**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q/A**

** **

**(AmendmentNo. 1)**

** **

| **ý    QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d)** |
|---------------------------------------------------------------------------------|
| **OF THE SECURITIES AND EXCHANGE ACT OF 1934**                                  |

** **

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

** **

**OR**

** **

| **o    TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d)** |
|-----------------------------------------------------------------------------|
| **OF THE SECURITIES AND EXCHANGE ACT OF 1934**                              |

 

**For thetransition period from           to**

 

 

**CommissionFile No. 0-3930**

**FRIENDLY ICE CREAM CORPORATION**

(Exact name of registrantas specified in its charter)

 

| **Massachusetts**         | **5812**                                                    | **04-2053130**                         |
|---------------------------|-------------------------------------------------------------|----------------------------------------|
| (State of

Incorporation) | (Primary  Standard Industrial

Classification  Code Number) | (I.R.S. Employer

Identification  No.) |

 

**1855 Boston Road**

**Wilbraham, Massachusetts 01095**

**(413) 543-2400**

 

(Address, including zipcode, and telephone number, including

area code, ofregistrant’s principal executive offices)

 

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

 

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

 

| **Class**                     |   | **Outstanding at April 29, 2001** |
|-------------------------------|--------|-----------------------------------|
|                          |   |                              |
| Common Stock, $.01 par  value |   | 7,364,283 shares                  |

 

** **

 

----

 

**IntroductoryNote - Restatements**

 

                 Friendly Ice Cream Corporation (the “Company”) as a result of anextensive review of its accounting policies determined that its policy forrecording restaurant advertising expense, included in operating expenses,although proper for annual reporting, needed to be revised for the Company’squarterly reporting.  Accordingly, theaccompanying financial statements and related disclosures have been restated toreflect this accounting change. This Form 10-Q/A does not modify or update anydisclosures except as required to reflect the results of the restatementdiscussed above on current period and prior period financial information.

** **

** **

** **

** **

** **

** **

** **

 

1

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**PART I — FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

**FRIENDLY ICE CREAM CORPORATION ANDSUBSIDIARIES**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

(In thousands)

 
|                                                            |   | **April 1,  2001** |    | **December  31,  2000** |   |
|-----------------------------------------------------------------|--------|--------------------|---------|-------------------------|--------|
|                                                            |   | **(unaudited)**    |    |                    |   |
|                                                            |   |               |    |                    |   |
| ASSETS                                                          |   |               |    |                    |   |
|                                                            |   |               |    |                    |   |
| CURRENT ASSETS:                                                 |   |               |    |                    |   |
| Cash and cash  equivalents                                      |   | $                  | 8,769   |                    | $      | 14,584 |   |
| Restricted cash                                                 |   | 775                |    | 1,737                   |   |
| Accounts  receivable, net                                       |   | 5,559              |    | 6,157                   |   |
| Inventories                                                     |   | 14,080             |    | 11,570                  |   |
| Deferred income  taxes                                          |   | 10,395             |    | 10,395                  |   |
| Prepaid expenses  and other current assets                      |   | 2,278              |    | 2,799                   |   |
| TOTAL CURRENT  ASSETS                                           |   | 41,856             |    | 47,242                  |   |
|                                                            |   |               |    |                    |   |
| PROPERTY AND  EQUIPMENT, net                                    |   | 218,674            |    | 226,865                 |   |
| INTANGIBLES AND  DEFERRED COSTS, net                            |   | 21,185             |    | 21,529                  |   |
| OTHER ASSETS                                                    |   | 3,240              |    | 2,050                   |   |
|                                                            |   |               |    |                    |   |
| TOTAL ASSETS                                                    |   | $                  | 284,955 |                    | $      | 297,686 |   |
|                                                            |   |               |    |                    |   |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                      |   |               |    |                    |   |
|                                                            |   |               |    |                    |   |
| CURRENT  LIABILITIES:                                           |   |               |    |                    |   |
| Current  maturities of long-term debt                           |   | $                  | 8,771   |                    | $      | 13,029 |   |
| Current  maturities of capital lease and finance obligations    |   | 2,053              |    | 2,143                   |   |
| Accounts payable                                                |   | 19,633             |    | 20,100                  |   |
| Accrued salaries  and benefits                                  |   | 11,485             |    | 10,956                  |   |
| Accrued interest  payable                                       |   | 8,685              |    | 3,515                   |   |
| Insurance  reserves                                             |   | 13,191             |    | 13,095                  |   |
| Restructuring  reserve                                          |   | 4,844              |    | 5,571                   |   |
| Other accrued  expenses                                         |   | 12,603             |    | 14,262                  |   |
| TOTAL CURRENT  LIABILITIES                                      |   | 81,265             |    | 82,671                  |   |
|                                                            |   |               |    |                    |   |
| DEFERRED INCOME  TAXES                                          |   | 11,762             |    | 13,276                  |   |
| CAPITAL LEASE  AND FINANCE OBLIGATIONS, less current maturities |   | 7,741              |    | 8,223                   |   |
| LONG-TERM DEBT,  less current maturities                        |   | 269,066            |    | 275,435                 |   |
| OTHER LONG-TERM  LIABILITIES                                    |   | 16,946             |    | 18,064                  |   |
|                                                            |   |               |    |                    |   |
| COMMITMENTS AND  CONTINGENCIES                                  |   |               |    |                    |   |
|                                                            |   |               |    |                    |   |
| STOCKHOLDERS’  DEFICIT:                                    |   |               |    |                    |   |
| Common stock                                                    |   | 74                 |    | 74                      |   |
| Additional  paid-in capital                                     |   | 139,081            |    | 138,988                 |   |
| Accumulated  deficit                                            |   | (240,980           | )       | (239,045                | )      |
| TOTAL  STOCKHOLDERS’ DEFICIT                               |   | (101,825           | )       | (99,983                 | )      |
|                                                            |   |               |    |                    |   |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ DEFICIT               |   | $                  | 284,955 |                    | $      | 297,686 |   |

 

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

 

 

2

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**FRIENDLYICE CREAM CORPORATION AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 

(Unaudited)

(In thousands, except pershare data)

 
|                                                             |   | **For the  Three Months Ended** |    |
|------------------------------------------------------------------|--------|---------------------------------|---------|
|                                                             |   | **April 1,  2001**              |    | **April 2,  2000** |   |
|                                                             |   |                            |    |   |   |
| REVENUES                                                         |   | $                               | 125,719 |   | $ | 144,089 |   |
|                                                             |   |                            |    |   |   |
| COSTS AND  EXPENSES:                                             |   |                            |    |   |   |
| Cost of sales                                                    |   | 42,060                          |    | 44,822 |   |
| Labor and  benefits                                              |   | 39,676                          |    | 48,176 |   |
| Operating  expenses                                              |   | 24,944                          |    | 30,860 |   |
| General and  administrative expenses                             |   | 9,332                           |    | 11,376 |   |
| Restructuring  costs                                             |   | —                          |    | 12,057 |   |
| Write-downs of  property and equipment                           |   | —                          |    | 17,672 |   |
| Depreciation and  amortization                                   |   | 7,552                           |    | 8,421 |   |
| Gain on  franchise sales of restaurant operations and properties |   | —                          |    | (2,087 | ) |
| (Gain) loss on  dispositions of other property and equipment     |   | (1,981                          | )       | 464 |   |
|                                                             |   |                            |    |   |   |
| OPERATING INCOME  (LOSS)                                         |   | 4,136                           |    | (27,672 | ) |
|                                                             |   |                            |    |   |   |
| Interest  expense, net                                           |   | 7,585                           |    | 7,938 |   |
|                                                             |   |                            |    |   |   |
| LOSS BEFORE  BENEFIT FROM INCOME TAXES                           |   | (3,449                          | )       | (35,610 | ) |
|                                                             |   |                            |    |   |   |
| Benefit from  income taxes                                       |   | 1,514                           |    | 17,100 |   |
|                                                             |   |                            |    |   |   |
| NET LOSS AND  COMPREHENSIVE LOSS                                 |   | $                               | (1,935  | ) | $ | (18,510 | ) |
|                                                             |   |                            |    |   |   |
| BASIC AND  DILUTED NET LOSS PER SHARE                            |   | $                               | (0.26   | ) | $ | (2.48 | ) |
|                                                             |   |                            |    |   |   |
| WEIGHTED AVERAGE  BASIC AND DILUTED SHARES                       |   | 7,376                           |    | 7,471 |   |

