<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended July 2, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
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)
MASSACHUSETTS 5812 04-2053130
(State of (Primary Standard Industrial (I.R.S. Employer
Incorporation) Classification Code Number) Identification No.)
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)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 7, 2000
----- -----------------------------
Common Stock, $.01 par value 7,420,963 shares
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
July 2, January 2,
2000 2000
--------- ---------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 11,672 $ 12,062
Restricted cash 1,106 2,066
Accounts receivable, net 5,810 3,924
Inventories 16,185 11,352
Deferred income taxes 5,657 5,657
Prepaid expenses and other current assets 3,617 6,298
--------- ---------
TOTAL CURRENT ASSETS 44,047 41,359
PROPERTY AND EQUIPMENT, net 242,911 289,839
INTANGIBLES AND DEFERRED COSTS, net 22,470 23,613
OTHER ASSETS 1,707 1,559
--------- ---------
TOTAL ASSETS $ 311,135 $ 356,370
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 14,581 $ 13,673
Current maturities of capital lease and finance obligations 1,599 1,688
Accounts payable 26,421 26,073
Accrued salaries and benefits 13,565 13,889
Accrued interest payable 3,806 4,006
Insurance reserves 9,221 9,748
Restructuring reserve 8,509 --
Other accrued expenses 12,510 20,106
--------- ---------
TOTAL CURRENT LIABILITIES 90,212 89,183
--------- ---------
DEFERRED INCOME TAXES 12,532 29,747
CAPITAL LEASE AND FINANCE OBLIGATIONS, less current maturities 7,324 7,913
LONG-TERM DEBT, less current maturities 281,988 292,432
OTHER LONG-TERM LIABILITIES 24,003 26,800
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock 74 75
Preferred stock -- --
Additional paid-in capital 138,746 138,459
Accumulated deficit (243,744) (228,239)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (104,924) (89,705)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 311,135 $ 356,370
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
1
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
-------------------------- ---------------------------
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES $164,144 $ 184,666 $ 313,519 $ 330,349
COSTS AND EXPENSES:
Cost of sales 50,271 50,265 95,129 94,453
Labor and benefits 49,399 58,959 97,575 109,323
Operating expenses 35,243 42,498 71,725 75,882
General and administrative expenses 10,302 10,741 21,771 22,666
Relocation of manufacturing and distribution facility -- 800 -- 800
Restructuring costs -- -- 12,056 --
Write-downs of property and equipment 688 303 18,360 589
Depreciation and amortization 7,319 8,566 15,740 16,795
Loss (gain) on sales of restaurant operations and properties 69 (657) (2,018) (913)
-------- --------- --------- ---------
OPERATING INCOME (LOSS) 10,853 13,191 (16,819) 10,754
Interest expense, net 7,963 8,302 15,901 16,637
Recovery of write-down of joint venture -- (646) -- (896)
-------- --------- --------- ---------
INCOME (LOSS) BEFORE BENEFIT FROM (PROVISION FOR)
INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 2,890 5,535 (32,720) (4,987)
Benefit from (provision for) income taxes 115 (2,269) 17,215 2,045
-------- --------- --------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 3,005 3,266 (15,505) (2,942)
Cumulative effect of change in accounting principle, net of
income tax benefit of $222 -- -- -- (319)
-------- --------- --------- ---------
NET INCOME (LOSS) $ 3,005 $ 3,266 $ (15,505) $ (3,261)
======== ========= ========= =========
BASIC NET INCOME (LOSS) PER SHARE:
Income (loss) before cumulative effect of change in
accounting principle $ 0.40 $ 0.44 $ (2.08) $ (0.40)
Cumulative effect of change in accounting principle, net of
income tax benefit -- -- -- (0.04)
-------- --------- --------- ---------
Net income (loss) $ 0.40 $ 0.44 $ (2.08) $ (0.44)
======== ========= ========= =========
DILUTED NET INCOME (LOSS) PER SHARE:
Income (loss) before cumulative effect of change in
accounting principle $ 0.40 $ 0.44 $ (2.08) $ (0.40)
Cumulative effect of change in accounting principle, net of
income tax benefit -- -- -- (0.04)
-------- --------- --------- ---------
Net income (loss) $ 0.40 $ 0.44 $ (2.08) $ (0.44)
======== ========= ========= =========
WEIGHTED AVERAGE SHARES:
Basic 7,438 7,493 7,454 7,488
======== ========= ========= =========
Diluted 7,498 7,507 7,454 7,488
======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
-------------------------
July 2, June 27,
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(15,505) $ (3,261)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Cumulative effect of change in accounting principle -- 319
Stock compensation expense 286 337
Relocation of manufacturing and distribution facility -- 800
Depreciation and amortization 15,740 16,795
Write-downs of property and equipment 18,360 589
Deferred income tax benefit (17,215) (2,045)
(Gain) loss on asset retirements (2,528) 358
Non-cash recovery of write-down of joint venture -- (69)
Changes in operating assets and liabilities:
Accounts receivable (1,886) (1,972)
Inventories (4,833) (2,684)
Other assets 4,070 (1,193)
Accounts payable 348 9,168
Accrued expenses and other long-term liabilities (2,935) (2,963)
-------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (6,098) 14,179
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (8,261) (26,316)
Proceeds from sales of property and equipment 24,381 2,845
Proceeds from sale of joint venture -- 1,150
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 16,120 (22,321)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 56,000 52,000
Repayments of debt (65,536) (40,341)
Repayments of capital lease and finance obligations (876) (823)
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (10,412) 10,836
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- (2)
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (390) 2,692
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,062 11,091
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,672 $ 13,783
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 15,540 $ 15,810
Income taxes 9 6
Capital lease obligations incurred 909 --
Capital lease obligations terminated 711 --
Notes received from sales of property and equipment 577 --
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
------ ------- -------- -------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $3,005 $ 3,266 $(15,505) $(3,261)
OTHER COMPREHENSIVE (LOSS),
NET OF TAX:
Currency translation effects -- (3) -- (2)
------ ------- -------- -------
OTHER COMPREHENSIVE (LOSS) -- (3) -- (2)
------ ------- -------- -------
COMPREHENSIVE INCOME (LOSS) $3,005 $ 3,263 $(15,505) $(3,263)
====== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
INTERIM FINANCIAL INFORMATION -
The accompanying financial statements as of July 2, 2000 and for the
second quarter and six months ended July 2, 2000 and June 27, 1999 are
unaudited, but, in the opinion of management, include all adjustments which are
necessary for a fair presentation of the consolidated financial position,
results of operations, cash flows and comprehensive income (loss) of Friendly
Ice Cream Corporation ("FICC") and subsidiaries (unless the context indicates
otherwise, collectively, the "Company"). Such adjustments consist solely of
normal recurring accruals. Operating results for the three and six month periods
ended July 2, 2000 and June 27, 1999 are not necessarily indicative of the
results that may be expected for the entire year due, in part, to the
seasonality of the Company's business. Historically, higher revenues and
operating income have been experienced during the second and third fiscal
quarters. The Company's Consolidated Financial Statements, including the notes
thereto, which are contained in the 1999 Annual Report on Form 10-K should be
read in conjunction with these Condensed Consolidated Financial Statements.
