SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NO. 0-3930
FRIENDLY ICE CREAM CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 5812 04-2053130
(State of (Primary Standard Industrial (I.R.S. Employer
Incorporation) Classification Code Number) Identification No.)
1855 BOSTON ROAD
WILBRAHAM, MASSACHUSETTS 01095
(413) 543-2400
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 9, 2000
Common Stock, $.01 par value 7,405,107 shares
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
October 1, January 2,
2000 2000
---- ----
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $9,020 $12,062
Restricted cash 2,788 2,066
Accounts receivable, net 5,864 3,924
Inventories 13,530 11,352
Deferred income taxes 5,657 5,657
Prepaid expenses and other current assets 3,037 6,298
-------- --------
TOTAL CURRENT ASSETS 39,896 41,359
PROPERTY AND EQUIPMENT, net 235,938 289,839
INTANGIBLES AND DEFERRED COSTS, net 22,126 23,613
OTHER ASSETS 1,788 1,559
-------- --------
TOTAL ASSETS $299,748 $356,370
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $16,512 $13,673
Current maturities of capital lease and finance obligations 2,075 1,688
Accounts payable 26,652 26,073
Accrued salaries and benefits 12,200 13,889
Accrued interest payable 8,578 4,006
Insurance reserves 7,945 9,748
Restructuring reserve 6,865 -
Other accrued expenses 14,590 20,106
-------- --------
TOTAL CURRENT LIABILITIES 95,417 89,183
-------- --------
DEFERRED INCOME TAXES 12,957 29,747
CAPITAL LEASE AND FINANCE OBLIGATIONS, less current maturities 8,362 7,913
LONG-TERM DEBT, less current maturities 261,915 292,432
OTHER LONG-TERM LIABILITIES 22,632 26,800
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock 74 75
Preferred stock - -
Additional paid-in capital 138,889 138,459
Accumulated deficit (240,498) (228,239)
-------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (101,535) (89,705)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $299,748 $356,370
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
1
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
For the Three Months Ended For the Nine Months Ended
----------------------------- ----------------------------
October 1, September 26, October 1, September 26,
2000 1999 2000 1999
---- ---- ---- ----
REVENUES (Note 5) $161,841 $192,087 $465,261 $513,859
COSTS AND EXPENSES:
Cost of sales 54,080 56,403 149,146 150,812
Labor and benefits 47,822 62,364 145,397 171,687
Operating expenses 32,437 38,969 95,197 106,677
General and administrative expenses 9,016 11,374 30,770 34,018
Relocation of manufacturing and distribution facility - - - 800
Restructuring costs - - 12,056 -
Write-downs of property and equipment 664 140 19,024 729
Depreciation and amortization 7,426 8,914 23,166 25,709
Loss (gain) on franchise sales of restaurant operations
and properties 95 (1,594) (1,923) (2,507)
Gains on sales of other property and equipment (964) (131) (2,018) (468)
-------- -------- ------- --------
OPERATING INCOME (LOSS) 11,265 15,648 (5,554) 26,402
Interest expense, net 7,594 8,242 23,495 24,879
Recovery of write-down of joint venture - - - (896)
-------- -------- ------- --------
INCOME (LOSS) BEFORE (PROVISION FOR) BENEFIT
FROM INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 3,671 7,406 (29,049) 2,419
(Provision for) benefit from income taxes (425) (2,233) 16,790 (188)
-------- -------- ------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 3,246 5,173 (12,259) 2,231
Cumulative effect of change in accounting
principle, net of income tax
benefit of $222 - - - (319)
-------- -------- ------- --------
NET INCOME (LOSS) $3,246 $5,173 $(12,259) $ 1,912
======== ======== ======== ========
BASIC NET INCOME (LOSS) PER SHARE:
Income (loss) before cumulative effect of
change in accounting principle $0.44 $0.69 $(1.65) $0.30
Cumulative effect of change in accounting
principle, net of income tax benefit - - - (0.04)
-------- -------- ------- --------
Net income (loss) $0.44 $0.69 $(1.65) $ 0.26
======== ======== ======== ========
DILUTED NET INCOME (LOSS) PER SHARE:
Income (loss) before cumulative effect of
change in accounting principle $0.44 $0.69 $(1.65) $0.29
Cumulative effect of change in accounting
principle, net of income tax benefit - - - (0.04)
-------- -------- ------- --------
Net income (loss) $0.44 $0.69 $(1.65) $ 0.25
======== ======== ======== ========
WEIGHTED AVERAGE SHARES:
Basic 7,409 7,495 7,439 7,490
======== ======== ======== ========
Diluted 7,437 7,524 7,439 7,504
======== ======== ======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Nine Months Ended
----------------------------
October 1, September 26,
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(12,259) $1,912
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Cumulative effect of change in accounting principle - 319
Stock compensation expense 429 518
Relocation of manufacturing and distribution facility - 800
Depreciation and amortization 23,166 25,709
Write-downs of property and equipment 19,024 729
Deferred income tax (benefit) expense (16,790) 188
Gain on asset dispositions (3,245) (1,855)
Non-cash recovery of write-down of joint venture - (69)
Changes in operating assets and liabilities:
Accounts receivable (1,940) 728
Inventories (2,178) (1,629)
Other assets 2,651 (915)
Accounts payable 579 9,989
Accrued expenses and other long-term liabilities (1,739) (1,838)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,698 34,586
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (12,807) (36,828)
Proceeds from sales of property and equipment 31,089 11,639
Proceeds from sale of joint venture - 1,150
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 18,282 (24,039)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 74,000 72,000
Repayments of debt (101,678) (74,678)
Repayments of capital lease and finance obligations (1,344) (1,284)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (29,022) (3,962)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - (2)
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,042) 6,583
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,062 11,091
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $9,020 $17,674
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $18,101 $18,671
Income taxes 62 9
Capital lease obligations incurred 2,891 -
Capital lease obligations terminated 711 -
Notes received from sales of property and equipment 577 -
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
For the Three Months Ended For the Nine Months Ended
----------------------------- ---------------------------
October 1, September 26, October 1, September 26,
2000 1999 2000 1999
---- ---- ---- ----
NET INCOME (LOSS) $3,246 $5,173 $(12,259) $1,912
OTHER COMPREHENSIVE (LOSS), NET OF TAX:
Currency translation effects - - - (2)
------- ------- --------- -------
OTHER COMPREHENSIVE (LOSS) - - - (2)
------- ------- --------- -------
COMPREHENSIVE INCOME (LOSS) $3,246 $5,173 $(12,259) $1,910
======= ======= ========= =======
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
INTERIM FINANCIAL INFORMATION -
The accompanying financial statements as of October 1, 2000 and for the
third quarter and nine months ended October 1, 2000 and September 26, 1999 are
unaudited, but, in the opinion of management, include all adjustments which are
necessary for a fair presentation of the consolidated financial position,
results of operations, cash flows and comprehensive income (loss) of Friendly
Ice Cream Corporation ("FICC") and subsidiaries (unless the context indicates
otherwise, collectively, the "Company"). Such adjustments consist solely of
normal recurring accruals. Operating results for the three and nine month
periods ended October 1, 2000 are not necessarily indicative of the results that
may be expected for the entire year due, in part, to the seasonality of the
Company's business. Historically, higher revenues and operating income have been
experienced during the second and third fiscal quarters. The Company's
Consolidated Financial Statements, including the notes thereto, which are
contained in the 1999 Annual Report on Form 10-K should be read in conjunction
with these Condensed Consolidated Financial Statements.
