-----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, GI7eO2CH0XWgl1L3i4Hpe53Lz2FSVjExcO1PA14V/LWoGeRp1gu6d7wgpzQnk8DB YR09wHFsKGzj5JaA3cUYUg== /in/edgar/work/0000912057-00-048169/0000912057-00-048169.txt : 20001110 0000912057-00-048169.hdr.sgml : 20001110 ACCESSION NUMBER: 0000912057-00-048169 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001001 FILED AS OF DATE: 20001109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRIENDLY ICE CREAM CORP CENTRAL INDEX KEY: 0000039135 STANDARD INDUSTRIAL CLASSIFICATION: [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: 757110 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 a2028863z10-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 October 1, 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 NOVEMBER 9, 2000 Common Stock, $.01 par value 7,405,107 shares PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
October 1, January 2, 2000 2000 ---- ---- (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $9,020 $12,062 Restricted cash 2,788 2,066 Accounts receivable, net 5,864 3,924 Inventories 13,530 11,352 Deferred income taxes 5,657 5,657 Prepaid expenses and other current assets 3,037 6,298 -------- -------- TOTAL CURRENT ASSETS 39,896 41,359 PROPERTY AND EQUIPMENT, net 235,938 289,839 INTANGIBLES AND DEFERRED COSTS, net 22,126 23,613 OTHER ASSETS 1,788 1,559 -------- -------- TOTAL ASSETS $299,748 $356,370 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current maturities of long-term debt $16,512 $13,673 Current maturities of capital lease and finance obligations 2,075 1,688 Accounts payable 26,652 26,073 Accrued salaries and benefits 12,200 13,889 Accrued interest payable 8,578 4,006 Insurance reserves 7,945 9,748 Restructuring reserve 6,865 - Other accrued expenses 14,590 20,106 -------- -------- TOTAL CURRENT LIABILITIES 95,417 89,183 -------- -------- DEFERRED INCOME TAXES 12,957 29,747 CAPITAL LEASE AND FINANCE OBLIGATIONS, less current maturities 8,362 7,913 LONG-TERM DEBT, less current maturities 261,915 292,432 OTHER LONG-TERM LIABILITIES 22,632 26,800 STOCKHOLDERS' EQUITY (DEFICIT): Common stock 74 75 Preferred stock - - Additional paid-in capital 138,889 138,459 Accumulated deficit (240,498) (228,239) -------- -------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (101,535) (89,705) -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $299,748 $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 Nine Months Ended ----------------------------- ---------------------------- October 1, September 26, October 1, September 26, 2000 1999 2000 1999 ---- ---- ---- ---- REVENUES (Note 5) $161,841 $192,087 $465,261 $513,859 COSTS AND EXPENSES: Cost of sales 54,080 56,403 149,146 150,812 Labor and benefits 47,822 62,364 145,397 171,687 Operating expenses 32,437 38,969 95,197 106,677 General and administrative expenses 9,016 11,374 30,770 34,018 Relocation of manufacturing and distribution facility - - - 800 Restructuring costs - - 12,056 - Write-downs of property and equipment 664 140 19,024 729 Depreciation and amortization 7,426 8,914 23,166 25,709 Loss (gain) on franchise sales of restaurant operations and properties 95 (1,594) (1,923) (2,507) Gains on sales of other property and equipment (964) (131) (2,018) (468) -------- -------- ------- -------- OPERATING INCOME (LOSS) 11,265 15,648 (5,554) 26,402 Interest expense, net 7,594 8,242 23,495 24,879 Recovery of write-down of joint venture - - - (896) -------- -------- ------- -------- INCOME (LOSS) BEFORE (PROVISION FOR) BENEFIT FROM INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 3,671 7,406 (29,049) 2,419 (Provision for) benefit from income taxes (425) (2,233) 16,790 (188) -------- -------- ------- -------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 3,246 5,173 (12,259) 2,231 Cumulative effect of change in accounting principle, net of income tax benefit of $222 - - - (319) -------- -------- ------- -------- NET INCOME (LOSS) $3,246 $5,173 $(12,259) $ 1,912 ======== ======== ======== ======== BASIC NET INCOME (LOSS) PER SHARE: Income (loss) before cumulative effect of change in accounting principle $0.44 $0.69 $(1.65) $0.30 Cumulative effect of change in accounting principle, net of income tax benefit - - - (0.04) -------- -------- ------- -------- Net income (loss) $0.44 $0.69 $(1.65) $ 0.26 ======== ======== ======== ======== DILUTED NET INCOME (LOSS) PER SHARE: Income (loss) before cumulative effect of change in accounting principle $0.44 $0.69 $(1.65) $0.29 Cumulative effect of change in accounting principle, net of income tax benefit - - - (0.04) -------- -------- ------- -------- Net income (loss) $0.44 $0.69 $(1.65) $ 0.25 ======== ======== ======== ======== WEIGHTED AVERAGE SHARES: Basic 7,409 7,495 7,439 7,490 ======== ======== ======== ======== Diluted 7,437 7,524 7,439 7,504 ======== ======== ======== ========
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 Nine Months Ended ---------------------------- October 1, September 26, 2000 1999 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $(12,259) $1,912 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Cumulative effect of change in accounting principle - 319 Stock compensation expense 429 518 Relocation of manufacturing and distribution facility - 800 Depreciation and amortization 23,166 25,709 Write-downs of property and equipment 19,024 729 Deferred income tax (benefit) expense (16,790) 188 Gain on asset dispositions (3,245) (1,855) Non-cash recovery of write-down of joint venture - (69) Changes in operating assets and liabilities: Accounts receivable (1,940) 728 Inventories (2,178) (1,629) Other assets 2,651 (915) Accounts payable 579 9,989 Accrued expenses and other long-term liabilities (1,739) (1,838) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 