**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

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

 

**For the quarterlyperiod ended June 29, 2003**

 

**OR**

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

 

**For the transition period from                to                **

 

**Commission FileNo. 0-3930**

 

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**FRIENDLY ICE CREAM CORPORATION**

(Exact Name of Registrant as Specified in Its Charter)

 

| **Massachusetts**                                                                   |   | **04-2053130**                     |
|-------------------------------------------------------------------------------------|--------|------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization)                     |   | (IRS Employer  Identification No.) |
|                                                                                |   |                               |
| **1855 Boston Road****Wilbraham,  Massachusetts**                                   |   | **01095**                          |
| (Address of Principal Executive Offices)                                            |   | (Zip Code)                         |
|                                                                                |   |                               |
| **(413) 543-2400**                                                                  |
| (Registrant’s Telephone Number, Including Area Code)                           |
|                                                                                |   |                               |
| **Not Applicable**                                                                  |
| (Former name, former address and former fiscal year, if changed since  last report) |

 

Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes  ý  No  o

 

Indicate by check mark whether theregistrant is an accelerated filer (as defined in Exchange Act Rule12b-2). Yes  o  No  ý

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock as of the latestpracticable date.

 

| **Class**                    |   | **Outstanding at July 18, 2003** |   |
|------------------------------|--------|----------------------------------|--------|
|                         |   |                             |   |
| Common Stock, $.01 par value |   | 7,449,677  shares                |   |

 

 

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**PART I - FINANCIAL INFORMATION**

 

**Item 1.  FinancialStatements**

 

**FRIENDLY ICE CREAM CORPORATION ANDSUBSIDIARIES**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

(Inthousands)

 
|                                                                      |   | **June 29,  2003** |       | **December 29,  2002** |       |
|---------------------------------------------------------------------------|--------|--------------------|------------|------------------------|------------|
|                                                                      |   | **(unaudited)**    |       |                   |       |
| ASSETS                                                                    |   |               | ** ** |                   | ** ** |
| CURRENT ASSETS:                                                           |   |               | ** ** |                   | ** ** |
| Cash and cash equivalents                                                 |   | $                  | 30,747     |                   | $          | 34,341 |   |
| Restricted cash                                                           |   | 2,180              |       | —                 |       |
| Accounts receivable                                                       |   | 13,683             |       | 10,853                 |       |
| Inventories                                                               |   | 15,649             |       | 17,278                 |       |
| Deferred income taxes                                                     |   | 7,771              |       | 7,771                  |       |
| Prepaid expenses and other current assets                                 |   | 3,112              |       | 3,062                  |       |
| TOTAL CURRENT ASSETS                                                      |   | 73,142             |       | 73,305                 |       |
| PROPERTY AND EQUIPMENT, net of accumulated depreciation  and amortization |   | 162,892            |       | 158,373                |       |
| INTANGIBLE ASSETS AND DEFERRED COSTS, net of accumulated  amortization    |   | 18,786             |       | 19,642                 |       |
| OTHER ASSETS                                                              |   | 5,847              |       | 5,878                  |       |
| TOTAL ASSETS                                                              |   | $                  | 260,667    |                   | $          | 257,198 |   |
|                                                                      |   |               |       |                   |       |
| LIABILITIES AND STOCKHOLDERS’  DEFICIT                               |   |               | ** ** |                   | ** ** |
| CURRENT LIABILITIES:                                                      |   |               | ** ** |                   | ** ** |
| Current maturities of long-term debt                                      |   | $                  | 1,067      |                   | $          | 1,031 |   |
| Current maturities of capital lease and finance  obligations              |   | 773                |       | 1,362                  |       |
| Accounts payable                                                          |   | 32,354             |       | 23,902                 |       |
| Accrued salaries and benefits                                             |   | 11,162             |       | 9,329                  |       |
| Accrued interest payable                                                  |   | 2,057              |       | 1,961                  |       |
| Insurance reserves                                                        |   | 10,792             |       | 11,330                 |       |
| Restructuring reserves                                                    |   | 649                |       | 937                    |       |
| Other accrued expenses                                                    |   | 15,865             |       | 22,885                 |       |
| TOTAL CURRENT LIABILITIES                                                 |   | 74,719             |       | 72,737                 |       |
| DEFERRED INCOME TAXES                                                     |   | 1,886              |       | 1,533                  |       |
| CAPITAL LEASE AND FINANCE OBLIGATIONS, less current  maturities           |   | 4,743              |       | 5,044                  |       |
| LONG-TERM DEBT, less current maturities                                   |   | 231,284            |       | 231,830                |       |
| ACCRUED PENSION COST                                                      |   | 15,711             |       | 16,281                 |       |
| OTHER LONG-TERM LIABILITIES                                               |   | 34,108             |       | 33,475                 |       |
| COMMITMENTS AND CONTINGENCIES                                             |   |               |       |                   |       |
| STOCKHOLDERS’ DEFICIT:                                               |   |               |       |                   |       |
| Common stock                                                              |   | 74                 |       | 74                     |       |
| Additional paid-in capital                                                |   | 140,291            |       | 139,974                |       |
| Accumulated other comprehensive loss                                      |   | (14,559            | )          | (14,559                | )          |
| Accumulated deficit                                                       |   | (227,590           | )          | (229,191               | )          |
| TOTAL STOCKHOLDERS’ DEFICIT                                          |   | (101,784           | )          | (103,702               | )          |
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT                          |   | $                  | 260,667    |                   | $          | 257,198 |   |

 

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

 

1

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**FRIENDLYICE CREAM CORPORATION AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

(Unaudited)

(Inthousands, except per share data)

 
|                                               |   | **For the Three Months Ended** |    | **For the Six Months Ended** |   |
|----------------------------------------------------|--------|--------------------------------|---------|------------------------------|--------|
|                                               |   | **June 29,****2003**           |    | **June 30,  2002**           |   | **June 29,****2003** |   | **June 30,  2002** |   |
|                                               |   |                           |    |                         |   |   |   |   |   |
| REVENUES                                           |   | $                              | 155,648 |                         | $      | 152,181 |   | $ | 284,338 |   | $ | 281,355 |   |
|                                               |   |                           |    |                         |   |   |   |   |   |
| COSTS AND EXPENSES:                                |   |                           |    |                         |   |   |   |   |   |
| Cost of sales                                      |   | 55,179                         |    | 52,952                       |   | 101,156 |   | 98,992 |   |
| Labor and benefits                                 |   | 43,796                         |    | 42,243                       |   | 81,924 |   | 80,161 |   |
| Operating expenses                                 |   | 30,539                         |    | 29,422                       |   | 55,602 |   | 53,462 |   |
| General and administrative expenses                |   | 9,170                          |    | 8,681                        |   | 18,458 |   | 17,280 |   |
| Reduction of restructuring reserve                 |   | —                         |    | (400                         | )      | — |   | (400 | ) |
| Write-downs of property and equipment              |   | —                         |    | 311                          |   | — |   | 431 |   |
| Depreciation and amortization                      |   | 5,746                          |    | 6,387                        |   | 11,373 |   | 13,073 |   |
| Loss on sales of other property and equipment, net |   | 835                            |    | 129                          |   | 1,408 |   | 641 |   |
|                                               |   |                           |    |                         |   |   |   |   |   |
| OPERATING INCOME                                   |   | 10,383                         |    | 12,456                       |   | 14,417 |   | 17,715 |   |
|                                               |   |                           |    |                         |   |   |   |   |   |
| Interest expense, net                              |   | 6,092                          |    | 6,215                        |   | 12,194 |   | 12,552 |   |
|                                               |   |                           |    |                         |   |   |   |   |   |
| INCOME BEFORE PROVISION FOR INCOME TAXES           |   | 4,291                          |    | 6,241                        |   | 2,223 |   | 5,163 |   |
|                                               |   |                           |    |                         |   |   |   |   |   |
| Provision for income taxes                         |   | (1,201                         | )       | (2,426                       | )      | (622 | ) | (1,756 | ) |
|                                               |   |                           |    |                         |   |   |   |   |   |
| NET INCOME                                         |   | $                              | 3,090   |                         | $      | 3,815 |   | $ | 1,601 |   | $ | 3,407 |   |
|                                               |   |                           |    |                         |   |   |   |   |   |
| BASIC NET INCOME PER SHARE                         |   | $                              | 0.42    |                         | $      | 0.52 |   | $ | 0.22 |   | $ | 0.46 |   |
|                                               |   |                           |    |                         |   |   |   |   |   |
| DILUTED NET INCOME PER SHARE                       |   | $                              | 0.41    |                         | $      | 0.49 |   | $ | 0.21 |   | $ | 0.44 |   |
|                                               |   |                           |    |                         |   |   |   |   |   |
| WEIGHTED AVERAGE SHARES:                           |   |                           |    |                         |   |   |   |   |   |
| Basic                                              |   | 7,441                          |    | 7,366                        |   | 7,428 |   | 7,359 |   |
| Diluted                                            |   | 7,574                          |    | 7,722                        |   | 7,564 |   | 7,668 |   |

 

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

 

2

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**FRIENDLY ICE CREAM CORPORATION ANDSUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited)

(Inthousands)

 
|                                                                               |   | **For the Six Months Ended** |   |
|------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                               |   | **June 29,  2003**           |   | **June 30,  2002** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |   |                         |   |   |   |
| Net income                                                                         |   | $                            | 1,601  |   | $ | 3,407 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |   |                         |   |   |   |
| Stock compensation expense                                                         |   | 129                          |   | 133 |   |
| Depreciation and amortization                                                      |   | 11,373                       |   | 13,073 |   |
| Write-downs of property and equipment                                              |   | —                       |   | 431 |   |
| Deferred income tax expense                                                        |   | 353                          |   | 2,086 |   |
| Loss on disposal of other property and equipment, net                              |   | 1,408                        |   | 641 |   |
| Changes in operating assets and liabilities:                                       |   |                         |   |   |   |
| Accounts receivable                                                                |   | (2,830                       | )      | (2,550 | ) |
| Inventories                                                                        |   | 1,629                        |   | (5,190 | ) |
| Other assets                                                                       |   | (2,199                       | )      | (2,669 | ) |
| Accounts payable                                                                   |   | 8,452                        |   | 2,536 |   |
| Accrued expenses and other long-term liabilities                                   |   | (6,097                       | )      | (3,221 | ) |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                          |   | 13,819                       |   | 8,677 |   |
|                                                                               |   |                         |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |   |                         |   |   |   |
| Purchases of property and equipment                                                |   | (16,201                      | )      | (4,811 | ) |
| Proceeds from sales of property and equipment                                      |   | —                       |   | 1,293 |   |
| NET CASH USED IN INVESTING ACTIVITIES                                              |   | (16,201                      | )      | (3,518 | ) |
|                                                                               |   |                         |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |   |                         |   |   |   |
| Repayments of debt                                                                 |   | (510                         | )      | (531 | ) |
| Repayments of capital lease and finance obligations                                |   | (890                         | )      | (928 | ) |
| Stock options exercised                                                            |   | 188                          |   | 88 |   |
| NET CASH USED IN FINANCING ACTIVITIES                                              |   | (1,212                       | )      | (1,371 | ) |
|                                                                               |   |                         |   |   |   |
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                               |   | (3,594                       | )      | 3,788 |   |
|                                                                               |   |                         |   |   |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                     |   | 34,341                       |   | 16,342 |   |
|                                                                               |   |                         |   |   |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                           |   | $                            | 30,747 |   | $ | 20,130 |   |
|                                                                               |   |                         |   |   |   |
| SUPPLEMENTAL DISCLOSURES:                                                          |   |                         |   |   |   |
| Cash paid (refunded) during the period for:                                        |   |                         |   |   |   |
| Interest                                                                           |   | $                            | 12,056 |   | $ | 11,648 |   |
| Income taxes                                                                       |   | 863                          |   | (18 | ) |
| Lease  incentive equipment received                                                |   | 243                          |   | — |   |

 

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

 

3

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**FRIENDLY ICE CREAM CORPORATION ANDSUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

(Unaudited)

 

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

 

*Interim Financial Information -*

 

The accompanying condensedconsolidated financial statements as of June 29, 2003 and for the secondquarters and six months ended June 29, 2003 and June 30, 2002 are unaudited,but, in the opinion of management, include all adjustments which are necessaryfor a fair presentation of the consolidated financial position, results ofoperations, cash flows and comprehensive income of Friendly Ice CreamCorporation (“FICC”) and subsidiaries (unless the context indicates otherwise,collectively, the “Company”). Such adjustments consist solely of normalrecurring accruals. Operating results for the three and six month periods endedJune 29, 2003 and June 30, 2002 are not necessarily indicative of the resultsthat may be expected for the entire year due, in part, to the seasonality ofthe Company’s business. Historically, higher revenues and operating income havebeen experienced during the second and third fiscal quarters. The Company’sconsolidated financial statements, including the notes thereto, which arecontained in the 2002 Annual Report on Form 10-K should be read in conjunctionwith these condensed consolidated financial statements. Capitalized terms nototherwise defined herein should be referenced to the 2002 Annual Report on Form10-K.

 

*Use of Estimates in the Preparation of FinancialStatements -*

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the dates of the financial statements and thereported amounts of revenues and expenses during the reporting periods. Thecritical accounting policies and most significant estimates and assumptionsrelate to revenue recognition, insurance reserves, recoverability of accountsreceivable, restructuring reserves, valuation allowances and pension and otherpost-retirement benefits expense. Actual amounts could differ significantly fromthe estimates.

 

*Revenue Recognition -*

 

The Company’s revenues are derivedprimarily from the operation of full-service restaurants, the distribution andsale of frozen desserts through retail and institutional locations andfranchising. The Company recognizes restaurant revenue upon receipt of paymentfrom the customer and retail revenue, net of allowances, upon delivery ofproduct. Reserves for discounts and allowances from retail sales are estimatedand accrued when revenue is recorded. Actual amounts could differ materiallyfrom the estimates. Franchise royalty income, based on net sales offranchisees, is payable monthly and is recorded on the accrual method. Initialfranchise fees are recorded as revenue upon completion of all significantservices, generally upon opening of the restaurant.