INVENTORIES -
Inventories are stated at the lower of first-in, first-out cost or
market. Inventories as of July 2, 2000 and January 2, 2000 were as follows (in
thousands):
<TABLE>
<CAPTION>
July 2, January 2,
2000 2000
------ ------
<S> <C> <C>
Raw materials $1,194 $354
Goods in process 204 126
Finished goods 14,787 10,872
------ ------
Total $16,185 $11,352
======= =======
</TABLE>
2. EARNINGS PER SHARE
Basic net income (loss) per share is calculated by dividing income
(loss) available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is calculated
by dividing earnings 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 17,406 and 7,655 for the six months ended July
2, 2000 and June 27, 1999, respectively.
Presented below is the reconciliation between basic and diluted weighted
average shares for the three months ended July 2, 2000 and June 27, 1999 (in
thousands):
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------------------------------------------
Basic Diluted
------------------------------- -----------------------------
July 2, 2000 June 27, 1999 July 2, 2000 June 27, 1999
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Weighted average number of
common shares outstanding during
the period 7,438 7,493 7,438 7,493
Adjustments:
Assumed exercise of stock options -- -- 60 14
----- ----- ----- -----
Weighted average number of
shares outstanding 7,438 7,493 7,498 7,507
===== ===== ===== =====
</TABLE>
5
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. 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, on December 28, 1998 the Company expensed previously
deferred restaurant preopening costs of approximately $541,000. This transaction
has been reflected as a cumulative effect of a change in accounting principle of
$319,000, net of the income tax benefit of $222,000, in the accompanying
condensed consolidated financial statements for the six months ended June 27,
1999.
4. SEGMENT REPORTING
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
condensed consolidated financial statements.
The Company'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. 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's franchise segment includes a royalty based on franchise restaurant
revenue. In addition, the Company receives rental income from various franchised
restaurants. The Company's international business primarily consisted of a
license agreement with several companies in the United Kingdom to distribute the
Company's frozen desserts and a 50% joint venture in Shanghai, China which
involved the manufacture and distribution of frozen desserts on a limited basis.
At December 27, 1998, these operations had been discontinued. 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 income (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.
6
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
4. SEGMENT REPORTING (CONTINUED)
EBITDA represents net income (loss) before (i) cumulative effect of
change in accounting principle, net of income taxes, (ii) benefit from
(provision for) income taxes, (iii) recovery of write-down of joint venture,
(iv) interest expense, net, (v) depreciation and amortization and (vi)
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-Q 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 (loss) from operations or other traditional indications of a
company's operating performance.
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
-------------------------- -------------------------
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Revenues:
Restaurant $ 136,800 $ 160,886 $ 262,223 $ 291,114
Foodservice (product sales to franchisees,
retail and institutional) 67,849 71,174 128,037 123,765
Franchise 1,765 1,402 4,042 2,466
International -- -- -- 23
--------- --------- --------- ---------
Total $ 206,414 $ 233,462 $ 394,302 $ 417,368
========= ========= ========= =========
Intersegment revenues:
Restaurant $ -- $ -- $ -- $ --
Foodservice (product sales to franchisees,
retail and institutional) (42,270) (48,796) (80,783) (87,019)
Franchise -- -- -- --
International -- -- -- --
--------- --------- --------- ---------
Total $ (42,270) $ (48,796) $ (80,783) $ (87,019)
========= ========= ========= =========
External revenues:
Restaurant $ 136,800 $ 160,886 $ 262,223 $ 291,114
Foodservice (product sales to franchisees,
retail and institutional) 25,579 22,378 47,254 36,746
Franchise 1,765 1,402 4,042 2,466
International -- -- -- 23
--------- --------- --------- ---------
Total $ 164,144 $ 184,666 $ 313,519 $ 330,349
========= ========= ========= =========
</TABLE>
7
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
4. SEGMENT REPORTING (CONTINUED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
EBITDA:
Restaurant $ 16,495 $ 18,050 $ 13,456 $ 27,945
Foodservice (product sales to franchisees,
retail and institutional) 7,065 8,829 12,574 11,568
Franchise 683 694 1,706 1,266
International -- 3 (1) (54)
Corporate (5,238) (5,341) (10,168) (12,250)
-------- -------- -------- --------
Total $ 19,005 $ 22,235 $ 17,567 $ 28,475
======== ======== ======== ========
Interest expense, net $ 7,963 $ 8,302 $ 15,901 $ 16,637
======== ======== ======== ========
Recovery of write-down of joint venture $ -- $ (646) $ -- $ (896)
======== ======== ======== ========
Income (loss) before (provision for) benefit from
income taxes and cumulative effect of change in
accounting principle:
Restaurant* $ 10,912 $ 11,400 $(15,834) $ 14,674
Foodservice (product sales to
franchisees, retail and institutional) 6,209 7,894 10,859 9,769
Franchise 583 511 1,523 937
International -- 649 (1) 842
Corporate (14,814) (14,919) (29,267) (31,209)
-------- -------- -------- --------
Total $ 2,890 $ 5,535 $(32,720) $ (4,987)
======== ======== ======== ========
Depreciation and amortization:
Restaurant $ 4,895 $ 6,347 $ 10,930 $ 12,682
Foodservice (retail and institutional) 856 935 1,715 1,799
Franchise 100 176 183 329
Corporate 1,468 1,108 2,912 1,985
-------- -------- -------- --------
Total $ 7,319 $ 8,566 $ 15,740 $ 16,795
======== ======== ======== ========
Capital expenditures, including capitalized leases:
Restaurant $ 5,830 $ 12,452 $ 6,837 $ 21,998
Foodservice (retail and institutional) 908 1,932 1,797 2,914
Corporate 205 583 536 1,404
-------- -------- -------- --------
Total $ 6,943 $ 14,967 $ 9,170 $ 26,316
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
July 2, January 2,
Identifiable assets: 2000 2000
-------- --------
<S> <C> <C>
Restaurant $216,389 $265,062
Foodservice (retail and institutional) 39,271 29,625
Franchise 4,767 3,935
International - 28
Corporate 50,708 57,720
-------- --------
Total $311,135 $356,370
======== ========
</TABLE>
* Includes restructuring costs of $12.1 million and the write-downs of property
and equipment of $18.4 million recorded during the six months ended July 2,
2000.
