0000912057-01-536390.txt : 20011029
0000912057-01-536390.hdr.sgml : 20011029
ACCESSION NUMBER: 0000912057-01-536390
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 1
CONFORMED PERIOD OF REPORT: 20010930
FILED AS OF DATE: 20011024
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: 1934 Act
SEC FILE NUMBER: 001-13579
FILM NUMBER: 1764692
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
a2061357z10-q.txt
FORM 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 SEPTEMBER 30, 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 (I.R.S. Employer
Incorporation) Industrial Identification No.)
Classification Code Number)
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 OCTOBER 19, 2001
----- -------------------------------
Common Stock, $.01 par value 7,352,710 shares
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 7,557 $ 14,584
Restricted cash........................................... -- 1,737
Accounts receivable, net.................................. 8,494 6,157
Inventories............................................... 15,394 11,570
Deferred income taxes..................................... 10,395 10,395
Prepaid expenses and other current assets................. 3,352 2,799
--------- ---------
TOTAL CURRENT ASSETS........................................ 45,192 47,242
--------- ---------
PROPERTY AND EQUIPMENT, net................................. 194,219 226,865
INTANGIBLES AND DEFERRED COSTS, net......................... 19,783 21,529
OTHER ASSETS................................................ 10,261 2,050
--------- ---------
TOTAL ASSETS................................................ $ 269,455 $ 297,686
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 3,990 $ 13,029
Current maturities of capital lease and finance
obligations............................................. 1,885 2,143
Accounts payable.......................................... 21,622 20,100
Accrued salaries and benefits............................. 10,242 10,956
Accrued interest payable.................................. 7,103 3,515
Insurance reserves........................................ 13,764 13,095
Restructuring reserve..................................... 3,658 5,571
Other accrued expenses.................................... 14,121 14,262
--------- ---------
TOTAL CURRENT LIABILITIES................................... 76,385 82,671
--------- ---------
DEFERRED INCOME TAXES....................................... 15,668 13,276
CAPITAL LEASE AND FINANCE OBLIGATIONS, less current
maturities................................................ 6,722 8,223
LONG-TERM DEBT, less current maturities..................... 251,350 275,435
OTHER LONG-TERM LIABILITIES................................. 14,905 18,064
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock.............................................. 74 74
Additional paid-in capital................................ 139,223 138,988
Accumulated deficit....................................... (234,872) (239,045)
--------- ---------
TOTAL STOCKHOLDERS' DEFICIT................................. (95,575) (99,983)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT................. $ 269,455 $ 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 FOR THE NINE MONTHS ENDED
---------------------------- ---------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2001 2000 2001 2000
------------- ------------ ------------- -----------
REVENUES................................. $152,015 $161,841 $430,295 $465,261
COSTS AND EXPENSES:
Cost of sales.......................... 54,840 54,081 149,757 149,146
Labor and benefits..................... 39,674 47,822 120,684 145,397
Operating expenses..................... 31,930 32,611 89,690 94,530
General and administrative expenses.... 8,393 8,857 27,070 30,424
Restructuring costs.................... -- -- -- 12,056
Write-downs of property and
equipment............................ 35 664 103 19,024
Depreciation and amortization.......... 7,037 7,426 21,686 23,166
(Gain) loss on franchise sales of
restaurant operations and properties... (219) 75 (4,042) (1,923)
Gain on disposition of other property and
equipment.............................. (317) (960) (2,559) (1,005)
-------- -------- -------- --------
OPERATING INCOME (LOSS).................. 10,642 11,265 27,906 (5,554)
Interest expense, net.................... 6,464 7,594 20,967 23,495
-------- -------- -------- --------
INCOME (LOSS) BEFORE (PROVISION FOR)
BENEFIT FROM INCOME TAXES AND
EXTRAORDINARY ITEM..................... 4,178 3,671 6,939 (29,049)
(Provision for) benefit from income
taxes.................................. (1,613) (425) (2,545) 16,790
-------- -------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM................................... 2,565 3,246 4,394 (12,259)
Extraordinary item, net of income tax
benefit of $153........................ (221) -- (221) --
-------- -------- -------- --------
NET INCOME (LOSS) AND COMPREHENSIVE
INCOME (LOSS).......................... $ 2,344 $ 3,246 $ 4,173 $(12,259)
======== ======== ======== ========
BASIC NET INCOME (LOSS) PER SHARE:
Income (loss) before extraordinary
item................................. $ 0.35 $ 0.44 $ 0.60 $ (1.65)
Extraordinary item, net of income tax
benefit.............................. (0.03) -- (0.03) --
-------- -------- -------- --------
Net income (loss)...................... $ 0.32 $ 0.44 $ 0.57 $ (1.65)
======== ======== ======== ========
DILUTED NET INCOME (LOSS) PER SHARE:
Income (loss) before extraordinary
item................................. $ 0.35 $ 0.44 $ 0.60 $ (1.65)
Extraordinary item, net of income tax
benefit.............................. (0.03) -- (0.03) --
-------- -------- -------- --------
Net income (loss)...................... $ 0.32 $ 0.44 $ 0.57 $ (1.65)
======== ======== ======== ========
WEIGHTED AVERAGE SHARES:
Basic.................................. 7,359 7,409 7,366 7,439
======== ======== ======== ========
Diluted................................ 7,416 7,437 7,382 7,439
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
FOR THE NINE MONTHS ENDED
---------------------------
SEPTEMBER 30, OCTOBER 1,
2001 2000
------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 4,173 $ (12,259)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item, net of income tax benefit........... 221 --
Stock compensation expense.............................. 235 429
Depreciation and amortization........................... 21,686 23,166
Write-downs of property and equipment................... 103 19,024
Deferred income tax expense (benefit)................... 2,545 (16,790)
Gain on asset retirements and sales..................... (6,710) (3,562)
Changes in operating assets and liabilities:
Accounts receivable................................... (2,337) (1,940)
Inventories........................................... (3,824) (2,178)
Other assets.......................................... (3,204) 2,608
Accounts payable...................................... 1,522 579
Accrued expenses and other long-term liabilities...... (1,840) (2,883)
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 12,570 6,194
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (8,440) (12,808)
Proceeds from sales of property and equipment............. 23,556 32,594
-------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES................... 15,116 19,786
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.................................. 51,405 74,000
Repayments of debt........................................ (84,529) (101,678)
Repayments of capital lease and finance obligations....... (1,589) (1,344)
-------- ---------
NET CASH USED IN FINANCING ACTIVITIES....................... (34,713) (29,022)
-------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (7,027) (3,042)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 14,584 12,062
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 7,557 $ 9,020
======== =========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest.................................................. $ 16,699 $ 18,101
Income taxes.............................................. 3 62
Capital lease obligations incurred.......................... -- 2,891
Capital lease obligations terminated........................ 170 711
Notes received from sales of property and equipment......... 4,250 577
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
September 30, 2001 and for the third quarter and nine months ended
September 30, 2001 and October 1, 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 income (loss) of Friendly Ice Cream Corporation ("FICC") and
subsidiaries (unless the context indicates otherwise, collectively, the
"Company"). Such adjustments consist solely of normal recurring accruals.
Operating results for the three and nine month periods ended September 30, 2001
and October 1, 2000 are not necessarily indicative of the results that may be
expected for the entire year due, in part, to the seasonality of the Company's
business. Historically, higher revenues and operating income have been
experienced during the second and third fiscal quarters. The Company's
Consolidated Financial Statements, including the notes thereto, which are
contained in the 2000 Annual Report on Form 10-K should be read in conjunction
with these Condensed Consolidated Financial Statements.
