. There wereno new restaurants opened during the first three months of 2005; however, twomall restaurants were remodeled during the quarter.

 

25

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*Foodservice revenues -* Foodservice (product sales to franchisees and retail customers) revenuesincreased $1.6 million, or 6.3%, to $26.9 million for the three months endedApril 2, 2006 from $25.3 million for the three months ended April 3, 2005. Thisincrease was primarily due to a $1.3 million increase in franchised restaurantproduct revenue resulting from the increased number of franchised restaurantsin the first quarter of 2006 compared to the same period in 2005. Sales tofoodservice retail supermarket customers increased $0.3 million in the threemonths ended April 2, 2006 compared to the same period in 2005 as case volumein our retail supermarket business increased 8.0% for the three months endedApril 2, 2006 when compared to the three months ended April 3, 2005.Discounting and sales allowances were 3.2% greater as a percentage of grossrevenues in the 2006 period when compared to the same period in 2005.

 

*Franchise revenues -* Franchise royalty and fee revenues increased $0.2 million, or 9.1%, to$3.5 million for the three months ended April 2, 2006 compared to $3.3 millionfor the same period in 2005.

 

Royaltieson franchised sales increased $0.2 million in the first quarter of 2006 ascompared to the same period in 2005 due primarily to the opening of six newfranchise restaurants and 16 re-franchised restaurants during the last 15months. The closing of three under-performing locations during the same periodhad little impact. Comparable franchised revenues grew 0.6% from the threemonths ended April 3, 2005 to the three months ended April 2, 2006.

 

Initialfranchise fees declined by $0.1 million during the three months ended April 2,2006 when compared to the same period in 2005 due to the refranchising of sevenCompany-operated locations during the quarter ended April 3, 2005 versus onere-franchise opening during the quarter ended April 2, 2006.

 

Anincrease in rental income for leased and subleased franchise locations of $0.1million contributed to the higher revenues. There were 214 and 201 franchiseunits open at April 2, 2006 and April 3, 2005, respectively.

 

*Cost of sales:*

 

Cost of sales increased $1.5 million, or 3.2%, to $48.4 million for thethree months ended April 2, 2006 from $46.9 million for the same period in2005. Cost of sales as a percentage of total revenues was 38.5% for both threemonth periods. A shift in sales mix from Company-operated restaurant sales tofoodservice sales had an unfavorable impact on the overall cost of sales as apercentage of total revenues. Foodservice sales to franchisees and retailsupermarket customers (21.4% and 20.8% of total revenues for the three monthsended April 2, 2006 and April 3, 2005, respectively) have a higher food cost asa percentage of revenue, at 92.6%, than sales in Company-operated restaurantsto restaurant patrons. Foodservice retail sales promotional allowances,recorded as offsets to revenues, increased by 3.2% in the 2006 quarter as apercentage of gross retail sales when compared to the 2005 quarter as a result ofa competitive climate in the northeast. This increase also had an unfavorableimpact on the overall cost of sales as a percentage of total revenues. Theseincreases were mostly offset by lower cream costs and growth in franchiserevenues.

 

The cost of cream was approximately $0.7 million lower in the threemonth period ended April 2, 2006 when compared to the same period in 2005;however, market losses on cash-settled butter futures contracts were $0.2greater than the losses experienced on butter future contracts during the firstquarter of 2005. We enter into commodity option contracts from time to time tomanage dairy cost pressures. Our commodity option contracts do not meet hedgeaccounting criteria as defined by SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” and its related amendment, SFAS No. 138,“Accounting for Certain Derivative Instruments and Certain Hedging Activities”,and, accordingly, are marked to market each period with the resulting gains orlosses recognized in cost of sales.

 

Restaurant cost of sales as a percentage of restaurant revenuesdecreased to 26.8% in the first quarter of 2006 from 27.4% in the first quarterof 2005. The decrease in the 2006 quarter when compared to the 2005 quarter wasin part due to lower cream costs, re-formulation of certain products and menuprice increases.

 

Increases in franchise revenues, which have no associated product cost,reduced cost of sales as a percentage of total revenues by 0.1% for the threemonths ended April 2, 2006 when compared to the 2005 quarter. Manufacturingefficiencies improved in the current period when compared to the same period ayear ago.

 

26

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For the remainder of 2006, we expect that cream prices will be lowerthan the prices experienced in 2005. Additionally, the results derived fromoptions for butter futures contracts are more likely to be unfavorable in 2006when compared to 2005.