7,698 34,586 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (12,807) (36,828) Proceeds from sales of property and equipment 31,089 11,639 Proceeds from sale of joint venture - 1,150 -------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 18,282 (24,039) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings 74,000 72,000 Repayments of debt (101,678) (74,678) Repayments of capital lease and finance obligations (1,344) (1,284) -------- -------- NET CASH USED IN FINANCING ACTIVITIES (29,022) (3,962) -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH - (2) -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,042) 6,583 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,062 11,091 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $9,020 $17,674 ======== ======== SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Interest $18,101 $18,671 Income taxes 62 9 Capital lease obligations incurred 2,891 - 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 Nine Months Ended ----------------------------- --------------------------- October 1, September 26, October 1, September 26, 2000 1999 2000 1999 ---- ---- ---- ---- NET INCOME (LOSS) $3,246 $5,173 $(12,259) $1,912 OTHER COMPREHENSIVE (LOSS), NET OF TAX: Currency translation effects - - - (2) ------- ------- --------- ------- OTHER COMPREHENSIVE (LOSS) - - - (2) ------- ------- --------- ------- COMPREHENSIVE INCOME (LOSS) $3,246 $5,173 $(12,259) $1,910 ======= ======= ========= =======
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 October 1, 2000 and for the third quarter and nine months ended October 1, 2000 and September 26, 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 nine month periods ended October 1, 2000 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 October 1, 2000 and January 2, 2000 were as follows (in thousands):
October 1, January 2, 2000 2000 ---- ---- Raw materials $864 $354 Goods in process 260 126 Finished goods 12,406 10,872 ------ ------ Total $13,530 $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 21,833 for the nine months ended October 1, 2000. Presented below is the reconciliation between basic and diluted weighted average shares for the three months and nine months ended October 1, 2000 and September 26, 1999 (in thousands):
For the Three Months Ended -------------------------- Basic Diluted ----- ------- October 1, 2000 September 26, 1999 October 1, 2000 September 26, 1999 --------------- ------------------ --------------- ------------------ Weighted average number of common shares outstanding during the period 7,409 7,495 7,409 7,495 Adjustments: Assumed exercise of stock options - - 28 29 ------- --------- -------- ------- Weighted average number of shares outstanding 7,409 7,495 7,437 7,524 ======= ========= ======== =======
5 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited)
For the Nine Months Ended ------------------------- Basic Diluted ----- ------- October 1, 2000 September 26, 1999 October 1, 2000 September 26, 1999 --------------- ------------------ --------------- ------------------ Weighted average number of common shares outstanding during the period 7,439 7,490 7,439 7,490 Adjustments: Assumed exercise of stock options - - - 14 ------- -------- ------- -------- Weighted average number of shares outstanding 7,439 7,490 7,439 7,504 ======= ======== ======= ========
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 was 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 nine months ended September 26, 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 (as disclosed on the Annual Report on Form 10-K) 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) (provision for) 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 For the Nine Months Ended ------------------------------- -------------------------------- October 1, September 26, October 1, September 26, 2000 1999 2000 1999 ---- ---- ---- ---- (in thousands) Revenues: Restaurant $137,462 $173,143 $399,685 $464,257 Foodservice (product sales to franchisees, retail and institutional) 65,500 69,968 183,438 185,156 Franchise 1,764 1,331 5,806 3,799 International - - - 23 --------- --------- --------- --------- Total $204,726 $244,442 $588,929 $653,235 ========= ========= ========= ========= Intersegment revenues: Restaurant $ - $ - $ - $ - Foodservice (product sales to franchisees, retail and institutional) (42,885) (52,355) (123,668) (139,376) Franchise - - - - International - - - - --------- --------- --------- --------- Total $(42,885) $(52,355) $(123,668) $(139,376) ========= ========= ========= ========= External revenues: Restaurant $137,462 $173,143 $399,685 $464,257 Foodservice (product sales to franchisees, retail and institutional) 22,615 17,613 59,770 45,780 Franchise 1,764 1,331 5,806 3,799 International - - - 23 --------- --------- --------- --------- Total $161,841 $192,087 $465,261 $513,859 ========= ========= ========= =========