8
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
5. NEW ACCOUNTING PRONOUNCEMENTS
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF No.
00-14, "Accounting for Certain Sales Incentives," which provides guidance on the
recognition, measurement, and income statement classification for sales
incentives offered voluntarily by a vendor without charge to customers that can
be used in, or that are exercisable by a customer as a result of, a single
exchange transaction. The Company is required to adopt EITF No. 00-14 for
periods beginning after May 18, 2000. The Company is in the process of
determining the effect of this accounting pronouncement and will adopt this
accounting treatment in the third quarter of fiscal 2000.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. The SAB specifically sets forth
criteria which must be met in order for revenue to be recognized. The Company
adopted SAB No. 101 on January 3, 2000. The adoption of SAB No. 101 did not have
an effect on the Company's consolidated financial position or results of
operations as the Company's revenue recognition policies complied with the
provisions of SAB No. 101.
In June 1998, the Financial Accounting Standards Board (FASB) 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 cannot be applied retroactively. SFAS No. 133
would have been effective for fiscal years beginning after June 15, 1999. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133." Under the provisions of SFAS No. 137, SFAS No. 133 shall be effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. In June
2000, the FASB issued SFAS No. 138, "Accounting for Certain Hedging Activities."
Under the provisions of SFAS No. 138, the accounting and reporting standards of
SFAS No. 133 for certain derivative instruments and certain hedging activities
have been amended. Management has not yet quantified the impact of adopting SFAS
No. 133, as amended by SFAS 137 and SFAS 138, on the Company's financial
statements. However, SFAS No. 133 could increase volatility in earnings and
other comprehensive income.
9
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
6. RESTRUCTURING PLAN
In March 2000, the Company's Board of Directors approved a
restructuring plan that provided for the immediate closing of 81 restaurants at
the end of March 2000 and the disposition of an additional 70 restaurants over
the next twenty-four months. The 70 locations will remain in operation until
they are sold, subleased or closed prior to March 2002. The 151 restaurants in
the restructuring were generally lower sales volume units operating in markets
in which management believes the Company has a strong market penetration. The
larger units in these markets will continue operating. In connection with the
restructuring plan, the Company eliminated approximately 150
management/administrative positions in the field organization and at corporate
headquarters.
As a result of this plan, the Company reported a pre-tax restructuring
charge of approximately $12.1 million for severance pay, rent, utilities and
real estate taxes, demarking, lease termination costs and certain other costs
associated with the closing of the locations, along with a pre-tax write-down of
property and equipment for these locations of approximately $17.0 million in the
first quarter ended April 2, 2000. Future annual savings associated with the
reduction in force are estimated by management to be $8.0 million. In connection
with this restructuring plan, the Company's credit facility was amended on March
23, 2000. The consolidated net worth covenant was adjusted primarily to reflect
the write-down of property and equipment and restructuring charges associated
with the restructuring plan and interest rates on borrowings were increased. The
per annum interest rates on the term loans, revolving credit facility and the
letter of credit facility were increased by 0.25% as a result of this amendment.
The Company believes that the combination of the funds anticipated to be
generated from operating activities and borrowing availability under the credit
facility will be sufficient to meet the Company's anticipated operating
requirements, capital requirements and obligations associated with the
restructuring. The following represents the reserve and related costs associated
with the restructuring (in thousands):
<TABLE>
<CAPTION>
Costs paid for
the Six
Months Ended Accrued as of
Expense July 2, 2000 July 2, 2000
------- ------------ ------------
<S> <C> <C> <C>
Severance pay $1,503 $(821) $682
Rent 5,490 (487) 5,003
Utilities and real estate taxes 1,632 (456) 1,176
Demarking 760 (289) 471
Lease termination costs 718 - 718
Environmental costs 404 (6) 398
Inventory 111 (80) 31
Equipment 727 (727) -
Outplacement services 160 (112) 48
Other 551 (569) (18)
------- ------- ------
Total $12,056 $(3,547) $8,509
======= ======== ======
</TABLE>
The write-down of property and equipment consisted of $7.8 million for the
81 locations closed at the end of March and $9.2 million for the 70 locations
which will be disposed of over the next 24 months. As of July 2, 2000, the
Company has sold 19 of the restructuring properties, of which 17 were included
in the list of 81 restaurants which were closed in March 2000. In addition, the
Company has terminated its lease obligations at 17 restructuring properties, of
which 15 were included in the list of 81 restaurants which were closed in March
2000. At July 2, 2000, the carrying value of the remaining 115 properties to be
disposed of was $12.9 million and is reflected in the condensed consolidated
balance sheets as property and equipment, net.
10
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
FICC's obligation related to the $200 million Senior Notes is
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 other
disclosures of the Guarantor Subsidiary as of July 2, 2000 and June 27, 1999,
and for the periods ended July 2, 2000 and June 27, 1999, 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.
