<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 April 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)
<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)
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.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT APRIL 30, 2000
<S> <C>
Common Stock, $.01 par value 7,432,383 Shares
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
April 2, January 2,
2000 2000
----------- ----------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................................ $ 11,966 $ 12,062
Restricted cash .......................................................... 1,317 2,066
Accounts receivable, net ................................................. 4,358 3,924
Inventories .............................................................. 14,851 11,352
Deferred income taxes .................................................... 5,657 5,657
Prepaid expenses and other current assets ................................ 2,930 6,298
--------- ---------
TOTAL CURRENT ASSETS ......................................................... 41,079 41,359
PROPERTY AND EQUIPMENT, net .................................................. 251,454 289,839
INTANGIBLES AND DEFERRED COSTS, net .......................................... 23,042 23,613
OTHER ASSETS ................................................................. 2,458 1,559
--------- ---------
TOTAL ASSETS ................................................................. $ 318,033 $ 356,370
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt ..................................... $ 10,011 $ 13,673
Current maturities of capital lease and finance obligations .............. 1,387 1,688
Accounts payable ......................................................... 25,081 26,073
Accrued salaries and benefits ............................................ 14,038 13,889
Accrued interest payable ................................................. 9,053 4,006
Insurance reserves ....................................................... 9,130 9,748
Restructuring reserve .................................................... 10,840 --
Other accrued expenses ................................................... 14,315 20,106
--------- ---------
TOTAL CURRENT LIABILITIES .................................................... 93,855 89,183
--------- ---------
DEFERRED INCOME TAXES ........................................................ 12,647 29,747
CAPITAL LEASE AND FINANCE OBLIGATIONS, less current maturities ............... 7,104 7,913
LONG-TERM DEBT, less current maturities ...................................... 287,294 292,432
OTHER LONG-TERM LIABILITIES .................................................. 25,207 26,800
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock ............................................................. 75 75
Preferred stock .......................................................... -- --
Additional paid-in capital ............................................... 138,600 138,459
Accumulated deficit ...................................................... (246,749) (228,239)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) ......................................... (108,074) (89,705)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ......................... $ 318,033 $ 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
April 2, March 28,
2000 1999
---- ----
<S> <C> <C>
REVENUES ................................................................. $ 149,375 $ 145,683
COSTS AND EXPENSES:
Cost of sales ........................................................ 44,858 44,188
Labor and benefits ................................................... 48,176 50,364
Operating expenses ................................................... 36,482 33,384
General and administrative expenses .................................. 11,468 11,925
Restructuring costs .................................................. 12,057 --
Write-downs of property and equipment ................................ 17,672 286
Depreciation and amortization ........................................ 8,421 8,229
Gain on sales of restaurant operations and properties .................... (2,087) (256)
--------- ---------
OPERATING LOSS ........................................................... (27,672) (2,437)
Interest expense, net .................................................... 7,938 8,335
Recovery of write-down of joint venture .................................. -- (250)
--------- ---------
LOSS BEFORE BENEFIT FROM INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE ........................................... (35,610) (10,522)
Benefit from income taxes ................................................ 17,100 4,314
--------- ---------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE ............................................................. (18,510) (6,208)
Cumulative effect of change in accounting principle, net of income
tax benefit of $222 .................................................... -- (319)
--------- ---------
NET LOSS ................................................................. $ (18,510) $ (6,527)
========= =========
BASIC AND DILUTED NET LOSS PER SHARE:
Loss before cumulative effect of change in accounting principle....... $ (2.48) $ (0.83)
Cumulative effect of change in accounting principle, net of
income tax benefit ................................................... -- (.04)
--------- ---------
Net loss ............................................................. $ (2.48) $ (0.87)
========= =========
WEIGHTED AVERAGE BASIC AND DILUTED SHARES ................................ 7,471 7,482
========= =========
</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 THREE MONTHS ENDED
April 2, March 28,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................................... $(18,510) $ (6,527)
Adjustments to reconcile net loss to net cash used in operating activities:
Cumulative effect of change in accounting principle ......................... -- 319
Stock compensation expense .................................................. 141 162
Depreciation and amortization ............................................... 8,421 8,229
Write-downs of property and equipment ....................................... 17,672 286
Deferred income tax benefit ................................................. (17,100) (4,314)
(Gain) loss on asset retirements and sales .................................. (3,344) 97
Changes in operating assets and liabilities:
Accounts receivable ...................................................... (434) 1,338
Inventories .............................................................. (3,499) (1,540)
Other assets ............................................................. 3,795 (1,407)
Accounts payable ......................................................... (992) 1,389
Accrued expenses and other long-term liabilities ......................... 8,034 (648)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES .............................................. (5,816) (2,616)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................................ (2,227) (11,349)
Proceeds from sales of property and equipment .................................. 17,199 1,691
Proceeds from sale of joint venture ............................................ -- 1,150
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ................................ 14,972 (8,508)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings ....................................................... 33,000 26,000