 

The table below shows the average monthly price of a poundof AA butter. Futures and options on AA butter are traded on the ChicagoMercantile Exchange and AA butter is the commodity used to derive the price ofcream. The prices shown were obtained from market quotes provided by the UnitedStates Department of Agriculture’s (“USDA”) Agricultural Marketing Service.

 
| **Month:**       | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| January          |       | $        | 1.3368     |     | $          | 1.5775   |       | $        | 1.4320     |     | $          | 1.0815   |       | $ | 1.3454 |   | $ | 1.2531 |   |
| February         |       | 1.1930   |       | 1.6145   |       | 1.7132   |       | 1.0405   |       | 1.2427   |       | 1.3852   |       |
| March            |       | 1.1663   |       | 1.5527   |       | 2.1350   |       | 1.0915   |       | 1.2473   |       | 1.5708   |       |
| April            |       |     |       | 1.4933   |       | 2.2204   |       | 1.0906   |       | 1.1712   |       | 1.8217   |       |
| May              |       |     |       | 1.4044   |       | 2.0363   |       | 1.0919   |       | 1.0590   |       | 1.8713   |       |
| June             |       |     |       | 1.5313   |       | 1.9300   |       | 1.1142   |       | 1.0427   |       | 1.9783   |       |
| July             |       |     |       | 1.6210   |       | 1.7458   |       | 1.1985   |       | 1.0302   |       | 1.8971   |       |
| August           |       |     |       | 1.6861   |       | 1.5408   |       | 1.1708   |       | 0.9752   |       | 2.0880   |       |
| September        |       |     |       | 1.6988   |       | 1.7656   |       | 1.1731   |       | 0.9635   |       | 2.0563   |       |
| October          |       |     |       | 1.6204   |       | 1.6475   |       | 1.1846   |       | 1.0315   |       | 1.4070   |       |
| November         |       |     |       | 1.4260   |       | 1.9238   |       | 1.2057   |       | 1.0425   |       | 1.3481   |       |
| December         |       |     |       | 1.3552   |       | 1.7083   |       | 1.2969   |       | 1.1198   |       | 1.2793   |       |
| Mathematical Avg |       | $        | 1.2320     |     | $          | 1.5484   |       | $        | 1.8166     |     | $          | 1.1450   |       | $ | 1.1059 |   | $ | 1.6630 |   |
|                  |            |          |            |          |            |          |            |          |            |          |            |          |            |  |  |  |  |  |  |  |

 

The cost of cream, the principal ingredient used in making ice cream,affects cost of sales as a percentage of total revenues, especially in foodservice’sretail business. A $0.10 increase in the cost of a pound of AA butter adverselyaffects our annual cost of sales by approximately $0.9 million. This adverseimpact may be offset by price increases or other factors. However, no assurancecan be given that we will be able to offset any cost increases in the futureand future increases in cream prices could have a material adverse effect onour results of operations. To minimize risk, alternative supply sourcescontinue to be pursued.

 

On September19, 2005, the Chicago Mercantile Exchange launched the firstelectronically traded, cash-settled butter futures contract.  This newfutures contract is designed to meet the needs of food and dairy companies thathave exposure to butterfat price risk but do not want to expose themselves tothe possibility of being compelled to take physical delivery of butter. The size of the contract is 20,000 pounds of AA butter, versus thetraditional butter futures contract, which is 40,000 pounds. The contract is cash settled based upon the USDA monthly weighted averageprice for butter in the United States.  With this new type of futurescontract, there is no risk of delivery of butter; therefore it offers usthe ability to hedge the price risk of cream (on a butter basis) without havingto take delivery of commodity butter.  We have evaluated this new hedginginstrument and believe it is an attractive way to hedge the price risk relatedto cream.  At April 2, 2006, we held 83 contracts spread over the remainingmonths of the year. These contracts correspond to approximately 20% of ouranticipated cream purchases for the remainder of the year.

 

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*Labor and benefits:*

 

Laborand benefits increased $0.9 million, or 2.6%, to $36.0 million for the threemonths ended April 2, 2006 from $35.1 million for the three months ended April3, 2005. Labor and benefits as a percentage of total revenues decreased to28.6% in the 2006 quarter from 28.8% in the 2005 quarter. As a percentage ofrestaurant revenues, labor and benefits increased to 37.8% in the 2006 quarterfrom 37.7% in the 2005 quarter. The increase in labor dollars was primarily aresult of higher general manager bonus and restaurant pension expense. Revenueincreases derived from franchised locations and retail customers, which do nothave any associated restaurant labor and benefits, contributed to the lowerrestaurant labor and benefits as a percentage of total revenues.

 

*Operating expenses:*

 

Operatingexpenses increased $0.6 million, or 2.6%, to $24.0 million for the three monthsended April 2, 2006 from $23.4 million for the three months ended April 3,2005. Operating expenses as a percentage of total revenues were 19.1% and 19.2%in the 2006 and 2005 periods, respectively. The dollar increase resulted fromhigher advertising and restaurant utility costs of $0.5 million and $0.4million, respectively. These increases were partially offset by lower costs forsnow removal and maintenance as a result of better weather in the 2006 periodwhen compared to the 2005 period.