11
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JULY 2, 2000
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 8,787 $ 51 $ 2,834 $ -- $ 11,672
Restricted cash -- -- 1,106 -- 1,106
Accounts receivable, net 5,287 523 -- -- 5,810
Inventories 16,185 -- -- -- 16,185
Deferred income taxes 5,471 12 -- 174 5,657
Prepaid expenses and other current
assets 8,566 751 4,051 (9,751) 3,617
--------- ------ ------- -------- ---------
Total current assets 44,296 1,337 7,991 (9,577) 44,047
Deferred income taxes -- 903 1,333 (2,236) --
Property and equipment, net 242,911 -- -- -- 242,911
Intangibles and deferred costs, net 22,470 -- -- -- 22,470
Investments in subsidiaries 3,213 -- -- (3,213) --
Other assets 792 3,866 5,729 (8,680) 1,707
--------- ------ ------- -------- ---------
Total assets $ 313,682 $6,106 $15,053 $(23,706) $ 311,135
========= ====== ======= ======== =========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current maturities of long-term
obligations $ 20,180 $ -- $ -- $ (4,000) $ 16,180
Deferred income taxes -- -- 1 (1) --
Accounts payable 26,421 -- -- -- 26,421
Accrued expenses 44,175 924 8,263 (5,751) 47,611
--------- ------ ------- -------- ---------
Total current liabilities 90,776 924 8,264 (9,752) 90,212
Deferred income taxes 14,593 -- -- (2,061) 12,532
Long-term obligations, less current
maturities 294,126 -- -- (4,814) 289,312
Other long-term liabilities 19,111 2,344 6,414 (3,866) 24,003
Stockholders' equity (deficit) (104,924) 2,838 375 (3,213) (104,924)
--------- ------ ------- -------- ---------
Total liabilities and stockholders'
equity (deficit) $ 313,682 $6,106 $15,053 $(23,706) $ 311,135
========= ====== ======= ======== =========
</TABLE>
12
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 2, 2000
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $162,838 $ 1,306 $ -- $ -- $164,144
Costs and expenses:
Cost of sales 50,271 -- -- -- 50,271
Labor and benefits 49,399 -- -- -- 49,399
Operating expenses and write-downs of
property and equipment 35,986 -- (55) -- 35,931
General and administrative expenses 9,457 845 -- -- 10,302
Depreciation and amortization 7,319 -- -- -- 7,319
Loss on sales of restaurant operations and
properties 69 -- -- -- 69
Interest expense (income) 8,136 -- (173) -- 7,963
-------- ------- ----- ----- --------
Income before benefit from (provision for)
income taxes and equity in net income of
consolidated subsidiaries 2,201 461 228 -- 2,890
Benefit from (provision for) income taxes 385 (190) (80) -- 115
-------- ------- ----- ----- --------
Income before equity in net income of
consolidated subsidiaries 2,586 271 148 -- 3,005
Equity in net income of consolidated
subsidiaries 419 -- -- (419) --
-------- ------- ----- ----- --------
Net income $ 3,005 $ 271 $ 148 $(419) $ 3,005
======== ======= ===== ===== ========
</TABLE>
13
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 2, 2000
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 310,339 $ 3,180 $ -- $ -- $ 313,519
Costs and expenses:
Cost of sales 95,129 -- -- -- 95,129
Labor and benefits 97,575 -- -- -- 97,575
Operating expenses and write-downs of
property and equipment 90,200 -- (115) -- 90,085
General and administrative expenses 20,500 1,271 -- -- 21,771
Restructuring costs 12,056 -- -- -- 12,056
Depreciation and amortization 15,740 -- -- -- 15,740
Gain on sales of restaurant operations
and properties (2,018) -- -- -- (2,018)
Interest expense (income) 16,246 -- (345) -- 15,901
--------- ------- ----- -------- ---------
(Loss) income before benefit from
(provision for) income taxes and equity
in net income of consolidated
subsidiaries (35,089) 1,909 460 -- (32,720)
Benefit from (provision for) income taxes 18,159 (783) (161) -- 17,215
--------- ------- ----- -------- ---------
(Loss) income before equity in net
income of consolidated subsidiaries (16,930) 1,126 299 -- (15,505)
Equity in net income of consolidated
subsidiaries 1,425 -- -- (1,425) --
--------- ------- ----- -------- ---------
Net (loss) income $ (15,505) $ 1,126 $ 299 $ (1,425) $ (15,505)
========= ======= ===== ======== =========
</TABLE>
14
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 2, 2000
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash (used in) provided by operating
activities $ (6,595) $ 37 $ 460 $-- $ (6,098)
-------- ---- ------- --- --------
Cash flows from investing activities:
Purchases of property and equipment (8,261) -- -- -- (8,261)
Proceeds from sales of property and
equipment 24,381 -- -- -- 24,381
-------- ---- ------- --- --------
Net cash provided by investing activities 16,120 -- -- -- 16,120
-------- ---- ------- --- --------
Cash flows from financing activities:
Proceeds from borrowings 56,000 -- -- -- 56,000
Repayments of obligations (66,412) -- -- -- (66,412)
-------- ---- ------- --- --------
Net cash used in financing activities (10,412) -- -- -- (10,412)
-------- ---- ------- --- --------
Net (decrease) increase in cash and cash
equivalents (887) 37 460 -- (390)
Cash and cash equivalents, beginning of
period 9,674 14 2,374 -- 12,062
-------- ---- ------- --- --------
Cash and cash equivalents, end of period $ 8,787 $ 51 $ 2,834 $-- $ 11,672
======== ==== ======= === ========
Supplemental disclosures:
Interest paid (received) $ 16,069 $-- $ (529) $-- $ 15,540
Income taxes (received) paid (1,022) 866 165 -- 9
Capital lease obligations incurred 909 -- -- -- 909
Capital lease obligations terminated 711 -- -- -- 711
Notes received from sales of property
and equipment 577 -- -- -- 577
</TABLE>
15
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JANUARY 2, 2000
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $9,674 $ 14 $ 2,374 $ - $ 12,062
Restricted cash - - 2,066 - 2,066
Accounts receivable, net 3,678 256 - (10) 3,924
Inventories 11,352 - - - 11,352
Deferred income taxes 5,471 12 - 174 5,657
Prepaid expenses and other current
assets 9,085 834 6,455 (10,076) 6,298
