-----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, HWUbl3j6ODCr1dSVXWyW5Pf+fUhVAVqb+cSIlwDXUK1FpmplOSewd1NOVQvKo+Z/ WxIepVFaHrFcwg5sIg6jrQ== 0001047469-99-019327.txt : 19990512 0001047469-99-019327.hdr.sgml : 19990512 ACCESSION NUMBER: 0001047469-99-019327 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990328 FILED AS OF DATE: 19990511 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: 99617000 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 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 March 28, 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 MAY 11, 1999 ----- -------------------------- Common Stock, $.01 par value 7,500,000 shares PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
March 28, December 27, 1999 1998 --------- ---------- ASSETS (unaudited) CURRENT ASSETS: Cash and cash equivalents $ 11,551 $ 11,091 Restricted cash 2,463 2,211 Trade accounts receivable 4,228 5,566 Inventories 17,100 15,560 Deferred income taxes 7,061 7,061 Prepaid expenses and other current assets 5,835 6,578 --------- ---------- TOTAL CURRENT ASSETS 48,238 48,067 PROPERTY AND EQUIPMENT, net 301,775 300,159 INTANGIBLES AND DEFERRED COSTS, net 24,617 25,178 OTHER ASSETS 1,342 1,144 --------- ---------- TOTAL ASSETS $ 375,972 $ 374,548 --------- ---------- --------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current maturities of long-term debt $ 6,305 $ 4,023 Current maturities of capital lease and finance obligations 1,689 1,677 Accounts payable 27,849 26,460 Accrued salaries and benefits 15,319 14,206 Accrued interest payable 7,397 2,593 Insurance reserves 8,640 9,116 Other accrued expenses 14,659 20,649 --------- ---------- TOTAL CURRENT LIABILITIES 81,858 78,724 --------- ---------- DEFERRED INCOME TAXES 32,652 37,188 CAPITAL LEASE AND FINANCE OBLIGATIONS, less current maturities 9,319 9,745 LONG-TERM DEBT, less current maturities 320,776 311,061 OTHER LONG-TERM LIABILITIES 28,332 28,431 STOCKHOLDERS' EQUITY (DEFICIT): Common stock 75 75 Preferred stock -- -- Additional paid-in capital 138,058 137,896 Accumulated deficit (235,166) (228,639) Accumulated other comprehensive income 68 67 --------- ---------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (96,965) (90,601) --------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 375,972 $ 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 --------------------------- March 28, March 29, 1999 1998 -------- -------- REVENUES $145,683 $151,674 COSTS AND EXPENSES: Cost of sales 44,188 46,241 Labor and benefits 50,364 50,252 Operating expenses 33,384 33,689 General and administrative expenses 11,763 11,420 Stock compensation expense 162 225 Write-downs of property and equipment 286 100 Depreciation and amortization 8,229 7,956 Gain on sales of restaurant operations (256) -- -------- -------- OPERATING (LOSS) INCOME (2,437) 1,791 Interest expense, net 8,335 7,883 (Recovery of write-down of) equity in net loss of joint venture (250) 316 -------- -------- LOSS BEFORE BENEFIT FROM INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (10,522) (6,408) Benefit from income taxes 4,314 2,435 -------- -------- LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (6,208) (3,973) Cumulative effect of change in accounting principle, net of income tax benefit of $222 ( 319) -- -------- -------- NET LOSS $ (6,527) $(3,973) -------- -------- -------- -------- BASIC AND DILUTED NET LOSS PER SHARE: Loss before cumulative effect of change in accounting principle $(0.83) $(0.53) Cumulative effect of change in accounting principle, net of income tax benefit (0.04) -- -------- -------- Net loss $(0.87) $(0.53) -------- -------- -------- -------- WEIGHTED AVERAGE BASIC AND DILUTED SHARES 7,482 7,443 -------- -------- -------- --------
The accompanying notes are an integral part of these condensed consolidated financial statements. 2 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