 

*General and administrative expenses:*

 

Generaland administrative expenses were $11.1 million and $9.4 million for the threemonths ended April 2, 2006 and April 3, 2005, respectively. General andadministrative expenses as a percentage of total revenues increased to 8.8% inthe 2006 period from 7.8% in the 2005 period. The $1.7 million increase isprimarily the result of increases in bonuses ($0.5 million), severance costs($0.3 million), salaries ($0.4 million), pension costs ($0.1 million) and legalfees ($0.1 million).

 

*Write-downs of property and equipment:*

 

Duringthe three months ended April 2, 2006, we determined that the carrying value ofone restaurant property exceeded its estimated fair values less costs to selland the carrying value was reduced by $0.2 million accordingly.

 

*Stock-based compensation expense:*

 

On January 2, 2006, we adopted the Financial Accounting StandardsBoard’s Statement of Financial Accounting Standard No. 123 (revised 2004), “*Share-Based Payment,” (“*SFAS No. 123R”),using the modified prospective application method. Compensation cost iscalculated on the date of grant using the fair value of the options asdetermined by the Black-Scholes valuation model. The Black-Scholes valuationmodel requires us to make several assumptions including volatility. We haveconsidered the guidance in SFAS No. 123R and believe that our historicalestimated volatility is materially indicative of expectations about futurevolatility.

 

During the three months ended April 2, 2006, we recognized $0.1 millionof total stock-based compensation expense as a result of the adoption of SFASNo. 123R, which was included in general and administrative expenses. We expectto recognize an additional $0.4 million of stock compensation expense duringthe remainder of 2006 related to the awards outstanding at April 2, 2006.

 

Prior to the adoption of SFAS No. 123R, we accounted for share-basedpayments to employees using APB Opinion No. 25’s, “*Accounting for Stock Issued to Employees*,” intrinsic valuemethod and, as such, generally recognized no compensation cost for employeestock options. The adoption of SFAS No. 123R under the modified prospectiveapplication method allowed us to recognize compensation cost (a) based on therequirement of SFAS 123R for all share-based payments granted after theeffective date and (b) based on the requirements of SFAS No. 123 for all awardsgranted to employees prior to the effective date of SFAS No. 123R that remainunvested on the effective date. Under the modified prospective applicationmethod, prior periods were not restated for the effect of SFAS No. 123R. Weused the straight-line attribution method to recognize expense for all grantsmade.

 

28

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OnDecember 20, 2004, our Board of Directors approved the vesting of alloutstanding and unvested options for our 1997 Plan and our 2003 Incentive Plan.This action was taken to reduce, or eliminate to the extent permitted, thetransition expense related to outstanding stock option awards under SFAS No.123R. The 259,850 options that were vested included 145,239 options withexercise prices greater than our closing stock price on the modification date.Under the accounting guidance of APB Opinion No. 25, the accelerated vestingresulted in stock-based compensation cost of $9,400 (net of related income taxbenefit of $6,600), which was included in net loss for the year ended January2, 2005. Additionally, the effect of the accelerated vesting in the Company’spro-forma disclosure was incremental stock-based compensation of approximately$0.7 million (net of related income tax benefit of $0.5 million). Stock-basedcompensation expense of $0.4 million and $0.1 million would otherwise have beenrecognized in accordance with SFAS No. 123R in our consolidated statements ofoperations during the 2006 and 2007 fiscal years, respectively.

 

As of April 2, 2006, there was $1.1 million of total unrecognizedcompensation cost related to unvested share-based awards. That cost is expectedto be recognized over a weighted-average period of 2.7 years.

 

See Note 3 of Notes to Condensed Consolidated Financial Statementscontained in Item 1 of this Quarterly Report on Form 10-Q for furtherinformation regarding our adoption of SFAS No. 123R.

 

*Depreciation and amortization:*

 

Depreciation and amortization was $5.8 million and $6.2 million for thethree months ended April 2, 2006 and April 3, 2005, respectively. Depreciationand amortization as a percentage of total revenues was 4.6% and 5.1% in the2006 and 2005 quarters, respectively. The 2005 quarter was higher primarily dueto a reduction of the lives of leasehold improvement assets as a result ofmanagement decisions to close certain leased properties sooner than previouslyanticipated.

 

*Gain on franchise sales of restaurantoperations and properties:*

 

Gain on franchise sales of restaurant operations and properties was$0.9 million and $1.3 million in the three months ended April 2, 2006 and April3, 2005, respectively. During the three months ended April 2, 2006, werecognized a gain of $0.9 million associated with the sale of certain equipmentassets, lease and sublease rights and franchise rights in one existingFriendly’s restaurant. During the three months ended April 3, 2005, werecognized a gain of $1.3 million associated with the sale of certain equipmentassets, lease and sublease rights and franchise rights in one existingFriendly’s restaurant.