-------- ------ ------- -------- --------
Total current assets 39,260 1,116 10,895 (9,912) 41,359
Deferred income taxes - 903 1,333 (2,236) -
Property and equipment, net 289,839 - - - 289,839
Intangible assets and deferred costs, net 23,613 - - - 23,613
Investments in subsidiaries 1,788 - - (1,788) -
Other assets 644 3,100 5,729 (7,914) 1,559
-------- ------ ------- -------- --------
Total assets $355,144 $5,119 $17,957 $(21,850) $356,370
======== ====== ======= ======== ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current maturities of long-term
obligations $ 19,361 $ - $ - $ (4,000) $ 15,361
Accounts payable 26,073 - - - 26,073
Deferred income taxes - - 1 (1) -
Accrued expenses 45,037 963 10,508 (8,759) 47,749
-------- ------ ------- -------- --------
Total current liabilities 90,471 963 10,509 (12,760) 89,183
Deferred income taxes 31,808 - - (2,061) 29,747
Long-term obligations, less current
maturities 305,159 - - (4,814) 300,345
Other liabilities 17,411 2,444 7,372 (427) 26,800
Stockholders' equity (deficit) (89,705) 1,712 76 (1,788) (89,705)
-------- ------ ------- -------- --------
Total liabilities and stockholders' equity
(deficit) $355,144 $5,119 $17,957 $(21,850) $356,370
======== ====== ======= ======== ========
</TABLE>
16
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 27, 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $183,902 $765 $ (1) $ - $184,666
Costs and expenses:
Cost of sales 50,265 - - - 50,265
Labor and benefits 58,959 - - - 58,959
Operating expenses and write-downs of
property and equipment 43,647 - (46) - 43,601
General and administrative expenses 10,372 430 (61) - 10,741
Depreciation and amortization 8,566 - - - 8,566
Gain on sales of restaurant operations and properties (657) - - - (657)
Interest expense (income) 8,485 - (183) - 8,302
Recovery of write-down of joint venture (646) - - - (646)
------- ----- ---- ----- --------
Income before provision for income taxes and
equity in net income of consolidated subsidiaries 4,911 335 289 - 5,535
Provision for income taxes (2,052) (137) (80) - (2,269)
------- ----- ---- ----- --------
Income before equity in net income of consolidated
subsidiaries 2,859 198 209 - 3,266
Equity in net income of consolidated subsidiaries 407 - - (407) -
------- ----- ---- ----- --------
Net income $ 3,266 $ 198 $209 $(407) $ 3,266
======= ===== ==== ===== ========
</TABLE>
17
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 27, 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $329,066 $ 1,260 $ 23 $ - $330,349
Costs and expenses:
Cost of sales 94,436 - 17 - 94,453
Labor and benefits 109,323 - - - 109,323
Operating expenses and write-downs of
property and equipment 77,373 - (102) - 77,271
General and administrative expenses 21,871 856 (61) - 22,666
Depreciation and amortization 16,795 - - - 16,795
Gain on sales of restaurant operations
and properties (913) - - - (913)
Interest expense (income) 17,000 - (363) - 16,637
Recovery of write-down of joint venture (896) - - - (896)
------- ------- ---- ----- --------
(Loss) income before benefit from
(provision for) income taxes, cumulative
effect of change in accounting principle
and equity in net income of consolidated
subsidiaries (5,923) 404 532 - (4,987)
Benefit from (provision for) income taxes 2,372 (165) (162) - 2,045
------- ------- ---- ----- --------
(Loss) income before cumulative effect
of change in accounting principle and
equity in net income of consolidated
subsidiaries (3,551) 239 370 - (2,942)
Cumulative effect of change in accounting
principle (319) - - - (319)
------- ------- ---- ----- --------
(Loss) income before equity in net income
of consolidated subsidiaries (3,870) 239 370 - (3,261)
Equity in net income of consolidated
subsidiaries 609 - - (609) -
------- ------- ---- ----- --------
Net (loss) income $(3,261) $ 239 $370 $(609) $ (3,261)
======= ======= ==== ===== ========
</TABLE>
18
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 27, 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities $ 13,999 $(21) $ 201 $ - $14,179
-------- ----- ------ --- -------
Cash flows from investing activities:
Purchases of property and equipment (26,316) - - - (26,316)
Proceeds from sales of property and
equipment 2,845 - - - 2,845
Return of advances from joint
venture 1,150 - - - 1,150
-------- ----- ------ --- -------
Net cash used in investing activities (22,321) - - - (22,321)
-------- ----- ------ --- -------
Cash flows from financing activities:
Proceeds from borrowings 52,000 - - - 52,000
Repayments of obligations (41,164) - - - (41,164)
-------- ----- ------ --- -------
Net cash provided by financing activities 10,836 - - - 10,836
-------- ----- ------ --- -------
Effect of exchange rate changes on cash - - (2) - (2)
-------- ----- ------ --- -------
Net increase (decrease) in cash and cash
equivalents 2,514 (21) 199 - 2,692
Cash and cash equivalents, beginning of
period 9,180 53 1,858 - 11,091
-------- ----- ------ --- -------
Cash and cash equivalents, end of period $ 11,694 $ 32 $2,057 $ - $13,783
======== ===== ====== === =======
Supplemental disclosures:
Interest paid (received) $ 15,990 $ - $ (180) $ - $15,810
Income taxes paid (received) 91 212 (297) - 6
</TABLE>
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO
INCLUDED ELSEWHERE HEREIN.
SAFE HARBOR STATEMENT
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 patterns, conditions needed to meet
re-imaging and new opening and franchising targets and costs associated with
improved service and other initiatives.
OVERVIEW
As of July 2, 2000, the Company owns and operates 486 restaurants,
franchises 106 restaurants and 8 cafes and manufactures and distributes a full
line of frozen dessert products. These products are distributed to Friendly's
restaurants and through more than 3,500 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 the frozen dessert products.
