-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JTd+fA0IN7KdhshaxbZcjpKIATgAnwhkNnMIZFmUz09Zx3p6q0N06XXXvypjntes doye4yr9tYw180RqhuGO1w== 0000912057-00-024489.txt : 20000516 0000912057-00-024489.hdr.sgml : 20000516 ACCESSION NUMBER: 0000912057-00-024489 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000402 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRIENDLY ICE CREAM CORP CENTRAL INDEX KEY: 0000039135 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 042053130 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13579 FILM NUMBER: 632744 BUSINESS ADDRESS: STREET 1: 1855 BOSTON ROAD CITY: WILBRAHAM STATE: MA ZIP: 01095 BUSINESS PHONE: 4135432400 MAIL ADDRESS: STREET 1: 1855 BOSTON ROAD CITY: WILBRAHAM STATE: MA ZIP: 01095 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended April 2, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from to COMMISSION FILE NO. 0-3930 FRIENDLY ICE CREAM CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 5812 04-2053130 (State of (Primary Standard Industrial (I.R.S. Employer Incorporation) Classification Code Number) Identification No.)
1855 BOSTON ROAD WILBRAHAM, MASSACHUSETTS 01095 (413) 543-2400 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT APRIL 30, 2000 Common Stock, $.01 par value 7,432,383 Shares
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
April 2, January 2, 2000 2000 ----------- ---------- ASSETS (unaudited) CURRENT ASSETS: Cash and cash equivalents ................................................ $ 11,966 $ 12,062 Restricted cash .......................................................... 1,317 2,066 Accounts receivable, net ................................................. 4,358 3,924 Inventories .............................................................. 14,851 11,352 Deferred income taxes .................................................... 5,657 5,657 Prepaid expenses and other current assets ................................ 2,930 6,298 --------- --------- TOTAL CURRENT ASSETS ......................................................... 41,079 41,359 PROPERTY AND EQUIPMENT, net .................................................. 251,454 289,839 INTANGIBLES AND DEFERRED COSTS, net .......................................... 23,042 23,613 OTHER ASSETS ................................................................. 2,458 1,559 --------- --------- TOTAL ASSETS ................................................................. $ 318,033 $ 356,370 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current maturities of long-term debt ..................................... $ 10,011 $ 13,673 Current maturities of capital lease and finance obligations .............. 1,387 1,688 Accounts payable ......................................................... 25,081 26,073 Accrued salaries and benefits ............................................ 14,038 13,889 Accrued interest payable ................................................. 9,053 4,006 Insurance reserves ....................................................... 9,130 9,748 Restructuring reserve .................................................... 10,840 -- Other accrued expenses ................................................... 14,315 20,106 --------- --------- TOTAL CURRENT LIABILITIES .................................................... 93,855 89,183 --------- --------- DEFERRED INCOME TAXES ........................................................ 12,647 29,747 CAPITAL LEASE AND FINANCE OBLIGATIONS, less current maturities ............... 7,104 7,913 LONG-TERM DEBT, less current maturities ...................................... 287,294 292,432 OTHER LONG-TERM LIABILITIES .................................................. 25,207 26,800 STOCKHOLDERS' EQUITY (DEFICIT): Common stock ............................................................. 75 75 Preferred stock .......................................................... -- -- Additional paid-in capital ............................................... 138,600 138,459 Accumulated deficit ...................................................... (246,749) (228,239) --------- --------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) ......................................... (108,074) (89,705) --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ......................... $ 318,033 $ 356,370 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 1 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data)
FOR THE THREE MONTHS ENDED April 2, March 28, 2000 1999 ---- ---- REVENUES ................................................................. $ 149,375 $ 145,683 COSTS AND EXPENSES: Cost of sales ........................................................ 44,858 44,188 Labor and benefits ................................................... 48,176 50,364 Operating expenses ................................................... 36,482 33,384 General and administrative expenses .................................. 11,468 11,925 Restructuring costs .................................................. 12,057 -- Write-downs of property and equipment ................................ 17,672 286 Depreciation and amortization ........................................ 8,421 8,229 Gain on sales of restaurant operations and properties .................... (2,087) (256) --------- --------- OPERATING LOSS ........................................................... (27,672) (2,437) Interest expense, net .................................................... 7,938 8,335 Recovery of write-down of joint venture .................................. -- (250) --------- --------- LOSS BEFORE BENEFIT FROM INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ........................................... (35,610) (10,522) Benefit from income taxes ................................................ 17,100 4,314 --------- --------- LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ............................................................. (18,510) (6,208) Cumulative effect of change in accounting principle, net of income tax benefit of $222 .................................................... -- (319) --------- --------- NET LOSS ................................................................. $ (18,510) $ (6,527) ========= ========= BASIC AND DILUTED NET LOSS PER SHARE: Loss before cumulative effect of change in accounting principle....... $ (2.48) $ (0.83) Cumulative effect of change in accounting principle, net of income tax benefit ................................................... -- (.04) --------- --------- Net loss ............................................................. $ (2.48) $ (0.87) ========= ========= WEIGHTED AVERAGE BASIC AND DILUTED SHARES ................................ 7,471 7,482 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 2 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
FOR THE THREE MONTHS ENDED April 2, March 28, 2000 1999 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ....................................................................... $(18,510) $ (6,527) Adjustments to reconcile net loss to net cash used in operating activities: Cumulative effect of change in accounting principle ......................... -- 319 Stock compensation expense .................................................. 141 162 Depreciation and amortization ............................................... 8,421 8,229 Write-downs of property and equipment ....................................... 17,672 286 Deferred income tax benefit ................................................. (17,100) (4,314) (Gain) loss on asset retirements and sales .................................. (3,344) 97 Changes in operating assets and liabilities: Accounts receivable ...................................................... (434) 1,338 Inventories .............................................................. (3,499) (1,540) Other assets ............................................................. 3,795 (1,407) Accounts payable ......................................................... (992) 1,389 Accrued expenses and other long-term liabilities ......................... 8,034 (648) -------- -------- NET CASH USED IN OPERATING ACTIVITIES .............................................. (5,816) (2,616) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ............................................ (2,227) (11,349) Proceeds from sales of property and equipment .................................. 17,199 1,691 Proceeds from sale of joint venture ............................................ -- 1,150 -------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ................................ 14,972 (8,508) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings ....................................................... 33,000 26,000 Repayments of debt ............................................................. (41,801) (14,003) Repayments of capital lease and finance obligations ............................ (451) (414) -------- -------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ................................ (9,252) 11,583 -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH ............................................ -- 1 -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............................... (96) 460 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..................................... 12,062 11,091 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD ........................................... $ 11,966 $ 11,551 ======== ======== SUPPLEMENTAL DISCLOSURES: Cash paid (refunded) during the period for: Interest ....................................................................... $ 2,609 $ 3,213 Income taxes ................................................................... (21) 2 Capital lease obligations terminated .............................................. 659 -- Notes received from sales of property and equipment ............................... 577 --