 

4

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*InsuranceReserves -*

 

The Company is self-insured throughretentions or deductibles for the majority of its workers’ compensation,automobile, general liability, employer’s liability, product liability andgroup health insurance programs. Self-insurance amounts vary up to $500,000 peroccurrence. Insurance with third parties, some of which is then reinsuredthrough Restaurant Insurance Corporation (“RIC”), the Company’s wholly-ownedsubsidiary, is in place for claims in excess of these self-insured amounts. RICreinsured 100% of the risk from $500,000 to $1,000,000 per occurrence throughSeptember 2, 2000 for FICC’s workers’ compensation, general liability, employer’sliability and product liability insurance. Subsequent to September 2, 2000, theCompany discontinued its use of RIC as a captive insurer for new claims. FICC’sand RIC’s liabilities for estimated incurred losses are actuarially determinedand recorded in the accompanying condensed consolidated financial statements onan undiscounted basis. Actual incurred losses may vary from the estimatedincurred losses and could have a material effect on the Company’s insuranceexpense.

 

*Concentration of Credit Risk -*

 

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

 

*Restructuring Reserves-*

 

On October 10, 2001, the Companyeliminated approximately 70 positions at corporate headquarters. In addition,approximately 30 positions in the restaurant construction and fabrication areaswere eliminated by December 30, 2001. The purpose of the reduction was tostreamline functions and reduce redundancy among its business segments. As aresult of the elimination of the positions and the outsourcing of certainfunctions, the Company reported a pre-tax restructuring charge of approximately$2,536,000 for severance, rent and unusable construction supplies in the yearended December 30, 2001.

 

In March 2000, the Company’s Boardof Directors approved a restructuring plan that provided for the immediateclosing of 81 restaurants at the end of March 2000 and the disposition of anadditional 70 restaurants over the next 24 months. As a result of this plan,the Company reported a pre-tax restructuring charge of approximately$12,100,000 for severance, rent, utilities and real estate taxes, demarking, leasetermination costs and certain other costs associated with the closing of thelocations, along with a pre-tax write-down of property and equipment for theselocations of approximately $17,000,000 in the year ended December 31, 2000. TheCompany reduced the restructuring reserve by $400,000 and $1,900,000 during theyears ended December 29, 2002 and December 30, 2001, respectively, since thereserve exceeded estimated remaining payments.

 

As of June 29, 2003, the remainingrestructuring reserve was $649,000. The restructuring reserve may be increasedor decreased based upon remaining payments, which could vary materially fromthe estimates depending upon the timing of restaurant closings and otherfactors.

 

5

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*Pension and OtherPost-Retirement Benefits -*

 

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

 

*Restricted Cash -*

 

Restaurant Insurance Corporation(“RIC”), an insurance subsidiary, is required to hold assets in trust whose valueis at least equal to certain of RIC’s outstanding estimated insurance claimliabilities. Accordingly, as of June 29, 2003, cash of approximately $2,180,000was restricted. There was no restricted cash as of December 29, 2002 as thisrequirement was satisfied with a letter of credit.

 

*Inventories -*

 

Inventories were stated at thelower of first-in, first-out cost or market. Inventories at June 29, 2003 andDecember 29, 2002 were (in thousands):

 
|             |   | **June 29,  2003** |   | **December 29,  2002** |   |
|------------------|--------|--------------------|--------|------------------------|--------|
|             |   |               |   |                   |   |
| Raw materials    |   | $                  | 1,686  |                   | $      | 801 |   |
| Goods in process |   | 156                |   | 203                    |   |
| Finished goods   |   | 13,807             |   | 16,274                 |   |
|             |   |               |   |                   |   |
| Total            |   | $                  | 15,649 |                   | $      | 17,278 |   |

 

6

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*Long-Lived Assets-*

 

In accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets,” the Company reviews its Non-Friendly Marks,which were assigned to the Company by Hershey in September 2002, for impairmenton a quarterly basis. The Company recognizes impairment has occurred when thecarrying value of the Non-Friendly Marks exceeds the estimated futureundiscounted cash flows of the trademarked products.

 

The Company reviews each restaurantproperty quarterly to determine which properties will be disposed of, if any.This determination is made based on poor operating results, deterioratingproperty values and other factors. In addition, the Company reviews allrestaurants with negative cash flow for impairment on a quarterly basis. TheCompany recognizes an impairment has occurred when the carrying value ofproperty reviewed exceeds its estimated fair value, which is estimated based onthe Company’s experience selling similar properties and local marketconditions, less costs to sell for properties to be disposed of.

 

*Income Taxes -*

 

The Company accounts for incometaxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” whichrequires recognition of deferred tax assets and liabilities for the expectedfuture tax consequences of events that have been included in the financialstatements or tax returns. A valuation allowance is recorded for deferred taxassets whose realization is not likely.

 

*DerivativeInstruments and Hedging Agreements -*

 

The Company enters into commodityoption contracts from time to time to manage dairy cost pressures. TheCompany’s commodity option contracts do not meet hedge accounting criteria asdefined by SFAS No. 133 and, accordingly, are marked to market each period,with the resulting gains or losses recognized in cost of sales.

 

7

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*Earnings PerShare -*

 

Basic earnings per share iscalculated by dividing net income by the weighted average number of commonshares outstanding during the period. Diluted earnings per share is calculatedby dividing net income by the weighted average number of shares of common stockand common stock equivalents outstanding during the period. Common stockequivalents are dilutive stock options and warrants that are assumed exercisedfor calculation purposes. The number of common stock options which could dilutebasic earnings per share in the future, that were not included in thecomputation of diluted income per share because to do so would have beenantidilutive, was 191,110 and 53,420 for the three months ended June 29, 2003and June 30, 2002, respectively. The number of common stock options which coulddilute basic earnings per share in the future, that were not included in thecomputation of diluted income per share because to do so would have beenantidilutive, was 191,110 and 55,340 for the six months ended June 29, 2003 andJune 30, 2002, respectively.

 

Presented below is thereconciliation between basic and diluted weighted average shares for the threeand six months ended June 29, 2003 and June 30, 2002 (in thousands):

 
|                                                                   |   | **For the Three Months Ended** |   |
|------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                   |   | **Basic**                      |   | **Diluted** |   |
|                                                                   |   | **June 29, 2003**              |   | **June 30, 2002** |   | **June 29, 2003** |   | **June 30, 2002** |   |
| Weighted average number of common shares outstanding during the period |   | 7,441                          |   | 7,366 |   | 7,441 |   | 7,366 |   |
| Adjustments:                                                           |   |                           |   |   |   |   |   |   |   |
| Assumed exercise of stock options                                      |   | —                         |   | — |   | 133 |   | 356 |   |
| Weighted average number of shares outstanding                          |   | 7,441                          |   | 7,366 |   | 7,574 |   | 7,722 |   |

 
|                                                                   |   | **For the Six Months Ended** | ** ** |
|------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                   |   | **Basic**                    | ** ** | **Diluted** | ** ** |
|                                                                   |   | **June 29, 2003**            |       | **June 30, 2002** | ** ** | **June 29, 2003** | ** ** | **June 30, 2002** | ** ** |
| Weighted average number of common shares outstanding during the period |   | 7,428                        |       | 7,359 |   | 7,428 |   | 7,359 |   |
| Adjustments:                                                           |   |                         |       |   |   |   |   |   |   |
| Assumed exercise of stock options                                      |   | —                       |       | — |   | 136 |   | 309 |   |
| Weighted average number of shares outstanding                          |   | 7,428                        |       | 7,359 |   | 7,564 |   | 7,668 |   |

 

8

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*Stock-BasedCompensation -*

 

The Company accounts forstock-based compensation for employees under Accounting Principles Board(“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and electedthe disclosure-only alternative under SFAS No. 123, “Accounting for Stock-BasedCompensation.”  No stock-basedcompensation cost is included in net income, as all options granted duringperiods presented had an exercise price equal to the market value of the stockon the date of grant. In accordance with SFAS No. 148, “Accounting for StockBased Compensation-Transition and Disclosure,” the following table presents theeffect on net income and net income per share had compensation cost for theCompany’s stock plans been determined consistent with SFAS No. 123:

 
|                                                                                                                               |   | **For the Three Months  Ended** |      | **For the Six Months  Ended** |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|-----------|-------------------------------|--------|
|                                                                                                                               |   | **June 29,  2003**              |      | **June 30,  2002**            |   | **June 29,  2003** |   | **June 30,  2002** |   |
|                                                                                                                               |   |                            |      |                          |   |   |   |   |   |
| Net income, as reported                                                                                                            |   | $                               | 3,090,000 |                          | $      | 3,815,000 |   | $ | 1,601,000 |   | $ | 3,407,000 |   |
| Less stock based compensation expense determined under  fair value method for all stock options, net of related income tax benefit |   | (50,000                         | )         | (49,000                       | )      | (92,000 | ) | (93,000 | ) |
|                                                                                                                               |   |                            |      |                          |   |   |   |   |   |
| Pro forma net income                                                                                                               |   | $                               | 3,040,000 |                          | $      | 3,766,000 |   | $ | 1,509,000 |   | $ | 3,314,000 |   |
|                                                                                                                               |   |                            |      |                          |   |   |   |   |   |
| Basic net income per share, as reported                                                                                            |   | $                               | 0.42      |                          | $      | 0.52 |   | $ | 0.22 |   | $ | 0.46 |   |
| Basic net income per share, pro forma                                                                                              |   | $                               | 0.41      |                          | $      | 0.51 |   | $ | 0.20 |   | $ | 0.45 |   |
|                                                                                                                               |   |                            |      |                          |   |   |   |   |   |
| Diluted net income per share, as reported                                                                                          |   | $                               | 0.41      |                          | $      | 0.49 |   | $ | 0.21 |   | $ | 0.44 |   |
| Diluted net income per share, pro forma                                                                                            |   | $                               | 0.40      |                          | $      | 0.49 |   | $ | 0.20 |   | $ | 0.43 |   |

 

Fair value was estimated on thegrant date using the Black-Scholes option pricing model with the followingassumptions for options issued in July 2002. There have been no options issuedduring the three and six month periods ended June 29, 2003.

 

| Risk  free interest rate |   | 3.60    | %      |
|--------------------------|--------|---------|--------|
| Expected  life           |   | 5 years |   |
| Expected  volatility     |   | 79.97   | %      |
| Dividend  yield          |   | 0.00    | %      |
| Fair  value              |   | $       | 4.99   |   |
|                          |        |         |        |  |

 

*Reclassifications -*

 

Certain prior year amounts havebeen reclassified to conform with current year presentation.

 

9

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**2.   SEGMENT REPORTING**

 

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

 

The Company’s restaurants targetfamilies with children and adults who desire a reasonably priced meal in afull-service setting. The Company’s menu offers a broad selection offreshly-prepared foods which appeal to customers throughout all dayparts. Themenu currently features over 100 items comprised of a broad selection ofbreakfast, lunch, dinner and afternoon and evening snack items. Foodserviceoperations manufactures frozen dessert products and distributes suchmanufactured products and purchased finished goods to the Company’s restaurantsand franchised operations. Additionally, it sells frozen dessert products todistributors and retail and institutional locations. The Company’s franchisesegment includes a royalty based on franchise restaurant revenue. In addition,the Company receives rental income from various franchised restaurants. TheCompany does not allocate general and administrative expenses associated withits headquarters operations to any business segment. These costs includeexpenses of the following functions: legal, accounting, personnel not directlyrelated to a segment, information systems and other headquarters activities.

 

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

 

10

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During the three and six monthsended June 29, 2003, the foodservice segment no longer charged additional zonepricing to the restaurant and franchise segments. As a result, intercompanyzone pricing of approximately $123,000 and $232,000 was reclassified out offoodservice revenue, resulting in reduced cost of sales in the restaurant andfranchise segments for the three and six months ended June 30, 2002,respectively, to conform with current year presentation. Additionally, secondquarter ice cream promotion marketing costs of $729,000 that were funded by thefoodservice segment in 2002 were reclassified to the restaurant segment.

