10-Q 1 a10-q.txt 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 July 2, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from to COMMISSION FILE NO. 0-3930 -------------------------- FRIENDLY ICE CREAM CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 5812 04-2053130 (State of (Primary Standard Industrial (I.R.S. Employer Incorporation) Classification Code Number) Identification No.) 1855 BOSTON ROAD WILBRAHAM, MASSACHUSETTS 01095 (413) 543-2400 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT AUGUST 7, 2000 ----- ----------------------------- Common Stock, $.01 par value 7,420,963 shares PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
July 2, January 2, 2000 2000 --------- --------- ASSETS (unaudited) CURRENT ASSETS: Cash and cash equivalents $ 11,672 $ 12,062 Restricted cash 1,106 2,066 Accounts receivable, net 5,810 3,924 Inventories 16,185 11,352 Deferred income taxes 5,657 5,657 Prepaid expenses and other current assets 3,617 6,298 --------- --------- TOTAL CURRENT ASSETS 44,047 41,359 PROPERTY AND EQUIPMENT, net 242,911 289,839 INTANGIBLES AND DEFERRED COSTS, net 22,470 23,613 OTHER ASSETS 1,707 1,559 --------- --------- TOTAL ASSETS $ 311,135 $ 356,370 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current maturities of long-term debt $ 14,581 $ 13,673 Current maturities of capital lease and finance obligations 1,599 1,688 Accounts payable 26,421 26,073 Accrued salaries and benefits 13,565 13,889 Accrued interest payable 3,806 4,006 Insurance reserves 9,221 9,748 Restructuring reserve 8,509 -- Other accrued expenses 12,510 20,106 --------- --------- TOTAL CURRENT LIABILITIES 90,212 89,183 --------- --------- DEFERRED INCOME TAXES 12,532 29,747 CAPITAL LEASE AND FINANCE OBLIGATIONS, less current maturities 7,324 7,913 LONG-TERM DEBT, less current maturities 281,988 292,432 OTHER LONG-TERM LIABILITIES 24,003 26,800 STOCKHOLDERS' EQUITY (DEFICIT): Common stock 74 75 Preferred stock -- -- Additional paid-in capital 138,746 138,459 Accumulated deficit (243,744) (228,239) --------- --------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (104,924) (89,705) --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 311,135 $ 356,370 ========= =========
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 For the Six Months Ended -------------------------- --------------------------- July 2, June 27, July 2, June 27, 2000 1999 2000 1999 -------- --------- --------- --------- REVENUES $164,144 $ 184,666 $ 313,519 $ 330,349 COSTS AND EXPENSES: Cost of sales 50,271 50,265 95,129 94,453 Labor and benefits 49,399 58,959 97,575 109,323 Operating expenses 35,243 42,498 71,725 75,882 General and administrative expenses 10,302 10,741 21,771 22,666 Relocation of manufacturing and distribution facility -- 800 -- 800 Restructuring costs -- -- 12,056 -- Write-downs of property and equipment 688 303 18,360 589 Depreciation and amortization 7,319 8,566 15,740 16,795 Loss (gain) on sales of restaurant operations and properties 69 (657) (2,018) (913) -------- --------- --------- --------- OPERATING INCOME (LOSS) 10,853 13,191 (16,819) 10,754 Interest expense, net 7,963 8,302 15,901 16,637 Recovery of write-down of joint venture -- (646) -- (896) -------- --------- --------- --------- INCOME (LOSS) BEFORE BENEFIT FROM (PROVISION FOR) INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 2,890 5,535 (32,720) (4,987) Benefit from (provision for) income taxes 115 (2,269) 17,215 2,045 -------- --------- --------- --------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 3,005 3,266 (15,505) (2,942) Cumulative effect of change in accounting principle, net of income tax benefit of $222 -- -- -- (319) -------- --------- --------- --------- NET INCOME (LOSS) $ 3,005 $ 3,266 $ (15,505) $ (3,261) ======== ========= ========= ========= BASIC NET INCOME (LOSS) PER SHARE: Income (loss) before cumulative effect of change in accounting principle $ 0.40 $ 0.44 $ (2.08) $ (0.40) Cumulative effect of change in accounting principle, net of income tax benefit -- -- -- (0.04) -------- --------- --------- --------- Net income (loss) $ 0.40 $ 0.44 $ (2.08) $ (0.44) ======== ========= ========= ========= DILUTED NET INCOME (LOSS) PER SHARE: Income (loss) before cumulative effect of change in accounting principle $ 0.40 $ 0.44 $ (2.08) $ (0.40) Cumulative effect of change in accounting principle, net of income tax benefit -- -- -- (0.04) -------- --------- --------- --------- Net income (loss) $ 0.40 $ 0.44 $ (2.08) $ (0.44) ======== ========= ========= ========= WEIGHTED AVERAGE SHARES: Basic 7,438 7,493 7,454 7,488 ======== ========= ========= ========= Diluted 7,498 7,507 7,454 7,488 ======== ========= ========= =========
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 Six Months Ended ------------------------- July 2, June 27, 2000 1999 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(15,505) $ (3,261) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Cumulative effect of change in accounting principle -- 319 Stock compensation expense 286 337 Relocation of manufacturing and distribution facility -- 800 Depreciation and amortization 15,740 16,795 Write-downs of property and equipment 18,360 589 Deferred income tax benefit (17,215) (2,045) (Gain) loss on asset retirements (2,528) 358 Non-cash recovery of write-down of joint venture -- (69) Changes in operating assets and liabilities: Accounts receivable (1,886) (1,972) Inventories (4,833) (2,684) Other assets 4,070 (1,193) Accounts payable 348 9,168 Accrued expenses and other long-term liabilities (2,935) (2,963) -------- -------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (6,098) 14,179 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (8,261) (26,316) Proceeds from sales of property and equipment 24,381 2,845 Proceeds from sale of joint venture -- 1,150 -------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 16,120 (22,321) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings 56,000 52,000 Repayments of debt (65,536) (40,341) Repayments of capital lease and finance obligations (876) (823) -------- -------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (10,412) 10,836 -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH -- (2) -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (390) 2,692 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,062 11,091 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,672 $ 13,783 ======== ======== SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Interest $ 15,540 $ 15,810 Income taxes 9 6 Capital lease obligations incurred 909 -- Capital lease obligations terminated 711 -- Notes received from sales of property and equipment 577 --
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 INCOME (LOSS) (Unaudited) (In thousands)