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) (In thousands)
FOR THE THREE MONTHS ENDED April 2, March 28, 2000 1999 ---- ---- NET LOSS .......................................... $(18,510) $ (6,527) OTHER COMPREHENSIVE INCOME, NET OF TAX: Currency translation effects .................. -- 1 -------- -------- OTHER COMPREHENSIVE INCOME ........................ -- 1 -------- -------- COMPREHENSIVE LOSS ................................ $(18,510) $ (6,526) ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION INTERIM FINANCIAL INFORMATION - The accompanying condensed consolidated financial statements as of April 2, 2000 and for the first quarter ended April 2, 2000 and March 28, 1999 are unaudited, but, in the opinion of management, include all adjustments which are necessary for a fair presentation of the consolidated financial position, results of operations, cash flows and comprehensive loss of Friendly Ice Cream Corporation ("FICC") and subsidiaries (unless the context indicates otherwise, collectively the "Company"). Such adjustments consist solely of normal recurring accruals. Operating results for the three month period ended April 2, 2000 and March 28, 1999 are not necessarily indicative of the results that may be expected for the entire year due, in part, to the seasonality of the Company's business. Historically, higher revenues and operating income have been experienced during the second and third fiscal quarters. The Company's Consolidated Financial Statements, including the notes thereto, which are contained in the 1999 Annual Report on Form 10-K should be read in conjunction with these Condensed Consolidated Financial Statements. INVENTORIES - Inventories are stated at the lower of first-in, first-out cost or market. Inventories as of April 2, 2000 and January 2, 2000 were as follows (in thousands):
April 2, January 2, 2000 2000 -------- ---------- Raw materials ........................... $ 546 $ 354 Goods in process ........................ 297 126 Finished goods .......................... 14,008 10,872 ------- ------- Total ................................... $14,851 $11,352 ======= =======
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform with current year presentation. 2. LOSS PER SHARE Basic net loss per share is calculated by dividing loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated by dividing earnings available to common stockholders by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Common stock equivalents are dilutive stock options and warrants that are assumed exercised for calculation purposes. The number of common stock equivalents which could dilute basic earnings per share in the future, that were not included in the computation of diluted loss per share because to do so would have been antidilutive was 2,027 for the three months ended March 28, 1999. There were no common stock equivalents which could dilute earnings per share in the future, for the three months ended April 2, 2000. 5 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 3. RESTAURANT PREOPENING COSTS In April 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 requires entities to expense as incurred all start-up and preopening costs that are not otherwise capitalizable as long-lived assets and is effective for fiscal years beginning after December 15, 1998. In accordance with this statement, on December 28, 1998, the Company expensed previously deferred restaurant preopening costs of approximately $541,000. This transaction has been reflected as a cumulative effect of a change in accounting principle of $319,000, net of the income tax benefit of $222,000, in the accompanying condensed consolidated financial statements for the three months ended March 28, 1999. 4. SEGMENT REPORTING Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision-maker is the Chairman of the Board and Chief Executive Officer of the Company. The Company's operating segments include restaurant, foodservice, franchise and international operations. The revenues from these segments include both sales to unaffiliated customers and intersegment sales, which generally are accounted for on a basis consistent with sales to unaffiliated customers. Intersegment sales and other intersegment transactions have been eliminated in the accompanying consolidated financial statements. The Company's restaurants target families with children and adults who desire a reasonably-priced meal in a full-service setting. The Company's menu offers a broad selection of freshly-prepared foods which appeal to customers throughout all dayparts. The menu currently features over 100 items comprised of a broad selection of breakfast, lunch, dinner and afternoon and evening snack items. Foodservice operations manufactures frozen dessert products and distributes such manufactured products and purchased finished goods to the Company's restaurants and franchised operations. Additionally, it sells frozen dessert products to distributors and retail and institutional locations. The Company's franchise segment includes a royalty based on franchise restaurant revenue. In addition, the Company receives rental income from various franchised restaurants. The Company's international business primarily consisted of a license agreement with several companies in the United Kingdom to distribute the Company's frozen desserts and a 50% joint venture in Shanghai, China which involved the manufacture and distribution of frozen desserts on a limited basis. At December 27, 1998, these operations had been discontinued. The Company does not allocate general and administrative expenses associated with its headquarters operations to any business segment. These costs include general and administrative expenses of the following functions: legal, accounting, personnel not directly related to a segment, information systems and other headquarters activities. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies except that the financial results for the foodservice operating segment, prior to intersegment eliminations, have been prepared using a management approach, which is consistent with the basis and manner in which the Company's management internally reviews financial information for the purpose of assisting in making internal operating decisions. The Company evaluates performance based on stand-alone operating segment income (loss) before income taxes and generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. 6 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 4. SEGMENT REPORTING (CONTINUED) EBITDA represents net loss before (i) cumulative effect of change in accounting principle, net of income taxes, (ii) benefit from income taxes, (iii) recovery of write-down of joint venture, (iv) interest expense, net, (v) depreciation and amortization and (vi) write-downs and all other non-cash items plus cash distributions from unconsolidated subsidiaries. The Company has included information concerning EBITDA in this Form 10-Q because it believes that such information is used by certain investors as one measure of a company's historical ability to service debt. EBITDA should not be considered as an alternative to, or more meaningful than, earnings (loss) from operations or other traditional indications of a company's operating performance.