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 Nine Months Ended ------------------------------- -------------------------------- October 1, September 26, October 1, September 26, 2000 1999 2000 1999 ---- ---- ---- ---- (in thousands) EBITDA: Restaurant $16,814 $21,327 $30,270 $49,272 Foodservice (product sales to franchisees, retail and institutional) 6,406 9,832 18,980 21,400 Franchise 739 750 2,445 2,016 International - (27) (1) (81) Corporate (4,462) (6,999) (14,629) (19,249) --------- --------- --------- --------- Total $19,497 $24,883 $37,065 $53,358 ========= ========= ========= ========= Interest expense, net $7,594 $8,242 $23,495 $24,879 ========= ========= ========= ========= Recovery of write-down of joint venture $ - $ - $ - $(896) ========= ========= ========= ========= Income (loss) before (provision for) benefit from income taxes and cumulative effect of change in accounting principle: Restaurant* $11,098 $14,543 $(4,736) $29,217 Foodservice (product sales to franchisees, retail and institutional) 5,581 8,992 16,440 18,761 Franchise 649 612 2,172 1,549 International - (27) (1) 815 Corporate (13,657) (16,714) (42,924) (47,923) --------- --------- --------- --------- Total $3,671 $7,406 $(29,049) $2,419 ========= ========= ========= ========= Depreciation and amortization: Restaurant $5,052 $6,644 $15,982 $19,326 Foodservice (retail and institutional) 825 840 2,540 2,639 Franchise 90 138 273 467 Corporate 1,459 1,292 4,371 3,277 --------- --------- --------- --------- Total $7,426 $8,914 $23,166 $25,709 ========= ========= ========= ========= Capital expenditures, including capitalized leases: Restaurant $5,824 $9,103 $12,662 $31,101 Foodservice (retail and institutional) 44 942 1,841 3,856 Corporate 659 467 1,195 1,871 --------- --------- --------- --------- Total $6,527 $10,512 $15,698 $36,828 ========= ========= ========= ========= October 1, January 2, Identifiable assets: 2000 2000 ---- ---- Restaurant $209,761 $265,062 Foodservice (retail and institutional) 36,333 29,625 Franchise 4,613 3,935 International - 28 Corporate 49,041 57,720 --------- --------- Total $299,748 $356,370 ========= =========
* Includes restructuring costs of $12.1 million and the write-downs of property and equipment of $19.0 million recorded during the nine months ended October 1, 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 adopted EITF No. 00-14 on July 3, 2000. As a result, the Company has reclassified certain retail selling expenses against retail revenue for all periods presented. 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. 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 Nine Months Ended Accrued as of Expense October 1, 2000 October 1, 2000 ------- --------------- --------------- Severance pay $1,503 $(1,331) $172 Rent 5,490 (1,578) 3,912 Utilities and real estate taxes 1,632 (786) 846 Demarking 760 (338) 422 Lease termination costs 718 - 718 Environmental costs 404 (6) 398 Inventory 111 (99) 12 Equipment 727 (727) - Outplacement services 160 (112) 48 Other 551 (214) 337 ------- ------- ------ Total $12,056 $(5,191) $6,865 ======= ======== ======
The write-down of property and equipment consisted of $7.8 million for the 81 locations closed at the end of March 2000 and $9.2 million for the 70 locations which will be disposed of over the next 24 months. As of October 1, 2000, the Company has sold 37 of the 151 restructuring properties, of which 30 were included in the 81 restaurants which were closed in March 2000. In addition, the Company has terminated its lease obligations at 24 restructuring properties, of which 20 were included in the list of 81 restaurants which were closed in March 2000. At October 1, 2000, the carrying value of the remaining 90 properties to be disposed of was $8.6 million and is reflected in the condensed consolidated balance sheets as property and equipment, net. As a result of the sales of closed properties from the restructuring, the Company recognized gains of approximately $1.0 million and $2.0 million for the three and nine months ended October 1, 2000. Based on information currently available, management believes that the restructuring reserve as of October 1, 2000 is adequate and not excessive and the carrying value of the remaining 90 properties to be disposed of as of October 1, 2000 is realizable. 10 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 7. DEBT The Company's credit facility was amended on September 28, 2000. The Consolidated leverage ratio was increased from 4.20 to 4.70 and the Consolidated interest coverage ratio was reduced from 1.70 to 1.50. The cost of the amendment was approximately $150,000. 8. SUBSEQUENT EVENT On October 2, 2000, the Company entered into an agreement granting Kessler Family LLC ("Kessler"), an existing franchisee, non-exclusive rights to operate and develop Friendly's full-service restaurants in the franchising region of Elmira, Binghamton, Utica and Watertown, New York (the "Second Kessler Agreement"). Pursuant to the Second Kessler Agreement, Kessler purchased certain assets and rights in 12 existing Friendly's restaurants and has an option to open an additional eight restaurants over the next six years. Gross proceeds from the sale were approximately $8,100,000, of which $370,000 was for franchise fees for the initial 12 restaurants. The $370,000 will be recorded as revenue in the year ending December 31, 2000. The Company will recognize a gain of approximately $3,600,000 related to the sale of the assets for the 12 existing franchised locations in the fourth quarter of fiscal 2000. 9. 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 October 1, 2000 and September 26, 1999, and for the periods ended October 1, 2000 and September 26, 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) 9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET AS OF OCTOBER 1, 2000 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated --------- ---------- ------------- ------------ ------------ Assets Current assets: Cash and cash equivalents $8,218 $11 $791 $ - $9,020 Restricted cash - - 2,788 - 2,788 Accounts receivable, net 5,368 496 - - 5,864 Inventories 13,530 - - - 13,530 Deferred income taxes 5,471 12 - 174 5,657 Prepaid expenses and other current assets 7,867 582 4,021 (9,433) 3,037 --------- ------ ------- -------- -------- Total current assets 40,454 1,101 7,600 (9,259) 39,896 Deferred income taxes - 903 1,333 (2,236) - Property and equipment, net 235,938 - - - 235,938 Intangibles and deferred costs, net 22,126 - - - 22,126 Investments in subsidiaries 3,149 - - (3,149) - Other assets 874 3,977 5,729 (8,792) 1,788 --------- ------ ------- -------- -------- Total assets $302,541 $5,981 $14,662 $(23,436) $299,748 ========= ====== ======= ========= ======== Liabilities and Stockholders' Equity (Deficit) Current liabilities: Current maturities of long-term obligations $22,587 $ - $ - $(4,000) $18,587 Deferred income taxes - - 1 (1) - Accounts payable 26,652 - - - 26,652 Accrued expenses 46,510 867 8,234 (5,433) 50,178 ------ --- ----- ------- ------ Total current liabilities 95,749 867 8,235 (9,434) 95,417 Deferred income taxes 15,018 - - (2,061) 12,957 Long-term obligations, less current maturities 275,091 - - (4,814) 270,277 Other long-term liabilities 18,218 2,481 5,911 (3,978) 22,632 Stockholders' equity (deficit) (101,535) 2,633 516 (3,149) (101,535) --------- ----- --- ------- --------- Total liabilities and stockholders' equity (deficit) $302,541 $5,981 $14,662 $(23,436) $299,748 ========= ====== ======= ========= ========
12 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION(CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 1, 2000 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------- ------------ ------------ Revenues $160,511 $1,330 $ - $ - $161,841 Costs and expenses: Cost of sales 54,080 - - - 54,080 Labor and benefits 47,822 - - - 47,822 Operating expenses and write-downs of property and equipment 33,145 - (44) - 33,101 General and administrative expenses 7,336 1,680 - - 9,016 Depreciation and amortization 7,426 - - - 7,426 Loss on sales of restaurant operations and properties 95 - - - 95 Gains on sales of other property and equipment (964) - - - (964) Interest expense (income) 7,768 - (174) - 7,594 ------ ------ ---- --- ------ Income (loss) before (provision for) benefit from income taxes and equity in net loss of consolidated subsidiaries 3,803 (350) 218 - 3,671 (Provision for) benefit from income taxes (493) 144 (76) - (425) ------ ------ ---- --- ------ Income (loss) before equity in net loss of consolidated subsidiaries 3,310 (206) 142 - 3,246 Equity in net loss of consolidated subsidiaries (64) - - 64 - ------ ------ ---- --- ------ Net income (loss) $3,246 $ (206) $142 $64 $3,246 ====== ====== ==== === ======
13 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED OCTOBER 1, 2000 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------- ------------ ------------ Revenues $460,751 $4,510 $ - $ - $465,261 Costs and expenses: Cost of sales 149,146 - - - 149,146 Labor and benefits 145,397 - - - 145,397 Operating expenses and write-downs of property and equipment 114,380 - (159) - 114,221 General and administrative expenses 27,819 2,951 - - 30,770 Restructuring costs 12,056 - - - 12,056 Depreciation and amortization 23,166 - - - 23,166 Gain on sales of restaurant operations and properties (1,923) - - - (1,923) Gains on sales of other property and equipment (2,018) - - - (2,018) Interest expense (income) 24,014 - (519) - 23,495 --------- -------- -------- ------- -------- (Loss) income before benefit from (provision for) income taxes and equity in net income of consolidated subsidiaries (31,286) 1,559 678 - (29,049) Benefit from (provision for) income taxes 17,666 (639) (237) - 16,790 --------- -------- -------- ------- -------- (Loss) income before equity in net income of consolidated subsidiaries (13,620) 920 441 - (12,259) Equity in net income of consolidated subsidiaries 1,361 - - (1,361) - --------- -------- -------- ------- -------- Net (loss) income $(12,259) $920 $441 $(1,361) $(12,259) ========= ======== ======== ======= ========
14 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED OCTOBER 1, 2000 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------- ------------ ------------ Net cash provided by (used in) operating activities $9,284 $(3) $(1,583) $ - $7,698 --------- ------ -------- ----- --------- Cash flows from investing activities: Purchases of property and equipment (12,807) - - - (12,807) Proceeds from sales of property and equipment 31,089 - - - 31,089 --------- ------ -------- ----- --------- Net cash provided by investing activities 18,282 - - - 18,282 --------- ------ -------- ----- --------- Cash flows from financing activities: Proceeds from borrowings 74,000 - - - 74,000 Repayments of obligations (103,022) - - - (103,022) --------- ------ -------- ----- --------- Net cash used in financing activities (29,022) - - - (29,022) --------- ------ -------- ----- --------- Net decrease in cash and cash equivalents (1,456) (3) (1,583) - (3,042) Cash and cash equivalents, beginning of period 9,674 14 2,374 - 12,062 --------- ------ -------- ----- --------- Cash and cash equivalents, end of period $8,218 $11 $791 $ - $9,020 ========= ====== ======== ===== ========= Supplemental disclosures: Cash paid (received) for: Interest $18,805 $ - $(704) $ - $18,101 Income taxes (1,075) 891 246 - 62 Capital lease obligations incurred 2,891 - - - 2,891 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) 9. 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) 9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 26, 1999 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------- ------------ ------------ Revenues $191,363 $723 $ 1 $ - $192,087 Costs and expenses: Cost of sales 56,402 - 1 - 56,403 Labor and benefits 62,364 - - - 62,364 Operating expenses and write-downs of property and equipment 39,162 - (53) - 39,109 General and administrative expenses 10,957 423 (6) - 11,374 Depreciation and amortization 8,914 - - - 8,914 Gain on sales of restaurant operations and properties (1,594) - - - (1,594) Gains on sales of other property and equipment (131) - - - (131) Interest expense (income) 8,427 - (185) - 8,242 -------- ---- ---- ---- ------- Income before provision for income taxes and equity in net income of consolidated subsidiaries 6,862 300 244 - 7,406 Provision for income taxes (2,026) (124) (83) - (2,233) -------- ---- ---- ---- ------- Income before equity in net income of consolidated subsidiaries 4,836 176 161 - 5,173 Equity in net income of consolidated subsidiaries 337 - - (337) - -------- ---- ---- ---- ------- Net income $ 5,173 $176 $161 $(337) $ 5,173 ======== ==== ==== ==== =======