 

EBITDA represents net income before(i) provision for income taxes, (ii) interest expense, net,(iii) depreciation and amortization, (iv) write-downs of property andequipment and (v) other non-cash items. The Company has included informationconcerning EBITDA in this Form 10-Q because the Company’s management incentiveplan pays bonuses based on achieving EBITDA targets and the Company believesthat such information is used by certain investors as one measure of a company’shistorical ability to service debt. EBITDA should not be considered as analternative to, or more meaningful than, earnings (loss) from operations orother traditional indications of a company’s operating performance.

 
|                   |   | **For the Three Months Ended** |    | **For the Six Months Ended** |   |
|------------------------|--------|--------------------------------|---------|------------------------------|--------|
|                   |   | **June 29,  2003**             |    | **June 30,  2002**           |   | **June 29,  2003** |   | **June 30,  2002** |   |
|                   |   | **(in thousands)**             |    |
| Revenues:              |   |                           |    |                         |   |   |   |   |   |
| Restaurant             |   | $                              | 123,002 |                         | $      | 121,893 |   | $ | 226,170 |   | $ | 226,149 |   |
| Foodservice            |   | 64,633                         |    | 61,964                       |   | 116,959 |   | 113,676 |   |
| Franchise              |   | 2,710                          |    | 2,550                        |   | 4,965 |   | 4,679 |   |
| Total                  |   | $                              | 190,345 |                         | $      | 186,407 |   | $ | 348,094 |   | $ | 344,504 |   |
|                   |   |                           |    |                         |   |   |   |   |   |
| Intersegment revenues: |   |                           |    |                         |   |   |   |   |   |
| Restaurant             |   | $                              | —  |                         | $      | — |   | $ | — |   | $ | — |   |
| Foodservice            |   | (34,697                        | )       | (34,226                      | )      | (63,756 | ) | (63,149 | ) |
| Franchise              |   | —                         |    | —                       |   | — |   | — |   |
| Total                  |   | $                              | (34,697 | )                            | $      | (34,226 | ) | $ | (63,756 | ) | $ | (63,149 | ) |
|                   |   |                           |    |                         |   |   |   |   |   |
| External revenues:     |   |                           |    |                         |   |   |   |   |   |
| Restaurant             |   | $                              | 123,002 |                         | $      | 121,893 |   | $ | 226,170 |   | $ | 226,149 |   |
| Foodservice            |   | 29,936                         |    | 27,738                       |   | 53,203 |   | 50,527 |   |
| Franchise              |   | 2,710                          |    | 2,550                        |   | 4,965 |   | 4,679 |   |
| Total                  |   | $                              | 155,648 |                         | $      | 152,181 |   | $ | 284,338 |   | $ | 281,355 |   |

 

11

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|                                       |   | **For the Three Months Ended** |   | **For the Six Months Ended** |   |
|--------------------------------------------|--------|--------------------------------|--------|------------------------------|--------|
|                                       |   | **June 29,  2003**             |   | **June 30,  2002**           |   | **June 29,  2003** |   | **June 30,  2002** |   |
|                                       |   | **(in thousands)**             |   |
| EBITDA:                                    |   |                           |   |                         |   |   |   |   |   |
| Restaurant                                 |   | $                              | 14,402 |                         | $      | 15,163 |   | $ | 24,483 |   | $ | 27,268 |   |
| Foodservice                                |   | 5,258                          |   | 5,398                        |   | 8,447 |   | 8,964 |   |
| Franchise                                  |   | 2,002                          |   | 1,755                        |   | 3,563 |   | 3,136 |   |
| Corporate                                  |   | (4,587                         | )      | (3,981                       | )      | (9,351 | ) | (8,383 | ) |
| (Loss) gain on property and equipment, net |   | (882                           | )      | 482                          |   | (1,223 | ) | (33 | ) |
| Reduction of restructure reserve           |   | —                         |   | 400                          |   | — |   | 400 |   |
| Total                                      |   | $                              | 16,193 |                         | $      | 19,217 |   | $ | 25,919 |   | $ | 31,352 |   |
|                                       |   |                           |   |                         |   |   |   |   |   |
| Interest expense, net-Corporate            |   | $                              | 6,092  |                         | $      | 6,215 |   | $ | 12,194 |   | $ | 12,552 |   |
|                                       |   |                           |   |                         |   |   |   |   |   |
| Depreciation and amortization:             |   |                           |   |                         |   |   |   |   |   |
| Restaurant                                 |   | $                              | 3,965  |                         | $      | 3,889 |   | $ | 7,765 |   | $ | 7,986 |   |
| Foodservice                                |   | 746                            |   | 828                          |   | 1,482 |   | 1,671 |   |
| Franchise                                  |   | 38                             |   | 66                           |   | 77 |   | 139 |   |
| Corporate                                  |   | 997                            |   | 1,604                        |   | 2,049 |   | 3,277 |   |
| Total                                      |   | $                              | 5,746  |                         | $      | 6,387 |   | $ | 11,373 |   | $ | 13,073 |   |
|                                       |   |                           |   |                         |   |   |   |   |   |
| Other non-cash expenses:                   |   |                           |   |                         |   |   |   |   |   |
| Corporate                                  |   | $                              | 64     |                         | $      | 63 |   | $ | 129 |   | $ | 133 |   |
| Write-downs of property and equipment      |   | —                         |   | 311                          |   | — |   | 431 |   |
| Total                                      |   | $                              | 64     |                         | $      | 374 |   | $ | 129 |   | $ | 564 |   |
|                                       |   |                           |   |                         |   |   |   |   |   |
| Income (loss) before income taxes:         |   |                           |   |                         |   |   |   |   |   |
| Restaurant                                 |   | $                              | 10,437 |                         | $      | 11,274 |   | $ | 16,718 |   | $ | 19,282 |   |
| Foodservice                                |   | 4,512                          |   | 4,570                        |   | 6,965 |   | 7,293 |   |
| Franchise                                  |   | 1,964                          |   | 1,689                        |   | 3,486 |   | 2,997 |   |
| Corporate                                  |   | (11,740                        | )      | (11,863                      | )      | (23,723 | ) | (24,345 | ) |
| (Loss) gain on property and equipment, net |   | (882                           | )      | 171                          |   | (1,223 | ) | (464 | ) |
| Reduction of restructure reserve           |   | —                         |   | 400                          |   | — |   | 400 |   |
| Total                                      |   | $                              | 4,291  |                         | $      | 6,241 |   | $ | 2,223 |   | $ | 5,163 |   |

 

12

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|                                                                   |   | **June 29,  2003** |    | **December 29,  2002** |   |
|------------------------------------------------------------------------|--------|--------------------|---------|------------------------|--------|
|                                                                   |   | **(in thousands)** |    |
| Capital expenditures, including assets acquired under  capital leases: |   |               |    |                   |   |
| Restaurant                                                             |   | $                  | 13,703  |                   | $      | 15,386 |   |
| Foodservice                                                            |   | 2,278              |    | 1,667                  |   |
| Corporate                                                              |   | 463                |    | 1,039                  |   |
| Total                                                                  |   | $                  | 16,444  |                   | $      | 18,092 |   |
|                                                                   |   |               |    |                   |   |
| Total assets:                                                          |   |               |    |                   |   |
| Restaurant                                                             |   | $                  | 150,382 |                   | $      | 144,927 |   |
| Foodservice                                                            |   | 41,058             |    | 39,631                 |   |
| Franchise                                                              |   | 7,750              |    | 9,062                  |   |
| Corporate                                                              |   | 61,477             |    | 63,578                 |   |
| Total                                                                  |   | $                  | 260,667 |                   | $      | 257,198 |   |

 

**3.   NEW ACCOUNTING PRONOUNCEMENTS**

 

In April 2003, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards(“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments andHedging Activities,” which is generally effective for contracts entered into ormodified after June 30, 2003 and for hedging relationships designated afterJune 30, 2003. SFAS 149 clarifies under what circumstances a contract with aninitial net investment meets the characteristic of a derivative as discussed inSFAS No. 133, clarifies when a derivative contains a financing component,amends the definition of “underlying” to conform it to the language used inFASB Interpretation No. 45, “Guarantor Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others” andamends certain other existing pronouncements. The Company has only limitedinvolvement with derivative financial instruments, does not use them fortrading purposes and is not a party to any leveraged derivatives. Since theCompany’s commodity option contracts do not meet the criteria for hedgeaccounting, the Company does not anticipate that the adoption of SFAS No. 149will have an impact on its financial position or results of operations.

 

In January 2003, the EmergingIssues Task Force (“EITF”) issued EITF Issue No. 02-16, “Accounting by aCustomer (Including a Reseller) for Certain Consideration Received from aVendor,” which states that cash consideration received from a vendor ispresumed to be a reduction of the prices of the vendor’s products or servicesand should, therefore, be characterized as a reduction of cost of sales whenrecognized in the statement of operations. That presumption is overcome whenthe consideration is either a reimbursement of specific, incremental,identifiable costs incurred to sell the vendor’s products, or a payment forassets or services delivered to the vendor. EITF Issue No. 02-16 is effectivefor arrangements entered into after November 21, 2002. The adoption of EITFIssue No. 02-16 had no material impact on net earnings in 2003.

 

13

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In January 2003, the FASB issuedInterpretation No. 46 “Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51” (“FIN 46”). FIN 46 requirescertain variable interest entities to be consolidated by the primary beneficiaryof the entity if the equity investors in the entity do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties. FIN 46 is effective for allnew variable interest entities created or acquired after January 31, 2003.For variable interest entities created or acquired prior to February 1,2003, the provisions of FIN 46 must be applied for the first interim orannual period beginning after June 15, 2003. The Company is currently inthe process of evaluating the impact of FIN 46 and has not yet determined theimpact on the Company’s results of operations or financial position.

 

In December 2002, the FASB issuedSFAS No. 148, “Accounting for Stock-Based Compensation–Transition andDisclosure,” which amends SFAS No. 123, “Accounting for Stock-BasedCompensation.” SFAS No. 148 allows for three methods of transition for thosecompanies that adopt SFAS No. 123’s provisions for fair value recognition.SFAS No. 148’s transition guidance and provisions for annual disclosures areeffective for fiscal years ending after December 15, 2002. The Company did notadopt fair value accounting for employee stock options under SFAS No. 123 andSFAS No. 148, but will continue to disclose the required pro-forma informationin the notes to the consolidated financial statements.

 

In July 2002, the FASB issued SFASNo. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFASNo. 146 addresses financial accounting and reporting for costs associated withexit or disposal activities and nullifies EITF Issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).” Theprincipal difference between SFAS No. 146 and EITF Issue No. 94-3 relates tothe timing of liability recognition. Under SFAS No. 146, a liability for a costassociated with an exit or disposal activity is recognized when the liabilityis incurred. Under EITF Issue No. 94-3, a liability for an exit cost wasrecognized at the date of an entity’s commitment to an exit plan. Theprovisions of SFAS No. 146 are effective for exit or disposal activities thatare initiated after December 31, 2002. The adoption of SFAS No. 146 had nomaterial effect on the Company’s financial position or results of operations.

 

In April 2002, the FASB issued SFASNo. 145, “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, andTechnical Corrections.” SFAS No. 4 required all gains and losses from theextinguishment of debt to be reported as extraordinary items and SFAS No. 64related to the same matter. SFAS No. 145 requires gains and losses from certaindebt extinguishment not to be reported as extraordinary items when the use ofdebt extinguishment is part of a risk management strategy. SFAS No. 44 wasissued to establish transitional requirements for motor carriers. Thosetransitions are completed, therefore SFAS No. 145 rescinds SFAS No. 44. SFASNo. 145 also amends SFAS No. 13 requiring sale-leaseback accounting for certainlease modifications. SFAS No. 145 is effective for fiscal years beginning afterMay 15, 2002. The provisions relating to sale-leaseback accounting areeffective for transactions occurring after May 15, 2002. The adoption of SFASNo. 145 had no material effect on the Company’s financial position or resultsof operations.

 

14

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**4.   RESTRUCTURINGRESERVES**

 

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

 
|                            |   | **For the Six Months Ended June 29, 2003**           |   |
|---------------------------------|--------|------------------------------------------------------|--------|
|                            |   | **Restructuring  Reserves as of  December 29, 2002** |   | **Costs Paid** |   | **Restructuring  Reserves as of  June 29, 2003** |   |
| Rent                            |   | $                                                    | 679    |   | $ | (128 | ) | $ | 551 |   |
| Utilities and real estate taxes |   | 121                                                  |   | (59 | ) | 62 |   |
| Equipment                       |   | 77                                                   |   | (77 | ) | — |   |
| Other                           |   | 60                                                   |   | (24 | ) | 36 |   |
| Total                           |   | $                                                    | 937    |   | $ | (288 | ) | $ | 649 |   |

 

 
|                            |   | **For the Six Months Ended June 30, 2002**             |   |
|---------------------------------|--------|--------------------------------------------------------|--------|
|                            |   | **Restructuring  Reserves as of****December 30, 2001** |   | **Costs Paid** |   | **Reserve****Reduction** |   | **Restructuring  Reserves as of****June 30, 2002** |   |
| Severance pay                   |   | $                                                      | 516    |   | $ | (473 | ) | $ | (32 | ) | $ | 11 |   |
| Rent                            |   | 1,318                                                  |   | (223 | ) | (314 | ) | 781 |   |
| Utilities and real estate taxes |   | 185                                                    |   | (86 | ) | 17 |   | 116 |   |
| Equipment                       |   | 480                                                    |   | (152 | ) | — |   | 328 |   |
| Outplacement services           |   | 6                                                      |   | (6 | ) | — |   | — |   |
| Other                           |   | 551                                                    |   | (116 | ) | (71 | ) | 364 |   |
| Total                           |   | $                                                      | 3,056  |   | $ | (1,056 | ) | $ | (400 | ) | $ | 1,600 |   |

 

Based on information currentlyavailable, management believes that the restructuring reserve as of June 29,2003 was adequate and not excessive.

 

15

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**5.   RELATEDPARTY TRANSACTION**

 

In 1994, TRC Realty LLC (asubsidiary of TRC whose majority equity owner is the Company’s Chairman)entered into a ten-year operating lease for an aircraft for use by both theCompany and TRC (which operates restaurants using the trademark PerkinsRestaurant and Bakery (“Perkins”)). In 1999, this lease was cancelled and TRCRealty LLC entered into a new ten-year operating lease for a new aircraft. TheCompany shared proportionately with Perkins in reimbursing TRC Realty LLC forleasing, tax and insurance expenses. In addition, the Company also incurredactual usage costs. TRC Realty LLC anticipates terminating the lease anddisposing of the aircraft by July 2003. See Note 7 of Notes to CondensedConsolidated Financial Statements for a discussion of a subsequent eventrelated to the aircraft.

 

**6.   FRANCHISE TRANSACTIONS**

 

In 2000, the Company and its firstfranchisee, Davco Restaurants, Inc. (“Davco”), agreed to terminate Davco’srights as the exclusive developer of new Friendly’s restaurants in Maryland,Delaware, the District of Columbia and northern Virginia, effective December28, 2000. At that time, Davco had the right to close up to 16 existingfranchised locations and operate the remaining 32 locations under theirrespective existing franchise agreements until such time as a new franchiseewas found for those locations. The existing franchise agreements for the 32locations were modified as of December 29, 2001 to allow early terminationsubject, however, to liquidated damages on 22 of the 32 franchise agreements.During the year ended December 30, 2001, Davco transferred its rights to threefranchised locations to a third party and closed two restaurants.  During the year ended December 29, 2002,Davco transferred its rights to 24 additional franchised locations to sixseparate third parties and closed six restaurants. During the six months endedJune 29, 2003, Davco closed two restaurants and transferred its rights to threeadditional franchised locations to two third parties. As of June 29, 2003Friendco Restaurants Inc., a subsidiary of Davco, operated eight restaurants.During June 2003, the Company entered into a Settlement Agreement and MutualGeneral Release (the “Agreement”) with Davco. The Agreement released Davco fromall obligations and guarantees related to certain leases associated withfranchised locations. Proceeds from the Agreement were $250,000, which wasrecorded as revenue in the quarter ended June 29, 2003.