For the Three Months Ended For the Six Months Ended -------------------------- ------------------------ July 2, June 27, July 2, June 27, 2000 1999 2000 1999 ------ ------- -------- ------- NET INCOME (LOSS) $3,005 $ 3,266 $(15,505) $(3,261) OTHER COMPREHENSIVE (LOSS), NET OF TAX: Currency translation effects -- (3) -- (2) ------ ------- -------- ------- OTHER COMPREHENSIVE (LOSS) -- (3) -- (2) ------ ------- -------- ------- COMPREHENSIVE INCOME (LOSS) $3,005 $ 3,263 $(15,505) $(3,263) ====== ======= ======== =======
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 financial statements as of July 2, 2000 and for the second quarter and six months ended July 2, 2000 and June 27, 1999 are unaudited, but, in the opinion of management, include all adjustments which are necessary for a fair presentation of the consolidated financial position, results of operations, cash flows and comprehensive income (loss) of Friendly Ice Cream Corporation ("FICC") and subsidiaries (unless the context indicates otherwise, collectively, the "Company"). Such adjustments consist solely of normal recurring accruals. Operating results for the three and six month periods ended July 2, 2000 and June 27, 1999 are not necessarily indicative of the results that may be expected for the entire year due, in part, to the seasonality of the Company's business. Historically, higher revenues and operating income have been experienced during the second and third fiscal quarters. The Company's Consolidated Financial Statements, including the notes thereto, which are contained in the 1999 Annual Report on Form 10-K should be read in conjunction with these Condensed Consolidated Financial Statements. INVENTORIES - Inventories are stated at the lower of first-in, first-out cost or market. Inventories as of July 2, 2000 and January 2, 2000 were as follows (in thousands):
July 2, January 2, 2000 2000 ------ ------ Raw materials $1,194 $354 Goods in process 204 126 Finished goods 14,787 10,872 ------ ------ Total $16,185 $11,352 ======= =======
2. EARNINGS PER SHARE Basic net income (loss) per share is calculated by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing earnings available to common stockholders by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Common stock equivalents are dilutive stock options and warrants that are assumed exercised for calculation purposes. The number of common stock equivalents which could dilute basic earnings per share in the future, that were not included in the computation of diluted earnings per share because to do so would have been antidilutive, was 17,406 and 7,655 for the six months ended July 2, 2000 and June 27, 1999, respectively. Presented below is the reconciliation between basic and diluted weighted average shares for the three months ended July 2, 2000 and June 27, 1999 (in thousands):
For the Three Months Ended ----------------------------------------------------------------- Basic Diluted ------------------------------- ----------------------------- July 2, 2000 June 27, 1999 July 2, 2000 June 27, 1999 ------------ ------------- ------------ ------------- Weighted average number of common shares outstanding during the period 7,438 7,493 7,438 7,493 Adjustments: Assumed exercise of stock options -- -- 60 14 ----- ----- ----- ----- Weighted average number of shares outstanding 7,438 7,493 7,498 7,507 ===== ===== ===== =====
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 six months ended June 27, 1999. 4. SEGMENT REPORTING Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision-maker is the Chairman and Chief Executive Officer of the Company. The Company's operating segments include restaurant, foodservice, franchise and international operations. The revenues from these segments include both sales to unaffiliated customers and intersegment sales, which generally are accounted for on a basis consistent with sales to unaffiliated customers. Intersegment sales and other intersegment transactions have been eliminated in the accompanying condensed consolidated financial statements. The Company's restaurants target families with children and adults who desire a reasonably-priced meal in a full-service setting. The Company's menu offers a broad selection of freshly-prepared foods which appeal to customers throughout all dayparts. The menu currently features over 100 items comprised of a broad selection of breakfast, lunch, dinner and afternoon and evening snack items. Foodservice operations manufactures frozen dessert products and distributes such manufactured products and purchased finished goods to the Company's restaurants and franchised operations. Additionally, it sells frozen dessert products to distributors and retail and institutional locations. The Company's franchise segment includes a royalty based on franchise restaurant revenue. In addition, the Company receives rental income from various franchised restaurants. The Company's international business primarily consisted of a license agreement with several companies in the United Kingdom to distribute the Company's frozen desserts and a 50% joint venture in Shanghai, China which involved the manufacture and distribution of frozen desserts on a limited basis. At December 27, 1998, these operations had been discontinued. The Company does not allocate general and administrative expenses associated with its headquarters operations to any business segment. These costs include general and administrative expenses of the following functions: legal, accounting, personnel not directly related to a segment, information systems and other headquarters activities. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies except that the financial results for the foodservice operating segment, prior to intersegment eliminations, have been prepared using a management approach, which is consistent with the basis and manner in which the Company's management internally reviews financial information for the purpose of assisting in making internal operating decisions. The Company evaluates performance based on stand-alone operating segment income (loss) before income taxes and generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. 6 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 4. SEGMENT REPORTING (CONTINUED) EBITDA represents net income (loss) before (i) cumulative effect of change in accounting principle, net of income taxes, (ii) benefit from (provision for) income taxes, (iii) recovery of write-down of joint venture, (iv) interest expense, net, (v) depreciation and amortization and (vi) write-downs and all other non-cash items plus cash distributions from unconsolidated subsidiaries. The Company has included information concerning EBITDA in this Form 10-Q because it believes that such information is used by certain investors as one measure of a company's historical ability to service debt. EBITDA should not be considered as an alternative to, or more meaningful than, earnings (loss) from operations or other traditional indications of a company's operating performance.