17 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 26, 1999 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------- ------------ ------------ Revenues $511,852 $ 1,983 $ 24 $ - $513,859 Costs and expenses: Cost of sales 150,794 - 18 - 150,812 Labor and benefits 171,687 - - - 171,687 Operating expenses and write-downs of property and equipment 108,361 - (155) - 108,206 General and administrative expenses 32,806 1,279 (67) - 34,018 Depreciation and amortization 25,709 - - - 25,709 Gain on sales of restaurant operations and properties (2,507) - - - (2,507) Gains on sales of other property and equipment (468) - - - (468) Interest expense (income) 25,427 - (548) - 24,879 Recovery of write-down of joint venture (896) - - - (896) -------- ------- ---- ----- --------- Income before benefit from (provision for) income taxes, cumulative effect of change in accounting principle and equity in net income of consolidated subsidiaries 939 704 776 - 2,419 Benefit from (provision for) income taxes 346 (289) (245) - (188) -------- ------- ---- ----- --------- Income before cumulative effect of change in accounting principle and equity in net income of consolidated subsidiaries 1,285 415 531 - 2,231 Cumulative effect of change in accounting principle (319) - - - (319) -------- ------- ---- ----- --------- Income before equity in net income of consolidated subsidiaries 966 415 531 - 1,912 Equity in net income of consolidated subsidiaries 946 - - (946) - -------- ------- ---- ----- --------- Net income $ 1,912 $415 $531 $(946) $ 1,912 ======== ======= ==== ===== =========
18 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 26, 1999 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------- ------------ ------------ Net cash provided by (used in) operating activities $34,285 $(32) $333 $- $34,586 ------- ----- ---- --- ------- Cash flows from investing activities: Purchases of property and equipment (36,828) - - - (36,828) Proceeds from sales of property and equipment 11,639 - - - 11,639 Proceeds from sale of joint venture 1,150 - - - 1,150 ------- ----- ---- --- ------- Net cash used in investing activities (24,039) - - - (24,039) ------- ----- ---- --- ------- Cash flows from financing activities: Proceeds from borrowings 72,000 - - - 72,000 Repayments of obligations (75,962) - - - (75,962) ------- ----- ---- --- ------- Net cash used in financing activities (3,962) - - - (3,962) ------- ----- ---- --- ------- Effect of exchange rate changes on cash - - (2) - (2) ------- ----- ---- --- ------- Net increase (decrease) in cash and cash equivalents 6,284 (32) 331 - 6,583 Cash and cash equivalents, beginning of period 9,180 53 1,858 - 11,091 ------- ----- ----- --- ------- Cash and cash equivalents, end of period $15,464 $ 21 $2,189 $- $17,674 ======= ===== ====== === ======= Supplemental disclosures: Cash paid (received) for: Interest $19,034 $ - $(363) $- $18,671 Income taxes 12 212 (215) - 9
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 October 1, 2000, the Company owns and operates 471 (of which 90 restaurants are held for disposition) restaurants, franchises 108 restaurants and 7 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 17 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 NINE MONTHS ENDED -------------------------- ------------------------- October 1, September 26, October 1, September 26, 2000 1999 2000 1999 ---- ---- ---- ---- Revenues: Restaurant 84.9% 90.1% 85.9% 90.3% Foodservice (product sales to franchisees, retail and institutional) 14.0 9.2 12.9 8.9 Franchise 1.1 0.7 1.2 0.8 ------ ------ ----- ----- Total revenues 100.0 100.0 100.0 100.0 ------ ------ ----- ----- Costs and expenses: Cost of sales 33.4 29.4 32.0 29.3 Labor and benefits 29.6 32.5 31.3 33.4 Operating expenses 20.0 20.3 20.5 20.8 General and administrative expenses 5.6 5.9 6.6 6.6 Relocation of manufacturing and distribution facility - - - 0.2 Restructuring costs - - 2.6 - Write-downs of property and equipment 0.4 0.1 4.1 0.1 Depreciation and amortization 4.6 4.6 5.0 5.0 Loss (gain) on sales of restaurant operations and properties 0.1 (0.8) (0.4) (0.5) Gains on sales of other property and equipment (0.6) (0.1) (0.5) (0.1) ----- ----- ----- ----- Operating income (loss) 6.9 8.1 (1.2) 5.2 Interest expense, net 4.6 4.3 5.0 4.9 Recovery of write-down of joint venture - - - (0.2) ------ ------ ------- ------- Income (loss) before (provision for) benefit from income taxes and cumulative effect of change in accounting principle 2.3 3.8 (6.2) 0.5 (Provision for) benefit from income taxes (0.3) (1.2) 3.6 - ----- ------ ------- ------- Income (loss) before cumulative effect of change in accounting principle 2.0 2.6 (2.6) 0.5 Cumulative effect of change in accounting principle, net of income tax benefit - - - (0.1) -------- -------- --------- ----- Net income (loss) 2.0% 2.6% (2.6)% 0.4% ======== ======== ========= =====
