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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15( ) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED JANUARY 2, 2000
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15( ) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 0-3930
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FRIENDLY ICE CREAM CORPORATION
(Exact name of registrant as specified in its charter)
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MASSACHUSETTS 5812 04-2053130
(State of (Primary Standard Industrial (I.R.S. Employer
Incorporation) Classification Code Number) Identification No.)
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1855 BOSTON ROAD
WILBRAHAM, MASSACHUSETTS 01095
(413) 543-2400
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF CLASS
Common Stock, $.01 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K /X/.
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The aggregate market value of voting stock held by nonaffiliates of the
registrant, based upon the closing sales price of the registrant's common stock
on March 21, 2000 on the National Market tier of the Nasdaq Stock Market, Inc.,
was $25,525,547. For purpose of the foregoing calculation only, all members of
the Board of Directors and executive officers of the registrant have been deemed
affiliates. The number of shares of common stock outstanding is 7,462,733 as of
March 21, 2000.
Documents incorporated by reference:
Part III of this 10-K incorporates information by reference from the
registrant's definitive proxy statement which will be filed no later than
120 days after January 2, 2000.
PART I
ITEM 1. BUSINESS
ORGANIZATION
Friendly's, founded in 1935, was publicly held from 1968 until
January 1979, at which time it was acquired by Hershey Foods Corporation
("Hershey"). In 1988, The Restaurant Company ("TRC"), an investor group led by
Donald N. Smith, the Company's current Chairman and Chief Executive Officer,
acquired Friendly's from Hershey (the "TRC Acquisition"). In November 1997, the
Company completed a public offering of 5,000,000 shares (approximately 70%) of
its common stock for gross proceeds of $90 million and a public offering of
$200 million of Senior Notes (collectively, the "Offerings").
Unless the context indicates otherwise: (i) references herein to
"Friendly's" or the "Company" refer to Friendly Ice Cream Corporation, its
predecessors and its consolidated subsidiaries; (ii) references herein to "FICC"
refer to Friendly Ice Cream Corporation and not its subsidiaries; and (iii) as
used herein, "Northeast" refers to the Company's core markets, which include
Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York,
Pennsylvania, Rhode Island and Vermont. The Company's fiscal years ended
January 2, 2000, December 27, 1998, December 28, 1997, December 29, 1996 and
December 31, 1995 are referred to herein as 1999, 1998, 1997, 1996 and 1995,
respectively. Each year includes 52 weeks except 1999 which includes 53 weeks.
GENERAL
The Company owns and operates 618 restaurants, franchises 60 full-service
restaurants and nine cafes and manufactures a complete line of packaged frozen
desserts distributed through more than 3,500 supermarkets and other retail
locations in 15 states. Friendly's offers its customers a unique dining
experience by serving a variety of high-quality, reasonably-priced breakfast,
lunch and dinner items, as well as its signature frozen desserts, in a fun and
casual neighborhood setting. For the year ended January 2, 2000, Friendly's
generated $709.0 million in total revenues and $65.0 million in EBITDA (as
defined herein) and incurred $33.7 million of interest expense. During the same
period, management estimates that approximately $238.2 million of total revenues
were from the sale of approximately 19.3 million gallons of frozen desserts.
Friendly's restaurants target families with children and adults who desire a
reasonably-priced meal in a full-service setting. The Company's menu offers a
broad selection of freshly-prepared foods which appeal to customers throughout
all dayparts. The menu currently features over 100 items comprised of a broad
selection of breakfast, lunch, dinner and afternoon and evening snack items.
Breakfast items include specialty omelettes and breakfast combinations featuring
eggs, pancakes and bacon or sausage. Breakfasts generally range from $2.50 to
$6.00 and account for approximately 12% of average restaurant revenues. Lunch
and dinner items include a line of wrap sandwiches, entree salads, soups,
super-melts, specialty burgers, appetizers including quesadillas, mozzarella
cheese sticks and "Fronions," and stir-fry, chicken, pot pie, tenderloin steak
and seafood entrees. These lunch and dinner items generally range from $3.50 to
$11.00, and these dayparts account for approximately 54% of average restaurant
revenues. Entree
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selections are complemented by Friendly's premium frozen desserts, including
softserve, which was introduced in fiscal 1999, the
Fribble-Registered Trademark-, the Company's signature thick shake, Happy
Ending-Registered Trademark- Sundaes, Candy Shoppe-Registered Trademark-
Sundaes, the Wattamelon Roll-Registered Trademark- and fat-free Sorbet
Smoothies. The Company's frozen desserts are an important component of the
Company's snack dayparts which accounts for 34% of average restaurant revenues.
Despite the Company's capital constraints, management has implemented a
number of initiatives to restore and improve operational and financial
efficiencies. From the date of the TRC Acquisition through 1999, the Company
(i) implemented a major revitalization of its restaurants, (ii) repositioned the
Friendly's concept from a sandwich and ice cream shoppe to a full-service,
family-oriented restaurant with broader menu and daypart appeal, (iii) elevated
customer service levels by recruiting more qualified managers and expanding the
Company's training program, (iv) disposed of 233 under-performing
restaurants,(v) capitalized upon the Company's strong brand name recognition by
initiating the sale of Friendly's unique line of packaged frozen desserts
through retail locations and (vi) has implemented a franchising strategy to
extend profitably the Friendly's brand without the substantial capital required
to build new restaurants. The Company is expanding its franchise business
through sales of existing restaurants, which may include development agreements,
in under-penetrated markets.
CAPITAL INVESTMENT PROGRAM
A significant component of the Company's capital investment program is the
FOCUS 2000 initiative which is designed to establish a consistent, enhanced
Friendly's brand image across the Company's entire restaurant operations. The
Company's capital spending strategy seeks to increase comparable restaurant
revenues and restaurant cash flow through the on-going revitalization and
re-imaging of existing restaurants and to increase total restaurant revenues
through the addition of new restaurants. The following illustrates the key
components of the Company's capital spending program.
RESTAURANT RE-IMAGING. The Company completed the re-imaging of 94
restaurants in 1999 at an estimated cost of $127,000 per restaurant (not
including costs related to development of the prototype). This cost typically
includes an interior redecoration and a new exterior package. The Company
believes that efficiencies and economics associated with remodeling a large
number of restaurants will reduce the average cost of the re-imaging in 2000 and
beyond. The Company expects to complete the re-imaging of approximately 15
restaurants during 2000.
NEW RESTAURANT CONVERSION AND CONSTRUCTION. The Company converted three
restaurants in 1999 at a cost of approximately $723,000 per restaurant,
excluding acquisition costs. The Company also converted two leased restaurants
at a cost of approximately $347,000 per restaurant. The Company constructed six
new restaurants in 1999 at a cost of approximately $1,106,000 per restaurant,
excluding land and pre-opening expenses. The Company also replaced two existing
buildings at a cost of approximately $871,000 per restaurant. The Company
expects to complete the conversion or construction of approximately three
restaurants during 2000. The Company is currently in the process of developing a
panelized building concept. This concept involves using pre-fabricated building
materials on new restaurants, which in turn would allow the Company to realize
efficiencies. The Company expects this concept will decrease construction time
and minimize potential delays resulting from weather factors. The new concept
will be used in all Company new construction, franchise new construction and
possibly small building replacements.
SEATING CAPACITY EXPANSION PROGRAM. Beginning with the TRC Acquisition
through January 2, 2000, the Company has expanded seating capacity at 33
restaurants by approximately 50 seats at an average cost of $293,000 per
restaurant. The Company completed the expansion of three restaurants in 1999 at
an average cost of $313,000 per restaurant. This cost typically includes adding
50 seats per restaurant, relocating certain equipment, an interior redecoration
and a new exterior package and increasing parking
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capacity where necessary and available. The Company expects to complete the
expansion of one restaurant during 2000.
INSTALLATION OF RESTAURANT AUTOMATION SYSTEMS. Beginning with the TRC
Acquisition through January 2, 2000, the Company has installed touch-screen
point of sale ("POS") register systems in approximately 353 Company-owned
restaurants and 57 franchised locations. The majority of these systems were
installed at an average cost of $33,000 per restaurant, although complete
systems have recently averaged $29,000. In addition, a limited system is now
being deployed in the older, smaller buildings at an average cost of $17,000.
These POS register systems are designed to improve revenue realization, food
cost management and labor scheduling while increasing the speed and accuracy of
processing customer orders. The Company installed POS register systems in ten
Company-owned restaurants during 1999 and in each new unit. The Company expects
to upgrade to the touch-screen POS system in approximately 200 restaurants
during fiscal 2000.
FRANCHISING PROGRAM
The Company has initiated a franchising strategy to expand its restaurant
presence in under-penetrated markets, accelerate restaurant growth in new
markets, increase marketing and distribution efficiencies and preempt
competition by acquiring restaurant locations in the Company's targeted markets.
The Company's wholly-owned subsidiary, Friendly's Restaurants Franchise, Inc.
("FRFI") commenced operations in 1996 for the purpose of franchising various
restaurant concepts. Since it began operations, FRFI has developed and now
offers a franchise program for Friendly's restaurants. The Company generally
seeks franchisees who have related business experience, capital adequacy to
build-out the Friendly's concept and no other operations which have directly
competitive restaurant or food concepts. As part of the development of its
franchise business, the Company also sells existing Company-owned restaurants,
known as "re-franchising." Friendly's receives (i) a royalty based on franchised
restaurant revenues and (ii) revenues and earnings from the sale of Friendly's
frozen desserts and other products.
On July 14, 1997, the Company entered into a long-term agreement granting
DavCo Restaurants, Inc. ("DavCo"), a franchisor of more than 230 Wendy's
restaurants, exclusive rights to operate, manage and develop Friendly's
full-service restaurants in the franchising region of Maryland, Delaware, the
District of Columbia and northern Virginia (the "DavCo Agreement"). Pursuant to
the DavCo Agreement, DavCo purchased certain assets and rights in 34 existing
Friendly's restaurants in this franchising region, committed to open an
additional 74 restaurants through 2005 and, subject to the fulfillment of
certain conditions, further agreed to open 26 additional restaurants, for a
total of 100 new restaurants in this franchising region through 2007.
On January 19, 2000, the Company entered into a long-term agreement granting
Kessler Family LLC ("Kessler"), a franchisor of 22 Burger King restaurants,
non-exclusive rights to operate, manage 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 in
this franchising region and committed to open an additional 15 restaurants over
the next seven years.
The Company does not have significant experience in franchising restaurants
and there can be no assurance that the Company will continue to successfully
locate and attract suitable franchisees or that such franchisees will have the
business abilities or sufficient access to capital to open restaurants or will
operate restaurants in a manner consistent with the Company's concept and
standards or in compliance with franchise agreements. The success of the
Company's franchising program will also be dependent upon certain other factors,
certain of which are not within the control of the Company or its franchisees,
including the availability of suitable sites on acceptable lease or purchase
terms, permitting and regulatory compliance and general economic and business
conditions.
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RESTAURANT CARRYOUT OPERATIONS
Through dedicated carryout areas, Friendly's restaurants offer the Company's
full line of frozen desserts, including soft serve ice cream products introduced
in fiscal 1999, and certain of its food menu items. Reserved parking is
available at many of the Company's free-standing restaurants to facilitate quick
carryout service. Approximately 15% of the Company's average free-standing
restaurant revenues are derived from its carryout business with a significant
portion of these sales occurring during the afternoon and evening snack periods.
In addition, approximately 4% of revenues come from sales of packaged frozen
desserts in display cases within its restaurants.
FOODSERVICE RETAIL OPERATIONS
In 1989, the Company extended its premium packaged frozen dessert line from
its restaurants into retail locations. The Company offers a branded product line
that includes approximately 59 half-gallon varieties featuring premium ice cream
shoppe flavors and unique sundae combinations, low and no fat frozen yogurt, low
fat ice cream and sherbet. Specialty flavors include Royal Banana Split,
Cappuccino Dream-TM- and Caramel Fudge Nut Blast-TM- and proprietary products
include the Jubilee Roll-Registered Trademark-, Wattamelon
Roll-Registered Trademark- and Friendly's branded ice cream cakes and pies. The
Company also licenses from Hershey the right to feature certain candy brands
including Almond Joy-Registered Trademark-, Mr. Goodbar-Registered Trademark-,
Reese's Pieces-Registered Trademark-, Reese's-Registered Trademark- Peanut
Butter Cups and York-Registered Trademark- Peppermint Patties on packaged sundae
cups and pints.
The Company focuses its marketing and distribution efforts in areas where it
has higher restaurant penetration and consumer awareness. During the initial
expansion of its retail business in 1989 and 1990, Albany, Boston and
Hartford/Springfield were primary markets of opportunity. The Company added the
New York and Philadelphia markets to its retail distribution efforts in 1992 and
1993. Subsequently, distribution was expanded into the Ohio, Pittsburgh,
Baltimore/Washington and Richmond markets.
The Company expects to continue building its retail distribution business in
its current retail markets. In these markets, the Company intends to increase
shelf space with existing accounts and add new accounts by (i) capitalizing on
its integrated restaurant and retail consumer advertising and promotion
programs, (ii) continuing new product introductions and (iii) improving trade
merchandising initiatives. Additionally, the Company expects to continue to
selectively enter new markets where its brand awareness is high according to
market surveys.
The Company has developed a broker/distributor network designed to protect
product quality through proper product handling and to enhance the merchandising
of the Company's frozen desserts. The Company's experienced sales force manages
this network to serve specific retailer needs on a market-by-market basis. In
addition, the Company's retail marketing and sales departments coordinate market
development plans and key account management programs. In conjunction with the
development of the Company's franchising strategy, the Company sells a variety
of products to its franchisees.
MARKETING
The Company's marketing strategy is to continue to strengthen Friendly's
brand equity and further capitalize on its strong customer awareness to
profitably build revenues across all businesses. The primary advertising
messages will reinforce Friendly's key strategic positioning of (1) a
family-oriented casual dining restaurant and (2) a contemporary ice cream
shoppe.
The Company's media plan is designed to build awareness and increase trial
among key target audiences while optimizing spending by market based on media
cost efficiencies and overall brand development. The Company classifies markets
based upon restaurant penetration and the resulting advertising and promotion
costs per restaurant. The Company's most highly-penetrated markets are supported
with regular spot television advertisements from March through December. The
Company augments its marketing efforts in these markets with radio advertising
to target the breakfast daypart or to
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increase the frequency of the promotional message. In addition, the Company
supports certain of these highly-penetrated markets (Albany, Boston,
Hartford/Springfield and Providence) during the peak summer season with
additional television media focusing on freshly-scooped and packaged frozen
desserts. In its less developed markets, the Company utilizes targeted local
store marketing initiatives such as radio, direct mail and newspaper
advertising. All of the Company's markets are supported with an extensive
promotional coupon program.
The Company believes that its integrated restaurant and retail marketing
efforts provide significant support for the development of its retail business.
Specifically, the retail business benefits from the awareness and trial of
Friendly's product offerings generated by its overall food and ice cream
advertising and couponing efforts. The Company believes that this approach
delivers a significantly higher level of consumer exposure and usage compared to
the Company's packaged frozen dessert competitors which have only retail
distribution. In turn, sales of the Company's products through more than 3,500
retail locations, supported by trade merchandising efforts, build incremental
awareness and usage of Friendly's which management believes benefits the
restaurants. Advertising and promotion expenditures were approximately
$22.9 million for 1999.
CERTAIN RISKS ASSOCIATED WITH THE FOOD SERVICE INDUSTRY
Food service businesses are often affected by changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns, the cost and availability of labor, purchasing power, availability of
products and the type, number and location of competing restaurants. The Company
could also be substantially adversely affected by publicity resulting from food
quality, illness, injury or other health concerns or alleged discrimination or
other operating issues stemming from one location or a limited number of
locations, whether or not the Company is liable. In addition, factors such as
increased cost of goods, regional weather conditions and the potential scarcity
of experienced management and hourly employees may also adversely affect the
foodservice industry in general and the results of operations and financial
condition of the Company.
MANUFACTURING
As of January 2, 2000, the Company produces most of its frozen desserts in
its Wilbraham, MA Company-owned manufacturing plant which employs a total of
approximately 200 people. During the year ended January 2, 2000, the Company
closed its Troy, OH manufacturing facility and moved the manufacturing and
distribution operations to its Wilbraham, MA and a newly-constructed
distribution facility in York, PA. The manufacturing plant occupies
approximately 41,000 square feet of manufacturing space. During 1999, the
Wilbraham plant operated at an average capacity of 80%, attaining 100% capacity
for the months of June through August, and produced (i) over 16.9 million
gallons of ice cream, sherbets and yogurt in bulk, half-gallons and pints,
(ii) 6.2 million sundae cups, (iii) 6.8 million frozen dessert rolls, pies and
cakes and (iv) 1.3 million gallons of fountain syrups and toppings. The quality
of the Company's products is important, both to sustain Friendly's image and to
enable the Company to satisfy customer expectations. Wherever possible, the
Company "engineers in" quality by installing modern processes such as
computerized mix-making equipment and monitoring devices to ensure all storage
tanks and rooms are kept at proper temperatures for maximum quality.
PURCHASING AND DISTRIBUTION
The basic raw materials for the Company's frozen desserts are dairy products
and sugar. The Company's purchasing department purchases other food products,
such as coffee, in large quantities. Although the Company generally does not
hedge its positions in any of these commodities, it may opportunistically hedge
some of its commodities and purchase some of these items in advance of a
specific need. As a result, the Company is subject to the risk of substantial
and sudden price increases, such as with
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the price of cream in 1998, and shortages or interruptions in the supply of such
items, which could have a material adverse effect on the Company.
In conjunction with the Company's product development department, the
Company's purchasing department evaluates the cost and quality of all major food
items on a quarterly basis and purchases these items through numerous vendors
with which it has long-term relationships. The Company contracts with vendors on
an annual, semiannual, or monthly basis depending on the item and the
opportunities within the marketplace. In order to promote competitive pricing
and uniform vendor specifications, the Company contracts directly for such
products as produce, milk and bread and other commodities and services. The
Company also minimizes the cost of all restaurant capital equipment by
purchasing directly from manufacturers or pooling volumes with master
distributors.
The Company owns one distribution center and leases two others. The Company
opened a new distribution facility in May 1999 in York, PA under an operating
lease. The Company distributes most product lines to its restaurants, and its
packaged frozen desserts to its retail customers, from warehouses in Chicopee
and Wilbraham, MA and York, PA with a combined non-union workforce of
approximately 200 employees. The Company's truck fleet delivers all but
locally-sourced produce, milk and selected bakery products to its restaurants at
least weekly, and during the highest sales periods, delivers to over 50% of
Friendly's restaurants twice per week. The Chicopee, Wilbraham and York
warehouses encompass 54,000 square feet, 109,000 square feet and approximately
86,000 square feet, respectively. The Company believes that these distribution
facilities operate at or above industry standards with respect to timeliness and
accuracy of deliveries.
The Company has distributed its products since its inception to protect the
product integrity of its frozen desserts. The Company delivers products to its
restaurants on its own fleet of tractors and trailers which display large-scale
images of the Company's featured products. The entire fleet is specially built
to be compatible with storage access doors, thus protecting frozen desserts from
"temperature shock." Recently acquired trailers have an innovative design which
provides individual temperature control for three distinct compartments. To
provide additional economies to the Company, the truck fleet backhauls on over
50% of its delivery trips, bringing the Company's purchased raw materials and
finished products back to the distribution centers.
RELOCATION OF TROY OPERATIONS
On December 1, 1998, the Company announced plans to relocate its
manufacturing and distribution operations from Troy, OH to Wilbraham, MA and
York, PA and sell the Troy, OH facility. The facility in York, PA, which is
leased by the Company, is an approximately 86,000 square foot distribution and
office facility. The Company completed the successful relocation of the Troy
operations in May 1999. In addition, the Company sold its Troy, OH manufacturing
facility in December 1999 (see Note 16 of Notes to Consolidated Financial
Statements).
HUMAN RESOURCES AND TRAINING
The average Friendly's restaurant employs between two and four management
team members, which may include one General Manager, one Assistant Manager, one
Guest Service Supervisor and one Manager-in-Training. The General Manager is
directly responsible for day-to-day operations. General Managers report to a
District Manager who typically has responsibility for an average of seven
restaurants. District Managers report to a Division Manager who typically has
responsibility for approximately 50 restaurants. Division Managers report to a
Regional Vice President who typically has responsibility for five or six
Division Managers covering approximately 309 restaurants.
The average Friendly's restaurant is staffed with four to twenty employees
per shift, including the salaried restaurant management. Shift staffing levels
vary by sales volume level, building configuration and
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time of day. The average restaurant typically utilized approximately
41,000 hourly-wage labor hours in 1999 in addition to salaried management.
EMPLOYEES
The total number of employees at the Company varies between 23,000 and
28,000 depending on the season of the year. As of January 2, 2000, the Company
employed approximately 23,000 employees, of which approximately 22,000 were
employed in Friendly's restaurants (including approximately 100 in field
management), approximately 500 were employed at the Company's manufacturing and
three distribution facilities and approximately 500 were employed at the
Company's corporate headquarters and other offices. None of the Company's
employees is a party to a collective bargaining agreement.
LICENSES AND TRADEMARKS
The Company is the owner or licensee of the trademarks and service marks
(the "Marks") used in its business. The Marks "Friendly-Registered Trademark-"
and "Friendly's-Registered Trademark-" are owned by the Company pursuant to
registrations with the U.S. Patent and Trademark office.
Upon the sale of the Company by Hershey in 1988, all of the Marks used in
the Company's business at that time which did not contain the word "Friendly" as
a component of such Marks (the "1988 Non-Friendly Marks"), such as
Fribble-Registered Trademark-, Fishamajig-Registered Trademark- and
Clamboat-Registered Trademark- were licensed by Hershey to the Company. The 1988
Non-Friendly Marks license has a term of 40 years expiring on September 2, 2028.
Such license included a prepaid license fee for the term of the license which is
renewable at the Company's option for an additional term of 40 years and has a
license renewal fee of $20.0 million.
Hershey also entered into non-exclusive licenses with the Company for
certain candy trademarks used by the Company in its frozen dessert sundae cups
(the "Cup License") and pints (the "Pint License"). The Cup License and Pint
License automatically renew for unlimited one-year terms subject to certain
nonrenewal rights held by both parties. Hershey is subject to a noncompete
provision in the sundae cup business for a period of two years if the Cup
License is terminated by Hershey without cause, provided that the Company
maintains its current level of market penetration in the sundae cup business.
However, Hershey is not subject to a noncompete provision if it terminates the
Pint License without cause.
The Company also has a non-exclusive license agreement with Leaf, Inc.
("Leaf") for use of the Heath-Registered Trademark- Bar candy trademark. The
term of the royalty-free Leaf license continues indefinitely subject to
termination by Leaf upon 60 days notice. Excluding the Marks subject to the
licenses with Hershey and Leaf, the Company is the owner of its Marks.
COMPETITION
The restaurant business is highly competitive and is affected by changes in
the public's eating habits and preferences, population trends and traffic
patterns, as well as by local and national economic conditions affecting
consumer spending habits, many of which are beyond the Company's control. Key
competitive factors in the industry are the quality and value of the food
products offered, quality and speed of service, attractiveness of facilities,
advertising, name brand awareness and image and restaurant location. Each of the
Company's restaurants competes directly or indirectly with locally-owned
restaurants as well as restaurants with national or regional images and, to a
limited extent, restaurants operated by its franchisees. A number of the
Company's significant competitors are larger or more diversified and have
substantially greater resources than the Company. The Company's retail
operations compete with national and regional manufacturers of frozen desserts,
many of which have greater financial resources and more established channels of
distribution than the Company. Key competitive factors in the retail food
business include brand awareness, access to retail locations, price and quality.
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GOVERNMENT REGULATION
The Company is subject to various federal, state and local laws affecting
its business. Each Friendly's restaurant is subject to licensing and regulation
by a number of governmental authorities, which include health, safety,
sanitation, building and fire agencies in the state or municipality in which the
restaurant is located. Difficulties in obtaining or failures to obtain required
licenses or approvals, or the loss of such licenses and approvals once obtained,
can delay, prevent the opening of, or close, a restaurant in a particular area.