 

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

 

 

3

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**FRIENDLY ICE CREAM CORPORATION ANDSUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

(Unaudited)

(In thousands)

 
|                                                                                       |   | **For the  Three Months Ended** |   |
|--------------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                                       |   | **April 1,  2001**              |   | **April 2,  2000** |   |
|                                                                                       |   |                            |   |   |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                     |   |                            |   |   |   |
| Net loss                                                                                   |   | $                               | (1,935 | ) | $ | (18,510 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |   |                            |   |   |   |
| Stock  compensation expense                                                                |   | 93                              |   | 141 |   |
| Depreciation and  amortization                                                             |   | 7,552                           |   | 8,421 |   |
| Write-downs of  property and equipment                                                     |   | —                          |   | 17,672 |   |
| Deferred income  tax benefit                                                               |   | (1,514                          | )      | (17,100 | ) |
| Gain on asset  retirements and sales                                                       |   | (1,981                          | )      | (2,380 | ) |
| Changes in  operating assets and liabilities:                                              |   |                            |   |   |   |
| Accounts  receivable                                                                       |   | 598                             |   | (434 | ) |
| Inventories                                                                                |   | (2,510                          | )      | (3,499 | ) |
| Other assets                                                                               |   | 37                              |   | 3,834 |   |
| Accounts payable                                                                           |   | (467                            | )      | (992 | ) |
| Accrued expenses  and other long-term liabilities                                          |   | 2,291                           |   | 7,490 |   |
| NET CASH PROVIDED  BY (USED IN) OPERATING ACTIVITIES                                       |   | 2,164                           |   | (5,357 | ) |
|                                                                                       |   |                            |   |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                     |   |                            |   |   |   |
| Purchases of  property and equipment                                                       |   | (2,026                          | )      | (2,227 | ) |
| Proceeds from  sales of property and equipment                                             |   | 5,246                           |   | 16,740 |   |
| NET CASH  PROVIDED BY INVESTING ACTIVITIES                                                 |   | 3,220                           |   | 14,513 |   |
|                                                                                       |   |                            |   |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                     |   |                            |   |   |   |
| Proceeds from  borrowings                                                                  |   | 8,000                           |   | 33,000 |   |
| Repayments of  debt                                                                        |   | (18,627                         | )      | (41,801 | ) |
| Repayments of  capital lease and finance obligations                                       |   | (572                            | )      | (451 | ) |
| NET CASH USED IN  FINANCING ACTIVITIES                                                     |   | (11,199                         | )      | (9,252 | ) |
|                                                                                       |   |                            |   |   |   |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                                 |   | (5,815                          | )      | (96 | ) |
|                                                                                       |   |                            |   |   |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                            |   | 14,584                          |   | 12,062 |   |
|                                                                                       |   |                            |   |   |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                                  |   | $                               | 8,769  |   | $ | 11,966 |   |
|                                                                                       |   |                            |   |   |   |
| SUPPLEMENTAL  DISCLOSURES:                                                                 |   |                            |   |   |   |
| Cash paid  (refunded) during the period for:                                               |   |                            |   |   |   |
| Interest                                                                                   |   | $                               | 2,136  |   | $ | 2,609 |   |
| Income taxes                                                                               |   | 2                               |   | (21 | ) |
| Capital lease  obligations terminated                                                      |   | —                          |   | 659 |   |
| Notes received  from the sale of property and equipment                                    |   | —                          |   | 577 |   |

 

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

 

 

4

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**FRIENDLY ICE CREAM CORPORATION ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

(Unaudited)

 

 

**1.  BASIS OFPRESENTATION**

 

*                InterimFinancial Information —*

 

                Theaccompanying condensed consolidated financial statements as of April 1, 2001and for the first quarter ended April 1, 2001 and April 2, 2000 are unaudited, but,in the opinion of management, include all adjustments which are necessary for afair presentation of the consolidated financial position, results ofoperations, cash flows and comprehensive loss of Friendly Ice Cream Corporation(“FICC”) and subsidiaries (unless the context indicates otherwise, collectivelythe “Company”).  Such adjustmentsconsist solely of normal recurring accruals. Operating results for the three month period ended April 1, 2001 andApril 2, 2000 are not necessarily indicative of the results that may beexpected for the entire year due, in part, to the seasonality of the Company’sbusiness.  Historically, higher revenuesand operating income have been experienced during the second and third fiscalquarters.  The Company’s ConsolidatedFinancial Statements, including the notes thereto, which are contained in the2000 Annual Report on Form 10-K should be read in conjunction with theseCondensed Consolidated Financial Statements.

 

*                Inventories -*

 

                Inventoriesare stated at the lower of first-in, first-out cost or market.  Inventories as of April 1, 2001 and December31, 2000 were as follows (in thousands):

 
|             |   | **April 1,  2001** |   | **December  31,  2000** |   |
|------------------|--------|--------------------|--------|-------------------------|--------|
|             |   |               |   |                    |   |
| Raw materials    |   | $                  | 1,657  |                    | $      | 1,307 |   |
| Goods in process |   | 139                |   | 66                      |   |
| Finished goods   |   | 12,284             |   | 10,197                  |   |
| Total            |   | $                  | 14,080 |                    | $      | 11,570 |   |

* *

*Debt-*

 

                Since 1997, theCompany has entered into several amendments related to covenant violations onits credit facility.  In March 2001,under the terms of the seventh amendment, covenant requirements, interest ratesand principal payments were revised. The credit facility matures in November 2002 and principal payments ofapproximately $14,948,000 are due on the term loans in 2001.  The Company is in the process of exploringvarious refinancing alternatives and has engaged Banc of America Securities LLCfor assistance in this process.  TheCompany believes that based on the terms of the seventh amendment, the Companyhas adequate cash and availability on its revolving credit facility to meet itsobligations through June 30, 2002. Additionally, the Company believes that it can comply with the revisedcovenant requirements under the amendment.

 

*Reclassifications-*

 

                Certainprior year amounts have been reclassified to conform with current yearpresentation.

 

 

**2.  NET LOSS PER SHARE**

 

                Basicnet loss per share is calculated by dividing loss available to commonstockholders by the weighted average number of shares of common stockoutstanding during the period.  Dilutedearnings per share is calculated by dividing earnings available to commonstockholders by the weighted average number of shares of common stock andcommon stock equivalents outstanding during the period.  Common stock equivalents are dilutive stockoptions that are assumed exercised for calculation purposes. There were nocommon stock equivalents which were excluded from diluted earnings (loss) pershare for the three months ended April 2, 2000 and there were 4,000 commonstock equivalents which were excluded from diluted earnings (loss) per sharefor the three months ended April 1, 2001 since the effect was antidilutive.