 

29

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

 

The loss on disposals of other property and equipment net was $0.1million for both three month periods ended April 2, 2006 and April 3, 2005. Thetable below identifies the components of the loss on disposals of otherproperty and equipment, net as shown on the accompanying condensed consolidatedstatements of operations (in thousands):

 
| ** **                                              | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                              | ** ** | **April 2,**                                  | ** ** | **April 3,** | ** ** |
| ** **                                              | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| ** **                                              | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Restaurant equipment assets retired due to  replacement |       | $                                                  | 75         |   | $ | 52 |   |
| Loss due to restaurant fire                             |       | 30                                                 |       | — |   |
| All other                                               |       | 4                                                  |       | 17 |   |
| Loss on disposals of other property and  equipment, net |       | $                                                  | 109        |   | $ | 69 |   |

 

*Interest expense, net:*

 

Interestexpense, net of capitalized interest and interest income was $5.4 million and$5.3 million for the three months ended April 2, 2006 and April 3, 2005,respectively. The increase in interest expense in the first quarter of 2006compared to the same period in 2005 is primarily due to a fee of $0.2 millionassociated with the assignment our Credit Facility from Bank of America andcertain other lenders to Wells Fargo Foothill. This fee was partially offset byreduced amounts of interest on capital leases and lower interest rates on ourmortgage financing. Total outstanding debt, including capital lease and financeobligations, decreased from $235.1 million at April 3, 2005 to $233.2 millionat April 2, 2006.

 

*Benefit from income taxes:*

 

As a result ofthe loss for the period ended April 2, 2006 and our intent to record a full valuationallowance on tax benefits until we can sustain an appropriate level ofprofitability, the benefit from income taxes was zero, an effective tax rate of0%, for the three months ended April 2, 2006. The benefit from income taxes was$0.7 million, an effective tax rate of 25.0%, for the three months ended April3, 2005.

 

*Loss from continuing operations:*

 

Lossfrom continuing operations was $4.4 million and $2.6 million for the threemonths ended April 2, 2006 and April 3, 2005, respectively, for the reasonsdiscussed above.

 

30

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*Income (loss) from discontinued operations:*

 

Inaccordance with SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets,” the results of operations of a component of an entity thateither has been disposed of or is classified as held for sale and any relatedgain (loss) on the sales are reported in discontinued operations if both of thefollowing conditions are met: (a) the operations and cash flows of the componenthave been (or will be) eliminated from the ongoing operations of the entity asa result of the disposal transaction and (b) the entity will not have anysignificant continuing involvement in the operations of the component after thedisposal transaction.

 

Income(loss) from the discontinued operations of properties that were disposed ofduring the three months ended April 2, 2006 or classified as held for sale atApril 2, 2006 consisted of the following (in thousands):

 
| ** **                                  | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                  | ** ** | **April 2,**                                  | ** ** | **April 3,** | ** ** |
| ** **                                  | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| ** **                                  | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Net sales                                   |       | $                                                  | —     |   | $ | 2,985 |   |
|                                        |       |                                               |       |   |   |
| Operating loss                              |       | $                                                  | (248       | ) | $ | (623 | ) |
| Gain on disposals of property and equipment |       | 2,864                                              |       | — |   |
| Income tax benefit                          |       | —                                             |       | 255 |   |
| Income (loss) from discontinued operations  |       | $                                                  | 2,616      |   | $ | (368 | ) |

 

**Liquidity and Capital Resources**

 

*General:*

 

Our primary sources of liquidity and capital resources are cashgenerated from operations and, if needed, borrowings under our $35 millionrevolving credit facility (the “Credit Facility”). 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. Other sources of cash are sales of under-performingexisting restaurant properties and other assets and re-franchising (to theextent FICC’s and its subsidiaries’ debt instruments permit). The amount ofdebt financing that FICC is able to incur is limited by the terms of our CreditFacility and 8.375% senior notes indenture. Below was the financing status ofour operating restaurants as of April 2, 2006:

 
| Owned land and building, mortgaged     |   | 61  |   |
|----------------------------------------|--------|-----|--------|
| Leased land, owned building, mortgaged |   | 1   |   |
| Sold and leased back                   |   | 59  |   |
| Owned land and building                |   | 17  |   |
| Leased land, owned building            |   | 69  |   |
| Leased land and building               |   | 105 |   |
| Total Company-operated restaurants     |   | 312 |   |

 

The restaurants above not identified as owned land and building,mortgaged or sold and leased back secure our obligations under the CreditFacility. Of the 17 restaurant properties identified as owned land andbuilding, six were available to be sold.

 

In addition to the 61 properties identified as owned land and building,mortgaged, we own and mortgage an additional 11 properties in this categorythat are operated by franchisees.