21 REVENUES: 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 adopted EITF No. 00-14 on July 3, 2000. As a result, the Company has reclassified certain retail selling expenses against retail revenue for all periods presented. Total revenues decreased $30.3 million, or 15.8%, to $161.8 million for the third quarter ended October 1, 2000 from $192.1 million for the same quarter in 1999. Restaurant revenues decreased $35.6 million, or 20.6%, to $137.5 million for the third quarter of 2000 from $173.1 million for the same quarter in 1999. Comparable restaurant revenues decreased 6.9%. The closing of 122 restaurants over the past 12 months impacted the decrease in restaurant revenue as the closings accounted for $17.6 million of the decline. The re-franchising of 37 restaurants during fiscal 2000 negatively impacted sales by $10.0 million. Partially offsetting these decreases was the increase in restaurant revenue of $1.3 million for new restaurants open less than 18 months. Foodservice (product sales to franchisees, retail and institutional) and other revenues increased by $5.0 million, or 28.4%, to $22.6 million for the third quarter of 2000 from $17.6 million for the same quarter in 1999. The increase was primarily due to new franchised locations. Franchise revenue increased $0.5 million, or 38.5%, to $1.8 million for the three months ended October 1, 2000 compared to $1.3 million for the three months ended September 26, 1999. The increase is primarily the result of the fact that there are 115 franchise units open at the end of the third quarter ended October 1, 2000 compared to 66 franchise units open at the end of the third quarter ended September 26, 1999. Total revenues decreased $48.6 million, or 9.5%, to $465.3 million for the nine months ended October 1, 2000 from $513.9 million for the same period in 1999. Restaurant revenues decreased $64.6 million, or 13.9%, to $399.7 million for the nine months ended October 1, 2000 from $464.3 million for the same period in 1999. Comparable restaurant revenues decreased 2.4%. The closing of 146 restaurants over the past 21 months impacted the decrease in restaurant revenues as the closings accounted for $37.7 million of the decline. The re-franchising of 37 restaurants during fiscal 2000 negatively impacted sales by $25.0 million. Partially offsetting these decreases was the increase in restaurant revenue of $7.9 million for new restaurants open less than 18 months. Foodservice (product sales to franchisees, retail and institutional) and other revenues increased by $14.0 million, or 30.6%, to $59.8 million for the nine months ended October 1, 2000 from $45.8 million for the nine months ended September 26, 1999. The increase was primarily due to an increase in the number of franchised locations. Franchise revenue was $5.8 million for the nine months ended October 1, 2000 compared to $3.8 million for the nine months ended September 26, 1999. The increase is primarily the result of the fact that there are 115 franchise units open at the end of the nine months ended October 1, 2000 compared to 66 franchise units open at the end of the nine months ended September 26, 1999. COST OF SALES: Cost of sales decreased $2.3 million, or 4.1% to $54.1 million for the third quarter ended October 1, 2000 from $56.4 million for the same quarter in 1999. Cost of sales as a percentage of total revenues increased to 33.4% for the third quarter of 2000 from 29.4% for the third 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 and an increase in retail supermarket sales. Foodservice sales to franchisees have a higher food cost as a percentage of revenue than sales to Company owned restaurants. Additionally, restaurant ice cream sales suffered, as weather in general was more favorable in the 1999 period when compared to 2000. Cost of sales decreased $1.7 million, or 1.1%, to $149.1 million for the nine months ended October 1, 2000 from $150.8 million for the same period in 1999. Cost of sales as a percentage of total revenues increased to 32.0% for the nine months in 2000 from 29.3% 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 $14.6 million, or 23.4%, to $47.8 million for the third quarter ended October 1, 2000 from $62.4 million for the same quarter in 1999. Labor and benefits as a percentage of total revenues decreased to 29.6% for the third quarter of 2000 from 32.5% 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. The closing of 122 lower volume restaurants over the past 12 months also resulted in a decline in restaurant labor as a percentage of total sales. Partially offsetting the decreases were higher group insurance claims per participant in 2000 when compared to 1999. 22 Labor and benefits decreased $26.3 million, or 15.3%, to $145.4 million for the nine months ended October 1, 2000 from $171.7 million for the same period in 1999. Labor and benefits as a percentage of total revenues decreased to 31.3% for the nine months of 2000 from 33.4% 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. The closing of 146 lower volume restaurants over the past 21 months also resulted in a decline in restaurant labor as a percentage of total sales. Partially offsetting the decreases were higher group insurance claims per participant in 2000 when compared to 1999. OPERATING EXPENSES: Operating expenses decreased $6.5 million, or 16.7%, to $32.4 million for the third quarter ended October 1, 2000 from $38.9 million for the same quarter in 1999. The decline in the number of operating restaurants reduced restaurant expenses. The growth in Foodservice sales to franchisees also favorably impacted the comparison of operating expenses to revenues as increases in these revenues resulted in only minor increases in operating expenses. 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 20.0% and 20.3% for the third quarters ended October 1, 2000 and September 26, 1999, respectively. Operating expenses decreased $11.5 million, or 10.8%, to $95.2 million for the nine months ended October 1, 2000 from $106.7 million for the same period in 1999. The decline in the number of operating restaurants reduced restaurant expenses. The growth in Foodservice sales to franchisees also favorably impacted the comparison of operating expenses to revenues as increases in these revenues resulted in only minor increases in operating expenses. 