REFINANCING STATUS AND DEBT--
The Company entered into its existing credit facility in November 1997. The
credit facility includes the revolving credit loan, term loans and letters of
credit. 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, September 30, 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, excluding prepayments made pursuant to the J&B
Agreement, 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
As of October 15, 2001, the Company has paid additional minimum cumulative
prepayments of $6,793,000 on the term loans, which exceed the minimum cumulative
prepayment requirement.
Tranche A of the term loans was prepaid and extinguished during the third
quarter ended September 30, 2001. Any remaining unpaid balances due on Tranches
B and C of the term loans will be paid on November 15, 2002.
4
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. BASIS OF PRESENTATION (CONTINUED)
FICC paid an amendment fee of approximately $256,000 to the lenders
contemporaneous with the execution of the seventh amendment. FICC paid an
additional amendment fee (the "Additional Fee") of $441,459 on October 1, 2001
pursuant to the seventh amendment, which will be expensed over the remaining
term of the credit facility using the effective yield method. If all obligations
under the credit facility were satisfied before September 30, 2001, the
Additional Fee would have been reduced to approximately $128,000. 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 September 30, 2002. Additionally, the Company believes that
it can comply with the revised covenant requirements under the amendment through
December 30, 2001.
The Company is undertaking a refinancing plan (collectively, the
"Refinancing Plan"), which has the following three principal components:
(i) obtaining a new revolving credit facility from one or more financial
institutions for $35 million;
(ii) obtaining $55 million in loans from GE Capital Franchise Finance
Corporation which will be secured by first mortgage liens upon 75 of
the Company's restaurants; and
(iii) entering into a sale and leaseback arrangement with one or more
financial institutions involving 45 of the Company's restaurants that
is expected to provide the Company up to $37.5 million in cash.
The Company would use the proceeds of these financings to repay the amounts
outstanding on its existing credit facility ($55,114,000 as of September 30,
2001), to increase working capital and, to the extent the proceeds of the
financings are sufficient, after giving effect to the foregoing, to finance a
tender offer for a portion of the Company's senior notes (the "Notes"). The
Company has obtained a commitment letter from GE Capital Franchise Finance
Corporation relating to the mortgage financing, but the Company does not have
any commitments or other agreements from any financial institutions relating to
the new revolving credit facility or the sale and leaseback arrangements
described above. The commitment letter received is contingent upon obtaining a
new revolving credit facility. The closing of each of the three financings
described above will be subject, among other things, to the negotiation of
definitive agreements and other definitive documentation. There can be no
assurance that the Company will be able to successfully implement any of the
components of the Refinancing Plan. The availability of funds from the closing
of these transactions will be a condition to the Company's ability to purchase
any Notes.
5
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. BASIS OF PRESENTATION (CONTINUED)
INVENTORIES--
Inventories are stated at the lower of first-in, first-out cost or market.
Inventories as of September 30, 2001 and December 31, 2000 were as follows (in
thousands):
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Raw materials....................................... $ 2,983 $ 1,307
Goods in process.................................... 145 66
Finished goods...................................... 12,266 10,197
------- -------
Total............................................... $15,394 $11,570
======= =======
RECLASSIFICATIONS--
Certain prior year amounts have been reclassified to conform with current
year presentation.
2. EARNINGS PER SHARE
Basic net income (loss) per share is calculated by dividing income (loss)
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is calculated by
dividing earnings available to common stockholders by the weighted average
number of shares of common stock and common stock equivalents outstanding during
the period. Common stock equivalents are dilutive stock options that are assumed
exercised for calculation purposes. The number of common stock equivalents which
could dilute basic earnings per share in the future, that were not included in
the computation of diluted earnings per share because to do so would have been
antidilutive, was 21,833 for the nine months ended October 1, 2000.
Presented below is the reconciliation between basic and diluted weighted
average shares for the three and nine months ended September 30, 2001 and
October 1, 2000 (in thousands):
FOR THE THREE MONTHS ENDED
-------------------------------------------------------
BASIC DILUTED
-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2001 2000 2001 2000
------------- ---------- ------------- ----------
Weighted average number of common shares
outstanding during the period................. 7,359 7,409 7,359 7,409
Assumed exercise of stock options............... -- -- 57 28
----- ----- ----- -----
Weighted average number of shares outstanding... 7,359 7,409 7,416 7,437
===== ===== ===== =====
6
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. EARNINGS PER SHARE (CONTINUED)
FOR THE NINE MONTHS ENDED
-------------------------------------------------------
BASIC DILUTED
-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2001 2000 2001 2000
------------- ---------- ------------- ----------
Weighted average number of common shares
outstanding during the period................. 7,366 7,439 7,366 7,439
Assumed exercise of stock options............... -- -- 16 --
----- ----- ----- -----
Weighted average number of shares outstanding... 7,366 7,439 7,382 7,439
===== ===== ===== =====
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.
On May 1, 2001, foodservice decreased its ice cream pricing to all
restaurants. This resulted in decreased foodservice restaurant revenues of 4.7%
and 3.0% for the third quarter and nine months ended September 30, 2001,
respectively.
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
7
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. SEGMENT REPORTING (CONTINUED)
accounts for intersegment sales and transfers as if the sales or transfers were
to third parties, that is, at current market prices.