 

 

5

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**3.  SEGMENT REPORTING**

 

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

 

                The Company’srestaurants target families with children and adults who desire a reasonably–pricedmeal in a full–service setting. The Company’s menu offers a broadselection of freshly–prepared foods which appeal to customers throughoutall dayparts. The menu currently features over 100 items comprised of a broadselection of breakfast, lunch, dinner and afternoon and evening snackitems.  Foodservice operationsmanufactures frozen dessert products and distributes such manufactured productsand purchased finished goods to the Company’s restaurants and franchisedoperations.  Additionally, it sellsfrozen dessert products to distributors and retail and institutional locations.The Company’s franchise segment includes a royalty based on franchiserestaurant revenue. In addition, the Company receives rental income from variousfranchised restaurants. The Company does not allocate general andadministrative expenses associated with its headquarters operations to anybusiness segment.  These costs includegeneral and administrative expenses of the following functions: legal, accounting,personnel not directly related to a segment, information systems and otherheadquarters 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 intersegment eliminations, havebeen prepared using a management approach, which is consistent with the basisand manner in which the Company’s management internally reviews financial informationfor the purpose of assisting in making internal operating decisions. TheCompany evaluates performance based on stand-alone operating segment income(loss) before income taxes and generally accounts for intersegment sales andtransfers as if the sales or transfers were to third parties, that is, atcurrent market prices.

 

 

6

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**               **EBITDA represents net loss before(i) cumulative effect of change in accounting principle, net of income taxes,(ii) benefit from income taxes, (iii) interest expense, net, (iv) depreciationand amortization and (v) write-downs and all other non-cash items plus cashdistributions from unconsolidated subsidiaries. The Company hasincluded information concerning EBITDA in this Form 10–Q because itbelieves that such information is used by certain investors as one measure of acompany’s historical ability to service debt. EBITDA should not be consideredas an alternative to, or more meaningful than, earnings (loss) from operationsor other traditional indications of a company’s operating performance.

 
|                                    |   | **For the  Three Months Ended** |    |
|-----------------------------------------|--------|---------------------------------|---------|
|                                    |   | **April 1,  2001**              |    | **April 2,  2000** |   |
|                                    |   | **(in thousands)**              |    |
|                                    |   |                            |    |   |   |
| Revenues:                               |   |                            |    |   |   |
| Restaurant                              |   | $                               | 107,145 |   | $ | 125,423 |   |
| Foodservice  (retail and institutional) |   | 47,822                          |    | 54,903 |   |
| Franchise                               |   | 1,561                           |    | 2,276 |   |
| Total                                   |   | $                               | 156,528 |   | $ | 182,602 |   |
|                                    |   |                            |    |   |   |
| Intersegment  revenues:                 |   |                            |    |   |   |
| Restaurant                              |   | $                               | —  |   | $ | — |   |
| Foodservice  (retail and institutional) |   | (30,809                         | )       | (38,513 | ) |
| Franchise                               |   | —                          |    | — |   |
| Total                                   |   | $                               | (30,809 | ) | $ | (38,513 | ) |
|                                    |   |                            |    |   |   |
| External  revenues:                     |   |                            |    |   |   |
| Restaurant                              |   | $                               | 107,145 |   | $ | 125,423 |   |
| Foodservice  (retail and institutional) |   | 17,013                          |    | 16,390 |   |
| Franchise                               |   | 1,561                           |    | 2,276 |   |
| Total                                   |   | $                               | 125,719 |   | $ | 144,089 |   |

 

 

7

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|                                            |   | **For the  Three Months Ended** |    |
|-------------------------------------------------|--------|---------------------------------|---------|
|                                            |   | **April 1,  2001**              |    | **April 2,  2000** |   |
|                                            |   | **(in thousands)**              |    |
|                                            |   |                            |    |   |   |
| EBITDA:                                         |   |                            |    |   |   |
| Restaurant                                      |   | $                               | 10,845  |   | $ | 7,494 |   |
| Foodservice (retail and institutional)          |   | 3,078                           |    | 5,519 |   |
| Franchise                                       |   | 494                             |    | 938 |   |
| Corporate                                       |   | (4,520                          | )       | (4,955 | ) |
| Gain on property and equipment, net             |   | 1,884                           |    | 1,623 |   |
| Restructuring costs                             |   | —                          |    | (12,057 | ) |
| Total                                           |   | $                               | 11,781  |   | $ | (1,438 | ) |
|                                            |   |                            |    |   |   |
| Interest expense, net                           |   | $                               | 7,585   |   | $ | 7,938 |   |
|                                            |   |                            |    |   |   |
| (Loss) income before benefit from income taxes: |   |                            |    |   |   |
| Restaurant                                      |   | $                               | 5,799   |   | $ | 1,459 |   |
| Foodservice (retail and institutional)          |   | 2,224                           |    | 4,660 |   |
| Franchise                                       |   | 434                             |    | 855 |   |
| Corporate                                       |   | (13,790                         | )       | (14,478 | ) |
| Gain on property and equipment, net             |   | 1,884                           |    | (16,049 | ) |
| Restructuring costs                             |   | —                          |    | (12,057 | ) |
| Total                                           |   | $                               | (3,449  | ) | $ | (35,610 | ) |
|                                            |   |                            |    |   |   |
| Depreciation and amortization:                  |   |                            |    |   |   |
| Restaurant                                      |   | $                               | 5,046   |   | $ | 6,035 |   |
| Foodservice (retail and institutional)          |   | 854                             |    | 859 |   |
| Franchise                                       |   | 60                              |    | 83 |   |
| Corporate                                       |   | 1,592                           |    | 1,444 |   |
| Total                                           |   | $                               | 7,552   |   | $ | 8,421 |   |
|                                            |   |                            |    |   |   |
|                                            |   |                            |    |   |   |
|                                            |   | **April 1,****2001**            |    | **December 31,****2000** |   |
|                                            |   | **(in thousands)**              |    |
|                                            |   |                            |    |   |   |
| Total assets:                                   |   |                            |    |   |   |
| Restaurant                                      |   | $                               | 194,853 |   | $ | 199,223 |   |
| Foodservice (retail and institutional)          |   | 33,607                          |    | 33,880 |   |
| Franchise                                       |   | 4,076                           |    | 3,745 |   |
| Corporate                                       |   | 52,419                          |    | 60,838 |   |
| Total                                           |   | $                               | 284,955 |   | $ | 297,686 |   |
|                                            |   |                            |    |   |   |
| Capital expenditures:                           |   |                            |    |   |   |
| Restaurant                                      |   | $                               | 1,301   |   | $ | 18,245 |   |
| Foodservice (retail and institutional)          |   | 490                             |    | 2,667 |   |
| Corporate                                       |   | 235                             |    | 1,535 |   |
| Total                                           |   | $                               | 2,026   |   | $ | 22,447 |   |

 

 

8

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**4.  NEW ACCOUNTINGPRONOUNCEMENTS**

 

                In April 2001, the FinancialAccounting Standards Board reached consensus on Emerging Issues Task Force(“EITF”) Issue No. 00-25, “Accounting for Consideration from a Vendor to aRetailer in Connection with the Purchase or Promotion of the Vendor’sProducts,” which is effective for quarters beginning after December 15, 2001,with prior financial statements restated if practicable.  This Issue addresses whether considerationfrom a vendor to a retailer is (a) an adjustment of the selling prices of thevendor’s products to the retailer and, therefore, should be deducted fromrevenue when recognized in the vendor’s income statement or (b) a cost incurredby the vendor for assets or services provided by the retailer to the vendorand, therefore, should be included as a cost or an expense when recognized inthe vendor’s income statement. Arrangements within the scope of this Issue include slotting fees,cooperative advertising arrangements and buy-downs.  Management has not yet quantified the impact of implementing IssueNo. 00-25 on the Company’s financial statements.

