-----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, EQYVS998/LqXGeyAyoxj1NIaw5u7GZVkYohWWH50kgwDzIOybaEWVnnaSjTxR+DZ FtxUiuJNHx844zYr+Pcxfg== 0000912057-01-516147.txt : 20010516 0000912057-01-516147.hdr.sgml : 20010516 ACCESSION NUMBER: 0000912057-01-516147 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010401 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRIENDLY ICE CREAM CORP CENTRAL INDEX KEY: 0000039135 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 042053130 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13579 FILM NUMBER: 1639388 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 a2047443z10-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 April 1, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from to COMMISSION FILE NO. 0-3930 FRIENDLY ICE CREAM CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 5812 04-2053130 (State of (Primary Standard Industrial (I.R.S. Employer Incorporation) Classification Code Number) Identification No.) 1855 BOSTON ROAD WILBRAHAM, MASSACHUSETTS 01095 (413) 543-2400 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT APRIL 29, 2001 Common Stock, $.01 par value 7,364,283 shares PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
April 1, December 31, 2001 2000 ---- ---- ASSETS (unaudited) CURRENT ASSETS: Cash and cash equivalents $8,769 $14,584 Restricted cash 775 1,737 Accounts receivable, net 5,559 6,157 Inventories 14,080 11,570 Deferred income taxes 10,395 10,395 Prepaid expenses and other current assets 2,278 2,799 ----- ----- TOTAL CURRENT ASSETS 41,856 47,242 ------ ------ PROPERTY AND EQUIPMENT, net 218,674 226,865 INTANGIBLES AND DEFERRED COSTS, net 21,185 21,529 OTHER ASSETS 3,240 2,050 ----- ----- TOTAL ASSETS $284,955 $297,686 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Current maturities of long-term debt $8,771 $13,029 Current maturities of capital lease and finance obligations 2,053 2,143 Accounts payable 19,633 20,100 Accrued salaries and benefits 11,485 10,956 Accrued interest payable 8,685 3,515 Insurance reserves 13,191 13,095 Restructuring reserve 4,844 5,571 Other accrued expenses 14,753 14,262 ------ ------ TOTAL CURRENT LIABILITIES 83,415 82,671 ------ ------ DEFERRED INCOME TAXES 10,880 13,276 CAPITAL LEASE AND FINANCE OBLIGATIONS, less current maturities 7,741 8,223 LONG-TERM DEBT, less current maturities 269,066 275,435 OTHER LONG-TERM LIABILITIES 16,946 18,064 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT: Common stock 74 74 Additional paid-in capital 139,081 138,988 Accumulated deficit (242,248) (239,045) --------- --------- TOTAL STOCKHOLDERS' DEFICIT (103,093) (99,983) --------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $284,955 $297,686 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 1 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data)
For the Three Months Ended -------------------------- April 1, April 2, 2001 2000 ---- ---- REVENUES $126,078 $144,180 COSTS AND EXPENSES: Cost of sales 42,060 44,822 Labor and benefits 39,676 48,176 Operating expenses 27,453 30,951 General and administrative expenses 9,332 11,376 Restructuring costs - 12,057 Write-downs of property and equipment - 17,672 Depreciation and amortization 7,552 8,421 Gain on franchise sales of restaurant operations and properties - (2,087) (Gain) loss on dispositions of other property and equipment (1,981) 464 ------- ------- OPERATING INCOME (LOSS) 1,986 (27,672) Interest expense, net 7,585 7,938 ------- ------- LOSS BEFORE BENEFIT FROM INCOME TAXES (5,599) (35,610) Benefit from income taxes 2,396 17,100 ------- ------- NET LOSS AND COMPREHENSIVE LOSS $(3,203) $(18,510) ======= ======= BASIC AND DILUTED NET LOSS PER SHARE $(0.43) $(2.48) ======= ====== WEIGHTED AVERAGE BASIC AND DILUTED SHARES 7,376 7,471 ======= ======
The accompanying notes are an integral part of these condensed consolidated financial statements. 2 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
For the Three Months Ended -------------------------- April 1, April 2, 2001 2000 ----- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(3,203) $(18,510) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Stock compensation expense 93 141 Depreciation and amortization 7,552 8,421 Write-downs of property and equipment - 17,672 Deferred income tax benefit (2,396) (17,100) Gain on asset retirements and sales (1,981) (2,380) Changes in operating assets and liabilities: Accounts receivable 598 (434) Inventories (2,510) (3,499) Other assets 37 3,834 Accounts payable (467) (992) Accrued expenses and other long-term liabilities 4,441 7,490 ----- ----- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,164 (5,357) ----- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (2,026) (2,227) Proceeds from sales of property and equipment 5,246 16,740 ----- ------ NET CASH PROVIDED BY INVESTING ACTIVITIES 3,220 14,513 ----- ------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings 8,000 33,000 Repayments of debt (18,627) (41,801) Repayments of capital lease and finance obligations (572) (451) ----- ------ NET CASH USED IN FINANCING ACTIVITIES (11,199) (9,252) ------ ------ NET DECREASE IN CASH AND CASH EQUIVALENTS (5,815) (96) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14,584 12,062 ------ ------ CASH AND CASH EQUIVALENTS, END OF PERIOD $8,769 $11,966 ====== ======= SUPPLEMENTAL DISCLOSURES: Cash paid (refunded) during the period for: Interest $2,136 $2,609 Income taxes 2 (21) Capital lease obligations terminated - 659 Notes received from the sale 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 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION INTERIM FINANCIAL INFORMATION - The accompanying condensed consolidated financial statements as of April 1, 2001 and for the first quarter ended April 1, 2001 and April 2, 2000 are unaudited, but, in the opinion of management, include all adjustments which are necessary for a fair presentation of the consolidated financial position, results of operations, cash flows and comprehensive loss of Friendly Ice Cream Corporation ("FICC") and subsidiaries (unless the context indicates otherwise, collectively the "Company"). Such adjustments consist solely of normal recurring accruals. Operating results for the three month period ended April 1, 2001 and April 2, 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 2000 Annual Report on Form 10-K should be read in conjunction with these Condensed Consolidated Financial Statements. INVENTORIES - Inventories are stated at the lower of first-in, first-out cost or market. Inventories as of April 1, 2001 and December 31, 2000 were as follows (in thousands):
April 1, December 31, 2001 2000 ---- ---- Raw materials $1,657 $1,307 Goods in process 139 66 Finished goods 12,284 10,197 ------ ------ Total $14,080 $11,570 ======= ======
DEBT - Since 1997, the Company has entered into several amendments related to covenant violations on its credit facility. In March 2001, under the terms of the seventh amendment, covenant requirements, interest rates and principal payments were revised. The credit facility matures in November 2002 and principal payments of approximately $14,948,000 are due on the term loans in 2001. The Company is in the process of exploring various refinancing alternatives and has engaged Banc of America Securities LLC for assistance in this process. The Company believes that based on the terms of the seventh amendment, the Company has adequate cash and availability on its revolving credit facility to meet its obligations through June 30, 2002. Additionally, the Company believes that it can comply with the revised covenant requirements under the amendment. RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform with current year presentation. 2. NET LOSS PER SHARE Basic net loss per share is calculated by dividing loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated by dividing earnings available to common stockholders by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Common stock equivalents are dilutive stock options that are assumed exercised for calculation purposes. There were no common stock equivalents which were excluded from diluted earnings (loss) per share for the three months ended April 2, 2000 and there were 4,000 common stock equivalents which were excluded from diluted earnings (loss) per share for the three months ended April 1, 2001 since the effect was antidilutive. 4 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 3. SEGMENT REPORTING Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision-maker is the Chairman of the Board and Chief Executive Officer of the Company. The Company's operating segments include restaurant, foodservice and franchise. 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 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. 5 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 3. SEGMENT REPORTING (CONTINUED) EBITDA represents net loss before (i) cumulative effect of change in accounting principle, net of income taxes, (ii) benefit from income taxes, (iii) interest expense, net, (iv) depreciation and amortization and (v) write-downs and all other non-cash items plus cash distributions from unconsolidated subsidiaries. The Company has included information concerning EBITDA in this Form 10-Q because it believes that such information is used by certain investors as one measure of a company's historical ability to service debt. EBITDA should not be considered as an alternative to, or more meaningful than, earnings (loss) from operations or other traditional indications of a company's operating performance.