Repayments of debt ............................................................. (41,801) (14,003)
Repayments of capital lease and finance obligations ............................ (451) (414)
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ................................ (9,252) 11,583
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ............................................ -- 1
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............................... (96) 460
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..................................... 12,062 11,091
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........................................... $ 11,966 $ 11,551
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid (refunded) during the period for:
Interest ....................................................................... $ 2,609 $ 3,213
Income taxes ................................................................... (21) 2
Capital lease obligations terminated .............................................. 659 --
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 LOSS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
April 2, March 28,
2000 1999
---- ----
<S> <C> <C>
NET LOSS .......................................... $(18,510) $ (6,527)
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Currency translation effects .................. -- 1
-------- --------
OTHER COMPREHENSIVE INCOME ........................ -- 1
-------- --------
COMPREHENSIVE LOSS ................................ $(18,510) $ (6,526)
======== ========
</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 condensed consolidated financial statements as of
April 2, 2000 and for the first quarter ended April 2, 2000 and March 28,
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 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
month period ended April 2, 2000 and March 28, 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 April 2, 2000 and January 2, 2000 were as follows (in
thousands):
<TABLE>
<CAPTION>
April 2, January 2,
2000 2000
-------- ----------
<S> <C> <C>
Raw materials ........................... $ 546 $ 354
Goods in process ........................ 297 126
Finished goods .......................... 14,008 10,872
------- -------
Total ................................... $14,851 $11,352
======= =======
</TABLE>
RECLASSIFICATIONS -
Certain prior year amounts have been reclassified to conform with
current year presentation.
2. LOSS PER SHARE
Basic net loss per share is calculated by dividing loss available to
common stockholders by the weighted average number of shares of common stock
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 loss per share because to do so would
have been antidilutive was 2,027 for the three months ended March 28, 1999.
There were no common stock equivalents which could dilute earnings per share in
the future, for the three months ended April 2, 2000.
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 three months ended March 28,
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 of the Board 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.
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 loss before (i) cumulative effect of change in
accounting principle, net of income taxes, (ii) benefit from 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
APRIL 2, MARCH 28,
2000 1999
---- ----
(in thousands)
<S> <C> <C>
Revenues:
Restaurant .................................................. $ 125,423 $ 130,228
Foodservice (retail and institutional) ...................... 60,188 52,591
Franchise ................................................... 2,277 1,064
International ............................................... -- 23
--------- ---------
Total ..................................................... $ 187,888 $ 183,906
========= =========
Intersegment revenues:
Restaurant .................................................. $ -- $ --
Foodservice (retail and institutional) ...................... (38,513) (38,223)
Franchise ................................................... -- --
International ............................................... -- --
--------- ---------
Total ..................................................... $ (38,513) $ (38,223)
========= =========
External revenues:
Restaurant .................................................. $ 125,423 $ 130,228
Foodservice (retail and institutional) ...................... 21,675 14,368
Franchise ................................................... 2,277 1,064
International ............................................... -- 23
--------- ---------
Total ..................................................... $ 149,375 $ 145,683
========= =========
</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
April 2, March 28,
2000 1999
-------- ---------
(in thousands)
<S> <C> <C>
EBITDA:
Restaurant ........................................... $ (3,039) $ 8,684
Foodservice (retail and institutional) ............... 5,509 2,732
Franchise ............................................ 1,023 273
International ........................................ (1) (57)
Corporate ............................................ (4,930) (5,392)
--------- ---------
Total .............................................. $ (1,438) $ 6,240
========== =========
Interest expense, net ..................................... $ 7,938 $ 8,335
========= ==========
Recovery of write-down of joint venture ................... $ -- $ 250
========= ==========
(Loss) income before income taxes and cumulative effect of
change in accounting principle:
Restaurant* .......................................... $ (26,746) $ 2,071
Foodservice (retail and institutional) ............... 4,650 1,868
Franchise ............................................ 940 119
International ........................................ (1) 193
Corporate ............................................ (14,453) (14,773)
--------- ---------
Total .............................................. $ (35,610) $ (10,522)
========= =========
Depreciation and amortization:
Restaurant ........................................... $ 6,035 $ 6,327
Foodservice (retail and institutional) ............... 859 864
Franchise ............................................ 83 154
Corporate ............................................ 1,444 884
--------- ---------
Total .............................................. $ 8,421 $ 8,229
========= =========
Identifiable assets: ...................................... April 2, January 2,
2000 2000
---- ----
Restaurant ........................................... 225,275 265,062
Foodservice (retail and institutional) ............... 35,230 29,625
Franchise ............................................ 4,036 3,935
International ........................................ -- 28
Corporate ............................................ 53,492 57,720
--------- ---------
Total .............................................. $ 318,033 $ 356,370
========= ==========
Capital expenditures:
Restaurant ........................................... $ 1,007 $ 9,546
Foodservice (retail and institutional) ............... 889 982
Corporate ............................................ 331 821
--------- ---------
Total .............................................. $ 2,227 $ 11,349
========= ==========
</TABLE>
* Includes restructuring costs of $12.1 million and the write-downs of property
and equipment of $17.7 million recorded during the three months ended April 2,
2000.
