Friendly's Reports Q2 Loss

Friendly Ice Cream Corporation (AMEX: FRN) announced financial results for the second quarter and six months ended July 1, 2007.

Highlights - Second Quarter Results

* Net revenues increased by $0.7 million, or 0.5%, to $142.2 million.

* Comparable restaurant sales were relatively flat for company-operated restaurants (decrease of 0.3%).

* Franchised restaurants comparable sales decreased 2.7%.

* The net loss was $0.04 per share versus net income of $0.58 in the prior year second quarter.

* Excluding net gains on property and equipment, adjusted EBITDA declined by $4.5 million. Included in adjusted EBITDA were $1.3 million in expenses for the proposed merger with an affiliate of Sun Capital Partners.

* Friendly's completed the conversion of its 56 ounce retail package to the more contemporary sqround format. Second quarter costs associated with the conversion were approximately $0.3 million.

* At the end of the quarter, cash and cash equivalents were $21.9 million and during the quarter, there were no borrowings against the revolving credit facility.

* Friendly's franchisees opened three new franchise restaurants during the quarter.

George M. Condos, President and Chief Executive Officer, said, 'The second quarter remained challenging for Friendly's. However, we continue to be optimistic about the impact of our key initiatives. For example, company-operated restaurant comparable sales trends improved in the second quarter of 2007 compared to the first quarter of 2007 and appear to be responding to our modified and more contemporary marketing messages. We have also begun to introduce new products in our restaurants, such as our new line of cold beverages, that we believe are more exciting and core to the Friendly's brand. We recently introduced a branded Ghirardelli chocolate ice cream that is only available in our restaurants. In September, we are planning to upgrade our hamburger products to Black Angus beef. The completion of the sqround packaging conversion was also an important milestone in our retail and manufacturing businesses.'

Financial Results

The net loss for the second quarter of 2007 was $0.3 million, or $0.04 per share, compared to net income of $4.7 million, or $0.58 per share, reported for the second quarter of 2006. Total revenues were $142.2 million compared to total revenues of $141.5 million for the prior year. Comparable restaurant sales decreased 0.3% for company-operated restaurants and 2.7% for franchised restaurants.

Adjusted EBITDA was $10.5 million for the second quarter of 2007 compared to adjusted EBITDA of $15.4 million for the second quarter of 2006. Excluding net gains on property and equipment, adjusted EBITDA was $10.1 million compared to $14.7 million for the prior year second quarter.

The net loss for the first six months of 2007 was $6.2 million, or $0.77 per share, compared to net income of $2.8 million, or $0.35 per share, reported for the first six months of 2006. The net loss for the first six months of 2006 included $3.3 million, or $0.41 per share, in net income from discontinued operations. Total revenues in the first six months of 2007 were $264.5 million compared to total revenues of $267.2 million for the first six months of 2006. Year-to-date, comparable restaurant sales decreased 2.1% for company-operated restaurants and 3.7% for franchised restaurants.

For the first six months of 2007, adjusted EBITDA was $16.3 million compared to adjusted EBITDA of $22.9 million for the first six months of 2006. Excluding net gains on property and equipment, adjusted EBITDA was $15.9 million compared to $21.3 million for the prior year. An explanation of the use of non-GAAP financial measures is explained in the note below and in the supplemental disclosure attached to this press release.

Business Segments - Second Quarter Results

Restaurant revenues were $107.2 million for the second quarter of 2007, an increase of $1.9 million, as compared to restaurant revenues of $105.3 million for the prior year second quarter. Comparable restaurant sales decreased slightly by 0.3%. The opening of two new restaurants and the assumption of the operation of twelve formerly franchised restaurants over the past 15 months resulted in increased restaurant revenues of $3.8 million. The closing of five restaurants and the acquisition of five restaurants by franchisees over the past 15 months resulted in revenue declines of $0.8 million and $1.1 million, respectively.

Adjusted restaurant EBITDA was $9.8 million, or 9.2% of restaurant revenues, for the second quarter of 2007 compared to $11.9 million, or 11.3% of restaurant revenues, in the prior year. Cost of sales, as a percentage of restaurant revenues, increased by 0.5% as compared to the prior year primarily due to increased commodity prices, as year over year menu pricing was minimal. A menu price increase of 1.4% is expected to be implemented during the third quarter to offset higher commodity prices. Labor and benefits, as a percentage of restaurant revenues, increased by 0.9% as a result of additional labor hours associated with the rollout of a new line of cold beverages in June along with normal wage rate pressures. These increases were partially offset by lower general manager bonus expense and reduced group insurance costs. Operating expenses of $26.8 million were $1.6 million higher than for the prior year second quarter mainly due to costs associated with one additional week of television advertising and higher supplies associated with the rollout of cold beverages. These costs were partially offset by a $0.3 million decline in field overhead expenses due to a reduction in the number of field support positions.

For the second quarter of 2007, Foodservice revenues decreased $1.0 million to $31.1 million from $32.1 million in the second quarter of 2006. Franchise restaurant product revenues increased by $0.8 million due to higher prices for commodities that are passed onto franchised restaurants. This increase was partially offset by a lower average number of operating franchise restaurants during the quarter and from the decrease in franchise comparable sales of 2.7%. Sales to retail supermarket customers decreased by $1.8 million primarily due to a reduction in retail supermarket case volume of 10.4% and increased trade spending and sales allowances. The Company is in the process of evaluating its level of trade spending and sales allowances to offset higher commodity prices. Foodservice EBITDA decreased by $2.1 million from the prior year to $3.7 million mainly due to lower sales volumes and higher costs of dairy related raw material ingredients (milk and cream) and whey protein.

The lower average number of operating franchise restaurants during the second quarter of 2007 was primarily the result of the Company's assumption of the operations of 11 previously franchised restaurants following the franchisee's non-payment of rents and royalties. The Company has been operating these restaurants since December 2006 while looking for a new franchisee to take over their operation.

Franchise revenues of $3.9 million for the second quarter of 2007 decreased slightly from $4.1 million for the second quarter of 2006. Comparable franchise sales decreased by 2.7%. Franchise royalties decreased by $0.1 million due to a lower average number of operating franchise restaurants during the quarter combined with the decrease in comparable franchise sales. Initial franchise fees and rental income were unchanged from the second quarter of 2006. Adjusted franchise EBITDA was $2.7 million as compared to $2.9 million for the prior year.

Corporate expenses of $6.4 million for the second quarter of 2007 were unfavorable by $0.2 million as compared to the second quarter of 2006 primarily due to costs of $1.3 million related to the proposed merger with an affiliate of Sun Capital Partners and increased stock compensation costs. These expenses were partially offset by lower salaries and bonus expenses.



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