For the Three Months Ended For the Six Months Ended -------------------------- ------------------------- July 2, June 27, July 2, June 27, 2000 1999 2000 1999 --------- --------- --------- --------- (in thousands) Revenues: Restaurant $ 136,800 $ 160,886 $ 262,223 $ 291,114 Foodservice (product sales to franchisees, retail and institutional) 67,849 71,174 128,037 123,765 Franchise 1,765 1,402 4,042 2,466 International -- -- -- 23 --------- --------- --------- --------- Total $ 206,414 $ 233,462 $ 394,302 $ 417,368 ========= ========= ========= ========= Intersegment revenues: Restaurant $ -- $ -- $ -- $ -- Foodservice (product sales to franchisees, retail and institutional) (42,270) (48,796) (80,783) (87,019) Franchise -- -- -- -- International -- -- -- -- --------- --------- --------- --------- Total $ (42,270) $ (48,796) $ (80,783) $ (87,019) ========= ========= ========= ========= External revenues: Restaurant $ 136,800 $ 160,886 $ 262,223 $ 291,114 Foodservice (product sales to franchisees, retail and institutional) 25,579 22,378 47,254 36,746 Franchise 1,765 1,402 4,042 2,466 International -- -- -- 23 --------- --------- --------- --------- Total $ 164,144 $ 184,666 $ 313,519 $ 330,349 ========= ========= ========= =========
7 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 4. SEGMENT REPORTING (CONTINUED)
For the Three Months Ended For the Six Months Ended -------------------------- ------------------------ July 2, June 27, July 2, June 27, 2000 1999 2000 1999 -------- -------- -------- -------- (in thousands) EBITDA: Restaurant $ 16,495 $ 18,050 $ 13,456 $ 27,945 Foodservice (product sales to franchisees, retail and institutional) 7,065 8,829 12,574 11,568 Franchise 683 694 1,706 1,266 International -- 3 (1) (54) Corporate (5,238) (5,341) (10,168) (12,250) -------- -------- -------- -------- Total $ 19,005 $ 22,235 $ 17,567 $ 28,475 ======== ======== ======== ======== Interest expense, net $ 7,963 $ 8,302 $ 15,901 $ 16,637 ======== ======== ======== ======== Recovery of write-down of joint venture $ -- $ (646) $ -- $ (896) ======== ======== ======== ======== Income (loss) before (provision for) benefit from income taxes and cumulative effect of change in accounting principle: Restaurant* $ 10,912 $ 11,400 $(15,834) $ 14,674 Foodservice (product sales to franchisees, retail and institutional) 6,209 7,894 10,859 9,769 Franchise 583 511 1,523 937 International -- 649 (1) 842 Corporate (14,814) (14,919) (29,267) (31,209) -------- -------- -------- -------- Total $ 2,890 $ 5,535 $(32,720) $ (4,987) ======== ======== ======== ======== Depreciation and amortization: Restaurant $ 4,895 $ 6,347 $ 10,930 $ 12,682 Foodservice (retail and institutional) 856 935 1,715 1,799 Franchise 100 176 183 329 Corporate 1,468 1,108 2,912 1,985 -------- -------- -------- -------- Total $ 7,319 $ 8,566 $ 15,740 $ 16,795 ======== ======== ======== ======== Capital expenditures, including capitalized leases: Restaurant $ 5,830 $ 12,452 $ 6,837 $ 21,998 Foodservice (retail and institutional) 908 1,932 1,797 2,914 Corporate 205 583 536 1,404 -------- -------- -------- -------- Total $ 6,943 $ 14,967 $ 9,170 $ 26,316 ======== ======== ======== ========
July 2, January 2, Identifiable assets: 2000 2000 -------- -------- Restaurant $216,389 $265,062 Foodservice (retail and institutional) 39,271 29,625 Franchise 4,767 3,935 International - 28 Corporate 50,708 57,720 -------- -------- Total $311,135 $356,370 ======== ========
* Includes restructuring costs of $12.1 million and the write-downs of property and equipment of $18.4 million recorded during the six months ended July 2, 2000. 8 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 5. NEW ACCOUNTING PRONOUNCEMENTS In May 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-14, "Accounting for Certain Sales Incentives," which provides guidance on the recognition, measurement, and income statement classification for sales incentives offered voluntarily by a vendor without charge to customers that can be used in, or that are exercisable by a customer as a result of, a single exchange transaction. The Company is required to adopt EITF No. 00-14 for periods beginning after May 18, 2000. The Company is in the process of determining the effect of this accounting pronouncement and will adopt this accounting treatment in the third quarter of fiscal 2000. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. The SAB specifically sets forth criteria which must be met in order for revenue to be recognized. The Company adopted SAB No. 101 on January 3, 2000. The adoption of SAB No. 101 did not have an effect on the Company's consolidated financial position or results of operations as the Company's revenue recognition policies complied with the provisions of SAB No. 101. In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that each derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the statement of operations, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 cannot be applied retroactively. SFAS No. 133 would have been effective for fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." Under the provisions of SFAS No. 137, SFAS No. 133 shall be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Hedging Activities." Under the provisions of SFAS No. 138, the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and certain hedging activities have been amended. Management has not yet quantified the impact of adopting SFAS No. 133, as amended by SFAS 137 and SFAS 138, on the Company's financial statements. However, SFAS No. 133 could increase volatility in earnings and other comprehensive income. 9 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 6. RESTRUCTURING PLAN In March 2000, the Company's Board of Directors approved a restructuring plan that provided for the immediate closing of 81 restaurants at the end of March 2000 and the disposition of an additional 70 restaurants over the next twenty-four months. The 70 locations will remain in operation until they are sold, subleased or closed prior to March 2002. The 151 restaurants in the restructuring were generally lower sales volume units operating in markets in which management believes the Company has a strong market penetration. The larger units in these markets will continue operating. In connection with the restructuring plan, the Company eliminated approximately 150 management/administrative positions in the field organization and at corporate headquarters. As a result of this plan, the Company reported a pre-tax restructuring charge of approximately $12.1 million for severance pay, rent, utilities and real estate taxes, demarking, lease termination costs and certain other costs associated with the closing of the locations, along with a pre-tax write-down of property and equipment for these locations of approximately $17.0 million in the first quarter ended April 2, 2000. Future annual savings associated with the reduction in force are estimated by management to be $8.0 million. In connection with this restructuring plan, the Company's credit facility was amended on March 23, 2000. The consolidated net worth covenant was adjusted primarily to reflect the write-down of property and equipment and restructuring charges associated with the restructuring plan and interest rates on borrowings were increased. The per annum interest rates on the term loans, revolving credit facility and the letter of credit facility were increased by 0.25% as a result of this amendment. The Company believes that the combination of the funds anticipated to be generated from operating activities and borrowing availability under the credit facility will be sufficient to meet the Company's anticipated operating requirements, capital requirements and obligations associated with the restructuring. The following represents the reserve and related costs associated with the restructuring (in thousands):