 

                InMay 2000, the Emerging Issues Task Force issued EITF No. 00-14, “Accounting forCertain Sales Incentives,” which provides guidance on the recognition,measurement and income statement classification for sales incentives offeredvoluntarily by a vendor without charge to customers that can be used in, orthat are exercisable by a customer as a result of, a single exchangetransaction. The Company adopted EITF No. 00-14 on July 3, 2000.   As a result, the Company has reclassifiedcertain retail selling expenses against retail revenue for the three monthsended April 2, 2000 to conform with the current period presentation.

 

                In June 1998, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instrumentsand Hedging Activities.”  SFAS No. 133establishes accounting and reporting standards requiring that each derivativeinstrument (including certain derivative instruments embedded in othercontracts) be recorded in the balance sheet as either an asset or liabilitymeasured at its fair value.  Thestatement requires that changes in the derivative’s fair value be recognizedcurrently in earnings unless specific hedge accounting criteria are met.Special accounting for qualifying hedges allows a derivative’s gains and lossesto offset related results on the hedged item in the statement of operations,and requires that a Company formally document, designate and assess the effectivenessof transactions that receive hedge accounting. Since the Company’s commodity option contracts do not meet the criteriafor hedge accounting, changes in the value of the commodity option contractsare recognized monthly in earnings.  Thecumulative effect upon adoption of approximately $77,000 has been recorded asincome in the accompanying Condensed Consolidated Statement of Operations.  It is not separately reported as acumulative effect since the effect is not significant.  Additional income of approximately $129,000was recorded during the first quarter of 2001. The unrealized gain on derivatives at April 1, 2001 was approximately$206,000.

 

 

9

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**5.   RESTRUCTURING PLAN**

 

                In March 2000, theCompany’s Board of Directors approved a restructuring plan that provided forthe immediate closing of 81 restaurants at the end of March 2000 and thedisposition of an additional 70 restaurants over the next 24 months.  The 70 locations will remain in operationuntil they are sold, subleased or closed prior to March 2002.  In connection with the restructuring plan,the Company eliminated approximately 150 management and administrativepositions in the field organization and at corporate headquarters.  As a result of this plan, the Companyreported a pre-tax restructuring charge of approximately $12,057,000 forseverance pay, rent, utilities and real estate taxes, demarking, leasetermination costs and certain other costs associated with the closing of the locations,along with a pre-tax write-down of property and equipment for these locationsof approximately $17,008,000 in the first quarter ended April 2, 2000.

 

                The following represents the restructuringreserve activity (in thousands):

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

 

                Thewrite-down of property and equipment consisted of $7.8 million for the 81locations closed at the end of March 2000 and $9.2 million for the 70 locationsto be disposed of over the following 24 months.  At April 1, 2001 the aggregate carrying amount of the remaining65 properties to be disposed of was $5.8 million.   At April 2, 2000, the aggregate carrying value of the 151properties to be disposed of was $18.9 million.  These amounts are reflected in the condensed consolidated balance sheets as property andequipment, net.

 

 

10

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**6.  SALES OF RESTAURANT OPERATIONS AND PROPERTIESTO FRANCHISEES**

 

**               **On April 13, 2001, the Company executed an agreementgranting J&B Restaurants Partners of Long Island Holding Co., LLC(“J&B”) certain limited exclusive rights to operate and develop Friendly’sfull-service restaurants in the franchising regions of Nassau and SuffolkCounties in Long Island, New York (the “J&B Agreement”).  Pursuant to the J&B Agreement, J&Bpurchased certain assets and rights in 31 existing Friendly’s restaurants andcommitted to open an additional 29 restaurants over the next 12 years. Thetransaction price was approximately $19,950,000, of which approximately$4,250,000 was received in a note.  Thecash proceeds were used to prepay approximately $4,711,000 on the term loans withthe remaining balance being applied to the revolving credit facility.  The 5-year note bears interest at an annualrate of 11% using a 20-year amortization schedule.  Payments are due monthly through the five years with a balloonpayment due at the end of five years.

 

**               **On January 19, 2000,the Company entered into an agreement granting Kessler Family LLC (“Kessler”)non-exclusive rights to operate and develop Friendly’s full-service restaurantsin the franchising region of Rochester, Buffalo and Syracuse, New York (the“Kessler Agreement”).  Pursuant to theKessler Agreement, Kessler purchased certain assets and rights in 29 existingFriendly’s restaurants and committed to open an additional 15 restaurants overthe next seven years.  Gross proceedsfrom the sale were approximately $13,300,000 of which $735,000 was forfranchise fees for the initial 29 restaurants. The $735,000 was recorded as revenue in the first quarter ending April2, 2000. The Company recognized a gain of approximately $1,400,000 related tothe sale of the assets for the 29 locations in the first quarter ending April2, 2000.  The Company also sold certainassets and rights in six other restaurants to two additional franchiseesresulting in a gain of $687,000.

 

 

**7.  SUPPLEMENTALCONDENSED CONSOLIDATING FINANCIAL INFORMATION**

 

                FICC’s obligation related to the $200 million Senior Notes 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 Friendly Ice Cream Corporation (the “Parent Company”),Friendly’s Restaurants Franchise, Inc. (the “Guarantor Subsidiary”) andFriendly’s International, Inc., Friendly Holding (UK) Limited, Friendly IceCream (UK) Limited and Restaurant Insurance Corporation (collectively, the “Non–guarantorSubsidiaries”). Separate complete financial statements and other disclosures ofthe Guarantor Subsidiary as of April 1, 2001 and April 2, 2000, and for theperiods ended April 1, 2001 and April 2, 2000, are not presented becausemanagement has determined that such information is not material to investors.

 

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

 

 

11

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**Supplemental Condensed ConsolidatingBalance Sheet**

**As of April 1, 2001**

 

(In thousands)