For the Three Months Ended -------------------------- April 1, April 2, 2001 2000 ---- ---- (in thousands) Revenues: Restaurant $107,145 $125,423 Foodservice (retail and institutional) 48,181 54,993 Franchise 1,561 2,277 -------- -------- Total $156,887 $182,693 ======== ======== Intersegment revenues: Restaurant $ - $ - Foodservice (retail and institutional) (30,809) (38,513) Franchise - - -------- -------- Total $(30,809) $(38,513) ======== ======== External revenues: Restaurant $107,145 $125,423 Foodservice (retail and institutional) 17,372 16,480 Franchise 1,561 2,277 -------- -------- Total $126,078 $144,180 ======== ========
6 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 3. SEGMENT REPORTING (CONTINUED)
For the Three Months Ended -------------------------- April 1, April 2, 2001 2000 ---- ---- (in thousands) EBITDA: Restaurant $8,767 $7,468 Foodservice (retail and institutional) 3,079 5,518 Franchise 494 938 Corporate (4,593) (4,928) Gain on property and equipment, net 1,884 1,623 Restructuring costs - (12,057) ------ -------- Total $9,631 $(1,438) ====== ======== Interest expense, net $7,585 $7,938 ====== ====== (Loss) income before benefit from income taxes: Restaurant $3,721 $1,433 Foodservice (retail and institutional) 2,225 4,659 Franchise 434 855 Corporate (13,863) (14,451) Gain on property and equipment, net 1,884 (16,049) Restructuring costs - (12,057) ------ -------- Total $(5,599) $(35,610) ====== ======== Depreciation and amortization: Restaurant $5,046 $6,035 Foodservice (retail and institutional) 854 859 Franchise 60 83 Corporate 1,592 1,444 ------ -------- Total $7,552 $8,421 ====== ========
April 1, December 31, 2001 2000 ---- ---- (in thousands) Total assets: Restaurant $194,853 $199,223 Foodservice (retail and institutional) 33,607 33,880 Franchise 4,076 3,745 Corporate 52,419 60,838 -------- -------- Total $284,955 $297,686 ======== ======== Capital expenditures: Restaurant $1,301 $18,245 Foodservice (retail and institutional) 490 2,667 Corporate 235 1,535 -------- -------- Total $2,026 $22,447 ======== ========
7 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 4. NEW ACCOUNTING PRONOUNCEMENTS In April 2001, the Financial Accounting Standards Board reached consensus on Emerging Issues Task Force ("EITF") Issue No. 00-25, "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products," which is effective for quarters beginning after December 15, 2001, with prior financial statements restated if practicable. This Issue addresses whether consideration from a vendor to a retailer is (a) an adjustment of the selling prices of the vendor's products to the retailer and, therefore, should be deducted from revenue when recognized in the vendor's income statement or (b) a cost incurred by the vendor for assets or services provided by the retailer to the vendor and, therefore, should be included as a cost or an expense when recognized in the vendor's income statement. Arrangements within the scope of this Issue include slotting fees, cooperative advertising arrangements and buy-downs. Management has not yet quantified the impact of implementing Issue No. 00-25 on the Company's financial statements. In May 2000, the Emerging Issues Task Force 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 the three months ended April 2, 2000 to conform with the current period presentation. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that each derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the statement of operations, and requires that a Company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. Since the Company's commodity option contracts do not meet the criteria for hedge accounting, changes in the value of the commodity option contracts are recognized monthly in earnings. The cumulative effect upon adoption of approximately $77,000 has been recorded as income in the accompanying Condensed Consolidated Statement of Operations. It is not separately reported as a cumulative effect since the effect is not significant. Additional income of approximately $129,000 was recorded during the first quarter of 2001. The unrealized gain on derivatives at April 1, 2001 was approximately $206,000. 8 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 5. 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 24 months. The 70 locations will remain in operation until they are sold, subleased or closed prior to March 2002. In connection with the restructuring plan, the Company eliminated approximately 150 management and 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 $12,057,000 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 $17,008,000 in the first quarter ended April 2, 2000. The following represents the restructuring reserve activity (in thousands):
Costs Paid During the Balance as of Quarter Ended Balance as of December 31, 2000 April 1, 2001 April 1, 2001 ----------------- ------------- ------------- Severance pay $74 $(74) $- Rent 3,585 (278) 3,307 Utilities and real estate taxes 1,105 (210) 895 Demarking 138 (12) 126 Lease termination costs 120 - 120 Inventory 5 (5) - Other 544 (148) 396 ------ ------ ------ Total $5,571 $(727) $4,844 ====== ====== ======
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 to be disposed of over the following 24 months. At April 1, 2001 the aggregate carrying amount of the remaining 65 properties to be disposed of was $5.8 million. At April 2, 2000, the aggregate carrying value of the 151 properties to be disposed of was $18.9 million. These amounts are reflected in the condensed consolidated balance sheets as property and equipment, net. 9 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 6. SALES OF RESTAURANT OPERATIONS AND PROPERTIES TO FRANCHISEES On April 13, 2001, the Company executed an agreement granting J&B Restaurants Partners of Long Island Holding Co., LLC ("J&B") certain limited exclusive rights to operate and develop Friendly's full-service restaurants in the franchising regions of Nassau and Suffolk Counties in Long Island, New York (the "J&B Agreement"). Pursuant to the J&B Agreement, J&B purchased certain assets and rights in 31 existing Friendly's restaurants and committed to open an additional 29 restaurants over the next 12 years. The transaction price was approximately $19,950,000, of which approximately $4,250,000 was received in a note. The cash proceeds were used to prepay approximately $4,711,000 on the term loans with the remaining balance being applied to the revolving credit facility. The 5-year note bears interest at an annual rate of 11% using a 20-year amortization schedule. Payments are due monthly through the five years with a balloon payment due at the end of five years. On January 19, 2000, the Company entered into an agreement granting Kessler Family LLC ("Kessler") non-exclusive rights to operate and develop Friendly's full-service restaurants in the franchising region of Rochester, Buffalo and Syracuse, New York (the "Kessler Agreement"). Pursuant to the Kessler Agreement, Kessler purchased certain assets and rights in 29 existing Friendly's restaurants and committed to open an additional 15 restaurants over the next seven years. Gross proceeds from the sale were approximately $13,300,000 of which $735,000 was for franchise fees for the initial 29 restaurants. The $735,000 was recorded as revenue in the first quarter ending April 2, 2000. The Company recognized a gain of approximately $1,400,000 related to the sale of the assets for the 29 locations in the first quarter ending April 2, 2000. The Company also sold certain assets and rights in six other restaurants to two additional franchisees resulting in a gain of $687,000. 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 April 1, 2001 and April 2, 2000, and for the periods ended April 1, 2001 and April 2, 2000, 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. 10 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET AS OF APRIL 1, 2001 (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------- ------------ ------------ Assets Current assets: Cash and cash equivalents $7,626 $12 $1,154 $(23) $8,769 Restricted cash - - 775 - 775 Accounts receivable, net 4,960 576 - 23 5,559 Inventories 14,080 - - - 14,080 Deferred income taxes 10,258 43 - 94 10,395 Prepaid expenses and other current assets 6,995 563 3,510 (8,790) 2,278 ----- --- ----- ------- ----- Total current assets 43,919 1,194 5,439 (8,696) 41,856 Deferred income taxes - 506 1,327 (1,833) - Property and equipment, net 218,674 - - - 218,674 Intangibles and deferred costs, net 21,185 - - - 21,185 Investments in subsidiaries 3,640 - - (3,640) - Other assets 2,325 2,844 6,229 (8,158) 3,240 ----- ----- ----- ------- ----- Total assets $289,743 $4,544 $12,995 $(22,327) $284,955 ======== ====== ======= ========= ======== Liabilities and Stockholders' Equity (Deficit) Current liabilities: Current maturities of long-term obligations $14,324 $- $- $(3,500) $10,824 Accounts payable 19,633 - - - 19,633 Accrued expenses 50,210 201 7,637 (5,090) 52,958 ------ --- ----- ------- ------ Total current liabilities 84,167 201 7,637 (8,590) 83,415 Deferred income taxes 12,619 - - (1,739) 10,880 Long-term obligations, less current maturities 282,121 - - (5,314) 276,807 Other long-term liabilities 13,929 1,191 4,870 (3,044) 16,946 Stockholders' equity (deficit) (103,093) 3,152 488 (3,640) (103,093) -------- ----- --- ------- -------- Total liabilities and stockholders' equity (deficit) $289,743 $4,544 $12,995 $(22,327) $284,955 ======== ====== ======= ========= ========
11 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 1, 2001 (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------- ------------ ------------ Revenues $124,885 $1,193 $- $- $126,078 Costs and expenses: Cost of sales 42,060 - - - 42,060 Labor and benefits 39,676 - - - 39,676 Operating expenses and write-downs of property and equipment 27,462 - (9) - 27,453 General and administrative expenses 8,173 1,159 - - 9,332 Depreciation and amortization 7,552 - - - 7,552 Gain on dispositions of other property and equipment (1,981) - - - (1,981) Interest expense (income) 7,806 - (221) - 7,585 ----- - ----- - ----- (Loss) income before benefit from (provision for) income taxes and equity in net income of consolidated subsidiaries (5,863) 34 230 - (5,599) Benefit from (provision for) income taxes 2,491 (14) (81) - 2,396 ----- ---- ---- ---- ----- (Loss) income before equity in net income of consolidated subsidiaries (3,372) 20 149 - (3,203) Equity in net income of consolidated subsidiaries 169 - - (169) - ----- ---- ---- ---- ----- Net (loss) income $(3,203) $20 $149 $(169) $(3,203) ======== === ===== ===== =======