The Company is also subject to federal and state environmental regulations, but
these have not had a material adverse effect on the Company's operations.
The Company's relationship with its current and potential franchisees is
governed by the laws of the several states which regulate substantive aspects of
the franchisor-franchisee relationship. Substantive state laws that regulate the
franchisor-franchisee relationship presently exist or are being considered in a
significant number of states, and bills will likely be introduced in Congress
which would provide for federal regulation of substantive aspects of the
franchisor-franchisee relationship. These current and proposed franchise
relationship laws limit, among other things, the duration and scope of
non-competition provisions, the ability of a franchisor to terminate or refuse
to renew a franchise and the ability of a franchisor to designate sources of
supply.
The Company's restaurant operations are also subject to federal and state
laws governing such matters as wages, hours, working conditions, civil rights
and eligibility to work. Some states have set minimum wage requirements higher
than the federal level. Significant numbers of hourly personnel at the Company's
restaurants are paid at rates related to the federal minimum wage and,
accordingly, increases in the minimum wage at a federal and/or state level could
increase labor costs at the Company's restaurants. Other governmental
initiatives such as mandated health insurance, if implemented, could adversely
affect the Company as well as the restaurant industry in general. The Company is
also subject to the Americans with Disabilities Act of 1990, which, among other
things, may require certain minor renovations to its restaurants to meet
federally-mandated requirements. The cost of these renovations is not expected
to be material to the Company.
FORWARD LOOKING STATEMENTS
Statements contained herein that are not historical facts, constitute
"forward looking statements" as that term is defined in the Private Securities
Litigation Reform Act of 1995. All forward looking statements are subject to
risks and uncertainties which could cause results to differ materially from
those anticipated. These factors include the Company's highly competitive
business environment, exposure to commodity prices, risks associated with the
foodservice industry, the ability to retain and attract new employees,
government regulations, the Company's high geographic concentration in the
Northeast and its attendant weather patterns, conditions needed to meet
re-imaging and new opening and franchising targets and risks associated with
improved service and other initiatives. Other factors that may cause actual
results to differ from the forward looking statements contained herein and that
may affect the Company's prospects in general are included in the Company's
other filings with the Securities and Exchange Commission.
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ITEM 2. PROPERTIES
The table below identifies the location of the 678 restaurants operating as
of January 2, 2000.
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COMPANY-OWNED/LEASED FRANCHISED RESTAURANTS
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FREESTANDING OTHER LEASED/OWNED BY LEASED TO FRANCHISEE TOTAL
STATE RESTAURANTS RESTAURANTS (A) FRANCHISEE BY FICC RESTAURANTS
- ----- ------------ --------------- --------------- -------------------- -----------
<S> <C> <C> <C> <C> <C>
Connecticut............. 48 17 -- -- 65
Delaware................ -- -- 4 2 6
Florida................. 14 2 -- -- 16
Maine................... 12 -- -- -- 12
Maryland................ 2 3 20 13 38
Massachusetts........... 113 36 -- -- 149
New Hampshire........... 14 5 -- -- 19
New Jersey.............. 45 16 3 1 65
New York................ 124 31 -- -- 155
Ohio.................... 42 1 -- -- 43
Pennsylvania............ 51 12 3 2 68
Rhode Island............ 8 -- -- -- 8
South Carolina.......... -- -- 2 -- 2
Vermont................. 9 2 -- -- 11
Virginia................ 8 3 4 6 21
--- --- -------- -------- ---
Total................... 490 128 36 24 678
=== === ======== ======== ===
</TABLE>
- ------------------------
(a) Includes primarily malls and strip centers.
The 542 freestanding restaurants (including 52 franchised restaurants) range
in size from approximately 2,400 square feet to approximately 5,000 square feet.
The 136 mall and strip center restaurants (including eight franchised
restaurants) range in size from approximately 2,200 square feet to approximately
3,800 square feet. Of the 618 restaurants operated by the Company at January 2,
2000, the Company owned the buildings and the land for 256 restaurants, owned
the buildings and leased the land for 144 restaurants, and leased both the
buildings and the land for 218 restaurants. The Company's leases generally
provide for the payment of fixed monthly rentals and related occupancy costs
(e.g., property taxes and insurance). Additionally, most mall and strip center
leases require the payment of common area maintenance charges and incremental
rent of between 3.0% and 6.0% of the restaurant's sales.
In addition to the Company's restaurants, the Company owns (i) an
approximately 260,000 square foot facility on 46 acres in Wilbraham, MA which
houses the corporate headquarters, a manufacturing and distribution facility and
a warehouse, (ii) approximately 13 acres of land in Troy, OH and (iii) an
approximately 18,000 square foot restaurant construction and maintenance service
facility located in Wilbraham, MA. The Company leases (i) an approximately
60,000 square foot distribution facility in Chicopee, MA, (ii) an approximately
86,000 square foot distribution and office facility in York, PA, (iii) an
approximately 38,000 square foot restaurant construction and maintenance support
facility in Ludlow, MA and (iv) on a short-term basis, space for its division
and regional offices, its training and development center and other support
facilities.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is named as a defendant in legal actions
arising in the ordinary course of its business. The Company is not party to any
pending legal proceedings other than routine litigation incidental to its
business. The Company does not believe that the resolutions of these claims will
have a material adverse effect on the Company's financial condition or results
of operations.
10
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None
EXECUTIVE OFFICERS
The executive officers of the Company and their respective ages and
positions with the Company are as follows:
DONALD N. SMITH, 59, has been Chairman and Chief Executive Officer of the
Company since September 1988. Mr. Smith also served as the Company's President
from September, 1988 to December 1998. Since 1986 Mr. Smith has been Chairman of
the Board and Chief Executive Officer of The Restaurant Company and its
predecessors, which owns and franchises a chain of mid-scale restaurants known
as Perkins Restaurant and Bakery. Since 1998 he has also been the Chief
Operating Officer of The Restaurant Company. Prior to joining The Restaurant
Company, Mr. Smith was President and Chief Executive Officer for
Diversifoods, Inc. from 1983 to October 1985. From 1980 to 1983, Mr. Smith was
Senior Vice President of PepsiCo., Inc. and was President of its Food Service
Division. He was responsible for the operations of Pizza Hut Inc. and Taco Bell
Corp., as well as North American Van Lines, Lee Way Motor Freight, Inc., PepsiCo
Foods International and La Petite Boulangerie. Prior to 1980, Mr. Smith was
President and Chief Executive Officer of Burger King Corporation and Senior
Executive Vice President and Chief Operations Officer for McDonald's
Corporation.
JOHN L. CUTTER, 55, has been President and Chief Operating Officer since
December, 1998. Prior to joining the Company, Mr. Cutter served as Chief
Operating Officer at Boston Chicken, Inc. from 1997 through October 1998. From
1993 through 1997, he served as Chief Executive Officer and President of Boston
Chicken Golden Gate, LLC, a franchisee of Boston Chicken, Inc. From 1991 through
1993, Mr. Cutter held the position of President and Chief Operating Officer for
Nanco Restaurants, Inc. Prior to 1991, Mr. Cutter held the position of Group
President at Saga Corporation/American Restaurant Group, Inc.
RICHARD L. COUCH, 46, has been Senior Vice President, Chief Marketing
Officer since November 1999. Prior to joining the Company, Mr. Couch operated as
the President and Strategic Art Director for his own consulting firm. From 1980
through 1988, Mr. Couch worked for the Saga Corporation/American Restaurant
Group, Inc. where he held a variety of executive positions. From 1976 through
1980, Mr. Couch was a marketing executive with Mr. Steak International.
PAUL J. KELLEY, 44, has been Senior Vice President, Chief Financial Officer,
Treasurer and Assistant Clerk since December 1999. Prior to joining the Company,
Mr. Kelley served as Chief Financial Officer, Secretary, with the Il Fornaio
(America) Corporation from April 1991 through December 1999. From January 1988
through April 1991, Mr. Kelley was the Vice President, Finance and a Board
Member at Bon Appetit Management Co. From 1977 through 1988, Mr. Kelley held
several positions with Saga Corporation/American Restaurant Group, Inc.
including Vice President and Controller of the Specialty Restaurant Group.
GERALD E. SINSIGALLI, 60, has been President, Foodservice Division of the
Company since January 1989. Mr. Sinsigalli has been employed in various
capacities with the Company since 1965. Mr. Sinsigalli's duties have included
District and Division Manager, Director and Vice President of Operations and
Senior Vice President.
GARRETT J. ULRICH, 49, has been Vice President, Human Resources since
September 1991. Mr. Ulrich held the position of Vice President, Human Resources
for Dun & Bradstreet Information Services, North America from 1988 to 1991. From
1978 to 1988, Mr. Ulrich held various Human Resource executive and managerial
positions at Pepsi Cola Company, a division of PepsiCo.
11
<PAGE>
ALLAN J. OKSCIN, 48, has been Corporate Controller since 1989 and has been
employed in various capacities with the Company since 1977. Mr. Okscin's duties
have included Assistant Controller and several managerial positions in Financial
Reporting, Financial Services and Internal Auditing. Mr. Okscin is a certified
public accountant.
AARON B. PARKER, 42, has been Associate General Counsel and Clerk of the
Company since August 1997. He served as Associate General Counsel and Assistant
Clerk of the Company from 1989 to 1997. He also served as the Company's Managing
Director of International Business from 1994 to 1996. Mr. Parker served as
Special Counsel to TRC from 1986 to 1996. Mr. Parker served as Associate General
Counsel of TRC and its predecessors from 1986 through 1988. Prior to joining
TRC, Mr. Parker was in private practice with the law firm of Wildman, Harrold,
Allen, Dixon & McDonnell.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock trades under the symbol FRND and is currently
traded on the Nasdaq National Market. The following table sets forth the closing
high and low sale price per share of the Company's common stock for the fiscal
years ended January 2, 2000 and December 27, 1998, respectively:
MARKET PRICE OF COMMON STOCK
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1999
- ------------------------------------------------------------
First Quarter............................................... $7.875 $5.063
Second Quarter.............................................. 8.125 5.50
Third Quarter............................................... 9.594 5.438
Fourth Quarter.............................................. 5.438 4.375
1998
- ------------------------------------------------------------
First Quarter............................................... $20.50 $11.00
Second Quarter.............................................. 26.50 15.375
Third Quarter............................................... 17.00 4.625
Fourth Quarter.............................................. 10.188 5.50
</TABLE>
On January 3, 2000, the Company was notified by The Nasdaq-Amex Group, a
NASD Company, that the Company's shares, which as of March 21, 2000 were traded
on the NASDAQ National Market, had failed to maintain a minimum bid price of
$5.00 per share or greater for 30 consecutive trading days as required under
NASDAQ rules. Accordingly, unless the Company's shares listed on NASDAQ trade at
$5.00 or above for at least ten consecutive trading days before April 3, 2000,
the Company's shares will be delisted from NASDAQ on April 5, 2000. As of
March 21, 2000, the Company's shares have not closed above $5.00 per share for
76 consecutive days. The Company will attempt to avoid or delay the delisting of
its shares on April 5, 2000 by requesting a hearing under NASDAQ rules
petitioning the NASDAQ Listing Qualifications Panel for (a) continued listing on
the NASDAQ National Market, or (b) transfer of the Company's listed shares to
the NASDAQ Small Cap Market.
The number of shareholders of record of the Company's Common Stock as of
March 21, 2000 was 7,462,733.
The Company currently intends to retain its earnings to finance future
growth and, therefore, does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. Any determination as to the payment of
dividends will depend upon the future results of operations, capital
requirements and financial condition of the Company and its subsidiaries and
such other facts as the Board of Directors of
12
<PAGE>
the Company may consider, including any contractual or statutory restrictions on
the Company's ability to pay dividends. The Company's credit facility and the
Indenture relating to its Senior Notes each limit the Company's ability to pay
dividends on its Common Stock, and the Company is currently prohibited from
paying any dividends (other than stock dividends) under these provisions (See
Note 7 of Notes to Consolidated Financial Statements). The Company has not paid
any dividends in the last five years.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated historical financial
information of FICC and its consolidated subsidiaries which has been derived
from the Company's audited Consolidated Financial Statements for each of the
five most recent fiscal years ended January 2, 2000. This information should be
read in conjunction with the Consolidated Financial Statements and related Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere herein. See Note 3 of Notes to
Consolidated Financial Statements for a discussion of the basis of the
presentation and significant accounting policies of the consolidated historical
financial information set forth below. No dividends were declared or paid for
any period presented.
<TABLE>
<CAPTION>
FISCAL YEAR (A)
(IN THOUSANDS, EXCEPT PER SHARE DATA) ----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant.............................. $618,433 $595,308 $593,671 $596,675 $593,570
Foodservice(retail and institutional)... 85,596 78,718 70,254 53,464 55,507
Franchise............................... 4,967 3,769 2,375 -- --
International........................... 23 301 1,247 668 72
-------- -------- -------- -------- --------
Total revenues............................ 709,019 678,096 667,547 650,807 649,149
-------- -------- -------- -------- --------
Costs and expenses:
Cost of sales........................... 206,413 204,884 197,627 191,956 192,600
Labor and benefits...................... 228,492 211,581 208,364 209,260 214,625
Operating expenses...................... 164,356 153,822 148,966 143,163 143,854
General and administrative expenses
(b)................................... 46,675 45,048 50,598 42,721 40,705
Expenses associated with
Recapitalization (c).................. -- -- 718 -- --
Relocation of manufacturing and
distribution facility (d)............. 1,175 945 -- -- --
Write-downs of property and equipment
(e)................................... 1,913 1,132 770 227 7,352
Depreciation and amortization........... 34,989 33,449 31,692 32,979 33,343
Gain on sales of restaurant operations and
properties (f).......................... (2,574) (1,005) (2,283) -- --
-------- -------- -------- -------- --------
Operating income.......................... 27,580 28,240 31,095 30,501 16,670
Interest expense, net (g)................. 33,694 31,838 39,303 44,141 41,904
(Recovery of write-down of) equity in net
loss of joint venture (h)............... (896) 4,828 1,530 -- --
-------- -------- -------- -------- --------
Loss before benefit from (provision for)
income taxes and cumulative effect of
change in accounting principle.......... (5,218) (8,426) (9,738) (13,640) (25,234)
Benefit from (provision for) income
taxes................................... 5,937 3,455 3,993 5,868 (33,419)
-------- -------- -------- -------- --------
Income (loss) before cumulative effect of
change in accounting principle.......... 719 (4,971) (5,745) (7,772) (58,653)
Cumulative effect of change in accounting
principle, net of income tax
effect(i)............................... (319) -- 2,236 -- --
-------- -------- -------- -------- --------
Net income (loss)......................... $ 400 $ (4,971) $ (3,509) $ (7,772) $(58,653)
======== ======== ======== ======== ========
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR (A)
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Basic and diluted income (loss) per share:
Income (loss) before cumulative effect of change in
accounting principle............................. $0.09 $(0.67) $(1.86) $(3.60) $(52.46)
Cumulative effect of change in accounting
principle, net of income tax effect.............. (0.04) -- 0.72 -- --
----- ------ ------ ------ -------
Net income (loss).................................. $0.05 $(0.67) $(1.14) $(3.60) $(52.46)
===== ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR (A)
----------------------------------------------------
OTHER DATA: 1999 1998 1997 1996 1995
- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
EBITDA (j)..................................... $65,045 $63,543 $72,363 $63,707 $57,365
Net cash provided by operating activities...... 34,551 32,865 22,118 26,163 27,790
Net cash used in investing activities.......... (22,775) (48,320) (23,437) (20,308) (18,166)
Net cash (used in) provided by financing
activities................................... (10,738) 11,405 (2,160) (10,997) 176
Capital expenditures:
Cash......................................... $41,388 $51,172 $31,638 $24,217 $19,092
Non-cash (k)................................. -- 608 2,227 5,951 3,305
------- ------- ------- ------- -------
Total capital expenditures..................... $41,388 $51,780 $33,865 $30,168 $22,397
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 27, DECEMBER 28, DECEMBER 29, DECEMBER 31,
2000 1998 1997 1996 1995
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).......... $(47,824) $(30,657) $(15,791) $ (20,700) $ (14,678)
Total assets....................... $356,370 $374,548 $371,871 $ 360,126 $ 370,292
Total long-term debt and capital
lease obligations, excluding
current maturities............... $300,345 $320,806 $310,425 $ 385,977 $ 389,144
Total stockholders' equity
(deficit)........................ $(89,705) $(90,601) $(86,361) $(173,156) $(165,534)
</TABLE>
- ------------------------
(a) Fiscal 1999 includes 53 weeks of operations. All other fiscal years
presented include 52 weeks of operations.
(b) General and administrative expenses includes stock compensation expense of
$563, $722 and $8,407 for 1999, 1998 and 1997, respectively.
(c) Includes payroll taxes associated with stock compensation discussed in (b),
and the write-off of deferred financing costs as a result of the
Recapitalization in 1997.
(d) Represents costs associated with the relocation of manufacturing and
distribution operations from Troy, OH to Wilbraham, MA and York, PA (see
Note 16 of Notes to Consolidated Financial Statements).
(e) Includes non-cash write-downs of approximately $220 in 1998 related to
equipment as a result of the closing of the Company's United Kingdom
operations and $3,346 in 1995 related to a postponed debt restructuring. All
other non-cash write-downs relate to property and equipment to be disposed
of in the normal course of the Company's operations.
(f) Represents gains recorded in connection with sales of equipment, operating
rights and properties to franchisees (see Notes 14 and 15 of Notes to
Consolidated Financial Statements).
14
<PAGE>
(g) Interest expense is net of capitalized interest of $397, $525, $250, $49 and
$62 and interest income of $132, $278, $338, $318 and $390 for 1999, 1998,
1997, 1996 and 1995, respectively.
(h) During fiscal 1999, the Company recovered approximately $827 of cash and $69
of equipment from its previous joint venture partner. Fiscal 1998 includes a
$3,486 write-down of the investment in and advances to the joint venture to
net realizable value based on the Company's decision to discontinue its
direct investment in the joint venture. The Company's share of the joint
venture's loss in 1998 and 1997 was $1,342 and $1,530, respectively (see
Note 18 of Notes to Consolidated Financial Statements).
(i) Relates to a change in accounting principle for pre-opening costs in fiscal
1999 (see Note 3 of Notes to Consolidated Financial Statements), and a
change in accounting principle for pensions in fiscal 1997 (see Note 10 of
Notes to Consolidated Financial Statements).
(j) EBITDA represents consolidated net income (loss) before (i) cumulative
effect of change in accounting principle, net of income tax effect,
(ii) benefit from (provision for) income taxes, (iii) (recovery of
write-down of) equity in net loss of joint venture, (iv) interest expense,
net, (v) depreciation and amortization and (vi) write-downs of property and
equipment and all other non-cash items. The Company has included information
concerning EBITDA in this Form 10-K because it believes that such
information is used by certain investors as one measure of a company's
historical ability to service debt. EBITDA should not be considered as an
alternative to, or more meaningful than, earnings from operations or other
traditional indications of a company's operating performance.
(k) Non-cash capital expenditures represent the cost of assets acquired through
the incurrence of capital lease obligations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY AND THE RELATED NOTES THERETO INCLUDED
ELSEWHERE HEREIN.
OVERVIEW
Friendly's owns and operates 618 restaurants, franchises 60 restaurants and
nine cafes and distributes a full line of frozen desserts through more than
3,500 supermarkets and other retail locations in 15 states. The Company was
publicly held from 1968 until January 1979, at which time it was acquired by
Hershey Foods Corporation ("Hershey"). Under Hershey's ownership, the number of
Company restaurants increased from 601 to 849. Hershey subsequently sold the
Company in September 1988 to The Restaurant Company ("TRC") in a
highly-leveraged transaction (the "TRC Acquisition").
Beginning in 1989, the new management focused on improving operating
performance through revitalizing and renovating restaurants, upgrading and
expanding the menu and improving management hiring, training, development and
retention. Also in 1989, the Company introduced its signature frozen desserts
into retail locations in the Northeast. Since the beginning of 1989, 44 new
restaurants have been opened while 233 under-performing restaurants have been
closed and 41 restaurants have been refranchised.
The high leverage associated with the TRC Acquisition has severely impacted
the liquidity and profitability of the Company. As of January 2, 2000, the
Company had a stockholders' deficit of $89.7 million. Cumulative net interest
expense of $455.9 million since the TRC Acquisition has significantly
contributed to the deficit. The Company's net income in 1999 of $0.4 million
included $33.7 million of interest expense, net. The degree to which the Company
is leveraged could have important consequences, including the following:
(i) potential impairment of the Company's ability to obtain additional financing
in the future; (ii) because borrowings under the Company's credit facility in
part bear interest at floating rates, the Company could be adversely affected by
any increase in prevailing rates; (iii) the Company is
15
<PAGE>
more leveraged than certain of its principal competitors, which may place the
Company at a competitive disadvantage; and (iv) the Company's substantial
leverage may limit its ability to respond to changing business and economic
conditions and make it more vulnerable to a downturn in general economic
conditions.
The Company's revenue, EBITDA and operating income have improved
significantly since the TRC Acquisition. Despite the closing of 189 restaurants
(net of restaurants opened) since the beginning of 1989, restaurant revenues
have increased 11.0% from $557.3 million in 1989 to $618.4 million in 1999,
while average revenue per restaurant has increased 44.1% from $665,000 to
$958,000 during the same period. Foodservice operations manufactures frozen
dessert products and distributes such manufactured products and purchased
finished goods to both the Company's and franchised restaurants. Additionally,
it sells frozen dessert products to distributors and retail and institutional
locations. Foodservice (retail and institutional), franchise and other revenues
have also increased from $1.4 million in 1989 to $90.6 million in 1999. In
addition, EBITDA has increased 37.1% from $47.4 million in 1989 to
$65.0 million in 1999, while operating income has increased from $4.1 million to
$27.6 million over the same period. As a result of the positive impact of the
Company's re-imaging program, the closing of under-performing restaurants, the
growth of foodservice and other businesses and the commencement in July 1997 of
the Company's franchising program, period-to-period comparisons may not be
meaningful. Despite these improvements in operating performance, and primarily
as a result of its high leverage and interest expense, the Company has reported
net income (losses) of $0.4 million, ($5.0 million), ($3.5 million),
($7.8 million) and ($58.7 million) for 1999, 1998, 1997, 1996 and 1995,
respectively.
The Company's revenues are derived primarily from the operation of
full-service restaurants, the distribution and sale of frozen desserts through
retail and institutional locations and franchising.
