-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NLlOVXDA3VBhMj2OmKWe2If0z8tmc18JN4MpOPLFX3Fl2cNZAdf78vJsHiLoFNXY f66xU1mX1qegRanaq0lKzw== 0000912057-99-004117.txt : 19991110 0000912057-99-004117.hdr.sgml : 19991110 ACCESSION NUMBER: 0000912057-99-004117 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990926 FILED AS OF DATE: 19991109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRIENDLY ICE CREAM CORP CENTRAL INDEX KEY: 0000039135 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 042053130 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13579 FILM NUMBER: 99744106 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 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 26, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 0-3930 FRIENDLY ICE CREAM CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 5812 04-2053130 (State of (Primary Standard Industrial (I.R.S. Employer Incorporation) Classification Code Number) Identification No.) 1855 BOSTON ROAD WILBRAHAM, MASSACHUSETTS 01095 (413) 543-2400 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 25, 1999 Common Stock, $.01 par value 7,495,122 shares PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
September 26, December 27, 1999 1998 ---- ---- ASSETS (unaudited) CURRENT ASSETS: Cash and cash equivalents $ 17,674 $ 11,091 Restricted cash 2,291 2,211 Accounts receivable 4,907 5,566 Inventories 17,189 15,560 Deferred income taxes 7,061 7,061 Prepaid expenses and other current assets 4,698 6,578 --------- --------- TOTAL CURRENT ASSETS 53,820 48,067 PROPERTY AND EQUIPMENT, net 301,663 300,159 INTANGIBLES AND DEFERRED COSTS, net 24,224 25,178 OTHER ASSETS 1,424 1,144 --------- --------- TOTAL ASSETS $ 381,131 $ 374,548 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current maturities of long-term debt $ 8,212 $ 4,023 Current maturities of capital lease and finance obligations 1,808 1,677 Accounts payable 36,449 26,460 Accrued salaries and benefits 14,863 14,206 Accrued interest payable 7,959 2,593 Insurance reserves 8,948 9,116 Other accrued expenses 13,366 20,649 --------- --------- TOTAL CURRENT LIABILITIES 91,605 78,724 --------- --------- DEFERRED INCOME TAXES 37,154 37,188 CAPITAL LEASE AND FINANCE OBLIGATIONS, less current maturities 8,330 9,745 LONG-TERM DEBT, less current maturities 304,194 311,061 OTHER LONG-TERM LIABILITIES 28,021 28,431 STOCKHOLDERS' EQUITY (DEFICIT): Common stock 75 75 Preferred stock -- -- Additional paid-in capital 138,414 137,896 Accumulated deficit (226,727) (228,639) Accumulated other comprehensive income 65 67 --------- --------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (88,173) (90,601) --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 381,131 $ 374,548 ========= =========
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 26, September 27, September 26, September 27, 1999 1998 1999 1998 ---- ---- ---- ---- REVENUES $ 198,121 $ 187,456 $ 528,470 $ 517,876 COSTS AND EXPENSES: Cost of sales 56,439 56,500 150,892 155,506 Labor and benefits 62,364 56,066 171,687 159,953 Operating expenses 44,837 42,006 120,719 115,993 General and administrative expenses 11,192 10,249 33,521 32,299 Stock compensation expense 181 183 518 537 Write-downs of property and equipment 140 485 1,529 653 Depreciation and amortization 8,914 8,536 25,709 24,621 Gain on sales of restaurant operations and properties (1,594) -- (2,507) -- --------- --------- --------- --------- OPERATING INCOME 15,648 13,431 26,402 28,314 Interest expense, net 8,242 7,997 24,879 23,866 Equity in net loss of (recovery of write-down of) joint venture -- 266 (896) 936 --------- --------- --------- --------- INCOME BEFORE PROVISION FOR INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 7,406 5,168 2,419 3,512 Provision for income taxes (2,233) (1,964) (188) (1,335) --------- --------- --------- --------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 5,173 3,204 2,231 2,177 Cumulative effect of change in accounting principle, net of income tax benefit of $222 -- -- (319) -- --------- --------- --------- --------- NET INCOME $ 5,173 $ 3,204 $ 1,912 $ 2,177 ========= ========= ========= ========= BASIC NET INCOME PER SHARE: Income before cumulative effect of change in accounting principle $ 0.69 $ 0.43 $ 0.30 $ 0.29 Cumulative effect of change in accounting principle, net of income tax benefit -- -- (0.04) -- --------- --------- --------- --------- Net income $ 0.69 $ 0.43 $ 0.26 $ 0.29 ========= ========= ========= ========= DILUTED NET INCOME PER SHARE: Income before cumulative effect of change in accounting principle $ 0.69 $ 0.43 $ 0.29 $ 0.29 Cumulative effect of change in accounting principle, net of income tax benefit -- -- (0.04) -- --------- --------- --------- --------- Net income $ 0.69 $ 0.43 $ 0.25 $ 0.29 ========= ========= ========= ========= WEIGHTED AVERAGE SHARES: Basic 7,495 7,455 7,490 7,449 ========= ========= ========= ========= Diluted 7,524 7,455 7,504 7,449 ========= ========= ========= =========
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 26, September 27, 1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,912 $ 2,177 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting principle 319 -- Stock compensation expense 518 537 Depreciation and amortization 25,709 24,621 Write-downs of property and equipment 1,529 653 Deferred income tax expense 188 282 (Gain) loss on disposal of property and equipment (1,855) 1,308 (Non-cash recovery of write-down of) equity in net loss of joint venture (69) 936 Changes in operating assets and liabilities: Accounts receivable 728 1,777 Inventories (1,629) (3,418) Other assets (915) 943 Accounts payable 9,989 3,332 Accrued expenses and other long-term liabilities (1,838) (3,372) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 34,586 29,776 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (36,828) (41,202) Proceeds from sales of property and equipment 11,639 1,448 Proceeds from sale of joint venture 1,150 -- -------- -------- NET CASH USED IN INVESTING ACTIVITIES (24,039) (39,754) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings 72,000 46,258 Repayments of debt (74,678) (38,124) Repayments of capital lease and finance obligations (1,284) (1,259) -------- -------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (3,962) 6,875 -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (2) 19 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,583 (3,084) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,091 15,132 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,674 $ 12,048 ======== ======== SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Interest $ 18,671 $ 18,507 Income taxes 9 455 Capital lease obligations incurred -- 608
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (In thousands)
For the Three Months Ended For the Nine Months Ended -------------------------- ------------------------- September 26, September 27, September 26, September 27, 1999 1998 1999 1998 ---- ---- ---- ---- NET INCOME $ 5,173 $ 3,204 $ 1,912 $ 2,177 OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: Currency translation effects -- 9 (2) 19 ------- ------- ------- ------- OTHER COMPREHENSIVE INCOME (LOSS) -- 9 (2) 19 ------- ------- ------- ------- COMPREHENSIVE INCOME $ 5,173 $ 3,213 $ 1,910 $ 2,196 ======= ======= ======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION INTERIM FINANCIAL INFORMATION - The accompanying condensed consolidated financial statements as of September 26, 1999 and for the third quarter and nine months ended September 26, 1999 and September 27, 1998 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 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 26, 1999 and September 27, 1998 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 1998 Annual Report on Form 10-K should be read in conjunction with these Condensed Consolidated Financial Statements. INVENTORIES - Inventories are stated at the lower of first-in, first-out cost or market. Inventories as of September 26, 1999 and December 27, 1998 were as follows (in thousands):
September 26, December 27, 1999 1998 ---- ---- Raw materials $ 1,661 $ 1,983 Goods in process 301 145 Finished goods 15,227 13,432 ------- ------- Total $17,189 $15,560 ======= =======
2. EARNINGS PER SHARE Basic net income per share is calculated by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is calculated by dividing income available to common stockholders by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Common stock equivalents are dilutive stock options and warrants that are assumed exercised for calculation purposes. Presented below is the reconciliation between basic and diluted weighted average shares (in thousands):