INVENTORIES -
Inventories are stated at the lower of first-in, first-out cost or
market. Inventories as of October 1, 2000 and January 2, 2000 were as follows
(in thousands):
October 1, January 2,
2000 2000
---- ----
Raw materials $864 $354
Goods in process 260 126
Finished goods 12,406 10,872
------ ------
Total $13,530 $11,352
======= =======
2. EARNINGS PER SHARE
Basic net income (loss) per share is calculated by dividing income
(loss) available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is calculated
by dividing earnings available to common stockholders by the weighted average
number of shares of common stock and common stock equivalents outstanding during
the period. Common stock equivalents are dilutive stock options and warrants
that are assumed exercised for calculation purposes. The number of common stock
equivalents which could dilute basic earnings per share in the future, that were
not included in the computation of diluted earnings per share because to do so
would have been antidilutive was 21,833 for the nine months ended October 1,
2000.
Presented below is the reconciliation between basic and diluted weighted
average shares for the three months and nine months ended October 1, 2000 and
September 26, 1999 (in thousands):
For the Three Months Ended
--------------------------
Basic Diluted
----- -------
October 1, 2000 September 26, 1999 October 1, 2000 September 26, 1999
--------------- ------------------ --------------- ------------------
Weighted average number of
common shares outstanding during
the period 7,409 7,495 7,409 7,495
Adjustments:
Assumed exercise of stock options - - 28 29
------- --------- -------- -------
Weighted average number of
shares outstanding 7,409 7,495 7,437 7,524
======= ========= ======== =======
5
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
For the Nine Months Ended
-------------------------
Basic Diluted
----- -------
October 1, 2000 September 26, 1999 October 1, 2000 September 26, 1999
--------------- ------------------ --------------- ------------------
Weighted average number of
common shares outstanding during
the period 7,439 7,490 7,439 7,490
Adjustments:
Assumed exercise of stock options - - - 14
------- -------- ------- --------
Weighted average number of
shares outstanding 7,439 7,490 7,439 7,504
======= ======== ======= ========
3. RESTAURANT PREOPENING COSTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires entities to expense as incurred all start-up and
preopening costs that are not otherwise capitalizable as long-lived assets and
was effective for fiscal years beginning after December 15, 1998. In accordance
with this Statement, on December 28, 1998 the Company expensed previously
deferred restaurant preopening costs of approximately $541,000. This transaction
has been reflected as a cumulative effect of a change in accounting principle of
$319,000, net of the income tax benefit of $222,000, in the accompanying
condensed consolidated financial statements for the nine months ended September
26, 1999.
4. SEGMENT REPORTING
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision-maker, or decision-making group, in deciding how to allocate
resources and in assessing performance. The Company's chief operating
decision-maker is the Chairman and Chief Executive Officer of the Company. The
Company's operating segments include restaurant, foodservice, franchise and
international operations. The revenues from these segments include both sales to
unaffiliated customers and intersegment sales, which generally are accounted for
on a basis consistent with sales to unaffiliated customers. Intersegment sales
and other intersegment transactions have been eliminated in the accompanying
condensed consolidated financial statements.
The Company's restaurants target families with children and adults who
desire a reasonably-priced meal in a full-service setting. The Company's menu
offers a broad selection of freshly-prepared foods which appeal to customers
throughout all dayparts. The menu currently features over 100 items comprised of
a broad selection of breakfast, lunch, dinner and afternoon and evening snack
items. Foodservice operations manufactures frozen dessert products and
distributes such manufactured products and purchased finished goods to the
Company's restaurants and franchised operations. Additionally, it sells frozen
dessert products to distributors and retail and institutional locations. The
Company's franchise segment includes a royalty based on franchise restaurant
revenue. In addition, the Company receives rental income from various franchised
restaurants. The Company's international business primarily consisted of a
license agreement with several companies in the United Kingdom to distribute the
Company's frozen desserts and a 50% joint venture in Shanghai, China which
involved the manufacture and distribution of frozen desserts on a limited basis.
At December 27, 1998, these operations had been discontinued. The Company does
not allocate general and administrative expenses associated with its
headquarters operations to any business segment. These costs include general and
administrative expenses of the following functions: legal, accounting, personnel
not directly related to a segment, information systems and other headquarters
activities.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies (as disclosed on the
Annual Report on Form 10-K) except that the financial results for the
foodservice operating segment, prior to intersegment eliminations, have been
prepared using a management approach, which is consistent with the basis and
manner in which the Company's management internally reviews financial
information for the purpose of assisting in making internal operating decisions.