16
<PAGE>
RESULTS OF OPERATIONS
The operating results of the Company expressed as a percentage of total
revenues are set forth below:
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Restaurant................................................ 87.2% 87.8% 88.9%
Foodservice(retail and institutional)..................... 12.1 11.6 10.5
Franchise................................................. 0.7 0.6 0.4
International............................................. -- -- 0.2
----- ----- -----
Total revenues.............................................. 100.0 100.0 100.0
----- ----- -----
Costs and expenses:
Cost of sales............................................. 29.1 30.2 29.6
Labor and benefits........................................ 32.2 31.2 31.2
Operating expenses........................................ 23.2 22.7 22.3
General and administrative expenses....................... 6.6 6.6 7.6
Expenses associated with Recapitalization................. -- -- 0.1
Relocation of manufacturing and distribution facility..... 0.2 0.1 --
Write-downs of property and equipment..................... 0.3 0.2 0.1
Depreciation and amortization............................. 4.9 4.9 4.8
Gain on sales of restaurant operations and properties..... (0.4) (0.1) (0.3)
----- ----- -----
Operating income............................................ 3.9 4.2 4.6
Interest expense, net....................................... 4.7 4.7 5.9
(Recovery of write-down of) equity in net loss of joint
venture................................................... (0.1) 0.7 0.2
----- ----- -----
Loss before benefit from income taxes and cumulative effect
of change in accounting principle......................... (0.7) (1.2) (1.5)
Benefit from income taxes................................... 0.8 0.5 0.6
----- ----- -----
Income (loss) before cumulative effect of change in
accounting principle...................................... 0.1 (0.7) (0.9)
Cumulative effect of change in accounting principle, net of
income tax effect......................................... 0.0 -- 0.4
----- ----- -----
Net income (loss)........................................... 0.1% (0.7)% (0.5)%
===== ===== =====
</TABLE>
1999 COMPARED TO 1998
REVENUES:
Total revenues increased $30.9 million, or 4.6%, to $709.0 million in 1999
from $678.1 million in 1998. Restaurant revenues increased $23.1 million, or
3.9%, to $618.4 million in 1999 from $595.3 million in 1998. Fiscal 1999
included a 53(rd) week of operations. The additional week contributed
approximately $12.5 million in total revenues for the restaurant and Foodservice
(retail and institutional) segments. Comparable restaurant revenues increased
2.2% from 1998 to 1999. Restaurant revenues increased by $14.2 million due to
the opening of 11 new Company-owned restaurants during the fiscal year ended
January 2, 2000. Revenues were favorably impacted by $17.7 million due to the
increased sales performance of the Company's 276 re-imaged restaurants. In
addition, sales at restaurants which have not been re-imaged increased
$5.5 million. Offsetting these increases was the decrease in sales of
$9.7 million primarily as the result of the closing of 34 under-performing
restaurants during the fiscal year ended January 2, 2000. Sales for the fiscal
year ended January 2, 2000 were also negatively impacted by $4.7 million as a
result of the sale of five restaurants to franchisees. Foodservice (retail and
institutional) revenues increased by
17
<PAGE>
$6.9 million, or 8.8%, to $85.6 million in 1999 from $78.7 million in 1998. The
increase was primarily due to an increase in sales as a result of the increase
in the number of franchise locations. There were 69 franchise units (including
cafes) open at January 2, 2000 compared to 53 franchise units open at
December 27, 1998. The Company's Foodservice division sells a variety of
products to the franchisees. Franchise revenues increased $1.2 million or 31.6%
to $5.0 million in 1999 from $3.8 million in 1998. The increase is primarily the
result of the increase in franchise units previously mentioned. International
revenues for 1999 were nominal as a result of the Company's decision to
discontinue its international business in 1998.
COST OF SALES:
Cost of sales increased $1.5 million, or 0.7%, to $206.4 million in 1999
from $204.9 million in 1998. Cost of sales as a percentage of total revenues
decreased to 29.1% in 1999 from 30.2% in 1998. The Company experienced a 30.1%
decrease in the cost of cream, the principal ingredient in ice cream, for the
fiscal year ended January 2, 2000 when compared to the fiscal year ended
December 27, 1998. In addition, 1998 included $0.2 million of inventory
write-downs associated with the Company's United Kingdom operations.
LABOR AND BENEFITS:
Labor and benefits increased $16.9 million, or 8.0%, to $228.5 million in
1999 from $211.6 million in 1998. Labor and benefits as a percentage of total
revenues was 32.2% for the fiscal year ended January 2, 2000 compared to 31.2%
for the fiscal year ended December 27, 1998. The higher labor cost as a
percentage of total revenues is primarily the result of the Company's emphasis
on improving guest service by increasing staffing levels at the restaurants, the
impact of low unemployment rates on wages and training related to the Company's
soft serve ice cream rollout in fiscal 1999. In addition, the 1999 average
hourly rate increased compared to 1998 due to increased over-time for staffing
at the carryout windows as part of the soft serve product introduction.
OPERATING EXPENSES:
Operating expenses increased $10.6 million, or 6.9%, to $164.4 million in
1999 from $153.8 million in 1998. Operating expenses as a percentage of total
revenues increased to 23.2% in 1999 from 22.7% in 1998. This increase was
primarily due to an increase in advertising and promotion expenses associated
with the rollout of the Company's new soft serve product and increased
maintenance expenses associated with improving restaurant standards in 1999.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses increased $1.7 million, or 3.8%, to
$46.7 million in 1999 from $45.0 million in 1998. General and administrative
expenses as a percentage of total revenues was 6.6% in 1999 and 1998. The
increase was partially due to $0.7 million of severance costs associated with
certain management changes in 1999. In addition, the increase was attributable
to the costs associated with new restaurant programs instituted to improve guest
service at the restaurants.
EBITDA:
As a result of the above, EBITDA increased $1.5 million, or 2.4%, to
$65.0 million in 1999 from $63.5 million in 1998. EBITDA as a percentage of
total revenues decreased to 9.2% in 1999 from 9.4% in 1998.
RELOCATION OF MANUFACTURING AND DISTRIBUTION FACILITY:
Relocation of manufacturing and distribution facility expense relates to
costs paid in connection with the relocation of manufacturing and distribution
operations from Troy, OH to Wilbraham, MA and York,
18
<PAGE>
PA. The $945,000 of expense in 1998 primarily represents severance, utility and
other anticipated costs with closing and relocating the manufacturing facility.
The 1999 expense includes a $1,033,000 loss on the sale of the Troy, OH
manufacturing facility and additional costs of $142,000 associated with the
relocation of the facility (see Note 16 of Notes to Consolidated Financial
Statements).
WRITE-DOWNS OF PROPERTY AND EQUIPMENT:
Write-downs of property and equipment increased $0.8 million to
$1.9 million in 1999 from $1.1 million in 1998 as 19 properties were written
down in fiscal 1999 and nine properties were written down in 1998.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization increased $1.6 million, or 4.8%, to
$35.0 million in 1999 from $33.4 million in 1998. Depreciation and amortization
as a percentage of total revenues was 4.9% in 1999 and 1998. The increase was
attributable to expenditures associated with re-imaging projects and new
restaurants.
GAIN ON SALES OF RESTAURANT OPERATIONS AND PROPERTIES:
Gain on sales of restaurant operations and properties increased
$1.6 million, to $2.6 million in 1999 from $1.0 million in 1998. The increase is
primarily the result of the Company selling the land and buildings associated
with 13 previously franchised restaurants to the Company's largest franchisee,
located in the Baltimore/Washington D.C. area, for $6.8 million in fiscal 1999
which resulted in a gain of $1.6 million.
INTEREST EXPENSE, NET:
Interest expense, net of capitalized interest and interest income, increased
by $1.9 million, or 6.0%, to $33.7 million in 1999 from $31.8 million in 1998.
The increase in interest expense, net was primarily due to the increase in the
average outstanding balance on the revolving credit facility during the fiscal
year ended January 2, 2000 compared to the fiscal year ended December 27, 1998,
along with the increase in interest rates associated with the credit agreement
that was amended effective December 27, 1998.
(RECOVERY OF WRITE-DOWN OF) EQUITY IN NET LOSS 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. On March 17, 1999 the Company received an additional $250,000 from the
joint venture partner. These additional proceeds were reflected as income in the
first quarter ended March 28, 1999. During June 1999, the Company was notified
by its joint venture partner that it would remit approximately $577,000 in cash
and $69,000 of equipment to the Company. The Company recorded such amounts as
income during the second quarter ended June 27, 1999. The Company received the
cash on July 22, 1999 and received the equipment in the fourth quarter ended
January 2, 2000.
BENEFIT FROM INCOME TAXES:
The benefit from income taxes was $5.9 million, or 114%, in 1999 compared to
$3.5 million, or 41%, in 1998. The sale of the land and buildings associated
with 13 previously franchised restaurants to the Company's largest franchisee,
the sale of the Troy, OH manufacturing facility and other franchise sales during
the fiscal year ended January 2, 2000 favorably impacted the provision for
income taxes as they triggered built-in gains which allowed for a reduction in
the valuation allowance on certain net operating loss carryforwards.
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CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET:
In accordance with Statement of Position (SOP) No. 98-5, the Company
recognized $0.3 million of expense, net of the related income tax benefit of
$0.2 million, for the fiscal year ended January 2, 2000 related to previously
deferred restaurant preopening costs.
NET INCOME (LOSS):
Net income was $0.4 million in 1999 compared to a net loss of $5.0 million
in 1998 for the reasons discussed above.
1998 COMPARED TO 1997
REVENUES:
Total revenues increased $10.6 million, or 1.6%, to $678.1 million in 1998
from $667.5 million in 1997. Restaurant revenues increased $1.6 million, or
0.3%, to $595.3 million in 1998 from $593.7 million in 1997. Comparable
restaurant revenues increased 3.3%. The increase in restaurant revenues was due
to the introduction of higher-priced lunch and dinner entrees, selected menu
price increases, a shift in sales mix to higher-priced items, a milder winter in
the 1998 period which allowed for favorable traffic comparisons and the
re-imaging of 142 restaurants under the Company's Focus 2000 program. The
increase in restaurant revenues was partially offset by the closing of 21
under-performing restaurants. There were seven new restaurants opened in 1998.
In addition, the increase was partially offset by the sale of 36 restaurants to
franchisees, which resulted in a $17.2 million reduction in restaurant revenues.
Restaurant revenues were also reduced by $1.9 million due to the close-down days
associated with the construction of the Company's re-imaging projects.
Foodservice (retail and institutional) revenues increased by $8.4 million, or
11.9%, to $78.7 million in 1998 from $70.3 million in 1997. The increase was
primarily due to an increase in retail sales in existing markets. International
revenues decreased $0.9 million to $0.3 million in 1998 from $1.2 million in
1997. Franchise revenues increased $1.4 million or 58% to $3.8 million in 1998
from $2.4 million in 1997. The increase is primarily the result of an increase
in the number of franchised units and initial fees associated with 1998
franchise transactions.
COST OF SALES:
Cost of sales increased $7.3 million, or 3.7%, to $204.9 million in 1998
from $197.6 million in 1997. Cost of sales as a percentage of total revenues
increased to 30.2% in 1998 from 29.6% in 1997. Results were significantly
impacted by an unprecedented increase in the cost of dairy raw materials,
specifically fresh cream. The total impact to the Company due to the cost of
dairy raw materials was an increase in cost of sales of approximately
$6.9 million. To compensate for this increase, the Company increased prices on
certain packaged ice cream products and modified promotional strategies. The
higher food cost as a percentage of total revenue was also due to the increases
in non-restaurant sales, which carry a higher food cost compared to restaurant
sales. In addition, 1998 included $0.2 million of inventory write-downs
associated with the Company's United Kingdom operations.
LABOR AND BENEFITS:
Labor and benefits increased $3.2 million, or 1.5%, to $211.6 million in
1998 from $208.4 million in 1997. Labor and benefits as a percentage of total
revenues was 31.2% for the years ended December 27, 1998 and December 28, 1997.
Although labor expenses increased, they remained at the same percentage of total
revenues primarily due to an increase in Foodservice (retail and institutional)
revenues as a percent of total revenues as these revenues have no associated
labor and benefits cost and lower workers' compensation insurance and pension
costs. The higher labor costs, as a percentage of restaurant revenues, are a
result of the Company's emphasis on improving guest service by increasing labor
at the restaurant level as a prelude to a major 1999 service initiative, which
is anticipated to result in increased labor costs.
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OPERATING EXPENSES:
Operating expenses increased $4.8 million, or 3.2%, to $153.8 million in
1998 from $149.0 million in 1997. Operating expenses as a percentage of total
revenues increased to 22.7% in 1998 from 22.3% in 1997. This increase was
primarily due to higher foodservice retail selling expenses, which resulted in
higher foodservice retail sales.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses decreased $5.6 million, or 11.1%, to
$45.0 million in 1998 from $50.6 million in 1997. General and administrative
expenses as a percentage of total revenues decreased to 6.6% in 1998 from 7.6%
in 1997. The decrease was primarily due to the costs recognized in 1997 for
stock compensation expense related to the Initial Public Offering offset by
increased Year 2000 training costs, higher relocation expenses and fringe
benefit expenses in 1998. In addition, contributing to the decrease were lower
incentive compensation costs and reduced management fees paid to TRC as a result
of the deconsolidation.
EBITDA:
As a result of the above, EBITDA decreased $8.9 million, or 12.2%, to
$63.5 million in 1998 from $72.4 million in 1997. EBITDA as a percentage of
total revenues decreased to 9.4% in 1998 from 10.8% in 1997.
RELOCATION OF MANUFACTURING AND DISTRIBUTION FACILITY:
Relocation of manufacturing and distribution facility expense relates to
costs expected to be paid in connection with the relocation of manufacturing and
distribution operations from Troy, Ohio to Wilbraham, Massachusetts and York,
Pennsylvania.
EXPENSES ASSOCIATED WITH RECAPITALIZATION:
In 1997, expenses associated with Recapitalization included payroll taxes
associated with stock compensation and the write-off of deferred financing costs
related to the Company's previous credit facility.
WRITE-DOWNS OF PROPERTY AND EQUIPMENT:
Write-downs of property and equipment increased $0.3 million to
$1.1 million in 1998 from $0.8 million in 1997. The increase is primarily the
result of $0.2 million of United Kingdom equipment write-downs in 1998.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization increased $1.7 million, or 5.4%, to
$33.4 million in 1998 from $31.7 million in 1997. Depreciation and amortization
as a percentage of total revenues increased to 4.9% in 1998 from 4.8% in 1997.
The increase was attributable to the Company's re-imaging projects. There were
142 units which were re-imaged in the year ended December 27, 1998 in addition
to the full year depreciation impact for the 43 units which were re-imaged in
the year ended December 28, 1997. Offsetting these increases was the net
reduction in total restaurants of 14 units from December 28, 1997.
GAIN ON SALES OF RESTAURANT OPERATIONS AND PROPERTIES:
Gain on sales of restaurant operations and properties decreased
$1.3 million, or 57%, to $1.0 million in 1998 from $2.3 million in 1997. The
decrease was due to the gain recognized in 1998 from the sale of
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equipment and operating rights for two locations compared to the gain recognized
in 1997 from the sale of equipment and operating rights for 34 locations.
INTEREST EXPENSE, NET:
Interest expense, net of capitalized interest and interest income, decreased
by $7.5 million, or 19.1%, to $31.8 million in 1998 from $39.3 million in 1997.
The decrease in interest expense was due to the reduction of debt, including
capital lease obligations, and interest rates associated with the Company's
Recapitalization in November 1997.
(RECOVERY OF WRITE-DOWN OF) EQUITY IN NET LOSS OF JOINT VENTURE:
The (recovery of write-down of) equity in net loss of joint venture
increased $3.3 million to $4.8 million in 1998 from $1.5 million in 1997. The
increase was primarily the result of the $3.5 million write-off of the
investment in and advances to the joint venture based on the Company's decision
to discontinue its direct investment in the joint venture. The Company's share
of the joint venture's loss in 1998 was $1.3 million.
BENEFIT FROM INCOME TAXES:
The benefit from income taxes was $3.5 million, or 41%, in 1998 compared to
$4.0 million, or 41%, in 1997.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET:
In 1997, the Company revised the method used in determining the
return-on-asset component of annual pension expense as described in Note 10 of
Notes to Consolidated Financial Statements. The cumulative effect of this change
was $2.2 million, net of income tax expense of $1.6 million.
NET LOSS:
Net loss was $5.0 million in 1998 compared to a net loss of $3.5 million in
1997 for the reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and capital resources are cash
generated from operations and borrowings under its revolving credit facility.
Net cash provided by operating activities was $34.6 million in 1999,
$32.9 million in 1998 and $22.1 million in 1997. Accounts receivable decreased
approximately $1.6 million from December 27, 1998 to January 2, 2000. The
decrease was primarily due to the timing of payments associated with Foodservice
retail promotional activity. Inventories decreased approximately $4.2 million
from December 27, 1998 to January 2, 2000 primarily due to the reduction in the
number of Company-owned restaurants from 646 restaurants at December 27, 1998
compared to 618 restaurants at January 2, 2000. Other assets increased
$1.8 million from December 27, 1998 to January 2, 2000, primarily related to
$0.7 million of costs associated with entering into lease agreements for two of
the Company's new restaurant locations. In addition, the increase was also
attributable to a $0.8 million reduction in the prepaid dessert center fees for
retail. Available borrowings under the revolving credit facility were
$34.0 million as of January 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
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under capital leases and for property and casualty insurance financing and the
amount of asset sales are limited by the terms of its credit facility and Senior
Notes.
The Company requires capital principally to maintain existing restaurant and
plant facilities, to continue to renovate and re-image existing restaurants, to
convert restaurants, to construct new restaurants and for general corporate
purposes. Since the TRC Acquisition and through January 2, 2000, the Company has
spent $380.4 million on capital expenditures, including capitalized leases, of
which $119.9 million was for the renovation of restaurants under its
revitalization and re-imaging programs.
Net cash used in investing activities was $22.8 million in 1999,
$48.3 million in 1998 and $23.4 million in 1997. Capital expenditures for
restaurant operations, including capitalized leases, were approximately
$36.3 million in 1999, $43.7 million in 1998 and $28.9 million in 1997. Capital
expenditures were offset by proceeds from the sale of property and equipment of
$17.5 million, $2.9 million and $5.0 million in 1999, 1998 and 1997,
respectively.
The Company also uses capital to repay borrowings when cash is sufficient to
allow for repayments. Net cash used in financing activities was $10.7 million in
1999. Net cash provided by financing activities was $11.4 million in 1998. Net
cash used in financing activities to repay borrowings was $14.6 million in 1997
excluding the effect of the Recapitalization, which resulted in proceeds of
$200 million from the issuance of Senior Notes, $90 million from term loans and
$90 million from the Common Stock Offering. These proceeds were used to pay the
balances outstanding under the previous credit facility, certain capital lease
obligations and fees and expenses related to the Recapitalization.
The Company had a working capital deficit of $47.8 million as of January 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 amounts for food, supplies and payroll become due.
The $200 million Senior Notes issued in connection with the Company's
November 1997 Recapitalization are unsecured, senior obligations of FICC,
guaranteed on an unsecured, senior basis by FICC's Friendly's Restaurant
Franchise, Inc. subsidiary, but are effectively subordinated to all secured
indebtedness of FICC, including the indebtedness incurred under the New Credit
Facility. The Senior Notes mature on December 1, 2007. Interest on the Senior
Notes is payable at 10.50% per annum semi-annually on June 1 and December 1 of
each year. The Senior Notes are redeemable, in whole or in part, at FICC's
option any time on or after December 1, 2002 at redemption prices from 105.25%
to 100.00%. The redemption price is based on the redemption date. Prior to
December 1, 2000, FICC may redeem up to $70 million of the Senior Notes at
110.50% with the proceeds of one or more equity offerings, as defined.
The Company entered into the New Credit Facility in November 1997 in
connection with its Recapitalization. The New Credit Facility includes
$90 million in term loans (the "Term Loans"), a $55 million revolving credit
facility (the "Revolving Credit Facility") and a $15 million letter of credit
facility (the "Letter of Credit Facility"). The New Credit Facility is
collateralized by substantially all of FICC's assets and by a pledge of FICC's
shares of certain of its subsidiaries' stock.
Borrowings under the New Credit Facility incurred interest through
December 27, 1998, at FICC's option, at either (i) the Eurodollar Rate plus
2.25% per annum or (ii) the ABR rate (the greater of (a) a specified prime rate
or (b) the federal funds rate plus 0.50%) plus 0.75% per annum for drawings
under the Revolving Credit Facility, 0.50% per annum for amounts undrawn under
the Revolving Credit Facility, 0.50% per annum for amounts unissued under the
Letter of Credit Facility and 2.50% per annum for amounts issued but undrawn
under the Letter of Credit Facility. Borrowings under the Term Loans incurred
interest through December 27, 1998, at FICC's option, at either the Eurodollar
Rate plus 2.25%, 2.50% and 2.75% or the ABR rate plus 0.75%, 1.00% and 1.25% for
Tranches A, B and C, respectively. As of January 2, 2000, the one-month and
three-month Eurodollar Rates were 5.84% and 6.00%, respectively.
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As of December 27, 1998, the one-month and three-month Eurodollar Rates were
5.63% and 5.28%, respectively. FICC entered into a three-year interest rate swap
agreement to hedge the impact of interest rate changes on the Term Loans. The
interest rate swap agreement has a notional amount equal to the unpaid balance,
before additional prepayments, of the Term Loans and effectively fixed the
interest rates on Tranches A, B and C of the Term Loans at 8.25%, 8.50% and
8.75%, respectively, prior to the effect of the amendment described below. The
interest rate swap agreement matures on November 20, 2000.
Effective December 27, 1998, the New Credit Facility was amended. In
connection with this amendment, certain covenants were changed and interest
rates on borrowings were increased. The per annum interest rates on drawings
under the Revolving Credit Facility increased 0.25% and 0.50% for Eurodollar and
ABR loans, respectively. The per annum interest rates on Tranches A, B and C of
Eurodollar Term Loans increased 0.25% and the per annum interest rates on ABR
Term Loans increased 0.50%, 0.25% and 0.25% for Tranches A, B and C,
respectively. The per annum interest rate on amounts issued but undrawn under
the Letter of Credit Facility increased 0.25%. References herein to the New
Credit Facility shall mean as amended on December 27, 1998. As a result of this
amendment, interest rates on the Company's Term Loans increased to 8.0%, 8.0%
and 8.25% for Tranches A, B and C, respectively, as of December 27, 1998. The
interest rates on the Company's Revolving Credit Facility increased to 9.0% for
ABR borrowings and 8.31% and 8.37% for the two outstanding Eurodollar borrowings
under this facility.
Additionally, effective December 31, 1999, the New Credit Facility was again
amended. As a result of this amendment, the Consolidated leverage ratio covenant
was revised for the fourth quarter ended January 2, 2000. The Company did not
incur any expenses associated with this amendment. As of January 2, 2000, the
interest rates in effect for the Company's Term Loans were 8.97%, 8.97% and
9.22% for Tranches A, B and C, respectively. The interest rates on the Company's
revolving credit facility were 9.75% for ABR borrowings and 8.97% for Eurodollar
borrowings under this facility. References herein to the New Credit Facility
shall mean as amended on December 31, 1999.
Annual scheduled principal payments due under the Term Loans will total
$9.1 million, $10.8 million, $10.6 million, $16.0 million, $15.2 million and
$18.8 million in 2000 through 2005, respectively. In addition to the principal
payments, the Term Loans are permanently reduced by: (i) specified percentages
of each year's Excess Cash Flow (as defined), (ii) specified percentages of the
aggregate net cash proceeds from certain issuances of indebtedness and
(iii) 100% of the aggregate net cash proceeds from asset sales (as defined) and
certain insurance claim proceeds, in each case in this clause (iii), in excess
of stated maximum amounts or not re-employed within 180 days in the Company's
business. Any such applicable proceeds and Excess Cash Flow are applied to the
Term Loans in inverse order of maturity. Principal payments due in 2000 on the
Term Loans as a result of Excess Cash Flow for 1999 of $4.5 million are included
in current maturities of long-term debt in the accompanying consolidated
financial statements. The Revolving Credit Facility matures on November 15,
2002.
The New Credit Facility imposes significant operating and financial
restrictions on the Company's ability to, among other things, incur
indebtedness, create liens, sell assets, engage in mergers or consolidations,
pay dividends and engage in certain transactions with affiliates. The New Credit
Facility limits the amount which the Company may spend on capital expenditures
and requires the Company to comply with certain financial covenants.
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 $30.4 million
in the aggregate, of which $22.7 million is expected to be spent on restaurant
operations. The Company's actual 2000 capital expenditures may vary from the
estimated amounts set forth herein.
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In addition, the Company will need capital in connection with commitments to
purchase approximately $61.8 million of raw materials, food products and
supplies used in the normal course of business and its self-insurance through
retentions or deductibles of the majority of its workers' compensation,
automobile, general liability and group health insurance programs. The Company's
self-insurance obligations may exceed its reserves.
The Company believes that the combination of the funds anticipated to be
generated from operating activities and borrowing availability under the New
Credit Facility will be sufficient to meet the Company's anticipated operating
and capital requirements for the foreseeable future.