EBITDA represents net income (loss) before (i) (provision for) benefit from
income taxes, (ii) interest expense, net, (iii) depreciation and amortization,
(iv) extraordinary item 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 FOR THE NINE MONTHS ENDED
---------------------------- ---------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2001 2000 2001 2000
------------- ------------ ------------- -----------
(IN THOUSANDS)
Revenues:
Restaurant............................. $118,931 $137,462 $345,029 $ 399,685
Foodservice............................ 64,905 65,501 177,712 183,439
Franchise.............................. 2,535 1,763 7,197 5,805
-------- -------- -------- ---------
Total................................ $186,371 $204,726 $529,938 $ 588,929
======== ======== ======== =========
Intersegment revenues:
Restaurant............................. $ -- $ -- $ -- $ --
Foodservice............................ (34,356) (42,885) (99,643) (123,668)
Franchise.............................. -- -- -- --
-------- -------- -------- ---------
Total................................ $(34,356) $(42,885) $(99,643) $(123,668)
======== ======== ======== =========
External revenues:
Restaurant............................. $118,931 $137,462 $345,029 $ 399,685
Foodservice............................ 30,549 22,616 78,069 59,771
Franchise.............................. 2,535 1,763 7,197 5,805
-------- -------- -------- ---------
Total................................ $152,015 $161,841 $430,295 $ 465,261
======== ======== ======== =========
8
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. SEGMENT REPORTING (CONTINUED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
---------------------------- ---------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2001 2000 2001 2000
------------- ------------ ------------- -----------
(IN THOUSANDS)
EBITDA:
Restaurant............................. $ 16,587 $ 16,085 $ 41,379 $ 39,643
Foodservice............................ 2,617 6,406 10,505 18,991
Franchise.............................. 1,482 581 3,903 2,099
Corporate.............................. (2,850) (4,460) (11,866) (14,629)
(Loss) gain on property and equipment,
net.................................. (55) 885 6,009 3,017
Restructuring costs.................... -- -- -- (12,056)
-------- -------- -------- ---------
Total................................ $ 17,781 $ 19,497 $ 49,930 $ 37,065
======== ======== ======== =========
Interest expense, net.................... $ 6,464 $ 7,594 $ 20,967 $ 23,495
======== ======== ======== =========
Depreciation and amortization:
Restaurant............................. $ 4,618 $ 5,052 $ 14,277 $ 15,982
Foodservice............................ 834 825 2,529 2,540
Franchise.............................. 62 90 183 273
Corporate.............................. 1,523 1,459 4,697 4,371
-------- -------- -------- ---------
Total................................ $ 7,037 $ 7,426 $ 21,686 $ 23,166
======== ======== ======== =========
Other non-cash expenses:
Corporate.............................. $ 67 $ 142 $ 235 $ 429
Write-downs of property and
equipment............................ 35 664 103 19,024
-------- -------- -------- ---------
Total................................ $ 102 $ 806 $ 338 $ 19,453
======== ======== ======== =========
Income (loss) before (provision for)
benefit from income taxes and
extraordinary item:
Restaurant............................. $ 11,969 $ 11,033 $ 27,102 $ 23,661
Foodservice............................ 1,783 5,581 7,976 16,451
Franchise.............................. 1,420 491 3,720 1,826
Corporate.............................. (10,904) (13,655) (37,765) (42,924)
(Loss) gain on property and equipment,
net.................................. (90) 221 5,906 (16,007)
Restructuring Costs.................... -- -- -- (12,056)
-------- -------- -------- ---------
Total................................ $ 4,178 $ 3,671 $ 6,939 $ (29,049)
======== ======== ======== =========
9
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. SEGMENT REPORTING (CONTINUED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
---------------------------- ---------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2001 2000 2001 2000
------------- ------------ ------------- -----------
(IN THOUSANDS)
Capital expenditures, including
capitalized leases:
Restaurant............................. $ 2,198 $ 5,824 $ 6,215 $ 12,662
Foodservice............................ 268 44 1,483 1,841
Corporate.............................. 248 659 742 1,195
-------- -------- -------- ---------
Total................................ $ 2,714 $ 6,527 $ 8,440 $ 15,698
======== ======== ======== =========
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Total assets:
Restaurant................................................ $171,257 $199,223
Foodservice............................................... 40,468 33,880
Franchise................................................. 6,196 3,745
Corporate................................................. 51,534 60,838
-------- --------
Total................................................... $269,455 $297,686
======== ========
4. NEW ACCOUNTING PRONOUNCEMENTS
In September 2001, the Emerging Issues Task Force ("EITF") issued EITF Issue
No. 01-10, "Accounting for the Impact of the September 11, 2001 Terrorist Acts,"
which provides guidance on how the costs related to the terrorist acts should be
classified, how to determine whether an asset impairment should be recognized
and how liabilities for losses and other costs should be recognized. The impact
of adopting EITF Issue No. 01-10 did not have any effect on the Company's
consolidated financial statements.
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 modifies the
rules for accounting for the impairment or disposal of long-lived assets. The
new rules become effective for fiscal years beginning after December 15, 2001,
with earlier application encouraged. The Company has not yet quantified the
impact of implementing SFAS No. 144 on the Company's consolidated financial
statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangibles." SFAS No. 142 modifies the rules for accounting for goodwill and
other intangible assets. The new rules become effective on January 1, 2002. The
impact of adopting SFAS No. 142 will not have a material effect on the Company's
consolidated financial statements and the Company will continue to amortize its
license agreement related to certain trademarked products.
10
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In April 2001, the FASB reached consensus on 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. EITF Issue No. 00-25 requires that consideration from a vendor to a
retailer be recorded as a reduction in revenue unless certain criteria are met.
Arrangements within the scope of this Issue include slotting fees, cooperative
advertising arrangements and buy-downs. As a result of EITF Issue No. 00-25,
certain costs previously recorded as expense will be reclassified and offset
against revenue. The Company's consolidated financial statements will be
reclassified to conform with the consensus in the fourth quarter of 2001.
In May 2000, the Emerging Issues Task Force issued EITF Issue 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 Issue No. 00-14 on July 3, 2000.
As a result, the Company has reclassified certain retail selling expenses
against retail revenue for the three and nine months ended October 1, 2000 to
conform with the current period presentation.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established 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 amount is not
significant. Additionally, net losses of approximately $113,000 were recorded
during the nine months ended September 30, 2001 related to the change in fair
value for the period. The fair market value of derivatives at September 30, 2001
was approximately $19,000.
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
following 24 months. The 70 locations will remain in operation until they are
sold, subleased or closed. 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 $12,056,000
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
11
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. RESTRUCTURING PLAN (CONTINUED)
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 NINE MONTHS ENDED BALANCE AS OF
DECEMBER 31, 2000 SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
----------------- ------------------ ------------------
Severance pay...................... $ 74 $ (74) $ --
Rent............................... 3,585 (900) 2,685
Utilities and real estate taxes.... 1,105 (519) 586
Demarking.......................... 138 (126) 12
Lease termination costs............ 120 (120) --
Inventory.......................... 5 (5) --
Other.............................. 544 (169) 375
------ ------- ------
Total.............................. $5,571 $(1,913) $3,658
====== ======= ======
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. As of September 30,
2001, the Company had sold 60 of the 151 restructuring properties, of which 36
were included in the 81 restaurants that were closed in March 2000. The Company
had also terminated its lease obligations at 49 restructuring properties, of
which 33 were included in the list of 81 restaurants that were closed in
March 2000. In addition, the Company has made a decision to continue to operate
25 of the 70 properties that were originally listed as locations to be disposed
of. No amounts were included in the restructuring reserve related to these
properties. These 25 properties are no longer being marketed and are now being
depreciated. At September 30, 2001, the aggregate carrying amount of the
remaining two operating restaurants and 15 closed properties to be disposed of
was $1.3 million. At December 31, 2000, the aggregate carrying value of the 73
properties to be disposed of was $7.0 million. The amounts related to properties
held for sale are reflected in the condensed consolidated balance sheets as
property and equipment, net.
6. SALES OF RESTAURANT OPERATIONS AND PROPERTIES TO FRANCHISEES
On September 14, 2001, the Company entered into an agreement granting Revere
Restaurant Group, Inc. ("Revere") certain limited exclusive rights to operate
and develop Friendly's full-service restaurants in designated areas within
Lehigh and Northampton counties, Pennsylvania (the "Revere Agreement"). Pursuant
to the Revere Agreement, Revere purchased certain assets and rights in six
existing Friendly's restaurants and committed to open an additional four
restaurants over the next seven years. The president of Revere is a former
employee of the Company. Gross proceeds from the sale were approximately
$3.4 million of which approximately $0.2 million was for franchise fees for the
initial six restaurants. The $0.2 million was recorded as revenue in the third
quarter ended September 30, 2001. The Company also recognized a gain of
approximately $0.3 million related to the sale of the assets for the six
locations in the third quarter ended September 30, 2001.
12
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. SALES OF RESTAURANT OPERATIONS AND PROPERTIES TO FRANCHISEES (CONTINUED)
On April 13, 2001, the Company entered into 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. Gross proceeds from the sale
were approximately $19,950,000, of which approximately $4,250,000 was received
in a note and $940,000 was for franchise fees for the initial 31 restaurants.
The $940,000 was recorded as revenue in the second quarter ended July 1, 2001.
The Company recognized a gain of approximately $3,955,000 related to the sale of
the assets for the 31 locations in the second quarter ended July 1, 2001. 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. The Company also sold certain assets and rights in
two other restaurants to an additional franchisee resulting in a loss of
$16,000.
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 ended 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 ended 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.
