<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15() OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 27, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15() OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-3930
------------------------
FRIENDLY ICE CREAM CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MASSACHUSETTS 5812 04-2053130
(State of (Primary Standard Industrial (I.R.S. Employer
Incorporation) Classification Code Number) Identification No.)
</TABLE>
1855 BOSTON ROAD
WILBRAHAM, MASSACHUSETTS 01095
(413) 543-2400
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF CLASS
- - ----------------------------------
<S> <C> <C>
Common Stock, $.01 par value
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K / /.
The aggregate market value of voting stock held by nonaffiliates of the
registrant, based upon the closing sales price of the registrant's common stock
on March 17, 1999 on the National Market tier of the Nasdaq Stock Market, Inc.,
was $39,685,584. For purpose of the foregoing calculation only, all members of
the Board of Directors and executive officers of the registrant have been deemed
affiliates. The number of shares of common stock outstanding is 7,474,401 as of
March 17, 1999.
Documents incorporated by reference:
Part III of this 10-K incorporates information by reference from the
registrant's definitive proxy statement which will be filed no later than 120
days after December 27, 1998.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
ORGANIZATION
Friendly's, founded in 1935, was publicly held from 1968 until January 1979,
at which time it was acquired by Hershey Foods Corporation ("Hershey"). In 1988,
The Restaurant Company ("TRC"), an investor group led by Donald Smith, the
Company's current Chairman and Chief Executive Officer, acquired Friendly's from
Hershey (the "TRC Acquisition"). In November 1997, the Company completed a
public offering of 5,000,000 shares (approximately 70%) of its common stock for
gross proceeds of $90 million and a public offering of $200 million of Senior
Notes (collectively, the "Offerings").
Unless the context indicates otherwise: (i) references herein to
"Friendly's" or the "Company" refer to Friendly Ice Cream Corporation, its
predecessors and its consolidated subsidiaries; (ii) references herein to "FICC"
refer to Friendly Ice Cream Corporation and not its subsidiaries; and (iii) as
used herein, "Northeast" refers to the Company's core markets, which include
Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York,
Pennsylvania, Rhode Island and Vermont. The Company's fiscal years ended
December 27, 1998, December 28, 1997, December 29, 1996, December 31, 1995 and
January 1, 1995 are referred to herein as 1998, 1997, 1996, 1995 and 1994,
respectively.
GENERAL
The Company owns and operates 646 restaurants, franchises 42 full-service
restaurants and 11 cafes and manufactures a complete line of packaged frozen
desserts distributed through more than 5,000 supermarkets and other retail
locations in 16 states. Friendly's offers its customers a unique dining
experience by serving a variety of high-quality, reasonably-priced breakfast,
lunch and dinner items, as well as its signature frozen desserts, in a fun and
casual neighborhood setting. For the year ended December 27, 1998, Friendly's
generated $678.1 million in total revenues and $63.5 million in EBITDA (as
defined herein) and incurred $31.8 million of interest expense. During the same
period, management estimates that over $226.2 million of total revenues were
from the sale of approximately 20 million gallons of frozen desserts.
Friendly's restaurants target families with children and adults who desire a
reasonably-priced meal in a full-service setting. The Company's menu offers a
broad selection of freshly-prepared foods which appeal to customers throughout
all dayparts. The menu currently features over 100 items comprised of a broad
selection of breakfast, lunch, dinner and afternoon and evening snack items.
Breakfast items include specialty omelettes and breakfast combinations featuring
eggs, pancakes and bacon or sausage. Breakfasts generally range from $2.00 to
$6.00 and account for approximately 12% of average restaurant revenues. Lunch
and dinner items include a line of wrap sandwiches, entree salads, soups,
super-melts, specialty burgers, appetizers including quesadillas, mozzarella
cheese sticks and "Fronions," and stir-fry, chicken, pot pie, tenderloin steak
and seafood entrees. These lunch and dinner items generally range from $4.00 to
$9.00, and these dayparts account for approximately 54% of average restaurant
revenues. Entree selections are complemented by Friendly's premium frozen
desserts, including the Fribble-Registered Trademark-, the Company's signature
thick shake, Happy Ending-Registered Trademark- Sundaes, Candy
Shoppe-Registered Trademark- Sundaes, the Wattamelon Roll-Registered Trademark-
and fat-free Sorbet Smoothies. The Company's frozen desserts are an important
component of the Company's snack dayparts which accounts for 34% of average
restaurant revenues.
Despite the Company's capital constraints, management has implemented a
number of initiatives to restore and improve operational and financial
efficiencies. From the date of the TRC Acquisition through 1994, the Company (i)
implemented a major revitalization of its restaurants, (ii) repositioned the
Friendly's concept from a sandwich and ice cream shoppe to a full-service,
family-oriented restaurant with broader menu and daypart appeal, (iii) elevated
customer service levels by recruiting more qualified managers and expanding the
Company's training program, (iv) disposed of 144 under-performing restaurants
and
1
<PAGE>
(v) capitalized upon the Company's strong brand name recognition by initiating
the sale of Friendly's unique line of packaged frozen desserts through retail
locations.
Beginning in 1994, the Company began implementing several growth initiatives
including (i) testing and implementing a program to expand the Company's
domestic distribution network by selling frozen desserts and other menu items
through non-traditional locations and (ii) implementing a franchising strategy
to extend profitably the Friendly's brand without the substantial capital
required to build new restaurants.
CAPITAL INVESTMENT PROGRAM
A significant component of the Company's capital investment program is the
FOCUS 2000 initiative which is designed to establish a consistent, enhanced
Friendly's brand image across the Company's entire restaurant operations. The
Company's capital spending strategy seeks to increase comparable restaurant
revenues and restaurant cash flow through the on-going revitalization and
re-imaging of existing restaurants and to increase total restaurant revenues
through the addition of new restaurants. The following illustrates the key
components of the Company's capital spending program.
RESTAURANT RE-IMAGING. The Company completed the re-imaging of 142
restaurants in 1998 at an estimated cost of $145,000 per restaurant (not
including costs related to development of the prototype). This cost typically
includes an interior redecoration and a new exterior package. The Company
believes that efficiencies and economics associated with remodeling a large
number of restaurants will reduce the average cost of the re-imaging in 1999 and
beyond. The Company expects to complete the re-imaging of approximately 96
restaurants during 1999.
NEW RESTAURANT CONVERSION AND CONSTRUCTION. The Company converted one
restaurant in 1998 at a cost of approximately $633,000. The Company constructed
six new restaurants in 1998 at a cost of approximately $964,000 per restaurant,
excluding land and pre-opening expenses. The Company expects to complete the
conversion or construction of approximately ten restaurants during 1999.
SEATING CAPACITY EXPANSION PROGRAM. Beginning with the TRC Acquisition
through December 27, 1998, the Company has expanded seating capacity by
approximately 50 seats at 30 restaurants at an average cost of $291,000 per
restaurant. The Company completed the expansion of two restaurants in 1998 at an
average cost of $308,000 per restaurant. This cost typically includes adding 50
seats per restaurant, relocating certain equipment, an interior redecoration and
a new exterior package and increasing parking capacity where necessary. The
Company expects to complete the expansion of one restaurant during 1999.
INSTALLATION OF RESTAURANT AUTOMATION SYSTEMS. Beginning with the TRC
Acquisition through December 27, 1998, the Company has installed touch-screen
point of sale ("POS") register systems in approximately 345 Company owned
restaurants and 39 franchised locations. The majority of these systems were
installed at an average cost of $34,000 per restaurant, although the most recent
installations average approximately $28,000. These POS register systems are
designed to improve revenue realization, food cost management and labor
scheduling while increasing the speed and accuracy of processing customer
orders. The Company expects to install POS register systems in approximately 50
Company-owned existing restaurants during 1999 and in every new unit.
FRANCHISING PROGRAM
The Company has initiated a franchising strategy to expand its restaurant
presence in under-penetrated markets, accelerate restaurant growth in new
markets, increase marketing and distribution efficiencies and preempt
competition by acquiring restaurant locations in the Company's targeted markets.
With the substantial completion of the Company's restaurant revitalization
program, the development and initial deployment of its two new freestanding
restaurant prototypes and the successful introduction of its new dinner line,
the Company believes it is in a position to maximize the value of its brand
appeal to
2
<PAGE>
prospective franchisees. The Company's wholly owned subsidiary, Friendly's
Restaurants Franchise, Inc. ("FRFI") commenced operations in 1996 for the
purpose of franchising various restaurant concepts. Since it began operations,
FRFI has developed and now offers a franchise program for both Friendly's
restaurants and Friendly's cafes. The Company generally seeks franchisees who
have related business experience, capital adequacy to build-out the Friendly's
concept and no operations which have directly competitive restaurant or food
concepts.
On July 14, 1997, the Company entered into a long-term agreement granting
DavCo Restaurants, Inc. ("DavCo"), a franchisor of more than 230 Wendy's
restaurants, exclusive rights to operate, manage and develop Friendly's
full-service restaurants in the franchising region of Maryland, Delaware, the
District of Columbia and northern Virginia (the "DavCo Agreement"). Pursuant to
the DavCo Agreement, DavCo purchased certain assets and rights in 34 existing
Friendly's restaurants in this franchising region, committed to open an
additional 74 restaurants over the next six years and, subject to the
fulfillment of certain conditions, further agreed to open 26 additional
restaurants, for a total of 100 new restaurants in this franchising region over
the next ten years. Friendly's receives (i) a royalty based on franchised
restaurant revenues and (ii) revenues and earnings from the sale to DavCo of
Friendly's frozen desserts and other products. DavCo is required to purchase
from Friendly's all of the frozen desserts to be sold in these restaurants. In
fiscal 1998, DavCo opened four new locations pursuant to the DavCo Agreement.
The Company franchised four additional restaurants and ten cafes in fiscal 1998
to other franchisees (see Notes 14 and 15 of Notes to Consolidated Financial
Statements).
The Company does not have significant experience in franchising restaurants
and there can be no assurance that the Company will continue to successfully
locate and attract suitable franchisees or that such franchisees will have the
business abilities or sufficient access to capital to open restaurants or will
operate restaurants in a manner consistent with the Company's concept and
standards or in compliance with franchise agreements. The success of the
Company's franchising program will also be dependent upon certain other factors,
certain of which are not within the control of the Company or its franchisees,
including the availability of suitable sites on acceptable lease or purchase
terms, permitting and regulatory compliance and general economic and business
conditions.
RESTAURANT CARRYOUT OPERATIONS
Through dedicated carryout areas, Friendly's restaurants offer the Company's
full line of frozen desserts and certain of its food menu items. Reserved
parking is available at many of the Company's free-standing restaurants to
facilitate quick carryout service. Approximately 15% of the Company's average
freestanding restaurant revenues are derived from its carryout business with a
significant portion of these sales occurring during the afternoon and evening
snack periods. In addition, approximately 5% of revenues come from sales of
packaged frozen desserts in display cases within its restaurants.
FOODSERVICE RETAIL OPERATIONS
In 1989, the Company extended its premium packaged frozen dessert line from
its restaurants into retail locations. The Company offers a branded product line
that includes approximately 60 half gallon varieties featuring premium ice cream
shoppe flavors and unique sundae combinations, low and no fat frozen yogurt, low
fat ice cream and sherbet. Specialty flavors include Royal Banana Split,
Cappuccino Dream-TM- and Caramel Fudge Nut Blast-TM-, and proprietary products
include the Jubilee Roll-Registered Trademark-, Wattamelon
Roll-Registered Trademark- and Friendly's branded ice cream cakes and pies. The
Company also licenses from Hershey the right to feature certain candy brands
including Almond Joy-Registered Trademark-, Mr. Goodbar-Registered Trademark-,
Reese's Pieces-Registered Trademark-, Reese's-Registered Trademark- Peanut
Butter Cups and York-Registered Trademark- Peppermint Patties on packaged sundae
cups and pints.
The Company focuses its marketing and distribution efforts in areas where it
has higher restaurant penetration and consumer awareness. During the initial
expansion of its retail business in 1989 and 1990, Albany, Boston and
Hartford/Springfield were primary markets of opportunity. The Company added the
3
<PAGE>
New York and Philadelphia markets to its retail distribution efforts in 1992 and
1993. Subsequently, distribution was expanded into the Ohio, Pittsburgh,
Baltimore/Washington and Richmond markets.
The Company expects to continue building its retail distribution business in
its current retail markets. In these markets, the Company intends to increase
shelf space with existing accounts and add new accounts by (i) capitalizing on
its integrated restaurant and retail consumer advertising and promotion
programs, (ii) continuing new product introductions and (iii) improving trade
merchandising initiatives. Additionally, the Company expects to continue to
selectively enter new markets where its brand awareness is high according to
market surveys.
The Company has developed a broker/distributor network designed to protect
product quality through proper product handling and to enhance the merchandising
of the Company's frozen desserts. The Company's experienced sales force manages
this network to serve specific retailer needs on a market-by-market basis. In
addition, the Company's retail marketing and sales departments coordinate market
development plans and key account management programs.
FOODSERVICE NON-TRADITIONAL LOCATIONS
In order to capitalize on both planned and impulse purchases, the Company is
leveraging the Friendly's brand name and enhancing consumer awareness by
introducing modified formats of the Friendly's concept into non-traditional
locations. These modified formats include (i) Friendly's Cafe, a quick service
concept offering frozen desserts and a limited menu, (ii) Friendly's branded ice
cream shoppes offering freshly-scooped and packaged frozen desserts and (iii)
Friendly's branded display cases and novelty carts with packaged single-serve
frozen desserts. The first Friendly's Cafe opened in October 1997 and a total of
11 are now open. The Company supplies frozen desserts to non-traditional
locations such as colleges and universities, sports facilities, amusement parks,
secondary school systems and business cafeterias directly or through selected
vendors pursuant to multi-year franchise or license agreements.
INTERNATIONAL OPERATIONS
The Company, through its Friendly's International, Inc. subsidiary, has a
master license agreement with a South Korean enterprise to develop Friendly's
"Great American" ice cream shoppes offering freshly-scooped and packaged frozen
desserts. As of December 27, 1998, the licensee and its sublicensees were
operating 11 ice cream shoppes.
In 1998, the Company announced that it was discontinuing its international
investments in China and the United Kingdom (see Note 18 of Notes to
Consolidated Financial Statements).
MARKETING
The Company's marketing strategy is to continue to strengthen Friendly's
brand equity and further capitalize on its strong customer awareness to
profitably build revenues across all businesses. The primary advertising message
promotes Friendly's unique ice cream offerings to introduce new lunch and dinner
products or line extensions. Management utilizes this strategy to encourage
consumer trial of new products and increase the average guest check while
reinforcing Friendly's unique food-with-ice cream experience. The Company's
food-with-ice cream promotions also build sales of packaged frozen desserts in
its restaurants and in retail locations.
The Company's media plan is designed to build awareness and increase trial
among key target audiences while optimizing spending by market based on media
cost efficiencies. The Company classifies markets based upon restaurant
penetration and the resulting advertising and promotion costs per restaurant.
The Company's 19 most highly-penetrated markets are supported with regular spot
television advertisements from March through December. The Company augments its
marketing efforts in these
4
<PAGE>
markets with radio advertising to target the breakfast daypart or to increase
the frequency of the promotional message. In addition, the Company supports
certain of these highly-penetrated markets (Albany, Boston, Hartford/Springfield
and Providence) during the peak summer season with additional television media
focusing on freshly-scooped and packaged frozen desserts. In its secondary
markets, the Company utilizes targeted local store marketing initiatives such as
radio, direct mail and newspaper advertising. All of the Company's markets are
supported with an extensive promotional coupon program.
The Company believes that its integrated restaurant and retail marketing
efforts provide significant support for the development of its retail business.
Specifically, the retail business benefits from the awareness and trial of
Friendly's product offerings generated by 34 weeks per year of
food-with-ice-cream advertising and couponing efforts. The Company believes that
this approach delivers a significantly higher level of consumer exposure and
usage compared to the Company's packaged frozen dessert competitors which have
only retail distribution. In turn, sales of the Company's products through more
than 5,000 retail locations, supported by trade merchandising efforts, build
incremental awareness and usage of Friendly's which management believes benefits
the restaurants. Advertising and promotion expenditures were approximately $21
million for 1998.
CERTAIN RISKS ASSOCIATED WITH THE FOOD SERVICE INDUSTRY
Food service businesses are often affected by changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns, the cost and availability of labor, purchasing power, availability of
products and the type, number and location of competing restaurants. The Company
could also be substantially adversely affected by publicity resulting from food
quality, illness, injury or other health concerns or alleged discrimination or
other operating issues stemming from one location or a limited number of
locations, whether or not the Company is liable. In addition, factors such as
increased cost of goods, regional weather conditions and the potential scarcity
of experienced management and hourly employees may also adversely affect the
foodservice industry in general and the results of operations and financial
condition of the Company.
MANUFACTURING
The Company produces substantially all of its frozen desserts in two
Company-owned manufacturing plants which employ a total of approximately 300
people. The Wilbraham, Massachusetts plant occupies approximately 41,000 square
feet of manufacturing space while the Troy, Ohio plant (see Purchasing and
Distribution) utilizes approximately 18,000 square feet. During 1998, the
combined plants operated at an average capacity of 61.2% and produced (i) over
17.0 million gallons of ice cream, sherbets and yogurt in bulk, half-gallons and
pints, (ii) 8.3 million sundae cups, (iii) 1.1 million frozen dessert rolls,
pies and cakes and (iv) 1.2 million gallons of fountain syrups and toppings. The
quality of the Company's products is important, both to sustain Friendly's image
and to enable the Company to satisfy customer expectations. Wherever possible,
the Company "engineers in" quality by installing modern processes such as
computerized mix-making equipment and monitoring devices to ensure all storage
tanks and rooms are kept at proper temperatures for maximum quality.
PURCHASING AND DISTRIBUTION
The basic raw materials for the Company's frozen desserts are dairy products
and sugar. The Company's purchasing department purchases other food products,
such as coffee, in large quantities. Although the Company generally does not
hedge its positions in any of these commodities, it may opportunistically
purchase some of these items in advance of a specific need. As a result, the
Company is subject to the risk of substantial and sudden price increases, such
as with the price of cream in 1998, shortages or interruptions in supply of such
items, which could have a material adverse effect on the Company.
5
<PAGE>
In conjunction with the Company's product development department, the
Company's purchasing department evaluates the cost and quality of all major food
items on a quarterly basis and purchases these items through numerous vendors
with which it has long-term relationships. The Company contracts with vendors on
an annual, semiannual, or monthly basis depending on the item and the
opportunities within the marketplace. In order to promote competitive pricing
and uniform vendor specifications, the Company contracts directly for such
products as produce, milk and bread and other commodities and services. The
Company also minimizes the cost of all restaurant capital equipment by
purchasing directly from manufacturers or pooling volumes with master
distributors.
The Company owns two distribution centers and leases a third which allow the
Company to control quality, costs and inventory from the point of purchase
through restaurant delivery. The Company distributes most product lines to its
restaurants, and its packaged frozen desserts to its retail customers, from
warehouses in Chicopee and Wilbraham, Massachusetts and Troy, Ohio with a
combined non-union workforce of approximately 200 employees. The Company's truck
fleet delivers all but locally-sourced produce, milk and selected bakery
products to its restaurants at least weekly, and during the highest sales
periods, delivers to over 50% of Friendly's restaurants twice per week. The
Chicopee, Wilbraham and Troy warehouses encompass 54,000 square feet, 109,000
square feet and 42,000 square feet, respectively. The Company believes that
these distribution facilities operate at or above industry standards with
respect to timeliness and accuracy of deliveries.
The Company has distributed its products since its inception to protect the
product integrity of its frozen desserts. The Company delivers products to its
restaurants on its own fleet of tractors and trailers which display large-scale
images of the Company's featured products. The entire fleet is specially built
to be compatible with storage access doors, thus protecting frozen desserts from
"temperature shock." Recently acquired trailers have an innovative design which
provides individual temperature control for three distinct compartments. To
provide additional economies to the Company, the truck fleet backhauls on over
50% of its delivery trips, bringing the Company's purchased raw materials and
finished products back to the distribution centers.
RELOCATION OF TROY OPERATIONS
On December 1, 1998, the Company announced plans to relocate its
manufacturing and distribution operations from Troy, Ohio to Wilbraham,
Massachusetts and York, Pennsylvania and sell the Troy, Ohio facility. The
facility in York, Pennsylvania, which will be leased by the Company, is being
constructed and will be an approximately 86,000 square foot distribution and
office facility. The Company plans to sell the Troy, Ohio facility after its
closing in May 1999 (see Note 16 of Notes to Consolidated Financial Statements).
HUMAN RESOURCES AND TRAINING
The average Friendly's restaurant employs between two and four salaried team
members, which may include one General Manager, one Assistant Manager, one Guest
Service Supervisor and one Manager-in-Training. The General Manager is directly
responsible for day-to-day operations. General Managers report to a District
Manager who typically has responsibility for an average of seven restaurants.
District Managers report to a Division Manager who typically has responsibility
for approximately 50 restaurants. Division Managers report to a Regional Vice
President who typically has responsibility for six or seven Division Managers
covering approximately 325 restaurants.
The average Friendly's restaurant is staffed with four to twenty employees
per shift, including the salaried restaurant management. Shift staffing levels
vary by sales volume level, building configuration and time of day. The average
restaurant typically utilized approximately 39,000 hourly-wage labor hours in
1998 in addition to salaried management.
6
<PAGE>
In March 1998, the Company began to test a "Friendly's University" staff
training program. In 1999, this initiative will be implemented throughout the
chain so that, over time, Friendly's restaurant waitpersons will receive more
than 30 hours of classroom and field instruction.
EMPLOYEES
The total number of employees at the Company varies between 24,000 and
28,000 depending on the season of the year. As of December 27, 1998, the Company
employed approximately 24,000 employees, of which approximately 23,000 were
employed in Friendly's restaurants (including approximately 100 in field
management), approximately 500 were employed at the Company's two manufacturing
and three distribution facilities and approximately 500 were employed at the
Company's corporate headquarters and other offices. None of the Company's
employees is a party to a collective bargaining agreement.
LICENSES AND TRADEMARKS
The Company is the owner or licensee of the trademarks and service marks
(the "Marks") used in its business. The Marks "Friendly-Registered Trademark-"
and "Friendly's-Registered Trademark-" are owned by the Company pursuant to
registrations with the U.S. Patent and Trademark office.
Upon the sale of the Company by Hershey in 1988, all of the Marks used in
the Company's business at that time which did not contain the word "Friendly" as
a component of such Marks (the "1988 Non-Friendly Marks"), such as
Fribble-Registered Trademark-, Fishamajig-Registered Trademark- and
Clamboat-Registered Trademark- were licensed by Hershey to the Company. The 1988
Non-Friendly Marks license has a term of 40 years expiring on September 2, 2028.
Such license included a prepaid license fee for the term of the license which is
renewable at the Company's option for an additional term of 40 years and has a
license renewal fee of $20.0 million.
Hershey also entered into non-exclusive licenses with the Company for
certain candy trademarks used by the Company in its frozen dessert sundae cups
(the "Cup License") and pints (the "Pint License"). The Cup License and Pint
License automatically renew for unlimited one-year terms subject to certain
nonrenewal rights held by both parties. Hershey is subject to a noncompete
provision in the sundae cup business for a period of two years if the Cup
License is terminated by Hershey without cause, provided that the Company
maintains its current level of market penetration in the sundae cup business.
However, Hershey is not subject to a noncompete provision if it terminates the
Pint License without cause.
The Company also has a non-exclusive license agreement with Leaf, Inc.
("Leaf") for use of the Heath-Registered Trademark- Bar candy trademark. The
term of the royalty-free Leaf license continues indefinitely subject to
termination by Leaf upon 60 days notice. Excluding the Marks subject to the
licenses with Hershey and Leaf, the Company is the owner of its Marks.
COMPETITION
The restaurant business is highly competitive and is affected by changes in
the public's eating habits and preferences, population trends and traffic
patterns, as well as by local and national economic conditions affecting
consumer spending habits, many of which are beyond the Company's control. Key
competitive factors in the industry are the quality and value of the food
products offered, quality and speed of service, attractiveness of facilities,
advertising, name brand awareness and image and restaurant location. Each of the
Company's restaurants competes directly or indirectly with locally-owned
restaurants as well as restaurants with national or regional images and, to a
limited extent, restaurants operated by its franchisees. A number of the
Company's significant competitors are larger or more diversified and have
substantially greater resources than the Company. The Company's retail
operations compete with national and regional manufacturers of frozen desserts,
many of which have greater financial resources and more established channels of
distribution than the Company. Key competitive factors in the retail food
business include brand awareness, access to retail locations, price and quality.
7
<PAGE>
GOVERNMENT REGULATION
The Company is subject to various Federal, state and local laws affecting
its business. Each Friendly's restaurant is subject to licensing and regulation
by a number of governmental authorities, which include health, safety,
sanitation, building and fire agencies in the state or municipality in which the
restaurant is located. Difficulties in obtaining or failures to obtain required
licenses or approvals, or the loss of such licenses and approvals once obtained,
can delay, prevent the opening of, or close, a restaurant in a particular area.
The Company is also subject to Federal and state environmental regulations, but
these have not had a material adverse effect on the Company's operations.
The Company's relationship with its current and potential franchisees is
governed by the laws of the several states which regulate substantive aspects of
the franchisor-franchisee relationship. Substantive state laws that regulate the
franchisor-franchisee relationship presently exist or are being considered in a
significant number of states, and bills will likely be introduced in Congress
which would provide for Federal regulation of substantive aspects of the
franchisor-franchisee relationship. These current and proposed franchise
relationship laws limit, among other things, the duration and scope of
non-competition provisions, the ability of a franchisor to terminate or refuse
to renew a franchise and the ability of a franchisor to designate sources of
supply.
The Company's restaurant operations are also subject to Federal and state
laws governing such matters as wages, hours, working conditions, civil rights
and eligibility to work. Some states have set minimum wage requirements higher
than the Federal level. In September 1997, the second phase of an increase in
the minimum wage was implemented in accordance with the Federal Fair Labor
Standards Act of 1996. Significant numbers of hourly personnel at the Company's
restaurants are paid at rates related to the Federal minimum wage and,
accordingly, increases in the minimum wage will increase labor costs at the
Company's restaurants. Other governmental initiatives such as mandated health
insurance, if implemented, could adversely affect the Company as well as the
restaurant industry in general. The Company is also subject to the Americans
with Disabilities Act of 1990, which, among other things, may require certain
minor renovations to its restaurants to meet federally-mandated requirements.
The cost of these renovations is not expected to be material to the Company.
FORWARD LOOKING STATEMENTS
Statements contained herein that are not historical facts, constitute
"forward looking statements" as that term is defined in the Private Securities
Litigation Reform Act of 1995. All forward looking statements are subject to
risks and uncertainties which could cause results to differ materially from
those anticipated. These factors include the Company's highly competitive
business environment, exposure to commodity prices, risks associated with the
foodservice industry, the ability to retain and attract new employees,
government regulations, the Company's high geographic concentration in the
Northeast and its attendant weather pattern, conditions needed to meet
re-imaging and new opening and franchising targets and risks associated with
improved service and other initiatives. Other factors that may cause actual
results to differ from the forward looking statements contained herein and that
may affect the Company's prospects in general are included in the Company's
other filings with the Securities and Exchange Commission.
8
<PAGE>
ITEM 2. PROPERTIES
The table below identifies the location of the 682 restaurants operating as
of December 27, 1998.
<TABLE>
<CAPTION>
FREESTANDING OTHER FRANCHISED TOTAL
STATE RESTAURANTS RESTAURANTS (A) RESTAURANTS RESTAURANTS
- - --------------------------------------------------------- --------------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C>
COMPANY-OWNED/LEASED
------------------------------------
Connecticut.............................................. 49 19 -- 68
Delaware................................................. -- -- 6 6
Florida.................................................. 13 2 -- 15
Maine.................................................... 11 -- -- 11
Maryland................................................. 3 5 22 30
Massachusetts............................................ 115 37 -- 152
Michigan................................................. 1 -- -- 1
New Hampshire............................................ 14 6 -- 20
New Jersey............................................... 47 16 -- 63
New York................................................. 131 30 -- 161
Ohio..................................................... 52 2 -- 54
Pennsylvania............................................. 51 12 2 65
Rhode Island............................................. 8 -- -- 8
Vermont.................................................. 8 2 -- 10
Virginia................................................. 10 2 6 18
--- --- --- ---
Total.................................................... 513 133 36 682
--- --- --- ---
--- --- --- ---
</TABLE>
- - ------------------------
(a) Includes primarily malls and strip centers.
The 545 freestanding restaurants (including 32 franchised restaurants) range
in size from approximately 2,400 square feet to approximately 5,000 square feet.
The 137 mall and strip center restaurants (including four franchised
restaurants) range in size from approximately 2,200 square feet to approximately
3,800 square feet. Of the 646 restaurants operated by the Company at December
27, 1998, the Company owned the buildings and the land for 275 restaurants,
owned the buildings and leased the land for 147 restaurants, and leased both the
buildings and the land for 224 restaurants. The Company's leases generally
provide for the payment of fixed monthly rentals and related occupancy costs
(e.g., property taxes and insurance). Additionally, most mall and strip center
leases require the payment of common area maintenance charges and incremental
rent of between 3.0% and 6.0% of the restaurant's sales.
In addition to the Company's restaurants, the Company owns (i) an
approximately 260,000 square foot facility on 46 acres in Wilbraham,
Massachusetts which houses the corporate headquarters, a manufacturing facility
and a warehouse, (ii) an approximately 77,000 square foot office, manufacturing
and warehouse facility on 13 acres in Troy, Ohio and (iii) an approximately
18,000 square foot restaurant construction and maintenance service facility
located in Wilbraham, Massachusetts. The Company leases (i) an approximately
60,000 square foot distribution facility in Chicopee, Massachusetts, (ii) an
approximately 38,000 square foot restaurant construction and maintenance support
facility in Ludlow, Massachusetts and (iii) on a short-term basis, space for its
division and regional offices, its training and development center and other
support facilities.
The Company announced on December 1, 1998 that it was relocating its
manufacturing and distribution facility from Troy, Ohio to Wilbraham,
Massachusetts and York, Pennsylvania. The facility in York, Pennsylvania, which
will be leased by the Company, is being constructed and will be an approximately
86,000 square foot distribution and office facility. The Company plans to sell
the Troy, Ohio facility after its closing in May 1999 (see Note 16 of Notes to
Consolidated Financial Statements).
9
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is named as a defendant in legal actions
arising in the ordinary course of its business. The Company is not party to any
pending legal proceedings other than routine litigation incidental to its
business. The Company does not believe that the resolutions of these claims
should have a material adverse effect on the Company's financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None
EXECUTIVE OFFICERS
The executive officers of the Company and their respective ages and
positions with the Company are as follows:
DONALD N. SMITH, 58, has been Chairman and Chief Executive Officer of the
Company since September 1988. Mr. Smith also served as the Company's President
from September, 1988 to December, 1998. Mr. Smith has also been Chairman of the
Board and Chief Executive Officer of Perkins Management Company, Inc. ("PMC"),
the general partner of a limited partnership operating a family restaurant chain
known as Perkins Family Restaurants, since 1986. In October, 1998, Mr. Smith
also became Chief Operating Officer of PMC. Prior to joining PMC, Mr. Smith was
President and Chief Executive Officer for Diversifoods, Inc. from 1983 to
October 1985. From 1980 to 1983, Mr. Smith was Senior Vice President of
PepsiCo., Inc. and was President of its Food Service Division. He was
responsible for the operations of Pizza Hut Inc. and Taco Bell Corp., as well as
North American Van lines, Lee Way Motor Freight, Inc., PepsiCo Foods
International and La Petite Boulangerie. Prior to 1980, Mr. Smith was President
and Chief Executive Officer of Burger King Corporation and Senior Executive Vice
President and Chief Operations Officer for McDonald's Corporation.