RECENT DEVELOPMENTS
In March 2000, the Company's Board of Directors approved a restructuring
plan that provides for the immediate closing of 79 restaurants by the end of
March 2000 and the disposition of an additional 71 restaurants. The
71 locations will remain in operation until they are sold, subleased or closed
prior to March 2002. The restaurants to be closed are 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 will eliminate
approximately 150 management/administrative employees in the field organization
and at corporate headquarters.
As a result of this plan, the Company will report a pre-tax write-down of
property and equipment of approximately $18 million and a pre-tax restructuring
charge of approximately $12 million for severance pay, lease cancellation fees,
restaurant de-identification costs and certain other costs associated with the
closing of the locations in the first quarter ended April 2, 2000. Management
believes that future annual savings associated with the reduction in force are
estimated to be $8 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 will be increased. The per annum interest rates on
the Term Loans, Revolving Credit Facility and the Letter of Credit Facility will
be increased by 0.25% as a result of this amendment.
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 will be recorded as revenue in the year ending December 31, 2000. The
Company will recognize a gain of approximately $1,500,000 related to the sale of
the assets for the 29 existing franchised locations in the year ending
December 31, 2000. As a result of the sale of these units, the Company recorded
a write-down of $500,000 in the first quarter of fiscal 2000 for the remaining
11 restaurants in this operating region, since the Company does not intend to
operate them in the future.
On January 3, 2000, the Company received notice from The Nasdaq-Amex Group,
a NASD Company, that the Company's shares, which are currently listed on the
NASDAQ National Market, had failed to maintain a minimum bid price of $5.00 per
share or greater for 30 consecutive trading days as required under NASDAQ rules.
See Item 5.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs historically being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have time-sensitive software may have
recognized a date using "00" as the year 1900 rather than the year 2000.
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This could have resulted in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal day-to-day
operations.
The Company completed the requirements outlined in its comprehensive plan to
address the Year 2000 Issue. The plan addressed three main phases:
(a) information systems; (b) embedded chips; and (c) supply chain readiness
(including customers as well as inventory and non-inventory suppliers). To
oversee the process, the Company established a Steering Committee comprised of
executives and chaired by the Company's Senior Executive Vice President, Chief
Financial Officer and Treasurer. The Committee reports regularly to the Board of
Directors and the Audit Committee. As of January 2, 2000, and through March 21,
2000, the Company had not had any major systems failures either in core
centralized systems or restaurant operating software and hardware. The minor
problems which arose were procedural in nature and were resolved. Remediation of
the Company's major business systems has been completed, including financial
reporting, asset management, accounts payable, payroll and human resources and
manufacturing, purchasing and distribution systems. Prior to January 2, 2000,
the Company had successfully completed an integrated Year 2000 test of its
critical financial operating system. This test also included the rollover of the
Company's network and operating system infrastructure. The systems tested
included financial reporting, asset management, accounts payable, payroll and
human resources and manufacturing, purchasing and distribution systems. The
Company continues to evaluate all software enhancements to ensure that no
adverse activity may affect the day-to-day operation of the Company.
Certification of restaurant systems was completed by the end of the second
quarter ended June 27, 1999. Retrofitting of restaurant technology hardware was
also completed by the end of the second quarter. Revised point-of-sale software
is currently installed at all restaurants and the Company continues to monitor
its operation during the normal course of business operations. Other key
restaurant software has also been certified.
Of the total project cost of $7.1 million, approximately $5.8 million was
attributable to the purchase of new software and hardware, which was
capitalized. The remaining $1.3 million was expensed as incurred.
The Company's total Year 2000 project cost included the costs and time
associated with the impact of third party Year 2000 Issues. The Company utilized
both internal and external resources to reprogram, or replace, and test the
software for the system improvement and Year 2000 modifications. The total cost
of the system improvement and the Year 2000 project was funded through operating
cash flows.
The Company continues to monitor all phases of its technology environment to
ensure that there are no long term issues. The Company does not anticipate any
effects of the Year 2000 Issue on a going forward basis.
NET OPERATING LOSS CARRYFORWARDS
As of January 2, 2000, the Company has a federal net operating loss ("NOL")
carryforward of $45.5 million. Because of a change of ownership of the Company
under Section 382 of the Internal Revenue Code on March 26, 1996, $21.3 million
of the NOL carryforward can be used only to offset current or future taxable
income to the extent that any additional net unrealized built-in gains which
existed at March 26, 1996 are recognized by March 26, 2001. The Common Stock
Offering in November 1997 resulted in the Company having another change of
ownership under Section 382 of the Internal Revenue Code. Accordingly, in tax
years ending after the Common Stock Offering, the Company is limited in how much
of its NOLs it can utilize. The amount of NOL's which may be used each year
prior to any built-in gains being triggered is approximately $2.4 million. The
NOLs expire, if unused, between 2001 and 2019. In addition, the NOL
carryforwards are subject to adjustment upon review by the Internal Revenue
Service.
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INFLATION
The inflationary factors which have historically affected the Company's
results of operations include increases in the costs of cream, sweeteners,
purchased food, labor and other operating expenses. Approximately 15% of wages
paid in the Company's restaurants are impacted by changes in the federal or
state minimum hourly wage rate. Accordingly, changes in the federal or state
minimum hourly wage rates directly affect the Company's labor cost. The Company
is able to minimize the impact of inflation on occupancy costs by owning the
underlying real estate for approximately 41% of its restaurants. The Company and
the restaurant industry typically attempt to offset the effect of inflation, at
least in part, through periodic menu price increases and various cost reduction
programs. However, no assurance can be given that the Company will be able to
offset such inflationary cost increases in the future.
SEASONALITY
Due to the seasonality of frozen dessert consumption, and the effect from
time to time of weather on patronage of the restaurants, the Company's revenues
and EBITDA are typically higher in its second and third quarters.
GEOGRAPHIC CONCENTRATION
Approximately 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.
RECENTLY ISSUED 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 is
required to adopt SAB No. 101 on January 3, 2000. The adoption of SAB No. 101 is
not expected to have a material effect on the Company's consolidated financial
position or results of operations as management believes 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
Statement of Financial Accounting Standards (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 (loss).
27
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Company has market risk exposure to interest rates on its fixed and
variable rate debt obligations and manages the exposure on certain variable rate
obligations through the use of an interest rate swap arrangement. The Company
does not enter into contracts for trading purposes. The information below
summarizes the Company's market risk associated with debt obligations and
derivative financial instruments as of January 2, 2000. For debt obligations,
the table presents principal cash flows and related average interest rates by
expected year of maturity. For variable rate debt obligations, the average
variable rates are based on implied forward rates as derived from appropriate
quarterly spot rate observations as of year end. For the interest rate swap
arrangement, the table presents the notional amount and related weighted average
interest rate by year of maturity. The average variable rate is the implied
forward rate as derived from appropriate quarterly spot rate observations as of
year end.
EXPECTED YEAR OF MATURITY
(in thousands)
<TABLE>
<CAPTION>
DESCRIPTION 2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
- ----------- -------- -------- -------- -------- -------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities:
Fixed Rate:
Senior Notes.............. -- -- -- -- -- $200,000 $200,000 $170,700
Average Interest Rates.... -- 10.50% 10.50%
Other Debt................ 53 53 53
Average Interest Rates.... 9.88% -- 9.88%
Variable Rate:
Tranche A............. $10,183 $10,286 $10,043 -- -- -- 30,512 30,512
Average Interest Rates.... 9.00% 9.59% 9.73% -- 9.44%
Tranche B............. 2,115 343 343 $15,771 $14,991 -- 33,563 33,563
Average Interest Rates.... 8.98% 9.59% 9.73% 9.74% 9.75% 9.70% --
Tranche C............. 1,322 214 214 214 214 18,799 20,977 20,977
Average Interest Rates.... 9.23% 9.84% 9.98% 9.99% 10.00% 10.09% 10.03% --
Revolving Credit
Facility................ -- -- 21,000 -- -- -- 21,000 21,000
Average Interest Rates.... 9.56% -- 9.56%
Interest Rate Swap:
Receive Variable/Pay
Fixed................... 85,052 -- -- -- -- -- 85,052 85,052
Average Pay Rate.......... 6.00% -- -- -- -- -- 6.00% --
Weighted Average Receive
Rate.................... 6.24% -- -- -- -- -- 6.24% --
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For a listing of consolidated financial statements which are included in
this document, see page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS OF THE REGISTRANT
Information regarding directors and Section 16(a) Compliance is incorporated
herein by reference from the Sections entitled "Proposal 1-Election of
Directors" and "Section 16(a) Beneficial Ownership
28
<PAGE>
Reporting Compliance" of the Company's definitive proxy statement which will be
filed no later than 120 days after January 2, 2000.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Sections entitled "Proposal
1--Election of Directors--Director Compensation" and "Executive Compensation" of
the Company's definitive proxy statement which will be filed no later than
120 days after January 2, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Section entitled "Stock Ownership"
of the Company's definitive proxy statement which will be filed no later than
120 days after January 2, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Section entitled "Executive
Compensation-Certain Relationships and Related Transactions" of the Company's
definitive proxy statement which will be filed no later than 120 days after
January 2, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<C> <C> <S>
(a) 1. Financial statements:
For a listing of consolidated financial statements which are
included in this document, see page F-1.
2. Schedules:
The following consolidated financial statement schedule and
Report of Independent Public Accountants thereon is included
pursuant to Item 14(d): Schedule II--Valuation and
Qualifying Accounts. All other schedules for which provision
is made in the applicable accounting regulation of the
Securities and Exchange Commission are not required under
the related instructions or are inapplicable and, therefore,
have been omitted.
(b) Exhibits:
The exhibit index is incorporated by reference herein.
(c) Reports on Form 8-K:
None
</TABLE>
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
FRIENDLY ICE CREAM CORPORATION
By:
-----------------------------------------
Name: Paul J. Kelley
Title: SENIOR VICE PRESIDENT, CHIEF
FINANCIAL OFFICER, TREASURER AND ASSISTANT
CLERK
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
NAME TITLE (CAPACITY) DATE
---- ---------------- ----
<C> <S> <C>
Chairman of the Board and
Chief Executive Officer
------------------------------------------- (Principal Executive March 21, 2000
Donald N. Smith Officer and Director)
Senior Vice President,
Chief Financial Officer,
Treasurer and Assistant
------------------------------------------- Clerk (Principal March 21, 2000
Paul J. Kelley Financial and Accounting
Officer)
------------------------------------------- Director March 21, 2000
Charles A. Ledsinger, Jr.
------------------------------------------- Director March 21, 2000
Steven L. Ezzes
------------------------------------------- Director March 21, 2000
Burton J. Manning
------------------------------------------- Director March 21, 2000
Michael J. Daly
</TABLE>
30
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of January 2, 2000 and
December 27, 1998....................................... F-3
Consolidated Statements of Operations for the Years Ended
January 2, 2000, December 27, 1998 and December 28,
1997.................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the Years Ended January 2, 2000, December
27, 1998 and December 28, 1997.......................... F-5
Consolidated Statements of Cash Flows for the Years Ended
January 2, 2000, December 27, 1998 and December 28,
1997.................................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Friendly Ice Cream Corporation:
We have audited the accompanying consolidated balance sheets of Friendly Ice
Cream Corporation (a Massachusetts corporation) and subsidiaries as of
January 2, 2000 and December 27, 1998, and the related consolidated statements
of operations, changes in stockholders' equity (deficit) and cash flows for each
of the three years in the period ended January 2, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Friendly Ice Cream
Corporation and subsidiaries as of January 2, 2000 and December 27, 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended January 2, 2000 in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 11, 2000 (except with respect to
matters discussed in Note 19, as to which
date is March 23, 2000)
32
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 27,
2000 1998
---------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 12,062 $ 11,091
Restricted cash........................................... 2,066 2,211
Accounts receivable....................................... 3,924 5,566
Inventories............................................... 11,352 15,560
Deferred income taxes..................................... 5,657 7,061
Prepaid expenses and other current assets................. 6,298 6,578
-------- --------
TOTAL CURRENT ASSETS........................................ 41,359 48,067
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization.............................................. 289,839 300,159
INTANGIBLE ASSETS AND DEFERRED COSTS, net of accumulated
amortization of $8,825 and $6,525 at January 2, 2000 and
December 27, 1998, respectively........................... 23,613 25,178
OTHER ASSETS................................................ 1,559 1,144
-------- --------
TOTAL ASSETS................................................ $356,370 $374,548
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 13,673 $ 4,023
Current maturities of capital lease and finance
obligations............................................. 1,688 1,677
Accounts payable.......................................... 26,073 26,460
Accrued salaries and benefits............................. 13,889 14,206
Accrued interest payable.................................. 4,006 2,593
Insurance reserves........................................ 9,748 9,116
Other accrued expenses.................................... 20,106 20,649
-------- --------
TOTAL CURRENT LIABILITIES................................... 89,183 78,724
======== ========
DEFERRED INCOME TAXES....................................... 29,747 37,188
CAPITAL LEASE AND FINANCE OBLIGATIONS, less current
maturities................................................ 7,913 9,745
LONG-TERM DEBT, less current maturities..................... 292,432 311,061
OTHER LONG-TERM LIABILITIES................................. 26,800 28,431
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value; authorized 50,000,000 shares
at January 2, 2000 and December 27, 1998; 7,480,692 and
7,461,600 shares issued and outstanding at January 2,
2000 and December 27, 1998, respectively................ 75 75
Preferred stock, $.01 par value; authorized 1,000,000
shares at January 2, 2000 and December 27, 1998; -0-
shares issued and outstanding at January 2, 2000 and
December 27, 1998....................................... -- --
Additional paid-in capital................................ 138,459 137,896
Accumulated deficit....................................... (228,239) (228,639)
Accumulated other comprehensive income.................... -- 67
-------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)........................ (89,705) (90,601)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)........ $356,370 $374,548
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
----------------------------------------
JANUARY 2, DECEMBER 27, DECEMBER 28,
2000 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
REVENUES.................................................. $709,019 $678,096 $667,547
COSTS AND EXPENSES:
Cost of sales........................................... 206,413 204,884 197,627
Labor and benefits...................................... 228,492 211,581 208,364
Operating expenses...................................... 164,356 153,822 148,966
General and administrative expenses..................... 46,675 45,048 50,598
Expenses associated with Recapitalization (Note 5)...... -- -- 718
Relocation of manufacturing and distribution facility
(Note 16)............................................. 1,175 945 --
Write-downs of property and equipment (Note 6).......... 1,913 1,132 770
Depreciation and amortization........................... 34,989 33,449 31,692
Gain on sales of restaurant operations and properties
(Notes 14 and 15)..................................... (2,574) (1,005) (2,283)
-------- -------- --------
OPERATING INCOME.......................................... 27,580 28,240 31,095
Interest expense, net of capitalized interest of $397,
$525 and $250 and interest income of $132, $278 and $338
for the years ended January 2, 2000, December 27, 1998
and December 28, 1997, respectively..................... 33,694 31,838 39,303
(Recovery of write-down of) equity in net loss of joint
venture (Note 18)....................................... (896) 4,828 1,530
-------- -------- --------
LOSS BEFORE BENEFIT FROM INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE................ (5,218) (8,426) (9,738)
Benefit from income taxes................................. 5,937 3,455 3,993
-------- -------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE.................................... 719 (4,971) (5,745)
Cumulative effect of change in accounting principle, net
of income tax effect of $222 and $1,554 for the years
ended January 2, 2000 and December 28, 1997,
respectively (Notes 3 and 10)........................... (319) -- 2,236
-------- -------- --------
NET INCOME (LOSS)......................................... $ 400 $ (4,971) $ (3,509)
======== ======== ========
BASIC AND DILUTED INCOME (LOSS) PER SHARE:
Income (loss) before cumulative effect of change in
accounting principle.................................. $ 0.09 $ (0.67) $ (1.86)
Cumulative effect of change in accounting principle, net
of income tax effect.................................. (0.04) -- 0.72
-------- -------- --------
Net income (loss)......................................... $ 0.05 $ (0.67) $ (1.14)
======== ======== ========
WEIGHTED AVERAGE SHARES:
Basic................................................... 7,491 7,452 3,087
======== ======== ========
Diluted................................................. 7,499 7,452 3,087
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------
COMMON STOCK CLASS A CLASS B ADDITIONAL
-------------------- -------------------- --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- -------- --------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 29, 1996......... -- $-- 1,285,384 $13 1,187,503 $12 $ 46,905
--------- --- --------- --- ---------- --- --------
Comprehensive loss:
Net loss......................... -- -- -- -- -- -- --
Translation adjustment........... -- -- -- -- -- -- --
--------- --- --------- --- ---------- --- --------
Total comprehensive loss........... -- -- -- -- -- -- --
--------- --- --------- --- ---------- --- --------
Shares returned to FICC at no cost
in connection with the Offerings
(Note 13)........................ -- -- (766,782) (8) -- -- --
Conversion of Class A Common Stock
and Class B Common Stock to
Common Stock..................... 1,706,105 17 (518,602) (5) (1,187,503) (12) --
Proceeds from Common Stock
Offering, net of expenses of
$8,087........................... 5,000,000 50 -- -- -- -- 81,870
Stock compensation expense......... 735,185 7 -- -- -- -- 8,400
--------- --- --------- --- ---------- --- --------
BALANCE, DECEMBER 28, 1997......... 7,441,290 74 -- -- -- -- 137,175
--------- --- --------- --- ---------- --- --------
Comprehensive (loss) income:
Net loss......................... -- -- -- -- -- -- --
Translation adjustment........... -- -- -- -- -- -- --
--------- --- --------- --- ---------- --- --------
Total comprehensive loss........... -- -- -- -- -- -- --
--------- --- --------- --- ---------- --- --------
Stock compensation expense......... 20,310 1 -- -- -- -- 721
--------- --- --------- --- ---------- --- --------
BALANCE, DECEMBER 27, 1998......... 7,461,600 75 -- -- -- -- 137,896
--------- --- --------- --- ---------- --- --------
Comprehensive income(loss):
Net income....................... -- -- -- -- -- -- --
Translation adjustment........... -- -- -- -- -- -- --
--------- --- --------- --- ---------- --- --------
Total comprehensive income......... -- -- -- -- -- -- --
--------- --- --------- --- ---------- --- --------
Stock compensation expense......... 19,092 -- -- -- -- -- 563
--------- --- --------- --- ---------- --- --------
BALANCE, JANUARY 2, 2000........... 7,480,692 $75 -- $-- -- $-- $138,459
========= === ========= === ========== === ========
<CAPTION>
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE
DEFICIT INCOME TOTAL
------------ -------------- ---------
<S> <C> <C> <C>
BALANCE, DECEMBER 29, 1996......... $(220,159) $73 $(173,156)
--------- --- ---------
Comprehensive loss:
Net loss......................... (3,509) -- (3,509)
Translation adjustment........... -- (15) (15)
--------- --- ---------
Total comprehensive loss........... (3,509) (15) (3,524)
--------- --- ---------
Shares returned to FICC at no cost
in connection with the Offerings
(Note 13)........................ -- -- (8)
Conversion of Class A Common Stock
and Class B Common Stock to
Common Stock..................... -- -- --
Proceeds from Common Stock
Offering, net of expenses of
$8,087........................... -- -- 81,920
Stock compensation expense......... -- -- 8,407
--------- --- ---------
BALANCE, DECEMBER 28, 1997......... (223,668) 58 (86,361)
--------- --- ---------
Comprehensive (loss) income:
Net loss......................... (4,971) -- (4,971)
Translation adjustment........... -- 9 9
--------- --- ---------
Total comprehensive loss........... (4,971) 9 (4,962)
--------- --- ---------
Stock compensation expense......... -- -- 722
--------- --- ---------
BALANCE, DECEMBER 27, 1998......... (228,639) 67 (90,601)
--------- --- ---------
Comprehensive income(loss):
Net income....................... 400 -- 400
Translation adjustment........... -- (67) (67)
--------- --- ---------
Total comprehensive income......... 400 (67) 333
--------- --- ---------
Stock compensation expense......... -- -- 563
--------- --- ---------
BALANCE, JANUARY 2, 2000........... $(228,239) $-- $ (89,705)
========= === =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
----------------------------------------
JANUARY 2, DECEMBER 27, DECEMBER 28,
2000 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 400 $ (4,971) $ (3,509)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of change in accounting principle, net
of income tax effect.................................. 319 -- (2,236)
Stock compensation expense.............................. 563 722 8,407
Non-cash expenses associated with Recapitalization...... -- -- 399
Relocation of manufacturing and distribution facility... 1,033 945 --
Depreciation and amortization........................... 34,989 33,449 31,692
Write-downs of property and equipment................... 1,913 1,132 770
Deferred income tax benefit............................. (5,815) (3,435) (4,083)
(Gain) loss on asset retirements and sales.............. (1,974) 123 1,939
(Recovery of write-down of) equity in net loss of joint
venture............................................... (69) 4,828 1,530
Changes in operating assets and liabilities:
Accounts receivable................................... 1,642 2,110 (3,930)
Inventories........................................... 4,208 111 (526)
Other assets.......................................... (1,825) (1,596) (7,998)
Accounts payable...................................... (387) 2,509 3,178
Accrued expenses and other long-term liabilities...... (446) (3,062) (3,515)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 34,551 32,865 22,118
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (41,388) (51,172) (31,638)
Proceeds from sales of property and equipment............... 17,463 2,852 5,043
Proceeds from sale of (advances to) joint venture........... 1,150 -- (1,400)
Purchases of investment securities.......................... -- -- (8,194)
Proceeds from sales and maturities of investment
securities................................................ -- -- 12,787
Acquisition of Restaurant Insurance Corporation, net of cash
acquired.................................................. -- -- (35)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES....................... (22,775) (48,320) (23,437)
======== ======== ========
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from other borrowings.............................. 109,000 69,258 167,548
Repayments of debt.......................................... (117,979) (56,133) (438,673)
Repayments of capital lease and finance obligations......... (1,759) (1,720) (12,955)
Proceeds from issuance of senior notes...................... -- -- 200,000
Proceeds from issuance of common stock...................... -- -- 81,920
-------- -------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES......... (10,738) 11,405 (2,160)
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (67) 9 (15)
======== ======== ========
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 971 (4,041) (3,494)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 11,091 15,132 18,626
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 12,062 $ 11,091 $ 15,132
======== ======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid (refunded) during the period for:
Interest.................................................. $ 31,131 $ 30,784 $ 46,040
Income taxes.............................................. (387) 532 168
Capital lease obligations incurred.......................... -- 608 2,227
Capital lease obligations terminated........................ 62 384 1,587
Note received from sale of property and equipment........... 600 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
In September 1988, The Restaurant Company ("TRC") and another investor
acquired Friendly Ice Cream Corporation ("FICC"). Subsequent to the acquisition,
Friendly Holding Corporation ("FHC") was organized to hold the outstanding
common stock of FICC, and in March 1996, FHC was merged into FICC. Additionally,
in March 1996, TRC distributed its shares of FICC's voting common stock to TRC's
shareholders and FICC deconsolidated from TRC.
In November 1997, FICC completed a public offering of five million shares of
its common stock for net proceeds of $81.9 million and a public offering of
$200 million of Senior Notes (collectively, the "Offerings"). Concurrent with
the Offerings, FICC entered into a new senior secured credit facility consisting
of (i) $90 million of term loans, (ii) a $55 million revolving credit facility
and (iii) a $15 million letter of credit facility (collectively, the "New Credit
Facility"). Proceeds from the Offerings and the New Credit facility were
primarily used to repay the $353.7 million outstanding under FICC's previous
credit facility (collectively, the "Recapitalization").
References herein to "Friendly's" or the "Company" refer to Friendly Ice
Cream Corporation, its predecessor and its consolidated subsidiaries.
2. NATURE OF OPERATIONS
As of January 2, 2000, Friendly's owns and operates 618 full-service
restaurants, franchises 60 restaurants and nine cafes and manufactures and
distributes a full line of frozen dessert products. These products are
distributed to Friendly's restaurants and cafes and to more than 3,500
supermarkets and other retail locations in 15 states. Management believes the
restaurants offer a wide variety of reasonably priced breakfast, lunch and
dinner menu items as well as frozen dessert products. For the years ended
January 2, 2000, December 27, 1998 and December 28, 1997, restaurant sales were
approximately 87%, 88% and 89%, respectively, of the Company's revenues. As of
January 2, 2000, December 27, 1998 and December 28, 1997, approximately 88%, 86%
and 85%, respectively, of the Company-owned restaurants were located in the
Northeast United States. As a result, a severe or prolonged economic recession
in this geographic area may adversely affect the Company more than certain of
its competitors which are more geographically diverse.