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 20.5% and 20.8% for the nine months ended October 1, 2000 and September 26, 1999, respectively. GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were $9.0 million for the third quarter ended October 1, 2000 and $11.4 million for the same period in 1999. General and administrative expenses as a percentage of total revenues decreased to 5.6% in the third quarter of 2000 from 5.9% for the same period in 1999. The March 2000 reduction of management/administrative positions associated with the closing of 81 restaurants and the planned closing of 70 additional restaurants benefited the quarter on quarter expenses comparison. Bonus expense was also lower in the current year's quarter. Costs associated with the number of franchised locations increased in the 2000 period when compared to 1999. General and administrative expenses were $30.8 million and $34.0 million for the nine months ended October 1, 2000 and September 26, 1999, respectively. General and administrative expenses as a percentage of total revenues was 6.6% for the nine months ended October 1, 2000 and for the same period in 1999. The March 2000 reduction of management/administrative positions associated with the closing of 81 restaurants and the planned closing of 70 additional restaurants benefited the comparison of the current year's costs to the prior year. Bonus expense in the current year was higher than the prior year. Costs associated with the number of franchised locations increased in the 2000 period when compared to 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 $5.4 million, or 21.7%, to $19.5 million for the third quarter ended October 1, 2000 from $24.9 million for the same quarter in 1999. EBITDA as a percentage of total revenues was 12.1% and 12.9% for the third quarters of 2000 and 1999, respectively. EBITDA decreased $16.3 million, or 30.5%, to $37.1 million for the nine months ended October 1, 2000 from $53.4 million for the same period in 1999. EBITDA as a percentage of total revenues was 8.0% and 10.4% for the nine months ended October 1, 2000 and September 26, 1999, respectively. RESTRUCTURING COSTS: Restructuring costs were $12.1 million for the nine months ended October 1, 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. 23 WRITE-DOWNS OF PROPERTY AND EQUIPMENT: Write-downs of property and equipment were $0.7 million and $0.1 million for the three months ended October 1, 2000 and September 26, 1999, respectively. Write-downs of property and equipment were $19.0 million and $0.7 million for the nine months ended October 1, 2000 and September 26, 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 2000 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 decreased $1.5 million, or 16.9%, to $7.4 million for the third quarter ended October 1, 2000 from $8.9 million for the same quarter in 1999. Depreciation and amortization as a percentage of total revenues was 4.6% for the third quarter of 2000 and for the same quarter in 1999. Depreciation and amortization decreased $2.5 million, or 9.7%, to $23.2 million for the nine months ended October 1, 2000 from $25.7 million for the same period in 1999. Depreciation and amortization as a percentage of total revenues was 5.0% for the nine months ended October 1, 2000 and for the same period in 1999. LOSS (GAIN) ON SALES OF RESTAURANT OPERATIONS AND PROPERTIES: Loss on sales of restaurant operations and properties for the third quarter ended October 1, 2000 was $0.1 million compared to a gain on sales of restaurant operations and properties of $1.6 million for the third quarter ended September 26, 1999. The decrease was the result of the sale of the land and buildings associated with 13 previously franchised restaurants to the Company's largest franchisee for the third quarter ended September 26, 1999. The gain on sales of restaurant operations and properties for the nine months ended October 1, 2000 was $1.9 million compared to the gain on sales of restaurant operations and properties for the nine months ended September 26, 1999 of $2.5 million. The Company recognized a 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 nine months ended October 1, 2000. The gain on the sales of restaurant operations and properties for the nine months ended September 26, 1999 represented the income related to the sale of the equipment and operating rights for three existing restaurants to three franchisees along with the sale of the land and buildings associated with 13 previously franchised restaurants to the Company's largest franchisee. On October 2, 2000, the Company entered into an agreement granting Kessler Family LLC ("Kessler"), an existing franchisee, non-exclusive rights to operate and develop Friendly's full-service restaurants in the franchising region of Elmira, Binghamton, Utica and Watertown, New York (the "Second Kessler Agreement"). Pursuant to the Second Kessler Agreement, Kessler purchased certain assets and rights in 12 existing Friendly's restaurants and has an option to open an additional eight restaurants over the next six years. Gross proceeds from the sale were approximately $8,100,000, of which $370,000 was for franchise fees for the initial 12 restaurants. The $370,000 will be recorded as revenue in the year ending December 31, 2000. The Company will recognize a gain of approximately $3,600,000 related to the sale of the assets for the 12 existing franchised locations in the fourth quarter of fiscal 2000. GAINS ON SALES OF OTHER PROPERTY AND EQUIPMENT: The gains on sales of other property and equipment were $1.0 million and $0.1 million for the three months ended October 1, 2000 and September 26, 1999, respectively. The gains on sales of other property and equipment were $2.0 million and $0.5 million for the nine months ended October 1, 2000 and September 26, 1999, respectively. The increase in these gains is the result of the Company selling restaurant properties over the course of the year in connection with its restructuring plan. INTEREST EXPENSE, NET: Interest expense, net of capitalized interest and interest income, decreased by $0.6 million, or 7.3%, to $7.6 million for the third quarter ended October 1, 2000 from $8.2 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 third quarter ended October 1, 2000 compared to the third quarter ended September 26, 1999. Since September 26, 1999, the Company has made $8.2 million of scheduled principal payments and has used $25.7 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 $1.4 million, or 5.6%, to $23.5 million for the nine months ended October 1, 2000 from $24.9 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 nine months ended October 1, 2000 compared to the nine months ended September 26, 1999. 24 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 nine months ended September 26, 1999, the Company reported a $0.9 million payment from the sale which was received on March 17, 1999, as income. (PROVISION FOR) BENEFIT FROM INCOME TAXES: The provision for income taxes was $0.4 million, or 11.6%, for the third quarter ended October 1, 2000 compared to a provision for income taxes of $2.2 million, or 30.2%, for the third quarter ended September 26, 1999. The benefit from income taxes was $16.8 million, or 57.8% for the nine months ended October 1, 2000, compared to the provision for $0.2 million, or 7.8%, for the nine months ended September 26, 1999. 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 which were previously closed as a result of the restructuring and additional sales to franchisees during the nine months ended October 1, 2000 and September 26, 1999 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 nine months ended September 26, 1999 related to previously deferred restaurant pre-opening costs. NET INCOME (LOSS): Net income was $3.2 million and $5.2 million for the third quarters ended October 1, 2000 and September 26, 1999, respectively. Net loss was $12.3 million for the nine months ended October 1, 2000 and net income was $1.9 million for the nine months ended September 26, 1999. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity and capital resources are cash generated from operations and borrowings under its revolving credit facility. Net cash provided by operating activities was $7.7 million in the nine months ended October 1, 2000 and $34.6 million in the nine months ended September 26, 1999. During the nine months ended October 1, 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 $2.2 million as a result of increased retail promotional activity expected for the fourth quarter. Other assets decreased $2.7 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 $0.8 million as a result of the reduction of Company owned restaurants from the sale of restaurants to franchisees and restaurant closings. Accrued expenses decreased $1.8 million from January 2, 2000 to October 1, 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 $1.2 million reduction in the gift certificate liability as a result of redemptions of year-end gift certificate sales, a $2.6 million reduction of the accrued pension obligation as a result of the Plan's overfunded status and a $3.3 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 $30.0 million as of October 1, 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. The Company's credit facility was amended on September 28, 2000. The Consolidated leverage ratio was increased from 4.20 to 4.70 and the Consolidated interest coverage ratio was reduced from 1.70 to 1.50. The cost of the amendment was approximately $150,000. 25 Net cash provided by investing activities was $18.3 million in the nine months ended October 1, 2000. Net cash used in investing activities was $24.0 million in the nine months ended September 26, 1999. Capital expenditures for restaurant operations, excluding capital leases, were approximately $12.8 million and $36.8 million for the nine months ended October 1, 2000 and September 26, 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 $31.1 million and $11.6 million in the nine months ended October 1, 2000 and September 26, 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 and disposal of properties in connection with restructuring. Net cash used in financing activities was $29.0 million in the nine months ended October 1, 2000 compared to $3.9 million for the nine months ended September 26, 1999. Since September 26, 1999, the Company has made $8.2 million of scheduled principal payments and has used $25.7 million of asset sale proceeds to reduce the amount outstanding on the term loans. The Company had a working capital deficit of $55.5 million as of October 1, 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 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 $24.6 million in the aggregate, of which $18.2 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 nine months ended October 1, 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 EX-27.1 2 a2028863zex-27_1.txt EXHIBIT 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. 9-MOS DEC-31-2000 JAN-03-2000 OCT-01-2000 11,808 0 6,232 368 13,530 39,896 494,383 258,445 299,748 95,417 261,915 0 0 74 (101,609) 299,748 459,455 465,261 149,146 389,740 0 0 23,495 (29,049) (16,790) (12,259) 0 0 0 (12,259) (1.65) (1.65)
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