FOR THE THREE MONTHS ENDED APRIL 2, MARCH 28, 2000 1999 ---- ---- (in thousands) Revenues: Restaurant .................................................. $ 125,423 $ 130,228 Foodservice (retail and institutional) ...................... 60,188 52,591 Franchise ................................................... 2,277 1,064 International ............................................... -- 23 --------- --------- Total ..................................................... $ 187,888 $ 183,906 ========= ========= Intersegment revenues: Restaurant .................................................. $ -- $ -- Foodservice (retail and institutional) ...................... (38,513) (38,223) Franchise ................................................... -- -- International ............................................... -- -- --------- --------- Total ..................................................... $ (38,513) $ (38,223) ========= ========= External revenues: Restaurant .................................................. $ 125,423 $ 130,228 Foodservice (retail and institutional) ...................... 21,675 14,368 Franchise ................................................... 2,277 1,064 International ............................................... -- 23 --------- --------- Total ..................................................... $ 149,375 $ 145,683 ========= =========
7 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 4. SEGMENT REPORTING (CONTINUED)
FOR THE THREE MONTHS ENDED April 2, March 28, 2000 1999 -------- --------- (in thousands) EBITDA: Restaurant ........................................... $ (3,039) $ 8,684 Foodservice (retail and institutional) ............... 5,509 2,732 Franchise ............................................ 1,023 273 International ........................................ (1) (57) Corporate ............................................ (4,930) (5,392) --------- --------- Total .............................................. $ (1,438) $ 6,240 ========== ========= Interest expense, net ..................................... $ 7,938 $ 8,335 ========= ========== Recovery of write-down of joint venture ................... $ -- $ 250 ========= ========== (Loss) income before income taxes and cumulative effect of change in accounting principle: Restaurant* .......................................... $ (26,746) $ 2,071 Foodservice (retail and institutional) ............... 4,650 1,868 Franchise ............................................ 940 119 International ........................................ (1) 193 Corporate ............................................ (14,453) (14,773) --------- --------- Total .............................................. $ (35,610) $ (10,522) ========= ========= Depreciation and amortization: Restaurant ........................................... $ 6,035 $ 6,327 Foodservice (retail and institutional) ............... 859 864 Franchise ............................................ 83 154 Corporate ............................................ 1,444 884 --------- --------- Total .............................................. $ 8,421 $ 8,229 ========= ========= Identifiable assets: ...................................... April 2, January 2, 2000 2000 ---- ---- Restaurant ........................................... 225,275 265,062 Foodservice (retail and institutional) ............... 35,230 29,625 Franchise ............................................ 4,036 3,935 International ........................................ -- 28 Corporate ............................................ 53,492 57,720 --------- --------- Total .............................................. $ 318,033 $ 356,370 ========= ========== Capital expenditures: Restaurant ........................................... $ 1,007 $ 9,546 Foodservice (retail and institutional) ............... 889 982 Corporate ............................................ 331 821 --------- --------- Total .............................................. $ 2,227 $ 11,349 ========= ==========
* Includes restructuring costs of $12.1 million and the write-downs of property and equipment of $17.7 million recorded during the three months ended April 2, 2000. 8 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 5. NEW ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. The SAB specifically sets forth criteria which must be met in order for revenue to be recognized. The Company adopted SAB No. 101 on January 3, 2000. The adoption of SAB No. 101 did not have an effect on the Company's consolidated financial position or results of operations as the Company's current revenue recognition policies comply with the provisions of SAB No. 101. In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that each derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the statement of operations, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 cannot be applied retroactively. SFAS No. 133 would have been effective for fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." Under the provisions of SFAS No. 137, SFAS No. 133 shall be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. Management has not yet quantified the impact of adopting SFAS No. 133 on the Company's financial statements and has not determined the timing or method of the Company's adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings and other comprehensive income. 9 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 6. RESTRUCTURING PLAN In March 2000, the Company's Board of Directors approved a restructuring plan that provided for the immediate closing of 81 restaurants at the end of March 2000 and the disposition of an additional 70 restaurants over the next twenty-four months. The 70 locations will remain in operation until they are sold, subleased or closed prior to March 2002. The restaurants which were closed were generally lower sales volume units operating in markets in which management believes the Company has a strong market penetration. The larger units in these markets will continue operating. In connection with the restructuring plan, the Company eliminated approximately 151 management/administrative positions in the field organization and at corporate headquarters. As a result of this plan, the Company reported a pre-tax restructuring charge of approximately $12.1 million for severance pay, rent, utilities and real estate taxes, demarking, lease termination costs and certain other costs associated with the closing of the locations along with a pre-tax write-down of property and equipment of approximately $17.0 million in the first quarter ended April 2, 2000. Future annual savings associated with the reduction in force are estimated by management to be $8.0 million. In connection with this restructuring plan, the Company's credit facility was amended on March 23, 2000. The consolidated net worth covenant was adjusted primarily to reflect the write-down of property and equipment and restructuring charges associated with the restructuring plan and interest rates on borrowings were increased. The per annum interest rates on the term loans, revolving credit facility and the letter of credit facility were increased by 0.25% as a result of this amendment. The Company believes that the combination of the funds anticipated to be generated from operating activities and borrowing availability under the credit facility will be sufficient to meet the Company's anticipated operating requirements, capital requirements and obligations associated with the restructuring. The following represents the reserve and related costs associated with the restructuring (in thousands):
Accrued as of Expense Costs Paid April 2, 2000 --------- ------------ --------------- Severance pay ......................... $ 1,503 $ (6) $ 1,497 Rent .................................. 5,490 -- 5,490 Utilities and real estate taxes ....... 1,632 -- 1,632 Demarking ............................. 760 (92) 668 Lease termination costs ............... 718 -- 718 Environmental costs ................... 404 -- 404 Inventory ............................. 111 -- 111 Outplacement services ................. 160 -- 160 Other ................................. 162 -- 162 ------- ------- ------- Total .......................... $10,940 $ (98) $10,842 ======= ======= =======