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--
The consolidated financial statements include the accounts of FICC and its
subsidiaries after elimination of intercompany accounts and transactions.
FISCAL YEAR--
Friendly's fiscal year ends on the last Sunday in December, unless that day
is earlier than December 27, in which case the fiscal year ends on the following
Sunday. The fiscal year ended January 2, 2000 includes 53 weeks. All other years
presented include 52 weeks.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS--
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the
37
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Future
facts and circumstances could alter management's estimates with respect to the
carrying values of long-lived assets and the adequacy of insurance reserves.
REVENUE RECOGNITION--
The Company recognizes restaurant revenue upon receipt of payment from the
customer and retail revenue upon shipment of product. Franchise royalty income,
based on gross sales of franchisees, is payable monthly and is recorded on the
accrual method. Initial franchise fees are recorded as revenue upon completion
of all significant services, generally upon opening of the restaurant.
CASH AND CASH EQUIVALENTS--
The Company considers all investments with an original maturity of three
months or less when purchased to be cash equivalents.
INVENTORIES--
Inventories are stated at the lower of first-in, first-out cost or market.
Inventories at January 2, 2000 and December 27, 1998 were (in thousands):
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 27,
2000 1998
---------- ------------
<S> <C> <C>
Raw materials......................................... $ 354 $ 1,983
Goods in process...................................... 126 145
Finished goods........................................ 10,872 13,432
------- -------
Total................................................. $11,352 $15,560
======= =======
</TABLE>
RESTRICTED CASH--
Restaurant Insurance Corporation ("RIC"), an insurance subsidiary, is
required by the reinsurer of RIC to hold assets in trust whose value is at least
equal to certain of RIC's outstanding estimated insurance claim liabilities.
Accordingly, as of January 2, 2000 and December 27, 1998, cash of approximately
$2,066,000 and $2,211,000, respectively, was restricted.
PROPERTY AND EQUIPMENT--
Property and equipment are carried at cost except for impaired assets which
are carried at fair value less cost to sell. Depreciation of property and
equipment is computed using the straight-line method over the following
estimated useful lives:
Buildings--30 years
Building improvements and leasehold improvements--Lesser of lease term or
20 years
Equipment--3 to 10 years
38
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
At January 2, 2000 and December 27, 1998, property and equipment included
(in thousands):
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 27,
2000 1998
---------- ------------
<S> <C> <C>
Land.................................................. $ 69,901 $ 76,025
Buildings and improvements............................ 127,967 128,531
Leasehold improvements................................ 44,777 43,365
Assets under capital leases........................... 12,676 12,887
Equipment............................................. 293,263 276,720
Construction in progress.............................. 8,291 11,807
-------- --------
Property and equipment................................ 556,875 549,335
Less: accumulated depreciation and amortization....... (267,036) (249,176)
-------- --------
Property and equipment, net........................... $289,839 $300,159
======== ========
</TABLE>
Major renewals and betterments are capitalized. Replacements and maintenance
and repairs which do not extend the lives of the assets are charged to
operations as incurred.
LONG-LIVED ASSETS--
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews the license agreement for the
right to use various trademarks and tradenames for impairment on a quarterly
basis. The Company recognizes an impairment has occurred when the carrying value
of the license agreement exceeds the estimated future cash flows of the
trademarked products.
The Company reviews each restaurant property quarterly to determine which
properties will be disposed of. This determination is made based on poor
operating results, deteriorating property values and other factors. The Company
recognizes an impairment has occurred when the carrying value of property
exceeds its estimated fair value, which is estimated based on the Company's
experience selling similar properties and local market conditions, less costs to
sell.
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 No. 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 consolidated statement of operations for the year ended January 2,
2000.
39
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INTERNAL USE SOFTWARE--
In accordance with SOP 98-1, "Accounting for The Costs of Computer Software
Developed or Obtained for Internal Use," the Company capitalizes costs incurred
in the development of internally used software if the criteria under SOP 98-1
have been met.
RESTAURANT CLOSURE COSTS--
Restaurant closure costs are recognized when a decision is made to close a
restaurant. Restaurant closure costs primarily represent writing down the
carrying amount of a restaurant's assets to the estimated fair market value less
costs of disposal and the net present value of any remaining operating lease
payments after the expected closure date.
INSURANCE RESERVES--
The Company is self-insured through retentions or deductibles for the
majority of its workers' compensation, automobile, general liability, product
liability and group health insurance programs. Self-insurance amounts vary up to
$500,000 per occurrence. Insurance with third parties, some of which is then
reinsured through RIC, is in place for claims in excess of these self-insured
amounts. RIC assumes 100% of the risk from $500,000 to $1,000,000 per occurrence
for the Company's workers' compensation, general liability and product liability
insurance. The Company's and RIC's liability for estimated incurred losses are
actuarially determined and recorded in the accompanying consolidated financial
statements on an undiscounted basis.
INCOME TAXES--
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns. A valuation allowance
is recorded for deferred tax assets whose realization is not likely.
ADVERTISING--
The Company expenses production and other advertising costs the first time
the advertising takes place. For the years ended January 2, 2000, December 27,
1998 and December 28, 1997, advertising expense was approximately $22,934,000,
$20,985,000 and $21,185,000, respectively.
INTEREST RATE SWAP AGREEMENT--
In connection with the Recapitalization, the Company entered into an
interest rate swap agreement. The interest differential to be paid or received
is accrued and recorded as an adjustment to interest expense.
EARNINGS PER SHARE--
Basic earnings 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
40
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
is calculated by dividing income (loss) available to common stockholders by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period. Common stock equivalents are dilutive stock
options and warrants that are assumed exercised for calculation purposes. The
number of common stock equivalents which could dilute basic earnings per share
in the future, that were not included in the computation of diluted earnings per
share because to do so would have been antidilutive, was 5,688 and 0 for the
years ended December 27, 1998 and December 28, 1997, respectively.
Presented below is the reconciliation between basic and diluted weighted
average shares (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
----------------------------------------
JANUARY 2, DECEMBER 27, DECEMBER 28,
2000 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Basic weighted average number of shares
outstanding............................. 7,491 7,452 3,087
Assumed exercise of stock options......... 8 -- --
----- ----- -----
Diluted weighted average number of shares
outstanding............................. 7,499 7,452 3,087
===== ===== =====
</TABLE>
STOCK-BASED COMPENSATION--
The Company accounts for stock-based compensation for employees under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and elected the disclosure-only alternative under SFAS No. 123,
"Accounting for Stock-Based Compensation."
RECENTLY ISSUED 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 is
required to adopt SAB No. 101 on January 3, 2000. The adoption of SAB No. 101 is
not expected to have a material effect on the Company's consolidated financial
position or results of operations as management believes 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
41
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
RECLASSIFICATIONS--
Certain prior year amounts have been reclassified to conform with current
year presentation. In addition, certain interim fiscal 1999 amounts have been
reclassified to conform with the January 2, 2000 presentation.
4. ACQUISITION OF RESTAURANT INSURANCE CORPORATION
On March 19, 1997, FICC acquired all of the outstanding shares of common
stock of RIC, a Vermont corporation, from TRC for cash of $1,300,000 and a
$1,000,000 promissory note payable to TRC bearing interest at an annual rate of
8.25%. The promissory note and accrued interest of approximately $1,024,000 were
paid on June 30, 1997. RIC, which was formed in 1993, reinsures certain Company
risks (i.e., workers' compensation, employer's liability, general liability and
product liability) from a third party insurer.
The acquisition was accounted for as a purchase. Accordingly, the results of
operations for RIC for the period subsequent to March 20, 1997 were included in
the accompanying consolidated financial statements. No pro forma information is
included since the effect of the acquisition was not material. The purchase
price was allocated to net assets acquired based on the estimated fair market
values at the date of acquisition. The purchase price was allocated as follows
(in thousands):
<TABLE>
<S> <C>
Cash and cash equivalents................................... $ 2,265
Restricted cash and investments............................. 12,061
Receivables and other assets................................ 3,101
Loss reserves............................................... (13,231)
Deferred income taxes....................................... (11)
Other liabilities........................................... (1,885)
-------
$ 2,300
=======
</TABLE>
42
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INTANGIBLE ASSETS AND DEFERRED COSTS
Intangible assets and deferred costs net of accumulated amortization as of
January 2, 2000 and December 27, 1998 were (in thousands):
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 27,
2000 1998
---------- ------------
<S> <C> <C>
Marks license agreement for the right to use various
trademarks and service marks amortized over a 40
year life on a straight-line basis.................. $13,366 $13,832
Deferred financing costs amortized over the terms of
the related loans on an effective yield basis....... 9,556 11,346
Other................................................. 691 --
------- -------
Intangible assets and deferred costs, net............. $23,613 $25,178
======= =======
</TABLE>
Upon the sale of the Company by Hershey Foods Corporation ("Hershey") in
1988, all of the trademarks and service marks (the "Marks") used in the
Company's business at that time which did not contain the word "Friendly" as a
component of such Marks were licensed by Hershey to the Company. The Marks
license agreement is being amortized over 40 years and expires on September 2,
2028. The Company reviews the estimated future cash flows related to each
trademarked product on a quarterly basis to determine whether any impairment has
occurred.
As a result of the Recapitalization in November 1997, previously deferred
financing costs of $399,000 were written off and were included in expenses
associated with the Recapitalization in the accompanying consolidated statement
of operations for the year ended December 28, 1997.
6. WRITE-DOWNS OF PROPERTY AND EQUIPMENT
At January 2, 2000, December 27, 1998 and December 28, 1997, there were 39,
25 and 40 restaurant properties held for disposition, respectively. The
restaurants held for disposition generally have poor operating results,
deteriorating property values or other adverse conditions. The Company
determined that the carrying values of certain of these properties exceeded
their estimated fair values less costs to sell. Accordingly, during the year
ended January 2, 2000, the carrying values of 19 properties were reduced by an
aggregate of $1,913,000; during the year ended December 27, 1998, the carrying
values of nine properties were reduced by an aggregate of $912,000 and during
the year ended December 28, 1997, the carrying values of 12 properties were
reduced by an aggregate of $770,000. The Company plans to dispose of the 39
properties by December 31, 2000. The aggregate operating loss, prior to
depreciation expense which is not reported at the restaurant level, for the
properties held for disposition was $1,148,000, $733,000 and $1,244,000 for the
years ended January 2, 2000, December 27, 1998 and December 28, 1997,
respectively. The aggregate carrying value of the properties held for
disposition at January 2, 2000 and December 27, 1998 was approximately
$5,476,000 and $2,570,000, respectively, which is included in property and
equipment in the accompanying consolidated balance sheets.
In 1998, the Company announced it was discontinuing its United Kingdom
operations. As a result, the Company recorded a write-down of $220,000 since the
carrying value of the equipment in the United Kingdom exceeded the estimated
fair value less costs to sell by $220,000.
43
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT
Debt at January 2, 2000 and December 27, 1998 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 27,
2000 1998
---------- ------------
<S> <C> <C>
Senior Notes, 10.50%, due December 1, 2007............ $200,000 $200,000
New Credit Facility:
Revolving Credit Facility, due November 15, 2002.... 21,000 25,000
Term Loans:
Tranche A, due April 15, 1999 through November 15,
2002............................................ 30,512 34,286
Tranche B, due April 15, 1999 through November 15,
2004............................................ 33,563 34,286
Tranche C, due April 15, 1999 through November 15,
2005............................................ 20,977 21,428
Other................................................. 53 84
-------- --------
306,105 315,084
Less: current portion................................. (13,673) (4,023)
-------- --------
Total long-term debt.................................. $292,432 $311,061
======== ========
</TABLE>
Principal payments due under long-term debt as of January 2, 2000 were as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- --------
<S> <C>
2000........................................................ $ 13,673
2001........................................................ 10,843
2002........................................................ 31,600
2003........................................................ 15,985
2004........................................................ 15,205
Thereafter.................................................. 218,799
--------
Total....................................................... $306,105
========
</TABLE>
The $200 million Senior Notes issued in connection with the November 1997
Recapitalization (the "Notes") are unsecured, senior obligations of FICC,
guaranteed on an unsecured, senior basis by FICC's Friendly's Restaurants
Franchise, Inc. subsidiary, but are effectively subordinated to all secured
indebtedness of FICC, including the indebtedness incurred under the New Credit
Facility. The Notes mature on December 1, 2007. Interest on the Notes is payable
at 10.50% per annum semi-annually on June 1 and December 1 of each year
commencing on June 1, 1998. The Notes are redeemable, in whole or in part, at
FICC's option any time on or after December 1, 2002 at redemption prices from
105.25% to 100.00%, based on the redemption date. Prior to December 1, 2000,
FICC may redeem up to $70 million of the Notes at 110.50% with the proceeds of
one or more equity offerings, as defined.
FICC entered into the New Credit Facility in November 1997 in connection
with the Recapitalization. The New Credit Facility includes $90 million of term
loans (the "Term Loans"), a $55 million revolving credit facility (the
"Revolving Credit Facility") and a $15 million letter of credit facility (the
"Letter of
44
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
Credit Facility"). The New Credit Facility is collateralized by substantially
all of FICC's assets and by a pledge of FICC's shares of certain of its
subsidiaries' stock.
Borrowings under the New Credit Facility incurred interest through
December 27, 1998, at FICC's option, at either (i) the Eurodollar Rate plus
2.25% per annum or (ii) the ABR rate (the greater of (a) a specified prime rate
or (b) the federal funds rate plus 0.50%) plus 0.75% per annum for drawings
under the Revolving Credit Facility, 0.50% per annum for amounts undrawn under
the Revolving Credit Facility, 0.50% per annum for amounts unissued under the
Letter of Credit Facility and 2.50% per annum for amounts issued but undrawn
under the Letter of Credit Facility. Borrowings under the Term Loans incurred
interest through December 27, 1998, at FICC's option, at either the Eurodollar
Rate plus 2.25%, 2.50% and 2.75% or the ABR rate plus 0.75%, 1.00% and 1.25% for
Tranches A, B and C, respectively. As of January 2, 2000, the one-month and
three-month Eurodollar Rates were 5.84% and 6.00%, respectively. As of
December 27, 1998, the one-month and three-month Eurodollar Rates were 5.63% and
5.28%, respectively. FICC entered into a three-year interest rate swap agreement
to hedge the impact of interest rate changes on the Term Loans. The interest
rate swap agreement has a notional amount equal to the unpaid balance, before
additional prepayments, of the Term Loans and effectively fixed the interest
rates on Tranches A, B and C of the Term Loans at 8.25%, 8.50% and 8.75%,
respectively, prior to the effect of the amendment described below. The interest
rate swap agreement matures on November 20, 2000.
Effective December 27, 1998, the New Credit Facility was amended. In
connection with this amendment, certain covenants were changed and interest
rates on borrowings were increased. The per annum interest rates on drawings
under the Revolving Credit Facility increased 0.25% and 0.50% for Eurodollar and
ABR loans, respectively. The per annum interest rates on Tranches A, B and C of
Eurodollar Term Loans increased 0.25% and the per annum interest rates on ABR
Term Loans increased 0.50%, 0.25% and 0.25% for Tranches A, B and C,
respectively. The per annum interest rate on amounts issued but undrawn under
the Letter of Credit Facility increased 0.25%. FICC paid a fee of approximately
$1,077,000 to the lenders in connection with this amendment. Such fee is
included in deferred financing costs. As a result of this amendment, interest
rates on the Company's Term Loans increased to 8.0%, 8.0% and 8.25% for Tranches
A, B and C, respectively, as of December 27, 1998. The interest rates on the
Company's Revolving Credit Facility increased to 9.0% for ABR borrowings and
8.31% and 8.37% for the two outstanding Eurodollar borrowings under this
facility.
Additionally, effective December 31, 1999, the New Credit Facility was again
amended. As a result of this amendment, the Consolidated leverage ratio covenant
was revised for the fourth quarter ended January 2, 2000. The Company did not
incur any expenses associated with this amendment. As of January 2, 2000, the
interest rates in effect for the Company's Term Loans were 8.97%, 8.97% and
9.22% for Tranches A, B and C, respectively. The interest rates on the Company's
revolving credit facility were 9.75% for ABR borrowings and 8.97% for Eurodollar
borrowings under this facility. References herein to the New Credit Facility
shall mean as amended on December 31, 1999. On March 23, 2000 the New Credit
Facility was further amended (See Note 19).
Annual scheduled principal payments due under the Term Loans total
$9.1 million, $10.8 million, $10.6 million, $16.0 million, $15.2 million and
$18.8 million in 2000 through 2005, respectively. In addition to the scheduled
principal payments, the Term Loans will be permanently reduced by (i) specified
percentages of each year's Excess Cash Flow (as defined), (ii) specified
percentages of the aggregate net cash proceeds from certain issuances of
indebtedness and (iii) 100% of the aggregate net cash proceeds from asset sales
(as defined) and certain insurance claim proceeds, in each case in this
clause (iii), in excess
45
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
of stated maximum amounts or not re-employed within 180 days in the Company's
business. Any such applicable proceeds and Excess Cash Flow are applied to the
Term Loans in inverse order of maturity. Principal payments due in 2000 on the
Term Loans as a result of Excess Cash Flow for 1999 of $4.5 million are included
in current maturities of long-term debt in the accompanying consolidated
financial statements.
As of January 2, 2000 and December 27, 1998, total letters of credit issued
were $10,774,000 and $10,535,000, respectively. During the years ended
January 2, 2000, December 27, 1998 and December 28, 1997, there were no drawings
against the letters of credit. The Letter of Credit Facility matures on
November 15, 2002.
As of January 2, 2000 and December 27, 1998, the unused portion of the
revolver was $34,000,000 and $30,000,000, respectively. The total average unused
portions of the revolver and letters of credit commitments were $23,385,000,
$35,708,000, $50,046,000 and $13,955,000 for the years ended January 2, 2000,
December 27, 1998, the period from November 19, 1997 through December 28, 1997
and the period from December 30, 1996 through November 18, 1997, respectively.
The Revolving Credit Facility matures on November 15, 2002.
The Senior Notes and New Credit Facility include certain restrictive
covenants including limitations on indebtedness, limitations on restricted
payments such as dividends and stock repurchases and limitations on sales of
assets and of subsidiary stock. Additionally, the New Credit Facility limits the
amount which the Company may spend on capital expenditures and requires the
Company to comply with certain financial covenants. The financial covenant
requirements, as defined under the New Credit Facility, and actual
ratios/amounts as of and for the years ended January 2, 2000 and December 27,
1998 were:
<TABLE>
<CAPTION>
JANUARY 2, 2000 DECEMBER 27, 1998
--------------------------- ---------------------------
REQUIREMENT ACTUAL REQUIREMENT ACTUAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Consolidated leverage ratio............ 4.70 to 1 4.58 to 1 5.25 to 1 4.88 to 1
Consolidated interest coverage ratio... 1.60 to 1 1.60 to 1 1.50 to 1 1.60 to 1
Consolidated fixed charge coverage
ratio................................ 1.25 to 1 1.37 to 1 1.30 to 1 1.43 to 1
Consolidated net worth (deficit)....... $(93,000,000) $(89,705,000) $(98,000,000) $(90,601,000)
</TABLE>
The fair values of FICC's financial instruments at January 2, 2000 and
December 27, 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 2, 2000 DECEMBER 27, 1998
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Senior Notes........................................ $200,000 $170,700 $200,000 $198,000
Term Loans.......................................... 85,052 85,052 90,000 90,000
Revolving Credit Facility........................... 21,000 21,000 25,000 25,000
Other debt.......................................... 53 53 84 84
Interest rate swap agreement........................ -- -- -- 1,438
-------- -------- -------- --------
Total............................................... $306,105 $276,805 $315,084 $314,522
======== ======== ======== ========
</TABLE>
46
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
The fair value of the Senior Notes was determined based on the actual trade
prices as of January 2, 2000 and December 27, 1998. FICC believes that the
carrying value of the Term Loans and Revolving Credit Facility as of January 2,
2000 and December 27, 1998 approximated fair value since the obligations have
variable interest rates. FICC believes that the carrying value of the other debt
as of January 2, 2000 and December 27, 1998 approximated the fair value based on
the terms of the obligations and the rates currently available to FICC for
similar obligations. The fair value of the interest rate swap agreement as of
January 2, 2000 and December 27, 1998 was determined based on the terms of the
agreement and existing market conditions.
8. LEASES
As of January 2, 2000, December 27, 1998 and December 28, 1997, the Company
operated 618, 646 and 662 restaurants, respectively. These operations were
conducted in premises owned or leased as follows:
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 27, DECEMBER 28,
2000 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Land and building owned................... 256 275 279
Land leased and building owned............ 144 147 146
Land and building leased.................. 218 224 237
--- --- ---
618 646 662
=== === ===
</TABLE>
Restaurants in shopping centers are generally leased for a term of 10 to
20 years. Leases of freestanding restaurants generally are for a 15 or 20 year
lease term and provide for renewal options for three or four five-year renewals
at the then current fair market value. Some leases provide for minimum payments
plus a percentage of sales in excess of stipulated amounts. Additionally, the
Company leases certain equipment over lease terms from three to seven years.
Future minimum lease payments under noncancelable leases with an original term
in excess of one year as of January 2, 2000 were (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR LEASES LEASES
- ---- --------- --------
<S> <C> <C>
2000...................................................... $15,406 $2,612
2001...................................................... 13,248 2,114
2002...................................................... 10,668 1,473
2003...................................................... 8,655 1,210
2004...................................................... 6,564 1,128
Thereafter................................................ 28,231 6,704
------- ------
Total future minimum lease payments....................... $82,772 15,241
=======
Less: amounts representing interest....................... (5,640)
------
Present value of minimum lease payments................... 9,601
Less: current portion of capital lease obligations........ (1,688)
------
Long-term maturities of capital lease obligations......... $7,913
======
</TABLE>
47
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LEASES (CONTINUED)
Capital lease obligations reflected in the accompanying consolidated balance
sheets have effective interest rates ranging from 8.00% to 12.00% and are
payable in monthly installments through 2016. Maturities of such obligations as
of January 2, 2000 were (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- --------
<S> <C>
2000........................................................ $1,688
2001........................................................ 1,371
2002........................................................ 858
2003........................................................ 665
2004........................................................ 641
Thereafter.................................................. 4,378
------
Total....................................................... $9,601
======
</TABLE>
Rent expense included in the accompanying consolidated statements of
operations for operating leases was (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
----------------------------------------
JANUARY 2, DECEMBER 27, DECEMBER 28,
2000 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Minimum rentals........................... $18,008 $16,484 $16,007
Contingent rentals........................ 2,147 1,788 1,762
------- ------- -------
Total..................................... $20,155 $18,272 $17,769
======= ======= =======
</TABLE>
9. INCOME TAXES
Prior to March 23, 1996, FICC and its subsidiaries were included in the
consolidated Federal income tax return of TRC. Under a tax sharing agreement
between TRC and FICC (formerly FHC) (the "TRC/ FICC Agreement"), FICC and its
subsidiaries (the "FICC Group") were obligated to pay TRC its allocable share of
the TRC group tax liability, determined as if the FICC Group were filing a
separate consolidated income tax return.
On March 23, 1996, TRC distributed its shares of FICC's voting common stock
to TRC's shareholders, the FICC Group deconsolidated from the TRC group and the
TRC/FICC Agreement expired. In addition, on March 26, 1996, shares of Class B
Common Stock were issued to FICC's lenders which resulted in an ownership change
pursuant to Internal Revenue Code Section 382.
Under the TRC/FICC Agreement, Federal net operating loss ("NOL")
carryforwards generated by the FICC Group and utilized or allocated to TRC were
available to the FICC Group on a separate company basis to carryforward.