12 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED APRIL 1, 2001 (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------- ------------ ------------ Net cash provided by (used in) operating activities $1,986 $(21) $1,184 $(985) $2,164 ------ ----- ------ ------ ------ Cash flows from investing activities: Purchases of property and equipment (2,026) - - - (2,026) Proceeds from sales of property and equipment 5,246 - - - 5,246 ------ ----- ------ ------ ------ Net cash provided by investing activities 3,220 - - - 3,220 ------ ----- ------ ------ ------ Cash flows from financing activities: Proceeds from borrowings 8,000 - - - 8,000 Repayments of obligations (19,199) - - - (19,199) Reinsurance payments made from deposits - - (962) 962 - ------ ----- ------ ------ ------ Net cash used in financing activities (11,199) - (962) 962 (11,199) ------ ----- ------ ------ ------ Net (decrease) increase in cash and cash equivalents (5,993) (21) 222 (23) (5,815) Cash and cash equivalents, beginning of period 13,619 33 932 - 14,584 ------ ----- ------ ------ ------ Cash and cash equivalents, end of period $7,626 $12 $1,154 $(23) $8,769 ====== === ====== ===== ====== Supplemental disclosures: Interest paid (received) $2,357 $- $(221) $- $2,136 Income taxes paid - 2 - - 2
13 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2000 (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------- ------------ ------------ Assets Current assets: Cash and cash equivalents $13,619 $33 $932 $- $14,584 Restricted cash - - 1,737 - 1,737 Accounts receivable, net 5,649 508 - - 6,157 Inventories 11,570 - - - 11,570 Deferred income taxes 10,258 43 - 94 10,395 Prepaid expenses and other current assets 7,435 551 4,057 (9,244) 2,799 ----- --- ----- ------- ----- Total current assets 48,531 1,135 6,726 (9,150) 47,242 Deferred income taxes - 506 1,327 (1,833) - Property and equipment, net 226,865 - - - 226,865 Intangible assets and deferred costs, net 21,529 - - - 21,529 Investments in subsidiaries 3,500 - - (3,500) - Other assets 1,135 3,614 5,729 (8,428) 2,050 ----- ----- ----- ------- ----- Total assets $301,560 $5,255 $13,782 $(22,911) $297,686 ======== ====== ======= ========= ======== Liabilities and Stockholders' Equity (Deficit) Current liabilities: Current maturities of long-term obligations $19,172 $- $- $(4,000) $15,172 Accounts payable 20,100 - - - 20,100 Accrued expenses 43,683 648 8,082 (5,014) 47,399 ------ --- ----- ------- ------ Total current liabilities 82,955 648 8,082 (9,014) 82,671 Deferred income taxes 15,015 - - (1,739) 13,276 Long-term obligations, less current maturities 288,472 - - (4,814) 283,658 Other liabilities 15,101 1,475 5,332 (3,844) 18,064 Stockholders' equity (deficit) (99,983) 3,132 368 (3,500) (99,983) -------- ----- --- ------- -------- Total liabilities and stockholders' equity (deficit) $301,560 $5,255 $13,782 $(22,911) $297,686 ======== ====== ======= ========= ========
14 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 2, 2000 (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------- ------------ ------------ Revenues $142,306 $1,874 $- $- $144,180 Costs and expenses: Cost of sales 44,822 - - - 44,822 Labor and benefits 48,176 - - - 48,176 Operating expenses and write-downs of property and equipment 48,683 - (60) - 48,623 General and administrative expenses 10,950 426 - - 11,376 Restructuring costs 12,057 - - - 12,057 Depreciation and amortization 8,421 - - - 8,421 Gain on franchise sales of restaurant operations and properties (2,087) - - - (2,087) Loss on dispositions of other property and equipment 464 - - - 464 Interest expense (income) 8,110 - (172) - 7,938 ----- ------ ----- ----- ----- (Loss) income before benefit from (provision for) income taxes and equity in net income of consolidated subsidiaries (37,290) 1,448 232 - (35,610) Benefit from (provision for) income taxes 17,774 (593) (81) - 17,100 ----- ------ ----- ----- ----- (Loss) income before equity in net income of consolidated subsidiaries (19,516) 855 151 - (18,510) Equity in net income of consolidated subsidiaries 1,006 - - (1,006) - ----- ------ ----- ------- -------- Net (loss) income $(18,510) $855 $151 $(1,006) $(18,510) ========= ====== ===== ======= ========
15 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED APRIL 2, 2000 (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------- ------------ ------------ Net cash (used in) provided by operating activities $(5,724) $36 $1,080 $(749) $(5,357) ------- --- ------ ----- ------- Cash flows from investing activities: Purchases of property and equipment (2,227) - - - (2,227) Proceeds from sales of property and equipment 16,740 - - - 16,740 ------- --- ------ ----- ------- Net cash provided by investing activities 14,513 - - - 14,513 ------- --- ------ ----- ------- Cash flows from financing activities: Proceeds from borrowings 33,000 - - - 33,000 Repayments of obligations (42,252) - - - (42,252) Reinsurance deposits received - - 800 (800) - Reinsurance payments made from deposits - - (1,549) 1,549 - ------- --- ------ ----- ------- Net cash used in financing activities (9,252) - (749) 749 (9,252) ------- --- ------ ----- ------- Net (decrease) increase in cash and cash equivalents (463) 36 331 - (96) Cash and cash equivalents, beginning of period 9,674 14 2,374 - 12,062 ------- --- ------ ----- ------- Cash and cash equivalents, end of period $9,211 $50 $2,705 $- $11,966 ====== === ====== ===== ======= Supplemental disclosures: Interest paid (received) $2,966 $- $(357) $- $2,609 Income taxes (refunded) paid (928) 823 84 - (21) Capital lease obligations terminated 659 - - - 659 Notes received from the sale of property and equipment 577 - - - 577
16 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. FORWARD LOOKING STATEMENTS Statements contained herein that are not historical facts, constitute "forward looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. All forward looking statements are subject to risks and uncertainties, which could cause results to differ materially from those anticipated. These factors include the Company's highly competitive business environment, uncertainty with respect to the Company's ability to refinance its existing debt facilities, exposure to commodity prices, risks associated with the foodservice industry, the ability to retain and attract new employees, government regulations, the Company's high geographic concentration in the Northeast and its attendant weather patterns, conditions needed to meet re-imaging and new opening and franchising targets and risks associated with improved service and other initiatives. Other factors that may cause actual results to differ from the forward looking statements contained herein and that may affect the Company's prospects in general are included in the Company's other filings with the Securities and Exchange Commission. OVERVIEW As of April 1, 2001, the Company owned and operated 438 restaurants and franchised 123 restaurants and five cafes. The Company distributes a full line of frozen dessert products to Friendly's restaurants and through more than 3,500 supermarkets and other retail locations in 15 states. The restaurants offer a wide variety of reasonably-priced breakfast, lunch and dinner menu items as well as the frozen dessert products. REVENUES: Total revenues decreased $18.1 million, or 12.6%, to $126.1 million for the first quarter ended April 1, 2001 from $144.2 million for the same quarter in 2000. Restaurant revenues decreased $18.3 million, or 14.6%, to $107.1 million for the first quarter of 2001 from $125.4 million for the same quarter in 2000. Restaurant revenues decreased by $19.7 million due to the closing of 133 under-performing restaurants and the re-franchising of 49 additional locations over the past 15 months. Closing of restaurants accounted for $14.2 million of the restaurant revenue decline and re-franchising reduced restaurant revenues by an additional $5.5 million. Partially offsetting this decrease was a 1.0% increase in comparable restaurant revenues. Revenues from the one location open less than one year were $0.4 million. Foodservice (product sales to franchisees, retail and institutional) revenues increased by $0.9 million, or 5.5%, to $17.4 million for the first quarter of 2001 from $16.5 million for the same quarter in 2000. The increase was due to the increase in the number of franchised units. Revenues from foodservice retail supermarket customers were lower in the current quarter when compared to same quarter in 2000. The Company's foodservice division sells a variety of products to the Company's franchisees and ice cream products to supermarkets and other retail locations. Franchise revenues decreased $0.7 million, or 30.4%, to $1.6 million for the three months ended April 1, 2001 from $2.3 million for the three months ended April 2, 2000. The decrease is due to a reduction of $1.0 million in initial fees from new franchised locations as 41 new locations were added in the first quarter of 2000 and only one new location was added in the same period in 2001. There were 128 franchised units (including cafes) open at April 1, 2001 compared to 109 franchised units open at April 2, 2000. COST OF SALES: Cost of sales decreased $2.7 million, or 6.0%, to $42.1 million for the first quarter ended April 1, 2001 from $44.8 million for the same quarter in 2000. Cost of sales as a percentage of total revenues increased to 33.3% for the first quarter of 2001 from 31.1% for the same quarter in 2000. The higher food cost as a percentage of total revenue was partially due to a shift in sales mix from Company-owned restaurant sales to foodservice sales. Foodservice sales to franchisees and retail customers have a higher food cost as a percentage of revenue than sales in Company-owned restaurants to restaurant patrons. The cost of cream, the principle ingredient used in making ice cream, was higher in the first quarter of 2001 when compared to the first quarter of 2000 and contributed to the rise in cost of sales as a percentage of total revenues, especially in foodservice's retail supermarket business. The Company believes that cream prices will continue to rise and will peak during the summer months. To minimize risk, hedging opportunities and alternative supply sources will be pursued. Additionally, the Company intends to raise prices to its retail customers. 