8
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
5. NEW ACCOUNTING PRONOUNCEMENTS
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 current revenue recognition policies comply 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.
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.
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 restaurants which
were closed 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 151
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 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>
Accrued as of
Expense Costs Paid April 2, 2000
--------- ------------ ---------------
<S> <C> <C> <C>
Severance pay ......................... $ 1,503 $ (6) $ 1,497
Rent .................................. 5,490 -- 5,490
Utilities and real estate taxes ....... 1,632 -- 1,632
Demarking ............................. 760 (92) 668
Lease termination costs ............... 718 -- 718
Environmental costs ................... 404 -- 404
Inventory ............................. 111 -- 111
Outplacement services ................. 160 -- 160
Other ................................. 162 -- 162
------- ------- -------
Total .......................... $10,940 $ (98) $10,842
======= ======= =======
</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. At April 2, 2000,
the carrying value of these 151 properties to be disposed of was $18.9 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. SALE OF RESTAURANT OPERATIONS AND PROPERTIES TO FRANCHISEES
On January 19, 2000, the Company entered into an agreement granting
Kessler Family LLC ("Kessler") non-exclusive rights to operate and develop
Friendly's full-service restaurants in the franchising region of Rochester,
Buffalo and Syracuse, New York (the "Kessler Agreement"). Pursuant to the
Kessler Agreement, Kessler purchased certain assets and rights in 29 existing
Friendly's restaurants and committed to open an additional 15 restaurants over
the next seven years. Gross proceeds from the sale were approximately
$13,300,000 of which $735,000 was for franchise fees for the initial 29
restaurants. The $735,000 was recorded as revenue in the first quarter ending
April 2, 2000. The Company recognized a gain of approximately $1,400,000 related
to the sale of the assets for the 29 existing franchised locations in the first
quarter ending April 2, 2000. The Company also sold certain assets and rights in
six other restaurants to two additional franchisees resulting in a gain of
$687,000.
8. 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 April 2, 2000 and March 28, 1999, and for the
periods ended April 2, 2000 and March 28, 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>
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF APRIL 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 ...................... $ 9,211 $ 50 $ 2,705 $ -- $ 11,966
Restricted cash ................................ -- -- 1,317 -- 1,317
Accounts receivable, net ....................... 3,950 408 -- -- 4,358
Inventories .................................... 14,851 -- -- -- 14,851
Deferred income taxes .......................... 5,471 12 -- 174 5,657
Prepaid expenses and other current
assets ....................................... 7,646 604 4,095 (9,415) 2,930
--------- --------- --------- --------- ---------
Total current assets ............................... 41,129 1,074 8,117 (9,241) 41,079
Deferred income taxes .............................. -- 903 1,333 (2,236) --
Property and equipment, net ........................ 251,454 -- -- -- 251,454
Intangibles and deferred costs, net ................ 23,042 -- -- -- 23,042
Investments in subsidiaries ........................ 2,793 -- -- (2,793) --
Other assets ....................................... 1,543 3,880 5,729 (8,694) 2,458
--------- --------- --------- --------- ---------
Total assets ....................................... $ 319,961 $ 5,857 $ 15,179 $ (22,964) $ 318,033
========= ========= ========= ========= =========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current maturities of long-term
obligations .................................. $ 15,398 $ -- $ -- $ (4,000) $ 11,398
Deferred income taxes .......................... -- -- 1 (1) --
Accounts payable ............................... 25,081 -- -- -- 25,081
Accrued expenses ............................... 53,485 678 8,308 (5,095) 57,376
--------- --------- --------- --------- ---------
Total current liabilities .......................... 93,964 678 8,309 (9,096) 93,855
Deferred income taxes .............................. 14,708 -- -- (2,061) 12,647
Long-term obligations, less current
maturities ......................................... 299,212 -- -- (4,814) 294,398
Other long-term liabilities ........................ 20,151 2,612 6,644 (4,200) 25,207
Stockholders' equity (deficit) ..................... (108,074) 2,567 226 (2,793) (108,074)
--------- --------- --------- --------- ---------
Total liabilities and stockholders'
equity (deficit) ................................. $ 319,961 $ 5,857 $ 15,179 $ (22,964) $ 318,033
========= ========= ========= ========= =========
</TABLE>
12
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 2, 2000
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
-------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues ......................................... $147,501 $1,874 $ -- $ -- $149,375
Costs and expenses:
Cost of sales ................................ 44,858 -- -- -- 44,858
Labor and benefits ........................... 48,176 -- -- -- 48,176
Operating expenses and write-downs of
property and equipment ..................... 54,214 -- (60) -- 54,154
General and administrative expenses .......... 11,042 426 -- -- 11,468
Restructuring costs .......................... 12,057 -- -- -- 12,057
Depreciation and amortization ................ 8,421 -- -- -- 8,421
Gain on sales of restaurant operations and
properties ..................................... (2,087) -- -- -- (2,087)
Interest expense (income) ........................ 8,110 -- (172) -- 7,938
------- --------- -------- ------- --------
(Loss) income before benefit from