Costs paid for the Six Months Ended Accrued as of Expense July 2, 2000 July 2, 2000 ------- ------------ ------------ Severance pay $1,503 $(821) $682 Rent 5,490 (487) 5,003 Utilities and real estate taxes 1,632 (456) 1,176 Demarking 760 (289) 471 Lease termination costs 718 - 718 Environmental costs 404 (6) 398 Inventory 111 (80) 31 Equipment 727 (727) - Outplacement services 160 (112) 48 Other 551 (569) (18) ------- ------- ------ Total $12,056 $(3,547) $8,509 ======= ======== ======
The write-down of property and equipment consisted of $7.8 million for the 81 locations closed at the end of March and $9.2 million for the 70 locations which will be disposed of over the next 24 months. As of July 2, 2000, the Company has sold 19 of the restructuring properties, of which 17 were included in the list of 81 restaurants which were closed in March 2000. In addition, the Company has terminated its lease obligations at 17 restructuring properties, of which 15 were included in the list of 81 restaurants which were closed in March 2000. At July 2, 2000, the carrying value of the remaining 115 properties to be disposed of was $12.9 million and is reflected in the condensed consolidated balance sheets as property and equipment, net. 10 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION FICC's obligation related to the $200 million Senior Notes is guaranteed fully and unconditionally by one of FICC's wholly-owned subsidiaries. There are no restrictions on FICC's ability to obtain dividends or other distributions of funds from this subsidiary, except those imposed by applicable law. The following supplemental financial information sets forth, on a condensed consolidating basis, balance sheets, statements of operations and statements of cash flows for Friendly Ice Cream Corporation (the "Parent Company"), Friendly's Restaurants Franchise, Inc. (the "Guarantor Subsidiary") and Friendly's International, Inc., Friendly Holding (UK) Limited, Friendly Ice Cream (UK) Limited and Restaurant Insurance Corporation (collectively, the "Non-guarantor Subsidiaries"). Separate complete financial statements and other disclosures of the Guarantor Subsidiary as of July 2, 2000 and June 27, 1999, and for the periods ended July 2, 2000 and June 27, 1999, are not presented because management has determined that such information is not material to investors. Investments in subsidiaries are accounted for by the Parent Company on the equity method for purposes of the supplemental consolidating presentation. Earnings of the subsidiaries are, therefore, reflected in the Parent Company's investment accounts and earnings. The principal elimination entries eliminate the Parent Company's investments in subsidiaries and intercompany balances and transactions. 11 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION(CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET AS OF JULY 2, 2000 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------ ------------ ------------ Assets Current assets: Cash and cash equivalents $ 8,787 $ 51 $ 2,834 $ -- $ 11,672 Restricted cash -- -- 1,106 -- 1,106 Accounts receivable, net 5,287 523 -- -- 5,810 Inventories 16,185 -- -- -- 16,185 Deferred income taxes 5,471 12 -- 174 5,657 Prepaid expenses and other current assets 8,566 751 4,051 (9,751) 3,617 --------- ------ ------- -------- --------- Total current assets 44,296 1,337 7,991 (9,577) 44,047 Deferred income taxes -- 903 1,333 (2,236) -- Property and equipment, net 242,911 -- -- -- 242,911 Intangibles and deferred costs, net 22,470 -- -- -- 22,470 Investments in subsidiaries 3,213 -- -- (3,213) -- Other assets 792 3,866 5,729 (8,680) 1,707 --------- ------ ------- -------- --------- Total assets $ 313,682 $6,106 $15,053 $(23,706) $ 311,135 ========= ====== ======= ======== ========= Liabilities and Stockholders' Equity (Deficit) Current liabilities: Current maturities of long-term obligations $ 20,180 $ -- $ -- $ (4,000) $ 16,180 Deferred income taxes -- -- 1 (1) -- Accounts payable 26,421 -- -- -- 26,421 Accrued expenses 44,175 924 8,263 (5,751) 47,611 --------- ------ ------- -------- --------- Total current liabilities 90,776 924 8,264 (9,752) 90,212 Deferred income taxes 14,593 -- -- (2,061) 12,532 Long-term obligations, less current maturities 294,126 -- -- (4,814) 289,312 Other long-term liabilities 19,111 2,344 6,414 (3,866) 24,003 Stockholders' equity (deficit) (104,924) 2,838 375 (3,213) (104,924) --------- ------ ------- -------- --------- Total liabilities and stockholders' equity (deficit) $ 313,682 $6,106 $15,053 $(23,706) $ 311,135 ========= ====== ======= ======== =========
12 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION(CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 2, 2000 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------ ------------ ------------ Revenues $162,838 $ 1,306 $ -- $ -- $164,144 Costs and expenses: Cost of sales 50,271 -- -- -- 50,271 Labor and benefits 49,399 -- -- -- 49,399 Operating expenses and write-downs of property and equipment 35,986 -- (55) -- 35,931 General and administrative expenses 9,457 845 -- -- 10,302 Depreciation and amortization 7,319 -- -- -- 7,319 Loss on sales of restaurant operations and properties 69 -- -- -- 69 Interest expense (income) 8,136 -- (173) -- 7,963 -------- ------- ----- ----- -------- Income before benefit from (provision for) income taxes and equity in net income of consolidated subsidiaries 2,201 461 228 -- 2,890 Benefit from (provision for) income taxes 385 (190) (80) -- 115 -------- ------- ----- ----- -------- Income before equity in net income of consolidated subsidiaries 2,586 271 148 -- 3,005 Equity in net income of consolidated subsidiaries 419 -- -- (419) -- -------- ------- ----- ----- -------- Net income $ 3,005 $ 271 $ 148 $(419) $ 3,005 ======== ======= ===== ===== ========
13 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION(CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JULY 2, 2000 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------ ------------ ------------ Revenues $ 310,339 $ 3,180 $ -- $ -- $ 313,519 Costs and expenses: Cost of sales 95,129 -- -- -- 95,129 Labor and benefits 97,575 -- -- -- 97,575 Operating expenses and write-downs of property and equipment 90,200 -- (115) -- 90,085 General and administrative expenses 20,500 1,271 -- -- 21,771 Restructuring costs 12,056 -- -- -- 12,056 Depreciation and amortization 15,740 -- -- -- 15,740 Gain on sales of restaurant operations and properties (2,018) -- -- -- (2,018) Interest expense (income) 16,246 -- (345) -- 15,901 --------- ------- ----- -------- --------- (Loss) income before benefit from (provision for) income taxes and equity in net income of consolidated subsidiaries (35,089) 1,909 460 -- (32,720) Benefit from (provision for) income taxes 18,159 (783) (161) -- 17,215 --------- ------- ----- -------- --------- (Loss) income before equity in net income of consolidated subsidiaries (16,930) 1,126 299 -- (15,505) Equity in net income of consolidated subsidiaries 1,425 -- -- (1,425) -- --------- ------- ----- -------- --------- Net (loss) income $ (15,505) $ 1,126 $ 299 $ (1,425) $ (15,505) ========= ======= ===== ======== =========