 

In addition to our 312 operating restaurants, we have seven closedproperties that are classified as held for sale in accordance with SFAS No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

 

31

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*Operating Cash Flows:*

 

Net cashprovided by operating activities was $2.7 million and $3.2 million for thethree months ended April 2, 2006 and April 3, 2005, respectively. Net lossexcluding the gains on sales of fixed assets and other non-cash expensescontributed $0.3 million to the $0.5 million decline in cash provided byoperating activities. Changes in working capital reduced cash by an additional$0.2 million as favorable changes in accounts receivable and notes receivablewere more than offset by unfavorable changes in inventory and accounts payable.We increased our inventory of ice cream as cream prices steadily declinedduring the quarter.

 

Wehad a working capital deficit of $12.4 million and $15.9 million as of April 2,2006 and January 1, 2006, respectively. Our working capital deficit includesassets classified as held for sale in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets.” The working capital needs of companies engaged inthe restaurant industry are generally low and as a result, restaurants arefrequently able to operate with a working capital deficit because: (i)restaurant operations are conducted primarily on a cash (and cash equivalent)basis with a low level of accounts receivable; (ii) rapid turnover allows alimited investment in inventories; and (iii) cash from sales is usuallyreceived before related expenses for food, supplies and payroll are paid.

 

*Investing Cash Flows:*

 

Netcash provided by investing activities was $3.4 million for the first quarterended April 2, 2006 as compared to net cash used in investing activities of$0.8 million for the first quarter ended April 3, 2005.

 

Duringboth three month periods ended April 2, 2006 and April 3, 2005, we spent $2.4million on capital expenditures, of which $2.2 million and $2.0 million,respectively, was spent on restaurant operations. Capital expenditures wereoffset by net proceeds from the sales of property and equipment of $5.8 millionand $1.7 million for the quarters ended April 2, 2006 and April 3, 2005,respectively.

 

As ofJanuary 1, 2006, we had 11 restaurants that were reported as “held for sale” inaccordance with SFAS No. 144. During the three months ended April 2, 2006, wesold five of these restaurants. In accordance with SFAS No. 144, the results ofoperations of the five properties that were disposed of during the three monthsended April 2, 2006 and the related net gain on the disposals, as well as theresults of operations of the properties held for sale at April 2, 2006, werereported separately as discontinued operations in the accompanying condensedconsolidated statements of operations for all periods presented. Operatinglosses before depreciation from these properties were $0.2 million and $0.4million during the three months ended April 2, 2006 and April 3, 2005,respectively. Gross proceeds on the disposals of the five properties soldduring the 2006 quarter were $5.1 million. There were no properties sold during the 2005 quarter.

 

During thefirst quarter of 2006, we completed one re-franchising transaction in which anexisting franchisee purchased one existing Company-operated restaurant andagreed to develop a total of two new restaurants in future years. Grossproceeds from this transaction were $1.2 million, of which $0.1 million was forfranchise fees and $1.1 million was for the sale of certain assets andleasehold rights.

 

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During thefirst quarter of 2005, we completed one re-franchising transaction in which anexisting franchisee purchased one existing Company-operated restaurant andagreed to develop a total of three new restaurants in future years. Gross proceedsfrom this transaction were $1.8 million, of which $0.1 million was forfranchise fees and $1.7 million was for the sale of certain assets andleasehold rights. In addition, we completed three transactions in which threeformer employees received franchises to operate six existing restaurants withoptions to purchase the restaurants within two years. If the options areexercised, one franchisee will also agree to develop two new restaurants infuture years. Proceeds from option transactions will be recognized uponpurchase.

 

*Financing Cash Flows:*

 

Netcash used in financing activities was $0.9 million and $4.7 million for thefirst quarters ended April 2, 2006 and April 3, 2005, respectively. There were$4.0 million of revolving credit loans outstanding at the end of 2004 that wererepaid in the first quarter of 2005. There were no revolving credit loansoutstanding at the end of 2005.

 

*Outstanding Debt:*

 

*Sale/Leasebackand Mortgage Financings*. In December 2001, wecompleted a financial restructuring plan which included the repayment of allamounts outstanding under our then existing credit facility and the purchase ofapproximately $21.3 million of our 10.5% senior notes with the proceeds from$55.0 million in long-term mortgage financing (the “Mortgage Financing”) and a$33.7 million sale and leaseback transaction (the “Sale/Leaseback Financing”).

 

In connection with the Sale/LeasebackFinancing, we sold 44 properties operating as Friendly’s restaurants andentered into a master lease with the buyer to lease the 44 properties for aninitial term of 20 years under a triple net lease. There are four five-yearrenewal options and lease payments are subject to escalator provisions everyfive years based upon increases in the Consumer Price Index.

 

Intereston $10.0 million of the original $55.0 million from the Mortgage Financing isvariable (“Variable Mortgages”) and the remaining $45.0 million of the original$55.0 million from the Mortgage Financing bears interest at a fixed annual rateof 10.16% (“Fixed Mortgages”). The Fixed Mortgages have a maturity date ofJanuary 1, 2022 and are amortized over 20 years.