 
|                                                       |   | **Parent  Company** |    | **Guarantor  Subsidiary** |   | **Non-guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|------------------------------------------------------------|--------|---------------------|---------|---------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
|                                                       |   |                |    |                      |   |                            |   |             |   |             |   |
| Assets                                                     |   |                |    |                      |   |                            |   |             |   |             |   |
|                                                       |   |                |    |                      |   |                            |   |             |   |             |   |
| Current assets:                                            |   |                |    |                      |   |                            |   |             |   |             |   |
| Cash and cash  equivalents                                 |   | $                   | 7,626   |                      | $      | 12                              |   | $                | 1,154  |             | $      | (23 | ) | $ | 8,769 |   |
| Restricted cash                                            |   | —              |    | —                    |   | 775                             |   | —           |   | 775              |   |
| Accounts  receivable, net                                  |   | 4,960               |    | 576                       |   | —                          |   | 23               |   | 5,559            |   |
| Inventories                                                |   | 14,080              |    | —                    |   | —                          |   | —           |   | 14,080           |   |
| Deferred income  taxes                                     |   | 10,258              |    | 43                        |   | —                          |   | 94               |   | 10,395           |   |
| Prepaid expenses  and other current assets                 |   | 6,995               |    | 563                       |   | 3,510                           |   | (8,790           | )      | 2,278            |   |
| Total current  assets                                      |   | 43,919              |    | 1,194                     |   | 5,439                           |   | (8,696           | )      | 41,856           |   |
| Deferred income  taxes                                     |   | —              |    | 506                       |   | 1,327                           |   | (1,833           | )      | —           |   |
| Property and  equipment, net                               |   | 218,674             |    | —                    |   | —                          |   | —           |   | 218,674          |   |
| Intangibles and  deferred costs, net                       |   | 21,185              |    | —                    |   | —                          |   | —           |   | 21,185           |   |
| Investments in  subsidiaries                               |   | 3,640               |    | —                    |   | —                          |   | (3,640           | )      | —           |   |
| Other assets                                               |   | 2,325               |    | 2,844                     |   | 6,229                           |   | (8,158           | )      | 3,240            |   |
|                                                       |   |                |    |                      |   |                            |   |             |   |             |   |
| Total assets                                               |   | $                   | 289,743 |                      | $      | 4,544                           |   | $                | 12,995 |             | $      | (22,327 | ) | $ | 284,955 |   |
|                                                       |   |                |    |                      |   |                            |   |             |   |             |   |
| Liabilities and Stockholders’ Equity (Deficit)        |   |                |    |                      |   |                            |   |             |   |             |   |
|                                                       |   |                |    |                      |   |                            |   |             |   |             |   |
| Current  liabilities:                                      |   |                |    |                      |   |                            |   |             |   |             |   |
| Current  maturities of long-term obligations               |   | $                   | 14,324  |                      | $      | —                          |   | $                | — |             | $      | (3,500 | ) | $ | 10,824 |   |
| Accounts payable                                           |   | 19,633              |    | —                    |   | —                          |   | —           |   | 19,633           |   |
| Accrued expenses                                           |   | 48,060              |    | 201                       |   | 7,637                           |   | (5,090           | )      | 50,808           |   |
| Total current  liabilities                                 |   | 82,017              |    | 201                       |   | 7,637                           |   | (8,590           | )      | 81,265           |   |
| Deferred income  taxes                                     |   | 13,501              |    | —                    |   | —                          |   | (1,739           | )      | 11,762           |   |
| Long-term  obligations, less current maturities            |   | 282,121             |    | —                    |   | —                          |   | (5,314           | )      | 276,807          |   |
| Other long-term  liabilities                               |   | 13,929              |    | 1,191                     |   | 4,870                           |   | (3,044           | )      | 16,946           |   |
| Stockholders’  equity (deficit)                       |   | (101,825            | )       | 3,152                     |   | 488                             |   | (3,640           | )      | (101,825         | )      |
|                                                       |   |                |    |                      |   |                            |   |             |   |             |   |
| Total  liabilities and stockholders’ equity (deficit) |   | $                   | 289,743 |                      | $      | 4,544                           |   | $                | 12,995 |             | $      | (22,327 | ) | $ | 284,955 |   |

** **

 

12

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**Supplemental Condensed ConsolidatingStatement of Operations**

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

 

(In thousands)

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

 

 

13

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**Supplemental Condensed ConsolidatingStatement of Cash Flows**

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

 

(In thousands)

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

 

 

14

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**Supplemental Condensed Consolidating Balance Sheet**

**As of December 31, 2000**

 

(Inthousands)

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

** **

 

15

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**Supplemental Condensed ConsolidatingStatement of Operations**

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

 

(In thousands)

 
|                                                                                                                   |   | **Parent  Company** |       | **Guarantor  Subsidiary** |       | **Non-guarantor  Subsidiaries** |       | **Eliminations** |       | **Consolidated** |       |
|------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|---------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
|                                                                                                                   |   |                |       |                      |       |                            |       |             |       |             |       |
| Revenues                                                                                                               |   | $                   | 142,215    |                      | $          | 1,874                           |       | $                | —     |             | $          | — |   | $ | 144,089 |   |
| Costs and  expenses:                                                                                                   |   |                |       |                      |       |                            |       |             |       |             |       |
| Cost of sales                                                                                                          |   | 44,822              |       | —                    |       | —                          |       | —           |       | 44,822           |       |
| Labor and  benefits                                                                                                    |   | 48,176              |       | —                    |       | —                          |       | —           |       | 48,176           |       |
| Operating  expenses and write-downs of property and equipment                                                          |   | 48,592              |       | —                    |       | (60                             | )          | —           |       | 48,532           |       |
| General and  administrative expenses                                                                                   |   | 10,950              |       | 426                       |       | —                          |       | —           |       | 11,376           |       |
| Restructuring  costs                                                                                                   |   | 12,057              |       | —                    |       | —                          |       | —           |       | 12,057           |       |
| Depreciation and  amortization                                                                                         |   | 8,421               |       | —                    |       | —                          |       | —           |       | 8,421            |       |
| Gain on  franchise sales of restaurant operations and properties                                                       |   | (2,087              | )          | —                    |       | —                          |       | —           |       | (2,087           | )          |
| Loss on  dispositions of other property and equipment                                                                  |   | 464                 |       | —                    |       | —                          |       | —           |       | 464              |       |
| Interest expense  (income)                                                                                             |   | 8,110               |       | —                    |       | (172                            | )          | —           |       | 7,938            |       |
|                                                                                                                   |   |                |       |                      |       |                            |       |             |       |             |       |
| (Loss) income  before benefit from (provision for) income taxes and equity in net income of  consolidated subsidiaries |   | (37,290             | )          | 1,448                     |       | 232                             |       | —           |       | (35,610          | )          |
|                                                                                                                   |   |                |       |                      |       |                            |       |             |       |             |       |
| Benefit from  (provision for) income taxes                                                                             |   | 17,774              |       | (593                      | )          | (81                             | )          | —           |       | 17,100           |       |
|                                                                                                                   |   |                |       |                      |       |                            |       |             |       |             |       |
| (Loss) income  before equity in net income of consolidated subsidiaries                                                |   | (19,516             | )          | 855                       |       | 151                             |       | —           |       | (18,510          | )          |
|                                                                                                                   |   |                | ** ** |                      | ** ** |                            | ** ** |             | ** ** |             | ** ** |
| Equity in net  income of consolidated subsidiaries                                                                     |   | 1,006               |       | —                    |       | —                          |       | (1,006           | )          | —           |       |
|                                                                                                                   |   |                |       |                      |       |                            |       |             |       |             |       |
| Net (loss)  income                                                                                                     |   | $                   | (18,510    | )                         | $          | 855                             |       | $                | 151        |             | $          | (1,006 | ) | $ | (18,510 | ) |

 

 

16

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**Supplemental Condensed ConsolidatingStatement of Cash Flows**

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

 