 

**7.   SUBSEQUENTEVENTS**

 

The $200 million Senior Notesissued in November 1997 (the “Senior Notes”) are unsecured seniorobligations of FICC, guaranteed on an unsecured senior basis by FICC’sFriendly’s Restaurants Franchise, Inc. subsidiary, but are effectivelysubordinated to all secured indebtedness of FICC, including the indebtednessincurred under the New Credit Facility. The Senior Notes mature onDecember 1, 2007. Interest on the Senior Notes is payable at 10.50% perannum semi-annually on June 1 and December 1 of each year. In July2003, the Company obtained a limited waiver to the New Credit Facility to allowthe Company to repurchase certain of the Senior Notes in an amount up to$3,000,000. In July 2003, FICC repurchased $2,000,000 in aggregate principalamount of the Senior Notes for $2,077,000, the then current market valueincluding interest.

 

During July 2003, the Companyagreed to enter into a development agreement granting Jax Family Rest., Inc.(“Jax”) certain limited exclusive rights to operate and develop Friendly’sfull-service restaurants in designated areas within Baker, Clay, Nassau, Putnamand St. John’s counties, Florida (the “Jax Agreement”). Pursuant to the JaxAgreement, Jax has agreed to open 10 new restaurants over the next seven years.The Company will receive development fees of $155,000, which represent one-halfof the initial franchise fees. The $155,000 will be recognized into income asrestaurants are opened.

 

At the Company’s July 23, 2003Board of Directors meeting, the disinterested Board members approved a paymentup to $1,000,000 to TRC Realty LLC.  Thepayment, if made, will

 

16

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terminate the Company’s existing cost sharing arrangementfor an aircraft with Perkins Restaurants and Bakery, an affiliate of TRC.  Under the existing cost sharing arrangement,which expires in January 2010, the Company pays approximately $500,000annually.

 

**8.   SUPPLEMENTALCONDENSED CONSOLIDATING FINANCIAL INFORMATION**

 

FICC’s obligation related to theSenior Notes are guaranteed fully and unconditionally by one of FICC’s whollyowned subsidiaries. There are no restrictions on FICC’s ability to obtaindividends or other distributions of funds from this subsidiary, except thoseimposed by applicable law. The following supplemental financial informationsets forth, on a condensed consolidating basis, balance sheets, statements ofoperations and statements of cash flows for FICC (the “Parent Company”), Friendly’sRestaurants Franchise, Inc. (the “Guarantor Subsidiary”) and Friendly’sInternational, Inc., Restaurant Insurance Corporation, Friendly’s Realty I,LLC, Friendly’s Realty II, LLC and Friendly’s Realty III, LLC (collectively,the “Non-guarantor Subsidiaries”). All of the LLCs’ assets were owned by theLLCs, which are separate entities with separate creditors which will beentitled to be satisfied out of the LLCs’ assets. Separate complete financialstatements and other disclosures of the Guarantor Subsidiary as of June 29,2003 and December 29, 2002 and for the six months ended June 29, 2003 and June30, 2002 were not presented because management has determined that suchinformation is not material to investors.

 

Investments in subsidiaries areaccounted for by the Parent Company on the equity method for purposes of thesupplemental consolidating presentation. Earnings of the subsidiaries are,therefore, reflected in the Parent Company’s investment accounts and earnings.The principal elimination entries eliminate the Parent Company’s investments insubsidiaries and intercompany balances and transactions.

 

17

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**Supplemental Condensed ConsolidatingBalance Sheet**

**As of June 29, 2003**

(Inthousands)

 
|                                                      |   | **Parent****Company** |    | **Guarantor  Subsidiary** |   | **Non-  guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|-----------------------------------------------------------|--------|-----------------------|---------|---------------------------|--------|-----------------------------------|--------|------------------|--------|------------------|--------|
|                                                      |   |                  |    |                      |   |                              |   |             |   |             |   |
| Assets                                                    |   |                  |    |                      |   |                              |   |             |   |             |   |
|                                                      |   |                  |    |                      |   |                              |   |             |   |             |   |
| Current assets:                                           |   |                  |    |                      |   |                              |   |             |   |             |   |
| Cash and cash equivalents                                 |   | $                     | 28,366  |                      | $      | 771                               |   | $                | 1,610  |             | $      | — |   | $ | 30,747 |   |
| Restricted cash                                           |   | —                |    | —                    |   | 2,180                             |   | —           |   | 2,180            |   |
| Accounts receivable, net                                  |   | 12,092                |    | 1,591                     |   | —                            |   | —           |   | 13,683           |   |
| Inventories                                               |   | 15,649                |    | —                    |   | —                            |   | —           |   | 15,649           |   |
| Deferred income taxes                                     |   | 7,718                 |    | 18                        |   | —                            |   | 35               |   | 7,771            |   |
| Prepaid expenses and other current assets                 |   | 7,972                 |    | 707                       |   | 7,776                             |   | (13,343          | )      | 3,112            |   |
| Total current assets                                      |   | 71,797                |    | 3,087                     |   | 11,566                            |   | (13,308          | )      | 73,142           |   |
| Deferred income taxes                                     |   | —                |    | 264                       |   | —                            |   | (264             | )      | —           |   |
| Property and equipment, net                               |   | 114,480               |    | —                    |   | 48,412                            |   | —           |   | 162,892          |   |
| Intangibles and deferred costs, net                       |   | 16,183                |    | —                    |   | 2,603                             |   | —           |   | 18,786           |   |
| Investments in subsidiaries                               |   | 4,756                 |    | —                    |   | —                            |   | (4,756           | )      | —           |   |
| Other assets                                              |   | 4,932                 |    | 7,411                     |   | 915                               |   | (7,411           | )      | 5,847            |   |
|                                                      |   |                  |    |                      |   |                              |   |             |   |             |   |
| Total assets                                              |   | $                     | 212,148 |                      | $      | 10,762                            |   | $                | 63,496 |             | $      | (25,739 | ) | $ | 260,667 |   |
|                                                      |   |                  |    |                      |   |                              |   |             |   |             |   |
| Liabilities and Stockholders’  (Deficit) Equity      |   |                  |    |                      |   |                              |   |             |   |             |   |
|                                                      |   |                  |    |                      |   |                              |   |             |   |             |   |
| Current liabilities:                                      |   |                  |    |                      |   |                              |   |             |   |             |   |
| Current maturities of long-term obligations               |   | $                     | 8,550   |                      | $      | —                            |   | $                | 1,066  |             | $      | (7,776 | ) | $ | 1,840 |   |
| Accounts payable                                          |   | 32,354                |    | —                    |   | —                            |   | —           |   | 32,354           |   |
| Accrued expenses                                          |   | 37,141                |    | 2,179                     |   | 6,614                             |   | (5,409           | )      | 40,525           |   |
| Total current liabilities                                 |   | 78,045                |    | 2,179                     |   | 7,680                             |   | (13,185          | )      | 74,719           |   |
| Deferred income taxes                                     |   | 2,115                 |    | —                    |   | —                            |   | (229             | )      | 1,886            |   |
| Long-term obligations, less current maturities            |   | 183,470               |    | —                    |   | 52,557                            |   | —           |   | 236,027          |   |
| Other long-term liabilities                               |   | 50,302                |    | 725                       |   | 6,361                             |   | (7,569           | )      | 49,819           |   |
| Stockholders’ (deficit) equity                       |   | (101,784              | )       | 7,858                     |   | (3,102                            | )      | (4,756           | )      | (101,784         | )      |
| Total liabilities and stockholders’ (deficit) equity |   | $                     | 212,148 |                      | $      | 10,762                            |   | $                | 63,496 |             | $      | (25,739 | ) | $ | 260,667 |   |

 

18

----

 

**Supplemental Condensed ConsolidatingStatement of Operations**

**For the Three Months Ended June 29, 2003**

(Inthousands)

 
|                                                                                                   |   | **Parent  Company** |    | **Guarantor  Subsidiary** |   | **Non-  Guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|--------------------------------------------------------------------------------------------------------|--------|---------------------|---------|---------------------------|--------|-----------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Revenues                                                                                               |   | $                   | 153,464 |                      | $      | 2,184                             |   | $                | — |             | $      | — |   | $ | 155,648 |   |
| Costs and expenses:                                                                                    |   |                |    |                      |   |                              |   |             |   |             |   |
| Cost of sales                                                                                          |   | 55,179              |    | —                    |   | —                            |   | —           |   | 55,179           |   |
| Labor and benefits                                                                                     |   | 43,796              |    | —                    |   | —                            |   | —           |   | 43,796           |   |
| Operating expenses and write-downs of property and equipment                                           |   | 32,249              |    | —                    |   | (1,710                            | )      | —           |   | 30,539           |   |
| General and administrative expenses                                                                    |   | 8,011               |    | 1,159                     |   | —                            |   | —           |   | 9,170            |   |
| Depreciation and amortization                                                                          |   | 5,173               |    | —                    |   | 573                               |   | —           |   | 5,746            |   |
| Loss on sales of other property and equipment, net                                                     |   | 780                 |    | —                    |   | 55                                |   | —           |   | 835              |   |
| Interest expense, net                                                                                  |   | 4,935               |    | —                    |   | 1,157                             |   | —           |   | 6,092            |   |
|                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Income (loss) before provision for income taxes and equity in net income  of consolidated subsidiaries |   | 3,341               |    | 1,025                     |   | (75                               | )      | —           |   | 4,291            |   |
|                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Provision for income taxes                                                                             |   | (737                | )       | (420                      | )      | (44                               | )      | —           |   | (1,201           | )      |
|                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Income (loss) before equity in net income of consolidated subsidiaries                                 |   | 2,604               |    | 605                       |   | (119                              | )      | —           |   | 3,090            |   |
|                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Equity in net income of consolidated subsidiaries                                                      |   | 486                 |    | —                    |   | —                            |   | (486             | )      | —           |   |
|                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Net income (loss)                                                                                      |   | $                   | 3,090   |                      | $      | 605                               |   | $                | (119   | )                | $      | (486 | ) | $ | 3,090 |   |

 

19

----

 

**Supplemental Condensed ConsolidatingStatement of Operations**

**For the Six Months Ended June 29, 2003**

(Inthousands)

 
|                                                                                                                  |   | **Parent  Company** |    | **Guarantor  Subsidiary** |   | **Non-  Guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|---------------------------|--------|-----------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                                                  |   |                |    |                      |   |                              |   |             |   |             |   |
| Revenues                                                                                                              |   | $                   | 280,164 |                      | $      | 4,174                             |   | $                | — |             | $      | — |   | $ | 284,338 |   |
| Costs and expenses:                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Cost of sales                                                                                                         |   | 101,156             |    | —                    |   | —                            |   | —           |   | 101,156          |   |
| Labor and benefits                                                                                                    |   | 81,924              |    | —                    |   | —                            |   | —           |   | 81,924           |   |
| Operating expenses and write-downs of property and equipment                                                          |   | 59,061              |    | —                    |   | (3,459                            | )      | —           |   | 55,602           |   |
| General and administrative expenses                                                                                   |   | 16,140              |    | 2,318                     |   | —                            |   | —           |   | 18,458           |   |
| Depreciation and amortization                                                                                         |   | 10,225              |    | —                    |   | 1,148                             |   | —           |   | 11,373           |   |
| Loss on sales of other property and equipment, net                                                                    |   | 1,291               |    | —                    |   | 117                               |   | —           |   | 1,408            |   |
| Interest expense, net                                                                                                 |   | 9,889               |    | —                    |   | 2,305                             |   | —           |   | 12,194           |   |
|                                                                                                                  |   |                |    |                      |   |                              |   |             |   |             |   |
| Income (loss) before benefit from (provision for) income taxes and  equity in net income of consolidated subsidiaries |   | 478                 |    | 1,856                     |   | (111                              | )      | —           |   | 2,223            |   |
|                                                                                                                  |   |                |    |                      |   |                              |   |             |   |             |   |
| Benefit from (provision for) income taxes                                                                             |   | 232                 |    | (761                      | )      | (93                               | )      | —           |   | (622             | )      |
|                                                                                                                  |   |                |    |                      |   |                              |   |             |   |             |   |
| Income (loss) before equity in net income of consolidated subsidiaries                                                |   | 710                 |    | 1,095                     |   | (204                              | )      | —           |   | 1,601            |   |
|                                                                                                                  |   |                |    |                      |   |                              |   |             |   |             |   |
| Equity in net income of consolidated subsidiaries                                                                     |   | 891                 |    | —                    |   | —                            |   | (891             | )      | —           |   |
|                                                                                                                  |   |                |    |                      |   |                              |   |             |   |             |   |
| Net income (loss)                                                                                                     |   | $                   | 1,601   |                      | $      | 1,095                             |   | $                | (204   | )                | $      | (891 | ) | $ | 1,601 |   |

 

20

----

 