Pursuant to the TRC/FICC Agreement, as of March 23, 1996, $99,321,000 of
carryforwards would have been available to the FICC Group to offset future
taxable income of the FICC Group. However, as a result of the deconsolidation
from TRC, the deferred tax asset related to the $65,034,000 of NOL carryforwards
utilized by TRC was written off by the Company in 1996 and 1995. As of
December 29, 1996, as a result of the change in ownership and limitations under
Section 382 of the Internal Revenue Code, a valuation allowance was placed on
$29,686,000 of the $34,287,000 remaining Federal NOL carryforwards generated for
the period prior to March 23, 1996. The amount of pre-change NOLs ("Old NOLs")
not reserved for as of December 29, 1996 represented the amount of NOLs which
had become available as of December 29, 1996 as a result of FICC realizing gains
which were unrealized as
48
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
of the date of the ownership change. Due to restrictions similar to Section 382
in most of the states FICC operates in and short carryforward periods, FICC
fully reserved for all state NOL carryforwards generated through March 26, 1996
as of December 29, 1996. For the period from March 27, 1996 to December 29,
1996, FICC generated a net operating loss carryforward of $5,735,000 for which
no valuation allowance was provided.
During the years ended January 2, 2000 and December 27, 1998, the Company
realized gains of $6,686,000 and $900,000, respectively, which were unrealized
as of the date of the first ownership change. The gains in fiscal 1999 were
primarily the result of the sale of real estate associated with 13 previously
franchised restaurants to the Company's largest franchisee, the sale of the
Company's Troy, Ohio manufacturing facility and other various franchise sales.
Accordingly, the valuation allowance was reduced by approximately $2,340,000 and
$315,000 during the years ended January 2, 2000 and December 27, 1998,
respectively. During the years ended January 2, 2000 and December 27, 1998, the
Company generated NOLs of approximately $5,108,000 and $185,000, respectively.
As a result, as of January 2, 2000, the Company has aggregate NOL carryforwards
of approximately $45.5 million which expire between 2001 and 2019.
The Common Stock Offering resulted in the Company having another change of
ownership under Section 382 of the Internal Revenue Code in November 1997. As a
result, usage of the NOLs generated between the last ownership change and the
Common Stock Offering ("New NOLs") is also limited. The amount of NOLs which may
be used each year prior to any built-in gains being triggered is approximately
$2.4 million. While the limitation on the use of the New NOLs will impact when
the New NOLs are utilized, the Company expects all New NOLs to be utilized
before they expire. Accordingly, no valuation allowance is required related to
any New NOLs as of January 2, 2000. The Company does not believe that it is more
likely than not that all Old NOLs will become available through realization of
unrealized gains as of the date of the March 1996 ownership change. Accordingly,
a valuation allowance has been provided against Old NOLs which have not been
made available as of January 2, 2000. As of January 2, 2000, a valuation
allowance has been provided against an aggregate of $21.3 million of Old NOLs.
The benefit from income taxes for the years ended January 2, 2000,
December 27, 1998, and December 28, 1997 was as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
----------------------------------------
JANUARY 2, DECEMBER 27, DECEMBER 28,
2000 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Current benefit (provision):
Federal................................. $ 104 $ 30 $ --
State................................... 18 (10) (86)
Foreign................................. -- -- (21)
------ ------ ------
Total current benefit (provision)......... 122 20 (107)
====== ====== ======
Deferred benefit:
Federal................................. 5,718 3,207 2,291
State................................... 319 228 255
------ ------ ------
Total deferred benefit.................... 6,037 3,435 2,546
------ ------ ------
Total benefit from income taxes........... $6,159 $3,455 $2,439
====== ====== ======
</TABLE>
49
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
A reconciliation of the difference between the statutory Federal income tax
rate and the effective income tax rate follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
----------------------------------------
JANUARY 2, DECEMBER 27, DECEMBER 28,
2000 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Statutory federal income tax rate......... 35% 35% 35%
State income taxes net of federal
benefit................................. 6 6 6
Decrease (increase) in valuation
allowance............................... 40 (1) (4)
Tax credits............................... 15 7 12
Nondeductible expenses.................... (4) (4) (10)
Other..................................... 15 (2) 2
--- -- ---
Effective tax rate........................ 107% 41% 41%
=== == ===
</TABLE>
Deferred tax assets and liabilities are determined as the difference between
the financial statement and tax bases of the assets and liabilities multiplied
by the enacted tax rates in effect for the year in which the differences are
expected to reverse. Significant deferred tax assets (liabilities) at
January 2, 2000 and December 27, 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 27,
2000 1998
---------- ------------
<S> <C> <C>
Property and equipment................................ $(44,272) $(47,175)
Federal, state and UK NOL carryforwards (net of
valuation allowance of $18,907 and $21,272 at
January 2, 2000 and December 27, 1998,
respectively)....................................... 9,639 5,329
Insurance reserves.................................... 4,516 4,540
Inventories........................................... 1,556 1,885
Accrued pension....................................... 2,308 2,578
Intangible assets..................................... (5,477) (5,651)
Tax credit carryforwards.............................. 4,732 3,401
Other................................................. 2,908 4,966
-------- --------
Net deferred tax liability............................ $(24,090) $(30,127)
======== ========
</TABLE>
10. EMPLOYEE BENEFIT PLANS
Substantially all of the employees of the Company are covered by a
non-contributory defined benefit cash balance pension plan. Plan benefits are
based on years of service and participant compensation during their years of
employment. The Company accrues the cost of its pension plan over its employees'
service lives.
Under the cash balance plan, a nominal account for each participant is
established. The Company makes an annual contribution to each participant's
account based on current wages and years of service. Each account earns a
specified rate of interest which is adjusted annually. Plan expenses may also be
paid from the assets of the plan.
50
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
For the years ended January 2, 2000 and December 27, 1998, the
reconciliation of the projected benefit obligation was (in thousands):
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 27,
2000 1998
---------- ------------
<S> <C> <C>
Beginning of year benefit obligation.................. $90,878 $79,311
Service cost........................................ 4,090 3,515
Interest cost....................................... 6,269 5,874
Plan amendments..................................... -- 4,811
Actuarial (gain) loss............................... (16,308) 6,038
Disbursements....................................... (5,754) (8,671)
------- -------
End of year benefit obligation........................ $79,175 $90,878
======= =======
</TABLE>
In 1997, pension benefits were reduced to certain employees. In 1998, death
benefits were increased. The effect of these amendments is being amortized over
the remaining employee service period of active plan participants.
The reconciliation of the funded status of the pension plan as of
January 2, 2000 and December 27, 1998 included the following components (in
thousands):
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 27,
2000 1998
---------- ------------
<S> <C> <C>
Projected benefit obligation.......................... $(79,175) $(90,878)
Fair value of plan assets............................. 124,614 112,622
-------- --------
Funded status......................................... 45,439 21,744
Unrecognized prior service cost....................... (6,012) (8,664)
Unrecognized net actuarial gain....................... (44,067) (18,459)
-------- --------
Accrued benefit cost.................................. $ (4,640) $ (5,379)
======== ========
</TABLE>
The reconciliation of fair value of assets of the plan as of January 2, 2000
and December 27, 1998 was (in thousands):
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 27,
2000 1998
---------- ------------
<S> <C> <C>
Beginning of year fair value of assets................ $112,622 $107,938
Beginning of year adjustment.......................... -- (2,719)
Actual return on plan assets.......................... 17,746 16,074
Disbursements......................................... (5,754) (8,671)
-------- --------
End of year fair value of assets...................... $124,614 $112,622
======== ========
</TABLE>
51
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The components of net pension (benefit) cost for the years ended January 2,
2000, December 27, 1998 and December 28, 1997 were (in thousands):
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 27, DECEMBER 28,
2000 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Service cost.............................. $ 4,090 $ 3,515 $3,764
Interest cost............................. 6,269 5,874 5,922
Expected return on assets................. (10,291) (9,767) (8,143)
Net amortization:
Unrecognized prior service cost......... (805) (956) (409)
Unrecognized net actuarial gain......... -- (282) (611)
------- ------- ------
Net pension (benefit) cost................ $ (737) $(1,616) $ 523
======= ======= ======
</TABLE>
A summary of the Company's key actuarial assumptions as of January 2, 2000,
December 27, 1998 and December 28, 1997 follows:
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 27, DECEMBER 28,
2000 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Discount rate............................. 8.00% 6.75% 7.25%
Salary increase rate...................... 3.75-5.25% 3.75-5.25% 4.00-5.50%
Expected long term rate of return......... 10.5% 10.5% 10.5%
</TABLE>
Effective December 30, 1996, FICC changed its method of calculating the
market-related value of plan assets used in determining the return-on-asset
component of annual pension expense and the cumulative net unrecognized gain or
loss subject to amortization. Under the previous accounting method, the
calculation of the market-related value of assets reflected amortization of the
actual realized and unrealized capital return on assets on a straight-line basis
over a five-year period. Under the new method, the calculation of the
market-related value of assets reflects the long-term rate of return expected by
the Company and amortization of the difference between the actual return
(including capital, dividends and interest) and the expected return over a
five-year period. The Company believes the new method is widely used in practice
and preferable because it results in calculated plan asset values that more
closely approximate fair value, while still mitigating the effect of annual
market-value fluctuations. Under both methods, only the cumulative net
unrecognized gain or loss which exceeds 10% of the greater of the projected
benefit obligation or the market-related value of plan assets is subject to
amortization. This change resulted in a non-cash benefit for the year ended
December 28, 1997 of $2,236,000 (net of taxes of $1,554,000), which represented
the cumulative effect of the change related to years prior to fiscal 1997, and
$607,000 (net of taxes of $421,000) in lower pension expense for the year ended
December 28, 1997.
The Company's Employee Savings and Investment Plan (the "Plan") covers all
eligible employees and is intended to be qualified under Sections 401(a) and
401(k) of the Internal Revenue Code. For the years ended January 2, 2000 and
December 27, 1998, the Company made matching contributions at the rate of 75% of
the first 2% of the participant's contributions and 50% of the next 4% of the
participant's contributions for employees of certain job classifications. For
other employees of the Company, the Company made matching contributions at the
rate of 75% of the first 2% of the participant's contributions and 50% of the
next 2% of the participant's contributions. For the year ended December 28,
1997, the Company made matching contributions at the rate of 75% of a
participant's first 2% of his/her contributions and 50% of a participant's next
2% of his/her contributions. All employee contributions are fully
52
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
vested. Employer contributions are vested at the completion of five years of
service or at retirement, death, disability or termination at age 65 or over, as
defined by the Plan. Contributions and administrative expenses for the Plan were
approximately $1,083,000, $1,211,000 and $1,089,000 for the years ended
January 2, 2000, December 27, 1998 and December 28, 1997, respectively.
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides health care and life insurance benefits to certain
groups of employees upon retirement. Eligible employees may continue their
coverages if they are receiving a pension benefit, are 55 years of age, and have
completed ten years of service. The plan requires contributions for health care
coverage from participants who retired after September 1, 1989. Life insurance
benefits are non-contributory. Benefits under the plan are provided through the
Company's general assets.
The Company accrues the cost of postretirement benefits over the years
employees provide services to the date of their full eligibility for such
benefits. The reconciliation of accumulated postretirement benefit obligation
for the years ended January 2, 2000 and December 27, 1998 is as follows (in
thousands):
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 27,
2000 1998
---------- ------------
<S> <C> <C>
Beginning of year benefit obligation.................. $6,444 $6,041
Service cost.......................................... 180 155
Interest cost......................................... 430 432
Actuarial (gain) loss................................. (866) 344
Disbursements......................................... (599) (528)
------ ------
End of year benefit obligation........................ $5,589 $6,444
====== ======
</TABLE>
The reconciliation of the funded status of the postretirement plan as of
January 2, 2000, and December 27, 1998 included the following components (in
thousands):
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 27,
2000 1998
---------- ------------
<S> <C> <C>
Accumulated postretirement benefit obligation......... $(5,589) $(6,444)
Fair value of plan assets............................. -- --
------- -------
Funded status......................................... (5,589) (6,444)
Unrecognized prior service cost....................... (928) (990)
Unrecognized net actuarial (gain) loss................ (545) 321
------- -------
Accrued benefit liability............................. $(7,062) $(7,113)
======= =======
</TABLE>
53
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
The components of net postretirement benefit cost for the years ended
January 2, 2000, December 27, 1998 and December 28, 1997 were (in thousands):
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 27, DECEMBER 28,
2000 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Service cost.............................. $180 $155 $134
Interest cost............................. 430 432 436
Net amortization of prior service cost.... (62) (62) (62)
---- ---- ----
Net postretirement benefit cost........... $548 $525 $508
==== ==== ====
</TABLE>
A summary of the Company's key actuarial assumptions as of January 2, 2000,
December 27, 1998, and December 28, 1997 follows:
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 27, DECEMBER 28,
2000 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Discount rate............................. 8.00% 6.75% 7.25%
Salary increase rate...................... 3.75-5.25% 3.75-5.25% 4.00-5.50%
Medical cost trend:
First year--1999........................ 6.25% 7.25% 7.25%
Ultimate................................ 5.25% 5.25% 5.25%
Years to reach ultimate................. 1 2 2
</TABLE>
A one-percentage-point increase in the assumed health care cost trend rate
would have increased postretirement benefit expense by approximately $60,000,
$55,000 and $51,000 and would have increased the accumulated postretirement
benefit obligation by approximately $454,000, $513,000 and $457,000 for the
years ended January 2, 2000, December 27, 1998 and December 28, 1997,
respectively. A one-percentage-point decrease in the assumed health care cost
trend rate would have decreased the postretirement benefit expense by
approximately $54,000, $50,000 and $46,000 and would have decreased the
accumulated postretirement benefit obligation by approximately $414,000,
$469,000 and $419,000 for the years ended January 2, 2000, December 27, 1998 and
December 28, 1997, respectively.
12. INSURANCE RESERVES
At January 2, 2000 and December 27, 1998, insurance reserves of
approximately $26,994,000 and $26,479,000, respectively, had been recorded.
Insurance reserves at January 2, 2000 and December 27, 1998 included RIC's
reserve for the Company's insurance liabilities of approximately $11,372,000 and
$11,432,000, respectively. Reserves also included accruals related to
postemployment benefits and postretirement benefits other than pensions. While
management believes these reserves are adequate, it is reasonably possible that
the ultimate liabilities will exceed such estimates. Classification of the
reserves was as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 27, DECEMBER 28,
2000 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Current................................... $ 9,748 $ 9,116 $ 7,248
Long-term................................. 17,246 17,363 19,726
------- ------- -------
Total..................................... $26,994 $26,479 $26,974
======= ======= =======
</TABLE>
54
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INSURANCE RESERVES (CONTINUED)
Following is a summary of the activity in the insurance reserves for the
years ended January 2, 2000, December 27, 1998 and December 28, 1997 (in
thousands):
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 27, DECEMBER 28,
2000 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Beginning balance......................... $26,479 $26,974 $16,940
Provision................................. 12,903 10,388 9,605
Payments.................................. (12,388) (10,883) (12,802)
Acquisition of RIC........................ -- -- 13,231
------- ------- -------
Ending balance............................ $26,994 $26,479 $26,974
======= ======= =======
</TABLE>
The provision for insurance reserves each year is actuarially determined and
reflects amounts for the current year as well as revisions in estimates to open
reserves for prior years. Payments include amounts paid on open claims for all
years.
13. STOCKHOLDERS' EQUITY (DEFICIT)
A Stock Rights Plan ("SRP") was adopted by FICC in 1991. Under the SRP,
certain eligible individuals were granted rights to purchase shares of voting
common stock of FICC for $.01 per share, subject to certain vesting,
anti-dilution and exercise requirements.
In connection with the Recapitalization, 766,782 shares of Class A Common
Stock were returned to FICC from certain shareholders for no consideration. The
shares were returned in accordance with an agreement with the Company's existing
lenders as a condition to the Recapitalization. Of such shares returned, 99,951
shares were issued to FICC's Chief Executive Officer and vested immediately,
371,285 shares were reserved for issuance under a restricted stock plan (the
"Restricted Stock Plan") which was adopted by FICC in connection with the
Recapitalization, as described below, and 295,546 shares were issued to certain
employees under a limited stock compensation program in which a one-time award
of common stock was made to certain employees of the Company. The 295,546 shares
issued under the limited stock compensation program vested immediately.
Additionally, 27,113 shares were issued under the 1996 Management Stock Plan
("MSP") and immediately vested and the remaining 61,238 nonvested shares under
the MSP vested. The estimated fair value of $8,407,000 of the (i) 27,113 shares
issued and vested under the MSP, (ii) 61,238 shares previously issued under the
MSP which vested in connection with the Recapitalization, (iii) 99,951 vested
shares issued to FICC's Chief Executive Officer in connection with the
Recapitalization and (iv) 295,546 vested shares issued to certain employees was
recorded as compensation expense by the Company upon consummation of the
Recapitalization in 1997.
The Restricted Stock Plan, pursuant to which 371,285 shares are authorized
for issuance, provides for the award of common stock, the vesting of which is
subject to conditions and limitations established by the Board of Directors.
Such conditions may include continued employment with the Company or the
achievement of performance measures. Upon the award of common stock, the
participant has the rights of a stockholder, including but not limited to the
right to vote such stock and the right to receive any dividends paid on such
stock. The Board of Directors, in its sole discretion, may designate employees
and persons providing material services to the Company as eligible for
participation in the Restricted Stock Plan. In 1997, 312,575 shares of common
stock were issued to directors and employees under the Restricted Stock Plan. In
1999 and 1998, the Company issued an additional 82,008 and 20,310 shares under
the Restricted Stock Plan, respectively. In addition, there were 62,916 shares
forfeited in 1999. The shares issued in 1997, 1998 and April 20, 1999 vest at
12.50% per year with accelerated vesting of an additional
55
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
12.50% per year if certain performance criteria are met. The shares issued on
January 5, 1999 and October 26, 1999 vest 25% in the first year and 12.5% per
year for the next six years with accelerated vesting of an additional 12.5% per
year if certain performance criteria are met. The Company is recording the fair
value of the shares issued at the issuance dates as compensation expense over
the estimated vesting periods. During the years ended January 2, 2000,
December 27, 1998 and December 28, 1997, the Company recorded stock compensation
expense of approximately $563,000, $722,000 and $8,407,000, respectively, which
is included in general and administrative expenses in the accompanying
consolidated statements of operations.
In connection with the Recapitalization, the Board of Directors adopted a
stock option plan (the "Stock Option Plan"), pursuant to which 395,000 shares of
common stock are authorized for issuance. The Stock Option Plan provides for the
issuance of nonqualified stock options and incentive stock options (which are
intended to satisfy the requirements of Section 422 of the Internal Revenue
Code) and stock appreciation rights. As of January 2, 2000, no stock
appreciation rights had been issued. The Board of Directors will determine the
employees who will receive awards under the Stock Option Plan and the terms of
such awards. The exercise price of a stock option or stock appreciation right
shall not be less than the fair market value of one share of common stock on the
date the stock option or stock appreciation right is granted. The options expire
ten years from the date of grant and vest over five years.
A summary of the status of the Company's Stock Option Plan as of January 2,
2000 and December 27, 1998 and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Options outstanding at December 29, 1996........... -- $ --
Granted.......................................... 162,150 17.38
Forfeited........................................ (1,400) 17.38
-------
Options outstanding at December 28, 1997........... 160,750 17.38
Granted.......................................... 81,025 7.99
Forfeited........................................ (9,260) 17.38
Cancelled........................................ (69,775) 17.39
-------
Options outstanding at December 27, 1998........... 162,740 12.42
Granted.......................................... 170,850 5.85
Forfeited........................................ (20,760) 10.49
Cancelled........................................ -- --
-------
Options outstanding at January 2, 2000............. 312,830 $ 9.09
-------
</TABLE>
At January 2, 2000 and December 27, 1998, options were exercisable on 33,390
and 4,550 shares of stock with a weighted average exercise price of $13.23 and
$17.38, respectively. As of December 28, 1997, none of the outstanding options
were exercisable.
On November 5, 1998, the Company cancelled 69,775 stock options outstanding
(original options granted on November 14, 1997, May 13, 1998 and July 29, 1998
at exercise prices of $17.38, $24.75 and $12.00, respectively) and granted
69,775 new options to the same individuals with an exercise price of $6.38,
which was the market value as of the close of the November 5, 1998 business day.
The employees whom this affected were middle management members of the Company.
No executives or directors of the Company were included.
56
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
The following table summarizes information related to outstanding options as
of January 2, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ----------------------------------------------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED-
RANGE OF NUMBER CONTRACTUAL AVERAGE
EXERCISE OUTSTANDING AS OF LIFE EXERCISE
PRICES JANUARY 2, 2000 (YEARS) PRICE
- ------------------ ----------------- ----------- ---------
<S> <C> <C> <C>
$4.95--$7.43....... 216,210 9.2 $5.80
7.43--9.90........ 12,180 9.5 9.31
9.90--12.38....... 1,700 7.6 12.00
17.33--19.80...... 80,490 7.9 17.38
22.28--24.75...... 2,250 8.4 24.75
-------
312,830 8.9 9.09
=======
</TABLE>
The Company applies APB No. 25 and related Interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized for its Stock
Option Plan. Had compensation cost for the Company's stock plans been determined
consistent with SFAS No. 123, the Company's net loss and basic and diluted net
loss per share for the years ended January 2, 2000, December 27, 1998 and
December 28, 1997 would have been the following pro forma amounts:
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 27, DECEMBER 28,
2000 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Income (loss) before cumulative effect of change in
accounting principle................................... $287,000 $(5,023,000) $(5,149,000)
Cumulative effect of change in accounting principle, net
of income tax effect................................... (319,000) -- 2,236,000
-------- ----------- -----------
Net loss................................................. $(32,000) $(5,023,000) $(2,913,000)
======== =========== ===========
Basic and diluted income (loss) per share:
Income (loss) before cumulative effect of change in
accounting principle................................... $ 0.04 $ (0.67) $ (1.66)
Cumulative effect of change in accounting principle, net
of income tax effect................................... (0.04) -- 0.72
-------- ----------- -----------
Net loss per share....................................... $ -- $ (0.67) $ (0.94)
======== =========== ===========
</TABLE>
Fair value was estimated on the grant date using the Black-Scholes option
pricing model with the following assumptions:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Risk free interest rate.......................... 5.66%-7.09% 4.88%-5.75%
Expected life.................................... 7 years 7 years
Expected volatility.............................. 79.14% 86.50%
Dividend yield................................... 0.00% 0.00%
Fair value....................................... $3.87-$7.15 $5.03-$19.68
</TABLE>
57
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Pursuant to a stockholder rights plan (the "Stockholder Rights Plan") FICC
adopted in connection with the Recapitalization, the Board of Directors declared
a dividend distribution of one purchase right (a "Right") for each outstanding
share of common stock. The Stockholder Rights Plan provides, in substance, that
should any person or group (other than certain management and affiliates)
acquire 15% or more of FICC's common stock, each Right, other than Rights held
by the acquiring person or group, would entitle its holder to purchase a
specified number of shares of common stock for 50% of their then current market
value. Until a 15% acquisition has occurred, the Rights may be redeemed by FICC
at any time prior to the termination of the Stockholder Rights Plan.
14. RELATED PARTY TRANSACTIONS
In June 1999, Visual Events, Inc., a company wholly-owned by Richard L.
Couch, the Company's Chief Marketing Officer, and his spouse, entered into a
contract with the Company pursuant to which Visual Events, Inc. will provide
various marketing management services for the Company. The contract provides for
a monthly retainer of $12,000 for 12 consecutive months commencing July 1, 1999
subject to early termination by either party upon 90 days notice. The contract
provides for Visual Events, Inc. to be reimbursed for certain expenses and to
perform other project based services subject to budgets approved by the Company.
Payments by the Company under the contract during the fiscal year ended
January 2, 2000 totalled approximately $166,000.