(In thousands)

 
|                                                    |   | **Parent  Company** |   | **Guarantor  Subsidiary** |   | **Non-guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|---------------------------------------------------------|--------|---------------------|--------|---------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
|                                                    |   |                |   |                      |   |                            |   |             |   |             |   |
| Net cash (used  in) provided by operating activities    |   | $                   | (5,724 | )                         | $      | 36                              |   | $                | 1,080  |             | $      | (749 | ) | $ | (5,357 | ) |
|                                                    |   |                |   |                      |   |                            |   |             |   |             |   |
| Cash flows from  investing activities:                  |   |                |   |                      |   |                            |   |             |   |             |   |
| Purchases of  property and equipment                    |   | (2,227              | )      | —                    |   | —                          |   | —           |   | (2,227           | )      |
| Proceeds from  sales of property and equipment          |   | 16,740              |   | —                    |   | —                          |   | —           |   | 16,740           |   |
| Net cash  provided by investing activities              |   | 14,513              |   | —                    |   | —                          |   | —           |   | 14,513           |   |
|                                                    |   |                |   |                      |   |                            |   |             |   |             |   |
| Cash flows from  financing activities:                  |   |                |   |                      |   |                            |   |             |   |             |   |
| Proceeds from  borrowings                               |   | 33,000              |   | —                    |   | —                          |   | —           |   | 33,000           |   |
| Repayments of  obligations                              |   | (42,252             | )      | —                    |   | —                          |   | —           |   | (42,252          | )      |
| Reinsurance  deposits received                          |   | —              |   | —                    |   | 800                             |   | (800             | )      | —           |   |
| Reinsurance  payments made from deposits                |   | —              |   | —                    |   | (1,549                          | )      | 1,549            |   | —           |   |
|                                                    |   |                |   |                      |   |                            |   |             |   |             |   |
| Net cash used in  financing activities                  |   | (9,252              | )      | —                    |   | (749                            | )      | 749              |   | (9,252           | )      |
|                                                    |   |                |   |                      |   |                            |   |             |   |             |   |
| Net (decrease)  increase in cash and cash equivalents   |   | (463                | )      | 36                        |   | 331                             |   | —           |   | (96              | )      |
|                                                    |   |                |   |                      |   |                            |   |             |   |             |   |
| Cash and cash  equivalents, beginning of period         |   | 9,674               |   | 14                        |   | 2,374                           |   | —           |   | 12,062           |   |
|                                                    |   |                |   |                      |   |                            |   |             |   |             |   |
| Cash and cash  equivalents, end of period               |   | $                   | 9,211  |                      | $      | 50                              |   | $                | 2,705  |             | $      | — |   | $ | 11,966 |   |
|                                                    |   |                |   |                      |   |                            |   |             |   |             |   |
| Supplemental  disclosures:                              |   |                |   |                      |   |                            |   |             |   |             |   |
| Interest paid  (received)                               |   | $                   | 2,966  |                      | $      | —                          |   | $                | (357   | )                | $      | — |   | $ | 2,609 |   |
| Income taxes  (refunded) paid                           |   | (928                | )      | 823                       |   | 84                              |   | —           |   | (21              | )      |
| Capital lease  obligations terminated                   |   | 659                 |   | —                    |   | —                          |   | —           |   | 659              |   |
| Notes received  from the sale of property and equipment |   | 577                 |   | —                    |   | —                          |   | —           |   | 577              |   |

 

 

17

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**Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

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

 

                **Forward LookingStatements**

 

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

 

 

                **Overview**

 

                Asof April 1, 2001, the Company owned and operated 438 restaurants and franchised123 restaurants and five cafes.  TheCompany distributes a full line of frozen dessert products to Friendly’srestaurants and through more than 3,500 supermarkets and other retail locationsin 15 states.  The restaurants offer awide variety of reasonably-priced breakfast, lunch and dinner menu items aswell as the frozen dessert products.

 

          *Revenues*:

 

          Total revenues decreased $18.4million, or 12.8%, to $125.7 million for the first quarter ended April 1, 2001from $144.1 million for the same quarter in 2000.  Restaurant revenues decreased $18.3 million, or 14.6%, to $107.1million for the first quarter of 2001 from $125.4 million for the same quarterin 2000.    Restaurant revenuesdecreased by $19.7 million due to the closing of 133 under-performingrestaurants and the re-franchising of 49 additional locations over the past 15months.  Closing of restaurantsaccounted for $14.2 million of the restaurant revenue decline and re-franchisingreduced restaurant revenues by an additional $5.5 million. Partially offsettingthis decrease was a 1.0% increase in comparable restaurant revenues.  Revenues from the one location open lessthan one year were $0.4 million. Foodservice (product sales to franchisees, retail and institutional)revenues increased by $0.6 million, or 3.7%, to $17.0 million for the firstquarter of 2001 from $16.4 million for the same quarter in 2000.  The increase was due to the increase in thenumber of franchised units.  Revenuesfrom foodservice retail supermarket customers were lower in the current quarterwhen compared to same quarter in 2000. The Company’s foodservice division sellsa variety of products to the Company’s franchisees and ice cream products tosupermarkets and other retail locations. Franchise revenues decreased $0.7 million, or 30.4%, to $1.6 million forthe three months ended April 1, 2001 from $2.3 million for the three monthsended April 2, 2000.  The decrease isdue to a reduction of $1.0 million in initial fees from new franchisedlocations as 41 new locations were added in the first quarter of 2000 and onlyone new location was added in the same period in 2001.  There were 128 franchised units (includingcafes) open at April 1, 2001 compared to 109 franchised units open at April 2,2000.

 

*          Cost of sales:*

 

          Cost ofsales decreased $2.7 million, or 6.0%, to $42.1 million for the first quarterended April 1, 2001 from $44.8 million for the same quarter in 2000.  Cost of sales as a percentage of totalrevenues increased to 33.3% for the first quarter of 2001 from 31.1% for thesame quarter in 2000.  The higher foodcost as a percentage of total revenue was partially due to a shift in sales mixfrom Company-owned restaurant sales to foodservice sales.  Foodservice sales to franchisees and retailcustomers have a higher food cost as a percentage of revenue than sales inCompany-owned restaurants to restaurant patrons.  The cost of cream, the principle ingredient used in making icecream, was higher in the first quarter of 2001 when compared to the firstquarter of 2000 and contributed to the rise in cost of sales as a percentage oftotal revenues, especially in foodservice’s retail supermarket business.  The Company believes that cream prices willcontinue to rise and will peak during the summer months.  To minimize risk, hedging opportunities andalternative supply sources will be pursued. Additionally, the Company intends to raise prices to its retailcustomers.

 

 

18

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          *Labor andbenefits:*

 

          Laborand benefits decreased $8.5 million, or 17.6%, to $39.7 million for the firstquarter ended April 1, 2001 from $48.2 million for the same quarter in2000.  Labor and benefits as apercentage of total revenues decreased to 31.5% for the first quarter of 2001from 33.4% for the same period in 2000. The lower labor cost as a percentage of total revenue is partially theresult of revenue increases derived from additional franchised locations, whichdo not have any associated restaurant labor and benefits.  In addition, the closing of 133under-performing Company-owned units over the past 15 months improved therelationship of restaurant labor and benefits to restaurant sales as well as tototal revenues.   Partially offsettingthe decreases were higher group insurance costs in 2001 when compared to thesame period in 2000.

 

*          Operating expenses:*

 

          Operatingexpenses decreased $6.0 million, or 19.4%, to $24.9 million for the firstquarter ended April 1, 2001 from $30.9 million for the same quarter in2000.  Operating expenses as apercentage of total revenues were 19.8% and 21.4% for the first quarters endedApril 1, 2001 and April 2, 2000, respectively. The decrease as a percentage of total revenues resulted from loweradvertising and promotional expenses, utility costs and snowplowing costs inthe 2001 quarter when compared to the 2000 quarter.