Effective August 6, 2001, the Company's largest franchisee, Davco
Restaurants, Inc. ("Davco") refranchised three Newark, Delaware units,
transferring it's rights to R.R.C. Restaurants, Inc. In addition, Davco closed
two units during the quarter ended September 30, 2001. Currently, Davco is
seeking to refranchise an additional 25 to 28 units.
7. EXTRAORDINARY ITEM
The Company recognized $0.2 million of expense, net of the related income
tax benefit of $0.2 million, in 2001 related to previously deferred financing
costs associated with Tranche A of the term loans, which was prepaid and
extinguished in full during the quarter ended September 30, 2001.
13
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. SUBSEQUENT EVENT
On October 10, 2001, the Company eliminated approximately 70 positions at
corporate headquarters. The purpose of the reduction was to streamline functions
and reduce redundancy amongst its business segments. In addition, approximately
30 positions in the restaurant construction and fabrication areas will be
eliminated by December 30, 2001. The Company believes the outsourcing of such
activities will be more cost effective in the future. Annual salaries and fringe
benefits associated with these 100 positions is approximately $5.6 million. As a
result of the elimination of the positions and the outsourcing of certain
functions, the Company will be reporting a pre-tax restructuring charge of
approximately $2.5-$3.0 million for severance pay, rent and inventory in the
fourth quarter ending December 30, 2001.
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
FICC's obligation related to the $200 million Senior Notes is guaranteed
fully and unconditionally by one of FICC's wholly- owned subsidiaries. There are
no restrictions on FICC's ability to obtain dividends or other distributions of
funds from this subsidiary, except those imposed by applicable law. The
following supplemental financial information sets forth, on a condensed
consolidating basis, balance sheets, statements of operations and statements of
cash flows for Friendly Ice Cream Corporation (the "Parent Company"), Friendly's
Restaurants Franchise, Inc. (the "Guarantor Subsidiary") and Friendly's
International, Inc. and Restaurant Insurance Corporation (together, the
"Non-guarantor Subsidiaries"). Separate complete financial statements and other
disclosures of the Guarantor Subsidiary as of September 30, 2001 and October 1,
2000, and for the periods ended September 30, 2001 and October 1, 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.
14
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2001
(Unaudited)
(In thousands)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
Assets
Current assets:
Cash and cash equivalents......... $ 6,661 $ 18 $ 878 $ -- $ 7,557
Restricted cash................... -- -- -- -- --
Accounts receivable, net.......... 7,848 646 -- -- 8,494
Inventories....................... 15,394 -- -- -- 15,394
Deferred income taxes............. 10,258 43 -- 94 10,395
Prepaid expenses and other current
assets.......................... 8,537 983 3,504 (9,672) 3,352
-------- ------ ------- -------- --------
Total current assets................ 48,698 1,690 4,382 (9,578) 45,192
Deferred income taxes............... -- 506 1,327 (1,833) --
Property and equipment, net......... 194,219 -- -- -- 194,219
Intangibles and deferred costs,
net............................... 19,783 -- -- -- 19,783
Investments in subsidiaries......... 5,327 -- -- (5,327) --
Other assets........................ 9,347 4,520 6,229 (9,835) 10,261
-------- ------ ------- -------- --------
Total assets........................ $277,374 $6,716 $11,938 $(26,573) $269,455
======== ====== ======= ======== ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current maturities of long-term
obligations..................... $ 9,375 $ -- $ -- $ (3,500) $ 5,875
Accounts payable.................. 21,622 -- -- -- 21,622
Accrued expenses.................. 46,167 1,026 7,682 (5,987) 48,888
-------- ------ ------- -------- --------
Total current liabilities........... 77,164 1,026 7,682 (9,487) 76,385
Deferred income taxes............... 17,407 -- -- (1,739) 15,668
Long-term obligations, less current
maturities........................ 263,386 -- -- (5,314) 258,072
Other long-term liabilities......... 14,992 1,080 3,539 (4,706) 14,905
Stockholders' (deficit) equity...... (95,575) 4,610 717 (5,327) (95,575)
-------- ------ ------- -------- --------
Total liabilities and stockholders'
(deficit) equity.................. $277,374 $6,716 $11,938 $(26,573) $269,455
======== ====== ======= ======== ========
15
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
(Unaudited)
(In thousands)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
Revenues............................ $149,941 $2,074 $ -- $ -- $152,015
Costs and expenses:
Cost of sales..................... 54,840 -- -- -- 54,840
Labor and benefits................ 39,674 -- -- -- 39,674
Operating expenses and write-downs
of property and equipment....... 31,964 -- 1 -- 31,965
General and administrative
expenses........................ 7,224 1,169 -- -- 8,393
Depreciation and amortization..... 7,037 -- -- -- 7,037
Gain on franchise sales of
restaurant operations and
properties........................ (219) -- -- -- (219)
Gain on dispositions of other
property and equipment............ (317) -- -- -- (317)
Interest expense (income)........... 6,640 -- (176) -- 6,464
-------- ------ ----- ----- --------
Income before provision for income
taxes, extraordinary item and
equity in net income of
consolidated subsidiaries......... 3,098 905 175 -- 4,178
Provision for income taxes.......... (1,180) (372) (61) -- (1,613)
-------- ------ ----- ----- --------
Income before extraordinary item and
equity in net income of
consolidated subsidiaries......... 1,918 533 114 -- 2,565
Extraordinary item, net of income
tax benefit....................... (221) -- -- -- (221)
-------- ------ ----- ----- --------
Income before equity in net income
of consolidated subsidiaries...... 1,697 533 114 -- 2,344
Equity in net income of consolidated
subsidiaries...................... 647 -- -- (647) --
-------- ------ ----- ----- --------
Net income.......................... $ 2,344 $ 533 $ 114 $(647) $ 2,344
======== ====== ===== ===== ========
16
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(Unaudited)
(In thousands)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
Revenues............................ $424,304 $ 5,991 $ -- $ -- $430,295
Costs and expenses:
Cost of sales..................... 149,757 -- -- -- 149,757
Labor and benefits................ 120,684 -- -- -- 120,684
Operating expenses and write-downs
of property and equipment....... 89,803 -- (10) -- 89,793
General and administrative
expenses........................ 23,585 3,485 -- -- 27,070
Depreciation and amortization..... 21,686 -- -- -- 21,686
Gain on franchise sales of
restaurant operations and
properties........................ (4,042) -- -- -- (4,042)
Gain on dispositions of other
property and equipment............ (2,559) -- -- -- (2,559)
Interest expense (income)........... 21,540 -- (573) -- 20,967
-------- ------- ----- ------- --------
Income before provision for income
taxes, extraordinary item and
equity in net income of
consolidated subsidiaries......... 3,850 2,506 583 -- 6,939
Provision for income taxes.......... (1,312) (1,028) (205) -- (2,545)
-------- ------- ----- ------- --------
Income before extraordinary item and
equity in net income of
consolidated subsidiaries......... 2,538 1,478 378 -- 4,394
Extraordinary item, net of income
tax benefit....................... (221) -- -- -- (221)
-------- ------- ----- ------- --------
Income before equity in net income
of consolidated subsidiaries...... 2,317 1,478 378 -- 4,173
Equity in net income of consolidated
subsidiaries...................... 1,856 -- -- (1,856) --
-------- ------- ----- ------- --------
Net income.......................... $ 4,173 $ 1,478 $ 378 $(1,856) $ 4,173
======== ======= ===== ======= ========
17
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(Unaudited)
(In thousands)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
Net cash provided by (used in)
operating activities............... $ 12,639 $(15) $ 2,240 $(2,294) $ 12,570
-------- ---- ------- ------- --------
Cash flows from investing activities:
Purchases of property and
equipment........................ (8,440) -- -- -- (8,440)
Proceeds from sales of property and
equipment........................ 23,556 -- -- -- 23,556
-------- ---- ------- ------- --------
Net cash provided by investing
activities......................... 15,116 -- -- -- 15,116
-------- ---- ------- ------- --------
Cash flows from financing activities:
Proceeds from borrowings........... 51,405 -- -- -- 51,405
Repayments of obligations.......... (86,118) -- -- -- (86,118)
Reinsurance deposits received...... -- -- 505 (505) --
Reinsurance payments made from
deposits......................... -- -- (2,799) 2,799 --
-------- ---- ------- ------- --------
Net cash used in financing
activities......................... (34,713) -- (2,294) 2,294 (34,713)
-------- ---- ------- ------- --------
Net decrease in cash and cash
equivalents........................ (6,958) (15) (54) -- (7,027)