For the Three Months Ended For the Nine Months Ended -------------------------- ------------------------- September 26, September 27, September 26, September 27, 1999 1998 1999 1998 ---- ---- ---- ---- Basic weighted average number of shares outstanding during the period 7,495 7,455 7,490 7,449 Adjustments: Assumed exercise of stock options 29 - 14 - ----- ----- ----- ----- Diluted weighted average number of shares during the period 7,524 7,455 7,504 7,449 ===== ===== ===== =====
5 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 3. RESTAURANT PREOPENING COSTS In April 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 requires entities to expense as incurred all start-up and preopening costs that are not otherwise capitalizable as long-lived assets and is effective for fiscal years beginning after December 15, 1998. In accordance with this statement, on December 28, 1998, the Company expensed previously deferred restaurant preopening costs of approximately $541,000. This transaction has been reflected as a cumulative effect of a change in accounting principle of $319,000, net of the income tax benefit of $222,000, in the accompanying condensed consolidated financial statements for the nine months ended September 26, 1999. 4. COMPREHENSIVE INCOME The following represents accumulated other comprehensive income (in thousands):
September 26, December 27, September 27, 1999 1998 1998 ---- ---- ---- Currency translation effects $65 $67 $77 === === ===
5. SEGMENT REPORTING The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information," during 1998. SFAS No. 131 established standards for reporting information about operating segments in annual and interim financial reports. It also established standards for related disclosures about products and services and geographic areas. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision-maker is the Chairman and Chief Executive Officer of the Company. The Company's operating segments include restaurant, foodservice (retail and institutional), franchise and international operations. The revenues from these segments include both sales to unaffiliated customers and intersegment sales, which generally are accounted for on a basis consistent with sales to unaffiliated customers. Intersegment sales and other intersegment transactions have been eliminated in the accompanying condensed consolidated financial statements. The Company does not allocate general and administrative expenses associated with its headquarters operations to any business segment. These costs include general and administrative expenses of the following functions: legal, accounting, personnel not directly related to a segment, information systems and other headquarters activities. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in the Company's Form 10-K for the year ended December 27, 1998, except that the financial results for the foodservice operating segment, prior to intersegment eliminations, have been prepared using a management approach which is consistent with the basis and manner in which the Company's management internally reviews financial information for the purpose of assisting in making internal operating decisions. The Company evaluates performance based on stand-alone operating segment income (loss) before income taxes and generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. 6 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 5. SEGMENT REPORTING (CONTINUED) EBITDA represents net income before (i) cumulative effect of change in accounting principle, net of income taxes, (ii) provision for income taxes, (iii) equity in net loss of (recovery of write-down of) joint venture, (iv) interest expense, net, (v) depreciation and amortization and (vi) non-cash write-downs and all other non-cash items, plus cash distributions from unconsolidated subsidiaries.
For the Three Months Ended For the Nine Months Ended ------------------------------- ----------------------------- September 26, September 27, September 26, September 27, 1999 1998 1999 1998 ---- ---- ---- ---- (in thousands) Revenues: Restaurant $ 173,143 $ 162,988 $ 464,257 $ 455,168 Foodservice (retail and institutional) 76,007 72,495 199,774 196,425 Franchise 1,332 982 3,798 2,664 International -- 19 23 283 --------- --------- --------- --------- Total $ 250,482 $ 236,484 $ 667,852 $ 654,540 ========= ========= ========= ========= Intersegment revenues: Restaurant $ -- $ -- $ -- $ -- Foodservice (retail and institutional) (52,361) (49,028) (139,382) (136,664) Franchise -- -- -- -- International -- -- -- -- --------- --------- --------- --------- Total $ (52,361) $ (49,028) $(139,382) $(136,664) ========= ========= ========= ========= External revenues: Restaurant $ 173,143 $ 162,988 $ 464,257 $ 455,168 Foodservice (retail and institutional) 23,646 23,467 60,392 59,761 Franchise 1,332 982 3,798 2,665 International -- 19 23 282 --------- --------- --------- --------- Total $ 198,121 $ 187,456 $ 528,470 $ 517,876 ========= ========= ========= =========
7 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 5. SEGMENT REPORTING (CONTINUED)
For the Three Months Ended For the Nine Months Ended -------------------------- ------------------------- September 26, September 27, September 26, September 27, 1999 1998 1999 1998 ---- ---- ---- ---- (in thousands) EBITDA: Restaurant $ 21,327 $ 22,403 $ 49,272 $ 56,665 Foodservice (retail and institutional) 9,832 5,665 22,200 15,108 Franchise 750 396 2,016 1,124 International (27) (250) (81) (632) Corporate (6,999) (5,579) (19,249) (18,140) --------- --------- --------- --------- Total $ 24,883 $ 22,635 $ 54,158 $ 54,125 ========= ========= ========= ========= Interest expense, net $ 8,242 $ 7,997 $ 24,879 $ 23,866 ========= ========= ========= ========= Equity in net loss of (recovery of write-down of) joint venture $ -- $ 266 $ (896) $ 936 ========= ========= ========= ========= Income (loss) before provision for income taxes and cumulative effect of change in accounting principle: Restaurant $ 14,543 $ 15,061 $ 29,217 $ 36,348 Foodservice (retail and institutional) 8,992 4,916 18,761 12,861 Franchise 612 249 1,549 685 International (27) (530) 815 (1,602) Corporate (16,714) (14,528) (47,923) (44,780) --------- --------- --------- --------- Total $ 7,406 $ 5,168 $ 2,419 $ 3,512 ========= ========= ========= ========= Depreciation and amortization: Restaurant $ 6,644 $ 6,857 $ 19,326 $ 19,664 Foodservice (retail and institutional) 840 749 2,639 2,247 Franchise 138 147 467 439 International -- 14 -- 34 Corporate 1,292 769 3,277 2,237 --------- --------- --------- --------- Total $ 8,914 $ 8,536 $ 25,709 $ 24,621 ========= ========= ========= ========= Identifiable assets: Restaurant $ 273,037 $ 270,596 Foodservice (retail and institutional) 43,815 44,418 Franchise 4,053 8,242 International 28 4,759 Corporate 60,198 54,314 --------- --------- Total $ 381,131 $ 382,329 ========= ========= Capital expenditures, including capitalized leases: Restaurant $ 9,103 $ 6,858 $ 31,101 $ 35,939 Foodservice (retail and institutional) 942 263 3,856 4,540 International -- -- -- -- Corporate 467 145 1,871 1,331 --------- --------- --------- --------- Total $ 10,512 $ 7,266 $ 36,828 $ 41,810 ========= ========= ========= =========
8 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 6. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND FOR HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that each derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the statement of operations, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 cannot be applied retroactively. SFAS No. 133 would have been effective for fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." Under the provisions of SFAS No. 137, SFAS No. 133 shall be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. Management has not yet quantified the impact of adopting SFAS No. 133 on the Company's financial statements and has not determined the timing or method of the Company's adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings and other comprehensive income. 