17 LABOR AND BENEFITS: Labor and benefits decreased $8.5 million, or 17.6%, to $39.7 million for the first quarter ended April 1, 2001 from $48.2 million for the same quarter in 2000. Labor and benefits as a percentage of total revenues decreased to 31.5% for the first quarter of 2001 from 33.4% for the same period in 2000. The lower labor cost as a percentage of total revenue is partially the result of revenue increases derived from additional franchised locations, which do not have any associated restaurant labor and benefits. In addition, the closing of 133 under-performing Company-owned units over the past 15 months improved the relationship of restaurant labor and benefits to restaurant sales as well as to total revenues. Partially offsetting the decreases were higher group insurance costs in 2001 when compared to the same period in 2000. OPERATING EXPENSES: Operating expenses decreased $3.5 million, or 11.3%, to $27.5 million for the first quarter ended April 1, 2001 from $31.0 million for the same quarter in 2000. Operating expenses as a percentage of total revenues were 21.8% and 21.5% for the first quarters ended April 1, 2001 and April 2, 2000, respectively. The increase as a percentage of total revenues resulted from higher advertising and promotional expenses, utility costs and snowplowing costs in the 2001 quarter when compared to the 2000 quarter. GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were $9.3 million and $11.4 million for the first quarters ended April 1, 2001 and April 2, 2000, respectively. General and administrative expenses as a percentage of total revenues decreased to 7.4% in the first quarter of 2001 from 7.9% for the same period in 2000. The decrease is primarily the result of the elimination of certain management and administrative positions associated with the Company's announcement of the immediate closing of 81 restaurants and the planned closing of 70 additional restaurants in March 2000. EBITDA: As a result of the above, EBITDA (EBITDA represents net loss before (i) cumulative effect of change in accounting principle, net of income taxes, (ii) benefit from income taxes (iii) interest expense, net, (iv) depreciation and amortization and (v) write-downs and all other non-cash items plus cash distributions from unconsolidated subsidiaries) increased $11.0 million, or 786.0%, to $9.6 million for the first quarter ended April 1, 2001 from $(1.4) million for the same quarter in 2000. EBITDA as a percentage of total revenues was 7.6% and (0.9)% for the first quarters of 2001 and 2000, respectively. The increase was primarily the result of the restructuring costs of $12.1 million recorded during the first quarter ended April 2, 2000 partially offset by the impact of the increased gains of $0.4 million on the sales of restaurant operations and properties. The Company has included information concerning EBITDA in this Form 10-Q because it believes that such information is used by certain investors as one measure of a company's historical ability to service debt. EBITDA should not be considered as an alternative to, or more meaningful than, earnings (loss) from operations or other traditional indications of a company's operating performance. RESTRUCTURING COSTS: Restructuring costs were $12.1 million for the first quarter ended April 2, 2000 as a result of the costs associated with the Company's decision to reorganize its restaurant field and headquarters organizations in conjunction with the closing of 81 under-performing restaurants and the planned closing of an additional 70 restaurants over the next 24 months. Included in these costs are severance, rent on closed units until lease termination, utilities and real estate taxes, demarking, lease termination, environmental and other miscellaneous costs. WRITE-DOWNS OF PROPERTY AND EQUIPMENT: Write-downs of property and equipment were $17.7 million for the first quarter ended April 2, 2000. The write-downs were 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 the additional 70 restaurants which will be closed over the next 24 months to their estimated net realizable value. As of April 1, 2001, 36 of these 70 restaurants have been closed. DEPRECIATION AND AMORTIZATION: Depreciation and amortization decreased $0.8 million, or 9.5%, to $7.6 million for the first quarter ended April 1, 2001 from $8.4 million for the same quarter in 2000. Depreciation and amortization as a percentage of total revenues was 5.9% for the first quarter ended April 1, 2001 compared to 5.8% for the first quarter ended April 2, 2000. 18 GAIN ON FRANCHISE SALES OF RESTAURANT OPERATIONS AND PROPERTIES: On January 19, 2000, the Company entered into an agreement granting Kessler Family LLC ("Kessler") non-exclusive rights to operate and develop Friendly's full-service restaurants in the franchising region of Rochester, Buffalo and Syracuse, New York (the "Kessler Agreement"). Pursuant to the Kessler Agreement, Kessler purchased certain assets and rights in 29 existing Friendly's restaurants and committed to open an additional 15 restaurants over the next seven years. Gross proceeds from the sale were approximately $13,300,000 of which $735,000 was for franchise fees for the initial 29 restaurants. The $735,000 was recorded as revenue in the first quarter ending April 2, 2000. The Company recognized a gain of approximately $1,400,000 related to the sale of the assets for the 29 locations in the first quarter ending April 2, 2000. The Company also sold certain assets and rights in six other restaurants to two additional franchisees resulting in a gain of $687,000. (GAIN) LOSS ON SALES OF OTHER PROPERTY AND EQUIPMENT: The (gain) loss on sales of other property and equipment was $(2.0) million and $0.5 million for the quarters ended April 1, 2001 and April 2, 2000, respectively. The gain in the 2001 quarter resulted from the sale of 11 closed locations during the first quarter ending April 1, 2001. The loss for the quarter ended April 2, 2000 resulted from normal retirements. INTEREST EXPENSE, NET: Interest expense, net of capitalized interest and interest income, decreased by $0.3 million, or 3.8%, to $7.6 million for the first quarter ended April 1, 2001 from $7.9 million for the same quarter in 2000. The decrease is primarily due to a reduction in the average outstanding debt. Total outstanding debt, including capital leases, was reduced from $305.8 million at April 2, 2000 to $287.6 million at April 1, 2001. BENEFIT FROM INCOME TAXES: The benefit from income taxes was $2.4 million, or 43%, and $17.1 million, or 48.0%, for the first quarters ended April 1, 2001 and April 2, 2000, respectively. The Company records income taxes based on the effective rate expected for the year with any changes in valuation allowance reflected in the period of change. The sale of the land and buildings to franchisees during the first quarter ended April 2, 2000 favorably impacted the provision for income taxes as it triggered built-in gains, which allowed for a reduction in the valuation allowance on certain net operating loss carryforwards. NET LOSS: Net loss was $3.2 million and $18.5 million for the first quarters ended April 1, 2001 and April 2, 2000, 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 provided by operating activities was $2.2 million for the three months ended April 1, 2001. Net cash used in operating activities was $5.4 million for the three months ended April 2, 2000. Inventories increased $2.5 million primarily as a result of anticipated increased retail sales. Accrued expenses and other long-term liabilities increased $4.4 million from December 31, 2000 to April 1, 2001 primarily due to a $5.2 million increase in accrued interest on the Senior Notes due to four months accrued at April 1, 2001 compared to one month accrued at December 31, 2000. This increase was offset by $1.0 million of payments made against the captive insurance company's reserves for workers compensation claims. Available borrowings under the revolving credit facility were $8.0 million as of April 1, 2001. Additional sources of liquidity consist of capital and operating leases for financing leased restaurant locations (in malls and shopping centers and land or building leases), restaurant equipment, manufacturing equipment, distribution vehicles and computer equipment. Additionally, sales of under-performing existing restaurant properties and other assets (to the extent the Company's debt instruments, if any, permit) are sources of cash. The amounts of debt financing that the Company will be able to incur under capital leases and for property and casualty insurance financing and the amount of asset sales by the Company are limited by the terms of its credit facility and Senior Notes. Net cash provided by investing activities was $3.2 million in the three months ended April 1, 2001 compared to $14.5 million in the three months ended April 2, 2000. Capital expenditures were approximately $2.0 million and $2.2 million for the three months ended April 1, 2001 and April 2, 2000, respectively. Proceeds from the sales of property and equipment were $5.2 million and $16.7 million in the three months ended April 1, 2001 and April 2, 2000, respectively. The decrease in proceeds was due to the receipt of $16.6 million in 2000 related to sales of restaurants to franchisees. There were no such sales in 2001. 19 Net cash used in financing activities was $11.2 million and $9.3 million in the three months ended April 1, 2001 and April 2, 2000, respectively. The Company had a working capital deficit of $41.6 million as of April 1, 2001. 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 and subject to certain exceptions, in excess of stated maximum allowable amounts must be used to permanently reduce outstanding obligations under the credit facility. During the three months ended April 1, 2001, the Company received $4.9 million of asset sale proceeds which were used to reduce the amount outstanding on the term loans. The Company entered into its existing credit facility in November 1997. Since 1997, the Company has executed several amendments to the credit facility. The most recent amendment occurred on March 19, 2001. All of the existing financial covenants were amended and a new financial covenant was added requiring minimum cumulative Consolidated EBITDA, as defined, on a monthly basis. Interest rates on term loans, borrowings under the revolving credit facility and issued letters of credit increased 0.25%. In addition, automatic increases in the interest rates will occur on August 2, 2001, January 2, 2002, April 1, 2002, July 1, 2002 and October 1, 2002 of 0.25%, 0.50%, 0.25%, 0.25% and 0.25%, respectively. Interest payments on all ABR loans, Eurodollar loans and issued letters of credit are required on a monthly basis rather than quarterly. Also due to the March 19, 2001 amendment, the maturity dates of Tranche B and Tranche C of the term loans were changed to November 15, 2002 from their original maturity dates of November 15, 2004 and November 15, 2005, respectively. Annual scheduled principal payments due through October 15, 2002 did not change. However, the amendment requires additional minimum cumulative prepayments on the term loans by the dates specified below as follows: October 15, 2001 $6,000,000 January 15, 2002 7,500,000 April 15, 2002 8,500,000 July 15, 2002 10,000,000 Any remaining unpaid balances due on Tranches B and C of the term loans will be paid on November 15, 2002. FICC paid a fee of approximately $256,000 to the lenders in connection with this amendment. Also, unless all obligations under the credit facility are satisfied prior to