The write-down of property and equipment consisted of $7.8 million for the 81 locations closed at the end of March and $9.2 million for the 70 locations which will be disposed of over the next 24 months. At April 2, 2000, the carrying value of these 151 properties to be disposed of was $18.9 million and is reflected in the condensed consolidated balance sheets as property and equipment, net. 10 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 7. SALE OF RESTAURANT OPERATIONS AND PROPERTIES TO FRANCHISEES On January 19, 2000, the Company entered into an agreement granting Kessler Family LLC ("Kessler") non-exclusive rights to operate and develop Friendly's full-service restaurants in the franchising region of Rochester, Buffalo and Syracuse, New York (the "Kessler Agreement"). Pursuant to the Kessler Agreement, Kessler purchased certain assets and rights in 29 existing Friendly's restaurants and committed to open an additional 15 restaurants over the next seven years. Gross proceeds from the sale were approximately $13,300,000 of which $735,000 was for franchise fees for the initial 29 restaurants. The $735,000 was recorded as revenue in the first quarter ending April 2, 2000. The Company recognized a gain of approximately $1,400,000 related to the sale of the assets for the 29 existing franchised locations in the first quarter ending April 2, 2000. The Company also sold certain assets and rights in six other restaurants to two additional franchisees resulting in a gain of $687,000. 8. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION FICC's obligation related to the $200 million Senior Notes is guaranteed fully and unconditionally by one of FICC's wholly-owned subsidiaries. There are no restrictions on FICC's ability to obtain dividends or other distributions of funds from this subsidiary, except those imposed by applicable law. The following supplemental financial information sets forth, on a condensed consolidating basis, balance sheets, statements of operations and statements of cash flows for Friendly Ice Cream Corporation (the "Parent Company"), Friendly's Restaurants Franchise, Inc. (the "Guarantor Subsidiary") and Friendly's International, Inc., Friendly Holding (UK) Limited, Friendly Ice Cream (UK) Limited and Restaurant Insurance Corporation (collectively, the "Non-guarantor Subsidiaries"). Separate complete financial statements and other disclosures of the Guarantor Subsidiary as of April 2, 2000 and March 28, 1999, and for the periods ended April 2, 2000 and March 28, 1999, are not presented because management has determined that such information is not material to investors. Investments in subsidiaries are accounted for by the Parent Company on the equity method for purposes of the supplemental consolidating presentation. Earnings of the subsidiaries are, therefore, reflected in the Parent Company's investment accounts and earnings. The principal elimination entries eliminate the Parent Company's investments in subsidiaries and intercompany balances and transactions. 11 SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET AS OF APRIL 2, 2000 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated --------- ---------- ------------- ------------ ------------ Assets Current assets: Cash and cash equivalents ...................... $ 9,211 $ 50 $ 2,705 $ -- $ 11,966 Restricted cash ................................ -- -- 1,317 -- 1,317 Accounts receivable, net ....................... 3,950 408 -- -- 4,358 Inventories .................................... 14,851 -- -- -- 14,851 Deferred income taxes .......................... 5,471 12 -- 174 5,657 Prepaid expenses and other current assets ....................................... 7,646 604 4,095 (9,415) 2,930 --------- --------- --------- --------- --------- Total current assets ............................... 41,129 1,074 8,117 (9,241) 41,079 Deferred income taxes .............................. -- 903 1,333 (2,236) -- Property and equipment, net ........................ 251,454 -- -- -- 251,454 Intangibles and deferred costs, net ................ 23,042 -- -- -- 23,042 Investments in subsidiaries ........................ 2,793 -- -- (2,793) -- Other assets ....................................... 1,543 3,880 5,729 (8,694) 2,458 --------- --------- --------- --------- --------- Total assets ....................................... $ 319,961 $ 5,857 $ 15,179 $ (22,964) $ 318,033 ========= ========= ========= ========= ========= Liabilities and Stockholders' Equity (Deficit) Current liabilities: Current maturities of long-term obligations .................................. $ 15,398 $ -- $ -- $ (4,000) $ 11,398 Deferred income taxes .......................... -- -- 1 (1) -- Accounts payable ............................... 25,081 -- -- -- 25,081 Accrued expenses ............................... 53,485 678 8,308 (5,095) 57,376 --------- --------- --------- --------- --------- Total current liabilities .......................... 93,964 678 8,309 (9,096) 93,855 Deferred income taxes .............................. 14,708 -- -- (2,061) 12,647 Long-term obligations, less current maturities ......................................... 299,212 -- -- (4,814) 294,398 Other long-term liabilities ........................ 20,151 2,612 6,644 (4,200) 25,207 Stockholders' equity (deficit) ..................... (108,074) 2,567 226 (2,793) (108,074) --------- --------- --------- --------- --------- Total liabilities and stockholders' equity (deficit) ................................. $ 319,961 $ 5,857 $ 15,179 $ (22,964) $ 318,033 ========= ========= ========= ========= =========
12 SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 2, 2000 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated -------- ---------- ------------- ------------ ------------ Revenues ......................................... $147,501 $1,874 $ -- $ -- $149,375 Costs and expenses: Cost of sales ................................ 44,858 -- -- -- 44,858 Labor and benefits ........................... 48,176 -- -- -- 48,176 Operating expenses and write-downs of property and equipment ..................... 54,214 -- (60) -- 54,154 General and administrative expenses .......... 11,042 426 -- -- 11,468 Restructuring costs .......................... 12,057 -- -- -- 12,057 Depreciation and amortization ................ 8,421 -- -- -- 8,421 Gain on sales of restaurant operations and properties ..................................... (2,087) -- -- -- (2,087) Interest expense (income) ........................ 8,110 -- (172) -- 7,938 ------- --------- -------- ------- -------- (Loss) income before benefit from (provision for) income taxes and equity in net income of consolidated subsidiaries ........ (37,290) 1,448 232 -- (35,610) Benefit from (provision for) income taxes ........ 17,774 (593) (81) -- 17,100 --------- --------- -------- ------- --------- (Loss) income before equity in net income of consolidated subsidiaries ................... (19,516) 855 151 -- (18,510) Equity in net income of consolidated subsidiaries ................................... 1,006 -- -- (1,006) -- --------- --------- -------- -------- --------- Net (loss) income ................................ $(18,510) $855 $151 $(1,006) $(18,510) ========= ========= ======== ======== =========
13 SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED APRIL 2, 2000 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ---------- ----------- ------------- ------------ ------------ Net cash (used in) provided by operating activities ........................... $(6,183) $36 $331 $- $(5,816) -------- ---- ------- -- -------- Cash flows from investing activities: Purchases of property and equipment . (2,227) -- -- -- (2,227) Proceeds from sales of property and equipment ......................... 17,199 -- -- -- 17,199 -------- ------- -------- ------ -------- Net cash provided by investing activities 14,972 -- -- -- 14,972 -------- ------- -------- ------ -------- Cash flows from financing activities: Proceeds from borrowings .............. 33,000 -- -- -- 33,000 Repayments of obligations ............. (42,252) -- -- -- (42,252) -------- ------- -------- ------ -------- Net cash used in financing activities .... (9,252) -- -- -- (9,252) -------- ------- -------- ------- -------- Net (decrease) increase in cash and cash equivalents ............................ (463) 36 331 -- (96) Cash and cash equivalents, beginning of period ................................. 9,674 14 2,374 -- 12,062 -------- ------- ------- ------- -------- Cash and cash equivalents, end of period . $9,211 $50 $2,705 $ -- $11,966 ======== ======= ======= ======= ======== Supplemental disclosures: Interest paid (received) .............. $2,966 $ -- $(357) $ -- $2,609 Income taxes (received) paid .......... (928) 823 84 -- (21) Capital lease obligations terminated .. 659 -- -- -- 659 Notes received from sales of property and equipment ....................... 577 -- -- -- 577
14 SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET AS OF JANUARY 2, 2000 (IN THOUSANDS)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated --------- ------------ ------------- ------------ ----------- Assets Current assets: Cash and cash equivalents ................ $9,674 $14 $2,374 $-- $12,062 Restricted cash .......................... -- -- 2,066 -- 2,066 Accounts receivable, net ................. 3,678 256 -- (10) 3,924 Inventories .............................. 11,352 -- -- -- 11,352 Deferred income taxes .................... 5,471 12 -- 174 5,657 Prepaid expenses and other current assets ................................. 9,085 834 6,455 (10,076) 6,298 ----- --- ----- -------- ----- Total current assets ........................ 39,260 1,116 10,895 (9,912) 41,359 Deferred income taxes ....................... -- 903 1,333 (2,236) -- Property and equipment, net ................. 289,839 -- -- -- 289,839 Intangible assets and deferred costs, net ... 23,613 -- -- -- 23,613 Investments in subsidiaries ................. 1,788 -- -- (1,788) -- Other assets ................................ 644 3,100 5,729 (7,914) 1,559 ------- ----- ------ ------- ----- Total assets ................................ $355,144 $5,119 $17,957 $(21,850) $356,370 ======== ====== ======= ========= ======== Liabilities and Stockholders' Equity (Deficit) Current liabilities: Current maturities of long-term obligations ............................. $19,361 $ -- $ -- $(4,000) $15,361 Accounts payable ......................... 26,073 -- -- -- 26,073 Deferred income taxes .................... -- -- 1 (1) -- Accrued expenses ......................... 45,037 963 10,508 (8,759) 47,749 ------ --- ------ ------- ------ Total current liabilities ................... 90,471 963 10,509 (12,760) 89,183 Deferred income taxes ....................... 31,808 -- -- (2,061) 29,747 Long-term obligations, less current maturities ............................... 305,159 -- -- (4,814) 300,345 Other liabilities ........................... 17,411 2,444 7,372 (427) 26,800 Stockholders' equity (deficit) .............. (89,705) 1,712 76 (1,788) (89,705) -------- ----- ------ ------- -------- Total liabilities and stockholders' equity (deficit) ................................ $355,144 $5,119 $17,957 $(21,850) $356,370 ======== ====== ======= ========= ========