Cash and cash equivalents, beginning
of period.......................... 13,619 33 932 -- 14,584
-------- ---- ------- ------- --------
Cash and cash equivalents, end of
period............................. $ 6,661 $ 18 $ 878 $ -- $ 7,557
======== ==== ======= ======= ========
Supplemental disclosures:
Interest paid (received)........... $ 17,273 $ -- $ (574) $ -- $ 16,699
Income taxes paid.................. 1 2 -- -- 3
Capital lease obligations
terminated....................... 170 -- -- -- 170
Note received from the sale of
property and equipment........... 4,250 -- -- -- 4,250
18
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. 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' (Deficit) Equity
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' (deficit) equity...... (99,983) 3,132 368 (3,500) (99,983)
-------- ------ ------- -------- --------
Total liabilities and stockholders'
(deficit) equity.................. $301,560 $5,255 $13,782 $(22,911) $297,686
======== ====== ======= ======== ========
19
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 1, 2000
(Unaudited)
(In thousands)
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------ ------------
Revenues.............................. $160,511 $1,330 $ -- $ -- $161,841
Costs and expenses:
Cost of sales....................... 54,081 -- -- -- 54,081
Labor and benefits.................. 47,822 -- -- -- 47,822
Operating expenses and write-downs
of property and equipment......... 33,319 -- (44) -- 33,275
General and administrative
expenses.......................... 7,177 1,680 -- -- 8,857
Depreciation and amortization....... 7,426 -- -- -- 7,426
Loss on franchise sales of restaurant
operations and properties........... 75 -- -- -- 75
Gain on dispositions of other property
and equipment....................... (960) -- -- -- (960)
Interest expense (income)............. 7,768 -- (174) -- 7,594
-------- ------ ---- --------- --------
Income (loss) before (provision for)
benefit from income taxes and equity
in net loss of consolidated
subsidiaries........................ 3,803 (350) 218 -- 3,671
(Provision for) benefit from income
taxes............................... (493) 144 (76) -- (425)
-------- ------ ---- --------- --------
Income (loss) before equity in net
loss of consolidated subsidiaries... 3,310 (206) 142 -- 3,246
Equity in net loss of consolidated
subsidiaries........................ (64) -- -- 64 --
-------- ------ ---- --------- --------
Net income (loss)..................... $ 3,246 $ (206) $142 $ 64 $ 3,246
======== ====== ==== ========= ========
20
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 1, 2000
(Unaudited)
(In thousands)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
Revenues............................ $460,751 $4,510 $ -- $ -- $465,261
Costs and expenses:
Cost of sales..................... 149,146 -- -- -- 149,146
Labor and benefits................ 145,397 -- -- -- 145,397
Operating expenses and write-downs
of property and equipment....... 113,713 -- (159) -- 113,554
General and administrative
expenses........................ 27,473 2,951 -- -- 30,424
Restructuring costs............... 12,056 -- -- -- 12,056
Depreciation and amortization..... 23,166 -- -- -- 23,166
Gain on franchise sales of
restaurant operations and
properties........................ (1,923) -- -- -- (1,923)
Gain on dispositions of other
property and equipment............ (1,005) -- -- -- (1,005)
Interest expense (income)........... 24,014 -- (519) -- 23,495
-------- ------ ---- ------- --------
(Loss) income before benefit from
(provision for) income taxes and
equity in net income of
consolidated subsidiaries......... (31,286) 1,559 678 -- (29,049)
Benefit from (provision for) income
taxes............................. 17,666 (639) (237) -- 16,790
-------- ------ ---- ------- --------
(Loss) income before equity in net
income of consolidated
subsidiaries...................... (13,620) 920 441 -- (12,259)
Equity in net income of consolidated
subsidiaries...................... 1,361 -- -- (1,361) --
-------- ------ ---- ------- --------
Net (loss) income................... $(12,259) $ 920 $441 $(1,361) $(12,259)
======== ====== ==== ======= ========
21
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 1, 2000
(Unaudited)
(In thousands)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------- ------------ ------------
Net cash provided by (used in)
operating activities.............. $ 7,780 $ (3) $ (105) $(1,478) $ 6,194
--------- ---- ------- ------- ---------
Cash flows from investing
activities:
Purchases of property and
equipment....................... (12,808) -- -- -- (12,808)
Proceeds from sales of property
and equipment................... 32,594 -- -- -- 32,594
--------- ---- ------- ------- ---------
Net cash provided by investing
activities........................ 19,786 -- -- -- 19,786
--------- ---- ------- ------- ---------
Cash flows from financing
activities:
Proceeds from borrowings.......... 74,000 -- -- -- 74,000
Repayments of obligations......... (103,022) -- -- -- (103,022)
Reinsurance deposits received..... -- -- 2,133 (2,133) --
Reinsurance payments made from
deposits........................ -- -- (3,611) 3,611 --
--------- ---- ------- ------- ---------
Net cash used in financing
activities........................ (29,022) -- (1,478) 1,478 (29,022)
--------- ---- ------- ------- ---------
Net decrease in cash and cash
equivalents....................... (1,456) (3) (1,583) -- (3,042)
Cash and cash equivalents, beginning
of period......................... 9,674 14 2,374 -- 12,062
--------- ---- ------- ------- ---------
Cash and cash equivalents, end of
period............................ $ 8,218 $ 11 $ 791 $ -- $ 9,020
========= ==== ======= ======= =========
Supplemental disclosures:
Interest paid (received).......... $ 18,805 $ -- $ (704) $ -- $ 18,101
Income taxes (refunded) paid...... (1,075) 891 246 -- 62
Capital lease obligations
incurred........................ 2,891 -- -- -- 2,891
Capital lease obligations
terminated...................... 711 -- -- -- 711
Note received from the sale of
property and equipment.......... 577 -- -- -- 577
22
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 ongoing
compliance with covenants in its existing debt facilities and its 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 September 30, 2001, the Company owned and operated 394 restaurants and
franchised 160 restaurants and 6 cafes. The Company manufactures and distributes
a full line of frozen dessert products, which are distributed to Friendly's
restaurants and through more than 3,500 supermarkets and other retail locations
in 17 states. The restaurants offer a wide variety of reasonably- priced
breakfast, lunch and dinner menu items as well as the frozen dessert products.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
---------------------------- ---------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2001 2000 2001 2000
------------- ------------ ------------- -----------
COMPANY UNITS:
Beginning of period.............. 403 486 449 618
Openings......................... -- -- -- 2
Re-franchised closings........... (6) -- (39) (37)
Closings......................... (3) (15) (16) (112)
--- --- --- ----
End of period.................... 394 471 394 471
=== === === ====
FRANCHISED UNITS:
Beginning of period.............. 163 114 127 69
Re-franchised openings........... 6 -- 39 37
Openings......................... 1 3 4 13
Closings......................... (4) (2) (4) (4)
--- --- --- ----
End of period.................... 166 115 166 115
=== === === ====
23
REVENUES:
Total revenues decreased $9.8 million, or 6.1%, to $152.0 million for the
third quarter ended September 30, 2001 from $161.8 million for the same quarter
in 2000. Restaurant revenues decreased $18.6 million, or 13.5%, to
$118.9 million for the third quarter of 2001 from $137.5 million for the same
quarter in 2000. Restaurant revenues decreased by $19.8 million due to the
closing of 41 under-performing restaurants and the re-franchising of 51
additional locations over the past 15 months. Closing of restaurants accounted
for $5.6 million of the restaurant revenue decline and re-franchising reduced
restaurant revenues by an additional $14.2 million. Partially offsetting this
decrease was a 1.5% increase in comparable restaurant revenues. Foodservice
(product sales to franchisees, retail and institutional) revenues increased by
$7.9 million, or 35.0%, to $30.5 million for the third quarter of 2001 from
$22.6 million for the same quarter in 2000. The increase in the number of
franchised units accounted for $4.1 million of the increase, sales to
foodservice retail supermarket customers increased by $3.5 million and sales to
outside distributors increased by $0.3 million. On May 1, 2001, foodservice
decreased its ice cream pricing to all restaurants. This resulted in decreased
foodservice revenues of 4.7% for the third quarter ended September 30, 2001. 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 increased $0.7 million, or 38.9%, to $2.5 million for the
three months ended September 30, 2001 compared to $1.8 million for the three
months ended October 1, 2000. The increase is largely the result of the
difference in the number of franchised locations operating during both periods.
