Friendly's
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Great Food
& Ice Cream May 3, 2006
Ms. Linda Cvrkel
Branch Chief
Division of Corporation Finance
United States
Securities and Exchange Commission
100 F Street, N.E.
Washington, D. C. 20549
Re: Friendly Ice Cream Corporation
Form 10-K: For the fiscal year ended December 31, 2005
Commission File #: 001-13579
Dear Ms. Cvrkel:
Reference is made to the Staff's letter of comment dated April 19, 2006 (the
"Staff's Letter"). Set forth are Friendly Ice Cream Corporation's (the
"Company") responses to the comments raised in the Staff's Letter relating to
the above-referenced filing on Form 10-K.
Consolidated Statement of Operations
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1. Please revise to provide separate disclosure of costs associated with
your franchise operations. Also, revise the notes to your financial
statements to disclose the changes in franchise operations that
occurred during the period. This disclosure should include the number
of franchises purchased and sold during the period and the number in
operation at the end of the period. Refer to the requirements outlined
in paragraph 23 of SFAS No. 45.
Response
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While certain costs are specific to our franchise operations, these
costs are not material to our overall operating costs. Additionally,
we make no allocation of corporate general and administration expenses
amongst our operating segments. These expenses include executive,
accounting, information systems, legal and human resources.
At the introduction to Management Discussion and Analysis of Financial
Condition and results of Operations (Item 7), we show in a summary
table the changes in unit counts for both company and franchised
locations and we will include this in our notes to our financial
statements in future filings.
Friendly Ice Cream Corporation o 1855 Boston Road o Wilbraham, MA o 01095
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Friendly Ice Cream Corporation
May 3, 2006
Page 2
Notes to the Financial Statements
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Note 2. Summary of basis of presentation and Significant Accounting Policies
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- Revenue Recognition, page F-7
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2. We note your disclosure that differences between your accrual for
discounts and trade promotions and the subsequent settlement
amount occur frequently and usually the differences are
individually insignificant. Please explain to us what you mean by
the phrase "usually the differences are individually
insignificant." As part of your response please provide us with
the amount of these differences for each of the last three years.
We may have further comment upon receipt of your response.
Response
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We are required to make estimates regarding the level of coupon
redemption, the amount of product to be purchased by certain
customers over certain time periods and related volume-based and
off-invoice discounts, and slotting fees based on product
shipments in order to estimate our overall trade spending. These
estimates are reviewed and recorded on a monthly basis based on
information provided by our regional sales managers as to the
types of arrangements that have been made with our customers,
historical results and current period activity, and are recorded
in our financial statements as an offset to sales and trade
receivables. Deductions from sales totaled $53.8 million in
fiscal 2005, $52.8 million in fiscal 2004 and $50.5 million in
fiscal 2003. Adjustments, which are recorded monthly, amounted to
$1.5 million in fiscal 2005, $2.8 million in 2004 and $0.3
million in 2003.
- Stock-Based Compensation, page F-14
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3. We note that the expected volatility factor used in the
Black-Scholes option-pricing model decreased significantly
between 2004 and 2005. Please tell us your basis for changes made
to this assumption. Your response should clearly explain how you
determined the volatility factors used for each period presented.
Response
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Paragraph B285 of SFAS No. 123 provides a list of factors that
should be considered in estimating expected volatility and
suggests that the historical period used to estimate volatility
should cover the expected lives of the options. The expected
lives of our options were estimated to be four to five years in
both 2004 and 2005. Due to the limited number of years that our
shares have been publicly traded, we used the entire historical
period for which trading activity was available. For options
issued in 2005, the Company used historical data beginning with
January 1, 2001, which allowed information from a historical
period similar to the expected lives of the options, yet
eliminated inconsistencies related to newly traded stock and the
2000 corporate restructure.
Friendly Ice Cream Corporation
May 3, 2006
Page 3
Note 5. Discontinued Operations, page F-20
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4. We note the gain on the disposal of 14 properties was recorded in
discontinued operations for the year ended December 31, 2005.
Please tell us the nature of the disposal for the nine properties
that were disposed of "other than by sales" and why you believe
they met the criteria for consideration as a discontinued
operation. Please tell us if any of these properties were
considered held for sale as of January 2, 2005. Additionally,
please tell us if you intend to sell any of the 11 properties
classified as held for sale as of January 1, 2006 through a
franchise agreement. Please note that due to the receipt of
franchise fees and future continuing involvement, the sale of
property to a franchisee may not qualify for discontinued
operations treatment. See example in paragraph A27 of SFAS No.