15 SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 28, 1999 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated -------- ---------- -------------- ------------ ------------ Revenues ........................................ $ 145,164 $ 495 $ 24 $-- $ 145,683 Costs and expenses: Cost of sales ............................... 44,171 -- 17 -- 44,188 Labor and benefits .......................... 50,364 -- -- -- 50,364 Operating expenses and write-downs of property and equipment ...................... 33,726 -- (56) -- 33,670 General and administrative expenses ......... 11,499 426 -- -- 11,925 Depreciation and amortization ............... 8,229 -- -- -- 8,229 Gain on sales of restaurant operations .......... (256) -- -- -- (256) Interest expense (income) ....................... 8,515 -- (180) -- 8,335 Recovery of write-down of joint venture ......... (250) -- -- -- (250) --------- ----- ----- --- -------- (Loss) income before benefit from (provision for) income taxes, cumulative effect of change in accounting principle and equity in net income of consolidated subsidiaries ................. . (10,834) 69 243 -- (10,522) Benefit from (provision for) income taxes ....... 4,424 (28) (82) -- 4,314 --------- ----- ----- --- -------- (Loss) income before cumulative effect of change in accounting principle and equity in net income of consolidated subsidiaries ....... (6,410) 41 161 -- (6,208) Cumulative effect of change in accounting principle ..................................... (319) -- -- -- (319) --------- ----- ----- --- ------- (Loss) income before equity in net income of consolidated subsidiaries ..................... (6,729) 41 161 -- (6,527) Equity in net income of consolidated subsidiaries .................................. 202 -- -- (202) -- --------- ----- ----- ----- ------- Net (loss) income ............................... $ (6,527) $ 41 $ 161 $(202) $(6,527) ========= ===== ===== ===== ========
16 SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 28, 1999 (Unaudited) (In thousands)
Parent Guarantor Non- guarantor Company Subsidiary Subsidiaries Eliminations Consolidated -------- ---------- -------------- ------------ ------------ Net cash (used in) provided by operating activities ............................................... $ (2,927) $268 $ 43 $ -- $ (2,616) -------- ---- ------- ---- -------- Cash flows from investing activities: Purchases of property and equipment ................... (11,349) -- -- -- (11,349) Proceeds from sales of property and equipment ............................................. 1,691 -- -- -- 1,691 Return of advance from joint venture .................. 1,150 -- -- -- 1,150 -------- ---- ------- ---- -------- Net cash used in investing activities .................... (8,508) -- -- -- (8,508) -------- ---- ------- ---- -------- Cash flows from financing activities: Proceeds from borrowings .............................. 26,000 -- -- -- 26,000 Repayments of obligations ............................. (14,417) -- -- -- (14,417) -------- ---- ------- ---- -------- Net cash provided by financing activities ............................................. 11,583 -- -- -- 11,583 -------- ---- ------- ---- -------- Effect of exchange rate changes on cash .................. -- -- 1 -- 1 -------- ---- ------- ---- -------- Net increase in cash and cash equivalents ....................................... 148 268 44 -- 460 Cash and cash equivalents, beginning of period ................................................. 9,180 53 1,858 -- 11,091 -------- ---- ------- ---- -------- Cash and cash equivalents, end of period .......................................... $ 9,328 $321 $ 1,902 $ -- $ 11,551 ======== ==== ======= ==== ======== Supplemental disclosures: Interest paid (received) ............................. $ 3,393 $ -- $ (180) $ -- $ 3,213 Income taxes (received) paid ......................... (87) 1 88 -- 2
17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE HEREIN. SAFE HARBOR STATEMENT Statements contained herein that are not historical facts, constitute "forward looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. All forward looking statements are subject to risks and uncertainties which could cause results to differ materially from those anticipated. These factors include the Company's highly competitive business environment, exposure to commodity prices, risks associated with the foodservice industry, the ability to retain and attract new employees, government regulations, the Company's high geographic concentration in the Northeast and its attendant weather patterns, conditions needed to meet reimaging and new opening and franchising targets and costs associated with improved service and other initiatives. OVERVIEW As of April 2, 2000, the Company owns and operates 502 restaurants, franchises 100 restaurants and nine cafes and distributes a full line of frozen dessert products. These products are distributed to Friendly's restaurants and through more than 3,500 supermarkets and other retail locations in 15 states. The restaurants offer a wide variety of reasonably priced breakfast, lunch and dinner menu items as well as the frozen dessert products. 18 RESULTS OF OPERATIONS The operating results of the Company expressed as a percentage of total revenues are set forth below: (Unaudited)
FOR THE THREE MONTHS ENDED April 2, March 28, 2000 1999 ---- ---- Revenues: Restaurant ......................................... 84.0% 89.4% Foodservice (retail and institutional) ............. 14.5 9.9 Franchise .......................................... 1.5 0.7 ----- ----- Total revenues ......................................... 100.0 100.0 ----- ----- Costs and expenses: Cost of sales ...................................... 30.0 30.3 Labor and benefits ................................. 32.3 34.6 Operating expenses ................................. 24.4 22.9 General and administrative expenses ................ 7.8 8.2 Restructuring costs ................................ 8.1 -- Write-downs of property and equipment .............. 11.8 0.2 Depreciation and amortization ...................... 5.6 5.7 Gain on sales of restaurant operations and properties .. (1.4) (0.2) ----- ----- Operating loss ......................................... (18.6) (1.7) Interest expense, net .................................. 5.3 5.7 Recovery of write-down of joint venture ................ -- (0.2) ----- ----- Loss before benefit from income taxes and cumulative effect of change in accounting principle .............. (23.9) (7.2) Benefit from income taxes .............................. 11.4 3.0 ----- ----- Loss before cumulative effect of change in accounting principle ............................................. (12.5) (4.2) Cumulative effect of change in accounting principle, net of income tax benefit ................................. -- (0.2) ----- ----- Net loss ............................................... (12.5)% (4.4)% ===== =====