 

          *General andadministrative expenses:*

 

          Generaland administrative expenses were $9.3 million and $11.4 million for the firstquarters ended April 1, 2001 and April 2, 2000, respectively.  General and administrative expenses as apercentage of total revenues decreased to 7.4% in the first quarter of 2001from 7.9% for the same period in 2000. The decrease is primarily the result ofthe elimination of certain management and administrative positions associatedwith the Company’s announcement of the immediate closing of 81 restaurants andthe planned closing of 70 additional restaurants in March 2000.

 

          *EBITDA:*

 

          As aresult of the above, EBITDA (EBITDArepresents net loss before (i) cumulative effect of change in accountingprinciple, net of income taxes, (ii) benefit from income taxes (iii) interestexpense, net, (iv) depreciation and amortization and (v) write-downs and allother non-cash items plus cash distributions from unconsolidated subsidiaries)increased $13.2 million, or 919.3%, to $11.8 million for the first quarterended April 1, 2001 from $(1.4) million for the same quarter in 2000.  EBITDA as a percentage of total revenues was9.4% and (1.0)% for the first quarters of 2001 and 2000, respectively.  The increase was primarily the result of therestructuring costs of $12.1 million recorded during the first quarter endedApril 2, 2000 partially offset by the impact of the increased gains of $0.4million on the sales of restaurant operations and properties. The Company has included information concerningEBITDA in this Form 10–Q because it believes that such information isused by certain investors as one measure of a company’s historical ability toservice debt. 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.

 

*          Restructuring costs:*

 

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

 

          W*rite-downsof property and equipment:*

 

          Write-downsof property and equipment were $17.7 million for the first quarter ended April2, 2000.  The write-downs were primarilythe result of the non-cash write-down of the 81 under-performing restaurantswhich were closed at the end of March 2000 and the non-cash write-down of theadditional 70 restaurants which will be closed over the next 24 months to theirestimated net realizable value.  As ofApril 1, 2001, 36 of these 70 restaurants have been closed.

 

          *Depreciationand amortization:*

 

          Depreciationand amortization decreased $0.8 million, or 9.5%, to $7.6 million for the firstquarter ended April 1, 2001 from $8.4 million for the same quarter in2000.  Depreciation and amortization asa percentage of total revenues was 5.9% for the first quarter ended April 1,2001 compared to 5.8% for the first quarter ended April 2, 2000.

 

 

19

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*          Gain on franchise sales of restaurantoperations and properties:*

 

*         *On January 19, 2000, the Companyentered into an agreement granting Kessler Family LLC (“Kessler”) non-exclusiverights to operate and develop Friendly’s full-service restaurants in thefranchising region of Rochester, Buffalo and Syracuse, New York (the “KesslerAgreement”).  Pursuant to the KesslerAgreement, Kessler purchased certain assets and rights in 29 existingFriendly’s restaurants and committed to open an additional 15 restaurants over thenext seven years.  Gross proceeds fromthe sale were approximately $13,300,000 of which $735,000 was for franchisefees for the initial 29 restaurants. The $735,000 was recorded as revenue in the first quarter ending April2, 2000. The Company recognized a gain of approximately $1,400,000 related tothe sale of the assets for the 29 locations in the first quarter ending April2, 2000.  The Company also sold certainassets and rights in six other restaurants to two additional franchiseesresulting in a gain of $687,000.

 

*          (Gain) loss on sales of other propertyand equipment:*

 

*         *The (gain) loss on sales of otherproperty and equipment was $(2.0) million and $0.5 million for the quartersended April 1, 2001 and April 2, 2000, respectively.  The gain in the 2001 quarter resulted from the sale of 11 closedlocations during the first quarter ending April 1, 2001.  The loss for the quarter ended April 2, 2000resulted from normal retirements.

 

*          Interest expense, net:*

 

*         *Interest expense, net of capitalized interest andinterest income, decreased by $0.3 million, or 3.8%, to $7.6 million for thefirst quarter ended April 1, 2001 from $7.9 million for the same quarter in2000.  The decrease is primarily due toa reduction in the average outstanding debt. Total outstanding debt, includingcapital leases, was reduced from $305.8 million at April 2, 2000 to $287.6million at April 1, 2001.

 

          *Benefit from**incometaxes:*

 

          Thebenefit from income taxes was $1.5 million, or 43.9% and $17.1 million, or48.0%, for the first quarters ended April 1, 2001 and April 2, 2000,respectively. The Company records income taxes based on the effective rateexpected for the year with any changes in valuation allowance reflected in theperiod of change.  The sale of the landand buildings to franchisees during the first quarter ended April 2, 2000favorably impacted the provision for income taxes as it triggered built-ingains, which allowed for a reduction in the valuation allowance on certain netoperating loss carryforwards.

 

*          Net loss:*

 

          Netloss was $1.9 million and $18.5 million for the first quarters ended April 1,2001 and April 2, 2000, respectively.

 

                **Liquidityand Capital Resources**

 

                TheCompany’s primary sources of liquidity and capital resources are cash generatedfrom operations and borrowings under its revolving credit facility.  Net cash provided by operating activitieswas $2.2 million for the three months ended April 1, 2001.   Net cash used in operating activities was$5.4 million for the three months ended April 2, 2000.  Inventories increased $2.5 million primarilyas a result of anticipated increased retail sales.  Accrued expenses and other long-term liabilities increased $2.3million from December 31, 2000 to April 1, 2001 primarily due to a $5.2 millionincrease in accrued interest on the Senior Notes due to four months accrued atApril 1, 2001 compared to one month accrued at December 31, 2000.  This increase was partially offset by $1.0million of payments made against the captive insurance company’s reserves forworkers compensation claims.  Availableborrowings under the revolving credit facility were $8.0 million as of April 1,2001.

 

                Additionalsources of liquidity consist of capital and operating leases for financingleased restaurant locations (in malls and shopping centers and land or buildingleases), restaurant equipment, manufacturing equipment, distribution vehiclesand computer equipment.  Additionally,sales of under-performing existing restaurant properties and other assets (tothe extent the Company’s debt instruments, if any, permit) are sources ofcash.  The amounts of debt financingthat the Company will be able to incur under capital leases and for propertyand casualty insurance financing and the amount of asset sales by the Companyare limited by the terms of its credit facility and Senior Notes.

 

                Netcash provided by investing activities was $3.2 million in the three monthsended April 1, 2001 compared to $14.5  million in the three months ended April 2, 2000.  Capital expenditures were approximately $2.0million and $2.2 million for the three months ended April 1, 2001 and April 2,2000, respectively.  Proceeds from thesales of property and equipment were $5.2 million and $16.7 million in thethree months ended April 1, 2001 and April 2, 2000, respectively.  The decrease in proceeds was due to thereceipt of $16.6 million in 2000 related to sales of restaurants tofranchisees.  There were no such salesin 2001.

 

 

20

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               Net cash used in financing activities was $11.2million and $9.3 million in the three months ended April 1, 2001 and April 2,2000, respectively.

 

                TheCompany had a working capital deficit of $39.4 million as of April 1,2001.  The Company is able to operatewith a substantial working capital deficit because: (i) restaurant operationsare conducted primarily on a cash (and cash equivalent) basis with a low levelof accounts receivable; (ii) rapid turnover allows a limited investment ininventories and (iii) cash from sales is usually received before relatedexpenses for food, supplies and payroll are paid.