For the Three Months Ended ----------------------------- March 28, March 29, 1999 1998 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(6,527) $(3,973) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Cumulative effect of change in accounting principle 319 -- Stock compensation expense 162 225 Depreciation and amortization 8,229 7,956 Write-downs of property and equipment 286 100 Deferred income tax benefit (4,314) (2,435) Loss on asset retirements 97 1,167 Equity in joint venture loss -- 316 Changes in operating assets and liabilities: Trade accounts receivable 1,338 1,155 Inventories (1,540) (3,016) Other assets (1,407) (420) Accounts payable 1,389 5,848 Accrued expenses and other long-term liabilities (648) 364 -------- -------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (2,616) 7,287 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (11,349) (15,066) Proceeds from sales of property and equipment 1,691 103 Proceeds from sale of joint venture 1,150 -- -------- -------- NET CASH USED IN INVESTING ACTIVITIES (8,508) (14,963) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings 26,000 20,258 Repayments of debt (14,003) (12,378) Repayments of capital lease and finance obligations (414) (375) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 11,583 7,505 -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 1 20 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 460 (151) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,091 15,132 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $11,551 $14,981 -------- -------- -------- -------- SUPPLEMENTAL DISCLOSURES: Interest paid $3,213 $2,292 Income taxes paid 2 113
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (Dollar amounts in thousands)
For The Three Months Ended -------------------------- March 28, March 29, 1999 1998 ---- ---- NET LOSS $(6,527) $(3,973) OTHER COMPREHENSIVE INCOME, NET OF TAX: Currency translation effects 1 20 ------- ------- OTHER COMPREHENSIVE INCOME 1 20 ------- ------- COMPREHENSIVE LOSS $(6,526) $(3,953) ------- ------- ------- -------
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION INTERIM FINANCIAL INFORMATION - The accompanying financial statements as of March 28, 1999 and for the first quarter ended March 28, 1999 and March 29, 1998 are unaudited, but, in the opinion of management, include all adjustments which are necessary for a fair presentation of the financial position and the results of operations, cash flows and comprehensive income (loss) of Friendly Ice Cream Corporation and subsidiaries (unless the context indicates otherwise, the "Company"). Such adjustments consist solely of normal recurring accruals. Operating results for the three month periods ended March 28, 1999 and March 29, 1998 are not necessarily indicative of the results that may be expected for the entire year due, in part, to the seasonality of the 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 at March 29, 1999 and December 27, 1998 were (in thousands):
March 28, December 27, 1999 1998 ------- ------- Raw materials $1,561 $1,983 Goods in process 246 145 Finished goods 15,293 13,432 ------ ------ Total $17,100 $15,560 ------- ------- ------- -------
2. EARNINGS (LOSS) PER SHARE Basic net loss per share is calculated by dividing loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per share is calculated by dividing loss 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 net loss per share in the future, that were not included in the computation of diluted net loss per share because to do so would have been antidilutive, was 2,027 for the three months ended March 28, 1999. There were no common stock equivalents which could dilute basic net loss per share for the three months ended March 29, 1998. 3. RESTAURANT PREOPENING COSTS In April 1998, the American Institute of Certified Public Accountants ("AICPA") 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, the Company expensed, in the three months ended March 28, 1999, previously deferred restaurant preopening costs of approximately $541,000 as of December 28, 1998. This transaction is reflected as a cumulative effect of a change in accounting principle of $319,000, net of the income tax benefit of $222,000. 4. COMPREHENSIVE INCOME The following represents accumulated other comprehensive loss (in thousands):
March 28, December 27, March 29, 1999 1998 1998 --------- ------------ --------- Currency translation effects $68 $67 $78 --- --- --- --- --- ---
5 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. SEGMENT REPORTING The Company adopted 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, 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 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. 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 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 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. EBITDA represents net loss before (i) cumulative effect of change in accounting principle, net of income taxes, (ii) benefit from (provision for) income taxes, (iii) (recovery of write-down of) equity in net loss 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.