19 REVENUES: Total revenues increased $3.7 million, or 2.5%, to $149.4 million for the first quarter ended April 2, 2000 from $145.7 million for the same quarter in 1999. Restaurant revenues decreased $4.8 million, or 3.7%, to $125.4 million for the first quarter of 2000 from $130.2 million for the same quarter in 1999. Comparable restaurant revenues increased 1.5%. The decrease in restaurant revenues was negatively impacted by $6.6 million due to the refranchising of 40 restaurants over the past 12 months. Partially offsetting this decrease was the increase in restaurant revenue of $2.6 million for new restaurants open less than one year. Foodservice (retail and institutional) and other revenues increased by $7.3 million, or 50.7%, to $21.7 million for the first quarter of 2000 from $14.4 million for the same quarter in 1999. The increase was partially due to the increase in the number of franchised units. The Company's Foodservice division sells a variety of products to the Company's franchisees. In addition, the increase was also impacted by the increased retail sales in the Northeast and Mid-Atlantic markets. Franchise revenues increased $1.2 million, or 109%, to $2.3 million for the three months ended April 2, 2000 from $1.1 million for the three months ended March 28, 1999. The increase is primarily due to the fact that there were 109 franchise units open at the end of the first quarter ended April 2, 2000 compared to 54 franchise units open at the end of the first quarter ended March 28, 1999. COST OF SALES: Cost of sales increased $0.7 million, or 1.6%, to $44.9 million for the first quarter ended April 2, 2000 from $44.2 million for the same quarter in 1999. Cost of sales as a percentage of total revenues decreased to 30.0% for the first quarter of 2000 from 30.3% for the same quarter in 1999. The lower food cost as a percentage of total revenue was primarily due to a decrease in cream prices, the principal ingredient in ice cream. The cream benefit was partially offset by an increase in non-restaurant sales, which carry a higher food cost compared to restaurant sales. LABOR AND BENEFITS: Labor and benefits decreased $2.2 million, or 4.4%, to $48.2 million for the first quarter ended April 2, 2000 from $50.4 million for the same quarter in 1999. Labor and benefits as a percentage of total revenues decreased to 32.3% for the first quarter of 2000 from 34.6% for the same period in 1999. The lower labor cost as a percentage of total revenue is primarily the result of revenue increases derived from additional franchised locations and higher retail sales both of which have no associated restaurant labor. OPERATING EXPENSES: Operating expenses increased $3.1 million, or 9.2%, to $36.5 million for the first quarter ended April 2, 2000 from $33.4 million for the same quarter in 1999. Operating expenses as a percentage of total revenues were 24.4% and 22.9% for the first quarters ended April 2, 2000 and March 28, 1999, respectively. The increase was primarily due to an increase in advertising and promotion expenses associated with the Company's retail business and to a lesser extent the higher supply and rental expense associated with the Company's soft serve ice cream products introduced in May of 1999. GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were $11.5 million and $11.9 million for the first quarters ended April 2, 2000 and March 28, 1999, respectively. General and administrative expenses as a percentage of total revenues decreased to 7.8% in the first quarter of 2000 from 8.2% for the same period in 1999. The decrease is primarily the result of positions that were not replaced due to restaurant closings over the past 12 months, the Company's plan to close 151 restaurants and the March 2000 reorganization of its restaurant field and headquarters organizations. EBITDA: As a result of the above, EBITDA (EBITDA represents net loss before (i) cumulative effect of change in accounting principle, net of income taxes, (ii) benefit from income taxes, (iii) recovery of write-down of joint venture, (iv) interest expense, net, (v) depreciation and amortization and (vi) write-downs and all other non-cash items plus cash distributions from unconsolidated subsidiaries) decreased $7.6 million, or 123%, to $(1.4) million for the first quarter ended April 2, 2000 from $6.2 million for the same quarter in 1999. EBITDA as a percentage of total revenues was (0.9)% and 4.2% for the first quarters of 2000 and 1999, respectively. The decrease was primarily the result of the restructuring costs of $12.1 million recorded during the first quarter ended April 2, 2000 partially offset by the impact of the increased gains on the sales of restaurant operations and properties. The Company has included information concerning EBITDA in this Form 10-Q because it believes that such information is used by certain investors as one measure of a company's historical ability to service debt. EBITDA should not be considered as an alternative to, or more meaningful than, earnings (loss) from operations or other traditional indications of a company's operating performance. 20 RESTRUCTURING COSTS Restructuring costs were $12.1 million for the first quarter ended April 2, 2000 as a result of the costs associated with the Company's decision to reorganize its restaurant field and headquarters organizations in conjunction with the closing of 81 under-performing restaurants and the planned closing of an additional 70 restaurants over the next 24 months. Included in these costs are severance, rent on closed units until lease termination, utilities and real estate taxes, demarking, lease termination, environmental and other miscellaneous costs. WRITE-DOWNS OF PROPERTY AND EQUIPMENT: Write-downs of property and equipment were $17.7 million and $0.3 million for the first quarters ended April 2, 2000 and March 28, 1999, respectively. The increase in write-downs is primarily the result of the non-cash write-down of the 81 under-performing restaurants which were closed at the end of March and the non-cash write-down of an additional 70 restaurants which will be closed over the next 24 months to their estimated net realizable value. DEPRECIATION AND AMORTIZATION: Depreciation and amortization increased $0.2 million, or 2.4%, to $8.4 million for the first quarter ended April 2, 2000 from $8.2 million for the same quarter in 1999. Depreciation and amortization as a percentage of total revenues was 5.6% for the first quarter ended April 2, 2000 compared to 5.7% for the first quarter ended March 28, 1999. GAIN ON SALES OF RESTAURANT OPERATIONS AND PROPERTIES: On January 19, 2000, the Company entered into an agreement granting Kessler Family LLC ("Kessler") non-exclusive rights to operate and develop Friendly's full-service restaurants in the franchising region of Rochester, Buffalo and Syracuse, New York (the "Kessler Agreement"). Pursuant to the Kessler Agreement, Kessler purchased certain assets and rights in 29 existing Friendly's restaurants and committed to open an additional 15 restaurants over the next seven years. Gross proceeds from the sale were approximately $13,300,000 of which $735,000 was for franchise fees for the initial 29 restaurants. The $735,000 was recorded as revenue in the first quarter ending April 2, 2000. The Company recognized a gain of approximately $1,400,000 related to the sale of the assets for the 29 existing franchised locations in the first quarter ending April 2, 2000. The Company also sold certain assets and rights in six other restaurants to two additional franchisees resulting in a gain of $687,000. INTEREST EXPENSE, NET: Interest expense, net of capitalized interest and interest income, decreased by $0.4 million, or 4.8%, to $7.9 million for the first quarter ended April 2, 2000 from $8.3 million for the same quarter in 1999. The decrease is primarily impacted by the decrease in the average outstanding balance on the term loans for the first quarter ended April 2, 2000 compared to the first quarter ended March 28, 1999. Since March 28, 1999, the Company has made $6.3 million of scheduled principal payments and has used $18.5 million of asset sale proceeds to reduce the amount outstanding on the term loans. RECOVERY OF WRITE-DOWN OF JOINT VENTURE: During the fourth quarter ended December 27, 1998, the Company sold its 50% interest in its China joint venture and recorded a write-down of $3.5 million to eliminate the Company's remaining investment in and advances to the joint venture. During the first quarter ended March 28, 1999, the Company reported a $0.3 million payment from the sale which was received on March 17, 1999, as income. BENEFIT FROM INCOME TAXES: The benefit from income taxes was $17.1 million, or 48.0%, and $4.3 million, or 41.0%, for the first quarters ended April 2, 2000 and March 28, 1999, respectively. The Company records income taxes based on the effective rate expected for the year with any changes in valuation allowance reflected in the period of change. The sale of the land and buildings to franchisees during the first quarter ended April 2, 2000 favorably impacted the provision for income taxes as it triggered built-in gains which allowed for a reduction in the valuation allowance on certain net operating loss carryforwards. 