 

On December 30, 2005, we completed a refinancing of the VariableMortgages (the “Variable Refinancing”). Under the terms of the loan agreementfor the Variable Refinancing, we borrowed an aggregate sum of $8.5 million. Theinterest rate is variable and is the sum of the 90-day LIBOR rate in effect(5.0% at April 2, 2006) plus 4% on an annual basis. Changes in the interestrate are calculated monthly and recognized annually when the monthly paymentamount is adjusted. Changes in the monthly payment amounts owed due to interestrate changes are reflected in the principal balances, which are re-amortizedover the remaining life of the mortgages. The loans under the VariableRefinancing have a maturity date of January 1, 2020 and are being amortizedover 14 years.

 

The primary purposes of the Variable Refinancing were to (i) reduce thevariable interest rate on the Variable Mortgages from LIBOR plus 6% on an annualbasis to LIBOR plus 4% on an annual basis, (ii) enable the partial prepaymentof the loans, subject to applicable prepayment premiums during the first threeyears and an agreed upon release value for properties released in connectionwith partial prepayments, and (iii) permit partial lien releases on theproperties subject to the loans upon partial prepayments. In addition, inconnection with this transaction, we prepaid two mortgage loans from the lenderin the aggregate amount of $1.0 million from existing cash.

 

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Pursuant to the terms of the Mortgage Financing, we may sell propertiessecuring our obligations provided that other properties are substituted inplace of the sold properties. The substituted properties must meet certainrequirements under the terms of the Mortgage Financing. In August 2005,proceeds of $0.4 million and $2.7 million were received in connection with thesale of two mortgaged properties and $0.4 million and $1.3 million was placedin escrow. As of January 1, 2006, these balances were held as collateral andwere included in restricted cash on the accompanying condensed consolidatedbalance sheet as of January 1, 2006. In connection with the VariableRefinancing, the mortgage on one of these properties was released and the $0.4million was released from escrow during the first quarter of 2006. Asubstitution property for the second property must be in place to secure ourobligations no later than May 31, 2006. As of April 2, 2006, the balance of$1.3 million that was held as collateral pending property substitution wasincluded in restricted cash on the accompanying condensed consolidated balancesheet as of April 2, 2006.

 

In September 2005, we acquired additional financing secured by ournewly constructed Milford, MA restaurant (the “Milford Mortgage”). Thefinancing provided for a real estate improvement and equipment loan. The realestate improvement loan has a principal balance of $0.8 million and isamortized over 15 years with a balloon payment due on October 1, 2010. Theequipment loan has a principal balance of $0.3 million and is amortized overseven years with a balloon payment due on October 1, 2010. The interest rate isvariable and is the sum of the 90-day LIBOR rate in effect (5.0% at April 2,2006) plus 4% on an annual basis. Changes in the interest rate are calculatedmonthly and recognized annually when the monthly payment amount is adjusted.Changes in the monthly payment amounts owed due to interest rate changes arereflected in the principal balances, which are re-amortized over the remaininglife of the mortgages. The variable rate notes are subject to prepaymentpenalties during the first three years.

 

Allmortgage financings are subject to annual covenants, including various minimumfixed charge coverage ratios. We were in compliance with the covenants for theVariable Mortgages and the Fixed Mortgages as of January 1, 2006. As of January1, 2006, we were not in compliance with the fixed charge coverage ratio relatedto the Milford Mortgage. We obtained a waiver from the Milford Mortgage lenderon March 7, 2006 waiving this covenant requirement for the year ended January1, 2006.

 

*8.375% SeniorNotes.*In 2003 and 2004, we purchased orredeemed all of the remaining outstanding 10.5% senior notes in a series oftransactions. In February 2004, we announced a cash tender offer and consentsolicitation for $176 million of our 10.5% senior notes to be financed with theproceeds from a $175 million private offering of new 8.375% senior notes (the“Senior Notes”), available cash and our Credit Facility. In March 2004, $127.4million of aggregate principal amount of 10.5% senior notes were purchased atthe tender offer and consent solicitation price of 104% of the principal amountand $0.5 million of aggregate principal amount of 10.5% senior notes werepurchased at the tender offer price of 102% of the principal amount. In April2004, the remaining $48.1 million of 10.5% senior notes were redeemed inaccordance with the 10.5% senior notes indenture at 103.5% of the principalamount.

 

The $175 million of Senior Notes issued in March 2004 are unsecuredsenior obligations of FICC, guaranteed on an unsecured senior basis by FICC’sFriendly’s Restaurants Franchise, Inc. subsidiary, but are effectivelysubordinated to all secured indebtedness of FICC, including the indebtednessincurred under our Credit Facility. The Senior Notes mature on June 15, 2012.Interest on the Senior Notes is payable at 8.375% per annum semi-annually on June15 and December 15 of each year. The Senior Notes are redeemable, in whole orin part, at any time on or after June 15, 2008 at FICC’s option at redemptionprices from 104.188% to 100.00%, based on the redemption date. In addition, atany time prior to June 15, 2007, FICC may redeem, subject to certainconditions, up to 35% of the aggregate principal amount of the Senior Noteswith the proceeds of one or more qualified equity offerings, as defined, at aredemption price of 108.375% of the principal amount, plus accrued interest.