JOHN L. CUTTER, 54, has been President and Chief Operating Officer since
December, 1998. Prior to joining the Company, Mr. Cutter served as Chief
Operating Officer at Boston Chicken, Inc. from 1997 through October, 1998. From
1993 through 1997, he served as Chief Executive Officer and President of Boston
Chicken Golden Gate, LLC, a franchisee of Boston Chicken, Inc. From 1991 through
1993, Mr. Cutter held the position of President and Chief Operating Officer for
Nanco Restaurants, Inc. Prior to 1991, Mr. Cutter held the position of Group
President at American Restaurant Group/SAGA.
PAUL J. MCDONALD, 55, has served as the Company's Senior Executive Vice
President, Chief Financial Officer, Treasurer and Assistant Clerk since
February, 1999. Mr. McDonald has been employed in various capacities with the
Company since 1976, including Chief Administrative Officer from February, 1996
to January, 1999, Director of Management Information Systems, Vice
President/Controller, Vice President Corporate Development and Vice President,
Finance and Chief Financial Officer. Mr. McDonald is a certified public
accountant.
GERALD E. SINSIGALLI, 59, has been President, Foodservice Division of the
Company since January 1989. Mr. Sinsigalli has been employed in various
capacities with the Company since 1965. Mr. Sinsigalli's duties have included
District and Division Manager, Director and Vice President of Operations and
Senior Vice President.
DENNIS J. ROBERTS, 50, has been Senior Vice President, Restaurant and
Franchise Operations of the Company since February, 1999. Mr. Roberts has been
employed in various capacities with the Company since 1969, including Senior
Vice President, Restaurant Operations from January, 1996 to February, 1999,
Restaurant, District and Division Manager, Regional Training Manager, Director
and Vice President of Restaurant Operations.
10
<PAGE>
SCOTT D. COLWELL, 41, has been Vice President, Marketing of the Company
since January 1996. Mr. Colwell has been employed in various capacities with the
Company since 1982 including Director, New Business Development; Senior
Director, Marketing and Sales and Senior Director, Retail Business.
GARRETT J. ULRICH, 48, has been Vice President, Human Resources since
September 1991. Mr. Ulrich held the position of Vice President, Human Resources
for Dun & Bradstreet Information Services, North America from 1988 to 1991. From
1978 to 1988, Mr. Ulrich held various Human Resource executive and managerial
positions at Pepsi Cola Company, a division of PepsiCo.
AARON B. PARKER, 41, has been Associate General Counsel and Clerk of the
Company since August, 1997. He served as Associate General Counsel and Assistant
Clerk of the Company since 1989. He also served as the Company's Managing
Director of International Business from 1994 to 1996. Mr. Parker served as
Special Counsel to TRC from 1986 to 1996. Mr. Parker served as Associate General
Counsel of PMC from 1986 through 1988. Prior to joining TRC and PMC, Mr. Parker
was in private practice with the law firm of Wildman, Harrold, Allen, Dixon &
McDonnell.
ALLAN J. OKSCIN, 47, has been Corporate Controller since 1989 and has been
employed in various capacities with the Company since 1977. Mr. Okscin's duties
have included Assistant Controller and several managerial positions in Financial
Reporting, Financial Services, and Internal Auditing. Mr. Okscin is a certified
public accountant.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock trades under the symbol FRND and is traded on the
Nasdaq National Market. The following table sets forth the closing high and low
sale price per share of the Company's common stock for the period from the
initial public offering (November 14, 1997) to December 27, 1998:
MARKET PRICE OF COMMON STOCK
<TABLE>
<CAPTION>
1998 HIGH LOW
- - ------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
First Quarter........................................................... $ 20.50 $ 11.00
Second Quarter.......................................................... 26.50 15.375
Third Quarter........................................................... 17.00 4.625
Fourth Quarter.......................................................... 10.1875 5.50
<CAPTION>
1997 HIGH LOW
- - ------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
Fourth Quarter.......................................................... $ 17.375 $ 11.375
</TABLE>
The number of shareholders of record of the Company's common stock as of
March 17, 1999 was 440.
The Company currently intends to retain its earnings to finance future
growth and, therefore, does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. Any determination as to the payment of
dividends will depend upon the future results of operations, capital
requirements and financial condition of the Company and its subsidiaries and
such other facts as the Board of Directors of the Company may consider,
including any contractual or statutory restrictions on the Company's ability to
pay dividends. The Company's credit facility and the Indenture relating to its
Senior Notes each limit the Company's ability to pay dividends on its Common
Stock, and the Company is currently prohibited from paying any dividends (other
than stock dividends) under these provisions (See Note 7 of Notes to
Consolidated Financial Statements). The Company has not paid any dividends in
the last two years.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated historical financial
information of FICC and its consolidated subsidiaries which has been derived
from the Company's audited Consolidated Financial Statements for each of the
five most recent fiscal years ending December 27, 1998. This information should
be read in conjunction with the Consolidated Financial Statements and related
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere herein. See Note 3 of Notes to
Consolidated Financial Statements for a discussion of the basis of the
presentation and significant accounting policies of the consolidated historical
financial information set forth below. No dividends were declared or paid for
any period presented.
<TABLE>
<CAPTION>
FISCAL YEAR (A)
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant......................................... $ 595,308 $ 593,671 $ 596,675 $ 593,570 $ 589,383
Foodservice(retail and institutional).............. 78,718 70,254 53,464 55,507 41,631
Franchise.......................................... 3,769 2,375 -- -- --
International...................................... 301 1,247 668 72 --
---------- ---------- ---------- ---------- ----------
Total revenues....................................... 678,096 667,547 650,807 649,149 631,014
---------- ---------- ---------- ---------- ----------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR (A)
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Costs and expenses:
Cost of sales...................................... 204,884 197,627 191,956 192,600 179,793
Labor and benefits................................. 211,581 208,364 209,260 214,625 211,838
Operating expenses................................. 153,822 148,966 143,163 143,854 132,010
General and administrative expenses................ 44,326 42,191 42,721 40,705 38,434
Stock compensation expense (b)..................... 722 8,407 -- -- --
Expenses associated with Recapitalization (c)...... -- 718 -- -- --
Relocation of manufacturing and distribution
facility (d)..................................... 945 -- -- -- --
Non-cash write-downs (e)........................... 1,132 770 227 7,352 --
Depreciation and amortization...................... 33,449 31,692 32,979 33,343 32,069
Gain on sales of restaurant operations (f)........... (1,005) (2,283) -- -- --
---------- ---------- ---------- ---------- ----------
Operating income..................................... 28,240 31,095 30,501 16,670 36,870
Interest expense, net (g)............................ 31,838 39,303 44,141 41,904 45,467
Equity in net loss and other write-downs associated
with joint venture (h)............................. 4,828 1,530 -- -- --
---------- ---------- ---------- ---------- ----------
Loss before benefit from (provision for) income taxes
and cumulative effect of change in accounting
principle.......................................... (8,426) (9,738) (13,640) (25,234) (8,597)
Benefit from (provision for) income taxes............ 3,455 3,993 5,868 (33,419) 4,661
Cumulative effect of change in accounting principle,
net of income tax expense(i)....................... -- 2,236 -- -- --
---------- ---------- ---------- ---------- ----------
Net loss............................................. $ (4,971) $ (3,509) $ (7,772) $ (58,653) $ (3,936)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Basic and diluted loss per share:
Loss before cumulative effect of change in
accounting principle............................. $ (0.67) $ (1.86) $ (3.60) $ (52.46) $ (3.52)
Cumulative effect of change in accounting
principle, net of income tax expense............. -- 0.72 -- -- --
---------- ---------- ---------- ---------- ----------
Net loss........................................... $ (0.67) $ (1.14) $ (3.60) $ (52.46) $ (3.52)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
OTHER DATA:
EBITDA (j)........................................... $ 63,543 $ 72,363 $ 63,707 $ 57,365 $ 68,939
Net cash provided by operating activities............ 32,865 22,118 26,163 27,790 38,381
Net cash used in investing activities................ (48,320) (23,437) (20,308) (18,166) (28,032)
Net cash provided by (used in) financing
activities......................................... 11,405 (2,160) (10,997) 176 (7,899)
Capital expenditures:
Cash............................................... $ 51,172 $ 31,638 $ 24,217 $ 19,092 $ 29,507
Non-cash (k)....................................... 608 2,227 5,951 3,305 7,767
---------- ---------- ---------- ---------- ----------
Total capital expenditures........................... $ 51,780 $ 33,865 $ 30,168 $ 22,397 $ 37,274
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28, DECEMBER 29, DECEMBER 31, JANUARY 1,
1998 1997 1996 1995 1995
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................. $ (30,657) $ (15,791) $ (20,700) $ (14,678) $ (35,856)
Total assets.............................. $ 374,548 $ 371,871 $ 360,126 $ 370,292 $ 374,669
Total long-term debt and capital lease
obligations, excluding current
maturities.............................. $ 320,806 $ 310,425 $ 385,977 $ 389,144 $ 369,549
Total stockholders' equity (deficit)...... $ (90,601) $ (86,361) $ (173,156) $ (165,534) $ (106,901)
</TABLE>
- - ------------------------
(a) All fiscal years presented include 52 weeks of operations.
(b) Represents stock compensation expense arising out of the issuance of certain
shares of common stock to management and the vesting of certain shares of
restricted stock previously issued to management (see Note 13 of Notes to
Consolidated Financial Statements).
(c) Includes payroll taxes associated with the stock compensation discussed in
(b) and the write-off of deferred financing costs as a result of the
Recapitalization in 1997.
(d) Represents estimated costs associated with the relocation of manufacturing
and distribution operations from Troy, Ohio to Wilbraham, Massachusetts and
York, Pennsylvania (see Note 16 of Notes to Consolidated Financial
Statements).
(e) Includes non-cash write-downs of approximately $220 in 1998 related to
equipment write-downs as a result of the closing of the Company's United
Kingdom operations and $3,346 in 1995 related to a postponed debt
restructuring. All other non-cash write-downs relate to property and
equipment to be disposed of in the normal course of the Company's operations
(see Notes 3, 6 and 18 of Notes to Consolidated Financial Statements).
(f) Represents gains recorded in connection with sales of equipment and
operating rights to franchisees (see Notes 14 and 15 of Notes to
Consolidated Financial Statements).
(g) Interest expense is net of capitalized interest of $525, $250, $49, $62 and
$176 and interest income of $278, $338, $318, $390 and $187 for 1998, 1997,
1996, 1995 and 1994, respectively.
(h) Includes a $3,486 write-down in 1998 of the investment in and advances to
the joint venture to net realizable value based on the Company's decision to
discontinue its direct investment in the joint venture. The Company's share
of the joint venture's loss in 1998 was $1,342 (see Note 18 of Notes to
Consolidated Financial Statements).
(i) Relates to a change in accounting principle for pensions (see Note 10 of
Notes to Consolidated Financial Statements).
(j) EBITDA represents consolidated net loss before (i) cumulative effect of
change in accounting principle, net of income tax expense, (ii) benefit from
(provision for) income taxes, (iii) equity in net loss and other write-downs
associated with joint venture, (iv) interest expense, net, (v) depreciation
and amortization and (vi) non-cash write-downs and all other non-cash items,
plus cash distributions from unconsolidated subsidiaries. The Company has
included information concerning EBITDA in this Form 10-K because it believes
that such information is used by certain investors as one measure of a
company's historical ability to service debt. EBITDA should not be
considered as an alternative to, or more meaningful than, earnings from
operations or other traditional indications of a company's operating
performance.
(k) Non-cash capital expenditures represent the cost of assets acquired through
the incurrence of capital lease obligations.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE
HEREIN.
OVERVIEW
Friendly's owns and operates 646 restaurants, franchises 42 restaurants and
11 cafes and distributes a full line of frozen desserts through more than 5,000
supermarkets and other retail locations in 16 states. The Company was publicly
held from 1968 until January 1979, at which time it was acquired by Hershey
Foods Corporation ("Hershey"). Under Hershey's ownership, the number of Company
restaurants increased from 601 to 849. Hershey subsequently sold the Company in
September 1988 to The Restaurant Company ("TRC") in a highly-leveraged
transaction (the "TRC Acquisition").
Beginning in 1989, the new management focused on improving operating
performance through revitalizing and renovating restaurants, upgrading and
expanding the menu and improving management hiring, training, development and
retention. Also in 1989, the Company introduced its signature frozen desserts
into retail locations in the Northeast. Since the beginning of 1989, 33 new
restaurants have been opened while 199 under-performing restaurants have been
closed.
The high leverage associated with the TRC Acquisition has severely impacted
the liquidity and profitability of the Company. As of December 27, 1998, the
Company had a stockholders' deficit of $90.6 million. Cumulative interest
expense of $421.8 million since the TRC Acquisition has significantly
contributed to the deficit. The Company's net loss in 1998 of $5.0 million
included $31.8 million of interest expense. The degree to which the Company is
leveraged could have important consequences, including the following: (i)
potential impairment of the Company's ability to obtain additional financing in
the future; (ii) because borrowings under the Company's credit facility in part
bear interest at floating rates, the Company could be adversely affected by any
increase in prevailing rates; (iii) the Company is more leveraged than certain
of its principal competitors, which may place the Company at a competitive
disadvantage; and (iv) the Company's substantial leverage may limit its ability
to respond to changing business and economic conditions and make it more
vulnerable to a downturn in general economic conditions.
The Company's revenue, EBITDA and operating income have improved
significantly since the TRC Acquisition. Despite the closing of 166 restaurants
(net of restaurants opened) since the beginning of 1989, restaurant revenues
have increased 6.8% from $557.3 million in 1989 to $595.3 million in 1998, while
average revenue per restaurant has increased 38.2% from $665,000 to $919,000
during the same period. Foodservice operations manufactures frozen dessert
products and distributes such manufactured products and purchased finished goods
to the Company's restaurants and franchised operations. Additionally, it sells
frozen dessert products to distributors and retail and institutional locations.
Foodservice (retail and institutional), franchise and international revenues
have also increased from $1.4 million in 1989 to $82.8 million in 1998. In
addition, EBITDA has increased 34% from $47.4 million in 1989 to $63.5 million
in 1998, while operating income has increased from $4.1 million to $28.2 million
over the same period. As a result of the positive impact of the Company's
revitalization program, the closing of under-performing restaurants, the growth
of foodservice and other businesses and the commencement in July 1997 of the
Company's franchising program, period-to-period comparisons may not be
meaningful. Despite these improvements in operating performance, and primarily
as a result of its high leverage and interest expense, the Company has reported
net losses of $5.0 million, $3.5 million, $7.8 million, $58.7 million and $3.9
million for 1998, 1997, 1996, 1995 and 1994, respectively.
The Company's revenues are derived primarily from the operation of
full-service restaurants, the distribution and sale of frozen desserts through
retail and institutional locations and its newly created franchising initiative.
15
<PAGE>
RESULTS OF OPERATIONS
The operating results of the Company expressed as a percentage of total
revenues are set forth below:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
Revenues:
Restaurant........................................................................... 87.8% 88.9% 91.7%
Foodservice (retail and institutional)............................................... 11.6 10.5 8.2
Franchise............................................................................ 0.6 0.4 --
International........................................................................ -- 0.2 0.1
--------- --------- ---------
Total revenues......................................................................... 100.0 100.0 100.0
Costs and expenses:
Cost of sales........................................................................ 30.2 29.6 29.5
Labor and benefits................................................................... 31.2 31.2 32.2
Operating expenses................................................................... 22.7 22.3 22.0
General and administrative expenses.................................................. 6.5 6.3 6.5
Stock compensation expense........................................................... 0.1 1.3 --
Expenses associated with Recapitalization............................................ -- 0.1 --
Relocation of manufacturing and distribution facility................................ 0.1 -- --
Write-downs of property and equipment................................................ 0.2 0.1 --
Depreciation and amortization........................................................ 4.9 4.8 5.1
Gain on sales of restaurant operations................................................. (0.1) (0.3) --
--------- --------- ---------
Operating income....................................................................... 4.2 4.6 4.7
Interest expense, net.................................................................. 4.7 5.9 6.8
Equity in net loss and other write-downs associated with joint venture................. 0.7 0.2 --
--------- --------- ---------
Loss before benefit from income taxes and cumulative effect of change in accounting
principle............................................................................ (1.2) (1.5) (2.1)
Benefit from income taxes.............................................................. 0.5 0.6 0.9
Cumulative effect of change in accounting principle, net of income tax expense......... -- 0.4 --
--------- --------- ---------
Net loss............................................................................... (0.7)% (0.5)% (1.2)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
1998 COMPARED TO 1997
REVENUES:
Total revenues increased $10.6 million, or 1.6%, to $678.1 million in 1998
from $667.5 million in 1997. Restaurant revenues increased $1.6 million, or
0.3%, to $595.3 million in 1998 from $593.7 million in 1997. Comparable
restaurant revenues increased 3.3%. The increase in restaurant revenues was due
to the introduction of higher-priced lunch and dinner entrees, selected menu
price increases, a shift in sales mix to higher-priced items, a milder winter in
the 1998 period which allowed for favorable traffic comparisons and the
re-imaging of 142 restaurants under the Company's Focus 2000 program. The
increase in restaurant revenues was partially offset by the closing of 21
underperforming restaurants. There were seven new restaurants opened in 1998. In
addition, the increase was partially offset by the sale of 36 restaurants to
franchisees, which resulted in a $17.2 million reduction in restaurant revenues.
Restaurant revenues were also reduced by $1.9 million due to the close-down days
associated with the construction of the Company's re-imaging project.
Foodservice (retail and institutional) revenues increased by $8.4 million, or
11.9%, to $78.7 million in 1998 from $70.3 million in 1997. The increase was
primarily due to an increase in retail sales in existing markets. International
revenues decreased $0.9 million to $0.3 million in 1998 from $1.2 million in
1997. Franchise revenues increased $1.4 million or 58% to $3.8 million in 1998
16
<PAGE>
from $2.4 million in 1997. The increase is primarily the result of an increase
in the number of franchised units and initial fees associated with 1998
franchise transactions (see Notes 14 and 15 of Notes to Consolidated Financial
Statements).
COST OF SALES:
Cost of sales increased $7.3 million, or 3.7%, to $204.9 million in 1998
from $197.6 million in 1997. Cost of sales as a percentage of total revenues
increased to 30.2% in 1998 from 29.6% in 1997. Results were significantly
impacted by an unprecedented increase in the cost of dairy raw materials,
specifically fresh cream. The total impact to the Company due to the cost of
dairy raw materials was an increase in cost of sales of approximately $6.9
million. To compensate for this increase, the Company increased prices on
certain packaged ice cream products, modified promotional strategies and
currently is continuing to evaluate ways to manage dairy cost pressures over the
long term. The higher food cost as a percentage of total revenue was also due to
the increases in non-restaurant sales, which carry a higher food cost compared
to restaurant sales. In addition, 1998 included $0.2 million of inventory
write-downs associated with the Company's United Kingdom operations.
LABOR AND BENEFITS:
Labor and benefits increased $3.2 million, or 1.5%, to $211.6 million in
1998 from $208.4 million in 1997. Labor and benefits as a percentage of total
revenues was 31.2% for the years ended December 27, 1998 and December 28, 1997.
Although labor expenses increased, they remained at the same percentage of total
revenues primarily due to an increase in foodservice (retail and institutional)
revenues as a percent of total revenues as these revenues have no associated
labor and benefits cost and lower workers' compensation insurance and pension
costs. The higher labor costs, as a percentage of restaurant revenues, are a
result of the Company's emphasis on improving guest service by increasing labor
at the restaurant level as a prelude to a major 1999 service initiative, which
is anticipated to result in increased labor costs.
OPERATING EXPENSES:
Operating expenses increased $4.8 million, or 3.2%, to $153.8 million in
1998 from $149.0 million in 1997. Operating expenses as a percentage of total
revenues increased to 22.7% in 1998 from 22.3% in 1997. This increase was
primarily due to higher foodservice retail selling expenses, which resulted in
higher foodservice retail sales.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses increased $2.1 million, or 5.0%, to
$44.3 million in 1998 from $42.2 million in 1997. General and administrative
expenses as a percentage of total revenues increased to 6.5% in 1998 from 6.3%
in 1997. The increase was primarily due to Year 2000 training costs, higher
relocation expenses and fringe benefit expenses. The increases were partially
offset by lower incentive compensation costs and reduced management fees paid to
TRC as a result of the deconsolidation (see Note 9 of Notes to Consolidated
Financial Statements).
EBITDA:
As a result of the above, EBITDA decreased $8.9 million, or 12.2%, to $63.5
million in 1998 from $72.4 million in 1997. EBITDA as a percentage of total
revenues decreased to 9.4% in 1998 from 10.8% in 1997.
17
<PAGE>
STOCK COMPENSATION EXPENSE:
Stock compensation expense represents stock compensation arising out of the
issuance of certain shares of common stock to management and the vesting of
certain shares of restricted stock issued to management (see Note 13 of Notes to
Consolidated Financial Statements).
RELOCATION OF MANUFACTURING AND DISTRIBUTION FACILITY:
Relocation of manufacturing and distribution facility expense relates to
costs expected to be paid in connection with the relocation of manufacturing and
distribution operations from Troy, Ohio to Wilbraham, Massachusetts and York,
Pennsylvania (see Note 16 of Notes to Consolidated Financial Statements).
EXPENSES ASSOCIATED WITH RECAPITALIZATION:
In 1997, expenses associated with Recapitalization included payroll taxes
associated with stock compensation and the write-off of deferred financing costs
related to the Company's previous credit facility (see Note 5 of Notes to
Consolidated Financial Statements).
WRITE-DOWNS OF PROPERTY AND EQUIPMENT:
Write-downs of property and equipment increased $0.3 million to $1.1 million
in 1998 from $0.8 million in 1997. The increase is primarily the result of $0.2
million of United Kingdom equipment write-downs in 1998.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization increased $1.7 million, or 5.4%, to $33.4
million in 1998 from $31.7 million in 1997. Depreciation and amortization as a
percentage of total revenues increased to 4.9% in 1998 from 4.8% in 1997. The
increase was attributable to the Company's re-imaging projects. There were 142
units which were re-imaged in the year ended December 27, 1998 in addition to
the full year depreciation impact for the 43 units which were re-imaged in the
year ended December 28, 1997. Offsetting these increases was the net reduction
in total restaurants of 14 units from December 28, 1997.
GAIN ON SALES OF RESTAURANT OPERATIONS:
Gain on sales of restaurant operations decreased $1.3 million, or 57%, to
$1.0 million in 1998 from $2.3 million in 1997. The decrease was due to the gain
recognized in 1998 from the sale of equipment and operating rights for two
locations compared to the gain recognized in 1997 from the sale of equipment and
operating rights for 34 locations (see Notes 14 and 15 of Notes to Consolidated
Financial Statements).
INTEREST EXPENSE, NET:
Interest expense, net of capitalized interest and interest income, decreased
by $7.5 million, or 19.1%, to $31.8 million in 1998 from $39.3 million in 1997.
The decrease in interest expense was due to the reduction of debt, including
capital lease obligations, and interest rates associated with the Company's
Recapitalization in November 1997 (see Note 7 of Notes to Consolidated Financial
Statements).
EQUITY IN NET LOSS AND OTHER WRITE-DOWNS ASSOCIATED WITH JOINT VENTURE:
The equity in net loss and other write-downs associated with the China joint
venture increased $3.3 million to $4.8 million in 1998 from $1.5 million in
1997. The increase was primarily the result of the $3.5 million write-off of the
investment in and advances to the joint venture based on the Company's decision
to discontinue its direct investment in the joint venture. The Company's share
of the joint venture's loss in 1998 was $1.3 million (see Note 18 of Notes to
Consolidated Financial Statements).
18
<PAGE>
BENEFIT FROM INCOME TAXES:
The benefit from income taxes was $3.5 million, or 41%, in 1998 compared to
$4.0 million, or 41%, in 1997 (see Note 9 of Notes to Consolidated Financial
Statements).
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET:
In 1997, the Company revised the method used in determining the
return-on-asset component of annual pension expense as described in Note 10 of
Notes to Consolidated Financial Statements. The cumulative effect of this change
was $2.2 million, net of income tax expense of $1.6 million.
NET LOSS:
Net loss was $5.0 million in 1998 compared to a net loss of $3.5 million in
1997 for the reasons discussed above.
1997 COMPARED TO 1996
REVENUES:
Total revenues increased $16.7 million, or 2.6%, to $667.5 million in 1997
from $650.8 million in 1996. Restaurant revenues decreased $3.0 million, or
0.5%, to $593.7 million in 1997 from $596.7 million in 1996. Comparable
restaurant revenues increased 2.9%. The increase in comparable restaurant
revenues was due to the introduction of higher-priced lunch and dinner entrees,
selected menu price increases, a shift in sales mix to higher-priced items, the
re-imaging of 43 restaurants under the Company's Focus 2000 program, the
revitalization of 12 restaurants, building expansions at seven restaurants and a
milder winter in the 1997 period, which allowed for favorable traffic
comparisons. The increase was partially offset by the sale of 34 restaurants to
a franchisee, which resulted in a $14.5 million reduction in restaurant
revenues, and the closing of 15 under-performing restaurants. Foodservice
(retail and institutional) and international revenues increased by $17.4
million, or 32.2%, to $71.5 million in 1997 from $54.1 million in 1996. The
increase was primarily due to a more effective sales promotion program.
Franchise revenues were $2.4 million in 1997 compared to none in 1996. The
increase is a result of the consummation of a franchise agreement on July 14,
1997 (see Note 15 of Notes to Consolidated Financial Statements).
COST OF SALES:
Cost of sales increased $5.6 million, or 2.9%, to $197.6 million in 1997
from $192.0 million in 1996. Cost of sales as a percentage of total revenues
increased to 29.6% in 1997 from 29.5% in 1996. The increase was due to an
increase in food costs at the foodservice level. The increase was partially
offset by a 0.4% reduction in food costs at the restaurant level as a result of
reduced promotional discounts.
LABOR AND BENEFITS:
Labor and benefits decreased $0.9 million, or 0.4%, to $208.4 million in
1997 from $209.3 million in 1996. Labor and benefits as a percentage of total
revenues decreased to 31.2% in 1997 from 32.2% in 1996. The decrease was due to
an increase in foodservice's retail and institutional and other revenues as a
percentage of total revenues as these revenues have no associated labor and
benefits cost and lower workers' compensation insurance and pension costs.
OPERATING EXPENSES:
Operating expenses increased $5.8 million, or 4.1%, to $149.0 million in
1997 from $143.2 million in 1996. Operating expenses as a percentage of total
revenues increased to 22.3% in 1997 from 22.0% in 1996. The increase was due to
higher advertising expenditures in 1997 partially offset by reduced costs for
snow removal and the allocation of fixed costs over higher total revenues in
1997.
19
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses decreased $0.5 million, or 1.2%, to
$42.2 million in 1997 from $42.7 million in 1996. General and administrative
expenses as a percentage of total revenues decreased to 6.3% in 1997 from 6.5%
in 1996. This decrease was due to reductions in pension costs and the
elimination of field management positions associated with the closing of 15
restaurants since the end of 1996.
EBITDA:
As a result of the above, EBITDA increased $8.7 million, or 13.7%, to $72.4
million in 1997 from $63.7 million in 1996. EBITDA as a percentage of total
revenues increased to 10.8% in 1997 from 9.8% in 1996.
STOCK COMPENSATION EXPENSE:
Stock compensation expense represents stock compensation arising out of the
issuance of certain shares of common stock to management and the vesting of
certain shares of restricted stock issued to management (see Note 13 of Notes to
Consolidated Financial Statements).
EXPENSES ASSOCIATED WITH RECAPITALIZATION:
Expenses associated with Recapitalization included payroll taxes associated
with the stock compensation discussed above and the write-off of deferred
financing costs related to the Company's previous credit facility (see Note 5 of
Notes to Consolidated Financial Statements).
WRITE-DOWNS OF PROPERTY AND EQUIPMENT:
Write-downs of property and equipment increased $0.6 million to $0.8 million
in 1997 from $0.2 million in 1996.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization decreased $1.3 million, or 3.9%, to $31.7
million in 1997 from $33.0 million in 1996. Depreciation and amortization as a
percentage of total revenues decreased to 4.8% in 1997 from 5.1% in 1996. The
decrease was due to the closing of 15 restaurants since the end of 1996.
GAIN ON SALE OF RESTAURANT OPERATIONS:
Gain on sale of restaurant operations represents the income related to the
sale of the equipment and operating rights for 34 existing locations to a
franchisee (see Note 15 of Notes to Consolidated Financial Statements).
INTEREST EXPENSE, NET:
Interest expense, net of capitalized interest and interest income, decreased
by $4.8 million, or 10.9%, to $39.3 million in 1997 from $44.1 million in 1996.
The decrease in interest expense was due to the write-off of interest no longer
payable under the Company's previous credit facility as well as a reduction in
interest expense on capital lease obligations as a result of lower amounts
outstanding in 1997 (see Note 7 of Notes to Consolidated Financial Statements).
EQUITY IN NET LOSS AND OTHER WRITE-DOWNS ASSOCIATED WITH JOINT VENTURE:
The equity in net loss and other write-downs associated with joint venture
of $1.5 million in 1997 represents the Company's 50% share of the China joint
venture's net loss for such period. Sales for the joint venture were minimal
during the 1997 period.
20
<PAGE>
BENEFIT FROM INCOME TAXES:
The benefit from income taxes was $4.0 million, or 41%, in 1997 compared to
a benefit of $5.9 million, or 43%, in 1996 (see Note 9 of Notes to Consolidated
Financial Statements).
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET:
In 1997, the Company revised the method used in determining the
return-on-asset component of annual pension expense as described in Note 10 of
Notes to Consolidated Financial Statements. The cumulative effect of this change
was $2.2 million, net of income tax expense of $1.6 million.
NET LOSS:
Net loss was $3.5 million in 1997 compared to a net loss of $7.8 million in
1996 for the reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and capital resources are cash
generated from operations and borrowings under its revolving credit facility.
Net cash provided by operating activities was $32.9 million in 1998, $22.1
million in 1997 and $26.2 million in 1996. Accounts payable increased
approximately $2.5 million from December 28, 1997 to December 27, 1998. The
increase was primarily due to the timing of payments made between the years
ended December 27, 1998 and December 28, 1997. Accrued expenses and other
long-term liabilities decreased $3.1 million from December 28, 1997 to December
27, 1998, of which approximately $1.9 million was due to expenses paid in the
early part of 1998 related to the Company's Recapitalization. In addition, the
Company's pension obligation was reduced by $1.6 million from December 28, 1997
and there was a decrease in accrued interest on the Senior Notes from December
28, 1997 to December 27, 1998 of $0.8 million related to the timing of when
payments were made in 1997 versus 1998. Offsetting these decreases was an
increase of approximately $0.9 million related to store construction and
maintenance costs at December 27, 1998 over December 28, 1997. Available
borrowings under the revolving credit facility were $30.0 million as of December
27, 1998.
Additional sources of liquidity consist of capital and operating leases for
financing leased restaurant locations (in malls and shopping centers and land or
building leases), restaurant equipment, manufacturing equipment, distribution
vehicles and computer equipment. Additionally, sales of under-performing
existing restaurant properties and other assets (to the extent of the Company's
and its subsidiaries' debt instruments, if any, permit) are sources of cash. The
amounts of debt financing that the Company will be able to incur under capital
leases and for property and casualty insurance financing and the amount of asset
sales are limited by the terms of its credit facility and Senior Notes (see Note
7 of Notes to Consolidated Financial Statements).
The Company requires capital principally to maintain existing restaurant and
plant facilities, to continue to renovate and re-image existing restaurants, to
convert restaurants, to construct new restaurants and for general corporate
purposes. Since the TRC Acquisition and through December 27, 1998, the Company
has spent $339.1 million on capital expenditures, including capitalized leases,
of which $108.1 million was for the renovation of restaurants under its
revitalization and re-imaging programs.
Net cash used in investing activities was $48.3 million in 1998, $23.4
million in 1997 and $20.3 million in 1996. Capital expenditures for restaurant
operations, including capitalized leases, were approximately $43.7 million in
1998, $28.9 million in 1997 and $22.7 million in 1996. Capital expenditures were
offset by proceeds from the sale of property and equipment of $2.9 million, $5.0
million and $8.4 million in 1998, 1997 and 1996, respectively.