20
<PAGE>
RESULTS OF OPERATIONS
The operating results of the Company expressed as a percentage of total
revenues are set forth below:
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Restaurant 83.3% 87.1% 83.6% 88.1%
Foodservice (product sales to franchisees, retail and
institutional) 15.6 12.1 15.1 11.1
Franchise 1.1 0.8 1.3 0.8
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Costs and expenses:
Cost of sales 30.6 27.2 30.3 28.6
Labor and benefits 30.1 31.9 31.1 33.1
Operating expenses 21.5 23.0 22.9 22.9
General and administrative expenses 6.3 5.8 6.9 6.9
Relocation of manufacturing and distribution facility - 0.4 - 0.2
Restructuring costs - - 3.9 -
Write-downs of property and equipment 0.4 0.2 5.9 0.2
Depreciation and amortization 4.5 4.7 5.0 5.1
Loss (gain) on sales of restaurant operations and
properties 0.0 (0.3) (0.6) (0.3)
----- ----- ----- -----
Operating income (loss) 6.6 7.1 (5.4) 3.3
Interest expense, net 4.9 4.5 5.0 5.0
Recovery of write-down of joint venture - (0.4) - (0.2)
----- ----- ----- -----
Income (loss) before benefit from (provision for) income
taxes and cumulative effect of change in accounting
principle 1.7 3.0 (10.4) (1.5)
Benefit from (provision for) income taxes 0.1 (1.2) 5.5 0.6
----- ----- ----- -----
Income (loss) before cumulative effect of change in
accounting principle 1.8 1.8 (4.9) (0.9)
Cumulative effect of change in accounting principle, net
of income tax benefit - - - (0.1)
----- ----- ----- -----
Net income (loss) 1.8% 1.8% (4.9)% (1.0)%
===== ===== ===== =====
</TABLE>
21
<PAGE>
REVENUES:
Total revenues decreased $20.6 million, or 11.2%, to $164.1 million for
the second quarter ended July 2, 2000 from $184.7 million for the same quarter
in 1999. Restaurant revenues decreased $24.1 million, or 15.0%, to $136.8
million for the second quarter of 2000 from $160.9 million for the same quarter
in 1999. Comparable restaurant revenues decreased 1.2% largely due to the strong
introduction of the soft serve product line in the prior year. The decrease in
restaurant revenue was primarily impacted by the closing of 114 restaurants over
the past 12 months. The closings accounted for $15.8 million of the decline. The
refranchising of 37 restaurants during fiscal 2000 negatively impacted sales by
$10.4 million. Partially offsetting these decreases was the increase in
restaurant revenue of $3.2 million for new restaurants open less than one year.
Foodservice (product sales to franchisees, retail and institutional) and other
revenues increased by $3.2 million, or 14.3%, to $25.6 million for the second
quarter of 2000 from $22.4 million for the same quarter in 1999. The increase
was primarily due to the increase in the number of franchised locations.
Franchise revenue increased $0.4 million, or 28.6%, to $1.8 million for the
three months ended July 2, 2000 compared to $1.4 million for the three months
ended June 27, 1999. The increase is primarily the result of the fact that there
are 114 franchise units open at the end of the second quarter ended July 2, 2000
compared to 63 franchise units open at the end of the second quarter ended June
27, 1999.
Total revenues decreased $16.8 million, or 5.1%, to $313.5 million for the
six months ended July 2, 2000 from $330.3 million for the same period in 1999.
Restaurant revenues decreased $28.9 million, or 10.0%, to $262.2 million for the
six months ended July 2, 2000 from $291.1 million for the same period in 1999.
Comparable restaurant revenues increased 0.1%. The decrease in restaurant
revenues was primarily impacted by the closing of 114 restaurants over the past
12 months. The closings accounted for $20.2 million of the decline. The
refranchising of 37 restaurants during fiscal 2000 negatively impacted sales by
$15.0 million. Partially offsetting these decreases was the increase in
restaurant revenue of $6.8 million for new restaurants open less than one year.
Foodservice (product sales to franchisees, retail and institutional) and other
revenues increased by $10.5 million, or 28.5%, to $47.3 million for the six
months ended July 2, 2000 from $36.8 million for the six months ended June 27,
1999. The increase was primarily due to an increase in the number of franchised
locations. Franchise revenue was $4.0 million for the six months ended July 2,
2000 compared to $2.5 million for the six months ended June 27, 1999. The
increase is primarily the result of the fact that there are 114 franchise units
open at the end of the six months ended July 2, 2000 compared to 63 franchise
units open at the end of the six months ended June 27, 1999.
COST OF SALES:
Cost of sales were $50.3 million for the second quarter ended July 2, 2000
and for the same quarter in 1999. Cost of sales as a percentage of total
revenues increased to 30.6% for the second quarter of 2000 from 27.2% for the
second quarter of 1999. The higher food cost as a percentage of total revenues
was primarily due to a shift in the sales mix from Company owned restaurant
sales to Foodservice sales to franchisees. Foodservice sales to franchisees have
a higher food cost as a percentage of revenue than sales to Company owned
restaurants.
Cost of sales increased $0.6 million, or 1.0%, to $95.1 million for the
six months ended July 2, 2000 from $94.5 million for the same period in 1999.
Cost of sales as a percentage of total revenues increased to 30.3% for the six
months in 2000 from 28.6% for the same period in 1999. The higher food cost as a
percentage of total revenues was primarily due to a shift in the sales mix from
Company owned restaurant sales to Foodservice sales to franchisees and an
increase in retail supermarket sales. Foodservice sales to franchisees and
retail sales have higher food costs as a percentage of revenue than sales to
Company owned restaurants.
LABOR AND BENEFITS:
Labor and benefits decreased $9.6 million, or 16.3%, to $49.4 million for
the second quarter ended July 2, 2000 from $59.0 million for the same quarter in
1999. Labor and benefits as a percentage of total revenues decreased to 30.1%
for the second quarter of 2000 from 31.9% for the same quarter in 1999. The
lower labor and benefits as a percentage of total revenues was primarily due to
increases in Foodservice sales to franchisees, which do not have any associated
restaurant labor and benefits. Partially offsetting the decreases was higher
group insurance claims per participant in 2000 when compared to 1999.
Labor and benefits decreased $11.7 million, or 10.7%, to $97.6 million for
the six months ended July 2, 2000 from $109.3 million for the same period in
1999. Labor and benefits as a percentage of total revenues decreased to 31.1%
for the six months of 2000 from 33.1% for the same period in 1999. The lower
labor and benefits as a percentage of total revenues was primarily due to
increases in Foodservice sales to franchisees and higher retail sales. These
sales do not have any associated restaurant labor and benefits. Partially
offsetting the decreases were higher group insurance claims per participant in
2000 when compared to 1999. The increase in claims had less impact on the six
months comparison than on the second quarter comparison.
22
<PAGE>
OPERATING EXPENSES:
Operating expenses decreased $7.3 million, or 17.2%, to $35.2 million for
the second quarter ended July 2, 2000 from $42.5 million for the same quarter in
1999. This decrease was primarily due to a decrease in supplies and advertising
expenses related to the rollout of the Company's new soft serve product in 1999.
The decline in the number of operating restaurants further reduced restaurant
maintenance expenses and utilities. Selling expense in support of higher retail
sales increased in the 2000 period when compared to 1999. Operating expenses as
a percentage of total revenues were 21.5% and 23.0% for the second quarters
ended July 2, 2000 and June 27, 1999, respectively.