7. CLOSING OF INTERNATIONAL OPERATIONS Effective October 15, 1998, Friendly's International, Inc. ("FII"), a subsidiary of FICC, entered into an agreement that provided for the sale of the Company's 50% equity interest in its China joint venture to the joint venture partner and the settlement of FICC's advances to the joint venture for an aggregate of approximately $2.3 million in notes and $335,000 of equipment. On February 25, 1999, FII received an initial payment of approximately $1.1 million and arranged for the shipment of the equipment to the United States. At that time, the Company believed that collection of any additional funds after February 25, 1999 from the joint venture partner under the terms of the settlement agreement was not probable due to the financial condition of the joint venture partner and restrictions on the transfer of funds from China. Accordingly, the Company recorded a write-down of approximately $3.5 million as of December 27, 1998 to reduce the Company's remaining investment in and advances to the joint venture to the $1.1 million which was received on February 25, 1999. On March 17, 1999, the Company received an additional $250,000 from the joint venture partner. Those additional proceeds were reflected as income in the first quarter ended March 28, 1999. During June 1999, the Company was notified by its joint venture partner that it would remit approximately $577,000 in cash and $69,000 of equipment to the Company. The Company recorded such amounts as income during the second quarter ended June 27, 1999. The Company received the cash on July 22, 1999 and anticipates receiving the equipment by the end of the current fiscal year. The Company does not anticipate any additional payments from the joint venture partner in the future. If any of the $0.3 million still due under the terms of the sale agreement is received by the Company, such amount will be recorded as income by the Company at such time. 8. SALE OF RESTAURANT PROPERTIES TO FRANCHISEE On September 24, 1999, the Company sold the land and buildings associated with 13 previously franchised restaurants to the Company's largest franchisee located in the Baltimore/Washington D.C. area for $6.8 million. This transaction, an integral component of Friendly Ice Cream Corporation's franchising strategy, resulted in a gain on sale of restaurant operations and properties of $1.6 million for the three months ended September 26, 1999. The sale of the land and buildings favorably impacted the provision for income taxes as it triggered built-in gains which allowed for a reduction in the valuation allowance on certain net operating loss carryforwards. 9 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 9. RELOCATION OF MANUFACTURING AND DISTRIBUTION FACILITY On December 1, 1998, the Company announced a plan to relocate its manufacturing and distribution operations from Troy, Ohio to Wilbraham, Massachusetts and York, Pennsylvania. The following table illustrates the remaining accrued costs and expenses associated with the closedown of the Troy, Ohio facility:
Accrued as of Accrued as of December 27, 1998 Costs Paid September 26, 1999 ----------------- ---------- ------------------ Severance pay $ 536,000 $ 526,500 $ 9,500 Utility costs 140,000 166,000 (26,000) Real estate taxes 87,000 -- 87,000 Outside storage 80,000 22,000 58,000 Outplacement services 50,000 50,000 -- Additional exit costs (plant maintenance, security and travel) 52,000 165,000 (113,000) --------- --------- --------- Total $ 945,000 $ 929,500 $ 15,500 ========= ========= =========
The Company successfully closed its Troy, Ohio manufacturing and distribution facility in May 1999 and relocated the operations to Wilbraham, Massachusetts and York, Pennsylvania. In addition, the Company recorded a non-cash write-down during June 1999 of $800,000 related to the Troy, Ohio facility to reflect the revised estimated net realizable value in conjunction with the anticipated sale of this facility. This amount is included in write-downs of property and equipment in the accompanying condensed consolidated statements of operations for the nine months ended September 26, 1999. 10. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION FICC's obligation related to the $200 million Senior Notes is guaranteed fully and unconditionally by one of FICC's wholly-owned subsidiaries. There are no restrictions on FICC's ability to obtain dividends or other distributions of funds from this subsidiary, except those imposed by applicable law. The following supplemental financial information sets forth, on a condensed consolidating basis, balance sheets, statements of operations and statements of cash flows for Friendly Ice Cream Corporation (the "Parent Company"), Friendly's Restaurants Franchise, Inc. (the "Guarantor Subsidiary") and Friendly's International, Inc., Friendly Holding (UK) Limited, Friendly Ice Cream (UK) Limited and Restaurant Insurance Corporation (collectively, the "Non-guarantor Subsidiaries"). Separate complete financial statements and other disclosures of the Guarantor Subsidiary as of September 26, 1999 and September 27, 1998, and for the periods ended September 26, 1999 and September 27, 1998, are not presented because management has determined that such information is not material to investors. Investments in subsidiaries are accounted for by the Parent Company on the equity method for purposes of the supplemental consolidating presentation. Earnings of the subsidiaries are, therefore, reflected in the Parent Company's investment accounts and earnings. The principal elimination entries eliminate the Parent Company's investments in subsidiaries and intercompany balances and transactions. 10 SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET AS OF SEPTEMBER 26, 1999 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------ ------------ ------------ Assets Current assets: Cash and cash equivalents $ 15,464 $ 21 $ 2,189 $ -- 17,674 Restricted cash -- -- 2,291 -- 2,291 Accounts receivable 4,679 228 -- -- 4,907 Inventories 17,189 -- -- -- 17,189 Deferred income taxes 6,783 -- 278 -- 7,061 Prepaid expenses and other current assets 9,196 3,569 4,704 (12,771) 4,698 --------- --------- --------- --------- --------- Total current assets 53,311 3,818 9,462 (12,771) 53,820 Deferred income taxes -- 503 1,024 (1,527) -- Property and equipment, net 301,663 -- -- -- 301,663 Intangibles and deferred costs, net 24,224 -- -- -- 24,224 Investments in subsidiaries 1,908 -- -- (1,908) -- Other assets 510 -- 5,729 (4,815) 1,424 --------- --------- --------- --------- --------- Total assets $ 381,616 $ 4,321 $ 16,215 $ (21,021) $ 381,131 ========= ========= ========= ========= ========= Liabilities and Stockholders' Equity (Deficit) Current liabilities: Current maturities of long-term obligations $ 14,520 $ -- $ -- $ (4,500) $ 10,020 Accounts payable 36,449 -- -- -- 36,449 Accrued expenses 44,576 563 8,268 (8,271) 45,136 --------- --------- --------- --------- --------- Total current liabilities 95,545 563 8,268 (12,771) 91,605 Deferred income taxes 38,681 -- -- (1,527) 37,154 Long-term obligations, less current maturities 317,339 -- -- (4,815) 312,524 Other long-term liabilities 18,224 2,221 7,576 -- 28,021 Stockholders' equity (deficit) (88,173) 1,537 371 (1,908) (88,173) --------- --------- --------- --------- --------- Total liabilities and stockholders' equity (deficit) $ 381,616 $ 4,321 $ 16,215 $ (21,021) $ 381,131 ========= ========= ========= ========= =========
11 SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 26, 1999 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------ ------------ ------------ Revenues $ 197,397 $ 723 $ 1 $ -- $ 198,121 Costs and expenses: Cost of sales 56,438 -- 1 -- 56,439 Labor and benefits 62,364 -- -- -- 62,364 Operating expenses and write-downs of property and equipment 45,030 -- (53) -- 44,977 General and administrative expenses 10,775 423 (6) -- 11,192 Stock compensation expense 181 -- -- -- 181 Depreciation and amortization 8,914 -- -- -- 8,914 Gain on sales of restaurant operations and properties (1,594) -- -- -- (1,594) Interest expense (income) 8,427 -- (185) -- 8,242 --------- --------- --------- --------- --------- Income before provision for income taxes and equity in net income of consolidated subsidiaries 6,862 300 244 -- 7,406 Provision for income taxes (2,026) (124) (83) -- (2,233) --------- --------- --------- --------- --------- Income before equity in net income of consolidated subsidiaries 4,836 176 161 -- 5,173 Equity in net income of consolidated subsidiaries 337 -- -- (337) -- --------- --------- --------- --------- --------- Net income $ 5,173 $ 176 $ 161 $ (337) $ 5,173 ========= ========= ========= ========= =========