The Company evaluates performance based on stand-alone operating segment income
(loss) before income taxes and generally accounts for intersegment sales and
transfers as if the sales or transfers were to third parties, that is, at
current market prices.
6
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
4. SEGMENT REPORTING (CONTINUED)
EBITDA represents net income (loss) before (i) cumulative effect of
change in accounting principle, net of income taxes, (ii) (provision for)
benefit from income taxes, (iii) recovery of write-down of joint venture, (iv)
interest expense, net, (v) depreciation and amortization and (vi) write-downs
and all other non-cash items plus cash distributions from unconsolidated
subsidiaries. The Company has included information concerning EBITDA in this
Form 10-Q because it believes that such information is used by certain investors
as one measure of a company's historical ability to service debt. EBITDA should
not be considered as an alternative to, or more meaningful than, earnings (loss)
from operations or other traditional indications of a company's operating
performance.
For the Three Months Ended For the Nine Months Ended
------------------------------- --------------------------------
October 1, September 26, October 1, September 26,
2000 1999 2000 1999
---- ---- ---- ----
(in thousands)
Revenues:
Restaurant $137,462 $173,143 $399,685 $464,257
Foodservice (product sales to
franchisees, retail and institutional) 65,500 69,968 183,438 185,156
Franchise 1,764 1,331 5,806 3,799
International - - - 23
--------- --------- --------- ---------
Total $204,726 $244,442 $588,929 $653,235
========= ========= ========= =========
Intersegment revenues:
Restaurant $ - $ - $ - $ -
Foodservice (product sales to
franchisees, retail and institutional) (42,885) (52,355) (123,668) (139,376)
Franchise - - - -
International - - - -
--------- --------- --------- ---------
Total $(42,885) $(52,355) $(123,668) $(139,376)
========= ========= ========= =========
External revenues:
Restaurant $137,462 $173,143 $399,685 $464,257
Foodservice (product sales to
franchisees, retail and institutional) 22,615 17,613 59,770 45,780
Franchise 1,764 1,331 5,806 3,799
International - - - 23
--------- --------- --------- ---------
Total $161,841 $192,087 $465,261 $513,859
========= ========= ========= =========
7
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
4. SEGMENT REPORTING (CONTINUED)
For the Three Months Ended For the Nine Months Ended
------------------------------- --------------------------------
October 1, September 26, October 1, September 26,
2000 1999 2000 1999
---- ---- ---- ----
(in thousands)
EBITDA:
Restaurant $16,814 $21,327 $30,270 $49,272
Foodservice (product sales to
franchisees, retail and institutional) 6,406 9,832 18,980 21,400
Franchise 739 750 2,445 2,016
International - (27) (1) (81)
Corporate (4,462) (6,999) (14,629) (19,249)
--------- --------- --------- ---------
Total $19,497 $24,883 $37,065 $53,358
========= ========= ========= =========
Interest expense, net $7,594 $8,242 $23,495 $24,879
========= ========= ========= =========
Recovery of write-down of joint venture $ - $ - $ - $(896)
========= ========= ========= =========
Income (loss) before (provision for)
benefit from income taxes and cumulative
effect of change in accounting principle:
Restaurant* $11,098 $14,543 $(4,736) $29,217
Foodservice (product sales to
franchisees, retail and institutional) 5,581 8,992 16,440 18,761
Franchise 649 612 2,172 1,549
International - (27) (1) 815
Corporate (13,657) (16,714) (42,924) (47,923)
--------- --------- --------- ---------
Total $3,671 $7,406 $(29,049) $2,419
========= ========= ========= =========
Depreciation and amortization:
Restaurant $5,052 $6,644 $15,982 $19,326
Foodservice (retail and institutional) 825 840 2,540 2,639
Franchise 90 138 273 467
Corporate 1,459 1,292 4,371 3,277
--------- --------- --------- ---------
Total $7,426 $8,914 $23,166 $25,709
========= ========= ========= =========
Capital expenditures, including capitalized leases:
Restaurant $5,824 $9,103 $12,662 $31,101
Foodservice (retail and institutional) 44 942 1,841 3,856
Corporate 659 467 1,195 1,871
--------- --------- --------- ---------
Total $6,527 $10,512 $15,698 $36,828
========= ========= ========= =========
October 1, January 2,
Identifiable assets: 2000 2000
---- ----
Restaurant $209,761 $265,062
Foodservice (retail and institutional) 36,333 29,625
Franchise 4,613 3,935
International - 28
Corporate 49,041 57,720
--------- ---------
Total $299,748 $356,370
========= =========
* Includes restructuring costs of $12.1 million and the write-downs of property
and equipment of $19.0 million recorded during the nine months ended October 1,
2000.
8
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
5. NEW ACCOUNTING PRONOUNCEMENTS
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF No.
00-14, "Accounting for Certain Sales Incentives," which provides guidance on the
recognition, measurement, and income statement classification for sales
incentives offered voluntarily by a vendor without charge to customers that can
be used in, or that are exercisable by a customer as a result of, a single
exchange transaction. The Company adopted EITF No. 00-14 on July 3, 2000. As a
result, the Company has reclassified certain retail selling expenses against
retail revenue for all periods presented.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. The SAB specifically sets forth
criteria which must be met in order for revenue to be recognized. The Company
adopted SAB No. 101 on January 3, 2000. The adoption of SAB No. 101 did not have
an effect on the Company's consolidated financial position or results of
operations as the Company's revenue recognition policies complied with the
provisions of SAB No. 101.
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards requiring that each
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the statement of operations, and requires that a company formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 cannot be applied retroactively. In June 1999,
the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133." Under
the provisions of SFAS No. 137, SFAS No. 133 shall be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. In June 2000, the
FASB issued SFAS No. 138, "Accounting for Certain Hedging Activities." Under the
provisions of SFAS No. 138, the accounting and reporting standards of SFAS No.
133 for certain derivative instruments and certain hedging activities have been
amended. Management has not yet quantified the impact of adopting SFAS No. 133,
as amended by SFAS 137 and SFAS 138, on the Company's financial statements.