Operating expenses decreased $4.2 million, or 5.5%, to $71.7 million for
the six months ended July 2, 2000 from $75.9 million for the same period in
1999. This decrease was primarily due to a decrease in supplies and advertising
expenses related to the rollout of the Company's new soft serve product in 1999.
The decline in the number of operating restaurants further reduced restaurant
maintenance expenses and utilities. Offsetting the reduced restaurant expense
were higher selling expenses in support of the higher retail sales in the 2000
period when compared to 1999. Operating expenses as a percentage of total
revenues were 22.9% for both the six months ended July 2, 2000 and June 27,
1999.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses were $10.3 million for the second
quarter ended July 2, 2000 and $10.7 million for the same period in 1999.
General and administrative expenses as a percentage of total revenues increased
to 6.3% in the second quarter of 2000 from 5.8% for the same period in 1999. The
increase in general and administrative expenses as a percentage of revenue was
primarily due to higher bonus expense recognized in 2000 when compared to 1999.
Costs associated with the number of franchised locations also increased in the
2000 period when compared to 1999.
General and administrative expenses were $21.8 million and $22.7 million
for the six months ended July 2, 2000 and June 27, 1999, respectively. General
and administrative expenses as a percentage of total revenues were 6.9% in the
six months ended July 2, 2000 and for the same period in 1999.
EBITDA:
As a result of the above, EBITDA (EBITDA represents net income (loss)
before (i) cumulative effect of change in accounting principle, net of income
taxes, (ii) benefit from (provision for) income taxes, (iii) recovery of
write-down of joint venture, (iv) interest expense, net, (v) depreciation and
amortization and (vi) write-downs and all other non-cash items plus cash
distributions from unconsolidated subsidiaries) decreased $3.2 million, or
14.4%, to $19.0 million for the second quarter ended July 2, 2000 from $22.2
million for the same quarter in 1999. EBITDA as a percentage of total revenues
was 11.6% and 12.0% for the second quarters of 2000 and 1999, respectively.
EBITDA decreased $10.9 million, or 38.2%, to $17.6 million for the six
months ended July 2, 2000 from $28.5 million for the same period in 1999. EBITDA
as a percentage of total revenues was 5.6% and 8.6% for the six months ended
July 2, 2000 and June 27, 1999, respectively.
RESTRUCTURING COSTS:
Restructuring costs were $12.1 million for the six months ended July 2,
2000 as a result of the costs associated with the Company's decision to
reorganize its restaurant field and headquarters organizations in conjunction
with the closing of 81 under-performing restaurants and the planned closing of
an additional 70 restaurants over the next 24 months. Included in these costs
are severance, rent on closed restaurants until lease termination, utilities and
real estate taxes, demarking, lease termination, environmental and other
miscellaneous costs.
WRITE-DOWNS OF PROPERTY AND EQUIPMENT:
Write-downs of property and equipment were $0.7 million and $0.3 million
for the three months ended July 2, 2000 and June 27, 1999, respectively.
Write-downs of property and equipment were $18.4 million and $0.6 million for
the six months ended July 2, 2000 and June 27, 1999, respectively. The increase
in write-downs is primarily the result of the non-cash write-down of the 81
under-performing restaurants which were closed at the end of March and the
non-cash write-down of an additional 70 restaurants which will be closed over
the next 24 months to their estimated net realizable value.
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DEPRECIATION AND AMORTIZATION:
Depreciation and amortization decreased $1.3 million, or 15.1%, to $7.3
million for the second quarter ended July 2, 2000 from $8.6 million for the same
quarter in 1999. Depreciation and amortization as a percentage of total revenues
decreased to 4.5% for the second quarter of 2000 from 4.7% for the same quarter
in 1999. The decrease was primarily due to the reduction in the number of
Company operating restaurants and a reduction in capital expenditures.
Depreciation and amortization decreased $1.1 million, or 6.5%, to $15.7
million for the six months ended July 2, 2000 from $16.8 million for the same
period in 1999. Depreciation and amortization as a percentage of total revenues
decreased to 5.0% for the six months ended July 2, 2000 from 5.1% for the same
period in 1999. The decrease was primarily due to the reduction in the number of
Company operating restaurants and a reduction in capital expenditures.
LOSS (GAIN) ON SALES OF RESTAURANT OPERATIONS AND PROPERTIES:
Loss on sales of restaurant operations and properties for the second
quarter ended July 2, 2000 was $0.1 million compared to a gain on sales of
restaurant operations and properties of $0.7 million for the second quarter
ended June 27, 1999. The decrease was the result of the sale of a restaurant to
a franchisee during the second quarter ended June 27, 1999. The gain on sales of
restaurant operations and properties for the six months ended July 2, 2000 was
$2.0 million compared to the gain on sales of restaurant operations and
properties for the six months ended June 27, 1999 of $0.9 million. The increase
was primarily the result of the gain of $1.4 million associated with the sale of
29 restaurants to a franchisee on January 19, 2000. The Company also sold
certain assets and rights in eight other restaurants to three additional
franchisees resulting in a gain of $0.7 million during the six months ended July
2, 2000. The gain on the sales of restaurant operations and properties for the
six months ended June 27, 1999 represented the income related to the sale of the
equipment and operating rights for three existing restaurants to franchisees.
INTEREST EXPENSE, NET:
Interest expense, net of capitalized interest and interest income,
decreased by $0.3 million, or 3.6%, to $8.0 million for the second quarter ended
July 2, 2000 from $8.3 million for the same quarter in 1999. The decrease is
primarily impacted by the decrease in the average outstanding balance on the
term loans for the second quarter ended July 2, 2000 compared to the second
quarter ended June 27, 1999. Since June 27, 1999, the Company has made $7.2
million of scheduled principal payments and has used $19.9 million of asset sale
proceeds to reduce the amount outstanding on the term loans.
Interest expense, net of capitalized interest and interest income,
decreased by $0.7 million, or 4.2%, to $15.9 million for the six months ended
July 2, 2000 from $16.6 million for the same period in 1999. The decrease is
primarily impacted by the decrease in the average outstanding balance on the
term loans for the six months ended July 2, 2000 compared to the six months
ended June 27, 1999.
RECOVERY OF WRITE-DOWN OF JOINT VENTURE:
During the fourth quarter ended December 27, 1998, the Company sold its
50% interest in its China joint venture and recorded a write-down of $3.5
million to eliminate the Company's remaining investment in and advances to the
joint venture. During the first six months ended June 27, 1999, the Company
reported a $0.3 million payment from the sale which was received on March 17,
1999, as income.