There were 166 franchise units open at the end of the third quarter ended
September 30, 2001 compared to 115 franchise units open at the end of the third
quarter ended October 1, 2000.
Total revenues decreased $35.0 million, or 7.5%, to $430.3 million for the
nine months ended September 30, 2001 from $465.3 million for the same period in
2000. Restaurant revenues decreased $54.7 million, or 13.7%, to $345.0 million
for the first nine months of 2001 from $399.7 million for the same period in
2000. Restaurant revenues decreased by $59.1 million due to the closing of 138
under-performing restaurants and the re-franchising of 88 additional locations
over the past 21 months. Closing of restaurants accounted for $27.0 million of
the restaurant revenue decline and re-franchising reduced restaurant revenues by
an additional $32.1 million. Partially offsetting this decrease was a 1.3%
increase in comparable restaurant revenues. Revenues from the one location open
less than one year were $0.5 million. Foodservice (product sales to franchisees,
retail and institutional) and other revenues increased by $18.3 million, or
30.6%, to $78.1 million for the nine months ended September 30, 2001 from
$59.8 million for the same period in 2000. The increase in the number of
franchised units accounted for $9.6 million of the increase, sales to
foodservice retail supermarket customers increased by $7.6 million and sales to
outside distributors increased by $1.1 million. On May 1, 2001, foodservice
decreased its ice cream pricing to all restaurants. This resulted in decreased
foodservice revenues of 3.0% for the nine months ended September 30, 2001.
Franchise revenue increased $1.4 million, or 24.1%, to $7.2 million for the nine
months ended September 30, 2001 compared to $5.8 million for the nine months
ended October 1, 2000. The increase is largely the result of the difference in
the number of franchised locations operating during both periods. There were 166
franchise units open at the end of the nine months ended September 30, 2001
compared to 115 franchise units open at the end of the nine months ended
October 1, 2000.
COST OF SALES:
Cost of sales increased $0.7 million, or 1.4%, to $54.8 million for the
third quarter ended September 30, 2001 from $54.1 million for the same quarter
in 2000. Cost of sales as a percentage of total revenues increased to 36.1% for
the third quarter of 2001 from 33.4% for the third quarter of 2000. The higher
food cost as a percentage of total revenue was mainly due to a shift in sales
mix from Company-owned restaurant sales to foodservice sales. Foodservice sales
to franchisees and retail
24
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
principal ingredient used in making ice cream, was higher in the third quarter
of 2001 when compared to the third quarter of 2000 and partially 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 be higher in the fourth quarter of 2001 when compared to those
prices experienced during the fourth quarter of 2000. To minimize risk,
alternative supply sources continue to be pursued.
Cost of sales increased $0.6 million, or 0.4%, to $149.7 million for the
nine months ended September 30, 2001 from $149.1 million for the same period in
2000. Cost of sales as a percentage of total revenues increased to 34.8% for the
nine months in 2001 from 32.0% for the same period 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 principal ingredient used in making ice cream, was higher in the
first nine months of 2001 when compared to the first nine months of 2000 and
contributed to the rise in cost of sales as a percentage of total revenues,
especially in foodservice's retail supermarket business. In May 2001, the
Company raised prices to its retail customers.
LABOR AND BENEFITS:
Labor and benefits decreased $8.1 million, or 17.0%, to $39.7 million for
the third quarter ended September 30, 2001 from $47.8 million for the same
quarter in 2000. Labor and benefits as a percentage of total revenues decreased
to 26.1% for the third quarter of 2001 from 29.5% for the same quarter in 2000.
The lower labor cost as a percentage of total revenue is partially the result of
revenue increases derived from additional franchised locations and higher sales
to foodservice retail supermarket customers, which do not have any associated
restaurant labor and benefits. In addition, the closing of 41 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.
Labor and benefits decreased $24.7 million, or 17.0%, to $120.7 million for
the nine months ended September 30, 2001 from $145.4 million for the same period
in 2000. Labor and benefits as a percentage of total revenues decreased to 28.0%
for the nine months of 2001 from 31.3% 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 and higher sales to
foodservice retail supermarket customers, which do not have any associated
restaurant labor and benefits. In addition, the closing of 138 under-performing
Company-owned units over the past 21 months improved the relationship of
restaurant labor and benefits to restaurant sales as well as to total revenues.
OPERATING EXPENSES:
Operating expenses decreased $0.7 million, or 2.1%, to $31.9 million for the
third quarter ended September 30, 2001 from $32.6 million for the same quarter
in 2000. Operating expenses as a percentage of total revenues were 21.0% and
20.2% for the third quarters ended September 30, 2001 and October 1, 2000,
respectively. The increase as a percentage of total revenues resulted from
higher costs for foodservice retail promotions and restaurant utilities in the
2001 quarter when compared to the 2000 quarter.
Operating expenses decreased $4.8 million, or 5.1%, to $89.7 million for the
nine months ended September 30, 2001 from $94.5 million for the same period in
2000. Operating expenses as a percentage of total revenues were 20.8% and 20.3%
for the nine months ended September 30, 2001 and October 1, 2000, respectively.
The increase as a percentage of total revenues resulted from higher
25
costs for foodservice retail promotions and restaurant advertising and utilities
in the 2001 period when compared to the 2000 period.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses were $8.4 million for the third quarter
ended September 30, 2001 and $8.9 million for the same period in 2000. General
and administrative expenses as a percentage of total revenues were 5.5% in the
third quarters of 2001 and 2000. In the 2001 period, bonus expense increased
$1.1 million when compared to the same period in 2000.
General and administrative expenses were $27.1 million and $30.4 million for
the nine months ended September 30, 2001 and October 1, 2000, respectively.