 

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*RevolvingCredit Facility.*We have a $35.0million Credit Facility which is available for borrowings to provide workingcapital, for letters of credit and for other corporate needs. As of April 2,2006 and January 1, 2006, total letters of credit outstanding were $17.1million and $16.0 million, respectively. During 2006 and 2005, there were nodrawings against the letters of credit. The revolving credit loans bearinterest at our option at either (a) the base rate plus the applicablemargin as in effect from time to time (the “Base Rate”) (10.25% at April 2,2006) or (b) the Eurodollar rate plus the applicable margin as in effectfrom time to time (the “Eurodollar Rate”) (9.32% at April 2, 2006). As of April2, 2006 and January 1, 2006, there were no revolving credit loans outstanding.As of April 2, 2006 and January 1, 2006, $17.9 million and $19.0 million,respectively, was available for borrowing.

 

TheCredit Facility has an annual “clean-up” provision which obligates us to repayin full any and all outstanding revolving credit loans for a period of not lessthan 15 consecutive days during the period beginning on or after May 1 andending on or before June 15 (or the next business day, if, in any year, June 15is not a business day) of each calendar year, such that immediately followingthe date of such repayment, the amount of all outstanding revolving creditloans shall be zero.

 

The Credit Facility matures on June 30, 2007. The Credit Facilityincludes certain restrictive covenants including limitations on indebtedness,restricted payments such as dividends and stock repurchases, liens, mergers,investments and sales of assets and of subsidiary stock. Additionally, theCredit Facility limits the amount which we may spend on capital expenditures,restricts the use of proceeds, as defined, from asset sales and requires thatwe comply with certain financial covenants. On March 15, 2006, we amended andrestated the Credit Facility as of December 30, 2005 to, among other things,(i) revise certain financial covenants beginning with the fourth quarter of2005 and extending through the Credit Facility maturity date of June 30, 2007(including leverage, interest coverage,minimum EBITDA and the deletion of the tangible net worth covenant) and(ii) permit certain transactions to be excluded from our annual capitalexpenditures limit. We were in compliance with the covenants in the CreditFacility as of April 2, 2006.

 

We anticipate requiring capital in the future principally to maintainexisting restaurant and plant facilities and to continue to renovate andre-image existing restaurants. We anticipate that capital expenditures for 2006will be between $18.0 million and $26.0 million in the aggregate, of which weexpect to spend between $14.0 million and $18.0 million on restaurants. Ouractual 2006 capital expenditures may vary from these estimated amounts. Webelieve that the combination of the funds generated from operating activities andborrowing availability under our Credit Facility will be sufficient to meet ouranticipated operating requirements, debt service requirements, leaseobligations, capital requirements and obligations associated with the corporaterestructurings.

 

There have been no material changes to our contractual obligations andcommitments from those disclosed in our 2005 Annual Report on Form 10-K.

 

**Seasonality**

 

Dueto the seasonality of ice cream consumption, and the effect from time to timeof weather on patronage of the restaurants, our revenues and operating incomeare typically higher in our second and third quarters.

 

**Geographic Concentration**

 

Approximately97% of the Company-operated restaurants are located, and substantially all ofits retail sales are generated, in the Northeast. As a result, a severe orprolonged economic recession or changes in demographic mix, employment levels,population density, weather, real estate market conditions or other factorsspecific to this geographic region may adversely affect us more than certain ofour competitors which are more geographically diverse.

 

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**Critical Accounting Estimates**

 

The discussion and analysis of our consolidated financial condition andresults of operations are based upon our interim condensed consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the U.S. The preparation of these condensedconsolidated financial statements requires us to make estimates and judgmentsthat affect the reported amounts of assets, liabilities, revenues and expenses,and related disclosure of contingent assets and liabilities. On an on-goingbasis, we evaluate our estimates, including those related to revenue recognition,insurance reserves, recoverability of accounts receivable, stock compensationexpense, income tax valuation allowances and pension and other post-retirementbenefits expense. We base our estimates on historical experience and on variousother assumptions that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources.

 

The critical accounting estimates that we believe affect the moresignificant judgments and estimates used in the preparation of our condensedconsolidated financial statements presented in this report are described in ourManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and in the Notes to the consolidated financial statements includedin our Annual Report on Form 10-K for the fiscal year ended January 1, 2006.The only material change to our critical accounting estimates relates tostock-based compensation and is described below.

 

Actual results may differ from these estimates under differentassumptions or conditions. Any differences may have a material impact on ourfinancial condition and results of operations. For a discussion of how these andother factors may affect our business, see the “Forward Looking Statement”above and other factors included in our other filings with the Securities andExchange Commission.