The Company also uses capital to repay borrowings when cash is sufficient to
allow for net repayments. Net cash provided by financing activities was $11.4
million in 1998. Net cash used in financing
21
<PAGE>
activities to repay borrowings was $14.6 million in 1997 excluding the effect of
the Recapitalization, which resulted in proceeds of $200 million from the
issuance of Senior Notes, $90 million from term loans and $90 million from the
Common Stock Offering. These proceeds were used to pay the balances outstanding
under the previous credit facility, certain capital lease obligations and fees
and expenses related to the Recapitalization. Net cash used in financing
activities was $11.0 million in 1996.
The Company had a working capital deficit of $30.7 million as of December
27, 1998. The Company is able to operate with a substantial working capital
deficit because: (i) restaurant operations are conducted primarily on a cash
(and cash equivalent) basis with a low level of accounts receivable; (ii) rapid
turnover allows a limited investment in inventories; and (iii) cash from sales
is usually received before related accounts for food, supplies and payroll
become due.
The $200 million Senior Notes issued in connection with the Company's
November 1997 Recapitalization are unsecured, senior obligations of FICC,
guaranteed on an unsecured, senior basis by FICC's Friendly's Restaurant
Franchise, Inc. subsidiary, but are effectively subordinated to all secured
indebtedness of FICC, including the indebtedness incurred under the New Credit
Facility. The Senior Notes mature on December 1, 2007. Interest on the Senior
Notes is payable at 10.50% per annum semi-annually on June 1 and December 1 of
each year. The Senior Notes are redeemable, in whole or in part, at FICC's
option any time on or after December 1, 2002 at redemption prices from 105.25%
to 100.00%. The redemption price is based on the redemption date. Prior to
December 1, 2000, FICC may redeem up to $70 million of the Senior Notes at
110.50% with the proceeds of one or more equity offerings, as defined.
The Company entered into the New Credit Facility in November 1997 in
connection with its Recapitalization. The New Credit Facility includes $90
million in term loans (the "Term Loans"), a $55 million revolving credit
facility (the "Revolving Credit Facility") and a $15 million letter of credit
facility (the "Letter of Credit Facility"). The New Credit Facility is
collateralized by substantially all of FICC's assets and by a pledge of FICC's
shares of certain of its subsidiaries' stock.
Effective December 27, 1998, the New Credit Facility was amended. In
connection with this amendment, certain covenants were changed and interest
rates on borrowings were increased. The per annum interest rates on drawings
under the Revolving Credit Facility increased 0.25% and 0.50% for Eurodollar and
ABR loans, respectively. The per annum interest rates on Tranches A, B and C of
Eurodollar Term Loans increased 0.25% and the per annum interest rates on ABR
Term Loans increased 0.50%, 0.25% and 0.25% for Tranches A, B and C,
respectively. The per annum interest rate on amounts issued but undrawn under
the Letter of Credit Facility increased 0.25% (see Note 7 of Notes to
Consolidated Financial Statements). References herein to the New Credit Facility
shall mean as amended on December 27, 1998.
Annual principal payments due under the Term Loans will total $4.0 million,
$9.1 million, $10.8 million, $12.6 million, $16.0 million, $17.4 million and
$20.1 million in 1999 through 2005, respectively. In addition to the scheduled
amortization, the Term Loans will be permanently reduced in certain
circumstances (see Note 7 of Notes to Consolidated Financial Statements). The
Revolving Credit Facility matures on November 15, 2002.
The New Credit Facility imposes significant operating and financial
restrictions on the Company's ability to, among other things, incur
indebtedness, create liens, sell assets, engage in mergers or consolidations,
pay dividends and engage in certain transactions with affiliates. The New Credit
Facility limits the amount which the Company may spend on capital expenditures
and requires the Company to comply with certain financial covenants (see Note 7
of Notes to Consolidated Financial Statements).
The Company anticipates requiring capital in the future principally to
maintain existing restaurant and plant facilities, to continue to renovate and
re-image existing restaurants, to convert restaurants and to construct new
restaurants. Capital expenditures for 1999 are anticipated to be $43.0 million
in the aggregate, of which $34.2 million will be spent on restaurant operations.
The Company's actual 1999 capital expenditures may vary from the estimated
amounts set forth herein.
22
<PAGE>
In addition, the Company may need capital in connection with commitments to
purchase approximately $86.7 million of raw materials, food products and
supplies used in the normal course of business and its self-insurance through
retentions or deductibles of the majority of its workers' compensation,
automobile, general liability and group health insurance programs. The Company's
self-insurance obligations may exceed its reserves (see Notes 12 and 15 of Notes
to Consolidated Financial Statements).
The Company believes that the combination of the funds anticipated to be
generated from operating activities and borrowing availability under the New
Credit Facility will be sufficient to meet the Company's anticipated operating
and capital requirements for the foreseeable future.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs historically being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal day-to-day operations.
The Company has developed a comprehensive plan to address the Year 2000
Issue. The plan addresses three main phases: (a) information systems; (b)
embedded chips; and (c) supply chain readiness (including customers as well as
inventory and non-inventory suppliers). To oversee the process, the Company has
established a Steering Committee comprised of executives and chaired by the
Company's Senior Executive Vice President, Chief Financial Officer and
Treasurer. The Committee reports regularly to the Board of Directors and the
Audit Committee. The Company retained the services of a third party consultant
with Year 2000 expertise to evaluate the Company's Year 2000 plan and make
recommendations. As of December 27, 1998, the Company is vigorously remediating
software and hardware deficiencies caused by the Year 2000 Issue and is at
various stages of completion. Major business systems are currently being
addressed and in some cases are already complete, as in the case of the
Company's financial reporting, accounts payable and manufacturing and
distribution systems. Human resource systems are currently being remediated and
are on schedule to be completed by the latter part of 1999. The Company will
perform Year 2000 integrated testing for system interoperability in the second
and third quarters of 1999. The Company continues to believe that with
modifications to existing software and conversions to new software, the Year
2000 Issue will not pose significant operational problems for its computer
systems. However, if such modifications or conversions are not made, or are not
completed timely on the remaining critical business systems, the Year 2000 Issue
could have a material impact on the operations of the Company. Based on the work
completed to date, the Company continues to anticipate that remediation will be
substantially completed prior to December 1999.
Substantial progress has been made in the certification of restaurant
systems and hardware. The Company has completed an inventory of restaurant
hardware, and various remediation strategies have been identified and
successfully tested for all classes of equipment. A detailed plan for retrofits
has been completed. The retrofits should essentially be complete by June 1999.
Software for non-compliant point of sale systems has been successfully
remediated and tested. Revised point of sale software should be in all
restaurants in March 1999. Other key restaurant software applications have also
been certified. The remaining software applications are not expected to pose
major problems and will be addressed in the second quarter of 1999. However,
further testing of all applications will continue throughout the year.
Embedded chip technology poses the most difficult challenge. The Company's
focus has been directed at the manufacturing and distribution operations. As of
December 27, 1998, all critical manufacturing functions have been evaluated and
questionable equipment hardware is continually remediated in order to be
compliant. The issues that currently remain open are non-critical in nature and
should not impair the
23
<PAGE>
Company's ability to conduct business. The Company continues to monitor its
communications environment both internally and externally and will react as
developments occur.
The Company continues to take vigorous steps to monitor Year 2000 supply
chain readiness by evaluating written assurances from over 325 business-critical
suppliers. As of December 27, 1998, the Company is aggressively evaluating a
small number of suppliers that the Company believes may not be compliant by
December 1999. The Company also continues to identify alternate sources wherever
appropriate.
If any of the Company's suppliers or customers do not, or if the Company
itself does not, successfully deal with the Year 2000 Issue, the Company could
experience delays in receiving or sending goods that would increase its costs
and that could cause the Company to lose business and even customers and could
subject the Company to claims for damages. Problems with the Year 2000 Issue
could also result in delays in the Company invoicing its customers or in the
Company receiving payments from them that would affect the Company's liquidity.
Problems with the Year 2000 Issue could affect the activities of the Company's
customers to the point that their demand for the Company's products is reduced.
The severity of these possible problems would depend on the nature of the
problem and how quickly it could be corrected or an alternative implemented,
which is unknown at this time. In the extreme, such problems could bring the
Company to a standstill.
As the Company enters into 1999, it will continue to evaluate the business
environment and will develop contingency plans for systems and resources in
order to conduct its normal day-to-day business operations. As previously noted,
some risks of the Year 2000 Issue are beyond the control of the Company, its
suppliers and customers. For example, no preparations or contingency plan will
protect the Company from a down-turn in economic activity caused by the possible
ripple effect throughout the entire economy that could be caused by problems of
others with the Year 2000 Issue.
The Company's total Year 2000 project cost includes the estimated costs and
time associated with the impact of third party Year 2000 Issues based on
presently available information. However, there can be no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted and would not have an adverse effect on the Company's systems. The
Company will utilize both internal and external resources to reprogram, or
replace, and test the software for the system improvement and Year 2000
modifications. The total cost of the system improvement and the Year 2000
project is being funded through operating cash flows.
Of the total project cost, approximately $4.5 million is attributable to the
purchase of new software and hardware which will be capitalized. The remaining
$1.3 million, which will be expensed as incurred, is not expected to have a
material effect on the results of operations. To date, the Company has incurred
approximately $3.1 million ($0.6 million expensed and $2.5 million capitalized
for new systems) related to system improvements and the Year 2000 project.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved, and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
NET OPERATING LOSS CARRYFORWARDS
As of December 27, 1998, the Company has a Federal net operating loss
("NOL") carryforward of $40.6 million. Because of a change of ownership of the
Company under Section 382 of the Internal
24
<PAGE>
Revenue Code on March 26, 1996 (see Note 9 of Notes to Consolidated Financial
Statements), $28.0 million of the NOL carryforward can be used only to offset
current or future taxable income to the extent that any additional net
unrealized built-in gains which existed at March 26, 1996 are recognized by
March 26, 2001. The Common Stock Offering in November 1997 resulted in the
Company having another change of ownership under Section 382 of the Internal
Revenue Code. Accordingly, in tax years ending after the Common Stock Offering,
the Company is limited in how much of its NOLs it can utilize. The amount of
NOL's which may be used each year prior to any built-in gains being triggered is
approximately $2.4 million. The NOLs expire, if unused, between 2001 and 2018.
In addition, the NOL carryforwards are subject to adjustment upon review by the
Internal Revenue Service (see Note 9 of Notes to Consolidated Financial
Statements).
INFLATION
The inflationary factors which have historically affected the Company's
results of operations include increases in the costs of cream, sweeteners,
purchased food, labor and other operating expenses. Approximately 16% of wages
paid in the Company's restaurants are impacted by changes in the Federal or
state minimum hourly wage rate. Accordingly, changes in the Federal or states
minimum hourly wage rate directly affect the Company's labor cost. The Company
is able to minimize the impact of inflation on occupancy costs by owning the
underlying real estate for approximately 43% of its restaurants. The Company and
the restaurant industry typically attempt to offset the effect of inflation, at
least in part, through periodic menu price increases and various cost reduction
programs. However, no assurance can be given that the Company will be able to
offset such inflationary cost increases in the future.
SEASONALITY
Due to the seasonality of frozen dessert consumption, and the effect from
time to time of weather on patronage of the restaurants, the Company's revenues
and EBITDA are typically higher in its second and third quarters.
GEOGRAPHIC CONCENTRATION
Approximately 86% of the Company-owned restaurants are located, and
substantially all of its retail sales are generated, in the Northeast. As a
result, a severe or prolonged economic recession or changes in demographic mix,
employment levels, population density, weather, real estate market conditions or
other factors specific to this geographic region may adversely affect the
Company more than certain of its competitors which are more geographically
diverse.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Company has market risk exposure to interest rates on its fixed and
variable rate debt obligations. The Company manages the exposure on the Term
Loans, as defined, through the use of an interest rate swap arrangement. Refer
to Note 7 of Notes to Consolidated Financial Statements for a summary of the
terms of the Company's debt obligations and interest rate swap arrangement,
including the fair values of such amounts. The Company does not enter into
contracts for trading purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For a listing of consolidated financial statements which are included in
this document, see page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
25
<PAGE>
PART III
ITEM 10. DIRECTORS OF THE REGISTRANT
Information regarding directors and Section 16(a) Compliance is incorporated
herein by reference from the Sections entitled "Proposal 1-Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" of the
Company's definitive proxy statement which will be filed no later than 120 days
after December 27, 1998.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Sections entitled "Proposal
1--Election of Directors-- Director Compensation" and "Executive Compensation"
of the Company's definitive proxy statement which will be filed no later than
120 days after December 27, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Section entitled "Stock Ownership"
of the Company's definitive proxy statement which will be filed no later than
120 days after December 27, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Section entitled "Executive
Compensation-Certain Relationships and Related Transactions" of the Company's
definitive proxy statement which will be filed no later than 120 days after
December 27, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) 1. Financial statements:
For a listing of consolidated financial statements which are included in this
document, see page F-1.
2. Schedules:
The following consolidated financial statement schedule and Report of Independent
Public Accountants thereon is included pursuant to Item 14(d): Schedule II --
Valuation and Qualifying Accounts. All other schedules for which provision is
made in the applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or are inapplicable
and, therefore, have been omitted.
(b) Exhibits:
The exhibit index is incorporated by reference herein.
(c) Reports on Form 8-K
None
</TABLE>
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
FRIENDLY ICE CREAM CORPORATION
By: Name: Paul J. McDonald
Title: SENIOR EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER, TREASURER AND
ASSISTANT CLERK
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
NAME TITLE (CAPACITY) DATE
- - -------------------------------------------- -------------------------------------------- ----------------------
<C> <S> <C>
Chairman of the Board and Chief Executive March 24, 1999
---------------------------------- Officer (Principal Executive Officer and
Donald N. Smith Director)
Senior Executive Vice President, Chief March 24, 1999
Financial Officer, Treasurer and Assistant
---------------------------------- Clerk (Principal Financial and Accounting
Paul J. McDonald Officer)
Director March 24, 1999
----------------------------------
Charles A. Ledsinger, Jr.
Director March 24, 1999
----------------------------------
Steven L. Ezzes
Director March 24, 1999
----------------------------------
Burton J. Manning
Director March 24, 1999
----------------------------------
Michael J. Daly
</TABLE>
27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of
Friendly Ice Cream Corporation:
We have audited in accordance with generally accepted auditing standards,
the consolidated balance sheets of Friendly Ice Cream Corporation and
subsidiaries (collectively, the Company) as of December 27, 1998 and December
28, 1997, and the related consolidated statements of operations, changes in
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 27, 1998, included in this Form 10-K, and have issued our
report thereon dated February 12, 1999 (except for the matter discussed in Note
18 of Notes to Consolidated Financial Statements, as to which the date is
February 25, 1999). Our audits were made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The accompanying Schedule II
- - -- Valuation and Qualifying Accounts is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
The information reflected in the schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 12, 1999
28
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 14(D)
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FRIENDLY ICE CREAM CORPORATION
FOR THE YEAR ENDED DECEMBER 27, 1998(1)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- - ----------------------------------------------- ------------- ---------------------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (2) OF PERIOD
- - ----------------------------------------------- ------------- ------------- ------------- ------------- -----------
Reserves deducted in the balance sheet from the
assets to which they relate:
Reserve for relocation of manufacturing and $ -- $ 945 $ -- $ -- $ 945
distribution facility........................
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
- - ------------------------
(1) Schedule is not applicable for 1996 or 1997.
(2) The charges to the accounts are for the purposes for which the reserves were
created.
29
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 27, 1998 and December 28, 1997................................ F-3
Consolidated Statements of Operations for the Years Ended December 27, 1998,
December 28, 1997 and December 29, 1996................................................................ F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended December 27,
1998, December 28, 1997 and December 29, 1996.......................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 27, 1998,
December 28, 1997 and December 29, 1996................................................................ F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Friendly Ice Cream Corporation:
We have audited the accompanying consolidated balance sheets of Friendly Ice
Cream Corporation and subsidiaries as of December 27, 1998 and December 28,
1997, and the related consolidated statements of operations, changes in
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 27, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Friendly Ice Cream
Corporation and subsidiaries as of December 27, 1998 and December 28, 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 27, 1998 in conformity with generally accepted
accounting principles.
As explained in Note 10 of Notes to Consolidated Financial Statements,
effective December 30, 1996, the Company changed its method of calculating the
market-related value of pension plan assets used in determining the
return-on-asset component of annual pension expense and the cumulative net
unrecognized gain or loss subject to amortization.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 12, 1999 (except for the matter
discussed in Note 18, as to which the date
is February 25, 1999)
F-2
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................................... $ 11,091 $ 15,132
Restricted cash.................................................................... 2,211 1,333
Accounts receivable................................................................ 5,566 8,922
Inventories........................................................................ 15,560 15,671
Deferred income taxes.............................................................. 7,061 8,831
Prepaid expenses and other current assets.......................................... 6,578 6,400
------------ ------------
TOTAL CURRENT ASSETS................................................................. 48,067 56,289
INVESTMENT IN JOINT VENTURE.......................................................... -- 2,970
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization............. 300,159 283,944
INTANGIBLES AND DEFERRED COSTS, net of accumulated amortization of $6,525 and $4,519
at December 27, 1998 and December 28, 1997, respectively........................... 25,178 25,994
OTHER ASSETS......................................................................... 1,144 2,674
------------ ------------
TOTAL ASSETS......................................................................... $ 374,548 $ 371,871
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt............................................... $ 4,023 $ 2,875
Current maturities of capital lease and finance obligations........................ 1,677 1,577
Accounts payable................................................................... 26,460 23,951
Accrued salaries and benefits...................................................... 14,206 13,804
Accrued interest payable........................................................... 2,593 2,607
Insurance reserves................................................................. 9,116 7,248
Other accrued expenses............................................................. 20,649 20,018
------------ ------------
TOTAL CURRENT LIABILITIES............................................................ 78,724 72,080
------------ ------------
DEFERRED INCOME TAXES................................................................ 37,188 42,393
CAPITAL LEASE AND FINANCE OBLIGATIONS, less current maturities....................... 9,745 11,341
LONG-TERM DEBT, less current maturities.............................................. 311,061 299,084
OTHER LONG-TERM LIABILITIES.......................................................... 28,431 33,334
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common Stock, $.01 par value; authorized 50,000,000 shares at December 27, 1998 and
December 28, 1997; 7,461,600 and 7,441,290 shares issued and outstanding at
December 27, 1998 and December 28, 1997, respectively............................ 75 74
Preferred Stock, $.01 par value; authorized 1,000,000 shares at December 27, 1998
and December 28, 1997; -0- shares issued and outstanding at December 27, 1998 and
December 28, 1997................................................................ -- --
Additional paid-in capital......................................................... 137,896 137,175
Accumulated deficit................................................................ (228,639) (223,668)
Accumulated other comprehensive income............................................. 67 58
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)................................................. (90,601) (86,361)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)................................. $ 374,548 $ 371,871
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------------------------------
<S> <C> <C> <C>
DECEMBER 27, DECEMBER 28, DECEMBER 29,
1998 1997 1996
------------- ------------- -------------
REVENUES........................................................................... $ 678,096 $ 667,547 $ 650,807
COSTS AND EXPENSES:
Cost of sales.................................................................... 204,884 197,627 191,956
Labor and benefits............................................................... 211,581 208,364 209,260
Operating expenses............................................................... 153,822 148,966 143,163
General and administrative expenses.............................................. 44,326 42,191 42,721
Stock compensation expense (Note 13)............................................. 722 8,407 --
Expenses associated with Recapitalization (Note 5)............................... -- 718 --
Relocation of manufacturing and distribution facility (Note 16).................. 945 -- --
Write-downs of property and equipment (Note 6)................................... 1,132 770 227
Depreciation and amortization.................................................... 33,449 31,692 32,979
Gain on sales of restaurant operations (Notes 14 and 15)........................... (1,005) (2,283) --
------------- ------------- -------------
OPERATING INCOME................................................................... 28,240 31,095 30,501
Interest expense, net of capitalized interest of $525, $250 and $49 and interest
income of $278, $338 and $318 for the years ended December 27, 1998, December 28,
1997 and December 29, 1996, respectively (Note 7)................................ 31,838 39,303 44,141
Equity in net loss and other write-downs associated with joint venture (Note 18)... 4,828 1,530 --
------------- ------------- -------------
LOSS BEFORE BENEFIT FROM INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE........................................................................ (8,426) (9,738) (13,640)
Benefit from income taxes.......................................................... 3,455 3,993 5,868
------------- ------------- -------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.................... (4,971) (5,745) (7,772)
Cumulative effect of change in accounting principle, net of income tax expense of
$1,554 (Note 10)................................................................. -- 2,236 --
------------- ------------- -------------
NET LOSS........................................................................... $ (4,971) $ (3,509) $ (7,772)
------------- ------------- -------------
------------- ------------- -------------
BASIC AND DILUTED LOSS PER SHARE:
Loss before cumulative effect of change in accounting principle.................. $ (0.67) $ (1.86) $ (3.60)
Cumulative effect of change in accounting principle, net of income tax expense... -- 0.72 --
------------- ------------- -------------
Net loss......................................................................... $ (0.67) $ (1.14) $ (3.60)
------------- ------------- -------------
------------- ------------- -------------
PRO FORMA AMOUNTS ASSUMING PENSION METHOD IS RETROACTIVELY APPLIED (Note 10):
Net loss......................................................................... $ (4,971) $ (5,745) $ (7,214)
------------- ------------- -------------
------------- ------------- -------------
Basic and diluted net loss per share............................................. $ (0.67) $ (1.86) $ (3.34)
------------- ------------- -------------
------------- ------------- -------------
WEIGHTED AVERAGE BASIC AND DILUTED SHARES.......................................... 7,452 3,087 2,161
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------------------
COMMON STOCK CLASS A CLASS B ADDITIONAL
---------------------- ---------------------- ----------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
--------- ----------- --------- ----------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1995.................... -- $ -- 1,090,969 $ 11 -- $ -- $ 46,842 $ (212,387)
--------- ----- --------- ----- ---------- ----- ----------- -------------
Comprehensive (loss)
income:
Net loss................ -- -- -- -- -- -- -- (7,772)
Translation adjustment.. -- -- -- -- -- -- -- --
--------- ----- --------- ----- ---------- ----- ----------- -------------
Total comprehensive (loss)
income.................. -- -- -- -- -- -- -- (7,772)
--------- ----- --------- ----- ---------- ----- ----------- -------------
Issuance of common stock
to lenders.............. -- -- -- -- 1,187,503 12 38 --
Proceeds from exercise of
warrants................ -- -- 71,527 1 -- -- 21 --
Stock compensation
expense................. -- -- 122,888 1 -- -- 4 --
--------- ----- --------- ----- ---------- ----- ----------- -------------
BALANCE, DECEMBER 29,
1996.................... -- -- 1,285,384 13 1,187,503 12 46,905 (220,159)
--------- ----- --------- ----- ---------- ----- ----------- -------------
Comprehensive loss:
Net loss................ -- -- -- -- -- -- -- (3,509)
Translation adjustment.. -- -- -- -- -- -- -- --
--------- ----- --------- ----- ---------- ----- ----------- -------------
Total comprehensive loss.. -- -- -- -- -- -- -- (3,509)
--------- ----- --------- ----- ---------- ----- ----------- -------------
Shares returned to FICC at
no cost in connection
with the Offerings (Note
13)..................... -- -- (766,782) (8) -- -- -- --
Conversion of Class A
Common Stock and Class B
Common Stock to Common
Stock................... 1,706,105 17 (518,602) (5) (1,187,503) (12) -- --
Proceeds from Common Stock
Offering, net of
expenses of $8,087...... 5,000,000 50 -- -- -- -- 81,870 --
Stock compensation
expense................. 735,185 7 -- -- -- -- 8,400 --
--------- ----- --------- ----- ---------- ----- ----------- -------------
BALANCE, DECEMBER 28,
1997.................... 7,441,290 74 -- -- -- -- 137,175 (223,668)
--------- ----- --------- ----- ---------- ----- ----------- -------------
Comprehensive (loss)
income:
Net loss................ -- -- -- -- -- -- -- (4,971)
Translation adjustment.. -- -- -- -- -- -- -- --
--------- ----- --------- ----- ---------- ----- ----------- -------------
Total comprehensive (loss)
income.................. -- -- -- -- -- -- -- (4,971)
--------- ----- --------- ----- ---------- ----- ----------- -------------
Stock compensation
expense................. 20,310 1 -- -- -- -- 721 --
--------- ----- --------- ----- ---------- ----- ----------- -------------
BALANCE, DECEMBER 27,
1998.................... 7,461,600 $ 75 -- $ -- -- $ -- $ 137,896 $ (228,639)
--------- ----- --------- ----- ---------- ----- ----------- -------------
--------- ----- --------- ----- ---------- ----- ----------- -------------
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME TOTAL
----------------- ---------
<S> <C> <C>
BALANCE, DECEMBER 31,
1995.................... $ -- $(165,534)
----- ---------
Comprehensive (loss)
income:
Net loss................ -- (7,772)
Translation adjustment.. 73 73
----- ---------
Total comprehensive (loss)
income.................. 73 (7,699)
----- ---------
Issuance of common stock
to lenders.............. -- 50
Proceeds from exercise of
warrants................ -- 22
Stock compensation
expense................. -- 5
----- ---------
BALANCE, DECEMBER 29,
1996.................... 73 (173,156)
----- ---------
Comprehensive loss:
Net loss................ -- (3,509)
Translation adjustment.. (15) (15)
----- ---------
Total comprehensive loss.. (15) (3,524)
----- ---------
Shares returned to FICC at
no cost in connection
with the Offerings (Note
13)..................... -- (8)
Conversion of Class A
Common Stock and Class B
Common Stock to Common
Stock................... -- --
Proceeds from Common Stock
Offering, net of
expenses of $8,087...... -- 81,920
Stock compensation
expense................. -- 8,407
----- ---------
BALANCE, DECEMBER 28,
1997.................... 58 (86,361)
----- ---------
Comprehensive (loss)
income:
Net loss................ -- (4,971)
Translation adjustment.. 9 9
----- ---------
Total comprehensive (loss)
income.................. 9 (4,962)
----- ---------
Stock compensation
expense................. -- 722
----- ---------
BALANCE, DECEMBER 27,
1998.................... $ 67 $ (90,601)
----- ---------
----- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
----------------------------------------
<S> <C> <C> <C>
DECEMBER 27, DECEMBER 28, DECEMBER 29,
1998 1997 1996
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................................. $ (4,971) $ (3,509) $ (7,772)
Adjustments to reconcile net loss to net cash provided by operating activities:
Cumulative effect of change in accounting principle................................ -- (2,236) --
Stock compensation expense......................................................... 722 8,407 --
Non-cash expenses associated with Recapitalization................................. -- 399 --
Relocation of manufacturing and distribution facility.............................. 945 -- --
Depreciation and amortization...................................................... 33,449 31,692 32,979
Write-downs of property and equipment.............................................. 1,132 770 227
Deferred income tax benefit........................................................ (3,435) (4,083) (5,926)
Loss (gain) on asset retirements................................................... 123 1,939 (916)
Equity in net loss and other write-downs associated with joint venture............. 4,828 1,530 --
Changes in operating assets and liabilities:
Accounts receivable.............................................................. 2,110 (3,930) 241
Inventories...................................................................... 111 (526) (66)
Other assets..................................................................... (1,596) (7,998) 1,309
Accounts payable................................................................. 2,509 3,178 (199)
Accrued expenses and other long-term liabilities................................. (3,062) (3,515) 6,286
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................................ 32,865 22,118 26,163
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................................................. (51,172) (31,638) (24,217)
Proceeds from sales of property and equipment........................................ 2,852 5,043 8,409
Purchases of investment securities................................................... -- (8,194) --
Proceeds from sales and maturities of investment securities.......................... -- 12,787 --
Acquisition of Restaurant Insurance Corporation, net of cash acquired................ -- (35) --
Advances to and investments in joint venture......................................... -- (1,400) (4,500)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES................................................ (48,320) (23,437) (20,308)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from other borrowings....................................................... 69,258 167,548 48,196
Repayments of debt................................................................... (56,133) (438,673) (52,084)
Repayments of capital lease and finance obligations.................................. (1,720) (12,955) (7,131)
Proceeds from issuance of senior notes............................................... -- 200,000 --
Proceeds from issuance of common stock............................................... -- 81,920 --
Proceeds from exercise of stock purchase warrants.................................... -- -- 22
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.................................. 11,405 (2,160) (10,997)
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.............................................. 9 (15) 78
------------ ------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................................ (4,041) (3,494) (5,064)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR......................................... 15,132 18,626 23,690
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR............................................... $ 11,091 $ 15,132 $ 18,626
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES
Interest paid........................................................................ $ 30,784 $ 46,040 $ 36,000
Income taxes paid.................................................................... 532 168 --
Capital lease obligations incurred................................................... 608 2,227 5,951
Capital lease obligations terminated................................................. 384 1,587 128
Issuance of common stock to lenders.................................................. -- -- 50
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
In September 1988, The Restaurant Company ("TRC") and another investor
acquired Friendly Ice Cream Corporation ("FICC"). Subsequent to the acquisition,
Friendly Holding Corporation ("FHC") was organized to hold the outstanding
common stock of FICC, and in March 1996, FHC was merged into FICC. Additionally,
in March 1996, TRC distributed its shares of FICC's voting common stock to TRC's
shareholders and FICC deconsolidated from TRC.
In November 1997, FICC completed a public offering of five million shares of
its common stock for net proceeds of $81.9 million and a public offering of $200
million of Senior Notes (collectively, the "Offerings"). Concurrent with the
Offerings, FICC entered into a new senior secured credit facility consisting of
(i) $90 million of term loans, (ii) a $55 million revolving credit facility and
(iii) a $15 million letter of credit facility (collectively, the "New Credit
Facility"). Proceeds from the Offerings and the New Credit facility were
primarily used to repay the $353.7 million outstanding under FICC's previous
credit facility (collectively, the "Recapitalization").
References herein to "Friendly's" or the "Company" refer to Friendly Ice
Cream Corporation, its predecessor and its consolidated subsidiaries.
2. NATURE OF OPERATIONS
Friendly's owns and operates 646 full-service restaurants, franchises 42
restaurants and 11 cafes and distributes a full line of frozen dessert products.
These products are distributed to Friendly's restaurants and cafes and to more
than 5,000 supermarkets and other retail locations in 16 states. The restaurants
offer a wide variety of reasonably priced breakfast, lunch and dinner menu items
as well as frozen dessert products. For the years ended December 27, 1998,
December 28, 1997 and December 29, 1996, restaurant sales were approximately
88%, 89% and 92%, respectively, of the Company's revenues. As of December 27,
1998, December 28, 1997 and December 29, 1996, approximately 86%, 85% and 80%,
respectively, of the Company-owned restaurants were located in the Northeast
United States. As a result, a severe or prolonged economic recession in this
geographic area may adversely affect the Company more than certain of its
competitors which are more geographically diverse.
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--
The consolidated financial statements include the accounts of FICC and its
subsidiaries after elimination of intercompany accounts and transactions.
FISCAL YEAR--
Friendly's fiscal year ends on the last Sunday in December, unless that day
is earlier than December 27, in which case the fiscal year ends on the following
Sunday.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Future facts
and circumstances could alter management's estimates with respect to the
carrying value of long-lived assets and the adequacy of insurance reserves.
F-7
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
REVENUE RECOGNITION--
The Company recognizes restaurant revenue upon receipt of payment from the
customer and retail revenue upon shipment of product. Franchise royalty income,
based on gross sales of franchisees, is payable monthly and is recorded on the
accrual method. Initial franchise fees are recorded upon completion of all
significant services, generally upon opening of the restaurant.
CASH AND CASH EQUIVALENTS--
The Company considers all investments with an original maturity of three
months or less when purchased to be cash equivalents.