**Supplemental Condensed ConsolidatingStatement of Cash Flows**

**For the Six Months Ended June 29, 2003**

(Inthousands)

 
|                                                |   | **Parent  Company** |   | **Guarantor  Subsidiary** |   | **Non-  Guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|-----------------------------------------------------|--------|---------------------|--------|---------------------------|--------|-----------------------------------|--------|------------------|--------|------------------|--------|
| Net cash provided by (used in) operating activities |   | $                   | 15,195 |                      | $      | (1,173                            | )      | $                | (1,365 | )                | $      | 1,162 |   | $ | 13,819 |   |
|                                                |   |                |   |                      |   |                              |   |             |   |             |   |
| Cash flows from investing activities:               |   |                |   |                      |   |                              |   |             |   |             |   |
| Purchases of property and equipment                 |   | (16,201             | )      | —                    |   | —                            |   | —           |   | (16,201          | )      |
| Return of investment in subsidiary                  |   | 357                 |   | —                    |   | —                            |   | (357             | )      | —           |   |
|                                                |   |                |   |                      |   |                              |   |             |   |             |   |
| Net cash used in investing activities               |   | (15,844             | )      | —                    |   | —                            |   | (357             | )      | (16,201          | )      |
|                                                |   |                |   |                      |   |                              |   |             |   |             |   |
| Cash flows from financing activities:               |   |                |   |                      |   |                              |   |             |   |             |   |
| Repayments of obligations                           |   | (890                | )      | —                    |   | (510                              | )      | —           |   | (1,400           | )      |
| Stock options exercised                             |   | 188                 |   | —                    |   | —                            |   | —           |   | 188              |   |
| Reinsurance deposits received                       |   | —              |   | —                    |   | 2,207                             |   | (2,207           | )      | —           |   |
| Reinsurance payments made from deposits             |   | —              |   | —                    |   | (1,045                            | )      | 1,045            |   | —           |   |
| Dividends paid                                      |   | —              |   | —                    |   | (357                              | )      | 357              |   | —           |   |
| Net cash (used in) provided by financing activities |   | (702                | )      | —                    |   | 295                               |   | (805             | )      | (1,212           | )      |
|                                                |   |                |   |                      |   |                              |   |             |   |             |   |
| Net decrease in cash and cash equivalents           |   | (1,351              | )      | (1,173                    | )      | (1,070                            | )      | —           |   | (3,594           | )      |
|                                                |   |                |   |                      |   |                              |   |             |   |             |   |
| Cash and cash equivalents, beginning of period      |   | 29,717              |   | 1,944                     |   | 2,680                             |   | —           |   | 34,341           |   |
|                                                |   |                |   |                      |   |                              |   |             |   |             |   |
| Cash and cash equivalents, end of period            |   | $                   | 28,366 |                      | $      | 771                               |   | $                | 1,610  |             | $      | — |   | $ | 30,747 |   |
|                                                |   |                |   |                      |   |                              |   |             |   |             |   |
| Supplemental disclosures:                           |   |                |   |                      |   |                              |   |             |   |             |   |
| Interest paid                                       |   | $                   | 9,733  |                      | $      | —                            |   | $                | 2,323  |             | $      | — |   | $ | 12,056 |   |
| Income taxes (refunded) paid                        |   | (706                | )      | 1,239                     |   | 330                               |   | —           |   | 863              |   |
| Lease incentive equipment received                  |   | 243                 |   | —                    |   | —                            |   | —           |   | 243              |   |

 

21

----

 

**SupplementalCondensed Consolidating Balance Sheet**

**As of December 29,2002**

 

(In thousands)

 
|                                                      |   | **Parent  Company** |    | **Guarantor  Subsidiary** |   | **Non-guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|-----------------------------------------------------------|--------|---------------------|---------|---------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
|                                                      |   |                |    |                      |   |                            |   |             |   |             |   |
| Assets                                                    |   |                |    |                      |   |                            |   |             |   |             |   |
|                                                      |   |                |    |                      |   |                            |   |             |   |             |   |
| Current assets:                                           |   |                |    |                      |   |                            |   |             |   |             |   |
| Cash and cash equivalents                                 |   | $                   | 29,717  |                      | $      | 1,944                           |   | $                | 2,680  |             | $      | — |   | $ | 34,341 |   |
| Accounts receivable, net                                  |   | 9,695               |    | 1,158                     |   | —                          |   | —           |   | 10,853           |   |
| Inventories                                               |   | 17,278              |    | —                    |   | —                          |   | —           |   | 17,278           |   |
| Deferred income taxes                                     |   | 7,718               |    | 18                        |   | —                          |   | 35               |   | 7,771            |   |
| Prepaid expenses and other current assets                 |   | 8,624               |    | 1,175                     |   | 7,778                           |   | (14,515          | )      | 3,062            |   |
| Total current assets                                      |   | 73,032              |    | 4,295                     |   | 10,458                          |   | (14,480          | )      | 73,305           |   |
| Deferred income taxes                                     |   | —              |    | 264                       |   | —                          |   | (264             | )      | —           |   |
| Property and equipment, net                               |   | 108,805             |    | —                    |   | 49,568                          |   | —           |   | 158,373          |   |
| Intangibles and deferred costs, net                       |   | 16,930              |    | —                    |   | 2,712                           |   | —           |   | 19,642           |   |
| Investments in subsidiaries                               |   | 4,222               |    | —                    |   | —                          |   | (4,222           | )      | —           |   |
| Other assets                                              |   | 4,963               |    | 6,742                     |   | 915                             |   | (6,742           | )      | 5,878            |   |
|                                                      |   |                |    |                      |   |                            |   |             |   |             |   |
| Total assets                                              |   | $                   | 207,952 |                      | $      | 11,301                          |   | $                | 63,653 |             | $      | (25,708 | ) | $ | 257,198 |   |
|                                                      |   |                |    |                      |   |                            |   |             |   |             |   |
| Liabilities and Stockholders’  (Deficit) Equity      |   |                |    |                      |   |                            |   |             |   |             |   |
|                                                      |   |                |    |                      |   |                            |   |             |   |             |   |
| Current liabilities:                                      |   |                |    |                      |   |                            |   |             |   |             |   |
| Current maturities of long-term obligations               |   | $                   | 9,138   |                      | $      | —                          |   | $                | 1,031  |             | $      | (7,776 | ) | $ | 2,393 |   |
| Accounts payable                                          |   | 23,902              |    | —                    |   | —                          |   | —           |   | 23,902           |   |
| Accrued expenses                                          |   | 42,581              |    | 3,654                     |   | 6,861                           |   | (6,654           | )      | 46,442           |   |
| Total current liabilities                                 |   | 75,621              |    | 3,654                     |   | 7,892                           |   | (14,430          | )      | 72,737           |   |
| Deferred income taxes                                     |   | 1,762               |    | —                    |   | —                          |   | (229             | )      | 1,533            |   |
| Long-term obligations, less current maturities            |   | 183,771             |    | —                    |   | 53,103                          |   | —           |   | 236,874          |   |
| Other long-term liabilities                               |   | 50,500              |    | 885                       |   | 5,198                           |   | (6,827           | )      | 49,756           |   |
| Stockholders’ (deficit) equity                       |   | (103,702            | )       | 6,762                     |   | (2,540                          | )      | (4,222           | )      | (103,702         | )      |
| Total liabilities and stockholders’ (deficit) equity |   | $                   | 207,952 |                      | $      | 11,301                          |   | $                | 63,653 |             | $      | (25,708 | ) | $ | 257,198 |   |

 

22

----

 

**Supplemental Condensed ConsolidatingStatement of Operations**

**For the Three Months Ended June 30, 2002**

(Inthousands)

 
|                                                                                                   |   | **Parent  Company** |    | **Guarantor  Subsidiary** |   | **Non-  guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|--------------------------------------------------------------------------------------------------------|--------|---------------------|---------|---------------------------|--------|-----------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Revenues                                                                                               |   | $                   | 149,979 |                      | $      | 2,202                             |   | $                | — |             | $      | — |   | $ | 152,181 |   |
| Costs and expenses:                                                                                    |   |                |    |                      |   |                              |   |             |   |             |   |
| Cost of sales                                                                                          |   | 52,952              |    | —                    |   | —                            |   | —           |   | 52,952           |   |
| Labor and benefits                                                                                     |   | 42,243              |    | —                    |   | —                            |   | —           |   | 42,243           |   |
| Operating expenses and write-downs of property and equipment                                           |   | 31,474              |    | —                    |   | (1,741                            | )      | —           |   | 29,733           |   |
| Reduction of restructuring reserve                                                                     |   | (400                | )       | —                    |   | —                            |   | —           |   | (400             | )      |
| General and administrative expenses                                                                    |   | 7,517               |    | 1,164                     |   | —                            |   | —           |   | 8,681            |   |
| Depreciation and amortization                                                                          |   | 5,803               |    | —                    |   | 584                               |   | —           |   | 6,387            |   |
| Loss on sales of other property and equipment, net                                                     |   | 129                 |    | —                    |   | —                            |   | —           |   | 129              |   |
| Interest expense                                                                                       |   | 5,043               |    | —                    |   | 1,172                             |   | —           |   | 6,215            |   |
|                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Income (loss) before provision for income taxes and equity in net income  of consolidated subsidiaries |   | 5,218               |    | 1,038                     |   | (15                               | )      | —           |   | 6,241            |   |
|                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Provision for income taxes                                                                             |   | (1,942              | )       | (426                      | )      | (58                               | )      | —           |   | (2,426           | )      |
|                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Income (loss) before equity in net income of consolidated subsidiaries                                 |   | 3,276               |    | 612                       |   | (73                               | )      | —           |   | 3,815            |   |
|                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Equity in net income of consolidated subsidiaries                                                      |   | 539                 |    | —                    |   | —                            |   | (539             | )      | —           |   |
|                                                                                                   |   |                |    |                      |   |                              |   |             |   |             |   |
| Net income (loss)                                                                                      |   | $                   | 3,815   |                      | $      | 612                               |   | $                | (73    | )                | $      | (539 | ) | $ | 3,815 |   |

 

23

----

 

**Supplemental Condensed ConsolidatingStatement of Operations**

**For the Six Months Ended June 30, 2002**

(Inthousands)

 
|                                                                                                   |   | **Parent****Company** |    | **Guarantor  Subsidiary** |   | **Non-  guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|--------------------------------------------------------------------------------------------------------|--------|-----------------------|---------|---------------------------|--------|-----------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                                   |   |                  |    |                      |   |                              |   |             |   |             |   |
| Revenues                                                                                               |   | $                     | 277,366 |                      | $      | 3,989                             |   | $                | — |             | $      | — |   | $ | 281,355 |   |
| Costs and expenses:                                                                                    |   |                  |    |                      |   |                              |   |             |   |             |   |
| Cost of sales                                                                                          |   | 98,992                |    | —                    |   | —                            |   | —           |   | 98,992           |   |
| Labor and benefits                                                                                     |   | 80,161                |    | —                    |   | —                            |   | —           |   | 80,161           |   |
| Operating expenses and write-downs of property and equipment                                           |   | 57,383                |    | —                    |   | (3,490                            | )      | —           |   | 53,893           |   |
| General and administrative expenses                                                                    |   | 14,952                |    | 2,328                     |   | —                            |   | —           |   | 17,280           |   |
| Reduction of restructuring reserve                                                                     |   | (400                  | )       | —                    |   | —                            |   | —           |   | (400             | )      |
| Depreciation and amortization                                                                          |   | 11,902                |    | —                    |   | 1,171                             |   | —           |   | 13,073           |   |
| Loss on sales of other property and equipment, net                                                     |   | 641                   |    | —                    |   | —                            |   | —           |   | 641              |   |
| Interest expense                                                                                       |   | 10,217                |    | —                    |   | 2,335                             |   | —           |   | 12,552           |   |
|                                                                                                   |   |                  |    |                      |   |                              |   |             |   |             |   |
| Income (loss) before provision for income taxes and equity in net income  of consolidated subsidiaries |   | 3,518                 |    | 1,661                     |   | (16                               | )      | —           |   | 5,163            |   |
|                                                                                                   |   |                  |    |                      |   |                              |   |             |   |             |   |
| Provision for income taxes                                                                             |   | (898                  | )       | (681                      | )      | (177                              | )      | —           |   | (1,756           | )      |
|                                                                                                   |   |                  |    |                      |   |                              |   |             |   |             |   |
| Income (loss) before equity in net income of consolidated subsidiaries                                 |   | 2,620                 |    | 980                       |   | (193                              | )      | —           |   | 3,407            |   |
|                                                                                                   |   |                  |    |                      |   |                              |   |             |   |             |   |
| Equity in net income of consolidated subsidiaries                                                      |   | 787                   |    | —                    |   | —                            |   | (787             | )      | —           |   |
|                                                                                                   |   |                  |    |                      |   |                              |   |             |   |             |   |
| Net income (loss)                                                                                      |   | $                     | 3,407   |                      | $      | 980                               |   | $                | (193   | )                | $      | (787 | ) | $ | 3,407 |   |

 

24

----

 

**Supplemental Condensed ConsolidatingStatement of Cash Flows**

**For the Six Months Ended June 30, 2002**

(Inthousands)

 
|                                           |   | **Parent****Company** |   | **Guarantor  Subsidiary** |   | **Non-  guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|------------------------------------------------|--------|-----------------------|--------|---------------------------|--------|-----------------------------------|--------|------------------|--------|------------------|--------|
| Net cash provided by operating activities      |   | $                     | 4,505  |                      | $      | 2,182                             |   | $                | 1,584  |             | $      | 406 |   | $ | 8,677 |   |
|                                           |   |                  |   |                      |   |                              |   |             |   |             |   |
| Cash flows from investing activities:          |   |                  |   |                      |   |                              |   |             |   |             |   |
| Purchases of property and equipment            |   | (4,811                | )      | —                    |   | —                            |   | —           |   | (4,811           | )      |
| Proceeds from sales of property and equipment  |   | 1,293                 |   | —                    |   | —                            |   | —           |   | 1,293            |   |
| Return of investment in subsidiary             |   | 280                   |   | —                    |   | —                            |   | (280             | )      | —           |   |
| Net cash used in investing activities          |   | (3,238                | )      | —                    |   | —                            |   | (280             | )      | (3,518           | )      |
|                                           |   |                  |   |                      |   |                              |   |             |   |             |   |
| Cash flows from financing activities:          |   |                  |   |                      |   |                              |   |             |   |             |   |
| Repayments of obligations                      |   | (1,066                | )      | —                    |   | (393                              | )      | —           |   | (1,459           | )      |
| Stock options exercised                        |   | 88                    |   | —                    |   | —                            |   | —           |   | 88               |   |
| Reinsurance deposits received                  |   | —                |   | —                    |   | 2,024                             |   | (2,024           | )      | —           |   |
| Reinsurance payments made from deposits        |   | —                |   | —                    |   | (1,618                            | )      | 1,618            |   | —           |   |
| Dividends paid                                 |   | —                |   | —                    |   | (280                              | )      | 280              |   | —           |   |
| Net cash used in financing activities          |   | (978                  | )      | —                    |   | (267                              | )      | (126             | )      | (1,371           | )      |
|                                           |   |                  |   |                      |   |                              |   |             |   |             |   |
| Net increase in cash and cash equivalents      |   | 289                   |   | 2,182                     |   | 1,317                             |   | —           |   | 3,788            |   |
|                                           |   |                  |   |                      |   |                              |   |             |   |             |   |
| Cash and cash equivalents, beginning of period |   | 15,116                |   | 104                       |   | 1,122                             |   | —           |   | 16,342           |   |
|                                           |   |                  |   |                      |   |                              |   |             |   |             |   |
| Cash and cash equivalents, end of period       |   | $                     | 15,405 |                      | $      | 2,286                             |   | $                | 2,439  |             | $      | — |   | $ | 20,130 |   |
|                                           |   |                  |   |                      |   |                              |   |             |   |             |   |
| Supplemental disclosures:                      |   |                  |   |                      |   |                              |   |             |   |             |   |
| Interest paid                                  |   | $                     | 9,758  |                      | $      | —                            |   | $                | 1,890  |             | $      | — |   | $ | 11,648 |   |
| Income taxes (refunded) paid                   |   | (1,030                | )      | 1,012                     |   | —                            |   | —           |   | (18              | )      |

 

25

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**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

*The following discussion should be read in conjunctionwith the Condensed Consolidated Financial Statements of the Company and thenotes thereto included elsewhere herein.*

 

**Forward Looking Statements**

 

Statements contained herein thatare not historical facts constitute “forward looking statements” as that termis defined in the Private Securities Litigation Reform Act of 1995. All forwardlooking statements are subject to risks and uncertainties which could causeresults to differ materially from those anticipated. These factors include theCompany’s highly competitive business environment, exposure to commodityprices, risks associated with the foodservice industry, the ability to retainand attract new employees, government regulations, the Company’s highgeographic concentration in the Northeast and its attendant weather patterns,conditions needed to meet restaurant re-imaging and new opening targets and costsassociated with improved service and other initiatives. Other factors that maycause actual results to differ from the forward looking statements containedherein and that may affect the Company’s prospects in general are included inthe Company’s other filings with the Securities and Exchange Commission.

