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June 12, 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
Form 10-Q: For the quarter ended March 31, 2006
Commission File #: 001-13579
Dear Ms. Cvrkel:
Reference is made to the Staff's letter of comment dated June 2, 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 filings on Form 10-K and Form 10-Q.
Notes to the Financial Statements
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Note 8. Income Taxes, page F-26
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1. We note from your response to our prior comment 4 that of the
$1,446,000 recognized in 2005 related to tax contingencies,
approximately $1,039,000 originated prior to 2005. Please explain to
us the nature and the amounts of the accruals for tax contingencies
included in the $1,446,000 as we are still unclear if the amounts
relate to interest or the related tax that should have been recognized
previously. Also, please identify the time period related to each tax
amount detailed in your response. Additionally, please explain why the
amounts that relate to periods prior to 2005 were not recognized until
2005.
Response
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A summary of the $1,446,000 recognized in 2005 related to tax contingencies is
as follows:
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Description Tax Interest Total
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Trade Promotions $ 1,039,000 $ - $ 1,039,000
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State Nexus 98,000 13,000 198,000
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RAR Adjustment 260,000 36,000 296,000
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Total $ 1,397,000 $ 49,000 $ 1,446,000
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Trade Promotions
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Reserves for discounts and allowances from retail sales (trade promotions) are
estimated and accrued, for both book and tax purposes, when revenue is recorded
and are based on promotional planners prepared by our retail sales force. The
exact amount of trade promotions is not known until the invoice is later paid.
If the Internal Revenue Service (IRS) successfully disallowed the accrued
year-end balance of trade promotions, the Company would be required to pay a
current tax; however, a deferred tax asset would be created Prior to 2005, the
deferred tax asset that would result from the recognition of the trade
promotions in a future year would offset any additional tax resulting from the
disallowance. Therefore, only interest was accrued for temporary items prior to
2005.
In 2005, the Company determined that a valuation allowance was required that
reduced the carrying value of net deferred tax assets to zero. Additionally, the
Company expects to record a full valuation allowance on future tax benefits
until it is able to sustain an appropriate level of profitability. While the
Company is recording a full valuation allowance, any disallowance of temporary
income tax deductions such as trade promotions would reduce earnings by the
amount of tax and interest. Therefore, during 2005, the Company accrued for tax
contingencies in the amount of $1,039,000, which represents the additional tax
that would result. This amount primarily related to 2002, which was the earliest
open tax year.
State Nexus
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The Company has taken the position that its franchising subsidiary, Friendly's
Restaurants Franchise, Inc. (FRFI), which has no employees nor tangible assets,
does not have nexus in the states of Ohio and Pennsylvania. As a result, FRFI
does not file state income tax returns in either of these two states. The
Company believes it is probable that these states would disagree with this
position. The additional tax of $98,000 relates only to the 2005 tax year and
the $13,000 of interest represents interest accrued for 2005.
RAR Adjustment
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In 2005, the IRS presented its preliminary findings for their audit of the
Company's 2002, 2003 and 2004 Federal consolidated income tax returns (the audit
was finalized in 2006 consistent with these preliminary findings). The audit
resulted in changes (RAR adjustments) to two of the entities included in the
consolidated return, i.e., Friendly Ice Cream Corporation (FICC) and Restaurant
Insurance Corporation (RIC). RIC is a wholly owned, Vermont captive insurance
corporation of FICC.
In order to comply with state income tax laws, FICC will file amended 2002, 2003
and 2004 state income tax returns. Because as an insurance corporation, RIC does
not file state income tax returns, the amended state returns will reflect only
the adjustments made to FICC. The Company believes that it is probable that
states will take the position the RAR adjustments made to both FICC and RIC
should be included on the amended state income tax returns and therefore accrued
for the RAR adjustment made to RIC. Historically, the Company's contingency for
RIC has only related to the additional interest at the federal level.
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, 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