INVENTORIES--
Inventories are stated at the lower of first-in, first-out cost or market.
Inventories at December 27, 1998 and December 28, 1997 were (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1998 1997
------------ ------------
<S> <C> <C>
Raw materials.................................................... $ 1,983 $ 2,011
Goods in process................................................. 145 136
Finished goods................................................... 13,432 13,524
------------ ------------
Total............................................................ $ 15,560 $ 15,671
------------ ------------
------------ ------------
</TABLE>
RESTRICTED CASH--
Restaurant Insurance Corporation ("RIC"), an insurance subsidiary (see Note
4), is required by the reinsurer of RIC to hold assets in trust whose value is
at least equal to certain of RIC's outstanding estimated insurance claim
liabilities. Accordingly, as of December 27, 1998 and December 28, 1997, cash of
approximately $2,211,000 and $1,333,000, respectively, was restricted.
PROPERTY AND EQUIPMENT--
Property and equipment are carried at cost except for impaired assets which
are carried at fair value less cost to sell (see Note 6). Depreciation of
property and equipment is computed using the straight-line method over the
following estimated useful lives:
Buildings - 30 years
Building improvements and leasehold improvements - Lesser of lease term or
20 years
Equipment - 3 to 10 years
F-8
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
At December 27, 1998 and December 28, 1997, property and equipment included
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1998 1997
------------ ------------
<S> <C> <C>
Land............................................................. $ 76,025 $ 76,160
Buildings and improvements....................................... 128,531 119,121
Leasehold improvements........................................... 43,365 40,300
Assets under capital leases...................................... 12,887 12,709
Equipment........................................................ 276,720 247,052
Construction in progress......................................... 11,807 12,551
------------ ------------
Property and equipment........................................... 549,335 507,893
Less: accumulated depreciation and amortization.................. (249,176) (223,949)
------------ ------------
Property and equipment, net...................................... $ 300,159 $ 283,944
------------ ------------
------------ ------------
</TABLE>
Major renewals and betterments are capitalized. Replacements and maintenance
and repairs which do not extend the lives of the assets are charged to
operations as incurred.
LONG-LIVED ASSETS--
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews the license agreement for the
right to use various trademarks and tradenames (see Note 5) for impairment on a
quarterly basis. The Company recognizes an impairment has occurred when the
carrying value of the license agreement exceeds the estimated future cash flows
of the trademarked products.
The Company reviews each restaurant property quarterly to determine which
properties will be disposed of. This determination is made based on poor
operating results, deteriorating property values and other factors. The Company
recognizes an impairment has occurred when the carrying value of property
exceeds its estimated fair value, which is estimated based on the Company's
experience selling similar properties and local market conditions, less costs to
sell (see Note 6).
RESTAURANT PREOPENING COSTS--
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires entities to expense as incurred all start-up and
preopening costs that are not otherwise capitalizable as long-lived assets and
is effective for fiscal years beginning after December 15, 1998. In accordance
with this statement, the Company will expense previously deferred restaurant
preopening costs of approximately $319,000 as of December 28, 1998. Such amount,
net of any related income tax effects, will be reflected as a cumulative effect
of a change in accounting principle in fiscal 1999.
INTERNAL USE SOFTWARE--
In accordance with SOP 98-1, "Accounting for The Costs of Computer Software
Developed or Obtained for Internal Use," the Company capitalizes costs incurred
in the development of internally used software if the criteria under SOP 98-1
have been met.
F-9
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
RESTAURANT CLOSURE COSTS--
Restaurant closure costs are recognized when a decision is made to close a
restaurant. Restaurant closure costs include writing down the carrying amount of
a restaurant's assets to estimated fair market value less costs of disposal and
the net present value of any remaining operating lease payments after the
expected closure date.
INSURANCE RESERVES--
The Company is self-insured through retentions or deductibles for the
majority of its workers' compensation, automobile, general liability, product
liability and group health insurance programs. Self-insurance amounts vary up to
$500,000 per occurrence. Insurance with third parties, some of which is then
reinsured through RIC (see Note 4), is in place for claims in excess of these
self-insured amounts. RIC assumes 100% of the risk from $500,000 to $1,000,000
per occurrence for the Company's worker's compensation, general liability and
product liability insurance. The Company's and RIC's liability for estimated
incurred losses are actuarially determined and recorded in the accompanying
consolidated financial statements on an undiscounted basis (see Note 12).
INCOME TAXES--
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns. A valuation allowance
is recorded for deferred tax assets whose realization is not likely (see Note
9).
ADVERTISING--
The Company expenses production and other advertising costs the first time
the advertising takes place. For the years ended December 27, 1998, December 28,
1997 and December 29, 1996, advertising expense was approximately $20,985,000,
$21,185,000 and $18,231,000, respectively.
INTEREST RATE SWAP AGREEMENT--
In connection with the Recapitalization, the Company entered into an
interest rate swap agreement. The interest differential to be paid or received
is accrued and recorded as an adjustment to interest expense (see Note 7).
EARNINGS PER SHARE--
On January 1, 1997, the Company adopted SFAS No. 128, "Earnings Per Share."
The adoption of this standard did not have a material impact on the Company's
computation of earnings per share. Additionally, on February 4, 1998, the
Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No.
98 on computations of earnings per share, which changed the guidance on how
common stock transactions prior to or in connection with an initial public
offering are treated in earnings per share computations.
Accordingly, all prior period earnings per share data presented have been
restated and all earnings per share data presented are in accordance with SFAS
No. 128 and SAB No. 98.
Basic earnings per share is calculated by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is
F-10
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
calculated by dividing income available to common stockholders by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period. Common stock equivalents are dilutive stock
options and warrants that are assumed exercised for calculation purposes. The
number of common stock equivalents which could dilute basic earnings per share
in the future, that were not included in the computation of diluted earnings per
share because to do so would have been antidilutive, was 5,688 for the year
ended December 27, 1998. There were no potentially dilutive common stock
equivalents for the years ended December 28, 1997 and December 29, 1996.
STOCK-BASED COMPENSATION--
On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 requires the measurement of the fair
value of stock options or warrants granted to be included in the statement of
operations or that pro forma information related to the fair value be disclosed
in the notes to financial statements. The Company continues to account for
stock-based compensation for employees under Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and elects the
disclosure-only alternative under SFAS No. 123.
COMPREHENSIVE INCOME--
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income (net income (loss) together with other non-owner changes in
equity) and its components in the financial statements. In accordance with SFAS
No. 130, the consolidated financial statements have been reclassified for
earlier periods.
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS--
On January 1, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures About Pensions and Other Postretirement Benefits," which
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable and requires additional information on
changes in the benefit obligations and fair values of plan assets (see Notes 10
and 11).
DERIVATIVE INSTRUMENTS--
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that each derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the statement of operations, and requires that a company formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. SFAS No. 133 cannot be applied retroactively. Management has not
yet quantified the impact of adopting SFAS No. 133 on the Company's financial
statements and has not determined the timing or method of the Company's adoption
of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings and
other comprehensive income.
F-11
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
RECLASSIFICATIONS--
Certain prior period amounts have been reclassified to conform with the
current year presentation.
4. ACQUISITION OF RESTAURANT INSURANCE CORPORATION
On March 19, 1997, FICC acquired all of the outstanding shares of common
stock of Restaurant Insurance Corporation ("RIC"), a Vermont corporation, from
TRC for cash of $1,300,000 and a $1,000,000 promissory note payable to TRC
bearing interest at an annual rate of 8.25%. The promissory note and accrued
interest of approximately $1,024,000 were paid on June 30, 1997. RIC, which was
formed in 1993, reinsures certain Company risks (i.e., workers' compensation,
employer's liability, general liability and product liability) from a third
party insurer (see Note 12).
The acquisition was accounted for as a purchase. Accordingly, the results of
operations for RIC for the period subsequent to March 20, 1997 were included in
the accompanying consolidated financial statements. No pro forma information is
included since the effect of the acquisition is not material. The purchase price
was allocated to net assets acquired based on the estimated fair market values
at the date of acquisition. The purchase price was allocated as follows (in
thousands):
<TABLE>
<S> <C>
Cash and cash equivalents......................................... $ 2,265
Restricted cash and investments................................... 12,061
Receivables and other assets...................................... 3,101
Loss reserves..................................................... (13,231)
Deferred income taxes............................................. (11)
Other liabilities................................................. (1,885)
---------
$ 2,300
---------
---------
</TABLE>
5. INTANGIBLE ASSETS AND DEFERRED COSTS
Intangible assets and deferred costs net of accumulated amortization as of
December 27, 1998 and December 28, 1997 were (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1998 1997
------------ ------------
<S> <C> <C>
Marks license agreement for the right to use various trademarks
and service marks amortized over a 40 year life on a straight
line basis..................................................... $ 13,832 $ 14,298
Deferred financing costs amortized over the terms of the related
loans on an effective yield basis.............................. 11,346 11,696
------------ ------------
$ 25,178 $ 25,994
------------ ------------
------------ ------------
</TABLE>
Upon the sale of the Company by Hershey in 1988, all of the trademarks and
service marks (the "Marks") used in the Company's business at that time which
did not contain the word "Friendly" as a component of such Marks were licensed
by Hershey to the Company. The Marks license agreement is being amortized over
40 years and expires on September 2, 2028. The Company reviews the estimated
future cash flows related to each trademarked product on a quarterly basis to
determine whether any impairment has occurred.
F-12
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INTANGIBLE ASSETS AND DEFERRED COSTS (CONTINUED)
As a result of the Recapitalization in November 1997, previously deferred
financing costs of $399,000 were written off and were included in expenses
associated with the Recapitalization in the accompanying consolidated statement
of operations for the year ended December 28, 1997.
6. WRITE-DOWNS OF PROPERTY AND EQUIPMENT
At December 27, 1998, December 28, 1997 and December 29, 1996, there were
25, 40 and 50 restaurant properties held for disposition, respectively. The
restaurants held for disposition generally have poor operating results,
deteriorating property values or other adverse conditions. The Company
determined that the carrying values of certain of these properties exceeded
their estimated fair values less costs to sell. Accordingly, during the year
ended December 27, 1998, the carrying values of 9 properties were reduced by an
aggregate of $912,000; during the year ended December 28, 1997, the carrying
values of 12 properties were reduced by an aggregate of $770,000 and during the
year ended December 29, 1996, the carrying values of 6 properties were reduced
by an aggregate of $227,000. The Company plans to dispose of the 25 properties
by December 31, 2000. The aggregate operating loss, prior to depreciation
expense which is not reported at the restaurant level, for the properties held
for disposition was $733,000, $1,244,000 and $1,129,000 for the years ended
December 27, 1998, December 28, 1997 and December 29, 1996, respectively. The
aggregate carrying value of the properties held for disposition at December 27,
1998 and December 28, 1997 was approximately $2,570,000 and $3,050,000,
respectively, which is included in property and equipment in the accompanying
consolidated balance sheets.
In 1998, the Company announced it was discontinuing its United Kingdom
operations. As a result, the Company recorded a write-down of $220,000 since the
carrying value of the equipment in the United Kingdom exceeded the estimated
fair value less costs to sell by $220,000 (see Note 18).
7. DEBT
Debt at December 27, 1998 and December 28, 1997 consisted of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1998 1997
------------ ------------
<S> <C> <C>
Senior Notes, 10.50%, due December 1, 2007........................................... $ 200,000 $ 200,000
New Credit Facility:
Revolving Credit Facility, due November 15, 2002................................... 25,000 9,000
Term Loans:
Tranche A, due April 15, 1999 through November 15, 2002.......................... 34,286 34,286
Tranche B, due April 15, 1999 through November 15, 2004.......................... 34,286 34,286
Tranche C, due April 15, 1999 through November 15, 2005.......................... 21,428 21,428
Insurance premium finance loans, 8.34%-8.75%......................................... -- 2,842
Other................................................................................ 84 117
------------ ------------
315,084 301,959
Less: current portion................................................................ (4,023) (2,875)
------------ ------------
Total long-term debt................................................................. $ 311,061 $ 299,084
------------ ------------
------------ ------------
</TABLE>
F-13
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
Principal payments due under long-term debt as of December 27, 1998 were as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
- - ---------------------------------------------------------------------------------- ----------
<S> <C>
1999.............................................................................. $ 4,023
2000.............................................................................. 9,175
2001.............................................................................. 10,843
2002.............................................................................. 37,557
2003.............................................................................. 15,985
Thereafter........................................................................ 237,501
----------
Total............................................................................. $ 315,084
----------
----------
</TABLE>
Effective January 1, 1996, the Company and its then existing lenders entered
an Amended and Restated Revolving Credit and Term Loan Agreement (the
"Agreement"). In connection with the Agreement, the lenders received an
aggregate of 1,187,503 shares of FICC's Class B Common Stock. The estimated fair
market value of the shares issued of $50,000 was recorded as a deferred
financing cost during the year ended December 29, 1996. Under the Agreement,
interest accrued on the revolving credit and term loans (collectively, the "Old
Credit Facility") at an annual rate of 11.00% with 0.50% of the accrued
interest, which was not currently payable, was classified in other long-term
liabilities. The deferred interest payable was waived by the lenders in November
1997 since the Old Credit Facility was repaid in full in connection with the
Recapitalization in November 1997. Accordingly, approximately $3.6 million of
deferred interest was recorded as a reduction in interest expense in November
1997.
The $200 million Senior Notes issued in connection with the November 1997
Recapitalization (the "Notes") are unsecured, senior obligations of FICC,
guaranteed on an unsecured, senior basis by FICC's Friendly's Restaurants
Franchise, Inc. subsidiary, but are effectively subordinated to all secured
indebtedness of FICC, including the indebtedness incurred under the New Credit
Facility. The Notes mature on December 1, 2007. Interest on the Notes is payable
at 10.50% per annum semi-annually on June 1 and December 1 of each year
commencing on June 1, 1998. The Notes are redeemable, in whole or in part, at
FICC's option any time on or after December 1, 2002 at redemption prices from
105.25% to 100.00%. The redemption price is based on the redemption date. Prior
to December 1, 2000, FICC may redeem up to $70 million of the Notes at 110.50%
with the proceeds of one or more equity offerings, as defined.
FICC entered into the New Credit Facility in November 1997 in connection
with the Recapitalization. The New Credit Facility includes $90 million of term
loans (the "Term Loans"), a $55 million revolving credit facility (the
"Revolving Credit Facility") and a $15 million letter of credit facility (the
"Letter of Credit Facility"). The New Credit Facility is collateralized by
substantially all of FICC's assets and by a pledge of FICC's shares of certain
of its subsidiaries' stock.
Borrowings under the New Credit Facility incurred interest through December
27, 1998, at FICC's option, at either (i) the Eurodollar Rate plus 2.25% per
annum or (ii) the ABR rate (the greater of (a) a specified prime rate or (b) the
federal funds rate plus 0.50%) plus 0.75% per annum for drawings under the
Revolving Credit Facility, 0.50% per annum for amounts undrawn under the
Revolving Credit Facility, 0.50% per annum for amounts unissued under the Letter
of Credit Facility and 2.50% per annum for amounts issued but undrawn under the
Letter of Credit Facility. Borrowings under the Term Loans incurred interest
through December 27, 1998, at FICC's option, at either the Eurodollar Rate plus
2.25%, 2.50% and 2.75% or the ABR rate plus 0.75%, 1.00% and 1.25% for Tranches
A, B and C, respectively. As
F-14
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
of December 27, 1998, the one-month and three-month Eurodollar Rates were 5.63%
and 5.28%, respectively. FICC also entered into a three year interest rate swap
agreement to hedge the impact of interest rate changes on the Term Loans. The
interest rate swap agreement has a notional amount of $90 million and
effectively fixed the interest rates on Tranches A, B and C of the Term Loans at
8.25%, 8.50% and 8.75%, respectively, prior to the effect of the amendment
described below. The interest rate swap agreement matures on November 20, 2000.
Effective December 27, 1998, the New Credit Facility was amended. In
connection with this amendment, certain covenants were changed and interest
rates on borrowings were increased. The per annum interest rates on drawings
under the Revolving Credit Facility increased 0.25% and 0.50% for Eurodollar and
ABR loans, respectively. The per annum interest rates on Tranches A, B and C of
Eurodollar Term Loans increased 0.25% and the per annum interest rates on ABR
Term Loans increased 0.50%, 0.25% and 0.25% for Tranches A, B and C,
respectively. The per annum interest rate on amounts issued but undrawn under
the Letter of Credit Facility increased 0.25%. FICC paid a fee of approximately
$1,077,000 to the lenders in connection with this amendment. References herein
to the New Credit Facility shall mean as amended on December 27, 1998.
Annual principal payments due under the Term Loans will total $4.0 million,
$9.1 million, $10.8 million, $12.6 million, $16.0 million, $17.4 million and
$20.1 million in 1999 through 2005, respectively. In addition to the principal
payments, the Term Loans will be permanently reduced by (i) specified
percentages of each year's Excess Cash Flow (as defined), (ii) specified
percentages of the aggregate net cash proceeds from certain issuances of
indebtedness and (iii) 100% of the aggregate net cash proceeds from asset sales
not in the ordinary course of business (as defined) and certain insurance claim
proceeds, in each case in this clause (iii), not re-employed within 180 days in
the Company's business. Any such applicable proceeds and Excess Cash Flow shall
be applied to the Term Loans in inverse order of maturity. The Revolving Credit
Facility matures on November 15, 2002.
As of December 27, 1998 and December 28, 1997, total letters of credit
issued were $10,535,000 and $14,404,000, respectively. During the years ended
December 27, 1998, December 28, 1997 and December 29, 1996, there were no
drawings against the letters of credit. The Letter of Credit Facility matures on
November 15, 2002.
As of December 27, 1998 and December 28, 1997, the unused portion of the
revolver was $30,000,000 and $46,000,000, respectively. The total average unused
portions of the revolver and letters of credit commitments were $35,708,000,
$50,046,000 and $13,955,000 for the year ended December 27, 1998, the period
from November 19, 1997 through December 28, 1997 and the period from December
30, 1996 through November 18, 1997, respectively.
The Senior Notes and New Credit Facility include certain restrictive
covenants including limitations on indebtedness, limitations on restricted
payments such as dividends and stock repurchases and limitations on sales of
assets and of subsidiary stock. Additionally, the New Credit Facility limits the
amount which the Company may spend on capital expenditures and requires the
Company to comply with certain
F-15
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
financial covenants. The financial covenant requirements, as defined under the
New Credit Facility, and actual ratios/amounts as of and for the years ended
December 27, 1998 and December 28, 1997 were:
<TABLE>
<CAPTION>
DECEMBER 27, 1998 DECEMBER 28, 1997
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
REQUIREMENT ACTUAL REQUIREMENT ACTUAL
-------------- -------------- -------------- --------------
Consolidated leverage ratio...................... 5.25 to 1 4.88 to 1 4.75 to 1 4.33 to 1
Consolidated interest coverage ratio............. 1.50 to 1 1.60 to 1 1.50 to 1 1.91 to 1
Consolidated fixed charge coverage ratio......... 1.30 to 1 1.43 to 1 1.40 to 1 1.65 to 1
Consolidated net worth (deficit)................. $ (98,000,000) $ (90,601,000) $ (95,000,000) $ (86,361,000)
</TABLE>
The fair values of FICC's financial instruments at December 27, 1998 and
December 28, 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, 1998 DECEMBER 28, 1997
---------------------- ----------------------
<S> <C> <C> <C> <C>
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
Senior Notes..................................................... $ 200,000 $ 198,000 $ 200,000 $ 203,000
Term Loans....................................................... 90,000 90,000 90,000 90,000
Revolving Credit Facility........................................ 25,000 25,000 9,000 9,000
Other debt....................................................... 84 84 2,959 2,959
Interest rate swap agreement..................................... -- 1,438 -- --
---------- ---------- ---------- ----------
Total............................................................ $ 315,084 $ 314,522 $ 301,959 $ 304,959
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The fair value of the Senior Notes was determined based on the actual trade
prices as of December 27, 1998 and December 28, 1997. FICC believes that the
carrying value of the Term Loans and Revolving Credit Facility as of December
27, 1998 and December 28, 1997 approximated fair value since the obligations
have variable interest rates. FICC believes that the carrying value of the other
debt as of December 27, 1998 and December 28, 1997 approximated the fair value
based on the terms of the obligations and the rates currently available to the
FICC for similar obligations. The fair value of the interest rate swap agreement
as of December 27, 1998 was determined based on the terms of the agreement and
existing market conditions. The Company believes that the fair value of the
interest rate swap agreement as of December 28, 1997 was not material.
8. LEASES
As of December 27, 1998, December 28, 1997 and December 29, 1996, the
Company operated 646, 662 and 707 restaurants, respectively. These operations
were conducted in premises owned or leased as follows:
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28, DECEMBER 29,
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Land and building owned........................... 275 279 296
Land leased and building owned.................... 147 146 161
Land and building leased.......................... 224 237 250
--- --- ---
646 662 707
--- --- ---
--- --- ---
</TABLE>
F-16
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LEASES (CONTINUED)
Restaurants in shopping centers are generally leased for a term of 10 to 20
years. Leases of freestanding restaurants generally are for a 15 or 20 year
lease term and provide for renewal options for three or four five-year renewals.
Some leases provide for minimum payments plus a percentage of sales in excess of
stipulated amounts. Additionally, the Company leases certain equipment over
lease terms from three to seven years.
Future minimum lease payments under noncancelable leases with an original
term in excess of one year as of December 27, 1998 were (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR LEASES LEASES
- - ------------------------------------------------------------------------ ----------- ---------
<S> <C> <C>
1999.................................................................... $ 14,137 $ 3,008
2000.................................................................... 12,662 2,678
2001.................................................................... 10,693 2,116
2002.................................................................... 8,001 1,473
2003.................................................................... 5,945 1,210
Thereafter.............................................................. 25,436 9,991
----------- ---------
Total minimum lease payments............................................ $ 76,874 20,476
-----------
Less: amount representing interest...................................... 9,054
---------
Present value of minimum lease payments................................. $ 11,422
---------
---------
</TABLE>
Capital lease obligations reflected in the accompanying consolidated balance
sheets have effective interest rates ranging from 8.00% to 12.00% and are
payable in monthly installments through 2016. Maturities of such obligations as
of December 27, 1998 were (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
- - ----------------------------------------------------------------------------------- ---------
<S> <C>
1999............................................................................... $ 1,677
2000............................................................................... 1,568
2001............................................................................... 1,191
2002............................................................................... 678
2003............................................................................... 488
Thereafter......................................................................... 5,820
---------
Total.............................................................................. $ 11,422
---------
---------
</TABLE>
Rent expense included in the accompanying consolidated financial statements
for operating leases was (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28, DECEMBER 29,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Minimum rentals................................... $ 16,484 $ 16,007 $ 16,051
Contingent rentals................................ 1,788 1,762 1,918
------------ ------------ ------------
Total............................................. $ 18,272 $ 17,769 $ 17,969
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-17
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
Prior to March 23, 1996, FICC and its subsidiaries were included in the
consolidated Federal income tax return of TRC. Under a tax sharing agreement
between TRC and FICC (formerly FHC) (the "TRC/ FICC Agreement"), FICC and its
subsidiaries (the "FICC Group") were obligated to pay TRC its allocable share of
the TRC group tax liability, determined as if the FICC Group were filing a
separate consolidated income tax return.
On March 23, 1996, TRC distributed its shares of FICC's voting common stock
to TRC's shareholders (see Note 1), the FICC Group deconsolidated from the TRC
group and the TRC/FICC Agreement expired. In addition, on March 26, 1996, shares
of Class B Common Stock were issued to FICC's lenders (see Note 7) which
resulted in an ownership change pursuant to Internal Revenue Code Section 382.
Under the TRC/FICC Agreement, Federal net operating loss ("NOL")
carryforwards generated by the FICC Group and utilized or allocated to TRC were
available to the FICC Group on a separate company basis to carryforward.
Pursuant to the TRC/FICC Agreement, as of March 23, 1996, $99,321,000 of
carryforwards would have been available to the FICC Group to offset future
taxable income of the FICC Group. However, as a result of the deconsolidation
from TRC, the deferred tax asset related to the $65,034,000 of NOLs utilized by
TRC was written off by the Company in 1996 and 1995. As of December 29, 1996, as
a result of the change in ownership and limitations under Section 382 of the
Internal Revenue Code, a valuation allowance was placed on $29,686,000 of the
$34,287,000 remaining Federal NOL carryforwards generated for the period prior
to March 23, 1996. The amount of pre-change NOLs ("Old NOLs") not reserved for
as of December 29, 1996 represented the amount of NOLs which had become
available as of December 29, 1996 as a result of FICC realizing gains which were
unrealized as of the date of the ownership change. Due to restrictions similar
to Section 382 in most of the states FICC operates in and short carryforward
periods, FICC fully reserved for all state NOL carryforwards generated through
March 26, 1996 as of December 29, 1996. For the period from March 27, 1996 to
December 29, 1996, FICC generated a net operating loss carryforward of
$5,735,000 for which no valuation allowance was provided.
During the years ended December 27, 1998 and December 28, 1997, the Company
realized gains of $900,000 and $861,000, respectively, which were unrealized as
of the date of the first ownership change. Accordingly, the valuation allowance
was reduced by approximately $315,000 and $301,000 during the years ended
December 27, 1998 and December 28, 1997, respectively. During the years ended
December 27, 1998 and December 28, 1997, the Company generated NOLs of
approximately $422,000 and $119,000, respectively. As a result, as of December
27, 1998, the Company has aggregate NOL carryforwards of approximately $40.6
million which expire between 2001 and 2018.
The Common Stock Offering resulted in the Company having another change of
ownership under Section 382 of the Internal Revenue Code in November 1997. As a
result, usage of the NOLs generated between the last ownership change and the
Common Stock Offering ("New NOLs") is also limited. The amount of NOLs which may
be used each year prior to any built-in gains being triggered is approximately
$2.4 million. While the limitation on the use of the New NOLs will impact when
the New NOLs are utilized, the Company expects all New NOLs to be utilized
before they expire. Accordingly, no valuation allowance is required related to
any New NOLs as of December 27, 1998. The Company does not believe that it is
more likely than not that all Old NOLs will become available through realization
of unrealized gains as of the date of the March 1996 ownership change.
Accordingly, a valuation allowance has been provided against Old NOLs which have
not been made available as of December 27, 1998. As of
F-18
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
December 27, 1998, a valuation allowance has been provided against an aggregate
of $28.0 million of Old NOLs.
The benefit from income taxes for the years ended December 27, 1998,
December 28, 1997 and December 29, 1996 was as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28, DECEMBER 29,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Current benefit (provision):
Federal......................................... $ 30 $ -- $ --
State........................................... (10) (86) --
Foreign......................................... -- (21) (58)
------ ------ ------
Total current benefit (provision)................. 20 (107) (58)
------ ------ ------
Deferred benefit:
Federal......................................... 3,207 2,291 5,126
State........................................... 228 255 800
------ ------ ------
Total deferred benefit............................ 3,435 2,546 5,926
------ ------ ------
Total benefit from income taxes................... $ 3,455 $ 2,439 $ 5,868
------ ------ ------
------ ------ ------
</TABLE>
A reconciliation of the difference between the statutory Federal income tax
rate and the effective income tax rate follows:
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28, DECEMBER 29,
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Statutory Federal income tax rate................. 35% 35% 35%
State income taxes net of Federal benefit......... 6 6 14
Write-off of NOL carryforwards and tax credits.... -- -- (13)
(Increase) decrease in valuation allowance........ (1) (4) 2
Tax credits....................................... 7 12 3
Nondeductible expenses............................ (4) (10) (1)
Other............................................. (2) 2 3
-- -- --
Effective tax rate................................ 41% 41% 43%
-- -- --
-- -- --
</TABLE>
Deferred tax assets and liabilities are determined as the difference between
the financial statement and tax bases of the assets and liabilities multiplied
by the enacted tax rates in effect for the year in which
F-19
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
the differences are expected to reverse. Significant deferred tax assets
(liabilities) at December 27, 1998 and December 28, 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1998 1997
------------ ------------
<S> <C> <C>
Property and equipment........................................... $ (47,175) $ (47,483)
Federal, state and UK NOL carryforwards (net of valuation
allowance of $21,272 and $21,151 at December 27, 1998 and
December 28, 1997, respectively)............................... 5,329 4,604
Insurance reserves............................................... 4,540 4,534
Inventories...................................................... 1,885 1,811
Accrued pension.................................................. 2,578 3,138
Intangible assets................................................ (5,651) (5,838)
Tax credit carryforwards......................................... 3,401 2,234
Other............................................................ 4,966 3,438
------------ ------------
Net deferred tax liability....................................... $ (30,127) $ (33,562)
------------ ------------
------------ ------------
</TABLE>
10. EMPLOYEE BENEFIT PLANS
Substantially all of the employees of the Company are covered by a
non-contributory defined benefit cash balance pension plan. Plan benefits are
based on years of service and participant compensation during their years of
employment. The Company accrues the cost of its pension plan over its employees'
service lives.
Under the cash balance plan, a nominal account for each participant is
established. The Company makes an annual contribution to each participant's
account based on current wages and years of service. Each account earns a
specified rate of interest which is adjusted annually. Plan expenses may also be
paid from the assets of the plan.
For the years ended December 27, 1998 and December 28, 1997, the
reconciliation of the projected benefit obligation was (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1998 1997
------------ ------------
<S> <C> <C>
Beginning of year benefit obligation............................. $ 79,311 $ 76,769
Service cost................................................... 3,515 3,764
Interest cost.................................................. 5,874 5,922
Plan amendments................................................ 4,811 (8,245)
Actuarial loss................................................. 6,038 5,694
Disbursements.................................................. (8,671) (4,593)
------------ ------------
End of year benefit obligation................................... $ 90,878 $ 79,311
------------ ------------
------------ ------------
</TABLE>
In 1997, the pension benefits were reduced to certain employees. In 1998,
death benefits were increased. The effect of these amendments is being amortized
over the remaining employee service period of active plan participants.
F-20
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The reconciliation of the funded status of the pension plan as of December
27, 1998 and December 28, 1997 included the following components (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1998 1997
------------ ------------
<S> <C> <C>
Projected benefit obligation..................................... $ (90,878) $ (79,311)
Fair value of plan assets........................................ 112,621 107,938
------------ ------------
Funded status.................................................... 21,743 28,627
Unrecognized prior service cost.................................. (8,664) (8,701)
Unrecognized net actuarial gain.................................. (18,459) (26,922)
------------ ------------
Net amount recognized............................................ $ (5,380) $ (6,996)
------------ ------------
------------ ------------
</TABLE>
The amount recognized in the accompanying consolidated balance sheets
consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1998 1997
------------- -------------
<S> <C> <C>
Accrued benefit cost............................................. $ 5,380 $ 6,996
------ ------
------ ------
</TABLE>
The reconciliation of fair value of assets of the plan as of December 27,
1998 and December 28, 1997 was (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1998 1997
------------ ------------
<S> <C> <C>
Beginning of year fair value of assets........................... $ 107,938 $ 90,626
Beginning of year adjustment..................................... (2,719) --
Actual return on plan assets..................................... 16,074 21,905
Disbursements.................................................... (8,672) (4,593)
------------ ------------
End of year fair value of assets................................. $ 112,621 $ 107,938
------------ ------------
------------ ------------
</TABLE>
The components of net pension (benefit) cost for the years ended December
27, 1998, December 28, 1997 and December 29, 1996 were (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28, DECEMBER 29,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Service cost...................................... $ 3,515 $ 3,764 $ 4,202
Interest cost..................................... 5,874 5,922 5,781
Expected return on assets......................... (9,767) (8,143) (7,051)
Net amortization:
Unrecognized prior service cost................. (956) (409) (409)
Unrecognized net actuarial gain................. (282) (611) (242)
------------ ------------ ------------
Net pension (benefit) cost........................ $ (1,616) $ 523 $ 2,281
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-21
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
A summary of the Company's key actuarial assumptions as of December 27,
1998, December 28, 1997 and December 29, 1996 follows:
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28, DECEMBER 29,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Discount rate..................................... 6.75% 7.25% 7.75%
Salary increase rate.............................. 3.75-5.25% 4.00-5.50% 4.50-6.00%
Expected long term rate of return................. 10.5% 10.5% 9.5%
</TABLE>
Effective December 30, 1996, FICC changed its method of calculating the
market-related value of plan assets used in determining the return-on-asset
component of annual pension expense and the cumulative net unrecognized gain or
loss subject to amortization. Under the previous accounting method, the
calculation of the market-related value of assets reflected amortization of the
actual realized and unrealized capital return on assets on a straight-line basis
over a five-year period. Under the new method, the calculation of the
market-related value of assets reflects the long-term rate of return expected by
the Company and amortization of the difference between the actual return
(including capital, dividends and interest) and the expected return over a
five-year period. The Company believes the new method is widely used in practice
and preferable because it results in calculated plan asset values that more
closely approximate fair value, while still mitigating the effect of annual
market-value fluctuations. Under both methods, only the cumulative net
unrecognized gain or loss which exceeds 10% of the greater of the projected
benefit obligation or the market-related value of plan assets is subject to
amortization. This change resulted in a non-cash benefit for the year ended
December 28, 1997 of $2,236,000 (net of taxes of $1,554,000), which represented
the cumulative effect of the change related to years prior to fiscal 1997, and
$607,000 (net of taxes of $421,000) in lower pension expense for the year ended
December 28, 1997 as compared to the previous accounting method. Had this change
been applied retroactively, pension expense would have been reduced by $946,000
for the year ended December 29, 1996.