 

**Overview**

 

The Company’s revenues are derivedprimarily from the operation of full-service restaurants, the distribution andsale of frozen desserts through retail and institutional locations and franchising.Friendly’s owns and operates 382 full-service restaurants, franchises 156full-service restaurants and six non-traditional units and manufactures a fullline of frozen desserts distributed through more than 3,500 supermarkets andother retail locations in 14 states.

 

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

 
|                |   | **For the Three Months Ended** |   | **For the Six Months Ended** |   |
|---------------------|--------|--------------------------------|--------|------------------------------|--------|
|                |   | **June 29,  2003**             |   | **June 30,  2002**           |   | **June 29,  2003** |   | **June 30,  2002** |   |
| Company Units:      |   |                           |   |                         |   |   |   |   |   |
| Beginning of period |   | 385                            |   | 390                          |   | 387 |   | 393 |   |
| Openings            |   | 1                              |   | —                       |   | 1 |   | — |   |
| Closings            |   | (4                             | )      | —                       |   | (6 | ) | (3 | ) |
| End of period       |   | 382                            |   | 390                          |   | 382 |   | 390 |   |
|                |   |                           |   |                         |   |   |   |   |   |
| Franchised Units:   |   |                           |   |                         |   |   |   |   |   |
| Beginning of period |   | 164                            |   | 166                          |   | 162 |   | 167 |   |
| Openings            |   | —                         |   | 1                            |   | 2 |   | 3 |   |
| Closings            |   | (2                             | )      | (2                           | )      | (2 | ) | (5 | ) |
| End of period       |   | 162                            |   | 165                          |   | 162 |   | 165 |   |

 

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*Revenues:*

 

Total revenues increased $3.4million, or 2.3%, to $155.6 million for the second quarter ended June 29, 2003from $152.2 million for the same quarter in 2002. Restaurant revenues increased$1.1 million, or 0.9%, to $123.0 million for the second quarter of 2003 from$121.9 million for the same quarter in 2002. Comparable restaurant revenuesincreased 2.4% from the 2002 quarter to the 2003 quarter as increases in thelunch and dinner dayparts offset decreases in the ice cream snack dayparts.Operating days in comparable operating units during the 2003 period werereduced by 0.4% due to construction period closings associated with the Company’sre-imaging program. Thirteen locations were re-imaged during the second quarterended June 29, 2003.  The opening of onenew restaurant in June 2003 increased restaurant revenues by $0.1 million. Theclosing of nine locations over the past 15 months resulted in a $1.3 milliondecline in restaurant revenues in the 2003 period as compared to the 2002period. Foodservice (product sales to franchisees and retail customers)revenues increased by $2.2 million, or 7.9%, to $29.9 million for the secondquarter ended June 29, 2003 from $27.7 million for the same quarter in 2002.Franchised restaurant product revenues and sales to foodservice retailsupermarket customers increased by $0.1 million and $2.1 million, respectively.Franchise royalty and fee revenues increased $0.1 million, or 6.2%, to $2.7million for the second quarter ended June 29, 2003 compared to $2.6 million forthe same quarter in 2002. The increase is the result of increased comparablefranchised restaurant revenues in the 2003 quarter when compared to the sameperiod in 2002 and $0.3 million received in the 2003 quarter pursuant to anagreement releasing Davco from all obligations and guarantees related tocertain leases associated with franchised locations. These increases werepartially offset by a reduction in franchise units in the 2003 period comparedto the 2002 period. There were 162 franchise units open at June 29, 2003compared to 165 franchise units open at June 30, 2002.

 

Total revenues increased $2.9million, or 1.1%, to $284.3 million for the six months ended June 29, 2003 from$281.4 million for the same period in 2002. Restaurant revenues were $226.2million for the six months ended June 29, 2003 and June 30, 2002. Recordsnowfall during the first quarter of the current year and increased rainfallduring the second quarter of the current year had an unfavorable impact onrestaurant revenues when compared to the prior year. Comparable restaurantrevenues increased 1.4% from the 2002 period to the 2003 period as increases inthe lunch and dinner dayparts offset decreases in the ice cream snack dayparts.Operating days in comparable operating units during the 2003 period werereduced by 0.3% due to construction period closings associated with theCompany’s re-imaging program. Twenty-four locations were re-imaged during thesix months ended June 29, 2003.  Theopening of one new restaurant in June 2003 increased restaurant revenues by$0.1 million. The closing of 12 locations over the past 18 months resulted in a$2.2 million decline in restaurant revenues in the 2003 period as compared tothe 2002 period. Foodservice (product sales to franchisees and retailcustomers) revenues increased by $2.7 million, or 5.3%, to $53.2 million forthe six months ended June 29, 2003 from $50.5 million for the same period in2002. Franchised restaurant product revenues and sales to foodservice retailsupermarket customers increased by $0.1 million and $2.6 million, respectively.Franchise royalty and fee revenues increased $0.2 million, or 6.1%, to $4.9 millionfor the six months ended June 29, 2003 compared to $4.7 million for the sameperiod in 2002. The increase is the result of increased comparable franchisedrestaurant revenues in the 2003 period when compared to the same period in 2002and $0.3 million received in the 2003 period pursuant to an agreement releasingDavco from all obligations and guarantees related to certain leases associatedwith franchised locations. These increases were partially offset by a reductionin franchise units in the 2003 period compared to the 2002 period. There were162 franchise units open at June 29, 2003 compared to 165 franchise units openat June 30, 2002.

 

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*Cost of sales:*

 

Cost of sales was $55.2 million and$53.0 million for the three months ended June 29, 2003 and June 30, 2002,respectively. Cost of sales as a percentage of total revenues increased to35.5% for the quarter ended June 29, 2003 from 34.8% for the same period in2002. The higher food cost as a percentage of total revenue was partially dueto a shift in sales mix from Company-owned restaurant sales to foodservicesales. Foodservice sales to franchisees and retail supermarket customers have ahigher food cost as a percentage of revenue than sales in Company-ownedrestaurants to restaurant patrons. Additionally, cooler temperatures in the2003 period when compared to the 2002 period had an unfavorable impact on therestaurant snack dayparts. The resulting decline in restaurant ice cream salesreduced the cost advantage derived from the Company’s manufacturing facility.An increase in foodservice retail sales promotional allowances, recorded asoffsets to revenues, also contributed to the increase. These increases werepartially offset by lower cream costs in 2003 when compared to 2002. As apercentage of restaurant revenues, cost of sales decreased to 26.6% in the 2003period as compared to 27.0% in the 2002 period in part due to an improvement infood cost controls in the current period.

 

Cost of sales was $101.2 millionand $99.0 million for the six months ended June 29, 2003 and June 30, 2002,respectively. Cost of sales as a percentage of total revenues increased to35.6% for the six months ended June 29, 2003 from 35.2% for the same period in2002. The higher food cost as a percentage of total revenue was partially dueto a shift in sales mix from Company-owned restaurant sales to foodservicesales. Foodservice sales to franchisees and retail supermarket customers have ahigher food cost as a percentage of revenue than sales in Company-ownedrestaurants to restaurant patrons. Additionally, cooler temperatures in the2003 period when compared to the 2002 period had an unfavorable impact on therestaurant snack dayparts. The resulting decline in restaurant ice cream salesreduced the cost advantage derived from the Company’s manufacturing facility.An increase in foodservice retail sales promotional allowances, recorded asoffsets to revenues, also contributed to the increase. These increases werepartially offset by lower cream costs in 2003 when compared to 2002. TheCompany expects that cream prices will increase during the remainder of 2003.Restaurant cost of sales as a percentage of restaurant revenues decreased to26.7% for the six months ended June 29, 2003 from 27.2% for the same period in2002. The decrease in the 2003 period when compared to the 2002 period was inpart due to an improvement in food cost controls in the current period.

 

The cost of cream, the principalingredient used in making ice cream, affects cost of sales as a percentage oftotal revenues, especially in foodservice’s retail business. A $0.10 increasein the cost of a pound of AA butter adversely affects the Company’s annual costof sales by approximately $1.1 million, which may be offset by a price increaseor other factors. To minimize risk, alternative supply sources continue to bepursued. However, no assurance can be given that the Company will be able tooffset any cost increases in the future and future increases in cream pricescould have a material adverse effect on the Company’s results of operations.

 

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*Labor and benefits:*

 

Labor and benefits increased $1.6million, or 3.7%, to $43.8 million for the second quarter ended June 29, 2003from $42.2 million for the same quarter in 2002. Labor and benefits as apercentage of total revenues increased to 28.1% for the second quarter endedJune 29, 2003 from 27.8% for the same quarter in 2002. As a percentage ofrestaurant revenues, labor and benefits increased to 35.6% for the 2003 periodfrom 34.8% in the 2002 period. The increase in labor and benefits as apercentage of restaurant revenue compared to the same period in 2002 resultedfrom less than anticipated snack daypart sales, which decreased in the currentperiod due to cooler temperatures. Additionally, increased group insuranceclaims, higher workers comp claims, increased payroll taxes and a reducedrestaurant pension benefit in the 2003 period when compared to the 2002 periodcontributed to this increase. Revenue increases derived from franchisedlocations and retail supermarket customers, which do not have any associatedrestaurant labor and benefits, reduced the impact of the higher restaurantlabor and benefits as a percentage of total revenues.

 

Labor and benefits increased $1.7million, or 2.2%, to $81.9 million for the six months ended June 29, 2003 from$80.2 million for the same period in 2002. Labor and benefits as a percentageof total revenues increased to 28.8% for the six months ended June 29, 2003from 28.5% for the same period in 2002. As a percentage of restaurant revenues,labor and benefits increased to 36.2% for the 2003 period from 35.5% in the2002 period. The increase in labor and benefits as a percentage of restaurantrevenue related to restaurant benefits due to increased group insurance claims,higher workers comp claims, increased payroll taxes and a reduced restaurantpension benefit in the 2003 period when compared to the 2002 period. Declinesin snack daypart revenues also had an unfavorable impact in the current period.Revenue increases derived from franchised locations and retail supermarketcustomers, which do not have any associated restaurant labor and benefits,reduced the impact of the higher restaurant benefits as a percentage of totalrevenues.

 

*Operating expenses:*

 

Operating expenses increased $1.1million, or 3.8%, to $30.5 million for the second quarter ended June 29, 2003from $29.4 million for the same quarter in 2002. Operating expenses as apercentage of total revenues were 19.6% and 19.3% for the second quarters endedJune 29, 2003 and June 30, 2002, respectively. The increase as a percentage oftotal revenues resulted from higher restaurant advertising costs in the 2003period when compared to the 2002 period.

 

Operating expenses increased $2.1million, or 4.0%, to $55.6 million for the six months ended June 29, 2003 from$53.5 million for the same period in 2002. Operating expenses as a percentageof total revenues were 19.6% and 19.0% for the six months ended June 29, 2003and June 30, 2002, respectively. The increase as a percentage of total revenuesresulted from higher restaurant costs for snow removal, natural gas andadvertising in the 2003 period when compared to the 2002 period.

 

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*General and administrative expenses:*

 

General and administrative expenseswere $9.2 million and $8.7 million for the second quarters ended June 29, 2003and June 30, 2002, respectively. General and administrative expenses as apercentage of total revenues increased to 5.9% for the second quarter endedJune 29, 2003 from 5.7% for the same period in 2002. The increase is primarilythe result of salary merit increases, higher employment recruitment costs forfield management positions, increases in legal fees and a reduction in thepension benefit.

 

General and administrative expenseswere $18.5 million and $17.3 million for the six months ended June 29, 2003 andJune 30, 2002, respectively. General and administrative expenses as apercentage of total revenues increased to 6.5% for the six months ended June29, 2003 from 6.1% for the same period in 2002. The increase is primarily theresult of salary merit increases, higher employment recruitment costs for fieldmanagement positions, increases in legal fees and a reduction in the pensionbenefit.

 

*Reduction of restructuring reserve:*

 

Reduction of restructuring reservewas $0.4 million for the three and six month periods ended June 30, 2002. TheCompany reduced the restructuring reserve by $0.4 million during 2002 since thereserve exceeded estimated remaining payments.

 

W*rite-downs of property and equipment:*

 

Write-downs of property andequipment were $0.3 million and $0.4 million for the three and six monthperiods ended June 30, 2002, respectively, primarily as a result of a writedown of a vacant land parcel. There were no write-downs of property andequipment for the three and six month periods ended June 29, 2003.