General and administrative expenses as a percentage of total revenues decreased
to 6.3% in the nine months ended September 30, 2001 from 6.5% 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 and an on-going hiring freeze. In the
2001 period, bonus expense increased $0.8 million when compared to the same
period in 2000.
EBITDA:
As a result of the above, EBITDA (EBITDA represents net income (loss) before
(i) benefit from (provision for) income taxes, (ii) interest expense, net,
(iii) depreciation and amortization, (iv) extraordinary item and
(v) write-downs and all other non-cash items plus cash distributions from
unconsolidated subsidiaries) decreased $1.7 million, or 8.8%, to $17.8 million
for the third quarter ended September 30, 2001 from $19.5 million for the same
quarter in 2000. EBITDA as a percentage of total revenues was 11.7% and 12.0%
for the third quarters of 2001 and 2000, respectively.
EBITDA increased $12.8 million, or 34.7%, to $49.9 million for the nine
months ended September 30, 2001 from $37.1 million for the same period in 2000.
EBITDA as a percentage of total revenues was 11.6% and 8.0% for the nine months
ended September 30, 2001 and October 1, 2000, respectively.
RESTRUCTURING COSTS:
Restructuring costs were $12.1 million for the nine months ended October 1,
2000 as a result of the costs associated with the Company's decision to
reorganize its restaurant field and headquarters organizations in conjunction
with the closing of 81 under-performing restaurants and the planned closing of
an additional 70 restaurants over the following 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 $0.7 million for the three months
ended October 1, 2000. Write-downs of property and equipment were $0.1 million
and $19.0 million for the nine months ended September 30, 2001 and October 1,
2000, respectively. The decrease in write-downs is primarily the result of the
non-cash write-down of the 81 under-performing restaurants which were closed at
the end of March 2000 and the non-cash write-down of the additional 70
restaurants which were to be closed over the following 24 months to their
estimated net realizable value. During the nine months ended September 30, 2001,
the Company made the decision to continue to operate 25 of these properties. As
of September 30, 2001, 27 of these 70 restaurants are still operating.
26
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization decreased $0.4 million, or 5.2%, to
$7.0 million for the third quarter ended September 30, 2001 from $7.4 million
for the same quarter in 2000. Depreciation and amortization as a percentage of
total revenues was 4.6% for the third quarters of 2001 and 2000.
Depreciation and amortization decreased $1.5 million, or 6.4%, to
$21.7 million for the nine months ended September 30, 2001 from $23.2 million
for the same period in 2000. Depreciation and amortization as a percentage of
total revenues was 5.0% for the nine months ended September 30, 2001 and
October 1, 2000.
(GAIN) LOSS ON FRANCHISE SALES OF RESTAURANT OPERATIONS AND PROPERTIES:
Gain on franchise sales of restaurant operations and properties was
$0.2 million for the third quarter ended September 30, 2001 compared to a loss
of $0.1 million for the third quarter ended October 1, 2000. The gain on
franchise sales of restaurant operations and properties was $4.0 million and
$1.9 million for the nine months ended September 30, 2001 and October 1, 2000,
respectively. The increase was primarily the result of the gain of $4.3 million
associated with the sale of 37 restaurants to a franchisee during the nine
months ended September 30, 2001 as compared to the gain of $1.4 million
associated with the sale of 29 restaurants to a franchisee on January 19, 2000.
The Company also sold certain assets and rights in eight other restaurants to
three additional franchisees resulting in a gain of $0.7 million during the nine
months ended October 1, 2000.
GAIN ON DISPOSITION OF OTHER PROPERTY AND EQUIPMENT:
The gain on disposition of other property and equipment for the quarters
ended September 30, 2001 and October 1, 2000 was $0.3 million and $1.0 million,
respectively. The gain on disposition of other property and equipment was
$2.6 million and $1.0 million for the nine months ended September 30, 2001 and
October 1, 2000, respectively. The gain in the 2001 period resulted from the
sale of 21 closed locations during the nine month period ended September 30,
2001 compared to the sale of 20 closed locations during the nine month period
ended October 1, 2000.
INTEREST EXPENSE, NET:
Interest expense, net of capitalized interest and interest income, decreased
by $1.1 million, or 14.9%, to $6.5 million for the third quarter ended
September 30, 2001 from $7.6 million for the same quarter in 2000. The decrease
is primarily due to a reduction in the average outstanding debt.
Interest expense, net of capitalized interest and interest income, decreased
by $2.5 million, or 10.8%, to $21.0 million for the nine months ended
September 30, 2001 from $23.5 million for the same period in 2000. The decrease
is primarily impacted by the decrease in the average outstanding balance on the
term loans for the nine months ended September 30, 2001 compared to the nine
months ended October 1, 2000. Total outstanding debt, including capital lease
obligations, was reduced from $288.9 million at October 1, 2000 to
$263.9 million at September 30, 2001.
(PROVISION FOR) BENEFIT FROM INCOME TAXES:
The provision for income taxes was $1.6 million, or 38.6%, for the third
quarter ended September 30, 2001 compared to $0.4 million, or 11.6%, for the
third quarter ended October 1, 2000. The provision for income taxes was
$2.5 million, or 36.7%, for the nine months ended September 30, 2001 compared to
a benefit from taxes of $16.8 million, or 57.8%, for the nine months ended
October 1, 2000. The Company records income taxes based on the effective rate
expected for the year with any changes in the valuation allowance reflected in
the period of change. The sales of the land and buildings to franchisees during
the nine months ended October 1, 2000 favorably impacted the
27
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.
EXTRAORDINARY ITEM:
The Company recognized $0.2 million of expense, net of the related income
tax benefit of $0.2 million, in 2001 related to previously deferred financing
costs associated with Tranche A of the term loans, which was prepaid and
extinguished during the quarter ended September 30, 2001.
NET INCOME (LOSS):
Net income was $2.3 million and $3.2 million for the third quarters ended
September 30, 2001 and October 1, 2000, respectively. Net income was
$4.2 million for the nine months ended September 30, 2001 compared to a net loss
of $12.3 million for the nine months ended October 1, 2000.
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 $12.6 million and $6.2 million for
the nine months ended September 30, 2001 and October 1, 2000, respectively.
During the nine months ended September 30, 2001, inventories increased
$3.8 million as a result of increased retail promotional activity expected for
the fourth quarter. Accounts payable increased $1.5 million primarily as a
result of increased inventory purchases. Accounts receivable increased
$2.3 million primarily due to increased retail supermarket sales along with the
increase in volume of foodservice product sales to franchisees. Accrued expenses
and other long- term liabilities decreased $1.8 million as a result of
$2.3 million of payments made against the captive insurance company's reserves
for workers compensation claims and $1.9 million of payments made against the
restructuring reserve. These decreases were offset by an increase in accrued
interest of $3.6 million related to the timing of interest payment dates.
Available borrowings under the revolving credit facility were $18 million as of
September 30, 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 and
its subsidiaries' debt instruments, if any, permit) are sources of cash. The
amounts of debt financing that the Company will be able to incur under capital
leases and for property and casualty insurance financing and the amount of asset
sales by the Company are limited by the terms of its credit facility and Senior
Notes.