The Company's Employee Savings and Investment Plan (the "Plan") covers all
eligible employees and is intended to be qualified under Sections 401(a) and
401(k) of the Internal Revenue Code. For the years ended December 27, 1998,
December 28, 1997 and December 29, 1996, the Company made matching contributions
at the rate of 75% of a participant's first 2% of his/her contributions and 50%
of a participant's next 2% of his/her contributions. All employee contributions
are fully vested. Employer contributions are vested at the completion of five
years of service or at retirement, death, disability or termination at age 65 or
over, as defined by the Plan. Contributions and administrative expenses for the
Plan were approximately $1,211,000, $1,089,000 and $1,002,000 for the years
ended December 27, 1998, December 28, 1997 and December 29, 1996, respectively.
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides health care and life insurance benefits to certain
groups of employees upon retirement. Eligible employees may continue their
coverages if they are receiving a pension benefit, are 55 years of age, and have
completed 10 years of service. The plan requires contributions for health care
coverage from participants who retired after September 1, 1989. Life insurance
benefits are non-contributory. Benefits under the plan are provided through the
Company's general assets.
F-22
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
The Company accrues the cost of postretirement benefits over the years
employees provide services to the date of their full eligibility for such
benefits. The reconciliation of accumulated postretirement benefit obligation
for the years ended December 27, 1998 and December 28, 1997 is as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1998 1997
------------- -------------
<S> <C> <C>
Beginning of year benefit obligation............................. $ 6,041 $ 5,709
Service cost..................................................... 155 134
Interest cost.................................................... 432 436
Actuarial loss................................................... 344 304
Disbursements.................................................... (528) (542)
------ ------
End of year benefit obligation................................... $ 6,444 $ 6,041
------ ------
------ ------
</TABLE>
The reconciliation of the funded status of the postretirement plan as of
December 27, 1998 and December 28, 1997 included the following components (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1998 1997
------------ ------------
<S> <C> <C>
Accumulated postretirement benefit obligation.................... $ (6,444) $ (6,041)
Fair value of plan assets........................................ -- --
------------ ------------
Funded status.................................................... (6,444) (6,041)
Unrecognized prior service cost.................................. (990) (1,051)
Unrecognized net actuarial loss (gain)........................... 321 (24)
------------ ------------
Net amount recognized............................................ $ (7,113) $ (7,116)
------------ ------------
------------ ------------
</TABLE>
The amount recognized in the accompanying consolidated balance sheets
consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1998 1997
------------- -------------
<S> <C> <C>
Accrued benefit liability........................................ $ 7,113 $ 7,116
------ ------
------ ------
</TABLE>
The components of net postretirement benefit cost for the years ended
December 27, 1998, December 28, 1997 and December 29, 1996 were (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28, DECEMBER 29,
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Service cost...................................... $ 155 $ 134 $ 125
Interest cost..................................... 432 436 436
Net amortization of prior service cost............ (62) (62) (62)
----- ----- -----
Net postretirement benefit cost................... $ 525 $ 508 $ 499
----- ----- -----
----- ----- -----
</TABLE>
F-23
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
A summary of the Company's key actuarial assumptions as of December 27,
1998, December 28, 1997 and December 29, 1996 follows:
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28, DECEMBER 29,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Discount rate..................................... 6.75% 7.25% 7.75%
Salary increase rate.............................. 3.75-5.25% 4.00-5.50% 4.00-5.50%
Medical cost trend:
First year--1998................................ 7.25% 7.25% 7.25%
Ultimate........................................ 5.25% 5.25% 5.25%
Years to reach ultimate......................... 2 2 2
</TABLE>
A one-percentage-point increase in the assumed health care cost trend rate
would have increased postretirement benefit expense by approximately $55,000,
$51,000 and $49,000 and would have increased the accumulated postretirement
benefit obligation by approximately $513,000, $457,000 and $411,000 for the
years ended December 27, 1998, December 28, 1997 and December 29, 1996,
respectively. A one-percentage-point decrease in the assumed health care cost
trend rate would have decreased the postretirement benefit expense by
approximately $50,000, $46,000 and $45,000 and would have decreased the
accumulated postretirement benefit obligation by approximately $469,000,
$419,000 and $378,000 for the years ended December 27, 1998, December 28, 1997
and December 29, 1996, respectively.
12. INSURANCE RESERVES
At December 27, 1998, December 28, 1997 and December 29, 1996, insurance
reserves of approximately $26,479,000, $26,974,000 and $16,940,000,
respectively, had been recorded. Insurance reserves at December 27, 1998 and
December 28, 1997 included RIC's reserve for the Company's insurance liabilities
of approximately $11,432,000 and $13,793,000, respectively. Reserves at December
27, 1998, December 28, 1997 and December 29, 1996 also included accruals related
to postemployment benefits and postretirement benefits other than pensions.
While management believes these reserves are adequate, it is reasonably possible
that the ultimate liabilities will exceed such estimates.
Classification of the reserves was as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28, DECEMBER 29,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current........................................... $ 9,116 $ 7,248 $ 3,973
Long-term......................................... 17,363 19,726 12,967
------------ ------------ ------------
Total............................................. $ 26,479 $ 26,974 $ 16,940
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-24
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INSURANCE RESERVES (CONTINUED)
Following is a summary of the activity in the insurance reserves for the
years ended December 27, 1998, December 28, 1997 and December 29, 1996 (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28, DECEMBER 29,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Beginning balance........................................... $ 26,974 $ 16,940 $ 20,847
Provision................................................... 10,388 9,605 8,363
Payments.................................................... (10,883) (12,802) (12,270)
Acquisition of RIC.......................................... -- 13,231 --
------------ ------------ ------------
Ending balance.............................................. $ 26,479 $ 26,974 $ 16,940
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The provision for insurance reserves each year is actuarially determined and
reflects amounts for the current year as well as revisions in estimates to open
reserves for prior years. Payments include amounts paid on open claims for all
years.
13. STOCKHOLDERS' EQUITY (DEFICIT)
As of December 29, 1996, three classes of common stock were authorized:
Class A (voting), Class B (limited voting) and Class C (non-voting). In
connection with the Recapitalization in November 1997, FICC amended its articles
of organization to give effect to a 923.6442-to-1 split of Class A Common Stock
and Class B Common Stock and authorize a new class of common stock. The
accompanying consolidated financial statements have been restated to reflect the
stock split.
A Stock Rights Plan ("SRP") was adopted by FICC in 1991. Under the SRP,
certain eligible individuals were granted rights to purchase shares of voting
common stock of FICC for $.01 per share, subject to certain vesting,
anti-dilution and exercise requirements.
On March 25, 1996, FICC established the Management Stock Plan ("MSP"). The
MSP provided for persons with rights granted under the SRP to waive their rights
under such plan and receive shares of FICC's Class A Common Stock. Accordingly,
in April 1996, all of the participants in the SRP made this election and the SRP
rights then outstanding were cancelled and 122,888 shares of Class A Common
Stock were issued, of which 61,650 were vested as of December 29, 1996. In April
1996, the fair value of the 122,888 shares of Class A Common Stock issued was
approximately $30,700, or $0.25 per share. The estimated fair value of the
20,334 additional shares vested in 1996 of $5,000 was recorded as compensation
expense in the year ended December 29, 1996.
In connection with the Recapitalization, 766,782 shares of Class A Common
Stock were returned to FICC from certain shareholders for no consideration. The
shares were returned in accordance with an agreement with the Company's existing
lenders as a condition to the Recapitalization. Of such shares, 99,951 shares
were issued to FICC's Chief Executive Officer and vested immediately, 371,285
shares were reserved for issuance under a restricted stock plan (the "Restricted
Stock Plan") which was adopted by FICC in connection with the Recapitalization,
as described below, and 295,546 shares were issued to certain employees under a
limited stock compensation program in which a one-time award of common stock was
made to certain employees of the Company. The 295,546 shares issued under the
limited stock compensation program vested immediately. Additionally, 27,113
shares were issued under the MSP and immediately vested and the remaining 61,238
nonvested shares under the MSP vested. The estimated fair value of $8,407,000 of
the (i) 27,113 shares issued and vested under the MSP, (ii) 61,238 shares
previously
F-25
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
issued under the MSP which vested in connection with the Recapitalization, (iii)
99,951 vested shares issued to FICC's Chief Executive Officer in connection with
the Recapitalization and (iv) 295,546 vested shares issued to certain employees
was recorded as compensation expense by the Company upon consummation of the
Recapitalization in 1997.
The Restricted Stock Plan, pursuant to which 371,285 shares are authorized
for issuance, provides for the award of common stock, the vesting of which is
subject to conditions and limitations established by the Board of Directors.
Such conditions may include continued employment with the Company or the
achievement of performance measures. Upon the award of common stock, the
participant has the rights of a stockholder, including but not limited to the
right to vote such stock and the right to receive any dividends paid on such
stock. The Board of Directors, in its sole discretion, may designate employees
and persons providing material services to the Company as eligible for
participation in the Restricted Stock Plan. In 1997, 312,575 shares of common
stock were issued to directors and employees under the Restricted Stock Plan. In
1998, the Company issued an additional 20,310 shares under the Restricted Stock
Plan. The shares vest at 12.50% per year with accelerated vesting of an
additional 12.50% per year if certain performance criteria are met. The Company
is recording the fair value of the shares issued at the issuance dates as
compensation expense over the estimated vesting periods. During the years ended
December 27, 1998 and December 28, 1997, the Company recorded stock compensation
expense of approximately $722,000 and $8,407,000, respectively.
In connection with the Recapitalization, the Board of Directors adopted a
stock option plan (the "Stock Option Plan"), pursuant to which 395,000 shares of
common stock are authorized for issuance. The Stock Option Plan provides for the
issuance of nonqualified stock options and incentive stock options (which are
intended to satisfy the requirements of Section 422 of the Internal Revenue
Code) and stock appreciation rights. As of December 27, 1998, no stock
appreciation rights had been issued. The Board of Directors will determine the
employees who will receive awards under the Stock Option Plan and the terms of
such awards. The exercise price of a stock option or stock appreciation right
shall not be less than the fair market value of one share of common stock on the
date the stock option or stock appreciation right is granted. The options expire
10 years from the date of grant and vest over five years.
A summary of the status of the Company's Stock Option Plan as of December
27, 1998 and December 28, 1997 and changes during the years ended on those dates
is presented below:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
----------- -------------
<S> <C> <C>
Options outstanding at December 29, 1996........................... -- $ --
Granted.......................................................... 162,150 17.38
Forfeited........................................................ (1,400) 17.38
-----------
Options outstanding at December 28, 1997........................... 160,750 17.38
Granted.......................................................... 81,025 7.99
Forfeited........................................................ (9,260) 17.38
Cancelled........................................................ (69,775) 17.39
-----------
Options outstanding at December 27, 1998........................... 162,740 $ 12.42
-----------
-----------
</TABLE>
At December 27, 1998, options were exercisable on 4,550 shares of stock with
an exercise price of $17.38. As of December 28, 1997, none of the outstanding
options were exercisable.
F-26
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Fair value was estimated on the grant date using the Black-Scholes option
pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997
---------------- ---------
<S> <C> <C>
Risk free interest rate......................................... 4.88%-5.75% 5.96%
Expected life................................................... 7 years 7 years
Expected volatility............................................. 86.50% 50.00%
Dividend yield.................................................. 0.00% 0.00%
Fair value...................................................... $5.03-$19.68 $10.39
</TABLE>
On November 5, 1998, the Company cancelled 69,775 stock options outstanding
(original options granted on November 14, 1997, May 13, 1998 and July 29, 1998
at exercise prices of $17.38, $24.75 and $12.00, respectively) and granted
69,775 new options to the same individuals with an exercise price of $6.38,
which was the market value as of the close of the November 5, 1998 business day.
The employees whom this affected were middle management members of the Company.
No executives or directors of the Company were included. Additionally, the
remaining 69,775 options outstanding related to these grant dates will be
cancelled and new options issued at the then fair market value if and when
certain performance criteria are met.
The following table summarizes information related to outstanding options as
of December 27, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- - ---------------------------------------------------------------------------
<S> <C> <C> <C>
WEIGHTED-AVERAGE
NUMBER REMAINING
RANGE OF OUTSTANDING AS OF CONTRACTUAL LIFE WEIGHTED AVERAGE
EXERCISE PRICES DECEMBER 27, 1998 (YEARS) EXERCISE PRICE
- - ------------------ ----------------- ----------------- -----------------
$4.95--$7.43 69,775 9.9 $ 6.38
9.90--12.38 3,475 9.6 12.00
17.33--19.80 86,840 8.9 17.38
22.28--24.75 2,650 9.4 24.75
------- -----
162,740 9.3 12.42
------- -----
------- -----
</TABLE>
The Company applies APB No. 25 and related interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized for its Stock
Option Plan. Had compensation cost for the Company's stock plans been determined
consistent with SFAS No. 123, the Company's net loss and basic net loss per
share for the years ended December 27, 1998 and December 28, 1997 would have
been the following pro forma amounts:
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1998 1997
------------- -------------
<S> <C> <C>
Loss before cumulative effect of change in accounting principle.................... $ (5,023,000) $ (5,149,000)
Cumulative effect of change in accounting principle................................ -- 2,236,000
------------- -------------
Net loss........................................................................... $ (5,023,000) $ (2,913,000)
------------- -------------
------------- -------------
Basic net loss per share:
Loss before cumulative effect of change in accounting principle.................... $ (0.67) $ (1.66)
Cumulative effect of change in accounting principle................................ -- 0.72
------------- -------------
Net loss per share................................................................. $ (0.67) $ (0.94)
------------- -------------
------------- -------------
</TABLE>
F-27
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Pursuant to a stockholder rights plan (the "Stockholder Rights Plan") FICC
adopted in connection with the Recapitalization, the Board of Directors declared
a dividend distribution of one purchase right (a "Right") for each outstanding
share of common stock. The Stockholder Rights Plan provides, in substance, that
should any person or group (other than certain management and affiliates)
acquire 15% or more of FICC's common stock, each Right, other than Rights held
by the acquiring person or group, would entitle its holder to purchase a
specified number of shares of common stock for 50% of their then current market
value. Until a 15% acquisition has occurred, the Rights may be redeemed by FICC
at any time prior to the termination of the Stockholder Rights Plan.
In 1991, one of the Company's lenders was issued warrants for 13,836 shares
of FICC's Class A Common Stock at an exercise price of $32.16 per share. These
warrants expired on September 2, 1998. None of these warrants had been
exercised. In 1991, certain officers of FICC purchased 97,906 shares of Class A
Common Stock and warrants convertible into an additional 71,527 shares of voting
common stock for an aggregate purchase price of $55,550. These warrants were
exercised on April 19, 1996 at an aggregate exercise price of $22,000.
14. RELATED PARTY TRANSACTIONS
On October 12, 1998, the Company entered into a franchise agreement with The
Ice Cream Corporation ("TICC"), as franchisee, which conditionally granted TICC
exclusive rights to purchase and develop Friendly's full service restaurants in
the Lancaster and Chester counties of Pennsylvania (the "TICC Agreement"). The
owners of TICC are family members of the Chairman of the Board and Chief
Executive Officer of the Company. Pursuant to the TICC Agreement, TICC purchased
at fair market value certain assets and rights in two existing Friendly's
restaurants, has committed to open an additional 10 restaurants over the next
six years and has an option to purchase an additional three restaurants.
Proceeds from the sale were approximately $1,547,700, of which $57,000 was for
initial franchise fees for the two initial restaurants, $125,000 for franchise
fees for certain of the additional restaurants described above and $25,000 for
the option to purchase two additional existing restaurants. The $57,000 was
recorded as revenue in the year ended December 27, 1998 and the option fees will
be recorded as income as additional restaurants are purchased. The Company
recognized income of approximately $1.0 million related to the sale of the
equipment and operating rights for the two existing franchised locations in the
year ended December 27, 1998. The franchisee is required by the terms of the
TICC Agreement to purchase from the Company all of the frozen dessert products
it sells in the franchised restaurants. The Company subleases the real estate to
TICC.
FICC's Chairman is an officer of the general partner of a subsidiary of TRC.
The Company entered into subleases for certain land, buildings and equipment
from the subsidiary of TRC. For the years ended December 27, 1998, December 28,
1997 and December 29, 1996, rent expense related to the subleases was
approximately $309,000, $279,000 and $278,000, respectively.
On March 19, 1997, FICC acquired all of the outstanding shares of common
stock of Restaurant Insurance Corporation ("RIC") from TRC (see Note 4). Prior
to the acquisition, RIC assumed, from a third party insurance company,
reinsurance premiums related to insurance liabilities of the Company of
approximately $4,198,000 for the year ended December 29, 1996. In addition, RIC
had reserves of approximately $13,038,000 related to Company claims at December
29, 1996.
TRC Realty Co. (a subsidiary of TRC) entered into a ten-year operating lease
for an aircraft, for use by both the Company and Perkins Family Restaurants,
L.P. ("Perkins"), a subsidiary of TRC. The
F-28
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RELATED PARTY TRANSACTIONS (CONTINUED)
Company shares equally with Perkins in reimbursing TRC Realty Co. for leasing,
tax and insurance expenses. In addition, the Company also incurs actual usage
costs. Total expense for the years ended December 27, 1998, December 28, 1997
and December 29, 1996 was approximately $691,000, $610,000 and $590,000,
respectively.
The Company purchased certain food products used in the normal course of
business from a division of Perkins. For the years ended December 27, 1998,
December 28, 1997 and December 29, 1996, purchases were approximately $945,000,
$975,000 and $1,425,000, respectively.
TRC provided FICC with certain management services for which TRC was
reimbursed approximately $110,000, $824,000 and $800,000 for the years ended
December 27, 1998, December 28, 1997 and December 29, 1996, respectively. The
1997 charges were reduced by a $350,000 refund from TRC for prior years.
Expenses were charged to FICC on a specific identification basis. FICC believes
the allocation method used was reasonable and approximated the amount that would
have been incurred on a stand-alone basis had FICC been operated as an
unaffiliated entity.
In March 1996, the Company's pension plan acquired three restaurant
properties from the Company. The land, buildings and improvements were purchased
by the plan at their appraised value of $2,043,000 and are located in
Connecticut, Vermont and Virginia. Simultaneously with the purchase, the pension
plan leased back the three properties to the Company at an aggregate annual base
rent of $214,000 for the first five years and $236,000 for the following five
years. With respect to these transactions the pension plan was represented by
independent legal and financial advisors. The transaction was recorded by the
Company as a direct financing lease since the Company has the right to
repurchase the properties at fair market value.
15. COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal proceedings arising in the ordinary
course of business which management believes, after consultation with legal
counsel, will not have a material adverse effect on the Company's financial
position or future operating results.
The Company has commitments to purchase approximately $86,700,000 of raw
materials, food products and supplies used in the normal course of business that
cover periods of one to twenty-four months. Most of these commitments are
noncancelable.
On July 14, 1997, the Company entered into an agreement which conditionally
granted a franchisee exclusive rights to operate, manage and develop Friendly's
full-service restaurants in the franchising region of Maryland, Delaware, the
District of Columbia and northern Virginia (the "Agreement"). Pursuant to the
Agreement, the franchisee purchased certain assets and rights in 34 existing
Friendly's restaurants in this franchising region, committed to open an
additional 74 restaurants over the next six years and, subject to the
fulfillment of certain conditions, further agreed to open 26 additional
restaurants, for a total of 100 new restaurants in this franchising region over
the next ten years. Gross proceeds from the sale were approximately $8,488,000
of which $860,000 was for initial franchise fees for the 34 initial restaurants,
$500,000 was for development rights and $930,000 was for franchise fees for
certain of the additional restaurants described above. The $860,000 was recorded
as revenue in the year ended December 28, 1997, and the development rights and
franchise fees received will be amortized into income over the initial ten-year
term of the Agreement and as additional restaurants are opened, respectively.
The Company recognized income of $2,283,000 related to the sale of the equipment
and operating rights for the 34 existing franchised locations in the year ended
December 28, 1997. The proceeds were allocated between
F-29
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
the assets sold and the development rights by the Company and the franchisee
based on the estimated fair market values. The franchisee is required by the
terms of the Agreement to purchase from the Company all of the frozen dessert
products it sells in the franchised restaurants. As of December 27, 1998, the
franchisee had opened four new units.
16. RELOCATION OF MANUFACTURING AND DISTRIBUTION FACILITY
On December 1, 1998, the Company announced a plan to relocate its
manufacturing and distribution operations from Troy, Ohio to Wilbraham,
Massachusetts and York, Pennsylvania. As of December 27, 1998, the Company
accrued certain costs and expenses associated with the closedown of its Troy
facility. Those costs are as follows:
<TABLE>
<S> <C>
Severance pay..................................................... $ 536,000
Utility costs..................................................... 140,000
Real estate taxes................................................. 87,000
Outside storage................................................... 80,000
Outplacement services............................................. 50,000
Additional exit costs (plant maintenance, security and travel).... 52,000
---------
Total........................................................... $ 945,000
---------
---------
</TABLE>
The severance pay benefits were communicated to the affected employees on
December 17, 1998. As a result of this plan, the Company anticipates that
approximately 197 individuals will have their employment terminated. The groups
of employees to be affected are comprised of:
<TABLE>
<S> <C>
Manufacturing......................... 103
Distribution.......................... 90
Office support........................ 4
---
197
---
---
</TABLE>
Management has not yet determined which, if any, office support employees
will be relocated to York, Pennsylvania.
17. SEGMENT REPORTING
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," during 1998. SFAS No. 131 established
standards for reporting information about operating segments in annual and
interim financial reports. It also established standards for related disclosures
about products and services and geographic areas. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision-maker, or
decision-making group, in deciding how to allocate resources and in assessing
performance. The Company's chief operating decision-maker is the Chairman and
Chief Executive Officer of the Company. The Company's operating segments include
restaurant, foodservice, franchise and international operations. The revenues
from these segments include both sales to unaffiliated customers and
intersegment sales, which generally are accounted for on a basis consistent with
sales to unaffiliated customers. Intersegment sales and other intersegment
transactions have been eliminated in the accompanying consolidated financial
statements.
F-30
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SEGMENT REPORTING (CONTINUED)
Foodservice operations manufactures frozen dessert products and distributes
such manufactured products and purchased finished goods to the Company's
restaurants and franchised operations. Additionally, it sells frozen dessert
products to distributors and retail and institutional locations. The Company
does not allocate general and administrative expenses associated with its
headquarters operations to any business segment. These costs include general and
administrative expenses of the following functions: legal, accounting, personnel
not directly related to a segment, information systems and other headquarters
activities.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies except that the
financial results for the foodservice operating segment, prior to intersegment
eliminations, have been prepared using a management approach, which is
consistent with the basis and manner in which the Company's management
internally reviews financial information for the purpose of assisting in making
internal operating decisions. The Company evaluates performance based on
stand-alone operating segment loss before income taxes and generally accounts
for intersegment sales and transfers as if the sales or transfers were to third
parties, that is, at current market prices.
EBITDA represents consolidated net loss before (i) cumulative effect of
change in accounting principle, net of income tax expense, (ii) benefit from
(provision for) income taxes, (iii) equity in net loss and other write-downs
associated with joint venture, (iv) interest expense, net, (v) depreciation and
amortization and (vi) non-cash write-downs and all other non-cash items plus
cash distributions from unconsolidated subsidiaries.
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28, DECEMBER 29,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
(IN THOUSANDS)
Revenues:
Restaurant................................................ $ 595,308 $ 593,671 $ 596,675
Foodservice............................................... 256,829 245,346 229,495
Franchise................................................. 3,769 2,375 --
International............................................. 301 1,247 668
------------ ------------ ------------
Total................................................... $ 856,207 $ 842,639 $ 826,838
------------ ------------ ------------
------------ ------------ ------------
Intersegment revenues:
Restaurant................................................ $ -- $ -- $ --
Foodservice............................................... (178,111) (175,092) (176,031)
Franchise................................................. -- -- --
International............................................. -- -- --
------------ ------------ ------------
Total................................................... $ (178,111) $ (175,092) $ (176,031)
------------ ------------ ------------
------------ ------------ ------------
External revenues:
Restaurant................................................ $ 595,308 $ 593,671 $ 596,675
Foodservice............................................... 78,718 70,254 53,464
Franchise................................................. 3,769 2,375 --
International............................................. 301 1,247 668
------------ ------------ ------------
Total................................................... $ 678,096 $ 667,547 $ 650,807
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-31
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SEGMENT REPORTING (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28, DECEMBER 29,
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
EBITDA:
Restaurant................................................ $ 70,771 $ 73,952 $ 74,727
Foodservice............................................... 17,659 20,035 13,747
Franchise................................................. 1,423 1,240 (340)
International............................................. (1,191) (1,127) (1,825)
Other..................................................... 184 755 --
Corporate................................................. (25,303) (22,492) (22,602)
------------ ------------ ------------
Total................................................... $ 63,543 $ 72,363 $ 63,707
------------ ------------ ------------
------------ ------------ ------------
Interest expense, net....................................... $ 31,838 $ 39,303 $ 44,141
------------ ------------ ------------
------------ ------------ ------------
Equity in net loss and other write-downs associated with
joint venture............................................. $ 4,828 $ 1,530 $ --
------------ ------------ ------------
------------ ------------ ------------
Income (loss) before income taxes and cumulative effect of
change in accounting principle:
Restaurant................................................ $ 43,218 $ 48,012 $ 46,035
Foodservice............................................... 14,663 17,186 11,241
Franchise................................................. 938 179 (340)
International............................................. (6,295) (2,707) (1,845)
Other..................................................... 184 755 --
Corporate................................................. (61,134) (73,163) (68,731)
------------ ------------ ------------
Total................................................... $ (8,426) $ (9,738) $ (13,640)
------------ ------------ ------------
------------ ------------ ------------
Depreciation and amortization:
Restaurant................................................ $ 26,641 $ 25,489 $ 28,465
Foodservice............................................... 2,996 2,849 2,506
Franchise................................................. 485 1,061 --
International............................................. 56 50 20
Corporate................................................. 3,271 2,243 1,988
------------ ------------ ------------
Total................................................... $ 33,449 $ 31,692 $ 32,979
------------ ------------ ------------
------------ ------------ ------------
Identifiable assets:
Restaurant................................................ $ 262,353 $ 244,457 $ 254,000
Foodservice............................................... 45,111 49,703 48,995
Franchise................................................. 11,713 11,404 200
International............................................. 1,485 5,887 5,588
Other..................................................... 6,690 6,786 166
Corporate................................................. 47,196 53,634 51,177
------------ ------------ ------------
Total................................................... $ 374,548 $ 371,871 $ 360,126
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-32
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SEGMENT REPORTING (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28, DECEMBER 29,
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Capital expenditures, including capitalized leases:
Restaurant................................................ $ 43,697 $ 28,966 $ 22,741
Foodservice............................................... 5,277 3,655 6,278
Corporate................................................. 2,806 1,244 1,149
------------ ------------ ------------
Total................................................... $ 51,780 $ 33,865 $ 30,168
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
18. CLOSING OF INTERNATIONAL OPERATIONS
Effective October 15, 1998, Friendly's International, Inc. ("FII"), a
subsidiary of the Company, entered into an agreement that provided for the sale
of the Company's 50% equity interest in its China joint venture to the joint
venture partner and the settlement of FICC's advances to the joint venture for
an aggregate of approximately $2.3 million in notes and $335,000 of equipment.
On February 25, 1999, FII received an initial payment of approximately $1.1
million and arranged for the shipment of the equipment to the United States. The
Company believes that collection of the remaining $1.2 million due under the
terms of the settlement agreement is not probable due to the financial condition
of the joint venture partner and restrictions on the transfer of funds from
China. Accordingly, the Company recorded a write-down of approximately $3.5
million as of December 27, 1998 to eliminate the Company's remaining investment
in and advances to the joint venture. If any additional proceeds are received by
the Company, such amount will be recorded as income by the Company at such time.
Additionally, in 1998 the Company determined that it would discontinue its
direct investment in the United Kingdom. Accordingly, the Company has recognized
an impairment loss of $468,000 to reduce the related assets to their estimated
net realizable value. Following is a summary of the write-down recorded for the
United Kingdom operations during the year ended December 27, 1998:
<TABLE>
<S> <C>
Inventory......................................... $ 230,000
Equipment......................................... 220,000
Accounts receivable............................... 18,000
---------
$ 468,000
---------
---------
</TABLE>
In addition, $150,000 of costs and expenses associated with the
discontinuation of the United Kingdom operations were accrued as of December 27,
1998.
19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
FICC's obligation related to the $200 million Senior Notes are guaranteed
fully and unconditionally by one of FICC's wholly owned subsidiaries. There are
no restrictions on FICC's ability to obtain dividends or other distributions of
funds from this subsidiary, except those imposed by applicable law. The
following supplemental financial information sets forth, on a condensed
consolidating basis, balance sheets, statements of operations and statements of
cash flows for Friendly Ice Cream Corporation (the "Parent Company"), Friendly's
Restaurants Franchise, Inc. (the "Guarantor Subsidiary") and Friendly's
International, Inc., Friendly Holding (UK) Limited, Friendly Ice Cream (UK)
Limited and Restaurant Insurance Corporation (collectively, the "Non-guarantor
Subsidiaries"). Separate complete financial statements and
F-33
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
other disclosures of the Guarantor Subsidiary as of December 27, 1998 and
December 28, 1997 and for the years ended December 27, 1998 and December 28,
1997 are not presented because management has determined that such information
is not material to investors.
Investments in subsidiaries are accounted for by the Parent Company on the
equity method for purposes of the supplemental 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 in subsidiaries and intercompany balances and
transactions.