(provision for) income taxes and equity in
net income of consolidated subsidiaries ........ (37,290) 1,448 232 -- (35,610)
Benefit from (provision for) income taxes ........ 17,774 (593) (81) -- 17,100
--------- --------- -------- ------- ---------
(Loss) income before equity in net income
of consolidated subsidiaries ................... (19,516) 855 151 -- (18,510)
Equity in net income of consolidated
subsidiaries ................................... 1,006 -- -- (1,006) --
--------- --------- -------- -------- ---------
Net (loss) income ................................ $(18,510) $855 $151 $(1,006) $(18,510)
========= ========= ======== ======== =========
</TABLE>
13
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 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 ........................... $(6,183) $36 $331 $- $(5,816)
-------- ---- ------- -- --------
Cash flows from investing activities:
Purchases of property and equipment . (2,227) -- -- -- (2,227)
Proceeds from sales of property and
equipment ......................... 17,199 -- -- -- 17,199
-------- ------- -------- ------ --------
Net cash provided by investing activities 14,972 -- -- -- 14,972
-------- ------- -------- ------ --------
Cash flows from financing activities:
Proceeds from borrowings .............. 33,000 -- -- -- 33,000
Repayments of obligations ............. (42,252) -- -- -- (42,252)
-------- ------- -------- ------ --------
Net cash used in financing activities .... (9,252) -- -- -- (9,252)
-------- ------- -------- ------- --------
Net (decrease) increase in cash and cash
equivalents ............................ (463) 36 331 -- (96)
Cash and cash equivalents, beginning of
period ................................. 9,674 14 2,374 -- 12,062
-------- ------- ------- ------- --------
Cash and cash equivalents, end of period . $9,211 $50 $2,705 $ -- $11,966
======== ======= ======= ======= ========
Supplemental disclosures:
Interest paid (received) .............. $2,966 $ -- $(357) $ -- $2,609
Income taxes (received) paid .......... (928) 823 84 -- (21)
Capital lease obligations terminated .. 659 -- -- -- 659
Notes received from sales of property
and equipment ....................... 577 -- -- -- 577
</TABLE>
14
<PAGE>
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>
15
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 28, 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues ........................................ $ 145,164 $ 495 $ 24 $-- $ 145,683
Costs and expenses:
Cost of sales ............................... 44,171 -- 17 -- 44,188
Labor and benefits .......................... 50,364 -- -- -- 50,364
Operating expenses and write-downs of
property and equipment ...................... 33,726 -- (56) -- 33,670
General and administrative expenses ......... 11,499 426 -- -- 11,925
Depreciation and amortization ............... 8,229 -- -- -- 8,229
Gain on sales of restaurant operations .......... (256) -- -- -- (256)
Interest expense (income) ....................... 8,515 -- (180) -- 8,335
Recovery of write-down of joint venture ......... (250) -- -- -- (250)
--------- ----- ----- --- --------
(Loss) income before benefit from
(provision for) income taxes, cumulative
effect of change in accounting principle
and equity in net income of
consolidated subsidiaries ................. . (10,834) 69 243 -- (10,522)
Benefit from (provision for) income taxes ....... 4,424 (28) (82) -- 4,314
--------- ----- ----- --- --------
(Loss) income before cumulative effect of
change in accounting principle and equity in
net income of consolidated subsidiaries ....... (6,410) 41 161 -- (6,208)
Cumulative effect of change in accounting
principle ..................................... (319) -- -- -- (319)
--------- ----- ----- --- -------
(Loss) income before equity in net income of
consolidated subsidiaries ..................... (6,729) 41 161 -- (6,527)
Equity in net income of consolidated
subsidiaries .................................. 202 -- -- (202) --
--------- ----- ----- ----- -------
Net (loss) income ............................... $ (6,527) $ 41 $ 161 $(202) $(6,527)
========= ===== ===== ===== ========
</TABLE>
16
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 28, 1999
(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 ............................................... $ (2,927) $268 $ 43 $ -- $ (2,616)
-------- ---- ------- ---- --------
Cash flows from investing activities:
Purchases of property and equipment ................... (11,349) -- -- -- (11,349)
Proceeds from sales of property and
equipment ............................................. 1,691 -- -- -- 1,691
Return of advance from joint venture .................. 1,150 -- -- -- 1,150
-------- ---- ------- ---- --------
Net cash used in investing activities .................... (8,508) -- -- -- (8,508)
-------- ---- ------- ---- --------
Cash flows from financing activities:
Proceeds from borrowings .............................. 26,000 -- -- -- 26,000
Repayments of obligations ............................. (14,417) -- -- -- (14,417)
-------- ---- ------- ---- --------
Net cash provided by financing
activities ............................................. 11,583 -- -- -- 11,583
-------- ---- ------- ---- --------
Effect of exchange rate changes on cash .................. -- -- 1 -- 1
-------- ---- ------- ---- --------
Net increase in cash and
cash equivalents ....................................... 148 268 44 -- 460
Cash and cash equivalents, beginning of
period ................................................. 9,180 53 1,858 -- 11,091
-------- ---- ------- ---- --------
Cash and cash equivalents,
end of period .......................................... $ 9,328 $321 $ 1,902 $ -- $ 11,551
======== ==== ======= ==== ========
Supplemental disclosures:
Interest paid (received) ............................. $ 3,393 $ -- $ (180) $ -- $ 3,213
Income taxes (received) paid ......................... (87) 1 88 -- 2
</TABLE>
17
<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
reimaging and new opening and franchising targets and costs associated with
improved service and other initiatives.