September 30, 2001, FICC will pay an additional fee of approximately $512,000 on that date. If all obligations under the credit facility are satisfied prior to September 30, 2001, the additional fee will be payable at that time and will be reduced to approximately $128,000. The Company anticipates requiring capital in the future principally to maintain existing restaurant and plant facilities and to continue to renovate and re-image existing restaurants. Capital expenditures for 2001 are anticipated to be $15.0 million in the aggregate, of which $8.5 million is expected to be spent on restaurant operations. The Company's actual 2001 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. On April 13, 2001, the Company executed an agreement granting J&B Restaurants Partners of Long Island Holding Co., LLC ("J&B") certain limited exclusive rights to operate and develop Friendly's full-service restaurants in the franchising regions of Nassau and Suffolk Counties in Long Island, New York (the "J&B Agreement"). Pursuant to the J&B Agreement, J&B purchased certain assets and rights in 31 existing Friendly's restaurants and committed to open an additional 29 restaurants over the next 12 years. The transaction price was approximately $19,950,000, of which approximately $4,250,000 was received in a note. The cash proceeds were used to prepay approximately $4.7 million on the term loans with the remaining balance being applied to the revolving credit facility. The 5-year note bears interest at an annual rate of 11% using a 20-year amortization schedule. Payments are due monthly through the five years with a balloon payment due at the end of five years. 20 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. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In April 2001, the Financial Accounting Standards Board reached consensus on Emerging Issues Task Force ("EITF") Issue No. 00-25, "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products," which is effective for quarters beginning after December 15, 2001, with prior financial statements restated if practicable. This Issue addresses whether consideration from a vendor to a retailer is (a) an adjustment of the selling prices of the vendor's products to the retailer and, therefore, should be deducted from revenue when recognized in the vendor's income statement or (b) a cost incurred by the vendor for assets or services provided by the retailer to the vendor and, therefore, should be included as a cost or an expense when recognized in the vendor's income statement. Arrangements within the scope of this Issue include slotting fees, cooperative advertising arrangements, and buy-downs. Management has not yet quantified the impact of implementing Issue No. 00-25 on the Company's financial statements. In May 2000, the Emerging Issues Task Force 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 the three months ended April 2, 2000 to conform with the current period presentation. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that each derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the statement of operations, and requires that a Company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. Since the Company's commodity option contracts do not meet the criteria for hedge accounting, changes in the value of the commodity option contracts are recognized monthly in earnings. The cumulative effect upon adoption of approximately $77,000 has been recorded as income in the accompanying condensed Consolidated Statement of Operations. It is not separately reported as a cumulative effect since the effect is not significant. Additional income of approximately $129,000 was recorded during the first quarter of 2001. The unrealized gain on derivatives at April 1, 2001 was approximately $206,000. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change in the Company's market risk exposure since the filing of the Annual Report on Form 10-K. PART II - OTHER INFORMATION ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K (a) Exhibits: Seventh Amendment to Credit Agreement. (b) No report on Form 8-K was filed during the three months ended April 1, 2001. 21 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/ ---------------------------------- Name: Paul J. McDonald Title: Executive Vice President, Chief Financial Officer 22 EX-4.1 2 a2047443zex-4_1.txt EXHIBIT 4.1 Exhibit 4.1 SEVENTH AMENDMENT SEVENTH AMENDMENT, dated as of March 19, 2001 (this "AMENDMENT"), to the Credit Agreement, dated as of November 19, 1997 (as amended, supplemented or otherwise modified, the "CREDIT AGREEMENT"), among FRIENDLY ICE CREAM CORPORATION, a Massachusetts corporation, the several banks and other financial institutions or entities parties thereto as Lenders, and SOCIETE GENERALE, as administrative agent. W I T N E S S E T H : ------------------- WHEREAS, pursuant to the Credit Agreement, the Lenders have agreed to make, and have made, extensions of credit to the Borrower; and WHEREAS, the Borrower has requested, and upon this Amendment becoming effective, the Lenders will have agreed, that certain provisions of the Credit Agreement be amended in the manner provided for in this Amendment; NOW, THEREFORE, in consideration of the premises and the agreements hereinafter set forth, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS. Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. SECTION 2. AMENDMENTS TO THE CREDIT AGREEMENT. Effective as of the date hereof, but subject to the satisfaction of the conditions precedent set forth in Section 4 hereof, the Credit Agreement is hereby amended as follows: 2.1 The following definitions are inserted in Section 1.1 in correct alphabetical order: "'FINANCIAL ADVISOR': any advisor retained by the Agent to (i) initially review and assess the agreed upon financial information provided by the Borrower including the budget and liquidity forecast and (ii) upon the failure of the Refinancing Conditions to be met or the occurrence of a Default, review and assess the Loan Parties' financial condition and projections, evaluate the Loan Parties' operations and provide such service as the Agent may reasonably request.; "'LONG ISLAND FRANCHISE SALE': the transaction contemplated in the Purchase and Sale Agreement dated as of January 15, 2001 between the Borrower and J & B Restaurant Partners of Long Island, LLC., whether the transaction occurs in one or more closings; "'REFINANCING CONDITIONS': as defined in Section 2.10(e)."; 2.2 The definition of Applicable Margin is amended and restated as follows: "'APPLICABLE MARGIN': for each Type of Loan, the rate per annum set forth under the relevant column heading below:
Eurodollar Loans ABR Loans ---------------- --------- Revolving Credit Loans 3.25% 1.75% Tranche A Term Loans 3.25% 1.75% Tranche B Term Loans 3.25% 1.75% Tranche C Term Loans 3.50% 2.00%
PROVIDED, that the Applicable Margin for each Type of Loan shall be increased by 0.25% on August 2, 2001, by an additional 0.50% on January 2, 2002 and by an additional 0.25% on each of April 1, 2002, July 1, 2002 and October 1, 2002."; 2.3 The definition of Asset Sale is amended by replacing "clause (a), (b), (c), (d) or (g) of Section 7.5" with "clause (a), (b), (c), (d), (g) or (h) of Section 7.5"; 2.4 The definition of Business-Sustaining Capital Expenditures is amended and restated as follows: "'BUSINESS-SUSTAINING CAPITAL EXPENDITURES': for any period of four consecutive fiscal quarters ending in fiscal year 2001 or 2002, Capital Expenditures during such period in an amount equal to $9,850,000 or $10,067,000, respectively, constituting the amount of Capital Expenditures necessary to maintain the then existing Property of the Borrower and its Subsidiaries in good working order and condition (excluding payments in respect of the principal amount of Indebtedness incurred in connection with such expenditures)."; 2.5 The definition of Commitment Fee Rate is amended by deleting the proviso. 2.6 The definition of Consolidated EBITDA is amended and restated as follows: -2- "'CONSOLIDATED EBITDA': for any period, Consolidated Net Income for such period PLUS, without duplication and to the extent reflected as a charge in the statement of such Consolidated Net Income for such period, the sum of (a) income tax expense, (b) interest expense, amortization or writeoff of debt discount and debt issuance costs and commissions, discounts and other fees and charges associated with Indebtedness (including the Loans), (c) depreciation and amortization expense, (d) amortization of intangibles (including, but not limited to, goodwill) and organization costs, (e) any extraordinary, unusual or non-recurring expenses or losses (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, losses on sales of assets outside of the ordinary course of business) and (f) any other non-cash charges, and MINUS, to the extent included in the statement of such Consolidated Net Income for such period, the sum of (a) interest income, (b) any extraordinary, unusual or non-recurring income or gains (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, gains on the sales of assets outside of the ordinary course of business (it being understood that sales of restaurants in an aggregate amount up to $2,500,000 in any fiscal year are deemed to be in the ordinary course of business and that all other gains from the sales of restaurants occurring after the Long Island Franchise Sale Date (defined below) are deemed to be extraordinary, unusual or non-recurring)) and (c) any other non-cash income, all as determined on a consolidated basis, PROVIDED, that, in calculating Consolidated EBITDA for periods that include any fiscal quarter of the Borrower's 1998 and 1999 fiscal years, any expenses resulting from the closing of the Borrower's Troy, Ohio manufacturing and distribution facility and the termination of its operations in China and the United Kingdom shall be disregarded to the extent that the aggregate amount of such expenses does not exceed $7,500,000 and PROVIDED, FURTHER, that, in calculating Consolidated EBITDA (i) for periods that include any fiscal quarter of the Borrower's 1999 fiscal year, an aggregate amount of up to $3,200,000 of gains resulting from sales of restaurants consummated on or prior to January 2, 2000 shall not be subtracted from Consolidated Net Income and (ii) for periods that include any fiscal quarter of the Borrower's 2001 fiscal year, any gains -3- resulting from sales of restaurants in the ordinary course of business consummated on or prior to the closing of the Long Island Franchise Sale (the "Long Island Franchise Sale Date") shall not be subtracted from Consolidated Net Income and shall not reduce the aggregate gains from sales of restaurants which are deemed to be in the ordinary course of business for the purposes of this definition."; 2.7 The definition of Interest Payment Date is