F-34
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 27, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 9,180 $ 53 $ 1,858 $ -- $ 11,091
Restricted cash............................... -- -- 2,211 -- 2,211
Accounts receivable........................... 5,370 175 21 -- 5,566
Inventories................................... 15,445 -- 115 -- 15,560
Deferred income taxes......................... 6,783 -- 278 -- 7,061
Prepaid expenses and other current assets..... 8,657 2,434 7,461 (11,974) 6,578
---------- ----------- ----------- ------------ ------------
Total current assets............................ 45,435 2,662 11,944 (11,974) 48,067
Deferred income taxes........................... -- 503 1,024 (1,527) --
Property and equipment, net..................... 300,159 -- -- -- 300,159
Intangibles and deferred costs, net............. 25,178 -- -- -- 25,178
Investments in subsidiaries..................... 965 -- -- (965) --
Other assets.................................... 222 -- 5,736 (4,814) 1,144
---------- ----------- ----------- ------------ ------------
Total assets.................................... $ 371,959 $ 3,165 $ 18,704 $ (19,280) $ 374,548
---------- ----------- ----------- ------------ ------------
---------- ----------- ----------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long- term
obligations................................. $ 10,200 $ -- $ -- $ (4,500) $ 5,700
Accounts payable.............................. 26,460 -- -- -- 26,460
Accrued expenses.............................. 42,035 574 11,429 (7,474) 46,564
---------- ----------- ----------- ------------ ------------
Total current liabilities....................... 78,695 574 11,429 (11,974) 78,724
Deferred income taxes........................... 38,715 -- -- (1,527) 37,188
Long-term obligations, less current
maturities.................................... 325,620 -- -- (4,814) 320,806
Other liabilities............................... 19,530 1,469 7,432 -- 28,431
Stockholders' equity (deficit).................. (90,601) 1,122 (157) (965) (90,601)
---------- ----------- ----------- ------------ ------------
Total liabilities and stockholders' equity
(deficit)..................................... $ 371,959 $ 3,165 $ 18,704 $ (19,280) $ 374,548
---------- ----------- ----------- ------------ ------------
---------- ----------- ----------- ------------ ------------
</TABLE>
F-35
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 27, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................ $ 676,093 $ 1,703 $ 300 $ -- $ 678,096
Costs and expenses:
Cost of sales................................. 204,364 -- 520 -- 204,884
Labor and benefits............................ 211,581 -- -- -- 211,581
Operating expenses and write-downs of property
and equipment............................... 154,715 -- 239 -- 154,954
General and administrative expenses........... 42,637 1,233 456 -- 44,326
Stock compensation expense.................... 722 -- -- -- 722
Relocation of manufacturing and distribution
facility.................................... 945 -- -- -- 945
Depreciation and amortization................. 33,393 -- 56 -- 33,449
Gain on sale of restaurant operations........... (1,005) -- -- -- (1,005)
Interest expense (income)....................... 32,746 -- (908) -- 31,838
Equity in net loss and other write-downs
associated with joint venture................. 1,168 -- 3,660 -- 4,828
---------- ----------- ----------- ------ ------------
(Loss) income before benefit from (provision
for) income taxes and equity in net loss of
consolidated subsidiaries..................... (5,173) 470 (3,723) -- (8,426)
Benefit from (provision for) income taxes....... 2,616 (193) 1,032 -- 3,455
---------- ----------- ----------- ------ ------------
(Loss) income before equity in net loss of
consolidated subsidiaries..................... (2,557) 277 (2,691) -- (4,971)
Equity in net loss of consolidated
subsidiaries.................................. (2,414) -- -- 2,414 --
---------- ----------- ----------- ------ ------------
Net (loss) income............................... $ (4,971) $ 277 $ (2,691) $ 2,414 $ (4,971)
---------- ----------- ----------- ------ ------------
---------- ----------- ----------- ------ ------------
</TABLE>
F-36
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 27, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities..................................... $ 33,456 $ (151) $ (508) $ 68 $ 32,865
----------- ----- ----------- --- ------------
Cash flows from investing activities:
Purchases of property and equipment............ (51,172) -- -- -- (51,172)
Proceeds from sales of property and
equipment.................................... 2,852 -- -- -- 2,852
----------- ----- ----------- --- ------------
Net cash used in investing activities............ (48,320) -- -- -- (48,320)
----------- ----- ----------- --- ------------
Cash flows from financing activities:
Dividends received (paid)...................... 800 -- (800) -- --
Proceeds from borrowings....................... 69,258 -- -- -- 69,258
(Repayments of obligations) reimbursements from
parent....................................... (58,253) -- 400 -- (57,853)
----------- ----- ----------- --- ------------
Net cash provided by (used in) financing
activities..................................... 11,805 -- (400) -- 11,405
----------- ----- ----------- --- ------------
Effect of exchange rate changes on cash.......... -- -- 9 -- 9
----------- ----- ----------- --- ------------
Net (decrease) increase in cash and cash
equivalents.................................... (3,059) (151) (899) 68 (4,041)
Cash and cash equivalents, beginning of year..... 12,239 204 2,757 (68) 15,132
----------- ----- ----------- --- ------------
Cash and cash equivalents, end of year........... $ 9,180 $ 53 $ 1,858 $ -- $ 11,091
----------- ----- ----------- --- ------------
----------- ----- ----------- --- ------------
Supplemental disclosures:
Interest paid (received)....................... $ 31,752 $ -- $ (968) $ -- $ 30,784
Income taxes (received) paid................... (811) 810 533 -- 532
Capital lease obligations incurred............. 608 -- -- -- 608
Capital lease obligations terminated........... 384 -- -- -- 384
</TABLE>
F-37
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 28, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 12,239 $ 204 $ 2,757 $ (68) $ 15,132
Restricted cash............................... -- -- 1,333 -- 1,333
Accounts receivable........................... 8,054 130 738 -- 8,922
Inventories................................... 15,165 -- 506 -- 15,671
Deferred income taxes......................... 8,831 -- -- -- 8,831
Prepaid expenses and other current assets..... 7,096 2,326 7,428 (10,450) 6,400
---------- ----------- ----------- ------------ ------------
Total current assets............................ 51,385 2,660 12,762 (10,518) 56,289
Deferred income taxes........................... -- 479 352 (831) --
Investment in joint venture..................... -- -- 2,970 -- 2,970
Property and equipment, net..................... 283,749 -- 195 -- 283,944
Intangibles and deferred costs, net............. 25,994 -- -- -- 25,994
Investments in subsidiaries..................... 3,769 -- -- (3,769) --
Other assets.................................... 1,754 -- 8,528 (7,608) 2,674
---------- ----------- ----------- ------------ ------------
Total assets.................................... $ 366,651 $ 3,139 $ 24,807 $ (22,726) $ 371,871
---------- ----------- ----------- ------------ ------------
---------- ----------- ----------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term obligations..... $ 8,852 $ -- $ -- $ (4,400) $ 4,452
Accounts payable.............................. 23,951 -- -- -- 23,951
Accrued expenses.............................. 36,820 885 12,090 (6,118) 43,677
---------- ----------- ----------- ------------ ------------
Total current liabilities....................... 69,623 885 12,090 (10,518) 72,080
Deferred income taxes........................... 43,224 -- -- (831) 42,393
Long-term obligations, less current
maturities.................................... 318,033 -- -- (7,608) 310,425
Other liabilities............................... 22,132 1,409 9,793 -- 33,334
Stockholders' equity (deficit).................. (86,361) 845 2,924 (3,769) (86,361)
---------- ----------- ----------- ------------ ------------
Total liabilities and stockholders' equity
(deficit)..................................... $ 366,651 $ 3,139 $ 24,807 $ (22,726) $ 371,871
---------- ----------- ----------- ------------ ------------
---------- ----------- ----------- ------------ ------------
</TABLE>
F-38
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 28, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................ $ 665,380 $ 1,459 $ 708 $ -- $ 667,547
Costs and expenses:
Cost of sales................................. 197,057 -- 570 -- 197,627
Labor and benefits............................ 208,364 -- -- -- 208,364
Operating expenses and write-downs of property
and equipment............................... 150,348 -- (612) -- 149,736
General and administrative expenses........... 40,698 607 886 -- 42,191
Stock compensation expense.................... 8,407 -- -- -- 8,407
Expenses associated with Recapitalization..... 718 -- -- -- 718
Depreciation and amortization................. 31,642 -- 50 -- 31,692
Gain on sale of restaurant operations........... (2,283) -- -- -- (2,283)
Interest expense (income)....................... 39,489 -- (186) -- 39,303
Equity in net loss of joint venture............. -- -- 1,530 -- 1,530
---------- ----------- ----------- ------ ------------
(Loss) income before benefit from (provision
for) income taxes, cumulative effect of change
in accounting principle and equity in net loss
of consolidated subsidiaries.................. (9,060) 852 (1,530) -- (9,738)
Benefit from (provision for) income taxes....... 4,562 (349) (220) -- 3,993
---------- ----------- ----------- ------ ------------
(Loss) income before cumulative effect of change
in accounting principle and equity in net loss
of consolidated subsidiaries.................. (4,498) 503 (1,750) -- (5,745)
Cumulative effect of change in accounting
principle..................................... 2,236 -- -- -- 2,236
---------- ----------- ----------- ------ ------------
(Loss) income before equity in net loss of
consolidated subsidiaries..................... (2,262) 503 (1,750) -- (3,509)
Equity in net loss of consolidated
subsidiaries.................................. (1,247) -- -- 1,247 --
---------- ----------- ----------- ------ ------------
Net (loss) income............................... $ (3,509) $ 503 $ (1,750) $ 1,247 $ (3,509)
---------- ----------- ----------- ------ ------------
---------- ----------- ----------- ------ ------------
</TABLE>
F-39
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 28, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities.................................... $ 15,007 $ (206) $ 7,385 $ (68) $ 22,118
---------- ----- ----------- ----- ------------
Cash flows from investing activities:
Purchases of property and equipment........... (31,572) -- (66) -- (31,638)
Proceeds from sales of property and
equipment................................... 5,043 -- -- -- 5,043
Purchases of investment securities............ -- -- (8,194) -- (8,194)
Proceeds from sales and maturities of
investment securities....................... -- -- 12,787 -- 12,787
Cash (paid) received in acquisition of
Restaurant Insurance Corporation............ (2,300) -- 2,265 -- (35)
Advances to joint venture..................... (1,400) -- -- -- (1,400)
Investments in consolidated subsidiaries...... (142) -- -- 142 --
---------- ----- ----------- ----- ------------
Net cash (used in) provided by investing
activities.................................... (30,371) -- 6,792 142 (23,437)
---------- ----- ----------- ----- ------------
Cash flows from financing activities:
Contribution of capital....................... -- 142 -- (142) --
Proceeds from issuance of common stock........ 81,920 -- -- -- 81,920
Proceeds from issuance of senior notes........ 200,000 -- -- -- 200,000
Proceeds from borrowings (advances to
parent)..................................... 179,957 -- (12,409) -- 167,548
(Repayments of obligations) reimbursements
from parent................................. (452,028) -- 400 -- (451,628)
---------- ----- ----------- ----- ------------
Net cash provided by (used in) financing
activities.................................... 9,849 142 (12,009) (142) (2,160)
---------- ----- ----------- ----- ------------
Effect of exchange rate changes on cash......... -- -- (15) -- (15)
---------- ----- ----------- ----- ------------
Net (decrease) increase in cash and cash
equivalents................................... (5,515) (64) 2,153 (68) (3,494)
Cash and cash equivalents, beginning of year.... 17,754 268 604 -- 18,626
---------- ----- ----------- ----- ------------
Cash and cash equivalents, end of year.......... $ 12,239 $ 204 $ 2,757 $ (68) $ 15,132
---------- ----- ----------- ----- ------------
---------- ----- ----------- ----- ------------
Supplemental disclosures:
Interest paid................................. $ 46,040 $ -- $ -- $ -- $ 46,040
Income taxes paid............................. 147 -- 21 168
Capital lease obligations incurred............ 2,227 -- -- -- 2,227
Capital lease obligations terminated.......... 1,587 -- -- -- 1,587
</TABLE>
F-40
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
----------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Restated Articles of Organization of Friendly Ice Cream Corporation (the "Company"). (Incorporated by
reference from 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.
4.1 Credit Agreement among the Company, Societe Generale, New York Branch and certain other banks and
financial institutions ("Credit Agreement"). (Incorporated by reference to Exhibit 10.1 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1997, File No. 0-3930.).
4.2 First Amendment to Credit Agreement
4.3 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 10.2 to the Registrants's Annual
Report on Form 10-K for the fiscal year ended December 28, 1997, File No. 0-3930.).
4.4 Rights Agreement between the Company and The Bank of New York, a Rights Agent. (Incorporated by reference
from Exhibit 4.3 to the Company's Registration Statement on Form S-1, Reg. No. 333-34633).
10.1 The Company's Stock Option Plan. (Incorporated by reference from Exhibit 10.1 to the Company's
Registration Statement on Form S-1, Reg. No. 333-34633).*
10.2 The Company's Restricted Stock Plan. (Incorporated by reference from Exhibit 10.2 to the Company's
Registration Statement on Form S-1, Reg. No. 333-34633).*
10.3 Agreement relating to the Company's Limited Stock Compensation Program.* (Incorporated by reference to
Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1997,
File No. 0-3930.).
10.4 Development Agreement between Friendly Ice Cream Corporation and FriendCo Restaurants, Inc. (Incorporated
by reference from Exhibit 10.4 to the Company's Registration Statement on Form S-1, Reg. No. 333-34633).
10.5 Franchise Agreement between Friendly's Restaurants Franchise, Inc. and FriendCo Restaurants, Inc.
(Incorporated by reference from Exhibit 10.5 to the Company's Registration Statement on Form S-1, Reg. No.
333-34633).
10.6 Management Agreement between Friendly Ice Cream Corporation and FriendCo Restaurants, Inc. (Incorporated
by reference from Exhibit 10.6 to the Company's Registration Statement on form S-1, Reg. No. 333-34633).
10.7 Purchase and Sale Agreement between Friendly Ice Cream Corporation and FriendCo Restaurants, Inc.
(Incorporated by reference from Exhibit 10.7 to the Company's Registration Statement on Form S-1, Reg. No.
333-34633).
10.8 Software License Agreement between Friendly's Restaurants Franchise, Inc. and FriendCo Restaurants, Inc.
(Exhibits 10.4 through 10.8, collectively, the "DavCo Agreement") (Incorporated by reference from Exhibit
10.8 to the Company's Registration Statement on Form S-1, Reg. No. 333-34633).
10.9 Sublease between SSP Company, Inc. and the Company, as amended, for the Chicopee, Massachusetts
Distribution Center. (Incorporated by reference from Exhibit 10.9 to the Company's Registration Statement
on Form S-1, Reg. No. 333-34633).
10.10 TRC Management Contract between the Company and The Restaurant Company. (Incorporated by reference from
Exhibit 10.10 to the Company's Registration Statement on Form S-1, Reg. No. 333-34633).
10.11 Aircraft Reimbursement Agreement between Company and TRC Realty Co.
</TABLE>
F-41
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
----------------------------------------------------------------------------------------------------------
<C> <S>
10.12 License Agreement between the Company and Hershey Foods Corporation for 1988 Non-Friendly Marks.
(Incorporated by reference from Exhibit 10.12 to the Company's Registration Statement on Form S-1, Reg.
No. 333-34633).
21.1 Subsidiaries of the Company. (Incorporated by reference from Exhibit 21.1 to the Company's Registration
Statement on Form S-1, Reg. No. 333-34633).
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
* -- Management Contract or Compensatory Plan or Arrangement
</TABLE>
F-42
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED
BY-LAWS
of
FRIENDLY ICE CREAM CORPORATION
Amended as of July 29, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
SECTION 1 OFFICES ...................................................................................1
Section 1.1 Registered Office..................................................................1
Section 1.2 Other Offices......................................................................1
SECTION 2 STOCKHOLDERS................................................................................1
Section 2.1 Time and Place of Meetings.........................................................1
Section 2.2 Annual Meetings....................................................................1
Section 2.3 Special Meetings...................................................................1
Section 2.4 Notice of Meetings.................................................................1
Section 2.5 Waiver of Notice...................................................................2
Section 2.6 Fixing of Record Date..............................................................2
Section 2.7 Stockholders' List of Meeting......................................................2
Section 2.8 Quorum; Adjournment................................................................3
Section 2.9 Voting Requirements................................................................3
Section 2.10 Proxies............................................................................3
Section 2.11 Notice of Stockholder Business.....................................................4
Section 2.12 Conduct of Meetings................................................................4
Section 2.13 Inspectors of Election.............................................................5
Section 2.14 Informal Action by Stockholders....................................................5
SECTION 3 DIRECTORS...................................................................................6
Section 3.1 General Powers.....................................................................6
Section 3.2 Number, Qualification, Tenure and Removal..........................................6
Section 3.3 Vacancies; Resignations............................................................6
Section 3.4 Place of Meetings..................................................................6
Section 3.5 Regular Meetings...................................................................6
Section 3.6 Special Meetings...................................................................6
Section 3.7 Notice.............................................................................7
Section 3.8 Waiver of Notice...................................................................7
Section 3.9 Quorum.............................................................................7
Section 3.10 Manner of Acting...................................................................7
Section 3.11 Committees.........................................................................7
Section 3.12 Organization.......................................................................7
Section 3.13 Action without Meeting.............................................................8
Section 3.14 Attendance by Telephone............................................................8
Section 3.15 Compensation.......................................................................8
Section 3.16 Presumption of Assent..............................................................8
Section 3.17 Notification of Nominations........................................................8
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 4 OFFICERS ..................................................................................10
Section 4.1 Enumeration.......................................................................10
Section 4.2 Salaries..........................................................................10
Section 4.3 Term of Office....................................................................10
Section 4.4 Chairman..........................................................................10
Section 4.5 President.........................................................................10
Section 4.6 Vice President....................................................................10
Section 4.7 Clerk.............................................................................10
Section 4.8 Assistant Clerk...................................................................11
Section 4.9 Treasurer.........................................................................11
Section 4.10 Assistant Treasurer...............................................................11
Section 4.11 Other Duties......................................................................11
SECTION 5 CERTIFICATES OF STOCK AND OTHER STOCKHOLDER MATTERS........................................11
Section 5.1 Form..............................................................................11
Section 5.2 Replacement.......................................................................12
Section 5.3 Transfer..........................................................................12
Section 5.4 Stock Ledger Determinative of Dividend Distributions and Voting Entitlement.......12
SECTION 6 INDEMNIFICATION............................................................................12
Section 6.1 Right to Indemnification..........................................................12
Section 6.2 Settlements.......................................................................13
Section 6.3 Notification and Defense of Proceedings...........................................13
Section 6.4 Advance of Expenses...............................................................14
Section 6.5 Certain Presumptions and Determinations...........................................14
Section 6.6 Remedies..........................................................................15
Section 6.7 Contract Right; Subsequent Amendment..............................................15
Section 6.8 Other Rights......................................................................15
Section 6.9 Partial Indemnification...........................................................15
Section 6.10 Insurance.........................................................................16
Section 6.11 Merger or Consolidation...........................................................16
Section 6.12 Savings Clause....................................................................16
Section 6.13 Subsequent Legislation............................................................16
Section 6.14 Indemnification of Others.........................................................16
SECTION 7 DIVIDENDS..................................................................................16
Section 7.1 Declaration of Dividends..........................................................16
Section 7.2 Reserves for Dividends............................................................16
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 8 GENERAL PROVISIONS.........................................................................17
Section 8.1 Fiscal Year.......................................................................17
Section 8.2 Corporate Seal....................................................................17
Section 8.3 Corporation Checks................................................................17
Section 8.4 Protection of Corporate Books.....................................................17
Section 8.5 Control Share Acquisitions........................................................17
SECTION 9 AMENDMENTS.................................................................................17
Section 9.1 Amendments of By-Laws.............................................................17
</TABLE>
<PAGE>
AMENDED AND RESTATED
BY-LAWS
of
FRIENDLY ICE CREAM CORPORATION
SECTION 1
OFFICES
SECTION 1.1 REGISTERED OFFICE. The registered office of Friendly Ice Cream
Corporation (the "Corporation") shall be in the town of Wilbraham, County of
Hampden, Commonwealth of Massachusetts at 1855 Boston Road.
SECTION 1.2 OTHER OFFICES. The Corporation may also have offices at such
other places both within and without the Commonwealth of Massachusetts as the
Board of Directors of the Corporation (the "Board") may from time to time
determine or the business of the Corporation may require.
SECTION 2
STOCKHOLDERS
SECTION 2.1 TIME AND PLACE OF MEETINGS. All meetings of the stockholders for
the election of directors or for any other purpose shall be held within the
Commonwealth of Massachusetts or, to the extent permitted by the Corporation's
Restated Articles of Organization as in effect from time to time (the "Articles
of Organization"), elsewhere in the United States.
SECTION 2.2 ANNUAL MEETINGS. An annual meeting of stockholders shall be
held, within six months after the end of the fiscal year of the Corporation, for
the purpose of electing directors to serve on the Board and transacting such
other business as may properly be brought before the meeting. The date of the
annual meeting shall be determined by the Board.
SECTION 2.3 SPECIAL MEETINGS. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by law, may be called only by
(i) the Board pursuant to a resolution approved by the affirmative vote of a
majority of the Directors then in office, (ii) the Chairman of the Board, if one
is elected or (iii) the President. Only those matters set forth in the notice of
the special meeting may be considered or acted upon at such special meeting,
except as otherwise provided by law.
SECTION 2.4 NOTICE OF MEETINGS. Written or printed notice stating the date,
time and place of the meeting and, in the case of a special meeting or a meeting
for which special notice is
1
<PAGE>
required by law, the purposes for which the meeting is called shall be mailed by
the Corporation to each stockholder entitled to vote at the meeting and, if
required by law, to any other stockholders entitled to receive notice, at the
stockholder's address shown in the Corporation's record of stockholders, with
postage pre-paid, not less than ten (10) nor more than sixty (60) days before
the meeting date, either personally or by mail, by or at the direction of the
President, Clerk, or Assistant Clerk, or the officer or persons calling the
meeting, to each stockholder of record entitled to vote at such meeting. Notice
shall be effective when mailed if it is mailed postage pre-paid and is correctly
addressed to the stockholder's address as it appears on the stock transfer books
of the Corporation.
SECTION 2.5 WAIVER OF NOTICE. A stockholder may at any time waive any notice
required by law, these By-Laws or the Corporation's Articles of Organization.
The waiver shall be in writing, be signed by the stockholder entitled to the
notice and be delivered to the Corporation for inclusion in the minutes for
filing with the corporate records. A stockholder's attendance at a meeting
waives objection to (i) lack of notice or defective notice of the meeting,
unless the stockholder at the beginning of the meeting objects to holding the
meeting or transacting business at the meeting, and (ii) consideration of a
particular matter at the meeting that is not within the purposes described in
the meeting notice, unless the stockholder objects to considering the matter
when it is presented.
SECTION 2.6 FIXING OF RECORD DATE. The Board may fix a future date as the
record date to determine the stockholders entitled to notice of a stockholders'
meeting, vote, take any other action or receive payment of any share or cash
dividend or other distribution. This date shall not be more than sixty (60) days
nor, in the case of a meeting, less than ten (10) days before the meeting or
action requiring a determination of stockholders. The record date for any
meeting, vote or other action of the stockholders shall be the same for all
classes of capital stock of the Corporation. If not otherwise fixed by the
Board, the record date to determine stockholders entitled to notice of and to
vote at an annual or special stockholders' meeting is the close of business on
the day before the first notice is first mailed or delivered to a stockholder.
If not otherwise fixed by the Board, the record date to determine stockholders
entitled to receive payment of any share or cash dividend or other distribution
is the close of business on the day the Board authorizes the share or cash
dividend or other distribution.
SECTION 2.7 STOCKHOLDERS' LIST OF MEETING. After a record date for a meeting
is fixed, the Corporation shall prepare an alphabetical list of all stockholders
entitled to notice of the stockholders' meeting. The list shall be arranged by
classes of capital stock of the Corporation and show the address of and number
of shares held by each stockholder. The stockholders' list shall be available
for inspection by any stockholder, upon proper demand as may be required by law,
beginning two business days after notice of the meeting is given and continuing
through the meeting, at the Corporation's principal office or at a place
identified in the meeting notice in the city where the meeting will be held. The
Corporation shall make the stockholders' list available at the meeting, and any
stockholder or the stockholder's agent or attorney shall be entitled to inspect
the list at any time during the meeting or any adjournment. Refusal or failure
to prepare or make available the stockholder's list does not affect the validity
of action taken at the meeting.
2
<PAGE>
SECTION 2.8 QUORUM; ADJOURNMENT.
(a) Shares issued, outstanding and entitled to vote may take action on a
matter at a meeting only if a quorum of these shares exists with respect to that
matter. Shares issued, outstanding and entitled to vote as a separate class may
take action on a matter at a meeting only if a quorum of those shares exists
with respect to that matter. Except as otherwise provided by the Articles of
Organization, at any meeting of the stockholders a majority of all shares of
stock issued, outstanding and entitled to vote on the record date for such
meeting (including shares as to which an abstention has been recorded and shares
as to which a nominee has no voting authority as to certain matters brought
before the meeting) shall constitute a quorum for the transaction of business.
(b) A majority of votes represented at the meeting, although less than a
quorum, may adjourn the meeting from time to time to a different time and place
without further notice to any stockholder of any adjournment. At an adjourned
meeting at which a quorum is present, any business may be transacted that might
have been transacted at the meeting originally held.
(c) Once a share is represented for any purpose at a meeting, it shall
be present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting unless a new record date is or must be set for the
adjourned meeting. A new record date must be set if the meeting is adjourned to
a date more than 120 days after the date fixed for the original meeting.
SECTION 2.9 VOTING REQUIREMENTS. At all meetings of stockholders, each
stockholder shall be entitled to vote, in person or by proxy, the shares of
voting stock owned by such stockholder of record on the record date for the
meeting. When a quorum is present or represented at any meeting, the affirmative
vote of a majority of the shares of stock voted on any matter, question or
proposal brought before such meeting shall decide such question, unless the
question is one upon which, by express provision of law, by the Articles of
Organization or by these By-Laws, a different vote is required, in which case
such express provision shall govern and control the decision of such question;
provided, however, that any election by stockholders shall be determined by a
plurality of the votes cast by the stockholders present or represented and
entitled to vote in such election. Shares as to which an abstention has been
recorded and shares as to which a nominee has no voting authority as to a
particular question or questions brought before the meeting will not be deemed
to be voted or cast with respect to such question or questions.
SECTION 2.10 PROXIES. A stockholder may vote shares in person or by proxy. A
stockholder may appoint a proxy by signing an appointment form either personally
or by the stockholder's attorney-in-fact. An appointment of a proxy is effective
when received by the Clerk or other officer of the Corporation authorized to
tabulate votes. Except as otherwise provided by law, a proxy dated more than six
months before the meeting named therein shall be valid and no proxy shall be
valid after the final adjournment of such meeting. A proxy with respect to stock
held in the name of two or more persons shall be valid if executed by any one of
3
<PAGE>
them unless at or prior to the exercise of the proxy the corporation receives a
specific written notice to the contrary from any one of them. A proxy purporting
to be executed by or on behalf of a stockholder shall be deemed valid unless
challenged at or prior to its exercise and the burden of proving its validity
shall rest on the challenger.
SECTION 2.11 NOTICE OF STOCKHOLDER BUSINESS. 1. At a meeting of the
stockholders, only such business shall be conducted as shall have been properly
brought before the meeting in accordance with the By-Laws. 2. To be properly
brought before a meeting, business must be (a) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board,
(b) otherwise properly brought before the meeting by or at the direction of the
Board, or (c) otherwise (i) properly be requested to be brought before the
meeting by a stockholder of record entitled to vote in the election of directors
generally, and (ii) constitute a proper subject to be brought before such
meeting. For business to be properly brought before a meeting of stockholders,
any stockholder who intends to bring any matter (other than the election of
directors) before a meeting of stockholders and is entitled to vote on such
matter must deliver written notice of such stockholder's intent to bring such
matter before the meeting of stockholders, either by personal delivery or by
United States mail, postage pre-paid, to the Clerk of the Corporation. Such
notice must be received by the Clerk not later than the following dates: (i)
with respect to an annual meeting of stockholders, ninety (90) days in advance
of such meeting provided that, unless at least one hundred twenty (120) days
advance notice of the meeting date is given, such notice shall be timely if
received at least ninety (90) days in advance of the anniversary of the prior
year's meeting; and (ii) with respect to any other meeting of stockholders or a
special meeting of stockholders, the close of business on the tenth day
following the date on which notice of such meeting is first given to
stockholders. For purposes of this Section 2.11, notice shall be deemed to first
be given to stockholders when disclosure of such date is first made in a press
release reported by the Dow Jones News Services, Associated Press or comparable
national news service or in a document publicly filed by the Corporation with
the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of
the Securities Exchange Act of 1934, as amended.
A stockholder's notice to the Clerk shall set forth as to each matter the
stockholder proposes to bring before the meeting of stockholders (a) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (b) the name and address,
as they appear on the Corporation's books, of the stockholder intending to
propose such business, (c) the class and number of shares of capital stock of
the Corporation which are beneficially owned by the stockholder, and (d) any
material interest of the stockholder in such business. No business shall be
conducted at a meeting of stockholders except in accordance with the procedures
set forth in Section 2.12 of this Article. The chairman of a meeting may, if the
facts warrant, determine and declare to the meeting that the business was not
properly brought before the meeting and in accordance with the provisions hereof
and, if the chairman should so determine, the chairman may so declare to the
meeting that any such business not properly brought before the meeting shall not
be transacted.
SECTION 2.12 CONDUCT OF MEETINGS. The date and time of the opening and the
closing of the polls for each matter upon which the stockholders will vote at a
meeting shall be announced
4
<PAGE>
at the meeting by the person presiding over the meeting. The Board may adopt by
resolution such rules and regulations for the conduct of the meeting of
stockholders as it shall deem appropriate. Except to the extent inconsistent
with such rules and regulations as adopted by the Board, the chairman of any
meeting of stockholders shall have the right and authority to prescribe such
rules, regulations and procedures and to do all such acts as, in the judgment of
such chairman, are appropriate for the proper conduct of the meeting. Such
rules, regulations or procedures, whether adopted by the Board or prescribed by
the chairman of the meeting, may include, without limitation, the following: (i)
the establishment of an agenda or order of business for the meeting; (ii) rules
and procedures for maintaining order at the meeting and the safety of those
present; (iii) limitations on attendance at or participation in the meeting to
stockholders of record of the Corporation, their duly authorized and constituted
proxies or such other persons as the chairman of the meeting shall determine;
(iv) restrictions on entry to the meeting after the time fixed for the
commencement thereof; and (v) limitations on the time allotted to questions or
comments by participants. Unless and to the extent determined by the Board or
the chairman of the meeting, meetings of stockholders shall not be required to
be held in accordance with the rules of parliamentary procedure.
SECTION 2.13 INSPECTORS OF ELECTION. The Corporation may, and shall if
required by law, in advance of any meeting of stockholders, appoint one or more
inspectors of election, who may be employees of the Corporation, to act at the
meeting or any adjournment thereof and to make a written report thereof. The
Corporation may designate one or more persons as alternate inspectors to replace
any inspector who fails to act. In the event that no inspector so appointed or
designated is able to act at a meeting of stockholders, the person presiding at
the meeting shall appoint one or more inspectors to act at the meeting. Each
inspector, before entering upon the discharge of his or her duties, shall take
and sign an oath to execute faithfully the duties of inspector with strict
impartiality and according to the best of his or her ability.
The inspector or inspectors so appointed or designated shall (i) ascertain
the number of shares of capital stock of the Corporation outstanding and the
voting power of each such share, (ii) determine the shares of capital stock of
the Corporation represented at the meeting and the validity of proxies and
ballots, (iii) count all votes and ballots, (iv) determine and retain for a
reasonable period a record of the disposition of any challenges made to any
determination by the inspectors, and (v) certify their determination of the
number of shares of capital stock of the Corporation represented at the meeting
and such inspectors' count of all votes and ballots. Such certification and
report shall specify such other information as may be required by law. In
determining the validity and counting of proxies and ballots cast at any meeting
of stockholders of the Corporation, the inspectors may consider such information
as is permitted by applicable law. No person who is a candidate for an office at
an election may serve as an inspector at such election.
SECTION 2.14 INFORMAL ACTION BY STOCKHOLDERS. Any action required to be
taken at a meeting of the stockholders or any other action which may be taken at
a meeting of the stockholders, may be taken without a meeting if a consent in
writing, setting forth the action so taken, shall be signed by all of the
stockholders entitled to vote with respect to the subject matter thereof and the
written consents are filed with the records of the meetings of the stockholders.