OVERVIEW
As of April 2, 2000, the Company owns and operates 502 restaurants,
franchises 100 restaurants and nine cafes 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 15 states.
The restaurants offer a wide variety of reasonably priced breakfast, lunch and
dinner menu items as well as the frozen dessert products.
18
<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
April 2, March 28,
2000 1999
---- ----
<S> <C> <C>
Revenues:
Restaurant ......................................... 84.0% 89.4%
Foodservice (retail and institutional) ............. 14.5 9.9
Franchise .......................................... 1.5 0.7
----- -----
Total revenues ......................................... 100.0 100.0
----- -----
Costs and expenses:
Cost of sales ...................................... 30.0 30.3
Labor and benefits ................................. 32.3 34.6
Operating expenses ................................. 24.4 22.9
General and administrative expenses ................ 7.8 8.2
Restructuring costs ................................ 8.1 --
Write-downs of property and equipment .............. 11.8 0.2
Depreciation and amortization ...................... 5.6 5.7
Gain on sales of restaurant operations and properties .. (1.4) (0.2)
----- -----
Operating loss ......................................... (18.6) (1.7)
Interest expense, net .................................. 5.3 5.7
Recovery of write-down of joint venture ................ -- (0.2)
----- -----
Loss before benefit from income taxes and cumulative
effect of change in accounting principle .............. (23.9) (7.2)
Benefit from income taxes .............................. 11.4 3.0
----- -----
Loss before cumulative effect of change in accounting
principle ............................................. (12.5) (4.2)
Cumulative effect of change in accounting principle, net
of income tax benefit ................................. -- (0.2)
----- -----
Net loss ............................................... (12.5)% (4.4)%
===== =====
</TABLE>
19
<PAGE>
REVENUES:
Total revenues increased $3.7 million, or 2.5%, to $149.4 million for
the first quarter ended April 2, 2000 from $145.7 million for the same quarter
in 1999. Restaurant revenues decreased $4.8 million, or 3.7%, to $125.4 million
for the first quarter of 2000 from $130.2 million for the same quarter in 1999.
Comparable restaurant revenues increased 1.5%. The decrease in restaurant
revenues was negatively impacted by $6.6 million due to the refranchising of 40
restaurants over the past 12 months. Partially offsetting this decrease was the
increase in restaurant revenue of $2.6 million for new restaurants open less
than one year. Foodservice (retail and institutional) and other revenues
increased by $7.3 million, or 50.7%, to $21.7 million for the first quarter of
2000 from $14.4 million for the same quarter in 1999. The increase was partially
due to the increase in the number of franchised units. The Company's Foodservice
division sells a variety of products to the Company's franchisees. In addition,
the increase was also impacted by the increased retail sales in the Northeast
and Mid-Atlantic markets. Franchise revenues increased $1.2 million, or 109%, to
$2.3 million for the three months ended April 2, 2000 from $1.1 million for the
three months ended March 28, 1999. The increase is primarily due to the fact
that there were 109 franchise units open at the end of the first quarter ended
April 2, 2000 compared to 54 franchise units open at the end of the first
quarter ended March 28, 1999.
COST OF SALES:
Cost of sales increased $0.7 million, or 1.6%, to $44.9 million for the
first quarter ended April 2, 2000 from $44.2 million for the same quarter in
1999. Cost of sales as a percentage of total revenues decreased to 30.0% for the
first quarter of 2000 from 30.3% for the same quarter in 1999. The lower food
cost as a percentage of total revenue was primarily due to a decrease in cream
prices, the principal ingredient in ice cream. The cream benefit was partially
offset by an increase in non-restaurant sales, which carry a higher food cost
compared to restaurant sales.