However, SFAS No. 133 could increase volatility in earnings and other
comprehensive income.
9
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
6. RESTRUCTURING PLAN
In March 2000, the Company's Board of Directors approved a
restructuring plan that provided for the immediate closing of 81 restaurants at
the end of March 2000 and the disposition of an additional 70 restaurants over
the next twenty-four months. The 70 locations will remain in operation until
they are sold, subleased or closed prior to March 2002. The 151 restaurants in
the restructuring were generally lower sales volume units operating in markets
in which management believes the Company has a strong market penetration. The
larger units in these markets will continue operating. In connection with the
restructuring plan, the Company eliminated approximately 150
management/administrative positions in the field organization and at corporate
headquarters.
As a result of this plan, the Company reported a pre-tax
restructuring charge of approximately $12.1 million for severance pay, rent,
utilities and real estate taxes, demarking, lease termination costs and
certain other costs associated with the closing of the locations, along with
a pre-tax write-down of property and equipment for these locations of
approximately $17.0 million in the first quarter ended April 2, 2000. Future
annual savings associated with the reduction in force are estimated by
management to be $8.0 million. In connection with this restructuring plan,
the Company's credit facility was amended on March 23, 2000. The consolidated
net worth covenant was adjusted primarily to reflect the write-down of
property and equipment and restructuring charges associated with the
restructuring plan and interest rates on borrowings were increased. The per
annum interest rates on the term loans, revolving credit facility and the
letter of credit facility were increased by 0.25% as a result of this
amendment. The Company believes that the combination of the funds anticipated
to be generated from operating activities and borrowing availability under
the credit facility will be sufficient to meet the Company's anticipated
operating requirements, capital requirements and obligations associated with
the restructuring. The following represents the reserve and related costs
associated with the restructuring (in thousands):
Costs paid for the
Nine Months Ended Accrued as of
Expense October 1, 2000 October 1, 2000
------- --------------- ---------------
Severance pay $1,503 $(1,331) $172
Rent 5,490 (1,578) 3,912
Utilities and real estate taxes 1,632 (786) 846
Demarking 760 (338) 422
Lease termination costs 718 - 718
Environmental costs 404 (6) 398
Inventory 111 (99) 12
Equipment 727 (727) -
Outplacement services 160 (112) 48
Other 551 (214) 337
------- ------- ------
Total $12,056 $(5,191) $6,865
======= ======== ======
The write-down of property and equipment consisted of $7.8 million for the
81 locations closed at the end of March 2000 and $9.2 million for the 70
locations which will be disposed of over the next 24 months. As of October 1,
2000, the Company has sold 37 of the 151 restructuring properties, of which 30
were included in the 81 restaurants which were closed in March 2000. In
addition, the Company has terminated its lease obligations at 24 restructuring
properties, of which 20 were included in the list of 81 restaurants which were
closed in March 2000. At October 1, 2000, the carrying value of the remaining 90
properties to be disposed of was $8.6 million and is reflected in the condensed
consolidated balance sheets as property and equipment, net. As a result of the
sales of closed properties from the restructuring, the Company recognized gains
of approximately $1.0 million and $2.0 million for the three and nine months
ended October 1, 2000. Based on information currently available, management
believes that the restructuring reserve as of October 1, 2000 is adequate and
not excessive and the carrying value of the remaining 90 properties to be
disposed of as of October 1, 2000 is realizable.
10
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
7. DEBT
The Company's credit facility was amended on September 28, 2000. The
Consolidated leverage ratio was increased from 4.20 to 4.70 and the Consolidated
interest coverage ratio was reduced from 1.70 to 1.50. The cost of the amendment
was approximately $150,000.
8. SUBSEQUENT EVENT
On October 2, 2000, the Company entered into an agreement granting
Kessler Family LLC ("Kessler"), an existing franchisee, non-exclusive rights to
operate and develop Friendly's full-service restaurants in the franchising
region of Elmira, Binghamton, Utica and Watertown, New York (the "Second Kessler
Agreement"). Pursuant to the Second Kessler Agreement, Kessler purchased certain
assets and rights in 12 existing Friendly's restaurants and has an option to
open an additional eight restaurants over the next six years. Gross proceeds
from the sale were approximately $8,100,000, of which $370,000 was for franchise
fees for the initial 12 restaurants. The $370,000 will be recorded as revenue in
the year ending December 31, 2000. The Company will recognize a gain of
approximately $3,600,000 related to the sale of the assets for the 12 existing
franchised locations in the fourth quarter of fiscal 2000.
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
FICC's obligation related to the $200 million Senior Notes is
guaranteed fully and unconditionally by one of FICC's wholly-owned
subsidiaries. There are no restrictions on FICC's ability to obtain dividends or
other distributions of funds from this subsidiary, except those imposed by
applicable law. The following supplemental financial information sets forth, on
a condensed consolidating basis, balance sheets, statements of operations and
statements of cash flows for Friendly Ice Cream Corporation (the "Parent
Company"), Friendly's Restaurants Franchise, Inc. (the "Guarantor Subsidiary")
and Friendly's International, Inc., Friendly Holding (UK) Limited, Friendly Ice
Cream (UK) Limited and Restaurant Insurance Corporation (collectively, the
"Non-guarantor Subsidiaries"). Separate complete financial statements and other
disclosures of the Guarantor Subsidiary as of October 1, 2000 and September 26,
1999, and for the periods ended October 1, 2000 and September 26, 1999, are not
presented because management has determined that such information is not
material to investors.
Investments in subsidiaries are accounted for by the Parent Company on
the equity method for purposes of the supplemental consolidating presentation.
Earnings of the subsidiaries are, therefore, reflected in the Parent Company's
investment accounts and earnings. The principal elimination entries eliminate
the Parent Company's investments in subsidiaries and intercompany balances and
transactions.