5
<PAGE>
SECTION 3
DIRECTORS
SECTION 3.1 GENERAL POWERS. The business and affairs of the Corporation
shall be managed and controlled by or under the direction of the Board, which
may exercise all such powers of the Corporation and do all such lawful acts and
things as are not by law or by Articles of Organization or by these By-Laws
directed or required to be exercised or done by the stockholders.
SECTION 3.2 NUMBER, QUALIFICATION, TENURE AND REMOVAL. The number of
Directors shall be fixed, from time to time, by the Board, in accordance with
Article VI of the Articles of Organization. A director shall hold office until
the annual meeting for the year in which his or her term expires and until his
or her successor shall be elected and shall qualify, subject, however, to prior
death, resignation, retirement, disqualification or removal from office.
Directors need not be residents of Massachusetts or stockholders of the
Corporation. At any meeting of the stockholders called for the purpose, any
Director may be removed from office only for cause by the affirmative vote of a
majority of the shares issued, outstanding and entitled to vote in the election
of Directors. At any meeting of the Board, any Director may be removed from
office only for cause by vote of a majority of the Directors then in office. A
Director may be removed for cause only after a reasonable notice and opportunity
to be heard before the body proposing to remove him or her.
SECTION 3.3 VACANCIES; RESIGNATIONS. Any vacancy on the Board that results
from an increase in the number of Directors shall be filled only by a majority
of the Directors then in office, provided that a quorum is present, and any
other vacancy occurring in the Board shall be filled by a majority of the
Directors then in office, even if less than a quorum, or by a sole remaining
Director. Any vacancy not filled by the Directors shall be filled by election at
an annual meeting or at a special meeting of stockholders called for that
purpose. A vacancy that will occur at a specified later date, by reason of a
resignation or otherwise, may be filled before the vacancy occurs, but the new
Director may not take office until the vacancy occurs.
SECTION 3.4 PLACE OF MEETINGS. The Board may hold meetings, both regular and
special, either within or without the Commonwealth of Massachusetts.
SECTION 3.5 REGULAR MEETINGS. The Board shall hold a regular meeting, to be
known as the annual meeting, immediately following each annual meeting of the
stockholders. Other regular meetings of the Board shall be held at such time and
at such place as shall from time to time be determined by the Board. No notice
of regular meetings need be given.
SECTION 3.6 SPECIAL MEETINGS. Special meetings of the Board may be called by
the Chairman or the President. Special meetings shall also be called by the
Clerk on written request of any two Directors. The person or persons authorized
to call special meetings of the Board
6
<PAGE>
may fix any place in or out of Massachusetts as the place for holding any
special meeting of the Board called by them.
SECTION 3.7 NOTICE. Notice of the date, time and place of any special
meeting of the Board shall be given at least three days prior to the meeting by
notice communicated in person, by telephone, telegraph, teletype, other form of
wire or wireless communication, mail or private carrier. If written, notice
shall be effective at the earliest of (a) when received, (b) its deposit in the
United States mail, as evidenced by the postmark, if mailed postage pre-paid and
correctly addressed, or (c) on the date shown on the return receipt, if sent by
registered or certified mail, return receipt requested and the receipt is signed
by or on behalf of the addressee. Notice by all other means shall be deemed
effective when received by or on behalf of the Director. Notice of any regular
or special meeting need not describe the purposes of the meeting unless required
by law or the Articles of Organization.
SECTION 3.8 WAIVER OF NOTICE. A Director may at any time waive any notice
required by law, these By-Laws or the Articles of Organization. Except as set
forth below, the waiver must be in writing, be signed by the Director entitled
to the notice, specify the meeting for which notice is waived and be filed with
the minutes or corporate records. A Director's attendance at or participation in
a meeting waives any required notice to the Director of the meeting unless the
Director at the beginning of the meeting, or promptly upon such Director's
arrival, objects to holding the meeting or transacting business at the meeting
and does not thereafter vote for or assent to action taken at the meeting.
SECTION 3.9 QUORUM. A majority of the number of Directors fixed in
accordance with Section 3.2 of this Article shall constitute a quorum for the
transaction of business at any meeting of the Board. If less than a quorum is
present at a meeting, a majority of the Directors present may adjourn the
meeting from time to time without further notice.
SECTION 3.10 MANNER OF ACTING. The act of the majority of the Directors
present at a meeting at which a quorum is present shall be the act of the Board,
unless a different number is provided by law, the Articles of Organization or
these By-Laws.
SECTION 3.11 COMMITTEES. The Board may, by vote of a majority of the
Directors then in office appoint from their number one or more committees and
delegate to such committees some or all of their powers to the extent permitted
by law, the Articles of Organization or these ByLaws. Except as the Board may
otherwise determine, any such committee shall be governed in the conduct of its
business by the rules governing the conduct of the business of the Board
contained in these By-laws and may, by majority vote of the entire committee
make other rules for the conduct of its business. The Board shall have power at
any time to fill vacancies in any such committees, to change its membership or
to discharge the committee.
SECTION 3.12 ORGANIZATION. The Chairman, if elected, shall act as chairman
at all meetings of the Board. If the Chairman is not elected or, if elected, is
not present, the President or, in the absence of the President, a Vice Chairman
(who is also a member of the Board and, if more than one, in order designated by
the Board or, in the absence of such designation, in order
7
<PAGE>
of their election), if any, or if no such Vice Chairman is present, a Director
chosen by a majority of the Directors present, shall act as chairman at meetings
of the Board.
SECTION 3.13 ACTION WITHOUT MEETING. Unless otherwise restricted by the
Articles of Organization or these By-Laws, any action required or permitted to
be taken at any meeting of the Board may be taken without a meeting, if all
members of the Board consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board.
SECTION 3.14 ATTENDANCE BY TELEPHONE. Members of the Board, may participate
in a meeting of the Board by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
SECTION 3.15 COMPENSATION. The Board shall have the authority to fix the
compensation of Directors, which may include their expenses, if any, of
attendance at each meeting of the Board.
SECTION 3.16 PRESUMPTION OF ASSENT. A Director who is present at a meeting
of the Board or a committee of the Board shall be deemed to have assented to the
action taken at the meeting unless (a) the Director's dissent or abstention from
the action is entered in the minutes of the meeting, (b) the Director delivers a
written notice of dissent or abstention to the action to the presiding officer
of the meeting before any adjournment of the meeting or to the Corporation
immediately after the adjournment of the meeting or (c) the Director objects at
the beginning of the meeting or promptly upon such Director's arrival to the
holding of the meeting or transacting business at the meeting. The right to
dissent or abstain is not available to a Director who voted in favor of the
action.
SECTION 3.17 NOTIFICATION OF NOMINATIONS. Except for Directors elected
pursuant to the provisions of Section 3.3 of this Article, only individuals
nominated for election to the Board pursuant to and in accordance with the
provision of this Section 3.17 may be elected to and may serve upon the Board of
the Corporation. Nominations for the election of Directors may be made by the
Board, a Committee thereof or by any stockholder entitled to vote in the
election of Directors generally. Subject to the foregoing, only a stockholder of
record entitled to vote in the election of Directors generally may nominate one
or more persons for election as Directors at a meeting of stockholders and only
if written notice of such stockholder's intent to make such nomination or
nominations has been given, either by personal delivery or by United States
mail, postage pre-paid, to the Clerk of the Corporation and has been received by
the Clerk not later than the following dates: (i) with respect to an election to
be held at an annual meeting of stockholders, sixty (60) days in advance of such
meeting if such meeting is to be held on a day which is within thirty (30) days
preceding the anniversary of the previous year's annual meeting, or ninety (90)
days in advance of such meeting if such meeting is to be held on or after the
anniversary of the previous year's annual meeting; and (ii) with respect to an
election to be held at a special meeting of stockholders for the election of
Directors, the close of business on the tenth day following the date on which
notice of such meeting is first given to stockholders. For purposes of this
Section 3.17, notice shall be deemed to first be given to stockholders when
8
<PAGE>
disclosure of such date is first made in a press release reported by the Dow
Jones News Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act
of 1934, as amended.
Each such notice shall set forth:
(a) the name and address of the stockholder who intends to make the
nomination and of the person or persons to be nominated;
(b) a representation that the stockholder is a holder of record of stock of
the Corporation entitled to vote at such meeting and intends to appear
in person or by proxy at the meeting to nominate the person or persons
specified in the notice;
(c) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations
are to be made by the stockholder; and
(d) such other information regarding each nominee proposed by such
stockholder as would be required to be included in a proxy statement
filed pursuant to the proxy rules of the Securities and Exchange
Commission, had the nominee been nominated, or intended to be nominated,
by the Board.
To be effective, each notice of intent to make a nomination given
hereunder shall be accompanied by the written consent of each nominee to serve
as a Director of the Corporation if elected.
The chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that a nomination was not properly brought before the
meeting in accordance with the provisions hereof and, if the chairman should so
determine, declare to the meeting that such nomination was not properly brought
before the meeting and shall not be considered.
9
<PAGE>
SECTION 4
OFFICERS
SECTION 4.1 ENUMERATION. The officers of the Corporation shall be chosen by
the Board and shall be a Chairman, President, a Clerk, and a Treasurer. The
Board may also elect one or more Vice Chairmen, one or more Vice Presidents, one
or more Assistant Clerks and Assistant Treasurers and such other officers and
agents as it shall deem appropriate. Any number of offices may be held by the
same person.
SECTION 4.2 SALARIES. The salaries of all officers of the Corporation shall
be fixed by the Board.
SECTION 4.3 TERM OF OFFICE. The officers of the Corporation shall be elected
at the annual meeting of the Board and shall hold office until their successors
are elected and qualified or until their earlier resignation, removal or death.
Any officer elected or appointed by the Board may be removed at any time by the
Board with or without cause. Any vacancy occurring in any office of the
Corporation required by this section shall be filled by the Board, and any
vacancy in any other office may be filled by the Board.
SECTION 4.4 CHAIRMAN. The Chairman shall preside, when present, at each
meeting of the Board and shall perform such other duties and have such powers as
the Board may from time to time prescribe. The Chairman shall have general
supervision, direction and control of the business and affairs of the
Corporation, subject to the control of the Board, shall preside at meetings of
stockholders and shall have such other functions, authority and duties as
customarily appertain to the office of the chief executive of a business
Corporation or as may be prescribed by the Board.
SECTION 4.5 PRESIDENT. During any period when there shall be an office of
Chairman, the President shall have such functions, authority and duties as may
be prescribed by the Board or the Chairman. The President need not be a
Director. During any period when there shall not be an office of Chairman, the
President shall have the functions, authority and duties provided for the
Chairman.
SECTION 4.6 VICE PRESIDENT. The Vice President or if there be more than one,
the Vice Presidents, shall perform, such duties and have such other powers as
may from time to time be prescribed by the Board, the Chairman or the President.
SECTION 4.7 CLERK. The Clerk shall keep a record of all proceedings of the
stockholders of the Corporation and of the Board, and shall perform like duties
for the standing committees when required. The Clerk shall give, or cause to be
given, notice, if any, of all meetings of the stockholders and shall perform
such other duties as may be prescribed by the Board, the Chairman or the
President. The Clerk shall have custody of the corporate seal of the Corporation
and the Clerk or in the absence of the Clerk any Assistant Clerk, shall have the
authority to affix the same to any instrument requiring it, and when so affixed
it may be attested by the signature of
10
<PAGE>
the Clerk or an Assistant Clerk. The Board may give general authority to any
other officer to affix the seal of the Corporation and to attest such affixing
of the seal. The Clerk shall be a resident of the Commonwealth of Massachusetts
unless the Corporation has a resident agent in accordance with Massachusetts
law.
SECTION 4.8 ASSISTANT CLERK. The Assistant Clerk or if there be more than
one, the Assistant Clerks in the order determined by the Board (or if there be
no such determination, then in order of their election), shall, in the absence
of the Clerk or in the event of the Clerk's inability or refusal to act, perform
the duties and exercise the powers of the Clerk and shall perform such other
duties as may from time to time be prescribed by the Board, the Chairman, or the
President.
SECTION 4.9 TREASURER. The Treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all monies
and other valuable assets in the name and to the credit of the Corporation in
such depositories as may be designated by the Board. The Treasurer shall
disburse the funds of the Corporation as may be ordered by the Board, taking
proper vouchers for such disbursements, and shall render to the Chairman, the
President and the Board, at its regular meetings or when the Board so requires,
an account of all transactions as Treasurer and of the financial condition of
the Corporation. The Treasurer shall perform such other duties as may from time
to time be prescribed by the Board, the Chairman or the President.
SECTION 4.10 ASSISTANT TREASURER. The Assistant Treasurer, or if there shall
be more than one, the Assistant Treasurers in the order determined by the Board
(or if there be no such determination, then in order of their election), shall,
in absence of the Treasurer or in the event of the Treasurer's inability or
refusal to act, perform the duties and exercise the powers of the Treasurer and
shall perform such other duties and have such other powers as may from time to
time be prescribed by the Board, the Chairman, the President or the Treasurer.
SECTION 4.11 OTHER DUTIES. Any officer who is elected or appointed from time
to time by the Board and whose duties are not specified in these By-Laws shall
perform such duties and have such powers as may be prescribed from time to time
by the Board, the Chairman or the President.
SECTION 5
CERTIFICATES OF STOCK AND OTHER STOCKHOLDER MATTERS
SECTION 5.1 FORM. The shares of the Corporation shall be represented by
certificates; PROVIDED, HOWEVER, that the Board may provide by resolution or
resolutions that some or all of any or all classes or series of the
Corporation's stock shall be uncertificated shares. Certificates of stock in the
Corporation, if any, shall be signed by or in the name of the Corporation by the
Chairman or the President or a Vice President and by the Treasurer or an
Assistant Treasurer of the Corporation. Where a certificate is countersigned by
a transfer agent, other than the Corporation or a director, officer or employee
of the Corporation, or by a registrar, the signatures of the Chairman, the
President or a Vice President and the Treasurer or an Assistant Treasurer
11
<PAGE>
may be facsimiles. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, the certificate may be issued by the Corporation with the
same effect as if such officer, transfer agent or registrar were such officer,
transfer agent or registrar at the date of its issue.
SECTION 5.2 REPLACEMENT. In case of the loss, destruction, mutilation or
theft of a certificate for any stock of the Corporation, a new certificate of
stock or uncertificated shares in place of any certificate therefor issued by
the Corporation may be issued upon (x) in the case of a mutilated certificate,
surrender of such mutilated certificate to the Corporation, and (y) in the case
of a certificate alleged to have been lost, destroyed or stolen, satisfactory
proof of such loss, destruction or theft and upon such terms as the Board may
prescribe. The Board may in its discretion require the owner of the lost,
mutilated, destroyed or stolen certificate, or his legal representative, to give
the Corporation a bond, in such sum and in such form and with such surety or
sureties as it may direct, to indemnify the Corporation against any claim that
may be made against it with respect to a certificate alleged to have been lost,
mutilated, destroyed or stolen.
SECTION 5.3 TRANSFER. Subject to the restrictions, if any, stated or noted
on the certificate, upon surrender to the Corporation or the transfer agent of
the Corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, it shall be
the duty of the Corporation to issue a new certificate of stock or
uncertificated shares in place of any certificate therefor issued by the
Corporation to the person entitled thereto, cancel the old certificate and
record the transaction on its books.
SECTION 5.4 STOCK LEDGER DETERMINATIVE OF DIVIDEND DISTRIBUTIONS AND VOTING
ENTITLEMENT. The Corporation shall be entitled to recognize the exclusive right
of a person registered on its books as the owner of shares to receive dividends
and other distributions, and to vote as such owner, and shall not be bound to
recognize any equitable or other claim to, or interest in, such share or shares
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the Commonwealth of
Massachusetts.
SECTION 6
INDEMNIFICATION
SECTION 6.1 RIGHT TO INDEMNIFICATION. The Corporation shall indemnify and
hold harmless each person who was or is a party or is threatened to be made a
party to or is otherwise involved in any threatened, pending or completed
action, suit, proceeding or investigation, whether civil, criminal or
administrative (a "Proceeding"), by reason of being, having been or having
agreed to become, a director or officer of the Corporation, or serving, having
served or having agreed to serve, at the request of the Corporation, as a
director or officer of, or in a similar capacity with, another organization or
in any capacity with respect to any employee benefit plan (any such person being
referred to hereafter as an "Indemnitee"), or by reason of any action
12
<PAGE>
alleged to have been taken or omitted in such capacity, against all expense,
liability and loss (including without limitation reasonable attorneys' fees,
judgments, fines, "ERISA" excise taxes or penalties) incurred or suffered by the
Indemnitee or on behalf of the Indemnitee in connection with such Proceeding and
any appeal therefrom, unless the Indemnitee shall have been adjudicated in such
Proceeding not to have acted in good faith in the reasonable belief that his or
her action was in the best interest of the Corporation or, to the extent such
matter relates to service with respect to an employee benefit plan, in the best
interests of the participants or beneficiaries of such employee benefit plan.
Notwithstanding anything to the contrary in these By-Laws, except as set forth
in Section 6.6 below, the Corporation shall not indemnify or advance expenses to
an Indemnitee seeking indemnification in connection with a Proceeding (or part
thereof) initiated by the Indemnitee, unless the initiation thereof was approved
by the Board.
SECTION 6.2 SETTLEMENTS. Subject to compliance by the Indemnitee with the
applicable provisions of Section 6.5 below, the right to indemnification
conferred in these By-Laws shall include the right to be paid by the
Corporation for amounts paid in settlement of any such Proceeding and any
appeal therefrom, and all expenses (including attorneys' fees) incurred in
connection with such settlement, pursuant to a consent decree or otherwise,
unless it is held or determined pursuant to Section 6.5 below that the
Indemnitee did not act in good faith in the reasonable belief that his or her
action was in the best interest of the Corporation or, to the extent such
matter relates to service with respect to an employee benefit plan, in the
best interests of the participants or beneficiaries of such employee benefit
plan.
SECTION 6.3 NOTIFICATION AND DEFENSE OF PROCEEDINGS. The Indemnitee shall
notify the Corporation in writing as soon as reasonably practicable of any
Proceeding involving the Indemnitee for which indemnity or advancement of
expenses is intended to be sought. Any omission to so notify the Corporation
shall not relieve it from any liability that it may have to the Indemnitee under
these By-Laws unless, and only to the extent that, such omission results in the
forfeiture of substantive rights or defenses by the Corporation. With respect to
any Proceeding of which the Corporation is so notified, the Corporation shall be
entitled but not obligated, to participate therein at its own expense and/or to
assume the defense thereof at its own expense, with legal counsel reasonably
acceptable to the Indemnitee, except as provided in the last sentence of this
Section 6.3. After notice from the Corporation to the Indemnitee of its election
so to assume such defense (subject to the limitations in the last sentence of
this Section 6.3), the Corporation shall not be liable to the Indemnitee for any
fees and expenses of counsel subsequently incurred by the Indemnitee in
connection with such Proceeding, other than as provided below in this Section
6.3. The Indemnitee shall have the right to employ his or her own counsel in
connection with such Proceeding, but the fees and expenses of such counsel
incurred after notice from the Corporation of its assumption of the defense
thereof at its expense with counsel reasonably acceptable to Indemnitee shall be
at the expense of the Indemnitee unless (i) the employment of counsel by the
Indemnitee at the Corporation's expense has been authorized by the Corporation,
(ii) counsel to the Indemnitee shall have reasonably concluded that there may be
a conflict of interest or position on any significant issue between the
Corporation and the Indemnitee in the conduct of the defense of such action or
(iii) the Corporation shall not in fact have employed counsel reasonably
acceptable to the Indemnitee to assume the defense of such Proceeding within a
reasonable time after receiving notice thereof, in each of which cases the
13
<PAGE>
fees and expenses of counsel for the Indemnitee shall be at the expense of the
Corporation, except as otherwise expressly provided in these By-Laws. The
Corporation shall not be entitled, without the consent of the Indemnitee, to
assume the defense of any Proceeding brought by or in the right of the
Corporation or as to which counsel for the Indemnitee shall have reasonably made
the conclusion provided for in clause (ii) above.
SECTION 6.4 ADVANCE OF EXPENSES. Except as provided in Section 6.3 of
these By- Laws, as part of the right to indemnification granted by these
By-Laws, any expenses (including attorneys' fees) incurred by an Indemnitee in
defending any Proceeding within the scope of Section 6.1 of these By-laws or any
appeal therefrom shall be paid by the Corporation in advance of the final
disposition of such matter, provided, however, that the payment of such expenses
incurred by an Indemnitee in advance of the final disposition of such matter
shall be made only upon receipt of a written undertaking by or on behalf of the
Indemnitee to repay all amounts so advanced in the event that it shall
ultimately be determined that the Indemnitee is not entitled to be indemnified
by the Corporation as authorized by Section 6.1 or Section 6.2 of these By-Laws.
Such undertaking need not be secured and shall be accepted without reference to
the financial ability of the Indemnitee to make such repayment. Such advancement
of expenses shall be made by the Corporation promptly following its receipt of
written requests therefor by the Indemnitee, accompanied by reasonably detailed
documentation, and of the foregoing undertaking.
SECTION 6.5 CERTAIN PRESUMPTIONS AND DETERMINATIONS. If, in a Proceeding
brought by or in the right of the Corporation, a director or officer of the
Corporation is held not liable for monetary damages, whether because that
director or officer is relieved of personal liability under the provisions of
Article VI, Part B of the Articles of Organization of the Corporation or
otherwise, that director or officer shall be deemed to have met the standard of
conduct set forth in Section 6.1 and thus to be entitled to be indemnified by
the Corporation thereunder. In any adjudicated Proceeding against an Indemnitee
brought by reason of the Indemnitee's serving, having served or agreed to serve,
at the request of the Corporation, for an organization other than the
Corporation in one or more of the capacities indicated in Section 6.1, if the
Indemnitee shall not have been adjudicated not to have acted in good faith in
the reasonable belief that the Indemnitee's action was in the best interest of
such other organization, the Indemnitee shall be deemed to have met the standard
of conduct set forth in Section 6.1 and thus be entitled to be indemnified
thereunder. An adjudication in such a Proceeding that the Indemnitee did not act
in good faith in the reasonable belief that the Indemnitee's action was in the
best interest of such other organization shall not create a presumption that the
Indemnitee has not met the standard of conduct set forth in Section 6.1. In
order to obtain indemnification of amounts paid in settlement pursuant to
Section 6.2 of these By-Laws, the Indemnitee shall submit to the Corporation a
written request, including in such request such documentation and information as
is reasonably available to the Indemnitee and is reasonably necessary to
determine whether and to what extent the Indemnitee is entitled to such
indemnification. Any such indemnification under Section 6.2 shall be made
promptly, and in any event within 60 days after receipt by the Corporation of
the written request of the Indemnitee, unless a court of competent jurisdiction
holds within such 60-day period that the Indemnitee did not meet the standard of
conduct set forth in Section 6.2 or the Corporation determines, by clear and
convincing evidence, within such 60-day period that the Indemnitee did not meet
such standard. Such determination shall be made by the Board, based
14
<PAGE>
on advice of independent legal counsel (who may, with the consent of the
Indemnitee, be regular legal counsel to the Corporation). The Corporation and
the directors shall be under no obligation to undertake any such determination
or to seek any ruling from any court.
SECTION 6.6 REMEDIES. The right to indemnification or advances as granted
by these By-Laws shall be enforceable by the Indemnitee in any court of
competent jurisdiction if the Corporation denies such a request, in whole or in
part, or, with respect to indemnification pursuant to Section 6.2, if no
disposition thereof is made within the 60-day period referred to above in
Section 6.5. Unless otherwise provided by law, the burden of proving that the
Indemnitee is not entitled to indemnification or advancement of expenses under
these By-Laws shall be on the Corporation. Neither absence of any determination
prior to the commencement of such action that indemnification is proper in the
circumstances because the Indemnitee has met any applicable standard of conduct,
nor an actual determination by the Corporation pursuant to Section 6.5 that the
Indemnitee has not met such applicable standard of conduct, shall be a defense
to the action or create a presumption that the Indemnitee has not met the
applicable standard of conduct. The Indemnitee's expenses (including reasonable
attorneys' fees) incurred in connection with successfully establishing his or
her right to indemnification, in whole or in part, in any such Proceeding shall
also be paid by the Corporation.
SECTION 6.7 CONTRACT RIGHT; SUBSEQUENT AMENDMENT. The right to
indemnification and advancement of expenses conferred in these By-Laws shall be
a contract right. No amendment, termination or repeal of these By-Laws or of the
relevant provisions of Chapter 156B of the Massachusetts General Laws or any
other applicable laws shall affect or diminish in any way the rights of any
Indemnitee to indemnification or advancement of expenses under the provisions
hereof with respect to any Proceeding arising out of or relating to any action,
omission, transaction or facts occurring prior to the final adoption of such
amendment, termination or repeal, except with the consent of the Indemnitee.
SECTION 6.8 OTHER RIGHTS. The indemnification and advancement of expenses
provided by these By-Laws shall not be deemed exclusive of any other rights to
which an Indemnitee seeking indemnification or advancement of expenses may be
entitled under any law (common or statutory), agreement or vote of stockholders
or directors or otherwise, both as to action in his or her official capacity and
as to action in any other capacity while holding office for the Corporation, and
shall continue as to an Indemnitee who has ceased to be a director or officer,
and shall inure to the benefit of the estate, heirs, executors and
administrators of the Indemnitee. Nothing contained in these By-Laws shall be
deemed to prohibit, and the Corporation is specifically authorized to enter
into, agreements with any Indemnitee providing indemnification rights and
procedures different from those set forth in these By-Laws.
SECTION 6.9 PARTIAL INDEMNIFICATION. If an Indemnitee is entitled under
any provision of these By-Laws to indemnification by the Corporation for some or
a portion of the expenses (including attorneys' fees), judgments, fines or
amounts paid in settlement actually and reasonably incurred by the Indemnitee or
on his or her behalf in connection with any Proceeding and any appeal therefrom
but not, however, for the total amount thereof, the Corporation shall
nevertheless indemnify the Indemnitee for the portion of such expenses
(including reasonable
15
<PAGE>
attorneys' fees), judgments, fines or amounts paid in settlement to which the
Indemnitee is entitled.
SECTION 6.10 INSURANCE. The Corporation may purchase and maintain
insurance, at its expense, to protect itself and any director, officer, employee
or agent of the Corporation or another organization or employee benefit plan
against any expense, liability or loss incurred by such person in any such
capacity, or arising out of such person's status as such, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under Chapter 156B of the Massachusetts General Laws.
SECTION 6.11 MERGER OR CONSOLIDATION. If the Corporation is merged into or
consolidated with another corporation and the Corporation is not the surviving
corporation, the surviving corporation shall assume the obligations of the
Corporation under these By-Laws with respect to any Proceeding arising out of or
relating to any action, omission, transaction or facts occurring on or prior to
the date of such merger or consolidation.
SECTION 6.12 SAVINGS CLAUSE. If these By-Laws or any portion hereof shall
be invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify and advance expenses to each Indemnitee
as to any expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement in connection with any Proceeding, including an action by or
in the right of the Corporation, to the fullest extent permitted by any
applicable portion of these By-Laws that shall not have been invalidated and to
the fullest extent permitted by applicable law.
SECTION 6.13 SUBSEQUENT LEGISLATION. If the Massachusetts General Laws
are amended after adoption of these By-Laws to expand further the
indemnification permitted to Indemnitees, then the Corporation shall
indemnify such persons to the fullest extent permitted by the Massachusetts
General Laws as so amended.
SECTION 6.14 INDEMNIFICATION OF OTHERS. The Corporation may, to the
extent authorized from time to time by its Board, grant indemnification
rights to employees or agents of the Corporation or other persons serving the
Corporation who are not Indemnitees, and such rights may be equivalent to, or
greater or less than, those set forth in these By-Laws.
SECTION 7
DIVIDENDS
SECTION 7.1 DECLARATION OF DIVIDENDS. Dividends may be declared by the Board
at any regular or special meeting, pursuant to law and in accordance with the
voting requirements stated in these By-Laws. Dividends may be paid in cash, in
property or in shares of the Corporation's capital stock.
SECTION 7.2 RESERVES FOR DIVIDENDS. Before payment of any dividend, there
may be set aside out of any funds of the Corporation available for dividends
such sum or sums as the Board
16
<PAGE>
from time to time, in its absolute discretion, deems proper as a reserve or
reserves to meet contingencies, or for repairing or maintaining any property of
the Corporation, or for such other purpose as the Board determines promotes the
interest of the Corporation and the Board may modify or abolish any such reserve
in the manner in which it was created.
SECTION 8
GENERAL PROVISIONS
SECTION 8.1 FISCAL YEAR. The fiscal year of the Corporation shall be fixed
by resolution of the Board.
SECTION 8.2 CORPORATE SEAL. The corporate seal shall be in such form as may
be approved from time to time by the Board. The seal may be used by causing it
or a facsimile thereof to be impressed or affixed or in any other manner
reproduced.
SECTION 8.3 CORPORATION CHECKS. All checks or other orders for the payment
of money and notes of the Corporation shall be signed by such officer or
officers or such other person or persons as the Board may from time to time
designate.
SECTION 8.4 PROTECTION OF CORPORATE BOOKS. As provided under applicable laws
of the Commonwealth of Massachusetts, or any successor laws, the Corporation
shall make available to the stockholders the books and records of the
Corporation, including, without limitation, periodic financial statements of the
Corporation.
SECTION 8.5 CONTROL SHARE ACQUISITIONS. The provisions of Chapter 110D of
the Massachusetts General Laws with respect to the regulation of control share
acquisitions shall not apply to this Corporation.
SECTION 9
AMENDMENTS
SECTION 9.1 AMENDMENTS OF BY-LAWS. Subject to any requirement set forth in
the Articles of Organization, these By-Laws may be altered, amended or repealed
or new By-Laws may be adopted by the Board or the stockholders; PROVIDED, that
Sections 2.3, 2.11, 3.2, 3.3, 3.17, 6.1-6.14, 8.5 and 9.1 of these By-Laws may
be amended or repealed only (i) by the affirmative vote of at least two-thirds
of the shares of the capital stock then issued and outstanding and entitled to
vote or (ii) by the affirmative vote of a majority of the directors then in
office. The fact that the power to amend, alter, repeal or adopt the By-Laws has
been conferred upon the Board shall not divest the stockholders of the same
powers.
17
<PAGE>
Exhibit 4.2
CONFORMED COPY
FIRST AMENDMENT
FIRST AMENDMENT, dated as of December 27, 1998 (this
"AMENDMENT"), to the Credit Agreement, dated as of November 19, 1997 (as
amended, supplemented or otherwise modified, the "CREDIT AGREEMENT"), among
FRIENDLY ICE CREAM CORPORATION, a Massachusetts corporation (the "BORROWER"),
the several banks and other financial institutions or entities parties thereto
(the "LENDERS"), and SOCIETE GENERALE, as administrative agent (in such
capacity, the "ADMINISTRATIVE AGENT").
W I T N E S S E T H:
WHEREAS, pursuant to the Credit Agreement, the Lenders have
agreed to make, and have made, extensions of credit to the Borrower;
WHEREAS, the Borrower has requested, and upon this Amendment
becoming effective, the Lenders will have agreed, that certain provisions of the
Credit Agreement be amended in the manner provided for in this Amendment;
NOW, THEREFORE, in consideration of the premises and the
agreements hereinafter set forth, the parties hereto hereby agree as follows:
SECTION 1. DEFINITIONS. Unless otherwise defined herein, terms
defined in the Credit Agreement and used herein shall have the meanings given to
them in the Credit Agreement.
SECTION 2. AMENDMENTS TO CREDIT AGREEMENT.
2.1 AMENDMENTS TO SECTION 1.1 OF THE CREDIT AGREEMENT.
Section 1.1 of the Credit Agreement is hereby amended by deleting therefrom the
definitions of the following terms in their respective entireties and
substituting in lieu thereof the following definitions:
"'APPLICABLE MARGIN': for each Type of Loan, the rate per
annum set forth under the relevant column heading below:
<TABLE>
<CAPTION>
Eurodollar ABR
Loans Loans
---------- -----
<S> <C> <C>
Revolving Credit Loans 2.75% 1.25%
Tranche A Term Loans 2.75% 1.25%
Tranche B Term Loans 2.75% 1.25%
Tranche C Term Loans 3.00% 1.50%;
</TABLE>
PROVIDED, that on and after the first Adjustment Date occurring after
the completion of four full fiscal quarters of the Borrower after the
Closing Date, the Applicable Margin
<PAGE>
2
with respect to Revolving Credit Loans and Tranche A Term Loans will be
determined pursuant to the Pricing Grid."