14 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION(CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JULY 2, 2000 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------ ------------ ------------ Net cash (used in) provided by operating activities $ (6,595) $ 37 $ 460 $-- $ (6,098) -------- ---- ------- --- -------- Cash flows from investing activities: Purchases of property and equipment (8,261) -- -- -- (8,261) Proceeds from sales of property and equipment 24,381 -- -- -- 24,381 -------- ---- ------- --- -------- Net cash provided by investing activities 16,120 -- -- -- 16,120 -------- ---- ------- --- -------- Cash flows from financing activities: Proceeds from borrowings 56,000 -- -- -- 56,000 Repayments of obligations (66,412) -- -- -- (66,412) -------- ---- ------- --- -------- Net cash used in financing activities (10,412) -- -- -- (10,412) -------- ---- ------- --- -------- Net (decrease) increase in cash and cash equivalents (887) 37 460 -- (390) Cash and cash equivalents, beginning of period 9,674 14 2,374 -- 12,062 -------- ---- ------- --- -------- Cash and cash equivalents, end of period $ 8,787 $ 51 $ 2,834 $-- $ 11,672 ======== ==== ======= === ======== Supplemental disclosures: Interest paid (received) $ 16,069 $-- $ (529) $-- $ 15,540 Income taxes (received) paid (1,022) 866 165 -- 9 Capital lease obligations incurred 909 -- -- -- 909 Capital lease obligations terminated 711 -- -- -- 711 Notes received from sales of property and equipment 577 -- -- -- 577
15 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION(CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET AS OF JANUARY 2, 2000 (In thousands)
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 ======== ====== ======= ======== ========
16 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION(CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 27, 1999 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------ ------------ ------------ Revenues $183,902 $765 $ (1) $ - $184,666 Costs and expenses: Cost of sales 50,265 - - - 50,265 Labor and benefits 58,959 - - - 58,959 Operating expenses and write-downs of property and equipment 43,647 - (46) - 43,601 General and administrative expenses 10,372 430 (61) - 10,741 Depreciation and amortization 8,566 - - - 8,566 Gain on sales of restaurant operations and properties (657) - - - (657) Interest expense (income) 8,485 - (183) - 8,302 Recovery of write-down of joint venture (646) - - - (646) ------- ----- ---- ----- -------- Income before provision for income taxes and equity in net income of consolidated subsidiaries 4,911 335 289 - 5,535 Provision for income taxes (2,052) (137) (80) - (2,269) ------- ----- ---- ----- -------- Income before equity in net income of consolidated subsidiaries 2,859 198 209 - 3,266 Equity in net income of consolidated subsidiaries 407 - - (407) - ------- ----- ---- ----- -------- Net income $ 3,266 $ 198 $209 $(407) $ 3,266 ======= ===== ==== ===== ========
17 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION(CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 27, 1999 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------ ------------ ------------ Revenues $329,066 $ 1,260 $ 23 $ - $330,349 Costs and expenses: Cost of sales 94,436 - 17 - 94,453 Labor and benefits 109,323 - - - 109,323 Operating expenses and write-downs of property and equipment 77,373 - (102) - 77,271 General and administrative expenses 21,871 856 (61) - 22,666 Depreciation and amortization 16,795 - - - 16,795 Gain on sales of restaurant operations and properties (913) - - - (913) Interest expense (income) 17,000 - (363) - 16,637 Recovery of write-down of joint venture (896) - - - (896) ------- ------- ---- ----- -------- (Loss) income before benefit from (provision for) income taxes, cumulative effect of change in accounting principle and equity in net income of consolidated subsidiaries (5,923) 404 532 - (4,987) Benefit from (provision for) income taxes 2,372 (165) (162) - 2,045 ------- ------- ---- ----- -------- (Loss) income before cumulative effect of change in accounting principle and equity in net income of consolidated subsidiaries (3,551) 239 370 - (2,942) Cumulative effect of change in accounting principle (319) - - - (319) ------- ------- ---- ----- -------- (Loss) income before equity in net income of consolidated subsidiaries (3,870) 239 370 - (3,261) Equity in net income of consolidated subsidiaries 609 - - (609) - ------- ------- ---- ----- -------- Net (loss) income $(3,261) $ 239 $370 $(609) $ (3,261) ======= ======= ==== ===== ========
18 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION(CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 27, 1999 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------ ------------ ------------ Net cash provided by (used in) operating activities $ 13,999 $(21) $ 201 $ - $14,179 -------- ----- ------ --- ------- Cash flows from investing activities: Purchases of property and equipment (26,316) - - - (26,316) Proceeds from sales of property and equipment 2,845 - - - 2,845 Return of advances from joint venture 1,150 - - - 1,150 -------- ----- ------ --- ------- Net cash used in investing activities (22,321) - - - (22,321) -------- ----- ------ --- ------- Cash flows from financing activities: Proceeds from borrowings 52,000 - - - 52,000 Repayments of obligations (41,164) - - - (41,164) -------- ----- ------ --- ------- Net cash provided by financing activities 10,836 - - - 10,836 -------- ----- ------ --- ------- Effect of exchange rate changes on cash - - (2) - (2) -------- ----- ------ --- ------- Net increase (decrease) in cash and cash equivalents 2,514 (21) 199 - 2,692 Cash and cash equivalents, beginning of period 9,180 53 1,858 - 11,091 -------- ----- ------ --- ------- Cash and cash equivalents, end of period $ 11,694 $ 32 $2,057 $ - $13,783 ======== ===== ====== === ======= Supplemental disclosures: Interest paid (received) $ 15,990 $ - $ (180) $ - $15,810 Income taxes paid (received) 91 212 (297) - 6
19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE HEREIN. SAFE HARBOR STATEMENT Statements contained herein that are not historical facts constitute "forward looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. All forward looking statements are subject to risks and uncertainties which could cause results to differ materially from those anticipated. These factors include the Company's highly competitive business environment, exposure to commodity prices, risks associated with the foodservice industry, the ability to retain and attract new employees, government regulations, the Company's high geographic concentration in the Northeast and its attendant weather patterns, conditions needed to meet re-imaging and new opening and franchising targets and costs associated with improved service and other initiatives. OVERVIEW As of July 2, 2000, the Company owns and operates 486 restaurants, franchises 106 restaurants and 8 cafes and manufactures and distributes a full line of frozen dessert products. These products are distributed to Friendly's restaurants and through more than 3,500 supermarkets and other retail locations in 16 states. The restaurants offer a wide variety of reasonably priced breakfast, lunch and dinner menu items as well as the frozen dessert products. 20 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 For the Six Months Ended -------------------------- ------------------------ July 2, June 27, July 2, June 27, 2000 1999 2000 1999 ---- ---- ---- ---- Revenues: Restaurant 83.3% 87.1% 83.6% 88.1% Foodservice (product sales to franchisees, retail and institutional) 15.6 12.1 15.1 11.1 Franchise 1.1 0.8 1.3 0.8 ----- ----- ----- ----- Total revenues 100.0 100.0 100.0 100.0 ----- ----- ----- ----- Costs and expenses: Cost of sales 30.6 27.2 30.3 28.6 Labor and benefits 30.1 31.9 31.1 33.1 Operating expenses 21.5 23.0 22.9 22.9 General and administrative expenses 6.3 5.8 6.9 6.9 Relocation of manufacturing and distribution facility - 0.4 - 0.2 Restructuring costs - - 3.9 - Write-downs of property and equipment 0.4 0.2 5.9 0.2 Depreciation and amortization 4.5 4.7 5.0 5.1 Loss (gain) on sales of restaurant operations and properties 0.0 (0.3) (0.6) (0.3) ----- ----- ----- ----- Operating income (loss) 6.6 7.1 (5.4) 3.3 Interest expense, net 4.9 4.5 5.0 5.0 Recovery of write-down of joint venture - (0.4) - (0.2) ----- ----- ----- ----- Income (loss) before benefit from (provision for) income taxes and cumulative effect of change in accounting principle 1.7 3.0 (10.4) (1.5) Benefit from (provision for) income taxes 0.1 (1.2) 5.5 0.6 ----- ----- ----- ----- Income (loss) before cumulative effect of change in accounting principle 1.8 1.8 (4.9) (0.9) Cumulative effect of change in accounting principle, net of income tax benefit - - - (0.1) ----- ----- ----- ----- Net income (loss) 1.8% 1.8% (4.9)% (1.0)% ===== ===== ===== =====