11
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF OCTOBER 1, 2000
(Unaudited)
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Assets
Current assets:
Cash and cash equivalents $8,218 $11 $791 $ - $9,020
Restricted cash - - 2,788 - 2,788
Accounts receivable, net 5,368 496 - - 5,864
Inventories 13,530 - - - 13,530
Deferred income taxes 5,471 12 - 174 5,657
Prepaid expenses and other current
assets 7,867 582 4,021 (9,433) 3,037
--------- ------ ------- -------- --------
Total current assets 40,454 1,101 7,600 (9,259) 39,896
Deferred income taxes - 903 1,333 (2,236) -
Property and equipment, net 235,938 - - - 235,938
Intangibles and deferred costs, net 22,126 - - - 22,126
Investments in subsidiaries 3,149 - - (3,149) -
Other assets 874 3,977 5,729 (8,792) 1,788
--------- ------ ------- -------- --------
Total assets $302,541 $5,981 $14,662 $(23,436) $299,748
========= ====== ======= ========= ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current maturities of long-term
obligations $22,587 $ - $ - $(4,000) $18,587
Deferred income taxes - - 1 (1) -
Accounts payable 26,652 - - - 26,652
Accrued expenses 46,510 867 8,234 (5,433) 50,178
------ --- ----- ------- ------
Total current liabilities 95,749 867 8,235 (9,434) 95,417
Deferred income taxes 15,018 - - (2,061) 12,957
Long-term obligations, less current
maturities 275,091 - - (4,814) 270,277
Other long-term liabilities 18,218 2,481 5,911 (3,978) 22,632
Stockholders' equity (deficit) (101,535) 2,633 516 (3,149) (101,535)
--------- ----- --- ------- ---------
Total liabilities and stockholders'
equity (deficit) $302,541 $5,981 $14,662 $(23,436) $299,748
========= ====== ======= ========= ========
12
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION(CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 1, 2000
(Unaudited)
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------- ------------ ------------
Revenues $160,511 $1,330 $ - $ - $161,841
Costs and expenses:
Cost of sales 54,080 - - - 54,080
Labor and benefits 47,822 - - - 47,822
Operating expenses and write-downs of
property and equipment 33,145 - (44) - 33,101
General and administrative expenses 7,336 1,680 - - 9,016
Depreciation and amortization 7,426 - - - 7,426
Loss on sales of restaurant operations and
properties 95 - - - 95
Gains on sales of other property and
equipment (964) - - - (964)
Interest expense (income) 7,768 - (174) - 7,594
------ ------ ---- --- ------
Income (loss) before (provision for)
benefit from income taxes and equity in net
loss of consolidated subsidiaries 3,803 (350) 218 - 3,671
(Provision for) benefit from income taxes
(493) 144 (76) - (425)
------ ------ ---- --- ------
Income (loss) before equity in net loss of
consolidated subsidiaries 3,310 (206) 142 - 3,246
Equity in net loss of consolidated
subsidiaries (64) - - 64 -
------ ------ ---- --- ------
Net income (loss) $3,246 $ (206) $142 $64 $3,246
====== ====== ==== === ======
13
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 1, 2000
(Unaudited)
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------- ------------ ------------
Revenues $460,751 $4,510 $ - $ - $465,261
Costs and expenses:
Cost of sales 149,146 - - - 149,146
Labor and benefits 145,397 - - - 145,397
Operating expenses and write-downs of
property and equipment 114,380 - (159) - 114,221
General and administrative expenses 27,819 2,951 - - 30,770
Restructuring costs 12,056 - - - 12,056
Depreciation and amortization 23,166 - - - 23,166
Gain on sales of restaurant operations
and properties (1,923) - - - (1,923)
Gains on sales of other property and
equipment (2,018) - - - (2,018)
Interest expense (income) 24,014 - (519) - 23,495
--------- -------- -------- ------- --------
(Loss) income before benefit from (provision
for) income taxes and equity in net
income of consolidated subsidiaries (31,286) 1,559 678 - (29,049)
Benefit from (provision for) income taxes 17,666 (639) (237) - 16,790
--------- -------- -------- ------- --------
(Loss) income before equity in net
income of consolidated subsidiaries (13,620) 920 441 - (12,259)
Equity in net income of consolidated
subsidiaries 1,361 - - (1,361) -
--------- -------- -------- ------- --------
Net (loss) income $(12,259) $920 $441 $(1,361) $(12,259)
========= ======== ======== ======= ========
14
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 1, 2000
(Unaudited)
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------- ------------ ------------
Net cash provided by (used in) operating
activities $9,284 $(3) $(1,583) $ - $7,698
--------- ------ -------- ----- ---------
Cash flows from investing activities:
Purchases of property and equipment (12,807) - - - (12,807)
Proceeds from sales of property and
equipment 31,089 - - - 31,089
--------- ------ -------- ----- ---------
Net cash provided by investing activities 18,282 - - - 18,282
--------- ------ -------- ----- ---------
Cash flows from financing activities:
Proceeds from borrowings 74,000 - - - 74,000
Repayments of obligations (103,022) - - - (103,022)
--------- ------ -------- ----- ---------
Net cash used in financing activities (29,022) - - - (29,022)
--------- ------ -------- ----- ---------
Net decrease in cash and cash equivalents (1,456) (3) (1,583) - (3,042)
Cash and cash equivalents, beginning of
period 9,674 14 2,374 - 12,062
--------- ------ -------- ----- ---------
Cash and cash equivalents, end of period $8,218 $11 $791 $ - $9,020
========= ====== ======== ===== =========
Supplemental disclosures:
Cash paid (received) for:
Interest $18,805 $ - $(704) $ - $18,101
Income taxes (1,075) 891 246 - 62
Capital lease obligations incurred 2,891 - - - 2,891
Capital lease obligations terminated 711 - - - 711
Notes received from sales of property
and equipment 577 - - - 577
15
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JANUARY 2, 2000
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------- ------------ ------------
Assets
Current assets:
Cash and cash equivalents $9,674 $14 $2,374 $- $12,062
Restricted cash - - 2,066 - 2,066
Accounts receivable, net 3,678 256 - (10) 3,924
Inventories 11,352 - - - 11,352
Deferred income taxes 5,471 12 - 174 5,657
Prepaid expenses and other current
assets 9,085 834 6,455 (10,076) 6,298