On October 12, 1998, the Company entered into a franchise agreement with The
Ice Cream Corporation ("TICC"), as franchisee, which conditionally granted TICC
exclusive rights to purchase and develop Friendly's full-service restaurants in
the Lancaster and Chester counties of Pennsylvania (the "TICC Agreement"). The
owners of TICC are family members of the Chairman of the Board and Chief
Executive Officer of the Company. Pursuant to the TICC Agreement, TICC purchased
at fair market value certain assets and rights in two existing Friendly's
restaurants, committed to open an additional ten restaurants by October 11, 2004
and received an option to purchase an additional three restaurants. Proceeds
from the sale were approximately $1,547,700, of which $57,000 was for initial
franchise fees for the two initial restaurants, $125,000 was for franchise fees
for certain of the additional restaurants described above and $25,000 was for
the option to purchase two additional existing restaurants. The $57,000 was
recorded as revenue in the year ended December 27, 1998 and the option fees will
be recorded as income as additional restaurants are purchased. The Company
recognized income of approximately $1.0 million related to the sale of the
equipment and operating rights for the two existing franchised locations in the
year ended December 27, 1998. The franchisee is required by the terms of the
TICC Agreement to purchase from the Company all of the frozen dessert products
it sells in the franchised restaurants. In December 1999, FICC's Chairman of the
Board and Chief Executive Officer purchased the underlying real estate at a
restaurant currently being franchised by TICC for $440,000, the fair market
value of the property. The Company recognized a loss on the sale of
approximately $56,000. The Company had a ground lease and owned the improvements
on one of the properties franchised to TICC. In October 1998, the Company
assigned the ground lease and in connection with that assignment, the Company
receives monthly assignment fees from TICC for the value of the improvements on
the property. The term of the assignment and related assignment fees is for
approximately 18 years ending in August 2016. The monthly assignment fees
payable to the Company are $2,434.90 which increase over the term of the
assignment to $2,678.40 in November 2003, $2,946.30 in November 2008 and
$3,240.90 in November 2013.
58
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RELATED PARTY TRANSACTIONS (CONTINUED)
FICC's Chairman of the Board and Chief Executive Officer is an officer of
TRC. FICC entered into subleases for certain land, buildings and equipment from
a subsidiary of TRC. For the years ended January 2, 2000, December 27, 1998 and
December 28, 1997, rent expense related to the subleases was approximately
$302,000, $309,000 and $279,000, respectively.
In 1994, TRC Realty LLC (a subsidiary of TRC) entered into a ten-year
operating lease for an aircraft for use by both the Company and TRC (which
operates restaurants using the trademark Perkins Restaurant and Bakery
("Perkins")). In 1999, this lease was cancelled and TRC Realty LLC entered into
a new ten-year operating lease for a new aircraft. The Company shares
proportionately with Perkins in reimbursing TRC Realty LLC for leasing, tax and
insurance expenses. In addition, the Company also incurs actual usage costs.
Total expense for the years ended January 2, 2000, December 27, 1998 and
December 28, 1997 was approximately $568,000, $691,000 and $610,000,
respectively.
The Company purchased certain food products used in the normal course of
business from a division of TRC. For the years ended January 2, 2000,
December 27, 1998 and December 28, 1997, purchases were approximately $967,000,
$945,000 and $975,000, respectively.
In June 1999, the Company's pension plan sold a restaurant business
(excluding the related property which is owned by the pension plan), located in
Mt. Laurel, New Jersey, to a franchisee of Friendly's Restaurants
Franchise, Inc., a subsidiary of FICC. Under the original lease agreement
between the Company and the pension plan, the Company leased the restaurant from
the pension plan for $62,700 per annum through June 2001. In conjunction with
the pension plan's sale of the restaurant business to the franchisee, the
Company will sublease the property to the franchisee for an aggregate annual
amount of $76,700 through July 31, 2001. Under the terms of the sublease
agreement, the pension plan will receive rental income directly from the
franchisee. The franchisee has the option to extend the lease for three,
five-year options and one, two-year and ten-month option.
In August 1999, the pension plan sold a restaurant business and the related
property, located in Randallstown, Maryland, to an independent third party. As a
result of the sale, the pension plan realized a loss of $107,500 in fiscal 1999.
The Company then contributed $107,500 to the pension plan, in settlement of its
ongoing obligations under the lease. The Company received an opinion from
outside legal counsel to the pension plan verifying that the transaction
complied with the Employee Retirement Income Security Act of 1974 because it
fell within a recognized exemption to 406(a)(1).
In March 1996, the Company's pension plan acquired three restaurant
properties from the Company. The land, buildings and improvements were purchased
by the plan at their appraised value of $2,043,000 and are located in
Connecticut, Vermont and Virginia. Simultaneously with the purchase, the pension
plan leased back the three properties to the Company at an aggregate annual base
rent of $214,000 for the first five years and $236,000 for the following five
years. With respect to these transactions the pension plan was represented by
independent legal and financial advisors. The transaction was recorded by the
Company as a direct financing lease since the Company has the right to
repurchase the properties at fair market value.
15. COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal proceedings arising in the ordinary
course of business which management believes, after consultation with legal
counsel, will not have a material adverse effect on the Company's financial
position or future operating results.
59
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has commitments to purchase approximately $61,800,000 of raw
materials, food products and supplies used in the normal course of business that
cover periods of one to twenty-four months. Most of these commitments are
noncancelable.
On 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 will be recorded as revenue in the year ending December 31, 2000. The
Company will recognize a gain of approximately $1,500,000 related to the sale of
the assets for the 29 existing franchised locations in the year ending
December 31, 2000. As a result of the sale of these units, the Company recorded
a write-down of $500,000 in the first quarter of fiscal 2000 for the remaining
11 restaurants in this operating region, since the Company does not intend to
operate them in the future.
On July 14, 1997, the Company entered into an agreement which conditionally
granted a franchisee exclusive rights to operate, manage and develop Friendly's
full-service restaurants in the franchising region of Maryland, Delaware, the
District of Columbia and northern Virginia (the "Agreement"). Pursuant to the
Agreement, the franchisee purchased certain assets and rights in 34 existing
Friendly's restaurants in this franchising region, committed to open an
additional 74 restaurants through 2005 and, subject to the fulfillment of
certain conditions, further agreed to open 26 additional restaurants, for a
total of 100 new restaurants in this franchising region through 2007. Gross
proceeds from the sale were approximately $8,488,000, of which $860,000 was for
initial franchise fees for the 34 initial restaurants, $500,000 was for
development rights and $930,000 was for franchise fees for certain of the
additional restaurants described above. The $860,000 was recorded as revenue in
the year ended December 28, 1997, and the development rights and franchise fees
received are being amortized into income over the initial ten-year term of the
Agreement and as additional restaurants are opened, respectively. The Company
recognized income of $2,283,000 related to the sale of the equipment and
operating rights for the 34 existing franchised locations in the year ended
December 28, 1997. The proceeds were allocated between the assets sold and the
development rights by the Company and the franchisee based on the estimated fair
market values. The franchisee is required by the terms of the Agreement to
purchase from the Company all of the frozen dessert products it sells in the
franchised restaurants. As of January 2, 2000, the franchisee had opened 15 new
units.
16. RELOCATION OF MANUFACTURING AND DISTRIBUTION FACILITY
On December 1, 1998, the Company announced a plan to relocate its
manufacturing and distribution operations from Troy, OH to Wilbraham, MA and
York, PA. The Company closed the Troy, OH
60
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. RELOCATION OF MANUFACTURING AND DISTRIBUTION FACILITY (CONTINUED)
manufacturing and distribution facility in May 1999 and transferred the
operations to Wilbraham, MA and York, PA. Following represents the restructuring
reserve and related costs associated with the relocation:
<TABLE>
<CAPTION>
ACCRUED AS OF ACCRUED AS OF
DECEMBER 27, 1998 1999 EXPENSE COSTS PAID JANUARY 2, 2000
----------------- ------------ ----------- ---------------
<S> <C> <C> <C> <C>
Severance pay......................... $536,000 $ 34,700 $ (570,700) $ --
Utility costs......................... 140,000 89,100 (229,100) --
Real estate taxes..................... 87,000 (87,000) -- --
Outside storage....................... 80,000 (58,000) (22,000) --
Outplacement services................. 50,000 -- (50,000) --
Additional exit costs (plant
maintenance, security and travel)... 52,000 163,200 (215,200) --
-------- -------- ----------- ---------
Total................................. $945,000 $142,000 $(1,087,000) $ --
======== ======== =========== =========
</TABLE>
In December 1999, the Company sold the Troy, OH manufacturing facility for
cash of $2.2 million and a seven year, 7.75% interest-bearing $600,000 note
receivable due January 2007. The Company incurred a total loss on the sale of
the property of $1,033,000 in fiscal 1999 which is included in relocation of
manufacturing and distribution facility in the accompanying consolidated
statements of operations.
17. 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 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's
franchise segment includes a royalty based on franchise restaurant revenue. In
addition, the Company receives rental income from various franchised
restaurants. 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.
61
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SEGMENT REPORTING (CONTINUED)
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.
EBITDA represents consolidated net income (loss) before (i) cumulative
effect of change in accounting principle, net of income tax effect,
(ii) benefit from (provision for) income taxes, (iii) (recovery of write-down
of) equity in net loss of joint venture, (iv) interest expense, net,
(v) depreciation and amortization and (vi) non-cash write-downs and all other
non-cash items.
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 27, DECEMBER 28,
2000 1998 1997
---------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Restaurant............................................. $ 618,433 $ 595,308 $ 593,671
Foodservice............................................ 268,703 256,829 245,346
Franchise.............................................. 4,967 3,769 2,375
International.......................................... 23 301 1,247
--------- --------- ---------
Total................................................ $ 892,126 $ 856,207 $ 842,639
========= ========= =========
Intersegment revenues:
Restaurant............................................. $ -- $ -- $ --
Foodservice............................................ (183,107) (178,111) (175,092)
Franchise.............................................. -- -- --
International.......................................... -- -- --
--------- --------- ---------
Total................................................ $(183,107) $(178,111) $(175,092)
========= ========= =========
External revenues:
Restaurant............................................. $ 618,433 $ 595,308 $ 593,671
Foodservice............................................ 85,596 78,718 70,254
Franchise.............................................. 4,967 3,769 2,375
International.......................................... 23 301 1,247
--------- --------- ---------
Total................................................ $ 709,019 $ 678,096 $ 667,547
========= ========= =========
</TABLE>
62
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SEGMENT REPORTING (CONTINUED)
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 27, DECEMBER 28,
2000 1998 1997
---------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
EBITDA:
Restaurant............................................. $ 66,038 $ 70,771 $ 73,952
Foodservice............................................ 26,757 17,659 20,035
Franchise.............................................. 2,389 1,423 1,240
International.......................................... (83) (1,191) (1,127)
Corporate.............................................. (30,056) (25,119) (21,737)
--------- --------- ---------
Total................................................ $ 65,045 $ 63,543 $ 72,363
========= ========= =========
Interest expense, net.................................. $ 33,694 $ 31,838 $ 39,303
========= ========= =========
(Recovery of write-down of) equity in net loss of joint
venture.............................................. $ (896) $ 4,828 $ 1,530
========= ========= =========
Income (loss) before income taxes and cumulative effect
of change in accounting principle:
Restaurant............................................. $ 38,173 $ 43,218 $ 48,012
Foodservice............................................ 23,119 14,663 17,186
Franchise.............................................. 1,822 938 179
International.......................................... 813 (6,295) (2,707)
Corporate.............................................. (69,145) (60,950) (72,408)
--------- --------- ---------
Total................................................ $ (5,218) $ (8,426) $ (9,738)
========= ========= =========
Depreciation and amortization:
Restaurant............................................. $ 25,952 $ 26,641 $ 25,489
Foodservice............................................ 3,638 2,996 2,849
Franchise.............................................. 567 485 1,061
International.......................................... -- 56 50
Corporate.............................................. 4,832 3,271 2,243
--------- --------- ---------
Total................................................ $ 34,989 $ 33,449 $ 31,692
========= ========= =========
Identifiable assets:
Restaurant............................................. $ 265,062 $ 262,353 $ 244,457
Foodservice............................................ 29,625 45,111 49,703
Franchise.............................................. 3,935 11,713 11,404
International.......................................... 28 1,485 5,887
Corporate.............................................. 57,720 53,886 60,420
--------- --------- ---------
Total................................................ $ 356,370 $ 374,548 $ 371,871
========= ========= =========
Capital expenditures, including capitalized leases:
Restaurant............................................. $ 36,343 $ 43,697 $ 28,966
Foodservice............................................ 4,810 5,277 3,655
Corporate.............................................. 235 2,806 1,244
--------- --------- ---------
Total................................................ $ 41,388 $ 51,780 $ 33,865
========= ========= =========
</TABLE>
63
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CLOSING OF INTERNATIONAL OPERATIONS
Effective October 15, 1998, Friendly's International, Inc. ("FII"), a
subsidiary of the Company, entered into an agreement that provided for the sale
of the Company's 50% equity interest in its China joint venture to the joint
venture partner and the settlement of FICC's advances to the joint venture for
an aggregate of approximately $2.3 million in notes and $335,000 of equipment.
On February 25, 1999, FII received an initial payment of approximately
$1.1 million and arranged for the shipment of the equipment to the United
States. Accordingly, the Company recorded a write-down of approximately
$3.5 million as of December 27, 1998 to eliminate the Company's remaining
investment in and advances to the joint venture. During the year ended
January 2, 2000, the Company received from its joint venture partner $827,000 of
cash and $69,000 of equipment as payment for the dissolution of the joint
venture partnership. The Company does not anticipate any additional payments
from the joint venture partner in the future. If any of the $0.3 million still
due under the terms of the sale is received by the Company, such amount will be
recorded as income by the Company at such time. Additionally, in 1998 the
Company determined that it would discontinue its direct investment in the United
Kingdom. Accordingly, the Company recognized an impairment loss of $468,000 to
reduce the related assets to their estimated net realizable value. Following is
a summary of the write-down recorded for the United Kingdom operations during
the year ended December 27, 1998:
<TABLE>
<S> <C>
Inventory................................................... $230,000
Equipment................................................... 220,000
Accounts receivable......................................... 18,000
--------
$468,000
========
</TABLE>
In addition, $150,000 of costs and expenses associated with the
discontinuation of the United Kingdom operations were accrued as of
December 27, 1998. Such costs were paid in fiscal 1999.
19. SUBSEQUENT EVENTS
In March 2000, the Company's Board of Directors approved a restructuring
plan that provides for the immediate closing of 79 restaurants by the end of
March 2000 and the disposition of an additional 71 restaurants. The
71 locations will remain in operation until they are sold, subleased or closed
prior to March 2002. The restaurants to be closed are 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 will eliminate
approximately 150 management/administrative employees in the field organization
and at corporate headquarters.
As a result of this plan, the Company will report a pre-tax write-down of
property and equipment of approximately $18 million and a pre-tax restructuring
charge of approximately $12 million for severance pay, lease cancellation fees,
restaurant de-identification costs and certain other costs associated with the
closing of the locations in the first quarter ended April 2, 2000. Management
believes that future annual savings associated with the reduction in force are
estimated to be $8 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 will be increased. The
64
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. SUBSEQUENT EVENTS (CONTINUED)
per annum interest rates on the Term Loans, Revolving Credit Facility and the
Letter of Credit Facility will be increased by 0.25% as a result of this
amendment.
On January 3, 2000, the Company was notified by The Nasdaq-Amex Group, a
NASD Company, that the Company's shares, which as of March 1, 2000 were listed
on the NASDAQ National Market, had failed to maintain a minimum bid price of
$5.00 per share or greater for 30 consecutive trading days as required under
NASDAQ rules. Accordingly, unless the Company's shares listed on NASDAQ trade at
$5.00 or above for at least ten consecutive trading days before April 3, 2000,
the Company's shares will be delisted from NASDAQ on April 5, 2000. As of
March 15, 2000, the Company's shares have not closed above $5.00 per share for
76 consecutive days. The Company may avoid or delay the delisting of its shares
on April 5, 2000 by requesting a hearing under NASDAQ rules petitioning the
NASDAQ Listing Qualifications Panel for (a) continued listing on the NASDAQ
National Market, or (b) transfer of the Company's listed shares to the NASDAQ
Small Cap Market.
20. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
FICC's obligation related to the $200 million Senior Notes are guaranteed
fully and unconditionally by one of FICC's wholly-owned subsidiaries. There are
no restrictions on FICC's ability to obtain dividends or other distributions of
funds from this subsidiary, except those imposed by applicable law. The
following supplemental financial information sets forth, on a condensed
consolidating basis, balance sheets, statements of operations and statements of
cash flows for Friendly Ice Cream Corporation (the "Parent Company"), Friendly's
Restaurants Franchise, Inc. (the "Guarantor Subsidiary") and Friendly's
International, Inc., Friendly Holding (UK) Limited, Friendly Ice Cream (UK)
Limited and Restaurant Insurance Corporation (collectively, the "Non-guarantor
Subsidiaries"). Separate complete financial statements and other disclosures of
the Guarantor Subsidiary as of January 2, 2000 and December 27, 1998 and for the
years ended January 2, 2000 and December 27, 1998 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.
65
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. 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............... 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>
66
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 2, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues............................ $706,295 $2,721 $ 23 $ (20) $709,019
Costs and expenses:
Cost of sales..................... 206,396 -- 17 -- 206,413
Labor and benefits................ 228,492 -- -- -- 228,492
Operating expenses and write-downs
of property and equipment....... 166,480 -- (211) -- 166,269
General and administrative
expenses........................ 45,041 1,720 (66) (20) 46,675
Relocation of manufacturing and
distribution facility........... 1,175 -- -- -- 1,175
Depreciation and amortization..... 34,989 -- -- -- 34,989
Gain on sales of restaurant
operations and properties......... (2,574) -- -- -- (2,574)
Interest expense (income)........... 34,426 -- (732) -- 33,694
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...................... (7,234) 1,001 1,015 -- (5,218)
Benefit from (provision for) income
taxes............................. 6,647 (411) (299) -- 5,937
-------- ------ ----- ------- --------
(Loss) income before cumulative
effect of change in accounting
principle and equity in net income
of consolidated subsidiaries...... (587) 590 716 -- 719
Cumulative effect of change in
accounting principle.............. (319) -- -- -- (319)
-------- ------ ----- ------- --------
(Loss) income before equity in net
income of consolidated
subsidiaries...................... (906) 590 716 -- 400
Equity in net income of consolidated
subsidiaries...................... 1,306 -- -- (1,306) --
-------- ------ ----- ------- --------
Net income.......................... $ 400 $ 590 $ 716 $(1,306) $ 400
======== ====== ===== ======= ========
</TABLE>
67
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 2, 2000
(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............... $ 34,007 $(39) $ 583 $ -- $ 34,551
Cash flows from investing activities:
Purchases of property and
equipment........................ (41,388) -- -- -- (41,388)
Proceeds from sales of property and
equipment........................ 17,463 -- -- -- 17,463
Proceeds from sale of joint
venture.......................... 1,150 -- -- -- 1,150
-------- ---- ------ --------- --------
Net cash used in investing
activities......................... (22,775) -- -- -- (22,775)
-------- ---- ------ --------- --------
Cash flows from financing activities:
Dividends received (paid).......... 500 -- (500) -- --
Proceeds from borrowings........... 109,000 -- -- -- 109,000
(Repayments of obligations)
reimbursements from parent....... (120,238) -- 500 -- (119,738)
-------- ---- ------ --------- --------
Net cash used in financing
activities......................... (10,738) -- -- -- (10,738)
-------- ---- ------ --------- --------
Effect of exchange rate changes on
cash............................... -- -- (67) -- (67)
-------- ---- ------ --------- --------
Net increase (decrease) in cash and
cash equivalents................... 494 (39) 516 -- 971
Cash and cash equivalents, beginning
of year............................ 9,180 53 1,858 -- 11,091
-------- ---- ------ --------- --------
Cash and cash equivalents, end of
year............................... $ 9,674 $ 14 $2,374 $ -- $ 12,062
-------- ---- ------ --------- --------
Supplemental disclosures:
Interest paid (received)........... $ 31,678 $ -- $ (547) $ -- $ 31,131
Income taxes (refunded) paid....... (479) 224 (132) (387)
Capital lease obligations
terminated....................... 62 -- -- -- 62
Note received from sale of property
and equipment.................... 600 -- -- -- 600
</TABLE>
68
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 27, 1998
(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......... $ 9,180 $ 53 $ 1,858 $ -- $ 11,091
Restricted cash................... -- -- 2,211 -- 2,211
Accounts receivable............... 5,370 175 21 -- 5,566
Inventories....................... 15,445 -- 115 -- 15,560
Deferred income taxes............. 6,783 -- 278 -- 7,061
Prepaid expenses and other current
assets.......................... 8,657 235 7,461 (9,775) 6,578
-------- ------ ------- -------- --------
Total current assets................ 45,435 463 11,944 (9,775) 48,067
Deferred income taxes............... -- 503 1,024 (1,527) --
Property and equipment, net......... 300,159 -- -- -- 300,159
Intangible assets and deferred
costs, net........................ 25,178 -- -- -- 25,178
Investments in subsidiaries......... 965 -- -- (965) --
Other assets........................ 222 2,199 5,736 (7,013) 1,144
-------- ------ ------- -------- --------
Total assets........................ $371,959 $3,165 $18,704 $(19,280) $374,548
======== ====== ======= ======== ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current maturities of long- term
obligations..................... $ 10,200 $ -- $ -- $ (4,500) $ 5,700
Accounts payable.................. 26,460 -- -- -- 26,460
Accrued expenses.................. 42,035 285 11,429 (7,185) 46,564
-------- ------ ------- -------- --------
Total current liabilities........... 78,695 285 11,429 (11,685) 78,724
Deferred income taxes............... 38,715 -- -- (1,527) 37,188
Long-term obligations, less current
maturities........................ 325,620 -- -- (4,814) 320,806
Other liabilities................... 19,530 1,758 7,432 (289) 28,431
Stockholders' equity (deficit)...... (90,601) 1,122 (157) (965) (90,601)
-------- ------ ------- -------- --------
Total liabilities and stockholders'
equity (deficit).................. $371,959 $3,165 $18,704 $(19,280) $374,548
======== ====== ======= ======== ========
</TABLE>
69
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 27, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues............................ $676,093 $1,703 $ 300 $ -- $678,096
Costs and expenses:
Cost of sales..................... 204,364 -- 520 -- 204,884
Labor and benefits................ 211,581 -- -- -- 211,581
Operating expenses and write-downs
of property and equipment....... 154,715 -- 239 -- 154,954
General and administrative
expenses........................ 43,359 1,233 456 -- 45,048
Relocation of manufacturing and
distribution facility........... 945 -- -- -- 945
Depreciation and amortization..... 33,393 -- 56 -- 33,449
Gain on sales of restaurant
operations........................ (1,005) -- -- -- (1,005)
Interest expense (income)........... 32,746 -- (908) -- 31,838
Equity in net loss and other
write-downs associated with joint
venture........................... 1,168 -- 3,660 -- 4,828
-------- ------ ------- ------ --------
(Loss) income before benefit from
(provision for) income taxes and
equity in net loss of consolidated
subsidiaries...................... (5,173) 470 (3,723) -- (8,426)
Benefit from (provision for) income
taxes............................. 2,616 (193) 1,032 -- 3,455
-------- ------ ------- ------ --------
(Loss) income before equity in net
loss of consolidated
subsidiaries...................... (2,557) 277 (2,691) -- (4,971)
Equity in net loss of consolidated
subsidiaries...................... (2,414) -- -- 2,414 --
-------- ------ ------- ------ --------
Net (loss) income................... $ (4,971) $ 277 $(2,691) $2,414 $ (4,971)
======== ====== ======= ====== ========
</TABLE>
70
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 27, 1998
(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............... $33,456 $(151) $ (508) $68 $32,865
------- ----- ------ --- -------
Cash flows from investing activities:
Purchases of property and
equipment........................ (51,172) -- -- -- (51,172)
Proceeds from sales of property and
equipment........................ 2,852 -- -- -- 2,852
------- ----- ------ --- -------
Net cash used in investing
activities......................... (48,320) -- -- -- (48,320)
------- ----- ------ --- -------
Cash flows from financing activities:
Dividends received (paid).......... 800 -- (800) -- --
Proceeds from borrowings........... 69,258 -- -- -- 69,258
(Repayments of obligations)
reimbursements from parent....... (58,253) -- 400 -- (57,853)
------- ----- ------ --- -------
Net cash provided by (used in)
financing activities............... 11,805 -- (400) -- 11,405
------- ----- ------ --- -------
Effect of exchange rate changes on
cash............................... -- -- 9 -- 9
------- ----- ------ --- -------
Net (decrease) increase in cash and
cash equivalents................... (3,059) (151) (899) 68 (4,041)
Cash and cash equivalents, beginning
of year............................ 12,239 204 2,757 (68) 15,132
------- ----- ------ --- -------
Cash and cash equivalents, end of
year............................... $ 9,180 $ 53 $1,858 $-- $11,091
======= ===== ====== === =======
Supplemental disclosures:
Interest paid (received)........... $31,752 $ -- $ (968) $-- $30,784
Income taxes (received) paid....... (811) 810 533 -- 532
Capital lease obligations
incurred......................... 608 -- -- -- 608
Capital lease obligations
terminated....................... 384 -- -- -- 384
</TABLE>
71
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of
Friendly Ice Cream Corporation:
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated balance sheets of Friendly Ice Cream
Corporation and subsidiaries as of January 2, 2000 and December 27, 1998, and
the related consolidated statements of operations, changes in stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
January 2, 2000, included in this Form 10-K, and have issued our report thereon
dated February 11, 2000 (except with respect to the matters discussed in
Note 19, as to which the date is March 23, 2000). Our audits were made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The accompanying Schedule II--Valuation and Qualifying Accounts is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. The information reflected in the schedule has
been subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 11, 2000
72
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 14(D)
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
FOR THE YEARS ENDED JANUARY 2, 2000 AND DECEMBER 27, 1998 (1)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ----------------------- ---------- ---------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
----------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Reserves deducted in the consolidated
balance sheets from the assets to which
they relate:
1999
- ------------------------------------------
Reserve for relocation of manufacturing
and distribution facility............... $945 $142(2) $ -- $1,087(2) $ --
1998
- ------------------------------------------
Reserve for relocation of manufacturing
and distribution facility............... $ -- $945 $ -- $ -- $945
</TABLE>
- ------------------------
(1) Schedule is not applicable for 1997.