BENEFIT FROM (PROVISION FOR) INCOME TAXES:
The benefit from income taxes was $0.1 million, or 4.0%, for the second
quarter ended July 2, 2000 compared to a provision for income taxes of $2.3
million, or 41%, for the second quarter ended June 27, 1999. The benefit from
income taxes was $17.2 million, or 52.6%, and $2.0 million, or 41%, for the six
months ended July 2, 2000 and June 27, 1999, respectively. The Company records
income taxes based on the effective rate expected for the year with any changes
in the valuation allowance reflected in the period of change. The sales of the
land and buildings to franchisees during the six months ended July 2, 2000
favorably impacted the provision for income taxes as it triggered built-in gains
which allowed for a reduction in the valuation allowance on certain net
operating loss carryforwards.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET:
In accordance with Statement of Position 98-5, the Company recognized $0.3
million of expense, net of income tax benefit, in the six months ended June 27,
1999 related to previously deferred restaurant preopening costs.
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NET INCOME (LOSS):
Net income was $3.0 million and $3.3 million for the second quarters ended
July 2, 2000 and June 27, 1999, respectively. Net loss was $15.5 million and
$3.3 million for the six months ended July 2, 2000 and June 27, 1999,
respectively.
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 used in operating activities was $6.1 million in the six
months ended July 2, 2000. Net cash provided by operating activities was $14.2
million in the six months ended June 27, 1999. During the six months ended July
2, 2000, accounts receivable increased approximately $1.9 million primarily due
to increased Foodservice retail supermarket sales along with the increase in
volume of Foodservice product sales to franchisees. Inventories increased $4.8
million as a result of increased retail and restaurant promotional activity
during the summer months. Other assets decreased $4.1 million primarily due to a
$2.2 million reduction in premium receivables associated with the Company's
captive insurance company. In addition, prepaid rent decreased approximately
$0.5 million as a result of the reduction of Company owned restaurants due to
the sale of restaurants to a franchisee. The decrease was also impacted by the
reduction in restricted cash as a result of payments made on workers
compensation claims. Accrued expenses decreased $2.9 million from January 2,
2000 to July 2, 2000. The decrease was primarily attributable to the $1.4
million of payments made on year-end accruals for restaurant construction and
maintenance, a $2.2 million decrease in unearned premiums in the Company's
captive insurance company, a $1.1 million reduction in the gift certificate
liability as a result of redemptions of year-end gift certificate sales, a $1.8
million reduction of the accrued pension obligation as a result of the Plan's
overfunded status and a $1.5 million reduction in insurance reserves for workers
compensation and general liability claims. Offsetting the decrease in accrued
expenses was the establishment of restructuring reserves associated with
management's restructuring plan and the fiscal 2000 bonus accrual. Available
borrowings under the revolving credit facility were $20.0 million as of July 2,
2000.
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
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 by the Company are limited by the terms of its credit
facility and Senior Notes.
Net cash provided by investing activities was $16.1 million in the six
months ended July 2, 2000. Net cash used in investing activities was $22.3
million in the six months ended June 27, 1999. Capital expenditures for
restaurant operations were approximately $6.8 million and $22.0 million for the
six months ended July 2, 2000 and June 27, 1999, respectively. The decrease in
capital expenditures was primarily due to the reduction in new units,
replacements and re-imaging projects. Proceeds from the sale of property and
equipment were $24.4 million and $2.8 million in the six months ended July 2,
2000 and June 27, 1999, respectively. The increase in proceeds from the sales of
property and equipment is primarily due to $16.6 million of proceeds received as
a result of sales of restaurants to franchisees.
Net cash used in financing activities was $10.4 million in the six
months ended July 2, 2000. Net cash provided by financing activities was $10.8
million in the six months ended June 27, 1999.
The Company had a working capital deficit of $46.2 million as of July
2, 2000. 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 expenses for food, supplies and payroll are
paid.
The Company's 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 credit
facility limits the amount which the Company may spend on capital expenditures
and requires the Company to comply with certain financial covenants. The
Company's credit facility also restricts the use of proceeds from asset sales.
Proceeds, as defined in the credit agreement, in excess of stated maximum
allowable amounts must be used to permanently reduce outstanding obligations
under the credit facility. Prepayments are applied first to the term loans in
inverse order of maturity and secondly, to permanently reduce the revolving
credit commitment. During the period from July 3, 2000 through December 31,
2000, the Company may retain up to a maximum of $3.0 million of net proceeds
from any asset sales to be invested into additional capital expenditures. The
Company's long-term debt is classified as of July 2, 2000 based on the terms
of an agreement reached in August, 2000 with its lenders.
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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 2000 are anticipated to be $27.0 million
in the aggregate, of which $20.0 million will be spent on restaurant operations.
The Company's actual 2000 capital expenditures may vary from these estimated
amounts. The Company believes that the combination of the funds anticipated to
be generated from operating activities and borrowing availability under the
credit facility will be sufficient to meet the Company's anticipated operating
requirements, capital requirements and obligations associated with the
restructuring.
SEASONALITY
Due to the seasonality of frozen dessert consumption and the effect
from time to time of weather on patronage in its restaurants, the Company's
revenues and EBITDA are typically higher in its second and third quarters.
GEOGRAPHIC CONCENTRATION
Approximately 89% 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company's market risk exposure
since the filing of the Annual Report on Form 10K.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) An annual meeting of Company's shareholders was held on May 10, 2000.
(b) Not applicable.
(c) The election of one nominee for director of the Company was voted upon at
the meeting. The number of affirmative votes and the number of votes
withheld with respect to such approval is as follows:
Nominee Affirmative Votes Votes Withheld
------- ----------------- --------------
Donald N. Smith 5,839,557 942,782
The results of the voting to approve the appointment of Arthur Andersen LLP
to audit the accounts of the Company and its subsidiaries for 2000 are as
follows:
For Against Abstain
--- ------- -------
6,747,888 27,301 7,150
There were no matters voted upon at the Company's annual meeting to which
broker non-votes applied.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) No report on Form 8-K was filed during the three months and six months ended
July 2, 2000.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRIENDLY ICE CREAM CORPORATION
By: By: /s/ Paul J. Kelley
--------------------
Name: Paul J. Kelley
Title: Senior Vice President,
Chief Financial Officer, Treasurer and
Assistant Clerk
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