21 REVENUES: Total revenues decreased $20.6 million, or 11.2%, to $164.1 million for the second quarter ended July 2, 2000 from $184.7 million for the same quarter in 1999. Restaurant revenues decreased $24.1 million, or 15.0%, to $136.8 million for the second quarter of 2000 from $160.9 million for the same quarter in 1999. Comparable restaurant revenues decreased 1.2% largely due to the strong introduction of the soft serve product line in the prior year. The decrease in restaurant revenue was primarily impacted by the closing of 114 restaurants over the past 12 months. The closings accounted for $15.8 million of the decline. The refranchising of 37 restaurants during fiscal 2000 negatively impacted sales by $10.4 million. Partially offsetting these decreases was the increase in restaurant revenue of $3.2 million for new restaurants open less than one year. Foodservice (product sales to franchisees, retail and institutional) and other revenues increased by $3.2 million, or 14.3%, to $25.6 million for the second quarter of 2000 from $22.4 million for the same quarter in 1999. The increase was primarily due to the increase in the number of franchised locations. Franchise revenue increased $0.4 million, or 28.6%, to $1.8 million for the three months ended July 2, 2000 compared to $1.4 million for the three months ended June 27, 1999. The increase is primarily the result of the fact that there are 114 franchise units open at the end of the second quarter ended July 2, 2000 compared to 63 franchise units open at the end of the second quarter ended June 27, 1999. Total revenues decreased $16.8 million, or 5.1%, to $313.5 million for the six months ended July 2, 2000 from $330.3 million for the same period in 1999. Restaurant revenues decreased $28.9 million, or 10.0%, to $262.2 million for the six months ended July 2, 2000 from $291.1 million for the same period in 1999. Comparable restaurant revenues increased 0.1%. The decrease in restaurant revenues was primarily impacted by the closing of 114 restaurants over the past 12 months. The closings accounted for $20.2 million of the decline. The refranchising of 37 restaurants during fiscal 2000 negatively impacted sales by $15.0 million. Partially offsetting these decreases was the increase in restaurant revenue of $6.8 million for new restaurants open less than one year. Foodservice (product sales to franchisees, retail and institutional) and other revenues increased by $10.5 million, or 28.5%, to $47.3 million for the six months ended July 2, 2000 from $36.8 million for the six months ended June 27, 1999. The increase was primarily due to an increase in the number of franchised locations. Franchise revenue was $4.0 million for the six months ended July 2, 2000 compared to $2.5 million for the six months ended June 27, 1999. The increase is primarily the result of the fact that there are 114 franchise units open at the end of the six months ended July 2, 2000 compared to 63 franchise units open at the end of the six months ended June 27, 1999. COST OF SALES: Cost of sales were $50.3 million for the second quarter ended July 2, 2000 and for the same quarter in 1999. Cost of sales as a percentage of total revenues increased to 30.6% for the second quarter of 2000 from 27.2% for the second quarter of 1999. The higher food cost as a percentage of total revenues was primarily due to a shift in the sales mix from Company owned restaurant sales to Foodservice sales to franchisees. Foodservice sales to franchisees have a higher food cost as a percentage of revenue than sales to Company owned restaurants. Cost of sales increased $0.6 million, or 1.0%, to $95.1 million for the six months ended July 2, 2000 from $94.5 million for the same period in 1999. Cost of sales as a percentage of total revenues increased to 30.3% for the six months in 2000 from 28.6% for the same period in 1999. The higher food cost as a percentage of total revenues was primarily due to a shift in the sales mix from Company owned restaurant sales to Foodservice sales to franchisees and an increase in retail supermarket sales. Foodservice sales to franchisees and retail sales have higher food costs as a percentage of revenue than sales to Company owned restaurants. LABOR AND BENEFITS: Labor and benefits decreased $9.6 million, or 16.3%, to $49.4 million for the second quarter ended July 2, 2000 from $59.0 million for the same quarter in 1999. Labor and benefits as a percentage of total revenues decreased to 30.1% for the second quarter of 2000 from 31.9% for the same quarter in 1999. The lower labor and benefits as a percentage of total revenues was primarily due to increases in Foodservice sales to franchisees, which do not have any associated restaurant labor and benefits. Partially offsetting the decreases was higher group insurance claims per participant in 2000 when compared to 1999. Labor and benefits decreased $11.7 million, or 10.7%, to $97.6 million for the six months ended July 2, 2000 from $109.3 million for the same period in 1999. Labor and benefits as a percentage of total revenues decreased to 31.1% for the six months of 2000 from 33.1% for the same period in 1999. The lower labor and benefits as a percentage of total revenues was primarily due to increases in Foodservice sales to franchisees and higher retail sales. These sales do not have any associated restaurant labor and benefits. Partially offsetting the decreases were higher group insurance claims per participant in 2000 when compared to 1999. The increase in claims had less impact on the six months comparison than on the second quarter comparison. 22 OPERATING EXPENSES: Operating expenses decreased $7.3 million, or 17.2%, to $35.2 million for the second quarter ended July 2, 2000 from $42.5 million for the same quarter in 1999. This decrease was primarily due to a decrease in supplies and advertising expenses related to the rollout of the Company's new soft serve product in 1999. The decline in the number of operating restaurants further reduced restaurant maintenance expenses and utilities. Selling expense in support of higher retail sales increased in the 2000 period when compared to 1999. Operating expenses as a percentage of total revenues were 21.5% and 23.0% for the second quarters ended July 2, 2000 and June 27, 1999, respectively. Operating expenses decreased $4.2 million, or 5.5%, to $71.7 million for the six months ended July 2, 2000 from $75.9 million for the same period in 1999. This decrease was primarily due to a decrease in supplies and advertising expenses related to the rollout of the Company's new soft serve product in 1999. The decline in the number of operating restaurants further reduced restaurant maintenance expenses and utilities. Offsetting the reduced restaurant expense were higher selling expenses in support of the higher retail sales in the 2000 period when compared to 1999. Operating expenses as a percentage of total revenues were 22.9% for both the six months ended July 2, 2000 and June 27, 1999. GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were $10.3 million for the second quarter ended July 2, 2000 and $10.7 million for the same period in 1999. General and administrative expenses as a percentage of total revenues increased to 6.3% in the second quarter of 2000 from 5.8% for the same period in 1999. The increase in general and administrative expenses as a percentage of revenue was primarily due to higher bonus expense recognized in 2000 when compared to 1999. Costs associated with the number of franchised locations also