12 SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 26, 1999 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------ ------------ ------------ Revenues $ 526,463 $ 1,983 $ 24 $ -- $ 528,470 Costs and expenses: Cost of sales 150,874 -- 18 -- 150,892 Labor and benefits 171,687 -- -- -- 171,687 Operating expenses and write-downs of property and equipment 122,403 -- (155) -- 122,248 General and administrative expenses 32,309 1,279 (67) -- 33,521 Stock compensation expense 518 -- -- -- 518 Depreciation and amortization 25,709 -- -- -- 25,709 Gain on sales of restaurant operations and properties (2,507) -- -- -- (2,507) Interest expense (income) 25,427 -- (548) -- 24,879 Recovery of write-down of joint venture (896) -- -- -- (896) --------- --------- --------- --------- --------- Income before benefit from (provision for) income taxes, cumulative effect of change in accounting principle and equity in net income of consolidated subsidiaries 939 704 776 -- 2,419 Benefit from (provision for) income taxes 346 (289) (245) -- (188) --------- --------- --------- --------- --------- Income before cumulative effect of change in accounting principle and equity in net income of consolidated subsidiaries 1,285 415 531 -- 2,231 Cumulative effect of change in accounting principle (319) -- -- -- (319) --------- --------- --------- --------- --------- Income before equity in net income of consolidated subsidiaries 966 415 531 -- 1,912 Equity in net income of consolidated subsidiaries 946 -- -- (946) -- --------- --------- --------- --------- --------- Net income $ 1,912 $ 415 $ 531 $ (946) $ 1,912 ========= ========= ========= ========= =========
13 SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 26, 1999 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------ ------------ ------------ Net cash provided by (used in) operating activities $ 34,285 $ (32) $ 333 $ -- $ 34,586 -------- -------- -------- -------- -------- Cash flows from investing activities: Purchases of property and equipment (36,828) -- -- -- (36,828) Proceeds from sales of property and equipment 11,639 -- -- -- 11,639 Proceeds from sale of joint venture 1,150 -- -- -- 1,150 -------- -------- -------- -------- -------- Net cash used in investing activities (24,039) -- -- -- (24,039) -------- -------- -------- -------- -------- Cash flows from financing activities: Proceeds from borrowings 72,000 -- -- -- 72,000 Repayments of obligations (75,962) -- -- -- (75,962) -------- -------- -------- -------- -------- Net cash used in financing activities (3,962) -- -- -- (3,962) -------- -------- -------- -------- -------- Effect of exchange rate changes on cash -- -- (2) -- (2) -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents 6,284 (32) 331 -- 6,583 Cash and cash equivalents, beginning of period 9,180 53 1,858 -- 11,091 -------- -------- -------- -------- -------- Cash and cash equivalents, end of period $ 15,464 $ 21 $ 2,189 $ -- $ 17,674 ======== ======== ======== ======== ======== Supplemental disclosures: Cash paid (received) for: Interest $ 19,034 $ -- $ (363) $ -- $ 18,671 Income taxes 12 212 (215) -- 9
14 SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 27, 1998 (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------ ------------ ------------ Assets Current assets: Cash and cash equivalents $ 9,180 $ 53 $ 1,858 $ -- $ 11,091 Restricted cash -- -- 2,211 -- 2,211 Accounts receivable 5,370 175 21 -- 5,566 Inventories 15,445 -- 115 -- 15,560 Deferred income taxes 6,783 -- 278 -- 7,061 Prepaid expenses and other current assets 8,657 2,434 7,461 (11,974) 6,578 --------- --------- --------- --------- --------- Total current assets 45,435 2,662 11,944 (11,974) 48,067 Deferred income taxes -- 503 1,024 (1,527) -- Property and equipment, net 300,159 -- -- -- 300,159 Intangibles and deferred costs, net 25,178 -- -- -- 25,178 Investments in subsidiaries 965 -- -- (965) -- Other assets 222 -- 5,736 (4,814) 1,144 --------- --------- --------- --------- --------- Total assets $ 371,959 $ 3,165 $ 18,704 $ (19,280) $ 374,548 ========= ========= ========= ========= ========= Liabilities and Stockholders' Equity (Deficit) Current liabilities: Current maturities of long-term obligations $ 10,200 $ -- $ -- $ (4,500) $ 5,700 Accounts payable 26,460 -- -- -- 26,460 Accrued expenses 42,035 574 11,429 (7,474) 46,564 --------- --------- --------- --------- --------- Total current liabilities 78,695 574 11,429 (11,974) 78,724 Deferred income taxes 38,715 -- -- (1,527) 37,188 Long-term obligations, less current maturities 325,620 -- -- (4,814) 320,806 Other long-term liabilities 19,530 1,469 7,432 -- 28,431 Stockholders' equity (deficit) (90,601) 1,122 (157) (965) (90,601) --------- --------- --------- --------- --------- Total liabilities and stockholders' equity (deficit) $ 371,959 $ 3,165 $ 18,704 $ (19,280) $ 374,548 ========= ========= ========= ========= =========
15 SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 27, 1998 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------ ------------ ------------ Revenues $ 186,957 $ 481 $ 18 $ -- $ 187,456 Costs and expenses: Cost of sales 56,463 -- 37 -- 56,500 Labor and benefits 56,066 -- -- -- 56,066 Operating expenses and write-downs of property and equipment 42,475 -- 16 -- 42,491 General and administrative expenses 9,850 313 86 -- 10,249 Stock compensation expense 183 -- -- -- 183 Depreciation and amortization 8,522 -- 14 -- 8,536 Interest expense (income) 8,235 -- (238) -- 7,997 Equity in net loss of joint venture -- -- 266 -- 266 --------- --------- --------- --------- --------- Income (loss) before (provision for) benefit from income taxes and equity in net loss of consolidated subsidiaries 5,163 168 (163) -- 5,168 (Provision for) benefit from income taxes (1,920) (71) 27 -- (1,964) --------- --------- --------- --------- --------- Income (loss) before equity in net loss of consolidated subsidiaries 3,243 97 (136) -- 3,204 Equity in net loss of consolidated subsidiaries (39) -- -- 39 -- --------- --------- --------- --------- --------- Net income (loss) $ 3,204 $ 97 $ (136) $ 39 $ 3,204 ========= ========= ========= ========= =========
16 SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1998 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------ ------------ ------------ Revenues $ 516,447 $ 1,147 $ 282 $ -- $ 517,876 Costs and expenses: Cost of sales 155,230 -- 276 -- 155,506 Labor and benefits 159,953 -- -- -- 159,953 Operating expenses and write-downs of property and equipment 116,659 -- (13) -- 116,646 General and administrative expenses 31,116 917 266 -- 32,299 Stock compensation expense 537 -- -- -- 537 Depreciation and amortization 24,587 -- 34 -- 24,621 Interest expense (income) 24,572 -- (706) -- 23,866 Equity in net loss of joint venture -- -- 936 -- 936 --------- --------- --------- --------- --------- Income (loss) before (provision for) benefit from income taxes and equity in net loss of consolidated subsidiaries 3,793 230 (511) -- 3,512 (Provision for) benefit from income taxes (1,368) (94) 127 -- (1,335) --------- --------- --------- --------- --------- Income (loss) before equity in net loss of consolidated subsidiaries 2,425 136 (384) -- 2,177 Equity in net loss of consolidated subsidiaries (248) -- -- 248 -- --------- --------- --------- --------- --------- Net income (loss) $ 2,177 $ 136 $ (384) $ 248 $ 2,177 ========= ========= ========= ========= =========
17 SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1998 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ------- ---------- ------------ ------------ ------------ Net cash provided by (used in) operating activities $ 29,599 $ (65) $ 174 $ 68 $ 29,776 -------- -------- -------- -------- -------- Cash flows from investing activities: Purchases of property and equipment (41,202) -- -- -- (41,202) Proceeds from sales of property and equipment 1,448 -- -- -- 1,448 -------- -------- -------- -------- -------- Net cash used in investing activities (39,754) -- -- -- (39,754) -------- -------- -------- -------- -------- Cash flows from financing activities: Dividend received (paid) 400 -- (400) -- -- Proceeds from borrowings 46,258 -- -- -- 46,258 Repayments of obligations (39,383) -- -- -- (39,383) -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities 7,275 -- (400) -- 6,875 -------- -------- -------- -------- -------- Effect of exchange rate changes on cash -- -- 19 -- 19 -------- -------- -------- -------- -------- Net (decrease) increase in cash and cash equivalents (2,880) (65) (207) 68 (3,084) Cash and cash equivalents, beginning of period 12,239 204 2,757 (68) 15,132 -------- -------- -------- -------- -------- Cash and cash equivalents, end of period $ 9,359 $ 139 $ 2,550 $ -- $ 12,048 ======== ======== ======== ======== ======== Supplemental disclosures: Cash paid (received) for: Interest $ 19,270 $ -- $ (763) $ -- $ 18,507 Income taxes (789) 810 434 -- 455 Capital lease obligations incurred 608 -- -- -- 608