LABOR AND BENEFITS:
Labor and benefits decreased $2.2 million, or 4.4%, to $48.2 million
for the first quarter ended April 2, 2000 from $50.4 million for the same
quarter in 1999. Labor and benefits as a percentage of total revenues decreased
to 32.3% for the first quarter of 2000 from 34.6% for the same period in 1999.
The lower labor cost as a percentage of total revenue is primarily the result of
revenue increases derived from additional franchised locations and higher retail
sales both of which have no associated restaurant labor.
OPERATING EXPENSES:
Operating expenses increased $3.1 million, or 9.2%, to $36.5 million
for the first quarter ended April 2, 2000 from $33.4 million for the same
quarter in 1999. Operating expenses as a percentage of total revenues were 24.4%
and 22.9% for the first quarters ended April 2, 2000 and March 28, 1999,
respectively. The increase was primarily due to an increase in advertising and
promotion expenses associated with the Company's retail business and to a lesser
extent the higher supply and rental expense associated with the Company's soft
serve ice cream products introduced in May of 1999.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses were $11.5 million and $11.9
million for the first quarters ended April 2, 2000 and March 28, 1999,
respectively. General and administrative expenses as a percentage of total
revenues decreased to 7.8% in the first quarter of 2000 from 8.2% for the same
period in 1999. The decrease is primarily the result of positions that were not
replaced due to restaurant closings over the past 12 months, the Company's plan
to close 151 restaurants and the March 2000 reorganization of its restaurant
field and headquarters organizations.
EBITDA:
As a result of the above, EBITDA (EBITDA represents net loss before
(i) cumulative effect of change in accounting principle, net of income taxes,
(ii) benefit from 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 $7.6 million, or 123%, to $(1.4)
million for the first quarter ended April 2, 2000 from $6.2 million for the
same quarter in 1999. EBITDA as a percentage of total revenues was (0.9)% and
4.2% for the first quarters of 2000 and 1999, respectively. The decrease was
primarily the result of the restructuring costs of $12.1 million recorded
during the first quarter ended April 2, 2000 partially offset by the impact
of the increased gains on the sales of restaurant operations and properties.
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.
20
<PAGE>
RESTRUCTURING COSTS
Restructuring costs were $12.1 million for the first quarter ended
April 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 units 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 $17.7 million and $0.3
million for the first quarters ended April 2, 2000 and March 28, 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.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization increased $0.2 million, or 2.4%, to $8.4
million for the first quarter ended April 2, 2000 from $8.2 million for the same
quarter in 1999. Depreciation and amortization as a percentage of total revenues
was 5.6% for the first quarter ended April 2, 2000 compared to 5.7% for the
first quarter ended March 28, 1999.
GAIN ON SALES OF RESTAURANT OPERATIONS AND PROPERTIES:
On January 19, 2000, the Company entered into an agreement granting
Kessler Family LLC ("Kessler") non-exclusive rights to operate and develop
Friendly's full-service restaurants in the franchising region of Rochester,
Buffalo and Syracuse, New York (the "Kessler Agreement"). Pursuant to the
Kessler Agreement, Kessler purchased certain assets and rights in 29 existing
Friendly's restaurants and committed to open an additional 15 restaurants over
the next seven years. Gross proceeds from the sale were approximately
$13,300,000 of which $735,000 was for franchise fees for the initial 29
restaurants. The $735,000 was recorded as revenue in the first quarter ending
April 2, 2000. The Company recognized a gain of approximately $1,400,000 related
to the sale of the assets for the 29 existing franchised locations in the first
quarter ending April 2, 2000. The Company also sold certain assets and rights in
six other restaurants to two additional franchisees resulting in a gain of
$687,000.
INTEREST EXPENSE, NET:
Interest expense, net of capitalized interest and interest income,
decreased by $0.4 million, or 4.8%, to $7.9 million for the first quarter ended
April 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 first quarter ended April 2, 2000 compared to the first
quarter ended March 28, 1999. Since March 28, 1999, the Company has made $6.3
million of scheduled principal payments and has used $18.5 million of asset sale
proceeds to reduce the amount outstanding on the term loans.
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 quarter ended March 28, 1999, the Company
reported a $0.3 million payment from the sale which was received on March 17,
1999, as income.
BENEFIT FROM INCOME TAXES:
The benefit from income taxes was $17.1 million, or 48.0%, and $4.3
million, or 41.0%, for the first quarters ended April 2, 2000 and March 28,
1999, respectively. The Company records income taxes based on the effective rate
expected for the year with any changes in valuation allowance reflected in the
period of change. The sale of the land and buildings to franchisees during the
first quarter ended April 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.
21
<PAGE>
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 three months ended
March 28, 1999 related to previously deferred restaurant preopening costs.
NET LOSS:
Net loss was $18.5 million and $6.5 million for the first quarters
ended April 2, 2000 and March 28, 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 $5.8 million for the three
months ended April 2, 2000 compared to $2.6 million for the same period of 1999.