March 28, March 29, 1999 1998 --------- -------- (in thousands) Revenues: Restaurant $130,228 $135,220 Foodservice 52,591 55,871 Franchise 1,064 812 International 23 198 -------- -------- Total $183,906 $192,101 -------- -------- -------- -------- Intersegment revenues: Restaurant $ -- $ -- Foodservice (38,223) (40,427) Franchise -- -- International -- -- -------- -------- Total $(38,223) $(40,427) -------- -------- -------- -------- External revenues: Restaurant $130,228 $135,220 Foodservice 14,368 15,444 Franchise 1,064 812 International 23 198 -------- -------- Total $145,683 $151,674 -------- -------- -------- --------
6 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. SEGMENT REPORTING (CONTINUED)
March 28, March 29, 1999 1998 ------- ------- (in thousands) EBITDA: Restaurant $9,895 $12,948 Foodservice 2,739 3,571 Franchise 572 421 International (57) (199) Corporate (6,909) (6,669) ------- ------- Total $6,240 $10,072 ------- ------- ------- ------- Interest expense, net $8,335 $7,883 ------- ------- ------- ------- (Recovery of write-down of) equity in net loss of joint venture $(250) $316 ------- ------- ------- ------- Income (loss) before income taxes and cumulative effect of change in accounting principle: Restaurant $3,274 $6,636 Foodservice 1,875 2,822 Franchise 426 275 International 193 (525) Corporate (16,290) (15,616) -------- -------- Total $(10,522) $(6,408) ------- ------- ------- ------- Depreciation and amortization: Restaurant $6,335 $6,212 Foodservice 864 749 Franchise 146 146 International - 10 Corporate 884 839 ------- ------- Total $8,229 $7,956 ------- ------- ------- ------- Identifiable assets: Restaurant $262,965 $255,946 Foodservice 39,524 41,661 Franchise 12,612 10,934 International 169 4,236 Corporate 60,702 66,648 ------- ------- Total $375,972 $379,425 ------- ------- ------- ------- Capital expenditures, including capitalized leases: Restaurant $9,546 $13,293 Foodservice 982 936 Corporate 821 837 International - - - - ------- ------- Total $11,349 $15,066 ------- ------- ------- -------
7 6. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND FOR HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board 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 is effective for fiscal years beginning after June 15, 1999. SFAS No. 133 cannot be applied retroactively. 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 (loss). 7. CLOSING OF INTERNATIONAL OPERATIONS Effective October 15, 1998, Friendly's International, Inc. ("FII"), a subsidiary of the Company, 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 in February 1999. 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. If any of the $0.9 million still due under the terms of the sale agreement are received by the Company, such amount will be recorded as income by the Company at such time. 8. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION Friendly Ice Cream Corporation's ("FICC") obligation related to the $200 million Senior Notes are 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 March 28, 1999 and March 29, 1998 and for the periods ended March 28, 1999 and March 29, 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. 8 SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET AS OF MARCH 28, 1999 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ---------- ---------- ------------- ------------- ------------ Assets Current assets: Cash and cash equivalents $ 9,328 $ 321 $ 1,902 $ -- $ 11,551 Restricted cash -- -- 2,463 -- 2,463 Trade accounts receivable 4,034 168 26 -- 4,228 Inventories 17,003 -- 97 -- 17,100 Deferred income taxes 6,783 -- 278 -- 7,061 Prepaid expenses and other current assets 9,024 -- 6,535 (9,724) 5,835 --------- --------- --------- --------- --------- Total current assets 46,172 489 11,301 (9,724) 48,238 Deferred income taxes -- 503 1,024 (1,527) -- Property and equipment, net 301,775 -- -- -- 301,775 Intangibles and deferred costs, net 24,617 -- -- -- 24,617 Investments in subsidiaries 1,168 -- -- (1,168) -- Other assets 426 2,548 5,730 (7,362) 1,342 --------- --------- --------- --------- --------- Total assets $ 374,158 $ 3,540 $ 18,055 $ (19,781) $ 375,972 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Liabilities and Stockholders' Equity (Deficit) Current liabilities: Current maturities of long-term obligations $ 12,494 $ -- $ -- $ (4,500) $ 7,994 Accounts payable 27,849 -- -- -- 27,849 Accrued expenses 40,144 631 10,463 (5,223) 46,015 --------- --------- --------- --------- --------- Total current liabilities 80,487 631 10,463 (9,723) 81,858 Deferred income taxes 34,179 -- -- (1,527) 32,652 Long-term obligations, less current maturities 334,909 -- -- (4,814) 330,095 Other long-term liabilities 21,548 1,746 7,587 (2,549) 28,332 Stockholders' equity (deficit) (96,965) 1,163 5 (1,168) (96,965) --------- --------- --------- --------- --------- Total liabilities and stockholders' equity (deficit) $ 374,158 $ 3,540 $ 18,055 $ (19,781) $ 375,972 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