"'CONSOLIDATED CASH INTEREST EXPENSE": for any period, total
cash interest expense (including that attributable to Capital Lease
Obligations) of the Borrower and its Subsidiaries for such period with
respect to all outstanding Indebtedness of the Borrower and its
Subsidiaries (including, without limitation, all commissions, discounts
and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing and net costs under Interest Rate
Protection Agreements to the extent such net costs are allocable to
such period in accordance with GAAP); PROVIDED that in no event shall
the amendment fees paid in connection with the First Amendment to this
Agreement constitute Consolidated Cash Interest Expense."
"'CONSOLIDATED EBITDA': for any period, Consolidated Net
Income for such period PLUS, without duplication and to the extent
reflected as a charge in the statement of such Consolidated Net Income
for such period, the sum of (a) income tax expense, (b) interest
expense, amortization or writeoff of debt discount and debt issuance
costs and commissions, discounts and other fees and charges associated
with Indebtedness (including the Loans), (c) depreciation and
amortization expense, (d) amortization of intangibles (including, but
not limited to, goodwill) and organization costs, (e) any
extraordinary, unusual or non-recurring expenses or losses (including,
whether or not otherwise includable as a separate item in the statement
of such Consolidated Net Income for such period, losses on sales of
assets outside of the ordinary course of business) and (f) any other
non-cash charges, and MINUS, to the extent included in the statement of
such Consolidated Net Income for such period, the sum of (a) interest
income, (b) any extraordinary, unusual or non-recurring income or gains
(including, whether or not otherwise includable as a separate item in
the statement of such Consolidated Net Income for such period, gains on
the sales of assets outside of the ordinary course of business (it
being understood that sales of restaurants in an aggregate amount up to
$2,500,000 in any fiscal year are deemed to be in the ordinary course
of business)) and (c) any other non-cash income, all as determined on a
consolidated basis, PROVIDED, that, in calculating Consolidated EBITDA
for periods that include any fiscal quarter of the Borrower's 1998 and
1999 fiscal years, any expenses resulting from the closing of the
Borrower's Troy, Ohio manufacturing and distribution facility and the
termination of its operations in China and the United Kingdom shall be
disregarded to the extent that the aggregate amount of such expenses
does not exceed $7,500,000."
"'EXCESS CASH FLOW': for any fiscal year of the Borrower, the
excess, if any, of (a) Consolidated EBITDA for such fiscal year over
(b) the sum, without duplication, of (i) the lesser of (x) the
aggregate amount actually paid by the Borrower and its Subsidiaries in
cash during such fiscal year on account of Capital Expenditures
(excluding the principal amount of Indebtedness incurred in connection
with such expenditures and any such expenditures financed with the
proceeds of any Reinvestment Deferred Amount (but only to the extent
such expenditures so financed exceed the amount of Capital Expenditures
permitted to be made in such fiscal year from the proceeds of any
Reinvestment Deferred Amount in accordance with the provisions of
clause (b) of Section 7.7)) and (y) in the case of fiscal years 1999
through 2002, the amount set forth opposite such fiscal year below:
<PAGE>
3
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- ------
<S> <C>
1999 $43,000,000
2000 41,500,000
2001 43,500,000
2002 45,500,000
</TABLE>
(ii) the aggregate amount of all prepayments of Revolving Credit Loans
during such fiscal year to the extent accompanying permanent optional
reductions of the Revolving Credit Commitments and all optional
prepayments of the Term Loans during such fiscal year, (iii) the
aggregate amount of all regularly scheduled principal payments of
Funded Debt (including, without limitation, the Term Loans) of the
Borrower and its Subsidiaries made during such fiscal year (other than
in respect of any revolving credit facility to the extent there is not
an equivalent permanent reduction in commitments thereunder), (iv) the
aggregate amount actually paid by the Borrower and its Subsidiaries in
cash during such fiscal year on account of income taxes and
(v) Consolidated Cash Interest Expense for such fiscal year."
2.2 AMENDMENT TO SECTION 2.10(A) OF THE CREDIT AGREEMENT.
Section 2.10(a) of the Credit Agreement is hereby amended by inserting,
immediately following the percentage "50%" that appears therein, the following
parenthetical phrase "(or 100%, if, as of the last day of the fiscal quarter
most recently ended prior to the date of such issuance for which financial
statements shall have been delivered to the Lenders pursuant to Section 6.1, the
Consolidated Leverage Ratio (adjusted to give PRO FORMA effect to such issuance
and to any application of the Net Cash Proceeds thereof to repay Indebtedness)
shall have been greater than 4 to 1)".
2.3 AMENDMENT TO SECTION 2.10(B) OF THE CREDIT AGREEMENT.
Section 2.10(b) of the Credit Agreement is hereby amended by deleting from the
proviso thereto the following: "(i) the Borrower may exclude from the
requirements of this paragraph the first $7,500,000 of aggregate Net Cash
Proceeds from Asset Sales and Recovery Events and (ii)".
2.4 AMENDMENT TO SECTION 6.2 OF THE CREDIT AGREEMENT. Section
6.2 of the Credit Agreement is hereby amended by adding at the end thereof the
following new paragraph (i):
"(i) within 15 days after the end of each fiscal month, a
certificate of an Authorized Signatory setting forth in reasonable
detail the aggregate sales revenues of the Borrower and its
Subsidiaries for such fiscal month and the calculation of Consolidated
EBITDA for such fiscal month."
<PAGE>
4
2.5 AMENDMENTS TO SECTION 7.1 OF THE CREDIT AGREEMENT.
Section 7.1 of the Credit Agreement is hereby amended by deleting said section
in its entirety and substituting in lieu thereof the following:
"7.1 FINANCIAL CONDITION COVENANTS.
(a) CONSOLIDATED LEVERAGE RATIO. Permit the Consolidated
Leverage Ratio as at the last day of any period of four consecutive fiscal
quarters of the Borrower (or, if less, the number of full fiscal quarters
subsequent to the Closing Date) ending with any fiscal quarter set forth below
to exceed the ratio set forth below opposite such fiscal quarter:
<TABLE>
<CAPTION>
Consolidated
Fiscal Quarter Leverage Ratio
-------------- --------------
<S> <C>
Fiscal quarters from and including fourth quarter of
fiscal 1997 through and including third quarter of
fiscal 1998 4.75 to 1.00
Fourth quarter of fiscal 1998 5.25 to 1.00
First quarter of fiscal 1999 5.90 to 1.00
Second quarter of fiscal 1999 5.50 to 1.00
Third quarter of fiscal 1999 5.00 to 1.00
Fourth quarter of fiscal 1999 4.40 to 1.00
First quarter of fiscal 2000 5.00 to 1.00
Second quarter of fiscal 2000 4.70 to 1.00
Third quarter of fiscal 2000 4.20 to 1.00
Fourth quarter of fiscal 2000 4.10 to 1.00
Fiscal quarters from and including first quarter of
fiscal 2001 through and including third quarter of
fiscal 2001 4.30 to 1.00
Fourth quarter of fiscal 2001 3.55 to 1.00
Fiscal quarters from and including first quarter of
fiscal 2002 through and including third quarter of
fiscal 2002 3.75 to 1.00
Fourth quarter of fiscal 2002 3.05 to 1.00
First fiscal quarter of fiscal 2003 and all fiscal
quarters thereafter 3.25 to 1.00
</TABLE>
<PAGE>
5
(b) CONSOLIDATED INTEREST COVERAGE RATIO. Permit the
Consolidated Interest Coverage Ratio for any period of four consecutive fiscal
quarters of the Borrower (or, if less, the number of full fiscal quarters
subsequent to the Closing Date) ending with any fiscal quarter set forth below
to be less than the ratio set forth below opposite such fiscal quarter:
<TABLE>
<CAPTION>
Consolidated
Fiscal Quarter Leverage Ratio
-------------- --------------
<S> <C>
Fiscal quarters from and including fourth
quarter of fiscal 1997 through and including
third quarter of fiscal 1998 1.50 to 1.00
Fourth quarter of fiscal 1998 1.50 to 1.00
First quarter of fiscal 1999 1.30 to 1.00
Second quarter of fiscal 1999 1.40 to 1.00
Third quarter of fiscal 1999 1.50 to 1.00
Fourth quarter of fiscal 1999 1.60 to 1.00
First quarter of fiscal 2000 1.50 to 1.00
Second quarter of fiscal 2000 1.60 to 1.00
Third quarter of fiscal 2000 1.70 to 1.00
Fourth quarter of fiscal 2000 1.75 to 1.00
Fiscal quarters from and including first quarter of
fiscal 2001 through and including third quarter of
fiscal 2001 1.65 to 1.00
Fourth quarter of fiscal 2001 1.95 to 1.00
Fiscal quarters from and including first
quarter of fiscal 2002 through and including 1.85 to 1.00
third quarter of fiscal 2002
Fourth quarter of fiscal 2002 2.10 to 1.00
Fiscal quarters from and including first
quarter of fiscal 2003 through and including
third quarter of fiscal 2003 2.00 to 1.00
Fourth fiscal quarter of fiscal 2003 and all
fiscal quarters thereafter 2.15 to 1.00
</TABLE>
<PAGE>
6
(c) CONSOLIDATED FIXED CHARGE COVERAGE RATIO. Permit the
Consolidated Fixed Charge Coverage Ratio for any period of four consecutive
fiscal quarters of the Borrower (or, if less, the number of full fiscal quarters
subsequent to the Closing Date) ending with any fiscal quarter set forth below
to be less than the ratio set forth below opposite such fiscal quarter:
<TABLE>
<CAPTION>
Consolidated Fixed
Fiscal Quarter Charge Coverage Ratio
-------------- ---------------------
<S> <C>
Fiscal quarters from and including fourth quarter of
fiscal 1997 through and including third quarter of
fiscal 1998 1.40 to 1.00
Fourth quarter of fiscal 1998 1.30 to 1.00
First quarter of fiscal 1999 1.15 to 1.00
Second quarter of fiscal 1999 1.20 to 1.00
Third quarter of fiscal 1999 1.20 to 1.00
Fourth quarter of fiscal 1999 1.25 to 1.00
First quarter of fiscal 2000 1.10 to 1.00
Second quarter of fiscal 2000 1.10 to 1.00
Third quarter of fiscal 2000 1.20 to 1.00
Fourth quarter of fiscal 2000 1.20 to 1.00
Fiscal quarters from and including first quarter of
fiscal 2001 through and including third quarter of
fiscal 2001 1.10 to 1.00
Fourth quarter of fiscal 2001 1.25 to 1.00
Fiscal quarters from and including first quarter of
fiscal 2002 through and including third quarter of
fiscal 2002 1.15 to 1.00
Fourth quarter of fiscal 2002 1.30 to 1.00
Fiscal quarters from and including first quarter of
fiscal 2003 through and including third quarter of
fiscal 2003 1.20 to 1.00
Fourth fiscal quarter of fiscal 2003 and all fiscal
quarters thereafter 1.30 to 1.00
</TABLE>
<PAGE>
7
(d) MAINTENANCE OF NET WORTH. Permit Consolidated Net Worth as
of the last day of any fiscal quarter of the Borrower ending during any fiscal
year set forth below to be less than the amount set forth below opposite such
fiscal year:
<TABLE>
<CAPTION>
Consolidated
Fiscal Quarter Net Worth
-------------- ------------
<S> <C>
Fiscal quarters from and including fourth quarter of
fiscal 1997 through and including third quarter of
fiscal 1998 ($95,000,000)
Fourth quarter of fiscal 1998 ($98,000,000)
First quarter of fiscal 1999 ($105,000,000)
Second quarter of fiscal 1999 ($100,000,000)
Third quarter of fiscal 1999 ($93,500,000)
Fourth quarter of fiscal 1999 ($93,000,000)
First quarter of fiscal 2000 ($103,500,000)
Second quarter of fiscal 2000 ($97,300,000)
Third quarter of fiscal 2000 ($88,000,000)
Fourth quarter of fiscal 2000 ($86,500,000)
Fiscal quarters from and including first quarter of
fiscal 2001 through and including third quarter of
fiscal 2001 ($91,500,000)
Fourth quarter of fiscal 2001 ($75,000,000)
Fiscal quarters from and including first quarter of
fiscal 2002 through and including third quarter of
fiscal 2002 ($80,000,000)
Fourth quarter of fiscal 2002 ($55,000,000)
Fiscal quarters from and including first quarter of
fiscal 2003 through and including third quarter of
fiscal 2003 ($60,000,000)
Fourth fiscal quarter of fiscal 2003 and all fiscal
quarters thereafter ($50,000,000)"
</TABLE>
2.6 AMENDMENT TO SECTION 7.6 OF THE CREDIT AGREEMENT.
Section 7.6 of the Credit Agreement is hereby amended by deleting
paragraph (b) of said Section in its entirety and
substituting in lieu thereof the following:
<PAGE>
8
"(b) [Intentionally omitted]."
2.7 AMENDMENT TO SECTION 7.7 OF THE CREDIT AGREEMENT.
Section 7.7 of the Credit Agreement is hereby amended by deleting said Section
in its entirety and substituting in lieu thereof the following:
"7.7 LIMITATION ON CAPITAL EXPENDITURES. Make or commit to
make (by way of the acquisition of securities of a Person or otherwise)
any Capital Expenditure, except (a) Capital Expenditures of the
Borrower and its Subsidiaries in the ordinary course of business not
exceeding by more than $3,000,000 the Permitted Capital Expenditure
Amount for such fiscal year and (b) Capital Expenditures made with the
proceeds of any Reinvestment Deferred Amount, provided that the
aggregate amount of Capital Expenditures made pursuant to this clause
(b) during any fiscal year set forth below shall not exceed the amount
set forth opposite such fiscal year below:
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- ------
<S> <C>
1999 $10,000,000
2000 3,000,000
2001 3,000,000
2002 and thereafter 3,000,000,
</TABLE>
provided that if the Reinvestment Deferred Amount for any fiscal year
set forth in the table above arising out of Asset Sales shall be less
than the amount set forth above for such fiscal year, an amount equal
to the lesser of (i) such difference and (ii) $3,000,000 shall be added
to the amount set forth above for the succeeding fiscal year for the
purposes of the immediately preceding proviso (but not for the purposes
of this proviso). Anything in this Section to the contrary
notwithstanding, (x) if during any fiscal year the amount of Capital
Expenditures by the Borrower and its Subsidiaries (other than Capital
Expenditures made with the proceeds of any Reinvestment Deferred
Amount) shall exceed the Permitted Capital Expenditure Amount for such
fiscal year by up to the $3,000,000 amount permitted by clause (a) of
the preceding sentence, the Permitted Capital Expenditure Amount for
the succeeding fiscal year shall be automatically reduced by an amount
equal to such excess and (y) in no event may the aggregate amount of
Capital Expenditures during fiscal years 1999 through 2002 exceed
$173,500,000."
2.8 AMENDMENTS TO ANNEXES. Annexes A and C to the Credit
Agreement are hereby amended to read in their entireties as set forth in Annexes
A and C, respectively, hereto.
SECTION 3. CONDITIONS TO EFFECTIVENESS. This Amendment shall
become effective as of the date set forth above (the "AMENDMENT EFFECTIVE DATE")
on the date on which (a) the Borrower and the Required Lenders shall have
executed and delivered to the Administrative Agent this Amendment, (b) each
Guarantor shall have executed the
<PAGE>
9
Acknowledgment and Consent in the form annexed hereto and (c) the Borrower shall
have paid to the Administrative Agent, on behalf of each Lender, an amendment
fee in an amount equal to .50% (or .75%, in the case of each Lender which shall
have executed and delivered its signature page hereto to counsel to the
Administrative Agent by noon on Wednesday, December 30, 1998) of the sum of such
Lender's Revolving Credit Commitment and Term Loans then outstanding.
SECTION 4. REPRESENTATIONS AND WARRANTIES. The representations
and warranties made by the Loan Parties in the Loan Documents are true and
correct in all material respects on and as of the Amendment Effective Date,
before and after giving effect to the effectiveness of this Amendment, as if
made on and as of the Amendment Effective Date, except to the extent such
representations and warranties expressly relate to a specific earlier date, in
which case such representations and warranties were true and correct as of such
earlier date.
SECTION 5. PAYMENT OF EXPENSES. The Borrower agrees to pay or
reimburse the Administrative Agent for all of its reasonable out-of-pocket costs
and expenses incurred in connection with this Amendment and any other documents
prepared in connection herewith and the transactions contemplated hereby,
including, without limitation, the reasonable fees and disbursements of counsel
to the Administrative Agent.
SECTION 6. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. On
and after the Amendment Effective Date, each reference in the Credit Agreement
to "this Agreement", "hereunder", "hereof" or words of like import referring to
the Credit Agreement, and each reference in the other Loan Documents to "the
Credit Agreement", "thereunder", "thereof" or words of like import referring to
the Credit Agreement, shall mean and be a reference to the Credit Agreement as
amended hereby. The execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of any Lender or the Administrative Agent under any of
the Loan Documents. Except as expressly amended herein, all of the provisions of
the Credit Agreement and the other Loan Documents are and shall remain in full
force and effect in accordance with the terms thereof and are hereby in all
respects ratified and confirmed.
SECTION 7. COUNTERPARTS. This Amendment may be executed by one
or more of the parties to this Amendment on any number of separate counterparts,
and all of said counterparts taken together shall be deemed to constitute one
and the same instrument. Delivery of an executed signature page of this
Amendment by facsimile transmission shall be effective as delivery of a manually
executed counterpart hereof. A set of the copies of this Amendment signed by all
the parties shall be lodged with the Borrower and the Administrative Agent.
SECTION 8. GOVERNING LAW. This Amendment and the rights and
obligations of the parties hereto shall be governed by, and construed and
interpreted in accordance with, the law of the State of New York.
<PAGE>
10
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their proper and duly authorized
officers as of the day and year first above written.
FRIENDLY ICE CREAM CORPORATION
By: /s/ Paul J. Mcdonald
------------------------------------------
Title: Senior Executive Vice President
and Chief Administrative Officer
SOCIETE GENERALE
By: /s/ Salvatore Galatioto
------------------------------------------
Title: Managing Director
TRANSAMERICA BUSINESS CREDIT
CORPORATION
By: /s/ Perry Vavoules
------------------------------------------
Title: Senior Vice President
SANWA BUSINESS CREDIT CORPORATION
By: /s/ Mark Flamm
------------------------------------------
Title: Vice President
TORONTO DOMINION (TEXAS), INC.
By: /s/ Sonja R. Jordan
------------------------------------------
Title: Vice President
<PAGE>
11
BANKBOSTON, N.A.
By: /s/ Rod Guinn
------------------------------------------
Title: Division Executive
GENERAL ELECTRIC CAPITAL
CORPORATION
By: /s/ Janet K. Williams
------------------------------------------
Title: Duly Authorized Signatory
FIRST SOURCE FINANCIAL LLP
By: First Source Financial, Inc.,
its Agent/Manager
By: /s/ John P. Thacker
------------------------------------------
Title: Senior Vice President
<PAGE>
12
NATIONSBANK, N.A.
By: /s/ Richard G. Parkhurst, Jr.
------------------------------------------
Title: Senior Vice President
PAMCO CAYMAN LTD.
By: Highland Capital Management, L.P.
as Collateral Manager
By: /s/ Mark Okada
------------------------------------------
Title: Executive Vice President
PAM CAPITAL FUNDING, L.P.
By: Highland Capital Management, L.P.
as Collateral Manager
By: /s/ Mark Okada
------------------------------------------
Title: Executive Vice President
SENIOR DEBT PORTFOLIO
By: First Source Financial, Inc.,
its Agent/Manager
By: /s/ Scott H. Page
------------------------------------------
Title: Vice President
FOOTHILL INCOME TRUST, L.P.
By: /s/ Karen S. Sandler
------------------------------------------
Title: Managing Partner
<PAGE>
14
ACKNOWLEDGMENT AND CONSENT
Each of the undersigned corporations as guarantors under the
Guarantee and Collateral Agreement, dated as of November 19, 1997, made by the
undersigned corporations in favor of the Administrative Agent, for the benefit
of the Lenders, hereby (a) consents to the transactions contemplated by this
Amendment and (b) acknowledges and agrees that the guarantees (and grants of
collateral security therefor) contained in such Guarantee and Collateral
Agreement are, and shall remain, in full force and effect after giving effect to
this Amendment and all prior modifications to the Credit Agreement.
FRIENDLY'S RESTAURANTS FRANCHISE,
INC.
By: /s/ Paul J. Mcdonald
----------------------------------------------
Title: Chief Administrative Officer, Senior
Executive Vice President and Assistant
Clerk
FRIENDLY'S INTERNATIONAL, INC.
By: /s/ Paul J. Mcdonald
---------------------------------------------
Title: Vice President, Finance and Assistant
Secretary
<PAGE>
ANNEX A
PRICING GRID FOR REVOLVING CREDIT LOANS,
TRANCHE A TERM LOANS AND COMMITMENT FEES
<TABLE>
<CAPTION>
Consolidated Applicable Margin
Leverage Ratio for Eurodollar Loans Commitment Fee Rate
-------------- -------------------- -------------------
<S> <C> <C>
greater than equal to $ 4.0 to 1.0 2.750% 0.500%
greater than equal to $ 3.5 to 1.0 and less than 4.0 to 1.0 2.500% 0.500%
greater than equal to $ 3.0 to 1.0 and less than 3.5 to 1.0 2.375% 0.500%
greater than equal to $ 2.5 to 1.0 and less than 3.0 to 1.0 2.125% 0.375%
less than 2.5 to 1.0 1.875% 0.375%
</TABLE>
Changes in the Applicable Margin with respect to Revolving Loans and
Tranche A Loans or in the Commitment Fee Rate resulting from changes in the
Consolidated Leverage Ratio shall become effective on the date (the "ADJUSTMENT
DATE") on which financial statements are delivered to the Lenders pursuant to
Section 6.1 (but in any event not later than the 45th day after the end of each
of the first three quarterly periods of each fiscal year or the 90th day after
the end of each fiscal year, as the case may be) and shall remain in effect
until the next change to be effected pursuant to this paragraph. If any
financial statements referred to above are not delivered within the time periods
specified above, then, until such financial statements are delivered, the
Consolidated Leverage Ratio as at the end of the fiscal period that would have
been covered thereby shall for the purposes of this definition be deemed to be
greater than 4.0 to 1.0. In addition, at all times while a Default or an Event
of Default shall have occurred and be continuing, there shall be no reduction in
the Applicable Margin with respect to Revolving Loans and Tranche A Loans or in
the Commitment Fee Rate; PROVIDED, HOWEVER, that any applicable reduction shall
become effective at such time as no Default or Event of Default shall be
continuing. Each determination of the Consolidated Leverage Ratio pursuant to
this definition shall be made as at the end of and with respect to the period of
four consecutive fiscal quarters of the Borrower ending at the end of the period
covered by the relevant financial statements and shall reflect the matters set
forth in the proviso to Section 7.1(a).
<PAGE>
ANNEX C
PERMITTED CAPITAL EXPENDITURE GRID
<TABLE>
<CAPTION>
Ratio of
Capital Consolidated Consolidated Permitted
Fiscal Expenditure EBITDA EBITDA to Capital
Year Amount Target Consolidated Expenditure
EBITDA Target Percentage
- - ------------------------------------------------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C>
1998 $53,000,000 $ 67,700,000
- - -------------------------------------------------------------
1999 $33,000,000 $ 77,800,000 greater than or equal to $ 0.90 to 1.00 100%
- - -------------------------------------------------------------
2000 $38,500,000 $ 84,800,000
- - ------------------------------------------------------------- ----------------------------------------------------------
2001 $40,500,000 $ 95,400,000 less than 0.90 to 1.00 80%
and
greater than or equal to $ 0.80 to 1.00
- - ------------------------------------------------------------- ----------------------------------------------------------
2002 and thereafter $42,500,000 $105,900,000 less than 0.80 to 1.00 50%
- - ------------------------------------------------------------- ----------------------------------------------------------
</TABLE>
Changes in the Permitted Capital Expenditure Amount resulting from
changes in the Ratio of Consolidated EBITDA to Consolidated EBITDA Target shall
become effective on the date (the "PERMITTED CAPITAL EXPENDITURE ADJUSTMENT
DATE") on which audited financial statements are delivered to the Lenders
pursuant to Section 6.1(a) with respect to any fiscal year, commencing with the
Borrower's 1998 fiscal year (but in any event not later than the 90th day after
the end of each such fiscal year), and shall remain in effect until the next
change to be effected pursuant to this paragraph. If any financial statements
are not delivered within the time period specified above, then, until such
financial statements are delivered, the Ratio of Consolidated EBITDA to
Consolidated EBITDA Target as at the end of the fiscal year that would have been
covered thereby shall for the purposes of this definition be deemed to be less
than 0.80 to 1.00. Each determination of the Ratio of Consolidated EBITDA to
Consolidated EBITDA Target shall be made with respect to the period of four
consecutive quarters of the Borrower ending at the end of the fiscal year
covered by the relevant financial statements.
<PAGE>
Exhibit 10.11
AIRCRAFT REIMBURSEMENT AGREEMENT
This Agreement is entered into as of April 14, 1994, among Friendly Ice
Cream Corporation, a Massachusetts corporation ("Friendly"), and TRC Realty Co.,
a Vermont corporation ("Lessee").
R E C I T A L S
Lessee has entered into that certain Aircraft Lease Agreement dated as
of April 14, 1994 (as amended, supplemented or modified from time to time, the
"Lease") with General Electric Capital Corporation ("Lessor") providing for the
lease by Lessee from the Lessor of a certain Beechjet 400A aircraft, FAA
Registration Mark N998GP and Manufacturer's Serial Number RK-32, together with
two Pratt & Whitney JT-15D-5 engines and related accessories and optional
equipment (collectively, the "Aircraft"). Friendly is an Affiliate of Lessee,
will be using the Aircraft in its business from time to time as permitted by the
Lease, and desires under this Agreement to provide for its reimbursement of
Lessee for certain costs and expenses of its use of the aircraft.
It is hereby agreed as follows:
1. Terms used with initial capital letters in this Agreement and not
otherwise defined shall have the respective meanings given thereto in the Lease.
The following terms when used in this Agreement shall have the meanings
indicated below:
"Contract User" shall mean Friendly and any other Affiliate of
Lessee which has entered into an Aircraft Reimbursement Agreement with
Lessee on substantially the same terms and conditions as are contained
in this Agreement.
"Fixed Costs" shall mean, with respect to any month, those
costs and expenses associated with the possession and use of the
Aircraft for such month of the type which are reflected as "Fixed
costs" on Exhibit A hereto.
"Usage Share" shall mean, with respect to each Contract User,
such Contract User's share (expressed as a percentage) of the usage of
the Aircraft by all Contract Users during the preceding month, which
share shall be determined by dividing the number of hours of use of the
Aircraft by such Contract User during such month by the total number of
hours of use of the Aircraft during such month by all Contract Users.
"Variable Expenses" shall mean, with respect to any month, all
costs and expenses incurred in connection with the possession and use
of the Aircraft during such month other than Fixed Costs, and shall
include, without limitation, those costs and expenses of the type which
are reflected as "Variable Expenses" on Exhibit A.
<PAGE>
2. Lessee agrees to make the Aircraft available for use by Friendly on
request, subject to the availability of the Aircraft and Lessee's customary
scheduling requirements. It is understood and agreed, however, that Lessee shall
be and remain solely responsible for the possession and use of the Aircraft and
for the payment and performance of all obligations under the Lease, and Friendly
shall have no responsibility or obligation with respect thereto except for the
reimbursement of costs as provided for in Section 4(a) of this Agreement.
3. This Agreement shall be for a term commencing on April 14, 1994 and
continuing to and through the Term of the Lease.
4. (a) Friendly shall reimburse Lessee monthly an amount equal to the
sum of (a) one-half (1/2) of the Fixed Costs of the Aircraft for the preceding
month, and (b) its Usage Share of the Variable Expenses of the Aircraft for the
preceding month; provided, however, that if there are more than two Contract
Users at any time during the term of this Agreement, the denominator in the
fraction in the foregoing clause (a) shall be increased to the total number of
Contract Users.
(b) For the purposes of this Agreement, Fixed costs and Variable
Expenses shall be Lessee's fully allocated costs, as determined by Lessee from
its books and records in accordance with generally accepted accounting
principles. The gross receipts received by Lessee with respect to any month from
the use of the Aircraft by a person other than a Contract User shall be credited
to Fixed Costs or Variable Expenses for such month in such consistent manner as
Lessee shall in good faith deem appropriate. All determinations of hourly use of
the Aircraft by Friendly for each month shall be made by Lessee in accordance
with its books and records.
(c) The Lessee will bill Friendly monthly, promptly after the last day
of the month, for the amount of its reimbursement amount for the Aircraft for
the preceding month, which bill will be due and payable within ten (10) days.
5. Lessee, if requested by Friendly shall permit Friendly to audit its
books and records relating to the costs and Aircraft usage being reimbursed
hereunder.
6. Nothing herein contained shall be construed as constituting a
partnership, joint venture or agency between Lessee and Friendly.
7. Each party hereto intends that this Agreement shall not benefit or
create any right or cause of action in or on behalf of any person other than the
parties hereto.
8. All terms and provisions of this Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and the respective successors
and assigns; provided, however, that this Agreement may not be assigned by
either party hereto without the written consent of the other party (which
consent shall not be unreasonably withheld).
<PAGE>
9. This Agreement shall be governed by the laws of the State of
Illinois.
In witness whereof, the parties have signed this Agreement as of the
date first above written.
FRIENDLY ICE CREAM CORPORATION
By: /s/ George G. Roller
-----------------------------------
Its: V.P. & Treasurer
TRC REALTY CO.
By: /s/ Larry W. Browne
-----------------------------------
Its: Executive Vice President
<PAGE>
EXHIBIT A
TRC REALTY CO.
AIRCRAFT REIMBURSEMENT ALLOCATION
FIXED COSTS
Lease Payments
Pilot (Salaries & Benefits)
Pilot Relocation
Hangar Rental
Property Taxes
Letter of Credit Fees
Set Up Expenses
Other Fees
Dues & Subscriptions
Supplies
Telephone
Amortization
Insurance
VARIABLE EXPENSES
Fuel
Maintenance
Engine
Landing Fees
Pilot Travel Expenses
Catering Costs
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of our
report dated February 12, 1999 (except for the matter discussed in Note 18 of
Notes to Consolidated Financial Statements, as to which the date is February 25,
1999) for Friendly Ice Cream Corporation and subsidiaries included in this Form
10-K into Friendly Ice Cream Corporation's previously filed Registration
Statements (File Nos. 333-40195, 333-40197 and 333-40199) on Form S-8.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
March 24, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-END> DEC-27-1998
<CASH> 13,302
<SECURITIES> 0
<RECEIVABLES> 5,730
<ALLOWANCES> 164
<INVENTORY> 15,560
<CURRENT-ASSETS> 48,067
<PP&E> 549,335
<DEPRECIATION> 249,176
<TOTAL-ASSETS> 374,548
<CURRENT-LIABILITIES> 78,724
<BONDS> 311,061
0
0
<COMMON> 75
<OTHER-SE> (90,676)
<TOTAL-LIABILITY-AND-EQUITY> 374,548
<SALES> 674,327
<TOTAL-REVENUES> 678,096
<CGS> 204,884
<TOTAL-COSTS> 570,287
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,838
<INCOME-PRETAX> (8,426)
<INCOME-TAX> 3,455
<INCOME-CONTINUING> (4,971)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,971)
<EPS-PRIMARY> (0.67)
<EPS-DILUTED> (0.67)
</TABLE>