-------- ------ ------- --------- --------
Total current assets 39,260 1,116 10,895 (9,912) 41,359
Deferred income taxes - 903 1,333 (2,236) -
Property and equipment, net 289,839 - - - 289,839
Intangible assets and deferred costs, net 23,613 - - - 23,613
Investments in subsidiaries 1,788 - - (1,788) -
Other assets 644 3,100 5,729 (7,914) 1,559
--- ----- ----- ------- -----
Total assets $355,144 $5,119 $17,957 $(21,850) $356,370
======== ====== ======= ========= ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current maturities of long-term
obligations $19,361 $ - $ - $(4,000) $15,361
Accounts payable 26,073 - - - 26,073
Deferred income taxes - - 1 (1) -
Accrued expenses 45,037 963 10,508 (8,759) 47,749
-------- ------ ------- --------- --------
Total current liabilities 90,471 963 10,509 (12,760) 89,183
Deferred income taxes 31,808 - - (2,061) 29,747
Long-term obligations, less current
maturities 305,159 - - (4,814) 300,345
Other liabilities 17,411 2,444 7,372 (427) 26,800
Stockholders' equity (deficit) (89,705) 1,712 76 (1,788) (89,705)
-------- ------ ------- --------- --------
Total liabilities and stockholders' equity
(deficit) $355,144 $5,119 $17,957 $(21,850) $356,370
======== ====== ======= ========= ========
16
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 26, 1999
(Unaudited)
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------- ------------ ------------
Revenues $191,363 $723 $ 1 $ - $192,087
Costs and expenses:
Cost of sales 56,402 - 1 - 56,403
Labor and benefits 62,364 - - - 62,364
Operating expenses and write-downs of
property and equipment 39,162 - (53) - 39,109
General and administrative expenses 10,957 423 (6) - 11,374
Depreciation and amortization 8,914 - - - 8,914
Gain on sales of restaurant operations and
properties (1,594) - - - (1,594)
Gains on sales of other property and
equipment (131) - - - (131)
Interest expense (income) 8,427 - (185) - 8,242
-------- ---- ---- ---- -------
Income before provision for income taxes
and equity in net income of consolidated
subsidiaries 6,862 300 244 - 7,406
Provision for income taxes (2,026) (124) (83) - (2,233)
-------- ---- ---- ---- -------
Income before equity in net income of
consolidated subsidiaries 4,836 176 161 - 5,173
Equity in net income of consolidated
subsidiaries 337 - - (337) -
-------- ---- ---- ---- -------
Net income $ 5,173 $176 $161 $(337) $ 5,173
======== ==== ==== ==== =======
17
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 26, 1999
(Unaudited)
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------- ------------ ------------
Revenues $511,852 $ 1,983 $ 24 $ - $513,859
Costs and expenses:
Cost of sales 150,794 - 18 - 150,812
Labor and benefits 171,687 - - - 171,687
Operating expenses and write-downs of
property and equipment 108,361 - (155) - 108,206
General and administrative expenses 32,806 1,279 (67) - 34,018
Depreciation and amortization 25,709 - - - 25,709
Gain on sales of restaurant operations
and properties (2,507) - - - (2,507)
Gains on sales of other property and
equipment (468) - - - (468)
Interest expense (income) 25,427 - (548) - 24,879
Recovery of write-down of joint venture (896) - - - (896)
-------- ------- ---- ----- ---------
Income before benefit from (provision for)
income taxes, cumulative effect of
change in accounting principle and equity
in net income of consolidated subsidiaries 939 704 776 - 2,419
Benefit from (provision for) income taxes 346 (289) (245) - (188)
-------- ------- ---- ----- ---------
Income before cumulative effect of change
in accounting principle and equity in net
income of consolidated subsidiaries 1,285 415 531 - 2,231
Cumulative effect of change in accounting
principle (319) - - - (319)
-------- ------- ---- ----- ---------
Income before equity in net income of
consolidated subsidiaries 966 415 531 - 1,912
Equity in net income of consolidated
subsidiaries 946 - - (946) -
-------- ------- ---- ----- ---------
Net income $ 1,912 $415 $531 $(946) $ 1,912
======== ======= ==== ===== =========
18
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 26, 1999
(Unaudited)
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------- ------------ ------------
Net cash provided by (used in) operating
activities $34,285 $(32) $333 $- $34,586
------- ----- ---- --- -------
Cash flows from investing activities:
Purchases of property and equipment (36,828) - - - (36,828)
Proceeds from sales of property and
equipment 11,639 - - - 11,639
Proceeds from sale of joint venture 1,150 - - - 1,150
------- ----- ---- --- -------
Net cash used in investing activities (24,039) - - - (24,039)
------- ----- ---- --- -------
Cash flows from financing activities:
Proceeds from borrowings 72,000 - - - 72,000
Repayments of obligations (75,962) - - - (75,962)
------- ----- ---- --- -------
Net cash used in financing activities (3,962) - - - (3,962)
------- ----- ---- --- -------
Effect of exchange rate changes on cash - - (2) - (2)
------- ----- ---- --- -------
Net increase (decrease) in cash and cash
equivalents 6,284 (32) 331 - 6,583
Cash and cash equivalents, beginning of
period 9,180 53 1,858 - 11,091
------- ----- ----- --- -------
Cash and cash equivalents, end of period $15,464 $ 21 $2,189 $- $17,674
======= ===== ====== === =======
Supplemental disclosures:
Cash paid (received) for:
Interest $19,034 $ - $(363) $- $18,671
Income taxes 12 212 (215) - 9
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO
INCLUDED ELSEWHERE HEREIN.
SAFE HARBOR STATEMENT
Statements contained herein that are not historical facts constitute
"forward looking statements" as that term is defined in the Private Securities
Litigation Reform Act of 1995. All forward looking statements are subject to
risks and uncertainties which could cause results to differ materially from
those anticipated. These factors include the Company's highly competitive
business environment, exposure to commodity prices, risks associated with the
foodservice industry, the ability to retain and attract new employees,
government regulations, the Company's high geographic concentration in the
Northeast and its attendant weather patterns, conditions needed to meet
re-imaging and new opening and franchising targets and costs associated with
improved service and other initiatives.