144. We may have further comment upon receipt of your response.
Response
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SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," states that in a period in which a component
of an entity has been disposed of or is classified as held for
sale, the income statement for current and prior periods shall
report the results of operations of the component, including any
gain or loss recognized, in discontinued operations if both of
the following conditions are met: (a) the operations and cash
flows of the component have been (or will be) eliminated from the
ongoing operations of the entity as a result of the disposal
transaction and (b) the entity will not have any significant
continuing involvement in the operations of the component after
the disposal transaction.
The nine properties that were disposed of other than by sale were
Company-operated restaurants that were abandoned due to the
termination of leases. We have eliminated the operations and cash
flows of the nine restaurants from the ongoing operations of the
Company and have no continuing involvement. These nine
properties, therefore, meet the criteria for discontinued
operations.
Friendly Ice Cream Corporation
May 3, 2006
Page 4
SFAS No. 44 also states that a long-lived asset to be sold shall
be classified as held for sale in the period in which all of the
following criteria are met:
a. Management, having the authority to approve the action,
commits to a plan to sell the asset.
b. The asset is available for immediate sale in its present
condition subject only to terms that are usual and
customary.
c. An active program to locate a buyer and other actions
required to complete the plan to sell the asset have been
initiated.
d. The sale of the asset is probable, and transfer of the asset
is expected to qualify for recognition as a completed sale,
within one year, except as permitted by paragraph 31.
e. The asset is being actively marketed for sale at a price
that is reasonable in relation to its current fair value.
f. Actions required to complete the plan indicate that it is
unlikely that significant changes to the plan will be made
or that the plan will be withdrawn.
Since these nine properties were abandoned, they were not
considered held for sale as of January 2, 2005.
We have not and do not intend to sell any of the properties held
for sale through a franchise agreement. In accordance with SFAS
No. 144, the conditions for reporting the results of operations
in discontinued operations are not met for those restaurants that
are sold through a franchise agreement as we would have
continuing involvement in the operations and we would receive
franchise royalties based on the sales volume.
Friendly Ice Cream Corporation
May 3, 2006
Page 5
5. We note that the gain on sale of the two properties sold in the
fourth quarter 2004 was included in operating income rather than
discontinued operations. Please explain to us and in the notes to
your financial statements why the gain on these two properties
was considered operating income in 2004; however the gain/loss on
the sale of properties in 2005 is classified as discontinued
operations.
Response
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At the end of 2004, there were no properties that met the
criteria for "held for sale" as defined in SFAS No. 144. The
restaurant net loss related to restaurants that closed during
2004 was $34,000. Based on the immateriality of the results
related to all 2004 closings, the results of operations and the
related gain was included in income from operations on the
Company's financial statements.
Note 8. Income Taxes, page F-26
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6. We note that the benefit for income taxes for the year ended
January 2, 2005 included a $2,156,000 reversal of income tax
accruals recorded in prior years and in fiscal 2005 you increased
income tax accruals related to ongoing tax audits and other tax
matters. Please explain to us in detail and revise the notes to
your financial statements in future filings to explain the nature
of the tax matters that resulted in a reversal of the accrual in
fiscal 2004 and an additional accrual in 2005. Additionally,
please provide us with your accounting policy for recording
income tax reserves that clearly explains how and when you
determine the amount that will ultimately be paid.
Response
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In 2004, the $2,156,000 reversal of income tax accruals was
predominately the result of reevaluating the potential audit
exposure related to expenses the Company incurred prior to 2004
for the use of an aircraft leased by the Company. During the 2004
fourth quarter financial closing process, the Company received
additional guidance from outside tax counsel that indicated that
it was not probable that the Internal Revenue Service would be
successful in disallowing the expenses for use of the aircraft.
The income tax accrual reversal related to the aircraft expense
was $2.1 million.
Prior to 2005, the Company would accrue the potential interest
only on probable audit exposures that would result in future
deduction, i.e., temporary differences. In 2005, the Company
determined that a valuation allowance was required that reduced
the carrying value of net deferred tax assets to zero. While the
Company is recording a full valuation allowance on future tax
benefits, any future disallowance of income tax deductions would
negatively impact earnings by the amount of the tax and interest.