21 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET: In accordance with Statement of Position 98-5, the Company recognized $0.3 million of expense, net of income tax benefit, in the three months ended March 28, 1999 related to previously deferred restaurant preopening costs. NET LOSS: Net loss was $18.5 million and $6.5 million for the first quarters ended April 2, 2000 and March 28, 1999, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity and capital resources are cash generated from operations and borrowings under its revolving credit facility. Net cash used in operating activities was $5.8 million for the three months ended April 2, 2000 compared to $2.6 million for the same period of 1999. Inventories increased $3.5 million primarily as a result of anticipated increased retail sales. Other assets decreased $3.8 million primarily due to a $2.2 million reduction in premium receivables associated with the Company's captive insurance company. In addition, prepaid rent decreased approximately $0.5 million as a result of the reduction of Company owned restaurants due to the sale of restaurants to Kessler. Additionally, the decrease was impacted by the reduction in restricted cash as a result of payments made on workers compensation claims. Accrued expenses and other long-term liabilities increased $8.0 million from January 2, 2000 to April 2, 2000 primarily due to the establishment of restructuring reserves associated with management's restructuring plan and a $5.0 million increase in accrued interest on the Senior Notes due to four months accrued at April 2, 2000 compared to one month accrued at January 2, 2000. These increases were offset by $1.2 million of payments made on year-end accruals for restaurant construction and maintenance, a $2.2 million decrease in unearned premiums in the Company's captive insurance company, a $1.0 million reduction in the gift certificate reserve as a result of redemptions of year-end gift certificate sales, $1.4 million of payments made against the captive insurance reserves for workers compensation claims and $1.0 million decrease in accrued advertising as a result of less restaurant advertising in the first quarter ended April 2, 2000 compared to the fourth quarter of 1999. Available borrowings under the revolving credit facility were $22.0 million as of April 2, 2000. Additional sources of liquidity consist of capital and operating leases for financing leased restaurant locations (in malls and shopping centers and land or building leases), restaurant equipment, manufacturing equipment, distribution vehicles and computer equipment. Additionally, sales of under-performing existing restaurant properties and other assets (to the extent the Company's debt instruments, if any, permit) are sources of cash. The amounts of debt financing that the Company will be able to incur under capital leases and for property and casualty insurance financing and the amount of asset sales by the Company are limited by the terms of its credit facility and Senior Notes. Net cash provided by investing activities was $14.9 million in the three months ended April 2, 2000. Net cash used in investing activities was $8.5 million for the three months ended March 28, 1999. Capital expenditures for restaurant operations were approximately $1.0 million and $9.5 million for the three months ended April 2, 2000 and March 28, 1999, respectively. The decrease in capital expenditures was primarily due to the reduction in new units, replacements and reimaging projects. Proceeds from the sales of property and equipment were $17.2 million and $1.7 million in the three months ended April 2, 2000 and March 28, 1999, respectively. The increase in proceeds from the sales of property and equipment is primarily due to $16.6 million of proceeds received as a result of the sale of restaurants to franchisees. Net cash used in financing activities was $9.3 million in the three months ended April 2, 2000. Net cash provided by financing activities was $11.6 million for the three months ended March 28, 1999. The Company had a working capital deficit of $52.8 million as of April 2, 2000. The Company is able to operate with a substantial working capital deficit because: (i) restaurant operations are conducted primarily on a cash (and cash equivalent) basis with a low level of accounts receivable; (ii) rapid turnover allows a limited investment in inventories and (iii) cash from sales is usually received before related expenses for food, supplies and payroll are paid. 22 The Company's credit facility imposes significant operating and financial restrictions on the Company's ability to, among other things, incur indebtedness, create liens, sell assets, engage in mergers or consolidations, pay dividends and engage in certain transactions with affiliates. The credit facility limits the amount which the Company may spend on capital expenditures and requires the Company to comply with certain financial covenants. The Company's credit facility also restricts the use of proceeds from asset sales. Proceeds, as defined in the credit agreement, in excess of stated maximum allowable amounts must be used to permanently reduce outstanding obligations under the credit facility. During the three months ended April 2, 2000, the Company received $14.4 million of asset sale proceeds which were used to reduce the amount outstanding on the term loans. Additionally, all future net proceeds received from asset sales for the period April 3, 2000 through July 2, 2000 must be used to further reduce outstanding obligations under the credit facility. During the period from July 3, 2000 through December 31, 2000, the Company may retain up to a maximum of $3.0 million of net proceeds from any asset sales to be invested into additional capital expenditures. Prepayments are applied first to the term loans in inverse order of maturity and secondly, to permanently reduce the revolving credit commitment. The Company anticipates requiring capital in the future principally to maintain existing restaurant and plant facilities, to continue to renovate and re-image existing restaurants, to convert restaurants and to construct new restaurants. Capital expenditures for 2000 are anticipated to be $27.0 million in the aggregate, of which $20.0 million will be spent on restaurant operations. The Company's actual 2000 capital expenditures may vary from these estimated amounts. The Company believes that the combination of the funds anticipated to be generated from operating activities and borrowing availability under the credit facility will be sufficient to meet the Company's anticipated operating requirements, capital requirements and obligations associated with the restructuring. SEASONALITY Due to the seasonality of frozen dessert consumption, and the effect from time to time of weather on patronage in its restaurants, the Company's revenues and EBITDA are typically higher in its second and third quarters. GEOGRAPHIC CONCENTRATION Approximately 88% of the Company-owned restaurants are located, and substantially all of its retail sales are generated, in the Northeast. As a result, a severe or prolonged economic recession or changes in demographic mix, employment levels, population density, weather, real estate market conditions or other factors specific to this geographic region may adversely affect the Company more than certain of its competitors which are more geographically diverse. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change in the Company's market risk exposure since the filing of the Annual Report on Form 10-K. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 4.1 Fourth Amendment to Credit Agreement. 27.1 Financial Data Schedule (b) No report on Form 8-K was filed during the three months ended April 2, 2000. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRIENDLY ICE CREAM CORPORATION By: /s/ PAUL J. KELLEY -------------------------------------------------- Name: Paul J. Kelley Title: Senior Vice President, Chief Financial Officer, Treasurer and Assistant Clerk 23 EX-4.1 2 EX-4.1 Exhibit 4.1 FOURTH AMENDMENT FOURTH AMENDMENT, dated as of March 16, 2000 (this "AMENDMENT"), to the Credit Agreement, dated as of November 19, 1997 (as amended, supplemented or otherwise modified, the "CREDIT AGREEMENT"), among FRIENDLY ICE CREAM CORPORATION, a Massachusetts corporation (the "BORROWER"), the several banks and other financial institutions or entities parties thereto (the "LENDERS"), and SOCIETE GENERALE, as administrative agent (in such capacity, the "ADMINISTRATIVE AGENT"). W I T N E S S E T H: WHEREAS, pursuant to the Credit Agreement, the Lenders have agreed to make, and have made, extensions of credit to the Borrower; and WHEREAS, the Borrower has requested, and upon this Amendment becoming effective, the Lenders will have agreed, that certain provisions of the Credit Agreement be amended in the manner provided for in this Amendment; NOW, THEREFORE, in consideration of the premises and the agreements hereinafter set forth, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS. Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. SECTION 2. AMENDMENTS TO CREDIT AGREEMENT. 2.1 AMENDMENTS TO SECTION 1.1 OF THE CREDIT AGREEMENT. (a) The definition of "Applicable Margin" in Section 1.1 of the Credit Agreement is hereby amended by deleting said definition in its entirety and substituting in lieu thereof the following: "APPLICABLE MARGIN": for each Type of Loan, the rate per annum set forth under the relevant column heading below:
Eurodollar ABR Loans Loans ----- ----- Revolving Credit Loans 3.00% 1.50% Tranche A Term Loans 3.00% 1.50% Tranche B Term Loans 3.00% 1.50% Tranche C Term Loans 3.25% 1.75%;