18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE HEREIN. SAFE HARBOR STATEMENT Statements contained herein that are not historical facts, constitute "forward looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. All forward looking statements are subject to risks and uncertainties which could cause results to differ materially from those anticipated. These factors include the Company's highly competitive business environment, exposure to commodity prices, risks associated with the foodservice industry, the ability to retain and attract new employees, government regulations, the Company's high geographic concentration in the Northeast and its attendant weather patterns, conditions needed to meet reimaging and new opening and franchising targets and costs associated with improved service and other initiatives. OVERVIEW As of September 26, 1999, the Company owns and operates 628 restaurants, franchises 56 restaurants and 10 cafes and distributes a full line of frozen dessert products. These products are distributed to Friendly's restaurants and through more than 5,000 supermarkets and other retail locations in 16 states. The restaurants offer a wide variety of reasonably priced breakfast, lunch and dinner menu items as well as the frozen dessert products. 19 RESULTS OF OPERATIONS The operating results of the Company expressed as a percentage of total revenues are set forth below: (Unaudited)
For the Three Months Ended For the Nine Months Ended -------------------------- ------------------------- September 26, September 27, September 26, September 27, 1999 1998 1999 1998 ---- ---- ---- ---- Revenues: Restaurant 87.4% 87.0% 87.8% 87.9% Foodservice (retail and institutional) 11.9 12.5 11.4 11.5 Franchise 0.7 0.5 0.8 0.5 International 0.0 0.0 0.0 0.1 ----- ----- ----- ----- Total revenues 100.0 100.0 100.0 100.0 ----- ----- ----- ----- Costs and expenses: Cost of sales 28.5 30.1 28.6 30.0 Labor and benefits 31.5 29.9 32.5 30.9 Operating expenses 22.6 22.4 22.8 22.4 General and administrative expenses 5.6 5.5 6.3 6.2 Stock compensation expense 0.1 0.1 0.1 0.1 Write-downs of property and equipment 0.1 0.3 0.3 0.1 Depreciation and amortization 4.5 4.6 4.9 4.8 Gain on sales of restaurant operations and properties (0.8) -- (0.5) -- ----- ----- ----- ----- Operating income 7.9 7.1 5.0 5.5 Interest expense, net 4.2 4.3 4.7 4.6 Equity in net loss of (recovery of write-down of) joint venture -- 0.1 (0.2) 0.2 ----- ----- ----- ----- Income before provision for income taxes and cumulative effect of change in accounting principle 3.7 2.7 0.5 0.7 Provision for income taxes (1.1) (1.0) -- (0.3) ----- ----- ----- ----- Income before cumulative effect of change in accounting principle 2.6 1.7 0.5 0.4 ----- ----- ----- ----- Cumulative effect of change in accounting principle, net of income tax benefit -- -- (0.1) -- ----- ----- ----- ----- Net income 2.6% 1.7% 0.4% 0.4% ===== ===== ===== =====
20 REVENUES: Total revenues increased $10.6 million, or 5.7%, to $198.1 million for the third quarter ended September 26, 1999 from $187.5 million for the same quarter in 1998. Restaurant revenues increased $10.1 million, or 6.2%, to $173.1 million for the third quarter of 1999 from $163.0 million for the same quarter in 1998. Comparable restaurant revenues increased 6.5%. The increase in restaurant revenues was impacted by the increased sales performance of the Company's 274 reimaged restaurants of $5.3 million. In addition, sales at new restaurants increased by $5.2 million, primarily due to the opening of 14 new Company owned restaurants since the end of the third quarter ended September 27, 1998. Sales at restaurants which have not been reimaged increased $4.0 million for the third quarter ended September 26, 1999 when compared to the same period ended September 27, 1998. Offsetting these increases was a decrease in sales of $2.7 million primarily as a result of the closing of 27 under-performing restaurants since the end of the third quarter ended September 27, 1998. Sales for the three months ended September 26, 1999 were also negatively impacted by $1.6 million as a result of the sale of five restaurants to franchisees since the end of the third quarter ended September 27, 1998. Foodservice (retail and institutional) and other revenues increased by $0.2 million, or 0.8%, to $23.7 million for the third quarter of 1999 from $23.5 million for the same quarter in 1998. The increase was primarily due to the increase in the number of franchised locations. The Company's foodservice division sells a variety of products to the Company's franchisees. Franchise revenues increased $0.3 million, or 30%, to $1.3 million for the three months ended September 26, 1999 from $1.0 million for the three months ended September 27, 1998. The increase is primarily due to the fact that there were 66 franchise units open at the end of the third quarter ended September 26, 1999 compared to 47 franchise units open at the end of the third quarter ended September 27, 1998. Total revenues increased $10.6 million, or 2.0%, to $528.5 million for the nine months ended September 26, 1999 from $517.9 million for the same period in 1998. Restaurant revenues increased $9.1 million, or 2.0%, to $464.3 million for the nine months ended September 26, 1999 from $455.2 million for the same period in 1998. Comparable restaurant revenues increased 2.2%. Sales at new restaurants increased by $10.4 million primarily due to the opening of 14 new Company owned restaurants since the end of the third quarter ended September 27, 1998. Sales were favorably impacted by $9.6 million due to the increased sales performance of the Company's 274 reimaged restaurants. Offsetting these increases was the decrease in sales of $7.2 million primarily as the result of the closing of 27 under-performing restaurants since the end of the third quarter ended September 27, 1998. Sales for the nine months ended September 26, 1999 were also negatively impacted by $3.6 million as a result of the sale of five restaurants to franchisees since the end of the third quarter ended September 27, 1998. Foodservice (retail and institutional) and other revenues increased by $0.6 million, or 1.0%, to $60.4 million for the nine months ended September 26, 1999 from $59.8 million for the nine months ended September 27, 1998. The increase was primarily due to an increase in the number of franchised locations. The Company's foodservice division sells a variety of products to the Company's franchisees. Franchise revenues were $3.8 million for the nine months ended September 26, 1999 compared to $2.7 million for the nine months ended September 27, 1998. The increase is primarily a result of the fact that there were 66 franchise units open at the end of the third quarter ended September 26, 1999 compared to 47 franchise units open at the end of the third quarter ended September 27, 1998. COST OF SALES: Cost of sales decreased $0.1 million, or 0.2%, to $56.4 million for the third quarter ended September 26, 1999 from $56.5 million for the same quarter in 1998. Cost of sales as a percentage of total revenues decreased to 28.5% for the third quarter of 1999 from 30.1% for the same quarter in 1998. The lower food cost as a percentage of total revenues was primarily due to the decrease in cream costs compared to the prior year. The Company experienced a 36.7% decrease in the cost of cream, the principal ingredient in ice cream, for the third quarter ended September 26, 1999 when compared to the same period ended September 27, 1998. Cost of sales decreased $4.6 million, or 3.0%, to $150.9 million for the nine months ended September 26, 1999 from $155.5 million for the same period in 1998. Cost of sales as a percentage of total revenues decreased to 28.6% for the nine months in 1999 from 30.0% for the same period in 1998. The Company experienced an 18.6% decrease in the cost of cream, the principal ingredient in ice cream, for the nine months ended September 26, 1999 when compared to the same period ended September 27, 1998. LABOR AND BENEFITS: Labor and benefits increased $6.3 million, or 11.2%, to $62.4 million for the third quarter ended September 26, 1999 from $56.1 million for the same quarter in 1998. Labor and benefits as a percentage of total revenues increased to 31.5% for the third quarter of 1999 from 29.9% for the same period in 1998. The higher labor cost as a percentage of total revenues is primarily the result of the Company's emphasis on improving guest service by increasing staffing levels at the restaurants, particularly at the restaurant carry out windows, as well as increases in the 1999 average hourly wage rate. Labor and benefits increased $11.7 million, or 7.3%, to $171.7 million for the nine months ended September 26, 1999 from $160.0 million for the same period in 1998. Labor and benefits as a percentage of total revenues increased to 32.5% for the nine months of 1999 from 30.9% for the same period in 1998. The higher labor cost as a percentage of total revenues is primarily the result of the Company's emphasis on improving guest service by increasing staffing levels at the restaurants, the impact of low unemployment rates and training related to the Company's soft serve ice cream rollout. In addition, the 1999 average hourly rate increased compared to 1998 due to increased staffing at the carryout windows as part of the soft serve product introduction. 