amended and restated as follows: "'INTEREST PAYMENT DATE': (a) as to any ABR Loan, the fifteenth day of each month in which such Loan is outstanding and the final maturity date of such Loan, (b) as to any Eurodollar Loan, the last day of each Interest Period and (c) as to any Loan (other than any Revolving Credit Loan that is an ABR Loan), the date of any repayment or prepayment made in respect thereof, but only to the extent of the portion prepaid or repaid."; 2.8 The definition of Interest Period is amended by replacing "one, two, three or six months thereafter, as selected" in clauses (a) and (b) with "one month thereafter as set forth"; 2.9 The definition of L/C Fee Payment Date is amended by replacing "January, April, July and October" with "month"; 2.10 The definition of Net Cash Proceeds is amended by (i) inserting after "(a) in connection with" "the Long Island Franchise Sale," and (ii) inserting before "such Asset Sale" in each place it appears "the Long Island Franchise Sale or"; 2.11 The definitions of Adjustment Date and Pricing Grid are deleted; 2.12 The definition of Tranche B Maturity Date is amended and restated as follows: "'Tranche B Maturity Date': November 15, 2002."; 2.13 The definition of Tranche C Maturity Date is amended and restated as follows: "'Tranche C Maturity Date': November 15, 2002."; 2.14 Section 2.3(b) is amended by (i) replacing "23" with "15", (ii) deleting the installments from January 15, 2003 through and including July 15, 2004 from the table and (iii) replacing the amount opposite "Tranche B Maturity Date" in the table with "the remaining balance of the Tranche B Term Loans"; -4- 2.15 Section 2.3(c) is amended by (i) replacing "27" with "15", (ii) deleting the installments from January 15, 2003 through and including July 15, 2005 from the table and (iii) replacing the amount opposite "Tranche C Maturity Date" in the table with "the remaining balance of the Tranche C Term Loans"; 2.16 Section 2.7(a) is amended by replacing "quarterly" with "monthly" and "January, April, July and October" with "month"; 2.17 Section 2.10(b) is amended and restated as follows: "(b) Unless the Required Prepayment Lenders shall otherwise agree, if on any date, the Borrower or any of its Subsidiaries shall receive proceeds in the form of cash or Cash Equivalents from any Asset Sale or Recovery Event then, unless a Reinvestment Notice shall be delivered in respect thereof, (i) such proceeds (exclusive of any amounts applied on such date in the manner permitted by clause (i) of the definition of Net Cash Proceeds) shall be delivered to the Agent and held by the Agent for the benefit of the Lenders for up to five Business Days, (ii) within five Business Days following receipt of such proceeds, the Borrower shall deliver a notice of prepayment and certificate (the "Prepayment Documents"), signed by an Authorized Signatory, setting forth its calculation of Net Cash Proceeds from such Asset Sale or Recovery Event and (iii) on the fifth Business Day following receipt of such proceeds, or on such earlier Business Day as the Borrower may request following delivery of the Prepayment Documents, the Net Cash Proceeds, together with any interest earned on such proceeds, shall be applied toward the prepayment of the Term Loans and the reduction of the Revolving Credit Commitments as set forth in Section 2.10(d) and the remaining balance, if any, of such proceeds shall be available to the Borrower; PROVIDED that, if the Borrower fails to timely deliver the Prepayment Documents, then, on the fifth Business Day following receipt of such proceeds, all such proceeds, together with any interest earned on such proceeds, shall be applied in the manner described in clause (iii) and PROVIDED FURTHER that, on each Reinvestment Prepayment Date, an amount equal to the Reinvestment Prepayment Amount with respect to the relevant Reinvestment Event shall be applied toward the prepayment of the Term Loans and the -5- reduction of the Revolving Credit Commitments as set forth in Section 2.10(d)." 2.18 Section 2.10(e) is added as follows: "(e) If (x) the Borrower fails (i) to continue to use reasonable efforts to pursue a refinancing of the Credit Agreement Obligations, (ii) to obtain, by no later than April 30, 2001, a commitment for such refinancing, which commitment shall be from a lender and in a form reasonably satisfactory to the Agent, or (iii) to satisfy, by no later than August 2, 2001, the Credit Agreement Obligations, or (y) at any time Bank of America Securities LLC determines not to pursue such refinancing (the "Refinancing Conditions"), then (I) on August 2, 2001 the Revolving Credit Commitments shall be reduced by $5,000,000, PROVIDED, HOWEVER, that no such Commitment reduction shall be required unless the closing of the Long Island Franchise Sale shall have occurred and the Net Cash Proceeds thereof shall have been no less than $10,000,000, and (II) in addition to reducing the Revolving Credit Commitments if required by clause (I) of this Section 2.10(e), paying the scheduled installments of principal due hereunder and making the prepayments required from the proceeds of the Long Island Franchise Sale pursuant to Section 7.5(h), the Borrower shall prepay Term Loans such that the cumulative additional prepayments of Term Loans applied in the manner and order set forth in Section 2.10(d) from January 1, 2001 through each of the test dates set forth below is no less than the amount set forth below opposite such date:
Minimum Cumulative Prepayment and Commitment Reduction Test Date to Lenders --------- -------------------- October 15, 2001 $ 6,000,000 January 15, 2002 $ 7,500,000 April 15, 2002 $ 8,500,000 July 15, 2002 $10,000,000.
"Concurrently with any reduction of Revolving Credit Commitments pursuant to this Section 2.10(e), the Borrower shall prepay Revolving Credit Loans to the extent, if any, that the Total Revolving Extensions of Credit exceed the amount of the Total Revolving Credit Commitments as reduced in accordance with this Section 2.10(e). Notwithstanding anything herein to the contrary, in no event shall any failure by the Borrower to meet a Refinancing Condition be a Default."; -6- 2.19 Section 2.16(b) is amended by (i) deleting "(except as otherwise provided in Section 2.16(d))" and (ii) inserting before the period at the end of the second sentence "(except as otherwise provided in Section 7.5(h))"; 2.20 Section 2.16(d) is amended and restated as follows: "(d) Intentionally omitted."; 2.21 Section 3.3(a) is amended by replacing "quarterly" each time it appears with "monthly"; 2.22 Section 6.1(b) is amended by deleting "and" at the end thereof and Section 6.1(c) is added as follows: "(c) as soon as available, but in any event not later than 20 days after the end of each fiscal month of the Borrower (30 days in the case of the last fiscal month of any fiscal year), the unaudited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such month and the related unaudited consolidated statements of income and of cash flows for such month and the portion of the fiscal year through the end of such month, setting forth in each case in comparative form the figures for the previous year and the most recent Projections delivered pursuant to Section 6.2(c) and including a statement of income reported on by business segment (in a format reasonably acceptable to the Agent), certified by an Authorized Signatory as being fairly stated in all material respects (subject to normal year-end audit adjustments); and"; 2.23 Section 6.2 is amended by adding before the period at the end of Section 6.2(i): "together with a forecast of cash receipts and disbursements (in a format reasonably acceptable to the Agent) for the thirteen week period commencing with the first week of the month in which such forecast is required to be delivered and, commencing with the second such forecast delivered, a report setting forth in comparative form the actual cash receipts and disbursements for the fiscal four or five week period ending with the last week in the month just ended and the forecast most recently delivered for such period."; -7- 2.24 Section 6.13 is added as follows: "6.13 FINANCIAL ADVISOR. The Borrower shall cooperate with the Financial Advisor."; 2.25 The table in Section 7.1(a) is amended by (i) replacing "4.10" appearing opposite the fourth quarter of fiscal 2000 with "5.30", (ii) replacing "Fiscal quarters from and including first quarter of fiscal 2001 through and including third quarter of fiscal 2001" and the ratio opposite such quarters with: "First quarter of fiscal 2001 5.10 to 1.00 "Second quarter of fiscal 2001 5.30 to 1.00 "Third quarter of fiscal 2001 5.00 to 1.00", (iii) replacing "3.55" appearing opposite the fourth quarter of fiscal 2001 with "5.20" and (iv) adding the following proviso to the end thereof: "PROVIDED, HOWEVER, if the Long Island Franchise Sale does not occur in the first quarter of fiscal 2001, then, in lieu of the ratio set forth above as at the last day of the four consecutive fiscal quarters of the Borrower ending with the first quarter of fiscal 2001, the Consolidated Leverage Ratio as at such day shall not exceed 5.90 to 1.00."; 2.26 The table in Section 7.1(b) is amended by (i) replacing "1.75" appearing opposite the fourth quarter of fiscal 2000 with "1.45", (ii) replacing "Fiscal quarters from and including first quarter of fiscal 2001 through and including third quarter of fiscal 2001" and the ratio opposite such quarters with: "First quarter of fiscal 2001 1.45 to 1.00 "Second quarter of fiscal 2001 1.40 to 1.00 "Third quarter of fiscal 2001 1.45 to 1.00", (iii) replacing "1.95" appearing opposite the fourth quarter of fiscal 2001 with "1.45" and (iv) adding the following proviso to the end thereof: "PROVIDED, HOWEVER, if the Long Island Franchise Sale does not occur in the first quarter of fiscal 2001, then, in lieu of the ratio set forth above for the period of four consecutive fiscal quarters of the Borrower ending with the first quarter of fiscal 2001, the Consolidated Interest Coverage Ratio for such period shall not be less than 1.30 to 1.00."; -8- 2.27 The table in Section 7.1(c) is amended by (i) replacing "1.20" appearing opposite the fourth quarter of fiscal 2000 with "1.05", (ii) replacing "1.10" appearing opposite "Fiscal quarters from and including first quarter of fiscal 2001 through and including third quarter of fiscal 2001" with "1.00", (iii) replacing "1.25" appearing opposite the fourth quarter of fiscal 2001 with "1.10" and (iv) adding the following proviso to the end thereof: "PROVIDED, HOWEVER, if the Long Island Franchise Sale does not occur in the first quarter of fiscal 2001, then, in lieu of the ratio set forth above for the period of four consecutive fiscal quarters of the Borrower ending with the first quarter of fiscal 2001, the Consolidated Fixed Charge Coverage Ratio for such period shall not be less than 0.95 to 1.00."; 2.28 The table in Section 7.1(d) is amended by (i) replacing "($105,000,000)" appearing opposite the first quarter of fiscal 2001 with "($106,000,000)", (ii) replacing "($100,000,000)" appearing opposite the second quarter of fiscal 2001 with "($103,500,000)", (iii) replacing "($95,000,000)" appearing opposite the third quarter of fiscal 2001 with "($100,000,000)", (iv) replacing "($92,000,000)" appearing opposite the fourth quarter of fiscal 2001 with "($103,000,000)" and (v) adding the following proviso to the end thereof: "PROVIDED, HOWEVER, if the Long Island Franchise Sale does not occur in the first quarter of fiscal 2001, then, in lieu of the ratio set forth above as at the last day of the first quarter of fiscal 2001, the Consolidated Net Worth of the Borrower as at such day shall not be less than ($108,500,000)."; 2.29 Section 7.1(e) is added as follows: "(e) MINIMUM CUMULATIVE CONSOLIDATED EBITDA. Permit the cumulative Consolidated EBITDA for the period beginning January 1, 2001 and ending on the last day of any fiscal month set forth below to be less than the amount set forth opposite such fiscal month:
Month Minimum Cumulative ----- Consolidated EBITDA ------------------- January 2001 ($ 108,000) February 2001 $ 1,466,000 March 2001 $ 9,897,000 April 2001 $12,282,000 May 2001 $16,074,000
-9-
Month Minimum Cumulative ----- Consolidated EBITDA ------------------- June 2001 $24,499,000 July 2001 $30,746,000 August 2001 $37,737,000 September 2001 $43,119,000 October 2001 $46,182,000 November 2001 $49,129,000 December 2001 $53,174,000 January 2002 $53,066,000 February 2002 $54,532,000 March 2002 $59,380,000
"PROVIDED, HOWEVER, if the Long Island Franchise Sale does not occur in the first quarter of fiscal 2001, then, in lieu of the amount set forth above for the period ending on the last day of March of fiscal 2001, the cumulative Consolidated EBITDA for such period shall not be less than $4,848,000."; 2.30 Section 7.5 is amended by (i) deleting "and" at the end of clause (f), (ii) replacing the period at the end of clause (g) with "; and" and (iii) adding clause (h) as follows: "(h) the Long Island Franchise Sale, provided, however, that (x) the initial closing of the Long Island Franchise Sale occurs no later than April 30, 2001, (y) the consideration received by the Borrower for the stores included in the Long Island Franchise Sale shall not be less than 85% of the aggregate market value of such stores based upon the appraisal report prepared by Cushman & Wakefield, Inc. as of February 1, 2001, and (z) simultaneously with the closing thereof, (i) the Net Cash Proceeds of the Long Island Franchise Sale shall be delivered to the Agent and applied as follows: FIRST, the sum of $2,710,714.29 shall be applied to the payment or prepayment of the installments of the Term Loans due April 15, 2001 if such installments of the Term Loans have not previously been paid; SECOND, the sum of $2,000,000.00 shall be applied to the prepayment of the Term Loans in accordance with Section 2.16(b); THIRD, the sum of $10,300,000 shall be applied to prepay Revolving Credit Loans; FOURTH, if none of the Net Cash Proceeds of the Long Island Franchise Sale shall have been applied to the payment or prepayment of the installments of the Term Loans due April 15, 2001, then the additional sum of $2,700,000 shall be applied to prepay Revolving Credit Loans; and FIFTH, the remaining amount shall be applied to the prepayment of the Term Loans in accordance with -10- Section 2.16(b); and (ii) the Borrower shall take all action necessary or reasonably requested by the Agent to grant to the Agent, for the benefit of the Lenders, a first priority security interest in any non-cash proceeds of the Long Island Franchise Sale, including the endorsement and delivery to the Agent, in accordance with the Guarantee and Collateral Agreement, of any such non-cash proceeds evidenced by notes."; 2.31 Section 10.2 is amended by replacing the notice information for the Agent with the following: "Societe Generale 1221 Avenue of the Americas New York, New York 10020 Attention: Edward J. Grimm Telephone: (212) 278-6450 Telecopy: (212) 278-6178 "with a copy to "Societe Generale 560 Lexington Avenue New York, New York 10022 Attention: Anna LoPiccolo Telephone: (212) 278-6732 Telecopy: (212) 278-5525"; 2.32 Section 10.5 is amended by inserting before the comma at the end of clause (a) thereof: "and the Financial Advisor, PROVIDED, HOWEVER, that if the Refinancing Conditions are duly performed and satisfied and no Default shall have occurred hereunder, the Borrower shall not be obligated to pay or reimburse the Agent for fees and expenses of the Financial Advisor in an amount greater than $125,000 plus reasonable and documented expenses"; 2.33 Section 10.6(c) is amended by inserting after "such consent" in the fourth line thereof "of the Borrower"; and 2.34 Annex A to the Credit Agreement is deleted. SECTION 3. AMENDMENT FEE. The Borrower shall pay to each Lender that executes and delivers this Amendment by 4:00 p.m. (New York City time) on Monday, March 19, 2001, an amendment fee of 0.75% of the sum of its outstanding Revolving Credit Commitment and Term Loans payable in two installments as follows: 0.25% on the Amendment Effective Date (the "First Amendment Fee Installment") and the balance of 0.50% on -11- September 30, 2001 (the "Second Amendment Fee Installment"), provided that, if the Credit Agreement Obligations are satisfied and paid in full in cash prior to September 30, 2001, then the Second Amendment Fee Installment will be due and payable in the reduced amount of 0.125% on the date of such payment. The fees payable hereunder shall be fully earned on the Amendment Effective Date. SECTION 4. CONDITIONS TO EFFECTIVENESS. This Amendment shall become effective as of the date set forth above (the "AMENDMENT EFFECTIVE DATE") on the date on which (a) the Borrower and the Required Lenders shall have executed and delivered to the Agent this Amendment, (b) each Guarantor shall have executed the Acknowledgment and Consent in the form annexed hereto, (c) the Borrower shall have paid all fees required to be paid, and expenses for which invoices have been presented (including fees, disbursements and other charges of counsel to the Agent) in connection with the Credit Agreement and this Amendment, (d) the Borrower shall have delivered to the Agent, to be applied toward the prepayment of the Term Loans and reduction of the Revolving Credit Commitments as set forth in Section 2.10(d), all Net Cash Proceeds held on the date this Amendment becomes effective, together with a notice of prepayment and certificate, signed by an Authorized Signatory, setting forth the Borrower's calculation of such Net Cash Proceeds, (e) each Loan Party shall have delivered to the Agent a Perfection Certificate in the form annexed hereto as Exhibit A, (f) the Borrower shall have delivered to the Agent a certified copy of the executed contract of sale for the Long Island Franchise Sale, (g) the Borrower shall have delivered to the Agent, with sufficient copies for each Lender, an appraisal report addressed to the Agent, for the benefit of the Lenders, opining on the market value of the fee simple and leasehold interests of the Borrower in its tangible assets (including real property and furniture, fixtures, equipment and machinery) as of February 1, 2001, prepared by Cushman & Wakefield, Inc. in a manner consistent with the appraisal prepared by Cushman & Wakefield, Inc. as of August 1, 1997 and including an opinion of such market value as of February 1, 2001, in excess of $300,000,000, excluding any assets which have been sold prior to the date of such report and excluding all assets which are included in the Long Island Franchise Sale and (h) the Borrower shall have paid to the Agent, on behalf of each Lender that shall have executed and delivered its signature page hereto to counsel to the Agent by 4:00 p.m. (New York City time) on Monday, March 19, 2001 the First Amendment Fee Installment. SECTION 5. CUSHMAN & WAKEFIELD MEETING. The Borrower shall arrange for a meeting among Cushman & Wakefield, the Agent and the Lenders which shall occur no later than March 30, 2001 to discuss the appraisal prepared by Cushman & Wakefield. SECTION 6. REPRESENTATIONS AND WARRANTIES. In order to induce the Agent and the Lenders to enter into this Amendment, -12- the Borrower hereby represents and warrants to the Agent and the Lenders as follows as of the Amendment Effective Date: 6.1 The representations and warranties made by the Loan Parties in the Loan Documents are true and correct in all material respects on and as of the Amendment Effective Date, before and after giving effect to the effectiveness of this Amendment, as if made on and as of the Amendment Effective Date, except to the extent such representations and warranties expressly relate to a specific earlier date, in which case such representations and warranties were true and correct in all material respects as of such earlier date. 6.2 No Default or Event of Default has occurred and is continuing. 6.3 Each of the Borrower and the other Loan Parties has the corporate power, and has been duly authorized by all requisite corporate action, to execute and deliver this Amendment and the other documents and agreements executed and delivered in connection herewith to which it is a party. This Amendment has been duly executed by the Borrower and the other documents and agreements executed and delivered in connection herewith to which the Borrower or any Loan Party is a party have been duly executed and delivered by each of the Borrower and the other Loan Parties. 6.4 Since July 29, 1998, the Certificate of Incorporation and bylaws of each of the Loan Parties has not been amended, supplemented or otherwise modified. 6.5 This Amendment is the legal, valid and binding obligation of the Borrower and the other documents and agreements executed or delivered in connection herewith to which any of the Borrower or the other Loan Parties is a party are the legal, valid and binding obligations of the Borrower and the other Loan Parties, in each case enforceable against each of the Borrower and the other Loan Parties in accordance with their respective terms, except as such enforceability may be limited by any applicable bankruptcy, insolvency, reorganization, moratorium, or similar law affecting creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 6.6 The execution, delivery and performance of this Amendment and the other documents and agreements executed and delivered in connection therewith does not and will not (i) violate any law, rule, regulation or court order to which any of the Borrower or the other Loan Parties is subject; (ii) conflict with or result in a breach of the certificate of incorporation or bylaws of the Borrower or any of the other Loan Parties or any agreement or instrument to which it is party or by which the properties of any of the Borrower or the other Loan Parties are bound; or (iii) result in the creation or imposition of any Lien, security interest or encumbrance on any property of the Borrower -13- or any of the other Loan Parties, whether now owned or hereafter acquired, other than Liens in favor of the Agent. 