9 SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 28, 1999 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ---------- ------------- ------------- ------------ ------------ Revenues $ 145,164 $ 495 $ 24 $ -- $ 145,683 Costs and expenses: Cost of sales 44,171 -- 17 -- 44,188 Labor and benefits 50,364 -- -- -- 50,364 Operating expenses and write-downs of property and equipment 33,726 -- (56) -- 33,670 General and administrative expenses 11,337 426 -- -- 11,763 Stock compensation expense 162 -- -- -- 162 Depreciation and amortization 8,229 -- -- -- 8,229 Gain on sales of restaurant operations (256) -- -- -- (256) Interest expense (income) 8,515 -- (180) -- 8,335 Recovery of write-down of joint venture (250) -- -- -- (250) ---------- ------------- ------------- ------------ ------------ (Loss) income before benefit from (provision for) income taxes, cumulative effect of change in accounting principle and equity in net income of consolidated subsidiaries (10,834) 69 243 -- (10,522) Benefit from (provision for) income taxes 4,424 (28) (82) -- 4,314 ---------- ------------- ------------- ------------ ------------ (Loss) income before cumulative effect of change in accounting principle and equity in net income of consolidated subsidiaries (6,410) 41 161 -- (6,208) Cumulative effect of change in accounting principle (319) -- -- -- (319) ---------- ------------- ------------- ------------ ------------ (Loss) income before equity in net income of consolidated subsidiaries (6,729) 41 161 -- (6,527) Equity in net income of consolidated subsidiaries 202 -- -- (202) -- ---------- ------------- ------------- ------------ ------------ Net (loss) income $ (6,527) $ 41 $ 161 $ (202) $ (6,527) ---------- ------------- ------------- ------------ ------------ ---------- ------------- ------------- ------------ ------------
10 SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 28, 1999 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated -------- ---------- ------------- ------------ ------------ Net cash (used in) provided by operating activities $ (2,927) $ 268 $ 43 $ -- $ (2,616) -------- ---------- ------------- ------------ ------------ Cash flows from investing activities: Purchases of property and equipment (11,349) -- -- -- (11,349) Proceeds from sales of property and equipment 1,691 -- -- -- 1,691 Return of advance from joint venture 1,150 -- -- -- 1,150 -------- ---------- ------------- ------------ ------------ Net cash used in investing activities (8,508) -- -- -- (8,508) -------- ---------- ------------- ------------ ------------ Cash flows from financing activities: Proceeds from borrowings 26,000 -- -- -- 26,000 Repayments of obligations (14,417) -- -- -- (14,417) -------- ---------- ------------- ------------ ------------ Net cash provided by financing activities 11,583 -- -- -- 11,583 -------- ---------- ------------- ------------ ------------ Effect of exchange rate changes on cash -- -- 1 -- 1 -------- ---------- ------------- ------------ ------------ Net increase in cash and cash equivalents 148 268 44 -- 460 Cash and cash equivalents, beginning of period 9,180 53 1,858 -- 11,091 -------- ---------- ------------- ------------ ------------ Cash and cash equivalents, end of period $ 9,328 $ 321 $ 1,902 $ -- $ 11,551 -------- ---------- ------------- ------------ ------------ -------- ---------- ------------- ------------ ------------ Supplemental disclosures: Interest paid (received) $ 3,393 $ -- $ (180) $ -- $ 3,213 Income taxes (received) paid (87) 1 88 -- 2
11 SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET AS OF MARCH 29, 1998 (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated -------- ---------- ------------- ------------ ------------ Assets Current assets: Cash and cash equivalents $ 12,067 $ 446 $ 2,468 $ -- $ 14,981 Restricted cash -- -- 1,670 -- 1,670 Trade accounts receivable 6,905 126 736 -- 7,767 Inventories 18,180 -- 507 -- 18,687 Deferred income taxes 8,831 -- -- -- 8,831 Prepaid expenses and other current assets 11,544 2,066 6,324 (12,067) 7,867 --------- --------- --------- --------- --------- Total current assets 57,527 2,638 11,705 (12,067) 59,803 Deferred income taxes -- 478 504 (982) -- Investment in joint venture -- -- 2,654 -- 2,654 Property and equipment, net 290,005 -- 185 -- 290,190 Intangibles and deferred costs, net 25,496 -- -- -- 25,496 Investments in subsidiaries 3,687 -- -- (3,687) -- Other assets 363 -- 8,528 (7,609) 1,282 --------- --------- --------- --------- --------- Total assets $ 377,078 $ 3,116 $ 23,576 $ (24,345) $ 379,425 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Liabilities and Stockholders' Equity (Deficit) Current liabilities: Current maturities of long-term obligations $ 6,766 $ -- $ -- $ (4,400) $ 2,366 Accounts payable 29,799 -- -- -- 29,799 Accrued expenses 40,159 871 10,739 (7,667) 44,102 --------- --------- --------- --------- --------- Total current liabilities 76,724 871 10,739 (12,067) 76,267 Deferred income taxes 40,841 -- 99 (982) 39,958 Long-term obligations, less current maturities 327,625 -- -- (7,609) 320,016 Other long-term liabilities 21,977 1,397 9,899 -- 33,273 Stockholders' equity (deficit) (90,089) 848 2,839 (3,687) (90,089) --------- --------- --------- --------- --------- Total liabilities and stockholders' equity (deficit) $ 377,078 $ 3,116 $ 23,576 $ (24,345) $ 379,425 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