21 OPERATING EXPENSES: Operating expenses increased $2.8 million, or 6.7%, to $44.8 million for the third quarter ended September 26, 1999 from $42.0 million for the same quarter in 1998. This increase was primarily due to an increase in advertising and promotion expenses associated with the Company's new soft serve product and increased maintenance expenses associated with improving restaurant standards. Operating expenses as a percentage of total revenues were 22.6% and 22.4% for the third quarters ended September 26, 1999 and September 27, 1998, respectively. Operating expenses increased $4.7 million, or 4.1%, to $120.7 million for the nine months ended September 26, 1999 from $116.0 million for the same period in 1998. This increase was primarily due to an increase in advertising and promotion expenses associated with the rollout of the Company's new soft serve product and increased maintenance expenses associated with improving restaurant standards. Operating expenses as a percentage of total revenues were 22.8% and 22.4% for the nine months ended September 26, 1999 and September 27, 1998, respectively. GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were $11.2 million and $10.2 million for the third quarters ended September 26, 1999 and September 27, 1998, respectively. General and administrative expenses as a percentage of total revenues increased to 5.6% in the third quarter of 1999 from 5.5% for the same period in 1998. The increase in general and administrative expenses is primarily attributable to the timing of the reduction of the bonus provision for the third quarter ended September 26, 1999 when compared to the third quarter ended September 27, 1998. In addition, the increase in general and administrative expenses was also impacted by costs associated with new restaurant programs instituted to improve guest service at the restaurants. General and administrative expenses were $33.5 million and $32.3 million for the nine months ended September 26, 1999 and September 27, 1998, respectively. General and administrative expenses as a percentage of total revenues increased to 6.3% in the nine months ended September 26, 1999 from 6.2% for the same period in 1998. The increase in general and administrative expenses is primarily attributable to the costs associated with new restaurant programs instituted to improve guest service at the restaurants. EBITDA: As a result of the above, EBITDA (EBITDA represents net income before (i) cumulative effect of change in accounting principle, net of income taxes, (ii) provision for income taxes, (iii) equity in net loss of (recovery of write-down of) joint venture, (iv) interest expense, net, (v) depreciation and amortization and (vi) non-cash write-downs and all other non-cash items plus cash distributions from unconsolidated subsidiaries) increased $2.3 million, or 10.2%, to $24.9 million for the third quarter ended September 26, 1999 from $22.6 million for the same quarter in 1998. EBITDA as a percentage of total revenues was 12.6% and 12.1% for the third quarters of 1999 and 1998, respectively. EBITDA increased $0.1 million, or 0.02%, to $54.2 million for the nine months ended September 26, 1999 from $54.1 million for the same period in 1998. EBITDA as a percentage of total revenues was 10.3% and 10.4% for the nine months ended September 26, 1999 and September 27, 1998, respectively. STOCK COMPENSATION EXPENSE: Stock compensation expense represents stock compensation arising out of the vesting of certain shares of restricted stock previously issued to management. Stock compensation expense was $0.2 million for the third quarters ended September 26, 1999 and September 27, 1998. Stock compensation expense was $0.5 million for the nine months ended September 26, 1999 and September 27, 1998. NON-CASH WRITE-DOWNS OF PROPERTY AND EQUIPMENT: Non-cash write-downs of property and equipment were $0.1 million and $0.5 million for the third quarters ended September 26, 1999 and September 27, 1998, respectively. Non-cash write-downs of property and equipment were $1.5 million and $0.7 million for the nine months ended September 26, 1999 and September 27, 1998, respectively. The increase in non-cash write-downs is primarily the result of the non-cash write-down of $0.8 million which the Company recorded in June 1999 for the Troy, Ohio manufacturing facility to estimated net realizable value in conjunction with the anticipated sale of this property. DEPRECIATION AND AMORTIZATION: Depreciation and amortization increased $0.4 million, or 4.7%, to $8.9 million for the third quarter ended September 26, 1999 from $8.5 million for the same quarter in 1998. The increase was primarily due to the Company's restaurant reimaging projects and the opening of new restaurants. Depreciation and amortization as a percentage of total revenues decreased to 4.5% for the third quarter of 1999 from 4.6% for the same quarter in 1998. 22 Depreciation and amortization increased $1.1 million, or 4.5%, to $25.7 million for the nine months ended September 26, 1999 from $24.6 million for the same period in 1998. Depreciation and amortization as a percentage of total revenues increased to 4.9% for the nine months ended September 26, 1999 from 4.8% for the same period in 1998. The increase was primarily due to the Company's restaurant reimaging projects and the opening of new restaurants. GAIN ON SALES OF RESTAURANT OPERATIONS AND PROPERTIES: During the third quarter ended September 26, 1999, the Company sold the land and buildings associated with 13 previously franchised restaurants to the Company's largest franchisee, located in the Baltimore/Washington D.C. area, for $6.8 million. This transaction, an integral part of the Company's franchising strategy, resulted in a gain on sale of restaurant operations and properties of $1.6 million. The gain on sales of restaurant operations and properties for the nine months ended September 26, 1999 represented the income related to the sale of the land and buildings to the Company's largest franchisee and the equipment and operating rights for three existing restaurants to three new franchisees. INTEREST EXPENSE, NET: Interest expense, net of capitalized interest and interest income, increased by $0.2 million, or 2.5%, to $8.2 million for the third quarter ended September 26, 1999 from $8.0 million for the same quarter in 1998. The increase in interest expense, net was primarily due to the increase in the average outstanding balance on the revolving credit facility during the third quarter ended September 26, 1999 compared to the third quarter ended September 27, 1998, along with the increase in interest rates associated with the credit agreement that was amended effective December 27, 1998. Interest expense, net of capitalized interest and interest income, increased by $1.0 million, or 4.2%, to $24.9 million for the nine months ended September 26, 1999 from $23.9 million for the same period in 1998. The increase in interest expense, net was primarily due to the increase in the average outstanding balance on the revolving credit facility during the nine months ended September 26, 1999 compared to the nine months ended September 27, 1998, along with the increase in the interest rates associated with the credit agreement that was amended effective December 27, 1998. EQUITY IN NET LOSS OF (RECOVERY OF WRITE-DOWN OF) JOINT VENTURE: During the fourth quarter ended December 27, 1998, the Company sold its 50% interest in its China joint venture and recorded a write-down of $3.5 million to eliminate the Company's remaining investment in and advances to the joint venture. On March 17, 1999 the Company received an additional $250,000 from the joint venture partner. These additional proceeds were reflected as income in the first quarter ended March 28, 1999. During June 1999, the Company was notified by its joint venture