 

*Stock-Based Compensation –*

 

The adoption of SFAS No. 123R in the first quarter of fiscal 2006requires that stock-based compensation expense associated with stock options berecognized in the statement of operations, rather than being disclosed in a proforma footnote to the consolidated financial statements. Determining the amountof stock-based compensation to be recorded requires us to develop estimates tobe used in calculating the grant-date fair value of stock options. We calculatethe grant-date fair values using the Black-Scholes valuation model. The use ofvaluation models requires us to make estimates of the following assumptions:

 

Expected volatility - we are responsible for estimating volatility andhave used historical volatility to estimate the grant-date fair value of stockoptions. Management considered the guidance in SFAS No. 123R and believes thatthe historical estimated volatility is materially indicative of expectationsabout future volatility. In general, the higher the expected volatility used inthe Black-Scholes valuation model, the higher the grant-date fair value of theoption.

 

Expected term - we use historical employee exercise and optionexpiration data to estimate the expected term assumption for the Black-Scholesgrant-date valuation. We believe that this historical data is currently thebest estimate of the expected term of a new option. Currently stock options areonly issued to corporate officers and directors. In general, the longer theexpected term used in the Black-Scholes valuation model, the higher thegrant-date fair value of the option.

 

Risk-free interest rate - the yield on zero-coupon U.S. Treasurysecurities for a period that is commensurate with the expected term assumptionis used as the risk-free interest rate.

 

Expected dividend yield - we have not paid any dividends inthe last five years and currently intend to retain any earnings to financefuture growth and, therefore, do not anticipate paying any cash dividends onour common stock in the foreseeable future.

 

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The amount of stock-based compensation recognized during a period isbased on the value of the portion of the awards that are ultimately expected tovest. SFAS No. 123R requires forfeitures to be estimated at the time of grantand revised, if necessary, in subsequent periods if actual forfeitures differfrom those estimates. The term “forfeitures” is distinct from “cancellations”or “expirations” and represents only the unvested portion of the surrenderedoption. We currently expect, based on an analysis of our historical forfeitures,that approximately 97% of our options will actually vest, and therefore haveapplied an annual forfeiture rate of 3% to all unvested options as of April 2,2006. This analysis will be re-evaluated quarterly and the forfeiture rate willbe adjusted as necessary. Ultimately, the actual expense recognized over thevesting period will only be for those shares that vest.

 

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

 

There has been no material change in our market riskexposure since the filing of the 2005 Annual Report on Form 10-K.

 

**Item 4. Controls and Procedures**

 

As ofApril 2, 2006, an evaluation was performed under the supervision and with theparticipation of our management, including our Chief Executive Officer (“CEO”)and Chief Financial Officer (“CFO”), of the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Rule13a-15(e) and Rule 15d-15(e) under the Exchange Act). Based on that evaluation,our CEO and CFO concluded that our disclosure controls and procedures wereeffective as of April 2, 2006.

 

There were no significant changes in our internal controlover financial reporting that occurred during our last fiscal quarter that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PART II – OTHER INFORMATION**

 

**Item 1A. Risk Factors**

 

There have been no material changes to our risk factors from thosedisclosed in our 2005 Annual Report on Form 10-K.

 

**Item 6. Exhibits**

 

(a)   Exhibits

 

The exhibit index is incorporated by reference herein.

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Actof 1934, the registrant has duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

 

 
|   | Friendly  Ice Cream Corporation |
|--------|---------------------------------|
|   |                            |
|   |                            |
|   | By:                             | /s/PAUL V. HOAGLAND |   |
|   |                            | Name: Paul V. Hoagland |
|   |                            | Title: Executive Vice President of  Administration |
|   |                            | and Chief Financial Officer |
|   |                            |  (Principal Financial Officer) |
|   |                            |   |
|   | Date:                           | May 4, 2006 |

 

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**EXHIBITINDEX**

 
| 4.9    | Amended and Restated Revolving Credit  Agreement dated as of March 15, 2006 (Incorporated by reference to Exhibit  4.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended January  1, 2006, File No. 001-13579).                      |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1   | Memorandum of Agreement Between Allan J.  Okscin and Friendly Ice Cream Corporation effective January 23, 2006  (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on  Form 8-K filed with the Commission on January 26, 2006).* |
| 31.1   | Certification pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 signed by John L. Cutter.                                                                                                                                                            |
| 31.2   | Certification pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 signed by Paul V. Hoagland.                                                                                                                                                          |
| 32.1   | Certification pursuant to 18 U.S.C. Section  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  signed by John L. Cutter and Paul V. Hoagland.                                                                                       |
|   |                                                                                                                                                                                                                                                          |
|        |
|   | * - Management Contract or Compensatory  Plan or Arrangement                                                                                                                                                                                                  |

 

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