(2) The charges to the accounts are for the purposes for which the reserves were
created.
73
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
3.1 Restated Articles of Organization of Friendly Ice Cream
Corporation (the "Company"). (Incorporated by reference from
Exhibit 3.1 to the Company's Registration Statement on
Form S-1, Reg. No. 333-34633).
3.2 Amended and Restated By-laws of the Company. (Incorporated
by reference to Exhibit 3.2 to the Registrant's Annual
Report on Form 10K for the fiscal year ended December 27,
1998, File No. 0-3930).
4.1 Credit Agreement among the Company, Societe Generale, New
York Branch and certain other banks and financial
institutions ("Credit Agreement"). (Incorporated by
reference to Exhibit 10.1 to the Registrant's Annual Report
on Form 10K for the fiscal year ended December 28, 1997,
File No. 0-3930).
4.2 First Amendment to Credit Agreement (Incorporated by
reference to Exhibit 10.2 to the Registrant's Annual Report
on Form 10K for the fiscal year ended December 27, 1997,
File No. 0-3930).
4.3 Senior Note Indenture between Friendly Ice Cream
Corporation, Friendly's Restaurants Franchise, Inc. and The
Bank of New York, as Trustee. (Incorporated by reference to
Exhibit 4.3 to the Registrant's Annual Report on Form 10K
for the fiscal year ended December 27, 1998, File
No. 0-3930).
4.4 Rights Agreement between the Company and The Bank of New
York, a Rights Agent. (Incorporated by reference from
Exhibit 4.3 to the Company's Registration Statement on
Form S-1, Reg. No. 333-34633).
4.5 Second Amendment to Credit Agreement.
4.6 Third Amendment to Credit Agreement.
10.1 The Company's Stock Option Plan. (Incorporated by reference
from Exhibit 10.1 to the Company's Registration Statement on
Form S-1, Reg. No. 333-34633).*
10.2 The Company's Restricted Stock Plan. (Incorporated by
reference from Exhibit 10.2 to the Company's Registration
Statement on Form S-1, Reg. No. 333-34633).*
10.3 Agreement relating to the Company's Limited Stock
Compensation Program.* (Incorporated by reference to
Exhibit 10.5 to the Registrant's Annual Report on Form 10K
for the fiscal year ended December 28, 1997, File
No. 0-3930).
10.4 Development Agreement between Friendly Ice Cream Corporation
and FriendCo Restaurants, Inc. (Incorporated by reference
from Exhibit 10.4 to the Company's Registration Statement on
Form S-1, Reg. No. 333-34633).
10.5 Franchise Agreement between Friendly's Restaurants
Franchise, Inc. and FriendCo Restaurants, Inc. (Incorporated
by reference from Exhibit 10.5 to the Company's Registration
Statement on Form S-1, Reg. No. 333-34633).
10.6 Management Agreement between Friendly Ice Cream Corporation
and FriendCo Restaurants, Inc. (Incorporated by reference
from Exhibit 10.6 to the Company's Registration Statement on
form S-1, Reg. No. 333-34633).
</TABLE>
74
<PAGE>
<TABLE>
<C> <S>
10.7 Purchase and Sale Agreement between Friendly Ice Cream
Corporation and FriendCo Restaurants, Inc. (Incorporated by
reference from Exhibit 10.7 to the Company's Registration
Statement on Form S-1, Reg. No. 333-34633).
10.8 Software License Agreement between Friendly's Restaurants
Franchise, Inc. and FriendCo Restaurants, Inc. (Exhibits
10.4 through 10.8, collectively, the "DavCo Agreement")
(Incorporated by reference from Exhibit 10.8 to the
Company's Registration Statement on Form S-1, Reg.
No. 333-34633).
10.9 Sublease between SSP Company, Inc. and the Company, as
amended, for the Chicopee, Massachusetts Distribution
Center. (Incorporated by reference from Exhibit 10.9 to the
Company's Registration Statement on Form S-1, Reg.
No. 333-34633).
10.10 TRC Management Contract between the Company and The
Restaurant Company. (Incorporated by reference from
Exhibit 10.10 to the Company's Registration Statement on
Form S-1, Reg. No. 333-34633).
10.11 Aircraft Reimbursement Agreement between Company and TRC
Realty Co. (Incorporated by reference to Exhibit 10.11 to
the Registrant's Annual Report on Form 10K for the fiscal
year ended December 27, 1998, File No. 0-3930).
10.12 License Agreement between the Company and Hershey Foods
Corporation for 1988 Non-Friendly Marks. (Incorporated by
reference from Exhibit 10.12 to the Company's Registration
Statement on Form S-1, Reg. No. 333-34633).
10.13 Letter agreement between registrant and Visual Events, Inc.
10.14 Memorandum of Agreement between registrant and Paul J.
McDonald.
21.1 Subsidiaries of the Company. (Incorporated by reference from
Exhibit 21.1 to the Company's Registration Statement on
Form S-1, Reg. No. 333-34633).
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
</TABLE>
*--Management Contract or Compensatory Plan or Arrangement
75
<PAGE>
Exhibit 4.5
SECOND AMENDMENT
SECOND AMENDMENT, dated as of December 30, 1999 (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 Section 2.10(b) 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. AMENDMENT TO SECTION 2.10(b) OF THE CREDIT AGREEMENT.
Paragraph (b) of Section 2.10 of the Credit Agreement is hereby amended by
deleting said paragraph in its entirety and substituting in lieu thereof the
following paragraph:
"(b) Unless the Required Prepayment Lenders shall otherwise agree,
if on any date, the Borrower or any of its Subsidiaries shall receive
Net Cash Proceeds from any Asset Sale or Recovery Event then, unless a
Reinvestment Notice shall be delivered in respect thereof, such Net
Cash Proceeds shall be applied on such date toward the prepayment of
the Term Loans and the reduction of the Revolving Credit Commitments as
set forth in Section 2.10(d); PROVIDED that, notwithstanding the
foregoing, (i) in the case of an Asset Sale, no such prepayment shall
be required until the earliest of (A) the date on which the aggregate
amount of Net Cash Proceeds received from such Asset Sale and all other
Asset Sales occurring during the same fiscal quarter of the Borrower
equals or exceeds $2,500,000, (B) the first occurrence thereafter of
the fifteenth day of January, April, July or October and (C) such
earlier date or dates as shall be requested by the Borrower, and (ii)
on each Reinvestment Prepayment Date, an amount equal to the
Reinvestment Prepayment Amount with respect to the relevant
Reinvestment Event shall
<PAGE>
2
be applied toward the prepayment of the Term Loans and the reduction of
the Revolving Credit Commitments as set forth in Section 2.10(d)."
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 Prepayment 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. The representations and
warranties made by the Loan Parties in the Loan Documents are true and correct
in all material respects on and as of the Amendment Effective Date, before and
after giving effect to the effectiveness of this Amendment, as if made on and as
of the Amendment Effective Date, except to the extent such representations and
warranties expressly relate to a specific earlier date, in which case such
representations and warranties were true and correct as of such earlier date.
SECTION 5. PAYMENT OF EXPENSES. The Borrower agrees to pay or
reimburse the Administrative Agent for all of its reasonable out-of-pocket costs
and expenses incurred in connection with this Amendment and any other documents
prepared in connection herewith and the transactions contemplated hereby,
including, without limitation, the reasonable fees and disbursements of counsel
to the Administrative Agent.
SECTION 6. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. On and
after the Amendment Effective Date, each reference in the Credit Agreement to
"this Agreement", "hereunder", "hereof" or words of like import referring to the
Credit Agreement, and each reference in the other Loan Documents to "the Credit
Agreement", "thereunder", "thereof" or words of like import referring to the
Credit Agreement, shall mean and be a reference to the Credit Agreement as
amended hereby. The execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of any Lender or the Administrative Agent under any of
the Loan Documents. Except as expressly amended herein, all of the provisions of
the Credit Agreement and the other Loan Documents are and shall remain in full
force and effect in accordance with the terms thereof and are hereby in all
respects ratified and confirmed.
SECTION 7. COUNTERPARTS. This Amendment may be executed by one or
more of the parties to this Amendment on any number of separate counterparts,
and all of said counterparts taken together shall be deemed to constitute one
and the same instrument. Delivery of an executed signature page of this
Amendment by facsimile transmission shall be effective as delivery of a manually
executed counterpart hereof. A set of the copies of this Amendment signed by all
the parties shall be lodged with the Borrower and the Administrative Agent.
SECTION 8. GOVERNING LAW. This Amendment and the rights and
obligations of the parties hereto shall be governed by, and construed and
interpreted in accordance with, the law of the State of New York.
<PAGE>
3
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:
FLEET BUSINESS CREDIT CORPORATION
By:
-------------------------------------
Title:
BLACK DIAMOND INTERNATIONAL FUNDING, LTD.
<PAGE>
4
By:
-------------------------------------
Title:
BLACK DIAMOND CLO, 1998-I LTD.
By:
-------------------------------------
Title:
BANKBOSTON, N.A.
By:
-------------------------------------
Title:
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.
<PAGE>
By: Highland Capital Management, L.P.
as Collateral Manager
By:
-------------------------------------
Title:
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>
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>
Exhibit 4.6
THIRD AMENDMENT
THIRD AMENDMENT, dated as of December 31, 1999 (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 Section 7.1(a) 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. AMENDMENT TO SECTION 7.1(a) OF THE CREDIT AGREEMENT.
Section 7.1(a) of the Credit Agreement is hereby amended by deleting the number
"4.40" appearing directly opposite the fourth quarter of fiscal 1999 in the
table therein and substituting in lieu thereof the number "4.70".
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. 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,
<PAGE>
except to the extent such representations and warranties expressly relate to a
specific earlier date, in which case such representations and warranties were
true and correct as of such earlier date.
SECTION 5. PAYMENT OF EXPENSES. The Borrower agrees to pay or
reimburse the Administrative Agent for all of its reasonable out-of-pocket costs
and expenses incurred in connection with this Amendment and any other documents
prepared in connection herewith and the transactions contemplated hereby,
including, without limitation, the reasonable fees and disbursements of counsel
to the Administrative Agent.
SECTION 6. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. On and
after the Amendment Effective Date, each reference in the Credit Agreement to
"this Agreement", "hereunder", "hereof" or words of like import referring to the
Credit Agreement, and each reference in the other Loan Documents to "the Credit
Agreement", "thereunder", "thereof" or words of like import referring to the
Credit Agreement, shall mean and be a reference to the Credit Agreement as
amended hereby. The execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of any Lender or the Administrative Agent under any of
the Loan Documents. Except as expressly amended herein, all of the provisions of
the Credit Agreement and the other Loan Documents are and shall remain in full
force and effect in accordance with the terms thereof and are hereby in all
respects ratified and confirmed.
SECTION 7. COUNTERPARTS. This Amendment may be executed by one or
more of the parties to this Amendment on any number of separate counterparts,
and all of said counterparts taken together shall be deemed to constitute one
and the same instrument. Delivery of an executed signature page of this
Amendment by facsimile transmission shall be effective as delivery of a manually
executed counterpart hereof. A set of the copies of this Amendment signed by all
the parties shall be lodged with the Borrower and the Administrative Agent.
SECTION 8. GOVERNING LAW. This Amendment and the rights and
obligations of the parties hereto shall be governed by, and construed and
interpreted in accordance with, the law of the State of New York.
<PAGE>
3
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:
FLEET BUSINESS CREDIT CORPORATION
By:
-------------------------------------
Title:
BLACK DIAMOND INTERNATIONAL FUNDING, LTD.
By:
-------------------------------------
Title:
BLACK DIAMOND CLO, 1998-I LTD.
<PAGE>
4
By:
-------------------------------------
Title:
BANKBOSTON, N.A.
By:
-------------------------------------
Title:
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.
<PAGE>
By: Highland Capital Management, L.P.
as Collateral Manager
By:
-------------------------------------
Title:
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>
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>
Exhibit 10.13
June 9, 1999
Scott Colwell
Friendly's Ice Cream Corp.
1855 Boston Road
Wilbraham, MA 01095 (Letterhead)
Dear Scott:
This letter is to confirm that effective July 1, 1999 Visual Events, Inc. will
operate under a monthly retainer relationship with Friendly's Ice Cream Corp.
The retainer is $12,000 per month and includes a total of eight (8) travel trips
by Visual Events during a 12 month period (i.e., July, 1999 through June, 2000).
Any additional trips over the eight within the twelve month period will be
invoiced as part of the project. This is a somewhat informal agreement, however,
the following shall be part of the monthly retainer:
MARKETING MANAGEMENT & PLANNING
The monthly retainer includes the following marketing management services as
needed:
- - Strategic planning assistance to support Friendly's internal brand
development
- - Development of turn key local store marketing strategies, programs and
systems
- - New program development and recommendations
- - Project management and proactive development assistance
- - Visual Events office support
CREATIVE DESIGN
The monthly retainer will include the initial creative direction on the
national Friendly's promotional windows for the year (e.g., approximately six
(6) food and three (3) ice cream promotions) and a reasonable amount of test
programs in support of anticipated national promotional campaigns. Design
revisions, mechanicals, illustrations, photography, printing, etc. for the
national windows will be invoiced based on approved budgets. All other
projects will be billed based on submitted budgets. Costs to be invoiced will
include the following:
- - Design - billed via approved budget
- - Design revisions - billed via approved budget
- - Mechanical production - billed via approved budget
- - Printing - billed via approved budget
- - Illustration - billed via approved budget
- - Photography - billed via approved budget
- - Shipping/courier - billed at actual costs
CONFIDENTIALITY
Visual Events has previously signed a confidentiality agreement with Friendly's
Ice Cream Corp.
The retainer will start July 1, 1999 and will continue until canceled by either
party with 90 days written notice. All invoices are to be paid net 30 days.
Approved: /s/Richard L. Couch Approved: /s/Scott Colwell 6/12/99
-------------------- ------------------------
Richard L. Couch Scott Colwell
President Vice President Marketing
<PAGE>
Exhibit 10.14
MEMORANDUM OF AGREEMENT
BETWEEN PAUL J. MCDONALD AND FRIENDLY ICE CREAM CORPORATION
This acknowledges and documents our mutual agreement concerning your
separation from Friendly Ice Cream Corporation ("Friendly's") effective November
30, 1999 ("Separation Date"). This agreement will confirm various matters
concerning your separation and the cessation of your work on November 30, 1999
in anticipation of your retirement on December 1, so that no misunderstanding
exists between you and Friendly's.
SALARY CONTINUATION
Friendly's will continue to pay you semimonthly after you cease work on
November 30, 1999, at your current base rate of pay (including car allowance and
4% Executive Match) until September 30, 2000. The payment you receive will be
subject to appropriate statutory wage deductions and such other deductions
normally made for employees of Friendly's. In addition, any financial obligation
you have to Friendly's will be deducted. Any earned and unused vacation for 1999
will also be paid to you on November 30, 1999.
VARIOUS BENEFIT PLANS
You will be eligible to participate in the short-term disability,
accidental death and dismemberment, long-term disability, pension plan,
Supplemental Executive Retirement Plan (SERP) and such other plans in which you
may currently be enrolled until November 30, 1999, as outlined under the terms
and conditions of these plans.
MEDICAL/DENTAL INSURANCE
Your group medical/dental insurance will be continued in effect
until the earlier of either 1) the date of your retirement or, 2) September 30,
2000. When you retire, you are eligible to participate in the medical insurance
coverage available to retirees who retire from active employment. The premium
for this retiree medical insurance will be paid by Friendly's until September
30, 2000, and by you thereafter. In addition, Friendly's will pay you on
December 15 a lump sum equivalent to the total premiums for group dental
coverage under COBRA for the period from December 1, 1999 through September 30,
2000. The Key Executive Physical Examination Program will be in effect and may
be utilized by you until December 31, 1999 and any related medical fees will be
grossed up for tax purposes for the current program. Any questions about such
insurance or coverage should be referred to Kathy Croteau on extension
<PAGE>
2144.
AIP BONUS PLAN
You will be eligible to participate in the Annual Incentive Plan
("AIP") for 1999 in accordance with the terms of the AIP plan, even though you
will not be actively at work. Any payment made to you under the Plan will be
made at the same time as the payment to all other participants in early 2000,
based on Board approval.
STOCK PLANS
You are covered under the terms and conditions of the stock plans
for which you are eligible. A qualified company representative will explain
these terms to you. Your shares in the MANAGEMENT STOCK PLAN are
nonforfeitable. Your LIMITED STOCK PLAN shares are also nonforfeitable, but
there are current restrictions on disposition or transfer of the shares in
accordance with the terms of the contract between you and Friendly's. These
restrictions will be eliminated effective January 1, 2000.
With respect to the 1997 RESTRICTED STOCK PLAN, either twelve and one
half percent (12-1/2%) or twenty-five percent (25%) of the unvested shares are
scheduled to vest for all participants who are employed at the time of vesting
with the acceptance of the 1999 financial results by the Board in early 2000, in
accordance with the terms of the Plan. Subject to the approval of the Board of
Directors, the shares granted to you will vest at the same time as other
participants, even though you will no longer be actively employed at the time.
Your unvested shares in this Plan will thereafter be forfeited.
LIFE INSURANCE
Life insurance provided originally through Confederation Life Insurance
Company and now by Pacific Mutual Life Insurance Company is unaffected by your
leaving employment because it is your own personal policy. Payments by
Friendly's on your behalf will cease as of September 30, 2000. Questions about
coverage thereafter or about other matters related to this policy should be
referred to Mr. Michael Lucey of the AYCO Corporation at (518)373-7739.
FINANCIAL CONSULTING SERVICES
You will be provided with a financial service consultation session by a
representative of AYCO Corporation. This will include preparation of your 1999
Income Tax returns and a consulting session for the purpose of your estate
planning. The AYCO fees will be grossed up
<PAGE>
Page 2 OF 4
for tax purposes consistent with the current program for eligible officers.
Please contact Gary Ulrich to arrange for these services.
AGREEMENT
In consideration of the terms set forth in this letter, you agree:
1. Without our prior written consent, you will forever refrain from
disclosing or confirming, either directly or indirectly, any
information concerning insurance, loss claims, loss payments, safety
and health conditions, financial condition, strategic planning or other
information relating to Friendly's and its subsidiaries, divisions,
parents and affiliates, their agents, employees, directors and officers
which you learned or became aware of since the inception of your
employment with Friendly's except for information which is generally
known by the public.
2. You will turn over to Friendly's any documents, manuals, plans,
equipment, business papers, computer diskettes or copies of the same
relating to Friendly's and its subsidiaries, divisions, parents and
affiliates, their agents, employees, directors and officers which are
in your control or possession.
3. You will forever refrain from taking any legal action against
Friendly's and its subsidiaries, divisions, parents and affiliates,
their agents, employees, directors and officers, specifically including
the release in full from any and all wage-and-hour, discrimination,
wrongful termination and/or equal employment opportunity claims whether
state, federal or local whether in contract, tort or otherwise and
including without limitation those arising under the Age Discrimination
in Employment Act of 1967, as amended (the "ADEA") and further
including any related claims for attorney's fees.
4. If you breach any of the terms of this Agreement, Friendly's is
entitled to recover from the other all costs, fees, and expenses
(including attorneys fees) -
(i) arising from your breach of this Agreement, and
(ii) necessary to compel the cessation of any further breach by
you of this Agreement. Additionally, any breach of this Agreement by
one party shall relieve the other from any further performance or
obligations under this Agreement.
5. It is also agreed that you will refrain from disclosing to any
third party the contents of this Agreement and keep the terms of this
Agreement confidential unless required by court order or other
governmental authority.
6. You agree to forever refrain from taking any action which brings
discredit upon or disparages Friendly's.
<PAGE>
Page 3 of 4
7. Friendly's shall not contest any claims made by you for
unemployment benefits administered by any governmental agency.
ENTIRE AGREEMENT
This is the entire agreement between us and any prior agreements or
understandings, whether oral or written, are entirely superseded by this
Agreement. We each have voluntarily accepted the terms as sufficient without
reservation. Pursuant to its obligations under the ADEA, Friendly's advises you
to consult with an attorney prior to executing this agreement. You have 21 days
from the date of this agreement in which to consider this agreement. In
addition, you may revoke this agreement for seven days following its execution.
This agreement shall not become effective or enforceable until the seven day
revocation period has expired.
If the above is in agreement with your understanding, please sign and
keep one copy of this document for your records and return one copy to me.
For Friendly Ice Cream Corporation:
By:
------------------------------------------
Garrett J. Ulrich
Vice President, Human Resources
ACCEPTED AND AGREED TO AS OF THIS DAY OF , 1999.
------ -----------------
By:
------------------------------------------
Paul J. McDonald
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 11, 2000 (except for the matters discussed in Note 19 of
Notes to Consolidated Financial Statements, as to which the date is March 23,
2000) for Friendly Ice Cream Corporation and subsidiaries included in this Form
10-K into Friendly Ice Cream Corporation's previously filed Registration
Statement (File Nos. 333-40195, 333-40197 and 333-40199) on Form S-8.
Hartford, Connecticut
March 23, 2000
<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>
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<PERIOD-END> JAN-02-2000
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<RECEIVABLES> 4,114
<ALLOWANCES> 190
<INVENTORY> 11,352
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<PP&E> 556,875
<DEPRECIATION> 267,036
<TOTAL-ASSETS> 356,370
<CURRENT-LIABILITIES> 89,183
<BONDS> 292,432
0
0
<COMMON> 75
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<TOTAL-LIABILITY-AND-EQUITY> 356,370
<SALES> 704,052
<TOTAL-REVENUES> 709,019
<CGS> 206,413
<TOTAL-COSTS> 599,261
<OTHER-EXPENSES> 0
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</TABLE>