partner that it would remit approximately $577,000 in cash and $69,000 of equipment to the Company. The Company recorded such amount as income during the second quarter ended June 27, 1999. The Company received the cash on July 22, 1999 and anticipates receiving the equipment by the end of the current fiscal year. The Company does not anticipate any additional payments from the joint venture partner in the future. If any of the $0.3 million still due under the terms of the sale is received by the Company, such amount will be recorded as income by the Company at such time. PROVISION FOR INCOME TAXES: The provision for income taxes was $2.2 million, or 30.1%, and $2.0 million, or 38.0%, for the third quarters ended September 26, 1999 and September 27, 1998, respectively. The provision for income taxes was $0.2 million, or 7.8%, and $1.3 million, or 38.0%, for the nine months ended September 26, 1999 and September 27, 1998, respectively. The Company records income taxes based on the effective rate expected for the year with any changes in valuation allowance reflected in the period of change. The sale of the land and buildings associated with 13 previously franchised restaurants to the Company's largest franchisee during the third quarter ended September 26, 1999 favorably impacted the provision for income taxes as it triggered built-in gains which allowed for a reduction of the valuation allowance on certain net operating loss carryforwards. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET: In accordance with Statement of Position 98-5, the Company recognized $0.3 million of expense, net of income tax benefit, in the nine months ended September 26, 1999 related to previously deferred restaurant preopening costs. NET INCOME: Net income was $5.2 million and $3.2 million for the third quarters ended September 26, 1999 and September 27, 1998, respectively. Net income was $1.9 million and $2.2 million for the nine months ended September 26, 1999 and September 27, 1998, respectively. 23 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 $34.6 million for the nine months ended September 26, 1999 compared to $29.8 million for the same period of 1998. During the nine months ended September 26, 1999, accounts receivable decreased approximately $0.7 million primarily due to the timing of payments associated with foodservice promotional activity. Inventories increased $1.6 million as a result of increased restaurant promotional activity, including prepack and soft serve ice cream products, and anticipated increased retail sales. Other assets increased $0.9 million primarily due to $0.4 million of new uniforms associated with the rollout of our new soft serve product along with new uniforms for our reimaged locations, $2.1 million of prepaid rental payments, $0.7 million of costs associated with entering into lease agreements for two of the Company's new restaurant locations, offset by $2.4 million of insurance premium receivable payments associated with the Company's captive insurance company. Accounts payable increased approximately $10.0 million for the nine months ended September 26, 1999 primarily related to the timing of payments. Accrued expenses and other long-term liabilities decreased $1.8 million from December 27, 1998 to September 26, 1999 primarily due to payments made on accruals for restaurant construction and maintenance, relocation, an amendment fee associated with the Company's credit facility, point of sale equipment and costs associated with the closing of the Troy, Ohio manufacturing facility. The decrease was also impacted by the recognition of premium income which had been deferred as of December 27, 1998. The increase in accrued interest payable was due to one month of accrued interest at December 27, 1998 compared to approximately four months of accrued interest at September 26, 1999. This increase was primarily based on the timing of required payments on the Senior Notes. Available borrowings under the revolving credit facility were $30.0 million as of September 26, 1999. Additional sources of liquidity consist of capital and operating leases for financing leased restaurant locations (in malls and shopping centers and land or building leases), restaurant equipment, manufacturing equipment, distribution vehicles and computer equipment. Additionally, sales of under-performing existing restaurant properties and other assets (to the extent the Company's debt instruments, if any, permit) are sources of cash. The amounts of debt financing that the Company will be able to incur under capital leases and for property and casualty insurance financing and the amount of asset sales by the Company are limited by the terms of its credit facility and Senior Notes. Net cash used in investing activities was $24.0 million in the nine months ended September 26, 1999 and $39.8 million in the same period of 1998. Capital expenditures for restaurant operations were approximately $9.1 million and $6.9 million for the three months ended September 26, 1999 and September 27, 1998, respectively. Capital expenditures for restaurant operations were approximately $31.1 million and $35.9 million for the nine months ended September 26, 1999 and September 27, 1998, respectively. The decrease in capital expenditures was primarily due to the reimaging of 92 restaurants and increasing the seating capacity in two restaurants during the nine months ended September 26, 1999 compared to 141 reimaged restaurants for the nine months ended September 27, 1998. Proceeds from the sales of property and equipment were $11.6 million and $1.4 million in the nine months ended September 26, 1999 and September 27, 1998, respectively. Net cash used in financing activities was $4.0 million in the nine months ended September 26, 1999. Net cash provided by financing activities was $6.9 million for the nine months ended September 27, 1998. The Company had a working capital deficit of $37.8 million as of September 26, 1999. The Company is able to operate with a substantial working capital deficit because: (i) restaurant operations are conducted primarily on a cash (and cash equivalent) basis with a low level of accounts receivable; (ii) rapid turnover allows a limited investment in inventories and (iii) cash from sales is usually received before related expenses for food, supplies and payroll are paid. The Company's credit facility imposes significant operating and financial restrictions on the Company's ability to, among other things, incur indebtedness, create liens, sell assets, engage in mergers or consolidations, pay dividends and engage in certain transactions with affiliates. The credit facility limits the amount which the Company may spend on capital expenditures and requires the Company to comply with certain financial covenants. The Company's credit facility also restricts the use of proceeds from asset sales. Proceeds, as defined in the credit agreement, in excess of stated maximum allowable amounts must be used to permanently reduce outstanding obligations under the credit facility. As of September 26, 1999, the Company reached the maximum allowable amount of proceeds and was required to make a mandatory prepayment of $349,000. Additionally, all future net proceeds received from asset sales for the period September 27, 1999 through January 2, 2000 must be used to further reduce outstanding obligations under the credit facility. During fiscal 2000, the Company may retain up to a maximum of $3.0 million of net proceeds from asset sales to be invested into additional capital expenditures. Prepayments will be applied first to the Term Loans in inverse order of maturity and secondly, to permanently reduce the revolving credit commitment. 