Net cash provided by investing activities was $15.1 million and
$19.8 million in the nine months ended September 30, 2001 and October 1, 2000,
respectively. Capital expenditures for restaurant operations were approximately
$5.8 million and $12.7 million for the nine months ended September 30, 2001 and
October 1, 2000, respectively. Other capital expenditures were $2.6 million and
$3.0 million for the nine months ended September 30, 2001 and October 1, 2000,
respectively. The decrease in capital expenditures was primarily due to the
reduction in new units, replacements and re-imaging projects. Cash proceeds from
the sale of property and equipment were $23.6 million and $32.6 million in the
nine months ended September 30, 2001 and October 1, 2000, respectively. The
decrease in proceeds was primarily due to the receipt of $7.4 million in 2001
compared to $15.2 million in 2000 related to the disposal of properties in
connection with the March 2000 restructuring.
Net cash used in financing activities was $34.7 million and $29.0 million in
the nine months ended September 30, 2001 and October 1, 2000, respectively.
28
The Company had a working capital deficit of $31.2 million as of
September 30, 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 nine months ended
September 30, 2001, the Company received $11.5 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. The
credit facility includes the revolving credit loan, term loans and letters of
credit. 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, September 30, 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, excluding prepayments made pursuant to the J&B
Agreement, 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
As of October 15, 2001, the Company has paid additional minimum cumulative
prepayments of $6,793,000 on the term loans, which exceed the minimum cumulative
prepayment requirement.
Tranche A of the term loans was prepaid and extinguished during the third
quarter ended September 30, 2001. Any remaining unpaid balances due on Tranches
B and C of the term loans will be paid on November 15, 2002.
FICC paid an amendment fee of approximately $256,000 to the lenders
contemporaneous with the execution of the seventh amendment. FICC paid an
additional amendment fee (the "Additional Fee") of $441,459 on October 1, 2001
pursuant to the seventh amendment, which will be expensed over the remaining
term of the credit facility using the effective yield method. If all obligations
under the credit facility were satisfied before September 30, 2001, the
Additional Fee would have been reduced to approximately $128,000. 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
29
through September 30, 2002. Additionally, the Company believes that it can
comply with the revised covenant requirements under the amendment through
December 30, 2001.
The Company is undertaking a refinancing plan (collectively, the
"Refinancing Plan"), which has the following three principal components:
(i) obtaining a new revolving credit facility from one or more financial
institutions for $35 million;
(ii) obtaining $55 million in loans from GE Capital Franchise Finance
Corporation which will be secured by first mortgage liens upon 75 of
the Company's restaurants; and
(iii) entering into a sale and leaseback arrangement with one or more
financial institutions involving 45 of the Company's restaurants that
is expected to provide the Company up to $37.5 million in cash.
The Company would use the proceeds of these financings to repay the amounts
outstanding on its existing credit facility ($55,114,000 as of September 30,
2001), to increase working capital and, to the extent the proceeds of the
financings are sufficient, after giving effect to the foregoing, to finance a
tender offer for a portion of the Company's senior notes (the "Notes"). The
Company has obtained a commitment letter from GE Capital Franchise Finance
Corporation relating to the mortgage financing, but the Company does not have
any commitments or other agreements from any financial institutions relating to
the new revolving credit facility or the sale and leaseback arrangements
described above. The commitment letter received is contingent upon obtaining a
new revolving credit facility. The closing of each of the three financings
described above will be subject, among other things, to the negotiation of
definitive agreements and other definitive documentation. There can be no
assurance that the Company will be able to successfully implement any of the
components of the Refinancing Plan. The availability of funds from the closing
of these transactions will be a condition to the Company's ability to purchase
any Notes.
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 $13.5 million in the aggregate, of which $10.0 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 September 14, 2001, the Company entered into an agreement granting Revere
Restaurant Group, Inc. ("Revere") certain limited exclusive rights to operate
and develop Friendly's full-service restaurants in designated areas within
Lehigh and Northampton counties, Pennsylvania (the "Revere Agreement"). Pursuant
to the Revere Agreement, Revere purchased certain assets and rights in six
existing Friendly's restaurants and committed to open an additional four
restaurants over the next seven years. Gross proceeds from the sale were
approximately $3.4 million of which approximately $0.2 million was for franchise
fees for the initial six restaurants. The cash proceeds were used to fund
operating activities of the Company.
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
30
$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.
RECENT DEVELOPMENTS
Effective August 6, 2001, the Company's largest franchisee, Davco
Restaurants, Inc. ("Davco") refranchised three Newark, DE units, transferring
it's rights to R.R.C. Restaurants, Inc. In addition, Davco closed two units
during the quarter ended September 30, 2001. Currently, Davco is seeking to
refranchise an additional 25 to 28 units.
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 September 2001, the Emerging Issues Task Force ("EITF") issued EITF Issue
No. 01-10, "Accounting for the Impact of the September 11, 2001 Terrorist Acts,"
which provides guidance on how the costs related to the terrorist acts should be
classified, how to determine whether an asset impairment should be recognized
and how liabilities for losses and other costs should be recognized. The impact
of adopting EITF Issue No. 01-10 did not have any effect on the Company's
consolidated financial statements.
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 modifies the
rules for accounting for the impairment or disposal of long-lived assets. The
new rules become effective for fiscal years beginning after December 15, 2001,
with earlier application encouraged. The Company has not yet quantified the
impact of implementing SFAS No. 144 on the Company's consolidated financial
statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangibles." SFAS No. 142 modifies the rules for accounting for goodwill and
other intangible assets. The new rules become effective on January 1, 2002. The
impact of adopting SFAS No. 142 will not have a material effect on the Company's
consolidated financial statements and the Company will continue to amortize its
license agreement related to certain trademarked products.
In April 2001, the FASB reached consensus on 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. EITF Issue No. 00-25 requires that consideration from a vendor to a
retailer be recorded as a reduction in revenue unless certain criteria are met.
Arrangements within the scope of this Issue include slotting fees, cooperative
advertising arrangements and buy-downs. As a result of EITF Issue No. 00-25,
certain costs previously recorded as expense will
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be reclassified and offset against revenue. The Company's consolidated financial
statements will be reclassified to conform with the consensus in the fourth
quarter of 2001.
In May 2000, the Emerging Issues Task Force issued EITF Issue 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 Issue No. 00-14 on July 3, 2000.
As a result, the Company has reclassified certain retail selling expenses
against retail revenue for the three and nine months ended October 1, 2000 to
conform with the current period presentation.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established 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 amount is not
significant. Additionally, net losses of approximately $113,000 were recorded
during the nine months ended September 30, 2001 related to the change in fair
value for the period. The fair market value of derivatives at September 30, 2001
was approximately $19,000.
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 10K.
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PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) An annual meeting of the Company's shareholders was held on May 16, 2001.
(b) Not applicable.
(c) The election of two nominees for directors of the Company was voted upon at
the meeting. The number of affirmative votes and the number of votes
withheld with respect to such approvals were as follows:
NOMINEE AFFIRMATIVE VOTES VOTES WITHHELD
------- ----------------- --------------
Michael J. Daly...................... 5,521,075 1,356,041
Burton J. Manning.................... 5,531,600 1,345,516
The results of the voting to approve the appointment of Arthur Andersen LLP
to audit the accounts of the Company and its subsidiaries for 2001 were as
follows:
FOR AGAINST ABSTAIN
--- ------- -------
6,767,341 104,375 5,400
There were no matters voted upon at the Company's annual meeting to which
broker non-votes applied.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) No report on Form 8-K was filed during the three months and nine months
ended September 30, 2001.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRIENDLY ICE CREAM CORPORATION
By: /s/ PAUL V. HOAGLAND
-----------------------------------------
Name: Paul V. Hoagland
Title: Senior Vice President, Chief
Financial
Officer, Treasurer and Assistant Clerk
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