Inventories increased $3.5 million primarily as a result of anticipated
increased retail sales. Other assets decreased $3.8 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 Kessler. Additionally, the decrease was impacted by
the reduction in restricted cash as a result of payments made on workers
compensation claims. Accrued expenses and other long-term liabilities increased
$8.0 million from January 2, 2000 to April 2, 2000 primarily due to the
establishment of restructuring reserves associated with management's
restructuring plan and a $5.0 million increase in accrued interest on the Senior
Notes due to four months accrued at April 2, 2000 compared to one month accrued
at January 2, 2000. These increases were offset by $1.2 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 $1.0
million reduction in the gift certificate reserve as a result of redemptions of
year-end gift certificate sales, $1.4 million of payments made against the
captive insurance reserves for workers compensation claims and $1.0 million
decrease in accrued advertising as a result of less restaurant advertising in
the first quarter ended April 2, 2000 compared to the fourth quarter of 1999.
Available borrowings under the revolving credit facility were $22.0 million as
of April 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 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 $14.9 million in the
three months ended April 2, 2000. Net cash used in investing activities was $8.5
million for the three months ended March 28, 1999. Capital expenditures for
restaurant operations were approximately $1.0 million and $9.5 million for the
three months ended April 2, 2000 and March 28, 1999, respectively. The decrease
in capital expenditures was primarily due to the reduction in new units,
replacements and reimaging projects. Proceeds from the sales of property and
equipment were $17.2 million and $1.7 million in the three months ended April 2,
2000 and March 28, 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 the sale of restaurants to franchisees.
Net cash used in financing activities was $9.3 million in the three
months ended April 2, 2000. Net cash provided by financing activities was $11.6
million for the three months ended March 28, 1999.
The Company had a working capital deficit of $52.8 million as of April
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.
22
<PAGE>
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. During the three months ended April 2, 2000, the
Company received $14.4 million of asset sale proceeds which were used to reduce
the amount outstanding on the term loans. Additionally, all future net proceeds
received from asset sales for the period April 3, 2000 through July 2, 2000 must
be used to further reduce outstanding obligations under the credit facility.
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. Prepayments are applied first
to the term loans in inverse order of maturity and secondly, to permanently
reduce the revolving credit commitment.
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 88% 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 10-K.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4.1 Fourth Amendment to Credit Agreement.
27.1 Financial Data Schedule
(b) No report on Form 8-K was filed during the three months ended April 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: /s/ PAUL J. KELLEY
--------------------------------------------------
Name: Paul J. Kelley
Title: Senior Vice President,
Chief Financial Officer, Treasurer and
Assistant Clerk
23
<PAGE>
Exhibit 4.1
FOURTH AMENDMENT
FOURTH AMENDMENT, dated as of March 16, 2000 (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; and
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.
(a) The definition of "Applicable Margin" in Section 1.1 of
the Credit Agreement is hereby amended by deleting said definition in its
entirety and substituting in lieu thereof the following:
"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 3.00% 1.50%
Tranche A Term Loans 3.00% 1.50%
Tranche B Term Loans 3.00% 1.50%
Tranche C Term Loans 3.25% 1.75%;
</TABLE>
<PAGE>
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 with respect to Revolving Credit
Loans and Tranche A Term Loans will be determined pursuant to the
Pricing Grid."
(b) The definition of "Business-Sustaining Capital
Expenditures" in Section 1.1 of the Credit Agreement is hereby amended by
deleting from the third line thereof the amount "$15,000,000" and substituting
in lieu thereof the amount "$11,000,000".
(c) The definition of "Consolidated EBITDA" in Section 1.1 of
the Credit Agreement is hereby amended by adding the following proviso after the
amount "$7,500,000" at the end of such definition:
"and PROVIDED, FURTHER, that, in calculating Consolidated EBITDA for
periods that include any fiscal quarter of the Borrower's 1999 fiscal
year, an aggregate amount of up to $3,200,000 of gains resulting from
sales of restaurants consummated on or prior to January 2, 2000 shall
not be subtracted from Consolidated Net Income"
2.2 AMENDMENT TO SECTION 7.1(d) OF THE CREDIT AGREEMENT.
Paragraph (d) of Section 7.1 of the Credit Agreement is hereby amended by
deleting said paragraph in its entirety and substituting in lieu thereof the
following:
"(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>
Fiscal Quarter Consolidated Net Worth
-------------- ----------------------
<S> <C> <C>
Fiscal quarters from and including fourth quarter of
fiscal 1997 through and including third quarter of ($95,000,000)
fiscal 1998
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 ($112,500,000)
Second quarter of fiscal 2000 ($109,500,000)
Third quarter of fiscal 2000 ($104,500,000)
Fourth quarter of fiscal 2000 ($103,000,000)
First quarter of fiscal 2001 ($105,000,000)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fiscal Quarter Consolidated Net Worth
-------------- ----------------------
<S> <C> <C>
Second quarter of fiscal 2001 ($100,000,000)
Third quarter of fiscal 2001 ($95,000,000)
Fourth quarter of fiscal 2001 ($92,000,000)
Fiscal quarters from and including first quarter of
fiscal 2002 through and including third quarter of ($97,000,000)
fiscal 2002
Fourth quarter of fiscal 2002 ($72,000,000)
Fiscal quarters from and including first quarter of
fiscal 2003 through and including third quarter of ($77,000,000)
fiscal 2003
Fourth fiscal quarter of fiscal 2003 and all fiscal
quarters thereafter ($67,000,000)"
</TABLE>
2.3 AMENDMENT TO ANNEX A. Annex A to the Credit Agreement is
hereby amended to read in its entirety as set forth in Annex A 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 and (b) each
Guarantor shall have executed the Acknowledgment and Consent in the form annexed
hereto.