OVERVIEW
As of October 1, 2000, the Company owns and operates 471 (of which 90
restaurants are held for disposition) restaurants, franchises 108 restaurants
and 7 cafes and manufactures and distributes a full line of frozen dessert
products. These products are distributed to Friendly's restaurants and through
more than 3,500 supermarkets and other retail locations in 17 states. The
restaurants offer a wide variety of reasonably priced breakfast, lunch and
dinner menu items as well as the frozen dessert products.
20
RESULTS OF OPERATIONS
The operating results of the Company expressed as a percentage of total
revenues are set forth below:
(Unaudited)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
October 1, September 26, October 1, September 26,
2000 1999 2000 1999
---- ---- ---- ----
Revenues:
Restaurant 84.9% 90.1% 85.9% 90.3%
Foodservice (product sales to franchisees, retail and
institutional) 14.0 9.2 12.9 8.9
Franchise 1.1 0.7 1.2 0.8
------ ------ ----- -----
Total revenues 100.0 100.0 100.0 100.0
------ ------ ----- -----
Costs and expenses:
Cost of sales 33.4 29.4 32.0 29.3
Labor and benefits 29.6 32.5 31.3 33.4
Operating expenses 20.0 20.3 20.5 20.8
General and administrative expenses 5.6 5.9 6.6 6.6
Relocation of manufacturing and distribution facility - - - 0.2
Restructuring costs - - 2.6 -
Write-downs of property and equipment 0.4 0.1 4.1 0.1
Depreciation and amortization 4.6 4.6 5.0 5.0
Loss (gain) on sales of restaurant operations and
properties 0.1 (0.8) (0.4) (0.5)
Gains on sales of other property and equipment (0.6) (0.1) (0.5) (0.1)
----- ----- ----- -----
Operating income (loss) 6.9 8.1 (1.2) 5.2
Interest expense, net 4.6 4.3 5.0 4.9
Recovery of write-down of joint venture - - - (0.2)
------ ------ ------- -------
Income (loss) before (provision for) benefit from
income taxes and cumulative effect
of change in accounting principle 2.3 3.8 (6.2) 0.5
(Provision for) benefit from income taxes (0.3) (1.2) 3.6 -
----- ------ ------- -------
Income (loss) before cumulative effect of change in
accounting principle 2.0 2.6 (2.6) 0.5
Cumulative effect of change in accounting principle, net
of income tax benefit - - - (0.1)
-------- -------- --------- -----
Net income (loss) 2.0% 2.6% (2.6)% 0.4%
======== ======== ========= =====
21
REVENUES:
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF No.
00-14, "Accounting for Certain Sales Incentives," which provides guidance on the
recognition, measurement, and income statement classification for sales
incentives offered voluntarily by a vendor without charge to customers that can
be used in, or that are exercisable by a customer as a result of, a single
exchange transaction. The Company adopted EITF No. 00-14 on July 3, 2000. As a
result, the Company has reclassified certain retail selling expenses against
retail revenue for all periods presented.
Total revenues decreased $30.3 million, or 15.8%, to $161.8 million for
the third quarter ended October 1, 2000 from $192.1 million for the same quarter
in 1999. Restaurant revenues decreased $35.6 million, or 20.6%, to $137.5
million for the third quarter of 2000 from $173.1 million for the same quarter
in 1999. Comparable restaurant revenues decreased 6.9%. The closing of 122
restaurants over the past 12 months impacted the decrease in restaurant revenue
as the closings accounted for $17.6 million of the decline. The re-franchising
of 37 restaurants during fiscal 2000 negatively impacted sales by $10.0 million.
Partially offsetting these decreases was the increase in restaurant revenue of
$1.3 million for new restaurants open less than 18 months. Foodservice (product
sales to franchisees, retail and institutional) and other revenues increased by
$5.0 million, or 28.4%, to $22.6 million for the third quarter of 2000 from
$17.6 million for the same quarter in 1999. The increase was primarily due to
new franchised locations. Franchise revenue increased $0.5 million, or 38.5%, to
$1.8 million for the three months ended October 1, 2000 compared to $1.3 million
for the three months ended September 26, 1999. The increase is primarily the
result of the fact that there are 115 franchise units open at the end of the
third quarter ended October 1, 2000 compared to 66 franchise units open at the
end of the third quarter ended September 26, 1999.
Total revenues decreased $48.6 million, or 9.5%, to $465.3 million for the
nine months ended October 1, 2000 from $513.9 million for the same period in
1999. Restaurant revenues decreased $64.6 million, or 13.9%, to $399.7 million
for the nine months ended October 1, 2000 from $464.3 million for the same
period in 1999. Comparable restaurant revenues decreased 2.4%. The closing of
146 restaurants over the past 21 months impacted the decrease in restaurant
revenues as the closings accounted for $37.7 million of the decline. The
re-franchising of 37 restaurants during fiscal 2000 negatively impacted sales by
$25.0 million. Partially offsetting these decreases was the increase in
restaurant revenue of $7.9 million for new restaurants open less than 18 months.
Foodservice (product sales to franchisees, retail and institutional) and other
revenues increased by $14.0 million, or 30.6%, to $59.8 million for the nine
months ended October 1, 2000 from $45.8 million for the nine months ended
September 26, 1999. The increase was primarily due to an increase in the number
of franchised locations. Franchise revenue was $5.8 million for the nine months
ended October 1, 2000 compared to $3.8 million for the nine months ended
September 26, 1999. The increase is primarily the result of the fact that there
are 115 franchise units open at the end of the nine months ended October 1, 2000
compared to 66 franchise units open at the end of the nine months ended
September 26, 1999.