12 SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 29, 1998 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated --------- ---------- ------------- ------------ ------------ Revenues $ 151,172 $ 303 $ 199 $ -- $ 151,674 Costs and expenses: Cost of sales 46,065 -- 176 -- 46,241 Labor and benefits 50,252 -- -- -- 50,252 Operating expenses and write-downs of property and equipment 33,798 (9) -- 33,789 General and administrative expenses 11,022 300 98 -- 11,420 Stock compensation expense 225 -- -- -- 225 Depreciation and amortization 7,946 -- 10 -- 7,956 Interest expense 8,118 -- (235) -- 7,883 Equity in net loss of joint venture -- -- 316 -- 316 --------- ---------- ------------- ------------ ------------ (Loss) income before benefit from (provision for) income taxes and equity in net loss of consolidated subsidiaries (6,254) 3 (157) -- (6,408) Benefit from (provision for) income taxes 2,383 (1) 53 -- 2,435 --------- ---------- ------------- ------------ ------------ (Loss) income before equity in net loss of consolidated subsidiaries (3,871) 2 (104) -- (3,973) Equity in net loss of consolidated subsidiaries (102) -- -- 102 -- --------- ---------- ------------- ------------ ------------ Net (loss) income $ (3,973) $ 2 $ (104) $ 102 $ (3,973) --------- ---------- ------------- ------------ ------------ --------- ---------- ------------- ------------ ------------
13 SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 29, 1998 (Unaudited) (In thousands)
Parent Guarantor Non-guarantor Company Subsidiary Subsidiaries Eliminations Consolidated --------- ---------- ------------- ------------ ------------ Net cash provided by operating activities $ 6,886 $ 242 $ 91 $ 68 $ 7,287 --------- ---------- ------------- ------------ ------------ Cash flows from investing activities: Purchases of property and equipment (15,066) -- -- -- (15,066) Proceeds from sales of property and equipment 103 -- -- -- 103 --------- ---------- ------------- ------------ ------------ Net cash used in investing activities (14,963) -- -- -- (14,963) --------- ---------- ------------- ------------ ------------ Cash flows from financing activities: Dividend received (paid) 400 -- (400) -- -- Proceeds from borrowings 20,258 -- -- -- 20,258 Repayments of long-term obligations (12,753) -- -- -- (12,753) --------- ---------- ------------- ------------ ------------ Net cash provided by (used in) financing activities 7,905 -- (400) -- 7,505 --------- ---------- ------------- ------------ ------------ Effect of exchange rate changes on cash -- -- 20 -- 20 --------- ---------- ------------- ------------ ------------ Net (decrease) increase in cash and cash equivalents (172) 242 (289) 68 (151) Cash and cash equivalents, beginning of period 12,239 204 2,757 (68) 15,132 --------- ---------- ------------- ------------ ------------ Cash and cash equivalents, end of period $ 12,067 $ 446 $ 2,468 $ -- $ 14,981 --------- ---------- ------------- ------------ ------------ --------- ---------- ------------- ------------ ------------ Supplemental disclosures: Interest paid $ 2,292 $ -- $ -- $ -- $ 2,292 Income taxes paid 94 19 -- -- 113
14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 28, 1999 AND MARCH 29, 1998 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 pattern, 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 March 28, 1999, Friendly's owns and operates 641 restaurants, franchises 45 restaurants and 9 cafes and distributes a full line of frozen dessert products. These products are distributed to Friendly's restaurants and cafes and to more than 5,000 supermarkets and other retail locations in 15 states. The restaurants offer a wide variety of reasonably priced breakfast, lunch and dinner menu items as well as the frozen dessert products. 15 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 ---------------------------- March 28, March 29, 1999 1998 --------- --------- Revenues: Restaurant 89.4% 89.2% Foodservice (retail and institutional) 9.9 10.2 Franchise 0.7 0.5 International -- 0.1 --------- --------- Total revenues 100.0 100.0 --------- --------- Costs and expenses: Cost of sales 30.3 30.5 Labor and benefits 34.6 33.1 Operating expenses 22.9 22.2 General and administrative expenses 8.1 7.5 Stock compensation expense 0.1 0.1 Write-downs of property and equipment 0.2 0.1 Depreciation and amortization 5.7 5.3 Gain on sales of restaurant operations (0.2) -- --------- --------- Operating (loss) income (1.7) 1.2 Interest expense, net 5.7 5.2 (Recovery of write-down of) equity in net loss of joint venture (0.2) 0.2 --------- --------- Loss before benefit from income taxes and cumulative effect of change in accounting principle (7.2) (4.2) Benefit from income taxes 3.0 1.7 Cumulative effect of change in accounting principle, net of income tax benefit (0.2) -- --------- --------- Net loss (4.4)% (2.5)% --------- --------- --------- ---------