 

*Depreciation and amortization:*

 

Depreciation and amortizationdecreased $0.7 million, or 10.0%, to $5.7 million for the second quarter endedJune 29, 2003 from $6.4 million for the same quarter in 2002. Depreciation andamortization as a percentage of total revenues was 3.7% and 4.2% in the 2003and 2002 quarters, respectively. The reduction reflects the impact associatedwith the Company’s closing of nine locations over the past 15 months and thedecline in depreciation expense associated with certain purchased software atthe Company’s headquarters.

 

Depreciation and amortizationdecreased $1.7 million, or 13.0%, to $11.4 million for the six months endedJune 29, 2003 from $13.1 million for the same period in 2002. Depreciation andamortization as a percentage of total revenues was 4.0% and 4.6% in the 2003and 2002 periods, respectively. The reduction reflects the impact associatedwith the Company’s closing of 12 locations over the past 18 months and thedecline in depreciation expense associated with certain purchased software atthe Company’s headquarters.

 

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

 

The loss on sales of other propertyand equipment, net was $0.8 million and $0.1 million for the quarters endedJune 29, 2003 and June 30, 2002, respectively. The loss on sales of otherproperty and equipment, net was $1.4 million and $0.6 million for the sixmonths ended June 29, 2003 and June 30, 2002, respectively.  The loss in the six month period in 2003primarily resulted from disposals related to the remodeling of restaurants andthe replacement of inoperative equipment. The loss during the six month periodin 2002 primarily resulted from the sale of idle land and four closedlocations.

 

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*Interest expense, net:*

 

Interest expense, net ofcapitalized interest and interest income, decreased by $0.1 million, or 2.0%,to $6.1 million for the second quarter ended June 29, 2003 from $6.2 millionfor the same period in 2002. The decrease is primarily impacted by the decreasein the average outstanding debt in the 2003 quarter compared to the 2002quarter and by lower interest rates.

 

Interest expense, net ofcapitalized interest and interest income, decreased by $0.4 million, or 2.9%,to $12.2 million for the six months ended June 29, 2003 from $12.6 million forthe same period in 2002. The decrease is primarily impacted by the decrease inthe average outstanding debt in the 2003 period compared to the 2002 period andby lower interest rates. Total outstanding debt, including capital lease andfinance obligations, was reduced from $240.5 million at June 30, 2002 to $237.9million at June 29, 2003.

 

*Provision for income taxes:*

 

The provision for income taxes was$1.2 million, or 28.0%, and $2.4 million, or 38.9%, for the second quartersended June 29, 2003 and June 30, 2002, respectively. The provision for incometaxes was $0.6 million, or 28.0%, and $1.8 million, or 34.0%, for the sixmonths ended June 29, 2003 and June 30, 2002, respectively. The rate in 2002was reduced in subsequent quarters as tax credits and changes to statevaluation allowances reduced the rate. The tax rate at the end of the 2002fiscal year was 24.0%.  At this time,the Company estimates that the effective tax rate for 2003 will be 28.0%. TheCompany records income taxes based on the effective rate expected for the yearwith any changes in the valuation allowance reflected in the period of change.

 

*Net income:*

 

Net income was $3.1 million and$3.8 million for the second quarters ended June 29, 2003 and June 30, 2002, respectively.Net income was $1.6 million and $3.4 million for the six months ended June 29,2003 and June 30, 2002, respectively, for the reasons discussed above.

 

**Liquidity and Capital Resources**

 

The Company’s primary sources ofliquidity and capital resources are cash generated from operations andborrowings under its revolving credit facility. Net cash provided by operatingactivities was $13.8 million for the six months ended June 29, 2003. During thesix months ended June 29, 2003, accounts receivable increased $2.8 million. Thenet retail trade receivable increased $2.2 million and restaurant credit cardreceivables increased $0.7 million as a result of seasonality and increasedsales volumes.  This increase is partiallyoffset by the receipt of monies related to franchisee gift cards sold of $0.4million and fire insurance proceeds collected of $0.3 million. Accountspayable, trade increased by $8.5 million primarily due to the seasonality ofadvertising and construction costs related to the restaurant re-imagingprojects and certain corporate projects. Accrued expenses and other long-termliabilities decreased $6.1 million as a result of $4.3 million of payments madefor corporate and restaurant bonuses and $3.6 million of payments made foraccrued construction costs. These decreases were offset by increased accruedpayroll taxes, as the number of restaurant employees is higher during thesummer months.

 

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Additional sources of liquidityconsist of capital and operating leases for financing leased restaurantlocations (in malls and shopping centers and land or building leases),restaurant equipment, manufacturing equipment, distribution vehicles andcomputer equipment. Additionally, sales of under-performing existing restaurantproperties and other assets (to the extent FICC’s and its subsidiaries’ debtinstruments permit) are sources of cash. The amount of debt financing that FICCwill be able to incur is limited by the terms of its New Credit Facility andSenior Notes.

 

Net cash used in investingactivities was $16.2 million for the six months ended June 29, 2003. Capitalexpenditures for restaurant operations were approximately $13.7 million for thesix months ended June 29, 2003.

 

The Company had a working capitaldeficit of $1.6 million as of June 29, 2003. 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.

 

In December 2001, the Companycompleted a financial restructuring plan (the “Refinancing Plan”) whichincluded the repayment of the $64.5 million outstanding under the Old CreditFacility and the repurchase of approximately $21.3 million in Senior Notes withthe proceeds from $55.0 million in long-term mortgage financing (the “MortgageFinancing”) and a $33.7 million sale and leaseback transaction (the“Sale/Leaseback Financing”). In addition, FICC secured a new $30.0 millionrevolving credit facility (the “New Credit Facility”) of which up to $20.0million is available to support letters of credit. The $30.0 million commitmentless outstanding letters of credit is available for borrowing to provideworking capital and for other corporate needs. As of June 29, 2003, $17.4million was available for additional borrowings under the New Credit Facility,total letters of credit outstanding were approximately $12.6 million and therewere no revolving credit loans outstanding.

 

Three new limited liabilitycorporations (“LLCs”) were organized in connection with the Mortgage Financing.Friendly Ice Cream Corporation is the sole member of each LLC. FICC sold 75 ofits operating Friendly’s restaurants to the LLCs in exchange for the proceedsfrom the Mortgage Financing. Promissory notes were issued for each of the 75properties. Each LLC is a separate entity with separate creditors which will beentitled to be satisfied out of such LLC’s assets. Each LLC is a borrower underthe Mortgage Financing.

 

The Mortgage Financing has amaturity date of January 1, 2022 and is amortized over 20 years. Interest on$10 million of the original $55 million from the Mortgage Financing is variableand is the sum of the 30-day LIBOR rate in effect (1.12% at June 29, 2003) plus6% on an annual basis. Changes in the interest rate are calculated monthly andrecognized annually when the monthly payment amount is adjusted. Changes in themonthly payment amounts owed due to interest rate changes are reflected in theprincipal balances which are re-amortized over the remaining life of themortgages. The remaining $45 million of the original $55 million from theMortgage Financing bears interest at a fixed annual rate of 10.16%. Eachpromissory note may be prepaid in full. The variable rate notes are subject toprepayment penalties during the first five years. The fixed rate notes may notbe prepaid without the Company providing the note holders with a yieldmaintenance premium.

 

The Mortgage Financing requires theCompany to maintain a fixed charge coverage ratio, as defined, of at least 1.10to 1 and each LLC to maintain a fixed charge coverage ratio, as defined, on anaggregate restaurant basis of at least 1.25 to 1, in each case calculated as ofthe last day of each fiscal year. The Company is in compliance with thesecovenants.

 

The New Credit Facility is securedby substantially all of the assets of FICC and two of its six subsidiaries,Friendly’s Restaurants Franchise Inc. and Friendly’s International Inc. Thesetwo subsidiaries also guaranty FICC’s obligations under the New CreditFacility.

 

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The New Credit Facility was amended on December 27,2002 to extend the maturity date to December 17, 2005. As of June 29, 2003,there were no revolving credit loans outstanding.

 

The revolving credit loans bearinterest at the Company’s option at either (a) the Base Rate plus theapplicable margin as in effect from time to time (the “Base Rate”) (6.0% atJune 29, 2003) or (b) the Eurodollar rate plus the applicable margin as ineffect from time to time (the “Eurodollar Rate”) (4.99% at June 29, 2003).

 

As of June 29, 2003 and December29, 2002, total letters of credit outstanding were approximately $12.6 millionand $14.6 million, respectively. During the six months ended June 29, 2003 andJune 30, 2002, there were no drawings against the letters of credit.

 

The New Credit Facility has anannual “clean-up” provision which obligates the Company to repay in full allrevolving credit loans on or before September 30 (or, if September 30 is not abusiness day, as defined, then the next business day) of each year and maintaina zero balance on such revolving credit for at least 30 consecutive days, toinclude September 30, immediately following the date of such repayment.

 

The New Credit Facility includescertain restrictive covenants including limitations on indebtedness, restrictedpayments such as dividends and stock repurchases and sales of assets and ofsubsidiary stock. Additionally, the New Credit Facility limits the amount whichthe Company may spend on capital expenditures, restricts the use of proceeds,as defined, from asset sales and requires the Company to comply with certainfinancial covenants.

 

In connection with the RefinancingPlan, in December 2001 the Company entered into and accounted for theSale/Leaseback Financing, which provided approximately $33.7 million ofproceeds to the Company. The Company sold 44 properties operating as Friendly’sRestaurants and entered into a master lease with the buyer to lease the 44properties for an initial term of 20 years. There are four five-year renewaloptions and lease payments are subject to escalator provisions every five yearsbased upon increases in the Consumer Price Index.

 

The $200 million Senior Notesissued in November 1997 (the “Senior Notes”) are unsecured senior obligationsof FICC, guaranteed on an unsecured senior basis by FICC’s Friendly’sRestaurants Franchise, Inc. subsidiary, but are effectively subordinated to allsecured indebtedness of FICC, including the indebtedness incurred under the NewCredit Facility. The Senior Notes mature on December 1, 2007. Interest onthe Senior Notes is payable at 10.50% per annum semi-annually on June 1and December 1 of each year. In connection with the Refinancing Plan, FICCrepurchased approximately $21.3 million in aggregate principal amount of theSenior Notes for $17.0 million. On July 3, 2003, the Company obtained a limitedwaiver to the New Credit Facility to allow the Company to repurchase certain ofthe Senior Notes in an amount up to $3.0 million, subject to certain conditions.In July 2003, FICC repurchased $2.0 million in aggregate principal amount ofthe Senior Notes for approximately $2.1 million, the then current market value.The remaining $176.7 million of the Senior Notes are redeemable, in whole or inpart, at FICC’s option at redemption prices from 105.25% to 100.00%, based onthe redemption date.

 

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The Company anticipates requiringcapital in the future principally to maintain existing restaurant and plant facilitiesand to continue to renovate and re-image existing restaurants. Capitalexpenditures for the remaining six months of 2003 are anticipated to be $15.5million in the aggregate, of which $11.0 million is expected to be spent onrestaurant operations. The Company’s actual 2003 capital expenditures may varyfrom these estimated amounts. The Company believes that the combination of thefunds anticipated to be generated from operating activities and borrowingavailability under the New Credit Facility will be sufficient to meet theCompany’s anticipated operating requirements, capital requirements andobligations associated with the restructuring.

 

The following represents thecontractual obligations and commercial commitments of the Company as of June 29,2003 (in thousands):

 
|                          |   |      |    | **Payments due by Period**     |   |
|-------------------------------|--------|-----------|---------|--------------------------------|--------|
|                          |   | **Total** |    | **Prior to December 28, 2003** |   | **1-3  years** |   | **4-5  years** |   | **More than  5 years** |   |
| Contractual Obligations:      |   |      |    |                           |   |   |   |   |   |   |   |
| Short-Term and Long-Term Debt |   | $         | 232,351 |                           | $      | 521 |   | $ | 2,368 |   | $ | 181,616 |   | $ | 47,846 |   |
| Capital Lease Obligations     |   | 8,580     |    | 739                            |   | 2,189 |   | 1,513 |   | 4,139 |   |
| Operating Leases              |   | 147,532   |    | 8,788                          |   | 31,789 |   | 24,309 |   | 82,646 |   |
| Purchase Commitments          |   | 67,697    |    | 63,722                         |   | 3,935 |   | 40 |   | — |   |
|                               |        |           |         |                                |        |  |  |  |  |  |  |  |  |  |  |  |

 
|                          |   |      |   | **Amount of Commitment Expiration by Period** |   |
|-------------------------------|--------|-----------|--------|-----------------------------------------------|--------|
|                          |   | **Total** |   | **Prior to December 28, 2003**                |   | **1-3  years** |   | **4-5  years** |   | **More than  5 years** |   |
| Other Commercial Commitments: |   |      |   |                                          |   |   |   |   |   |   |   |
| Revolving Credit Facility     |   | $         | 17,373 |                                          | $      | — |   | $ | 17,373 |   | $ | — |   | $ | — |   |
| Letters of Credit             |   | 12,627    |   | —                                        |   | 12,627 |   | — |   | — |   |
|                               |        |           |        |                                               |        |  |  |  |  |  |  |  |  |  |  |  |

 

**Seasonality**

 

Due to the seasonality of frozendessert consumption, and the effect from time to time of weather on patronageof the restaurants, the Company’s revenues and operating income are typicallyhigher in its second and third quarters.

 

**Geographic Concentration**

 

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

 

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**Significant Accounting Policies**

 

Financial Reporting Release No. 60issued by the Securities and Exchange Commission requires all companies toinclude a discussion of critical accounting policies or methods used in thepreparation of financial statements. The following is a brief discussion of themore significant accounting policies and methods used by the Company. TheCompany’s consolidated financial statements, including the notes thereto, whichare contained in the 2002 Annual Report on Form 10-K should be read inconjunction with this discussion.