 

                TheCompany’s credit facility imposes significant operating and financialrestrictions on the Company’s ability to, among other things, incurindebtedness, create liens, sell assets, engage in mergers or consolidations,pay dividends and engage in certain transactions with affiliates.  The credit facility limits the amount whichthe Company may spend on capital expenditures and requires the Company tocomply with certain financial covenants. The Company’s credit facility also restricts the use of proceeds fromasset sales.  Proceeds, as defined inthe credit agreement and subject to certain exceptions, in excess of statedmaximum allowable amounts must be used to permanently reduce outstandingobligations under the credit facility. During the three months ended April 1, 2001, the Company received $4.9million of asset sale proceeds which were used to reduce the amount outstandingon the term loans.

 

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

 

                Also due to theMarch 19, 2001 amendment, the maturity dates of Tranche B and Tranche C of theterm loans were changed to November 15, 2002 from their original maturity datesof November 15, 2004 and November 15, 2005, respectively.  Annual scheduled principal payments duethrough October 15, 2002 did not change. However, the amendment requires additional minimum cumulativeprepayments on the term loans by the dates specified below as follows:

 

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

 

Any remaining unpaid balances due on Tranches B and Cof the term loans will be paid on November 15, 2002.

 

                FICCpaid a fee of approximately $256,000 to the lenders in connection with thisamendment.  Also, unless all obligationsunder the credit facility are satisfied prior to September 30, 2001, FICC willpay an additional fee of approximately $512,000 on that date.  If all obligations under the credit facilityare satisfied prior to September 30, 2001, the additional fee will be payableat that time and will be reduced to approximately $128,000.

 

                TheCompany anticipates requiring capital in the future principally to maintainexisting restaurant and plant facilities and to continue to renovate andre-image existing restaurants.  Capitalexpenditures for 2001 are anticipated to be $15.0 million in the aggregate, ofwhich $8.5 million is expected to be spent on restaurant operations.  The Company’s actual 2001 capitalexpenditures may vary from these estimated amounts. The Company believes that the combination of the funds anticipated to begenerated from operating activities and borrowing availability under the creditfacility will be sufficient to meet the Company’s anticipated operatingrequirements, capital requirements and obligations associated with therestructuring.

 

                OnApril 13, 2001, the Company executed an agreement granting J&B RestaurantsPartners of Long Island Holding Co., LLC (“J&B”) certain limited exclusiverights to operate and develop Friendly’s full-service restaurants in thefranchising regions of Nassau and Suffolk Counties in Long Island, New York(the “J&B Agreement”).  Pursuant tothe J&B Agreement, J&B purchased certain assets and rights in 31existing Friendly’s restaurants and committed to open an additional 29restaurants over the next 12 years. The transaction price was approximately$19,950,000, of which approximately $4,250,000 was received in a note.  The cash proceeds were used to prepayapproximately $4.7 million on the term loans with the remaining balance beingapplied to the revolving credit facility. The 5-year note bears interest at an annual rate of 11% using a 20-yearamortization schedule.  Payments are duemonthly through the five years with a balloon payment due at the end of fiveyears.

 

 

21

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                **Seasonality**

 

                Dueto the seasonality of frozen dessert consumption, and the effect from time totime of weather on patronage in its restaurants, the Company’s revenues andEBITDA are typically higher in its second and third quarters.

 

                **GeographicConcentration**

 

                Approximately89% of the Company-owned restaurants are located, and substantially all of itsretail sales are generated, in the Northeast. As a result, a severe or prolonged economic recession or changes indemographic mix, employment levels, population density, weather, real estatemarket conditions or other factors specific to this geographic region mayadversely affect the Company more than certain of its competitors which aremore geographically diverse.

 

                **Recently Issued Accounting Pronouncements**

 

                In April 2001, the FinancialAccounting Standards Board reached consensus on Emerging Issues Task Force(“EITF”) Issue No. 00-25, “Accounting for Consideration from a Vendor to aRetailer in Connection with the Purchase or Promotion of the Vendor’sProducts,” which is effective for quarters beginning after December 15, 2001,with prior financial statements restated if practicable.  This Issue addresses whether considerationfrom a vendor to a retailer is (a) an adjustment of the selling prices of thevendor’s products to the retailer and, therefore, should be deducted fromrevenue when recognized in the vendor’s income statement or (b) a cost incurredby the vendor for assets or services provided by the retailer to the vendorand, therefore, should be included as a cost or an expense when recognized inthe vendor’s income statement. Arrangements within the scope of this Issue include slotting fees,cooperative advertising arrangements, and buy-downs.  Management has not yet quantified the impact of implementingIssue No. 00-25 on the Company’s financial statements.

 

                InMay 2000, the Emerging Issues Task Force issued EITF No. 00-14, “Accounting forCertain Sales Incentives,” which provides guidance on the recognition,measurement, and income statement classification for sales incentives offeredvoluntarily by a vendor without charge to customers that can be used in, orthat are exercisable by a customer as a result of, a single exchangetransaction. The Company adopted EITF No. 00-14 on July 3, 2000.   As a result, the Company has reclassifiedcertain retail selling expenses against retail revenue for the three monthsended April 2, 2000 to conform with the current period presentation.

 

                InJune 1998, the Financial Accounting Standards Board (“FASB”) issued Statementof Financial Accounting Standards (“SFAS”) No. 133, “Accounting for DerivativeInstruments and Hedging Activities.” SFAS No. 133 establishes accounting and reporting standards requiringthat each derivative instrument (including certain derivative instrumentsembedded in other contracts) be recorded in the balance sheet as either anasset or liability measured at its fair value. The statement requires that changes in the derivative’s fair value berecognized currently in earnings unless specific hedge accounting criteria aremet. Special accounting for qualifying hedges allows a derivative’s gains andlosses to offset related results on the hedged item in the statement ofoperations, and requires that a Company formally document, designate and assessthe effectiveness of transactions that receive hedge accounting.  Since the Company’s commodity option contractsdo not meet the criteria for hedge accounting, changes in the value of thecommodity option contracts are recognized monthly in earnings.  The cumulative effect upon adoption ofapproximately $77,000 has been recorded as income in the accompanying condensedConsolidated Statement of Operations. It is not separately reported as a cumulative effect since the effect isnot significant.  Additional income ofapproximately $129,000 was recorded during the first quarter of 2001.  The unrealized gain on derivatives at April1, 2001 was approximately $206,000.

 

**Item 3. Quantitative and Qualitative Disclosures About MarketRisk**

 

**               **There has been no material change in theCompany’s market risk exposure since the filing of the Annual Report on

Form 10-K.

 

**Item 4.Controls and Procedures**

 

As of April 1, 2001, anevaluation was performed under the supervision and with the participation ofthe Company’s management, including the CEO and CFO, of the effectiveness ofthe design and operation of the Company’s disclosure controls and procedures.  Based on that evaluation, the Company’smanagement, including the CEO and CFO, concluded that the Company’s disclosurecontrols and procedures were effective as of April 1, 2001.  There have been no significant changes inthe Company’s internal controls or in other factors that could significantlyaffect internal controls subsequent to April 1, 2001.

** **

**PART II — OTHER INFORMATION**

 

**Item 6.  Exhibit and Reports on Form 8-K**

 

(a)          Exhibits:

 

Seventh Amendment toCredit Agreement.

 

(b)   No reporton Form 8-K was filed during the three months ended April 1, 2001.

 

 

22

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**SIGNATURES**

 

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

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

** **

 

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**Certifications**

 

I, Donald N. Smith, certify that:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

a)              all significant deficiencies in the design or operationof internal controls which could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

 

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

 

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

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

 

 

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I, Paul V. Hoagland, certify that:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

a)              all significant deficiencies in the design or operationof internal controls which could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

 

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

 

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

 

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

 

 

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