16 REVENUES: Total revenues decreased $6.0 million, or 4.0%, to $145.7 million for the first quarter ended March 28, 1999 from $151.7 million for the same quarter in 1998. Restaurant revenues decreased $5.0 million, or 3.7%, to $130.2 million for the first quarter of 1999 from $135.2 million for the same quarter in 1998. Comparable restaurant revenues decreased 3.8%. This decrease included a 5.3% decline in revenues for restaurants which have not yet been reimaged. Comparable restaurant revenues increased 6.9% for the first quarter ended March 29, 1998. The closing of 21 underperforming restaurants from the end of the first quarter ended March 29, 1998 resulted in a decrease in restaurant sales of $2.0 million. In addition, restaurant sales decreased by $0.8 million due to the impact of franchising four Company restaurants since the end of the first quarter of 1998. Unfavorable weather in the first quarter ended March 28, 1999 compared to the first quarter ended March 29, 1998 also had a negative impact on sales. Revenues from the six new restaurants opened since March 29, 1998 and the 106 reimaged restaurants during this period had a favorable impact on the quarter on quarter comparison. The Company opened two new restaurants in the three months ended March 28, 1999. Foodservice (retail and institutional) and other revenues decreased by $1.2 million, or 7.7%, to $14.4 million for the first quarter of 1999 from $15.6 million for the same quarter in 1998. The decrease relates primarily to a decline in retail sales in the Mid-Atlantic market. Franchise revenue increased $0.3 million, or 38%, to $1.1 million for the first quarter of 1999 from $0.8 million for the same quarter in 1998. The increase is primarily the result of the increase in the number of franchised restaurants. There were 45 franchised restaurants as of March 28, 1999 compared to 34 franchised restaurants as of March 29, 1998. COST OF SALES: Cost of sales decreased $2.0 million, or 4.3%, to $44.2 million for the first quarter ended March 28, 1999 from $46.2 million for the first quarter ended March 29, 1998. Cost of sales as a percentage of total revenues decreased to 30.3% for the first quarter of 1999 from 30.5% for the same quarter in 1998. The cost of dairy raw materials, specifically fresh cream, was higher during the first quarter of 1999 when compared to the same period in 1998. Approximately 0.1% of the decrease in food cost as a percentage of total revenue was primarily due to the increase in franchise revenues, which do not have any associated food costs. LABOR AND BENEFITS: Labor and benefits increased $0.1 million, or 0.2%, to $50.4 million for the first quarter ended March 28, 1999 from $50.3 million for the same quarter in 1998. Labor and benefits as a percentage of total revenues increased to 34.6% for the first quarter in 1999 from 33.1% for the same quarter in 1998. The higher labor cost as a percentage of revenues is primarily the result of the Company's emphasis on improving guest service by increasing staffing levels at the restaurants. OPERATING EXPENSES: Operating expenses decreased $0.3 million, or 0.9%, to $33.4 million for the first quarter ended March 28, 1999 from $33.7 million for the same quarter in 1998. Operating expenses as a percentage of total revenues increased to 22.9% for the first quarter ended March 28, 1999 from 22.2% for the first quarter ended March 29, 1998. The increase as a percentage of revenues was primarily related to an increase in snow removal and weather related costs, a maintenance initiative to improve restaurant standards and an increase in restaurant advertising and promotion expenses. GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses increased $0.4 million, or 3.5%, to $11.8 million for the first quarter ended March 28, 1999 from $11.4 million for the same quarter in 1998 primarily due to higher relocation and consulting expenses. General and administrative expenses as a percentage of total revenues were 8.1% and 7.5% for the first quarters ended March 28, 1999 and March 29, 1998, respectively. The increase as a percentage of total revenues was primarily the result of the decrease in revenues. EBITDA: As a result of the above, EBITDA (EBITDA represents net loss before (i) cumulative effect of change in accounting principle, net of income taxes, (ii) benefit from (provision for) income taxes, (iii) (recovery of write-down of) equity in net loss 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) decreased $3.9 million, or 38.6%, to $6.2 million for the first quarter ended March 28, 1999 from $10.1 million for the same quarter in 1998. EBITDA as a percentage of total revenues was 4.3% and 6.7% for the first quarter of 1999 and 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 first quarter of 1999 and 1998. 