6.7 No consent or authorization of, filing with or other act by or in respect of any Governmental Authority or any other Person is required in connection with the execution, delivery, performance, validity or enforceability of (i) this Amendment by the Borrower or (ii) the other documents or agreements executed or delivered in connection herewith to which any of the Borrower or the other Loan Parties is party, or the consummation of the transactions contemplated hereby or thereby, or the continuing operations of any of the Borrower or the other Loan Parties following the consummation of such transactions, except for such as have been obtained or made. 6.8 As of March 7, 2001, the aggregate outstanding principal balance of the Tranche A Term Loans is $4,301,831.69, the aggregate outstanding principal balance of the Tranche B Term Loans is $19,779,757.55, the aggregate outstanding principal balance of the Tranche C Term Loans is $11,671,466.61 and the aggregate outstanding balance of the Revolving Extensions of Credit is $65,911,995.00, consisting of Revolving Credit Loans in the aggregate amount of $55,000,000.00 and Letter of Credit Obligations in the aggregate amount of $10,911,995.00. Interest and fees have accrued thereon as provided in the Credit Agreement. The obligation of the Borrower and the other Loan Parties to repay the Loans and the other Obligations, together with all interest and fees accrued thereon, is absolute and unconditional, and there exists no right of setoff or recoupment, counterclaim or defense of any nature whatsoever to payment of the Obligations. SECTION 7. PAYMENT OF EXPENSES. The Borrower agrees to pay or reimburse the Agent for all of its reasonable out-of-pocket expenses incurred in connection with this Amendment and any other documents prepared in connection herewith and the transactions contemplated hereby, including, without limitation, the reasonable fees and disbursements of counsel to the Agent. SECTION 8. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. On and after the Amendment Effective Date, each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof" or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to "the Credit Agreement," "thereunder," "thereof" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended hereby. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Lender or the Agent under any of the Loan Documents. Except as expressly amended herein, all of the provisions of the Credit Agreement and the other Loan Documents are and shall remain in full force and effect in accordance with the terms thereof and are hereby in all respects ratified and confirmed. -14- SECTION 9. MISCELLANEOUS. 9.1 The Borrower agrees to execute (and to cause each of the other Loan Parties to execute) such other and further documents and instruments as the Agent may request to implement the provisions of this Amendment. 9.2 This Amendment shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns. No other person or entity shall be entitled to claim any right or benefit hereunder, including, without limitation, the status of a third-party beneficiary of this Amendment. 9.3 This Amendment, together with the Credit Agreement and the other Loan Documents, constitutes the entire agreement and understanding among the parties relating to the subject matter hereof, and supersedes all prior proposals, negotiations, agreements and understandings relating to such subject matter. In entering into this Amendment, the Borrower acknowledges that it is not relying on any statement, representation, warranty, covenant or agreement of any kind made by any Agent, any Lender, or any employee, agent or professional of any Agent or Lender, except for the express written agreements of the Agent and Lenders set forth herein. 9.4 The provisions of this Amendment are intended to be severable. If any provision of this Amendment shall be held invalid or unenforceable in whole or in part in any jurisdiction, such provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or enforceability without in any manner affecting the validity or enforceability of such provision in any other jurisdiction or the remaining provisions of this Amendment in any jurisdiction. 9.5 This Amendment may be executed in counterparts and by any party to this Amendment on separate counterparts, all of which, when so executed, shall be deemed an original, but all of such counterparts shall constitute one and the same agreement. Any signature delivered by a party by facsimile transmission shall be deemed to be, and effective as, an original signature hereto. 9.6 Any notices with respect to this Amendment shall be given in the manner provided for in Section 10.2 of the Credit Agreement. 9.7 All representations, warranties, covenants, agreements, undertakings, waivers and releases of the Borrower contained herein shall survive the Amendment Effective Date and payment in full of the Obligations. -15- 9.8 No amendment, modification, rescission, waiver or release of any provision of this Amendment shall be effective unless the same shall be in writing and signed by the Borrower and the Required Lenders. 9.9 This Amendment shall constitute a Loan Document. SECTION 10. RELEASE OF CLAIMS. THE BORROWER HEREBY ACKNOWLEDGES AND AGREES THAT IT DOES NOT HAVE ANY DEFENSES, COUNTERCLAIMS, OFFSETS, CROSS-COMPLAINTS, CLAIMS OR DEMANDS OF ANY KIND OR NATURE WHATSOEVER THAT CAN BE ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF LIABILITY OF THE BORROWER TO REPAY ANY AGENT OR ANY LENDER AS PROVIDED IN THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS OR TO SEEK AFFIRMATIVE RELIEF OR DAMAGES OF ANY KIND OR NATURE FROM ANY AGENT OR ANY LENDER. THE BORROWER HEREBY VOLUNTARILY AND KNOWINGLY RELEASES AND FOREVER DISCHARGES THE AGENT AND THE LENDERS, AND THE AGENT'S AND EACH LENDER'S PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, OR EXPENSES, AND LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN, ANTICIPATED OR UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORE THE DATE THIS AMENDMENT IS EXECUTED, WHICH THE BORROWER MAY NOW OR HEREAFTER HAVE AGAINST ANY SUCH AGENT OR LENDER, AND THE AGENT'S OR LENDER'S PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, IF ANY, AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE, INCLUDING, WITHOUT LIMITATION, THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER THE CREDIT AGREEMENT OR OTHER LOAN DOCUMENTS, AND NEGOTIATION AND EXECUTION OF THIS AMENDMENT. SECTION 11. GOVERNING LAW; JURISDICTION; WAIVER OF JURY TRIAL. Sections 10.11, 10.12 and 10.14 of the Credit Agreement shall apply to this Amendment and to any suit, action or proceeding related to this Amendment. {THE REMAINDER OF THIS PAGE IS INTENTIONALLY BLANK} -16- IN WITNESS WHEREOF, the parties hereof have caused this amendment to be executed and delivered by their proper and duly authorized officers as of the day and year first above written. FRIENDLY ICE CREAM CORPORATION By: ------------------------------------------- Name: Title: S-1 SOCIETE GENERALE, as Agent and a Lender By: ------------------------------------------- Name: Title: S-2 TRANSAMERICA BUSINESS CREDIT CORPORATION By: -------------------------------------------- Name: Title: S-3 BLACK DIAMOND INTERNATIONAL FUNDING, LTD. By: -------------------------------------------- Name: Title: S-4 BLACK DIAMOND CLO, 1998-I LTD. By: -------------------------------------------- Name: Title: S-5 BLACK DIAMOND CLO, 2000-I LTD. By: -------------------------------------------- Name: Title: S-6 FLEET NATIONAL BANK By: -------------------------------------------- Name: Title: S-7 HIGHLAND LEGACY LTD. By: -------------------------------------------- Name: Title: S-8 FIRST SOURCE FINANCIAL LLP By: First Source Financial, Inc. its Agent/Manager By: -------------------------------------------- Name: Title: S-9 BANK OF AMERICA, N.A. By: -------------------------------------------- Name: Title: S-10 PAMCO CAYMAN LTD. By: Highland Capital Management, L.P., as Collateral Manager By: -------------------------------------------- Name: Title: S-11 PAM CAPITAL FUNDING, L.P. By: Highland Capital Management, L.P., as Collateral Manager By: ------------------------------------------- Name: Title: S-12 FLEET NATIONAL BANK AS TRUST ADMINISTRATOR FOR LONG LANE MASTER TRUST IV By: -------------------------------------------- Name: Title: S-13 FIRST UNION NATIONAL BANK By: ------------------------------------------- Name: Title: S-14 FOOTHILL INCOME TRUST, L.P. By: FIT GP LLC, its General Partner By: ------------------------------------------- Name: Title: S-15 ACKNOWLEDGMENT, CONSENT AND RELEASE Each of the undersigned corporations as guarantors under the Guarantee and Collateral Agreement, dated as of November 19, 1997, made by the undersigned corporations in favor of the Agent, for the benefit of the Lenders, hereby (a) consents to the transactions contemplated by this Amendment, (b) acknowledges and agrees that the guarantees (and grants of collateral security therefor) contained in such Guarantee and Collateral Agreement are, and shall remain, in full force and effect after giving effect to this Amendment and all prior modifications to the Credit Agreement, (c) acknowledges and agrees that its obligations under the Guarantee and Collateral Agreement are absolute and unconditional, and there exists no right of setoff or recoupment, counterclaim or defense of any nature whatsoever thereto, and (d) HEREBY VOLUNTARILY AND KNOWINGLY RELEASES AND FOREVER DISCHARGES THE AGENT AND THE LENDERS, AND EACH AGENT'S AND LENDER'S PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, OR EXPENSES, AND LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN, ANTICIPATED OR UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORE THE DATE THE FOREGOING AMENDMENT IS EXECUTED, WHICH IT MAY NOW OR HEREAFTER HAVE AGAINST ANY SUCH AGENT OR LENDER, AND SUCH AGENT'S OR LENDER'S PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, IF ANY, AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE, INCLUDING, WITHOUT LIMITATION, THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER THE CREDIT AGREEMENT OR OTHER CREDIT DOCUMENTS, AND NEGOTIATION AND EXECUTION OF THE FOREGOING AMENDMENT. FRIENDLY'S RESTAURANTS FRANCHISE, INC. By: -------------------------------------------- Name: Title: FRIENDLY'S INTERNATIONAL, INC. By: -------------------------------------------- Name: Title: -----END PRIVACY-ENHANCED MESSAGE-----