increased in the 2000 period when compared to 1999. General and administrative expenses were $21.8 million and $22.7 million for the six months ended July 2, 2000 and June 27, 1999, respectively. General and administrative expenses as a percentage of total revenues were 6.9% in the six months ended July 2, 2000 and for the same period in 1999. EBITDA: As a result of the above, EBITDA (EBITDA represents net income (loss) before (i) cumulative effect of change in accounting principle, net of income taxes, (ii) benefit from (provision for) income taxes, (iii) recovery of write-down of joint venture, (iv) interest expense, net, (v) depreciation and amortization and (vi) write-downs and all other non-cash items plus cash distributions from unconsolidated subsidiaries) decreased $3.2 million, or 14.4%, to $19.0 million for the second quarter ended July 2, 2000 from $22.2 million for the same quarter in 1999. EBITDA as a percentage of total revenues was 11.6% and 12.0% for the second quarters of 2000 and 1999, respectively. EBITDA decreased $10.9 million, or 38.2%, to $17.6 million for the six months ended July 2, 2000 from $28.5 million for the same period in 1999. EBITDA as a percentage of total revenues was 5.6% and 8.6% for the six months ended July 2, 2000 and June 27, 1999, respectively. RESTRUCTURING COSTS: Restructuring costs were $12.1 million for the six months ended July 2, 2000 as a result of the costs associated with the Company's decision to reorganize its restaurant field and headquarters organizations in conjunction with the closing of 81 under-performing restaurants and the planned closing of an additional 70 restaurants over the next 24 months. Included in these costs are severance, rent on closed restaurants until lease termination, utilities and real estate taxes, demarking, lease termination, environmental and other miscellaneous costs. WRITE-DOWNS OF PROPERTY AND EQUIPMENT: Write-downs of property and equipment were $0.7 million and $0.3 million for the three months ended July 2, 2000 and June 27, 1999, respectively. Write-downs of property and equipment were $18.4 million and $0.6 million for the six months ended July 2, 2000 and June 27, 1999, respectively. The increase in write-downs is primarily the result of the non-cash write-down of the 81 under-performing restaurants which were closed at the end of March and the non-cash write-down of an additional 70 restaurants which will be closed over the next 24 months to their estimated net realizable value. 23 DEPRECIATION AND AMORTIZATION: Depreciation and amortization decreased $1.3 million, or 15.1%, to $7.3 million for the second quarter ended July 2, 2000 from $8.6 million for the same quarter in 1999. Depreciation and amortization as a percentage of total revenues decreased to 4.5% for the second quarter of 2000 from 4.7% for the same quarter in 1999. The decrease was primarily due to the reduction in the number of Company operating restaurants and a reduction in capital expenditures. Depreciation and amortization decreased $1.1 million, or 6.5%, to $15.7 million for the six months ended July 2, 2000 from $16.8 million for the same period in 1999. Depreciation and amortization as a percentage of total revenues decreased to 5.0% for the six months ended July 2, 2000 from 5.1% for the same period in 1999. The decrease was primarily due to the reduction in the number of Company operating restaurants and a reduction in capital expenditures. LOSS (GAIN) ON SALES OF RESTAURANT OPERATIONS AND PROPERTIES: Loss on sales of restaurant operations and properties for the second quarter ended July 2, 2000 was $0.1 million compared to a gain on sales of restaurant operations and properties of $0.7 million for the second quarter ended June 27, 1999. The decrease was the result of the sale of a restaurant to a franchisee during the second quarter ended June 27, 1999. The gain on sales of restaurant operations and properties for the six months ended July 2, 2000 was $2.0 million compared to the gain on sales of restaurant operations and properties for the six months ended June 27, 1999 of $0.9 million. The increase was primarily the result of the gain of $1.4 million associated with the sale of 29 restaurants to a franchisee on January 19, 2000. The Company also sold certain assets and rights in eight other restaurants to three additional franchisees resulting in a gain of $0.7 million during the six months ended July 2, 2000. The gain on the sales of restaurant operations and properties for the six months ended June 27, 1999 represented the income related to the sale of the equipment and operating rights for three existing restaurants to franchisees. INTEREST EXPENSE, NET: Interest expense, net of capitalized interest and interest income, decreased by $0.3 million, or 3.6%, to $8.0 million for the second quarter ended July 2, 2000 from $8.3 million for the same quarter in 1999. The decrease is primarily impacted by the decrease in the average outstanding balance on the term loans for the second quarter ended July 2, 2000 compared to the second quarter ended June 27, 1999. Since June 27, 1999, the Company has made $7.2 million of scheduled principal payments and has used $19.9 million of asset sale proceeds to reduce the amount outstanding on the term loans. Interest expense, net of capitalized interest and interest income, decreased by $0.7 million, or 4.2%, to $15.9 million for the six months ended July 2, 2000 from $16.6 million for the same period in 1999. The decrease is primarily impacted by the decrease in the average outstanding balance on the term loans for the six months ended July 2, 2000 compared to the six months ended June 27, 1999. RECOVERY OF WRITE-DOWN OF JOINT VENTURE: During the fourth quarter ended December 27, 1998, the Company sold its 50% interest in its China joint venture and recorded a write-down of $3.5 million to eliminate the Company's remaining investment in and advances to the joint venture. During the first six months ended June 27, 1999, the Company reported a $0.3 million payment from the sale which was received on March 17, 1999, as income. BENEFIT FROM (PROVISION FOR) INCOME TAXES: The benefit from income taxes was $0.1 million, or 4.0%, for the second quarter ended July 2, 2000 compared to a provision for income taxes of $2.3 million, or 41%, for the second quarter ended June 27, 1999. The benefit from income taxes was $17.2 million, or 52.6%, and $2.0 million, or 41%, for the six months ended July 2, 2000 and June 27, 1999, respectively. The Company records income taxes based on the effective rate expected for the year with any changes in the valuation allowance reflected in the period of change. The sales of the land and buildings to franchisees during the six months ended July 2, 2000 favorably impacted the provision for income taxes as it triggered built-in gains which allowed for a reduction in the valuation allowance on certain net operating loss carryforwards. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET: In accordance with Statement of Position 98-5, the Company recognized $0.3 million of expense, net of income tax benefit, in the six months ended June 27, 1999 related to previously deferred restaurant preopening costs. 