PROVIDED, that on and after the first Adjustment Date occurring after the completion of four full fiscal quarters of the Borrower after the Closing Date, the Applicable Margin with respect to Revolving Credit Loans and Tranche A Term Loans will be determined pursuant to the Pricing Grid." (b) The definition of "Business-Sustaining Capital Expenditures" in Section 1.1 of the Credit Agreement is hereby amended by deleting from the third line thereof the amount "$15,000,000" and substituting in lieu thereof the amount "$11,000,000". (c) The definition of "Consolidated EBITDA" in Section 1.1 of the Credit Agreement is hereby amended by adding the following proviso after the amount "$7,500,000" at the end of such definition: "and PROVIDED, FURTHER, that, in calculating Consolidated EBITDA for periods that include any fiscal quarter of the Borrower's 1999 fiscal year, an aggregate amount of up to $3,200,000 of gains resulting from sales of restaurants consummated on or prior to January 2, 2000 shall not be subtracted from Consolidated Net Income" 2.2 AMENDMENT TO SECTION 7.1(d) OF THE CREDIT AGREEMENT. Paragraph (d) of Section 7.1 of the Credit Agreement is hereby amended by deleting said paragraph in its entirety and substituting in lieu thereof the following: "(d) MAINTENANCE OF NET WORTH. Permit Consolidated Net Worth as of the last day of any fiscal quarter of the Borrower ending during any fiscal year set forth below to be less than the amount set forth below opposite such fiscal year:
Fiscal Quarter Consolidated Net Worth -------------- ---------------------- Fiscal quarters from and including fourth quarter of fiscal 1997 through and including third quarter of ($95,000,000) fiscal 1998 Fourth quarter of fiscal 1998 ($98,000,000) First quarter of fiscal 1999 ($105,000,000) Second quarter of fiscal 1999 ($100,000,000) Third quarter of fiscal 1999 ($93,500,000) Fourth quarter of fiscal 1999 ($93,000,000) First quarter of fiscal 2000 ($112,500,000) Second quarter of fiscal 2000 ($109,500,000) Third quarter of fiscal 2000 ($104,500,000) Fourth quarter of fiscal 2000 ($103,000,000) First quarter of fiscal 2001 ($105,000,000)
Fiscal Quarter Consolidated Net Worth -------------- ---------------------- Second quarter of fiscal 2001 ($100,000,000) Third quarter of fiscal 2001 ($95,000,000) Fourth quarter of fiscal 2001 ($92,000,000) Fiscal quarters from and including first quarter of fiscal 2002 through and including third quarter of ($97,000,000) fiscal 2002 Fourth quarter of fiscal 2002 ($72,000,000) Fiscal quarters from and including first quarter of fiscal 2003 through and including third quarter of ($77,000,000) fiscal 2003 Fourth fiscal quarter of fiscal 2003 and all fiscal quarters thereafter ($67,000,000)"
2.3 AMENDMENT TO ANNEX A. Annex A to the Credit Agreement is hereby amended to read in its entirety as set forth in Annex A hereto. SECTION 3. CONDITIONS TO EFFECTIVENESS. This Amendment shall become effective as of the date set forth above (the "AMENDMENT EFFECTIVE DATE") on the date on which (a) the Borrower and the Required Lenders shall have executed and delivered to the Administrative Agent this Amendment and (b) each Guarantor shall have executed the Acknowledgment and Consent in the form annexed hereto. SECTION 4. REPRESENTATIONS AND WARRANTIES. In order to induce the Administrative Agent and the Lenders to enter into this Amendment, the Borrower hereby represents and warrants to the Administrative Agent and the Lenders that the representations and warranties made by the Loan Parties in the Loan Documents are true and correct in all material respects on and as of the Amendment Effective Date, before and after giving effect to the effectiveness of this Amendment, as if made on and as of the Amendment Effective Date, except to the extent such representations and warranties expressly relate to a specific earlier date, in which case such representations and warranties were true and correct as of such earlier date. SECTION 5. PAYMENT OF EXPENSES. The Borrower agrees to pay or reimburse the Administrative Agent for all of its reasonable out-of-pocket costs and expenses incurred in connection with this Amendment and any other documents prepared in connection herewith and the transactions contemplated hereby, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent. SECTION 6. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. On and after the Amendment Effective Date, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to "the Credit Agreement", "thereunder", "thereof" or words of like import referring to the 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. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. FRIENDLY ICE CREAM CORPORATION By:______________________________ Title: SOCIETE GENERALE By:______________________________ Title: TRANSAMERICA BUSINESS CREDIT CORPORATION By:______________________________ Title: BLACK DIAMOND INTERNATIONAL FUNDING, LTD. By:______________________________ Title: BLACK DIAMOND CLO, 1998-I LTD. By:______________________________ Title: FLEET NATIONAL BANK By:______________________________ Title: GENERAL ELECTRIC CAPITAL CORPORATION By:_______________________________ Title: FIRST SOURCE FINANCIAL LLP By: First Source Financial, Inc., its Agent/Manager By:__________________________ Title: BANK OF AMERICA, N.A. By:_______________________________ Title: PAMCO CAYMAN LTD. By: Highland Capital Management, L.P. as Collateral Manager By:__________________________ Title: 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: CANADIAN IMPERIAL BANK OF COMMERCE By:_______________________________ Title: 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: ANNEX A PRICING GRID FOR REVOLVING CREDIT LOANS, TRANCHE A TERM LOANS AND COMMITMENT FEES
- ------------------------------------------------- --------------------------- ------------------------------ Consolidated Applicable Margin Commitment Fee Rate Leverage Ratio for Eurodollar Loans - ------------------------------------------------- --------------------------- ------------------------------ Greater than or Equal to 4.0 to 1.0 3.000% 0.500% - ------------------------------------------------- --------------------------- ------------------------------ Greater than Less or Equal to 3.5 to 1.0 and than 4.0 to 1.0 2.750% 0.500% - ------------------------------------------------- --------------------------- ------------------------------ Greater than Less or Equal to 3.0 to 1.0 and than 3.5 to 1.0 2.625% 0.500% - ------------------------------------------------- --------------------------- ------------------------------ Greater than Less or Equal to 2.5 to 1.0 and than 3.0 to 1.0 2.375% 0.375% - ------------------------------------------------- --------------------------- ------------------------------ Less than 2.5 to 1.0 2.125% 0.375% - ------------------------------------------------- --------------------------- ------------------------------
Changes in the Applicable Margin with respect to Revolving Loans and Tranche A Loans or in the Commitment Fee Rate resulting from changes in the Consolidated Leverage Ratio shall become effective on the date (the "ADJUSTMENT DATE") on which financial statements are delivered to the Lenders pursuant to Section 6.1 (but in any event not later than the 45th day after the end of each of the first three quarterly periods of each fiscal year or the 90th day after the end of each fiscal year, as the case may be) and shall remain in effect until the next change to be effected pursuant to this paragraph. If any financial statements referred to above are not delivered within the time periods specified above, then, until such financial statements are delivered, the Consolidated Leverage Ratio as at the end of the fiscal period that would have been covered thereby shall for the purposes of this definition be deemed to be greater than 4.0 to 1.0. In addition, at all times while a Default or an Event of Default shall have occurred and be continuing, there shall be no reduction in the Applicable Margin with respect to Revolving Loans and Tranche A Loans or in the Commitment Fee Rate; PROVIDED, HOWEVER, that any applicable reduction shall become effective at such time as no Default or Event of Default shall be continuing. Each determination of the Consolidated Leverage Ratio pursuant to this definition shall be made as at the end of and with respect to the period of four consecutive fiscal quarters of the Borrower ending at the end of the period covered by the relevant financial statements and shall reflect the matters set forth in the proviso to Section 7.1(a). EX-27.1 3 EX-27.1
5 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. 3-MOS JAN-2-2000 JAN-3-2000 APR-2-2000 13,283 0 4,631 273 14,851 41,079 525,998 274,544 318,033 93,855 287,294 0 0 75 (108,149) 318,033 147,098 149,375 44,858 129,516 0 0 7,938 (35,610) 17,100 (18,510) 0 0 0 (18,510) (2.48) (2.48)
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