17 NON-CASH WRITE-DOWNS ON PROPERTY AND EQUIPMENT: Non-cash write-downs on property and equipment were $0.3 million and $0.1 million for the first quarters ended March 28, 1999 and March 29, 1998, respectively. DEPRECIATION AND AMORTIZATION: Depreciation and amortization increased $0.2 million, or 2.5%, to $8.2 million for the first quarter ended March 28, 1999 from $8.0 million for the same quarter in 1998. Depreciation and amortization as a percentage of total revenues increased to 5.7% for the first quarter in 1999 from 5.3% for the same quarter in 1998. The increase was primarily attributable to the Company's 34 restaurants reimaged during the first quarter ended March 28, 1999 and 72 restaurants reimaged during the last nine months of 1998. GAIN ON SALES OF RESTAURANT OPERATIONS: Gain on sales of restaurant operations for the first quarter ended March 28, 1999 represented the income related to the sale of the equipment and operating rights for two existing locations sold to franchisees. INTEREST EXPENSE, NET: Interest expense, net of capitalized interest and interest income, increased by $0.4 million, or 5.0%, to $8.3 million for the first quarter ended March 28, 1999 from $7.9 million for the same quarter in 1998. The increase in interest expense was due to the increase in the average outstanding balance on the revolver during the first quarter ended March 28, 1999 compared to the first quarter ended March 29, 1998 along with the increase in interest rates associated with the credit agreement that was amended in the latter part of the year ended December 27, 1998. (RECOVERY OF WRITE-DOWN OF) EQUITY IN NET LOSS OF JOINT VENTURE: During the fourth quarter ended December 27, 1998, the Company sold its 50% interest in its China joint venture and recorded a write-down of $3.5 million to eliminate the Company's remaining investment in and advances to the joint venture. During the first quarter ended March 28, 1999, the Company reported, as income, a $0.3 million payment from the sale which was received on March 17, 1999. The loss for the first quarter ended March 29, 1998 period reflects the Company's 50% share of the China joint venture's net loss for the period. BENEFIT FROM INCOME TAXES: The benefit from income taxes was $4.3 million, or 41% of the loss before benefit from income taxes and cumulative effect of change in accounting principle, and $2.4 million, or 38% of the loss before benefit from income taxes and cumulative effect of change in accounting principle, for the first quarter ended March 28, 1999 and March 29, 1998, respectively. The Company records income taxes based on the effective rate expected for the year. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET: In accordance with Statement of Position No. 98-5, the Company recognized $0.3 million of expense, net of income tax benefit, in the three months ended March 28, 1999 related to previously deferred restaurant preopening costs. NET LOSS : The net loss was $6.5 million and $4.0 million for the first quarter ended March 28, 1999 and March 29, 1998, respectively. 18 LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity and capital resources are cash generated from operations and borrowings under its revolving credit facility. Net cash used in operating activities was $2.6 million for the three months ended March 28, 1999. Net cash provided by operating activities was $7.3 million for the three months ended March 29, 1998. Trade accounts receivable decreased approximately $1.3 million during the first quarter ended March 28, 1999 primarily related to lower Foodservice sales in the first quarter ended March 28, 1999 compared to the fourth quarter ended December 27, 1998. Inventories increased $1.5 million primarily related to the impact of transitioning manufacturing operations from Troy, Ohio to Wilbraham, Massachusetts during the first quarter ended March 28, 1999. Other assets increased $1.4 million due to the timing of restaurant rent prepayments of $1.9 million offset by the recognition of premium income of $0.9 million related to the Company's captive insurance entity. Accounts payable increased approximately $1.4 million for the three months ended March 28, 1999 from December 27, 1998 primarily related to the timing of payments made. Available borrowings under the revolving credit facility were $18.0 million as of March 28, 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 