24 NET INCOME (LOSS): Net income was $3.0 million and $3.3 million for the second quarters ended July 2, 2000 and June 27, 1999, respectively. Net loss was $15.5 million and $3.3 million for the six months ended July 2, 2000 and June 27, 1999, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity and capital resources are cash generated from operations and borrowings under its revolving credit facility. Net cash used in operating activities was $6.1 million in the six months ended July 2, 2000. Net cash provided by operating activities was $14.2 million in the six months ended June 27, 1999. During the six months ended July 2, 2000, accounts receivable increased approximately $1.9 million primarily due to increased Foodservice retail supermarket sales along with the increase in volume of Foodservice product sales to franchisees. Inventories increased $4.8 million as a result of increased retail and restaurant promotional activity during the summer months. Other assets decreased $4.1 million primarily due to a $2.2 million reduction in premium receivables associated with the Company's captive insurance company. In addition, prepaid rent decreased approximately $0.5 million as a result of the reduction of Company owned restaurants due to the sale of restaurants to a franchisee. The decrease was also impacted by the reduction in restricted cash as a result of payments made on workers compensation claims. Accrued expenses decreased $2.9 million from January 2, 2000 to July 2, 2000. The decrease was primarily attributable to the $1.4 million of payments made on year-end accruals for restaurant construction and maintenance, a $2.2 million decrease in unearned premiums in the Company's captive insurance company, a $1.1 million reduction in the gift certificate liability as a result of redemptions of year-end gift certificate sales, a $1.8 million reduction of the accrued pension obligation as a result of the Plan's overfunded status and a $1.5 million reduction in insurance reserves for workers compensation and general liability claims. Offsetting the decrease in accrued expenses was the establishment of restructuring reserves associated with management's restructuring plan and the fiscal 2000 bonus accrual. Available borrowings under the revolving credit facility were $20.0 million as of July 2, 2000. Additional sources of liquidity consist of capital and operating leases for financing leased restaurant locations (in malls and shopping centers and land or building leases), restaurant equipment, manufacturing equipment, distribution vehicles and computer equipment. Additionally, sales of under-performing existing restaurant properties and other assets (to the extent the Company's and its subsidiaries' debt instruments, if any, permit) are sources of cash. The amounts of debt financing that the Company will be able to incur under capital leases and for property and casualty insurance financing and the amount of asset sales by the Company are limited by the terms of its credit facility and Senior Notes. Net cash provided by investing activities was $16.1 million in the six months ended July 2, 2000. Net cash used in investing activities was $22.3 million in the six months ended June 27, 1999. Capital expenditures for restaurant operations were approximately $6.8 million and $22.0 million for the six months ended July 2, 2000 and June 27, 1999, respectively. The decrease in capital expenditures was primarily due to the reduction in new units, replacements and re-imaging projects. Proceeds from the sale of property and equipment were $24.4 million and $2.8 million in the six months ended July 2, 2000 and June 27, 1999, respectively. The increase in proceeds from the sales of property and equipment is primarily due to $16.6 million of proceeds received as a result of sales of restaurants to franchisees. Net cash used in financing activities was $10.4 million in the six months ended July 2, 2000. Net cash provided by financing activities was $10.8 million in the six months ended June 27, 1999. The Company had a working capital deficit of $46.2 million as of July 2, 2000. The Company is able to operate with a substantial working capital deficit because: (i) restaurant operations are conducted primarily on a cash (and cash equivalent) basis with a low level of accounts receivable; (ii) rapid turnover allows a limited investment in inventories and (iii) cash from sales is usually received before related expenses for food, supplies and payroll are paid. The Company's credit facility imposes significant operating and financial restrictions on the Company's ability to, among other things, incur indebtedness, create liens, sell assets, engage in mergers or consolidations, pay dividends and engage in certain transactions with affiliates. The credit facility limits the amount which the Company may spend on capital expenditures and requires the Company to comply with certain financial covenants. The Company's credit facility also restricts the use of proceeds from asset sales. Proceeds, as defined in the credit agreement, in excess of stated maximum allowable amounts must be used to permanently reduce outstanding obligations under the credit facility. Prepayments are applied first to the term loans in inverse order of maturity and secondly, to permanently reduce the revolving credit commitment. During the period from July 3, 2000 through December 31, 2000, the Company may retain up to a maximum of $3.0 million of net proceeds from any asset sales to be invested into additional capital expenditures. The Company's long-term debt is classified as of July 2, 2000 based on the terms of an agreement reached in August, 2000 with its lenders. 25 The Company anticipates requiring capital in the future principally to maintain existing restaurant and plant facilities, to continue to renovate and re-image existing restaurants, to convert restaurants and to construct new restaurants. Capital expenditures for 2000 are anticipated to be $27.0 million in the aggregate, of which $20.0 million will be spent on restaurant operations. The Company's actual 2000 capital expenditures may vary from these estimated amounts. The Company believes that the combination of the funds anticipated to be generated from operating activities and borrowing availability under the credit facility will be sufficient to meet the Company's anticipated operating requirements, capital requirements and obligations associated with the restructuring. SEASONALITY Due to the seasonality of frozen dessert consumption and the effect from time to time of weather on patronage in its restaurants, the Company's revenues and EBITDA are typically higher in its second and third quarters. GEOGRAPHIC CONCENTRATION Approximately 89% of the Company owned restaurants are located, and substantially all of its retail sales are generated, in the Northeast. As a result, a severe or prolonged economic recession or changes in demographic mix, employment levels, population density, weather, real estate market conditions or other factors specific to this geographic region may adversely affect the Company more than certain of its competitors which are more geographically diverse. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change in the Company's market risk exposure since the filing of the Annual Report on Form 10K. 26 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) An annual meeting of Company's shareholders was held on May 10, 2000. (b) Not applicable. (c) The election of one nominee for director of the Company was voted upon at the meeting. The number of affirmative votes and the number of votes withheld with respect to such approval is as follows: Nominee Affirmative Votes Votes Withheld ------- ----------------- -------------- Donald N. Smith 5,839,557 942,782 The results of the voting to approve the appointment of Arthur Andersen LLP to audit the accounts of the Company and its subsidiaries for 2000 are as follows: For Against Abstain --- ------- ------- 6,747,888 27,301 7,150 There were no matters voted upon at the Company's annual meeting to which broker non-votes applied. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1 Financial Data Schedule (b) No report on Form 8-K was filed during the three months and six months ended July 2, 2000. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRIENDLY ICE CREAM CORPORATION By: By: /s/ Paul J. Kelley -------------------- Name: Paul J. Kelley Title: Senior Vice President, Chief Financial Officer, Treasurer and Assistant Clerk 27