As such, the income tax accrual in 2005 was increased by
$1,446,000 to include the potential additional tax, as well as
the interest, on tax contingencies.
Friendly Ice Cream Corporation
May 3, 2006
Page 6
The Company accounts for income tax exposures pursuant to SFAS
No. 5, "Accounting for Contingencies," ("SFAS No. 5") which
provides that an estimated loss from a loss contingency should be
accrued by a charge to income if both the following criteria are
met:
1. Information available prior to issuance of the
financial statements indicates that it is probable that
an asset had been impaired or a liability had been
incurred at the date of the financial statements.
2. The amount of loss can be reasonably estimated.
Therefore, the Company will provide for a tax exposure if, based
on the available information, it is probable that a taxing
authority will disagree with a tax position that will negatively
affect the amount of taxes previously paid or currently due and
the amount can be reasonably estimated. Tax exposure requirements
are reviewed quarterly.
Note 17. Commitments and Contingencies, Page F-42
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7. We note from page 18 that there are a few legal proceedings in
which you are involved. To the extent that there is a reasonable
possibility that a loss or an additional loss may have been
incurred, these potential loss contingencies should be disclosed
in the notes to the financial statements. See paragraph 10 of
SFAS No.5. Please revise future filings as appropriate.
Response
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Paragraph 8 of SFAS No. 5 states that an estimated loss from a
loss contingency shall be accrued by a charge to income if both
of the following conditions are met: a.) Information available
prior to issuance of the financial statements indicates that it
is probable that an asset had been impaired or a liability had
been incurred at the date of the financial statements. It is
implicit in this condition that it must be probable that one or
more future events will occur confirming the fact of the loss;
and b.) The amount of loss can be reasonably estimated.
Paragraph 10 of SFAS No. 5 states that if no accrual is made for
a loss contingency because one or both of the conditions in
paragraph 8 are not met, disclosure of the contingency shall be
made when there is at least a reasonable possibility that a loss
or an additional loss may have been incurred.
No specific disclosure has been provided in the notes to the
financial statements as management believes that a potential loss
is not probable relating to these matters. In future filings,
management will continue to assess the outcome of outstanding
legal proceedings and make the appropriate disclosures as
required by SFAS No.5.
Friendly Ice Cream Corporation
May 3, 2006
Page 7
Note 18. Segment Reporting, Page F-43
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Form 8-K dated March 17, 2006, November 9, 2005, August 4, 2005 and May 2, 2005
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8. We note your use of the non-GAAP performance measure EBITDA as a
segment performance measure in which you eliminate other
non-operating income (expense), write-downs of property and
equipment, net periodic pension cost (benefit), and other
non-cash items. Because you adjust for items other than interest,
taxes, depreciation, and amortization, titling the measure EBITDA
may be confusing to investors. Please revise the title in future
filings to indicate clearly that you have adjusted the measure
for additional items. For guidance, see Question 14 of the
staff's "Frequently Asked Questions Regarding the Use of Non-GAAP
Financial Measures" dated June 13, 2003.
Response
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In future filings, the title will be "Adjusted EBITDA."
Schedule 14A Proxy Statement
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Certain Relationships and Related Transactions, page 27
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9. We note that certain transactions between the Company and
affiliates of its officers and directors as discussed on page 27
of the Schedule 14A Proxy Statement have not been disclosed in
the Company's financial statements as required by SFAS No. 57.
Please revise the notes to the Company's financial statements in
future filings to include disclosure of all transactions between
Company and its affiliates.
Response
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In future filings, management will ensure that all transactions
between Company and its affiliates are disclosed.
The Company hereby acknowledges that (i) the Company is responsible for the
adequacy and accuracy of the disclosure in its filings, (ii) Staff comments or
changes to disclosure in response to Staff comments do not foreclose the
Commission from taking any action with respect to its filings and (iii) the
Company may not assert Staff comments as a defense in any proceeding initiated
by the Commission or any person under the federal securities laws of the United
States.
If you have any questions regarding the Company's responses to the Staff Letter,
please contact Florence Tassinari, Assistant Controller at (413) 731-4032.
Sincerely,
Friendly Ice Cream Corporation
By: / s / PAUL V. HOAGLAND
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Paul V. Hoagland
Executive Vice President of Administration
And Chief Financial Officer