24 The Company anticipates requiring capital in the future principally to maintain existing restaurant and plant facilities, to continue to renovate and reimage existing restaurants, to convert restaurants and to construct new restaurants. Capital expenditures for 1999 are anticipated to be $43.0 million in the aggregate, of which $35.0 million will be spent on restaurant operations. The Company's actual 1999 capital expenditures may vary from these estimated amounts. IMPACT OF YEAR 2000 The Year 2000 Issue is the result of computer programs historically being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal day-to-day operations. The Company continues to execute its comprehensive plan to address the Year 2000 Issue. The plan addresses three main phases: (a) information systems; (b) embedded chips; and (c) supply chain readiness (including customers as well as inventory and non-inventory suppliers). To oversee the process, the Company has established a Steering Committee comprised of executives and chaired by the Company's Senior Executive Vice President, Chief Financial Officer and Treasurer. The Committee reports regularly to the Board of Directors and the Audit Committee. The Company retained the services of a third party consultant with Year 2000 expertise to evaluate the Company's Year 2000 plan and make recommendations. As of September 26, 1999, the Company is vigorously remediating software and hardware deficiencies caused by the Year 2000 Issue and is at various stages of completion. Remediation of the Company's major business systems is complete, including financial reporting, asset management, accounts payable, payroll and human resources and manufacturing, purchasing and distribution systems. As of September 26, 1999, the Company has successfully completed an integrated Year 2000 test of its critical financial and operating systems. This test also included the rollover of the Company's network and operating system infrastructure. The systems tested included: financial reporting, asset management, accounts payable, payroll and human resources and manufacturing, purchasing and distribution systems. As of September 26, 1999, the Company continues to remediate and test the remaining systems. Software vendors of the Company's critical systems, from time to time, have provided updates to their software that may further insulate the Company from Year 2000 issues. The Company evaluates all software enhancements to ensure that no adverse activity may affect the day to day operation of the Company. The Company anticipates that its remaining targets are attainable in 1999. The Company continues to believe that with modifications to existing software and conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications or conversions are not made, or are not completed timely on the remaining business systems, the Year 2000 Issue should not have a material impact on the operations of the Company. Based on the work completed to date, the Company continues to anticipate that remediation will be substantially completed prior to December 1999. Certification of restaurant systems was completed by the end of the second quarter ended June 27, 1999. Retrofitting of restaurant technology hardware was also completed by the end of the second quarter. Revised point-of-sale software is currently installed at all restaurants and the Company continues to monitor its operation during the normal course of business operations. Other key restaurant software has also been certified. However, further testing of all applications will continue throughout the year. Embedded chip technology poses the most difficult challenge. The Company's focus has been directed at the manufacturing and distribution operations. As of September 26, 1999, all critical manufacturing functions have been evaluated and questionable equipment hardware is continually remediated in order to be compliant. The issues that currently remain open are non-critical in nature and should not impair the Company's ability to conduct its business. The Company continues to monitor its communications environment both internally and externally and will react as developments occur. The Company continues to take vigorous steps to monitor Year 2000 supply chain readiness by evaluating written assurances and on-site visits with over 325 business-critical suppliers. As of September 26, 1999, the Company continues to follow up with a very small number of vendors where Year 2000 compliance may be questionable. The Company also continues to identify alternate sources wherever appropriate. 25 If any of the Company's suppliers or customers do not, or if the Company itself does not, successfully deal with the Year 2000 Issue, the Company could experience delays in receiving or sending goods that would increase its costs and that could cause the Company to lose business and even customers and could subject the Company to claims for damages. Problems with the Year 2000 Issue could also result in delays in the Company invoicing its customers or in the Company receiving payments from them that would affect the Company's liquidity. Problems with the Year 2000 Issue could affect the activities of the Company's customers to the point that their demand for the Company's products is reduced. The severity of these possible problems would depend on the nature of the problem and how quickly it could be corrected or an alternative implemented, which is unknown at this time. In the extreme, such problems could bring the Company to a standstill. Although the Company has not developed a formal contingency plan to deal with business interruptions, management believes that it does have policies and procedures in place to handle any short-term disruptions to its business. The Company is currently developing a formal contingency plan to address issues which are outside of its control to ensure any disruptions to the business do not negatively impact the Company. The Company continues to evaluate the business environment and appropriate Year 2000 developments and is beginning the process to refine and consolidate operational procedures and resources in order to conduct its normal day-to-day business operations. As previously noted, some risks of the Year 2000 Issue are beyond the control of the Company, its suppliers and customers. For example, no preparations or contingency plan will protect the Company from a down-turn in economic activity caused by the possible ripple effect throughout the entire economy that could be caused by problems of others with the Year 2000 Issue. The Company's total Year 2000 project cost includes the estimated costs and time associated with the impact of third party Year 2000 Issues based on presently available information. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and would not have an adverse effect on the Company's systems. The Company will utilize both internal and external resources to reprogram, or replace, and test the software for the system improvement and Year 2000 modifications. The total cost of the system improvement and the Year 2000 project is being funded through operating cash flows. Of the total estimated project cost of $7.0 million, approximately $5.7 million is attributable to the purchase of new software and hardware, which will be capitalized. The remaining $1.3 million, which will be expensed as incurred, is not expected to have a material effect on the results of operations. To date, the Company has incurred approximately $6.2 million ($1.1 million expensed and $5.1 million capitalized for new systems) related to system improvements and the Year 2000 project. The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. SEASONALITY Due to the seasonality of frozen dessert consumption, and the effect from time to time of weather on patronage in its restaurants, the Company's revenues and EBITDA are typically higher in its second and third quarters. GEOGRAPHIC CONCENTRATION Approximately 88% of the Company-owned restaurants are located, and substantially all of its retail sales are generated, in the Northeast. As a result, a severe or prolonged economic recession or changes in demographic mix, employment levels, population density, weather, real estate market conditions or other factors specific to this geographic region may adversely affect the Company more than certain of its competitors which are more geographically diverse. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change in the Company's market risk exposure since the filing of the Annual Report on Form 10-K. 26 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1 Financial Data Schedule (b) No report on Form 8-K was filed during the three months and nine months ended September 26, 1999. 27 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRIENDLY ICE CREAM CORPORATION By: /s/ Paul J. Mcdonald --------------------------------------- Name: Paul J. McDonald Title: Senior Executive Vice President, Chief Financial Officer, Treasurer and Assistant Clerk 28 EX-27.1 2 EXHIBIT 27-1
5 This schedule contains summary financial information extracted from Consolidated Statements of Operations and Consolidated Balance Sheets and is qualified in its entirety by reference to such financial statements. 9-MOS JAN-02-2000 DEC-28-1998 SEP-26-1999 19,965 0 5,031 124 17,189 53,820 571,302 269,639 381,131 91,605 304,194 0 0 75 (88,248) 381,131 524,671 528,470 150,892 443,438 0 0 24,879 2,419 (188) 2,231 0 0 (319) 1,912 0.26 0.25
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