 

*Use of Estimates in the Preparation of FinancialStatements -*

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the dates of the financial statements and thereported amounts of revenues and expenses during the reporting periods. Thecritical accounting policies and most significant estimates and assumptionsrelate to revenue recognition, insurance reserves, recoverability of accountsreceivable, restructuring reserves, valuation allowances and pension and otherpost-retirement benefits expense. Actual amounts could differ significantlyfrom the estimates.

 

*Revenue Recognition -*

 

The Company’s revenues are derivedprimarily from the operation of full-service restaurants, the distribution andsale of frozen desserts through retail and institutional locations andfranchising. The Company recognizes restaurant revenue upon receipt of paymentfrom the customer and retail revenue, net of allowances, upon delivery ofproduct. Reserves for discounts and allowances from retail sales are estimatedand accrued when revenue is recorded. Actual amounts could differ materiallyfrom the estimates. Franchise royalty income, based on net sales offranchisees, is payable monthly and is recorded on the accrual method. Initialfranchise fees are recorded as revenue upon completion of all significantservices, generally upon opening of the restaurant.

 

*Insurance Reserves -*

 

The Company is self-insured throughretentions or deductibles for the majority of its workers’ compensation,automobile, general liability, employer’s liability, product liability andgroup health insurance programs. Self-insurance amounts vary up to $500,000 peroccurrence. Insurance with third parties, some of which is then reinsuredthrough Restaurant Insurance Corporation (“RIC”), the Company’s wholly-ownedsubsidiary, is in place for claims in excess of these self-insured amounts. RICreinsured 100% of the risk from $500,000 to $1,000,000 per occurrence throughSeptember 2, 2000 for FICC’s workers’ compensation, general liability,employer’s liability and product liability insurance. Subsequent to September2, 2000, the Company discontinued its use of RIC as a captive insurer for newclaims. FICC’s and RIC’s liabilities for estimated incurred losses areactuarially determined and recorded in the accompanying condensed consolidatedfinancial statements on an undiscounted basis. Actual incurred losses may varyfrom the estimated incurred losses and could have a material affect on theCompany’s insurance expense.

 

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*Concentration of Credit Risk -*

 

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

 

*Restructuring Reserves -*

 

On October 10, 2001, the Companyeliminated approximately 70 positions at corporate headquarters. In addition,approximately 30 positions in the restaurant construction and fabrication areaswere eliminated by December 30, 2001. The purpose of the reduction was tostreamline functions and reduce redundancy among its business segments. As aresult of the elimination of the positions and the outsourcing of certainfunctions, the Company reported a pre-tax restructuring charge of approximately$2.5 million for severance, rent and unusable construction supplies in the yearended December 30, 2001.

 

In March 2000, the Company’s Boardof Directors approved a restructuring plan that provided for the immediateclosing of 81 restaurants at the end of March 2000 and the disposition of anadditional 70 restaurants over the next 24 months. As a result of this plan,the Company reported a pre-tax restructuring charge of approximately $12.1million for severance, rent, utilities and real estate taxes, demarking, leasetermination costs and certain other costs associated with the closing of thelocations, along with a pre-tax write-down of property and equipment for theselocations of approximately $17.0 million in the year ended December 31, 2000.The Company reduced the restructuring reserve by $0.4 million and $1.9 millionduring the years ended December 29, 2002 and December 30, 2001, respectively,since the reserve exceeded estimated remaining payments.

 

As of June 29, 2003, the remainingrestructuring reserve was $0.6 million. The restructuring reserve may beincreased or decreased based upon remaining payments, which could varymaterially from the estimates depending upon the timing of restaurant closingsand other factors.

 

*Pension and Other Post-Retirement Benefits -*

 

The determination of the Company’sobligation and expense for pension and other post-retirement benefits isdependent upon the selection of certain assumptions used by actuaries incalculating such amounts. Those assumptions include, among other things, thediscount rate, expected long-term rate of return on plan assets and rates ofincrease in compensation and health care costs. In accordance with accountingprinciples generally accepted in the United States, actual results that differfrom the assumptions are accumulated and amortized over future periods and,therefore, generally affect the recognized expense and recorded obligation insuch future periods. Significant differences in actual experience orsignificant changes in the assumptions may materially affect the future pensionand other post-retirement obligations and expense.

 

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*Long-Lived Assets-*

 

In accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets,” the Company reviews its 1988 Non-FriendlyMarks, which were assigned to the Company by Hershey in September 2002, forimpairment on a quarterly basis. The Company recognizes impairment has occurredwhen the carrying value of the 1988 Non-Friendly Marks exceeds the estimatedfuture undiscounted cash flows of the trademarked products.

 

The Company reviews each restaurantproperty quarterly to determine which properties will be disposed of, if any.This determination is made based on poor operating results, deterioratingproperty values and other factors. In addition, the Company reviews allrestaurants with negative cash flow for impairment on a quarterly basis. TheCompany recognizes impairment has occurred when the carrying value of propertyreviewed exceeds its estimated fair value, which is estimated based on theCompany’s experience selling similar properties and local market conditions, lesscosts to sell for properties to be disposed of.

 

*Income Taxes -*

 

The Company accounts for incometaxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” whichrequires recognition of deferred tax assets and liabilities for the expected futuretax consequences of events that have been included in the financial statementsor tax returns. A valuation allowance is recorded for deferred tax assets whoserealization is not likely. As of June 29, 2003 and December 29, 2002, avaluation allowance of $10.2 million existed related to state NOL carryforwardsdue to restrictions on the usage of state NOL carryforwards and shortcarryforward periods for certain states. Taxable income by state for futureperiods is difficult to estimate. The amount and timing of any future taxableincome may affect the usage of such carryforwards, which could result in amaterial change in the valuation allowance.

 

*Stock-Based Compensation -*

 

The Company accounts forstock-based compensation for employees under Accounting Principles Board(“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and electedthe disclosure-only alternative under SFAS No. 123, “Accounting for Stock-BasedCompensation.”  No stock-based compensationcost is included in net income, as all options granted during periods presentedhad an exercise price equal to the market value of the stock on the date ofgrant. In accordance with SFAS No. 148, “Accounting for Stock BasedCompensation-Transition and Disclosure,” the Company will continue to disclosethe required pro-forma information in the notes to the consolidated financialstatements.

 

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**Item 3.Quantitative and Qualitative Disclosures About Market Risk**

 

There has been no material changein the Company’s market risk exposure since the filing of the 2002 AnnualReport on Form 10-K.

 

**Item 4. Controlsand Procedures**

 

As of June 29, 2003, an evaluationwas performed under the supervision and with the participation of the Company’smanagement, including the Chief Executive Officer (“CEO”) and Chief FinancialOfficer (“CFO”), of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEOand CFO, concluded that the Company’s disclosure controls and procedures wereeffective as of June 29, 2003.  Therehave been no significant changes in the Company’s internal controls or in otherfactors that could significantly affect internal controls subsequent to June29, 2003.

 

**PART II - OTHER INFORMATION**

 

**Item 4.  Submission ofmatters to a vote of security holders**

 

(a)     Anannual meeting of the Company’s shareholders was held on May 14, 2003.

 

(b)     Notapplicable.

 

(c)     At theAnnual Meeting of Shareholders, the shareholders voted on the followingmatters:

 

(1)              The election of one director to serve until the 2006Annual Meeting of shareholders,

(2)              The ratification of the appointment of theindependent auditors for 2003 and

(3)              The approval of the 2003 Incentive Plan.

 

Thevoting results were as follows:

 
| **Director**    |   | **Affirmative Votes** |   | **Votes Withheld** |   |
|-----------------|--------|-----------------------|--------|--------------------|--------|
| Donald N. Smith |   | 5,118,232             |   | 1,460,905          |   |

 

AdditionalDirectors, whose terms of office as Directors continued after the meeting, areas follows:

 
| **Term Expiring in 2004** |   | **Term Expiring in 2005** |
|---------------------------|--------|---------------------------|
| Michael J. Daly           |   | Steven L. Ezzes           |
| Burton J. Manning         |   | Charles A. Ledsinger, Jr. |

 

Theproposal to approve the appointment of independent auditors for 2003 wasapproved by shareholders as follows:

 
| **Affirmative Votes** |   | **Negative Votes** |   | **Votes Withheld** |   |
|-----------------------|--------|--------------------|--------|--------------------|--------|
| 6,541,801             |   | 32,313             |   | 5,023              |   |

 

TheCompany’s 2003 Incentive Plan was approved by shareholders as follows:

 
| **Affirmative Votes** |   | **Negative Votes** |   | **Votes Withheld** |   |
|-----------------------|--------|--------------------|--------|--------------------|--------|
| 6,281,531             |   | 269,995            |   | 27,611             |   |

 

Therewere no matters voted upon at the Company’s annual meeting to which brokernon-votes applied.

 

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

 

(a) Exhibits

 

The exhibit index is incorporated by referenceherein.

 

(b) Reports on Form 8-K

 
| **Date of Event Reported** |   | **Event Reported**                               |
|----------------------------|--------|--------------------------------------------------|
| April 28, 2003             |   | Item 7 – Financial Statements and  Exhibits |
|                       |   | Item 9 – Regulation FD Disclosure           |

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 

 
|   | Friendly Ice Cream Corporation |
|--------|--------------------------------|
|   |                           |   |
|   |                           |   |
|   | By:                       | /s/  PAUL V. HOAGLAND |   |
|   |                           | Name:  Paul V. Hoagland |
|   |                           | Title:  Executive Vice President of Administration  and Chief Financial Officer |
|   |                           |   |
|   | Date:                          | July  24, 2003 |

 

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**Certifications**

 

I, John L. Cutter, certify that:

 

1.               I have reviewed this quarterly report on Form 10-Qof 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, andother financial information included in this quarterly report, fairly presentin all material respects the financial condition, results of operations andcash flows of the registrant as of, and for, the periods presented in thisquarterly report;

 

4.               The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant andhave:

 

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 conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

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

 

a)              all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in 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: July 24, 2003 |                                   |
|---------------------|----------------------------------------|
|                |                                   |
|                | /s/   JOHN L CUTTER          |
|                | Chief Executive Officer and  President |

 

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I, Paul V. Hoagland, certify that:

 

1.               I have reviewed this quarterly report on Form 10-Qof 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, andother financial information included in this quarterly report, fairly presentin all material respects the financial condition, results of operations andcash flows of the registrant as of, and for, the periods presented in thisquarterly report;

 

4.               The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant andhave:

 

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 conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

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

 

a)              all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

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

 

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

 
| Date: July 24, 2003 |                                                                     |
|---------------------|--------------------------------------------------------------------------|
|                |                                                                     |
|                | /s/  PAUL V. HOAGLAND                                          |
|                | Executive Vice President of  Administration  and Chief Financial Officer |

 

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**EXHIBIT INDEX**

 
| 3.1    |   | Restated  Articles of Organization of Friendly Ice Cream Corporation (the  “Company”)  (Incorporated by reference  to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, Reg. No.  333-34633).                                                                                                     |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2    |   | Amended  and Restated By-laws of the Company (Incorporated by reference to Exhibit 3.2  to the Registrant’s Annual Report on Form 10-K for the fiscal year ended  December 27, 1998, File No. 0-3930).                                                                                                                          |
| 4.1    |   | Credit  Agreement among the Company, Fleet Bank, N.A and certain other banks and  financial institutions (“Credit Agreement”) dated as of December 17, 2001  (Incorporated by reference to Exhibit 4.1 to the Registrant’s Annual Report  on Form 10-K for the fiscal year ended December 30, 2001, File No. 0-3930). |
| 4.1(a) |   | Consent,  Limited Waiver and Amendment No. 1 to Revolving Credit Agreement dated as of  February 15, 2002. (Incorporated by reference to Exhibit 4.1(a) to the  Registrant’s Annual Report on Form 10-K for the fiscal year ended December  29, 2002, File No. 0-3930).                                                         |
| 4.1(b) |   | Limited  Waiver and Amendment No. 2 to Revolving Credit Agreement dated as of December  27, 2002. (Incorporated by reference to Exhibit 4.1(b) to the Registrant’s  Annual Report on Form 10-K for the fiscal year ended December 29, 2002, File  No. 0-3930).                                                                  |
| 4.2    |   | Loan  Agreement between the Company’s subsidiary, Friendly’s Realty I, LLC and GE  Capital Franchise Finance Corporation dated as of December 17, 2001  (Incorporated by reference to Exhibit 4.2 to the Registrant’s Annual Report  on Form 10-K for the fiscal year ended December 30, 2001, File No. 0-3930).      |
| 4.3    |   | Loan  Agreement between the Company’s subsidiary, Friendly’s Realty II, LLC and GE  Capital Franchise Finance Corporation dated as of December 17, 2001  (Incorporated by reference to Exhibit 4.3 to the Registrant’s Annual Report  on Form 10-K for the fiscal year ended December 30, 2001, File No. 0-3930).     |
| 4.4    |   | Loan  Agreement between the Company’s subsidiary, Friendly’s Realty III, LLC and GE  Capital Franchise Finance Corporation dated as of December 17, 2001  (Incorporated by reference to Exhibit 4.4 to the Registrant’s Annual Report  on Form 10-K for the fiscal year ended December 30, 2001, File No. 0-3930).    |
| 4.5    |   | Senior  Note Indenture between Friendly Ice Cream Corporation, Friendly’s Restaurants  Franchise, Inc. and The Bank of New York, as Trustee (Incorporated by  reference to Exhibit 4.5 to the Registrant’s Annual Report on Form 10-K for  the fiscal year ended December 27, 1998, File No. 0-3930).                      |
| 4.6    |   | Rights  Agreement between the Company and The Bank of New York, a Rights Agent  (Incorporated by reference to Exhibit 4.6 to the Company’s Registration  Statement on Form S-1, Reg. No. 333-34633).                                                                                                                            |
| 99.1   |   | Certification  of Periodic Report dated July 24, 2003 signed by John L. Cutter.                                                                                                                                                                                                                                                      |
| 99.2   |   | Certification  of Periodic Report dated July 24, 2003 signed by Paul V. Hoagland.                                                                                                                                                                                                                                                    |

 

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* -Management Contract or Compensatory Plan or Arrangement

 

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