SECTION 4. REPRESENTATIONS AND WARRANTIES. In order to induce
the Administrative Agent and the Lenders to enter into this Amendment, the
Borrower hereby represents and warrants to the Administrative Agent and the
Lenders that 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
<PAGE>
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>
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:______________________________
Title:
SOCIETE GENERALE
By:______________________________
Title:
TRANSAMERICA BUSINESS CREDIT
CORPORATION
By:______________________________
Title:
BLACK DIAMOND INTERNATIONAL
FUNDING, LTD.
By:______________________________
Title:
BLACK DIAMOND CLO, 1998-I LTD.
By:______________________________
Title:
FLEET NATIONAL BANK
By:______________________________
Title:
<PAGE>
GENERAL ELECTRIC CAPITAL
CORPORATION
By:_______________________________
Title:
FIRST SOURCE FINANCIAL LLP
By: First Source Financial, Inc.,
its Agent/Manager
By:__________________________
Title:
BANK OF AMERICA, N.A.
By:_______________________________
Title:
PAMCO CAYMAN LTD.
By: Highland Capital Management, L.P.
as Collateral Manager
By:__________________________
Title:
<PAGE>
PAM CAPITAL FUNDING, L.P.
By: Highland Capital Management, L.P.
as Collateral Manager
By:__________________________
Title:
SENIOR DEBT PORTFOLIO
By: First Source Financial, Inc.,
its Agent/Manager
By:__________________________
Title:
FIRST UNION NATIONAL BANK
By:_______________________________
Title:
FOOTHILL INCOME TRUST, L.P.
By:_______________________________
Title:
<PAGE>
CANADIAN IMPERIAL BANK OF COMMERCE
By:_______________________________
Title:
<PAGE>
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:________________________________
Title:
FRIENDLY'S INTERNATIONAL, INC.
By:________________________________
Title:
<PAGE>
ANNEX A
PRICING GRID FOR REVOLVING CREDIT LOANS,
TRANCHE A TERM LOANS AND COMMITMENT FEES
<TABLE>
<CAPTION>
- ------------------------------------------------- --------------------------- ------------------------------
Consolidated Applicable Margin Commitment Fee Rate
Leverage Ratio for Eurodollar Loans
- ------------------------------------------------- --------------------------- ------------------------------
<S> <C> <C>
Greater than
or Equal to 4.0 to 1.0 3.000% 0.500%
- ------------------------------------------------- --------------------------- ------------------------------
Greater than Less
or Equal to 3.5 to 1.0 and than 4.0 to 1.0 2.750% 0.500%
- ------------------------------------------------- --------------------------- ------------------------------
Greater than Less
or Equal to 3.0 to 1.0 and than 3.5 to 1.0 2.625% 0.500%
- ------------------------------------------------- --------------------------- ------------------------------
Greater than Less
or Equal to 2.5 to 1.0 and than 3.0 to 1.0 2.375% 0.375%
- ------------------------------------------------- --------------------------- ------------------------------
Less than 2.5 to 1.0 2.125% 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).
<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> 3-MOS
<FISCAL-YEAR-END> JAN-2-2000
<PERIOD-START> JAN-3-2000
<PERIOD-END> APR-2-2000
<CASH> 13,283
<SECURITIES> 0
<RECEIVABLES> 4,631
<ALLOWANCES> 273
<INVENTORY> 14,851
<CURRENT-ASSETS> 41,079
<PP&E> 525,998
<DEPRECIATION> 274,544
<TOTAL-ASSETS> 318,033
<CURRENT-LIABILITIES> 93,855
<BONDS> 287,294
0
0
<COMMON> 75
<OTHER-SE> (108,149)
<TOTAL-LIABILITY-AND-EQUITY> 318,033
<SALES> 147,098
<TOTAL-REVENUES> 149,375
<CGS> 44,858
<TOTAL-COSTS> 129,516
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,938
<INCOME-PRETAX> (35,610)
<INCOME-TAX> 17,100
<INCOME-CONTINUING> (18,510)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,510)
<EPS-BASIC> (2.48)
<EPS-DILUTED> (2.48)
</TABLE>