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 are limited by the terms of its credit facility and Senior Notes. Net cash used in investing activities was $8.5 million for the three months ended March 28, 1999 compared to $15.0 million for the three months ended March 29, 1998. Capital expenditures for restaurant operations were approximately $9.5 million in the three months of 1999 and $13.3 million in the same period of 1998. The decrease in capital expenditures was primarily due to the reimaging of 34 restaurants for the three months ended March 28, 1999 compared to 70 restaurants reimaged for the three months ended March 29, 1998. Proceeds from the sale of property and equipment were $1.7 million and $0.1 million in 1999 and 1998, respectively. Net cash provided by financing activities was $11.6 million in the three months ended March 28, 1999 and $7.5 million in the same period of 1998. The Company had a working capital deficit of $33.6 million as of March 28, 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 was in compliance with the covenants as of March 28, 1999. 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. 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 Company's actual 1999 capital expenditures may vary from the estimated amounts set forth herein. 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 has developed a 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 19 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 March 28, 1999, the Company is vigorously remediating software and hardware deficiencies caused by the Year 2000 Issue and is at various stages of completion. Major business systems are currently being addressed and in some cases are already complete, as in the case of the Company's financial reporting, asset management, accounts payable and manufacturing and distribution systems. Human resource systems are currently being remediated and are on schedule to be completed by the latter part of 1999. The Company will perform Year 2000 integrated testing for system interoperability in the second and third quarters of 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 critical business systems, the Year 2000 Issue could 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. 20 Substantial progress has been made in the certification of restaurant systems and hardware. The Company has completed an inventory of restaurant hardware, and various remediation strategies have been identified and successfully tested for all classes of equipment. A detailed plan for retrofits has been completed. The retrofits should essentially be complete by June 1999. Software for non-compliant point of sale systems has been successfully remediated and tested. Revised point of sale software is now installed in all restaurants. Other key restaurant software applications have also been certified. The remaining software applications are not expected to pose major problems and will be addressed in the second quarter of 1999. 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 March 28, 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 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 from over 325 business-critical suppliers. As of March 28,1999, the Company is aggressively evaluating a small number of suppliers that the Company believes may not be compliant by December 1999. The Company also continues to identify alternate sources wherever appropriate. 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. The Company continues to evaluate the business environment and will develop contingency plans for systems 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 project cost, approximately $4.9 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 $4.0 million ($0.9 million expensed and $3.1 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. 21 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 87% 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. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time the Company is named as a defendant in legal actions arising in the ordinary course of its business. The Company is not party to any pending legal proceedings other than routine litigation incidental to its business. The Company does not believe that the resolutions of these claims should have a material adverse effect on the Company's financial condition or results of operations. 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 ended March 28, 1999. 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 22 EXHIBIT INDEX 27.1 Financial Data Schedule 23 EX-27 2 EXHIBIT 27
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. 3-MOS JAN-02-2000 DEC-28-1999 MAR-28-1999 14,014 0 4,404 176 17,100 48,238 558,613 256,838 375,972 81,858 320,776 0 0 75 (97,040) 375,972 144,619 145,683 44,188 127,936 0 0 8,335 (10,522) 4,314 (6,208) 0 0 (319) (6,527) (0.87) (0.87)
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