COST OF SALES:
Cost of sales decreased $2.3 million, or 4.1% to $54.1 million for the
third quarter ended October 1, 2000 from $56.4 million for the same quarter
in 1999. Cost of sales as a percentage of total revenues increased to 33.4%
for the third quarter of 2000 from 29.4% for the third quarter of 1999. The
higher food cost as a percentage of total revenues was primarily due to a
shift in the sales mix from Company owned restaurant sales to Foodservice
sales to franchisees and an increase in retail supermarket sales. Foodservice
sales to franchisees have a higher food cost as a percentage of revenue than
sales to Company owned restaurants. Additionally, restaurant ice cream sales
suffered, as weather in general was more favorable in the 1999 period when
compared to 2000.
Cost of sales decreased $1.7 million, or 1.1%, to $149.1 million for the
nine months ended October 1, 2000 from $150.8 million for the same period in
1999. Cost of sales as a percentage of total revenues increased to 32.0% for the
nine months in 2000 from 29.3% for the same period in 1999. The higher food cost
as a percentage of total revenues was primarily due to a shift in the sales mix
from Company owned restaurant sales to Foodservice sales to franchisees and an
increase in retail supermarket sales. Foodservice sales to franchisees and
retail sales have higher food costs as a percentage of revenue than sales to
Company owned restaurants.
LABOR AND BENEFITS:
Labor and benefits decreased $14.6 million, or 23.4%, to $47.8 million for
the third quarter ended October 1, 2000 from $62.4 million for the same quarter
in 1999. Labor and benefits as a percentage of total revenues decreased to 29.6%
for the third quarter of 2000 from 32.5% for the same quarter in 1999. The lower
labor and benefits as a percentage of total revenues was primarily due to
increases in Foodservice sales to franchisees, which do not have any associated
restaurant labor and benefits. The closing of 122 lower volume restaurants over
the past 12 months also resulted in a decline in restaurant labor as a
percentage of total sales. Partially offsetting the decreases were higher group
insurance claims per participant in 2000 when compared to 1999.
22
Labor and benefits decreased $26.3 million, or 15.3%, to $145.4 million
for the nine months ended October 1, 2000 from $171.7 million for the same
period in 1999. Labor and benefits as a percentage of total revenues decreased
to 31.3% for the nine months of 2000 from 33.4% for the same period in 1999. The
lower labor and benefits as a percentage of total revenues was primarily due to
increases in Foodservice sales to franchisees and higher retail sales. These
sales do not have any associated restaurant labor and benefits. The closing of
146 lower volume restaurants over the past 21 months also resulted in a decline
in restaurant labor as a percentage of total sales. Partially offsetting the
decreases were higher group insurance claims per participant in 2000 when
compared to 1999.
OPERATING EXPENSES:
Operating expenses decreased $6.5 million, or 16.7%, to $32.4 million for
the third quarter ended October 1, 2000 from $38.9 million for the same quarter
in 1999. The decline in the number of operating restaurants reduced restaurant
expenses. The growth in Foodservice sales to franchisees also favorably impacted
the comparison of operating expenses to revenues as increases in these revenues
resulted in only minor increases in operating expenses. Selling expense in
support of higher retail sales increased in the 2000 period when compared to
1999. Operating expenses as a percentage of total revenues were 20.0% and 20.3%
for the third quarters ended October 1, 2000 and September 26, 1999,
respectively.
Operating expenses decreased $11.5 million, or 10.8%, to $95.2 million for
the nine months ended October 1, 2000 from $106.7 million for the same period in
1999. The decline in the number of operating restaurants reduced restaurant
expenses. The growth in Foodservice sales to franchisees also favorably impacted
the comparison of operating expenses to revenues as increases in these revenues
resulted in only minor increases in operating expenses. Offsetting the reduced
restaurant expense were higher selling expenses in support of the higher retail
sales in the 2000 period when compared to 1999. Operating expenses as a
percentage of total revenues were 20.5% and 20.8% for the nine months ended
October 1, 2000 and September 26, 1999, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses were $9.0 million for the third
quarter ended October 1, 2000 and $11.4 million for the same period in 1999.
General and administrative expenses as a percentage of total revenues decreased
to 5.6% in the third quarter of 2000 from 5.9% for the same period in 1999. The
March 2000 reduction of management/administrative positions associated with the
closing of 81 restaurants and the planned closing of 70 additional restaurants
benefited the quarter on quarter expenses comparison. Bonus expense was also
lower in the current year's quarter. Costs associated with the number of
franchised locations increased in the 2000 period when compared to 1999.
General and administrative expenses were $30.8 million and $34.0 million
for the nine months ended October 1, 2000 and September 26, 1999, respectively.
General and administrative expenses as a percentage of total revenues was 6.6%
for the nine months ended October 1, 2000 and for the same period in 1999. The
March 2000 reduction of management/administrative positions associated with the
closing of 81 restaurants and the planned closing of 70 additional restaurants
benefited the comparison of the current year's costs to the prior year. Bonus
expense in the current year was higher than the prior year. Costs associated
with the number of franchised locations increased in the 2000 period when
compared to 1999.
EBITDA:
As a result of the above, EBITDA (EBITDA represents net income (loss)
before (i) cumulative effect of change in accounting principle, net of income
taxes, (ii) benefit from (provision for) income taxes, (iii) recovery of
write-down of joint venture, (iv) interest expense, net, (v) depreciation and
amortization and (vi) write-downs and all other non-cash items plus cash
distributions from unconsolidated subsidiaries) decreased $5.4 million, or
21.7%, to $19.5 million for the third quarter ended October 1, 2000 from $24.9
million for the same quarter in 1999. EBITDA as a percentage of total revenues
was 12.1% and 12.9% for the third quarters of 2000 and 1999, respectively.
EBITDA decreased $16.3 million, or 30.5%, to $37.1 million for the nine
months ended October 1, 2000 from $53.4 million for the same period in 1999.
EBITDA as a percentage of total revenues was 8.0% and 10.4% for the nine months
ended October 1, 2000 and September 26, 1999, respectively.
RESTRUCTURING COSTS:
Restructuring costs were $12.1 million for the nine months ended October
1, 2000 as a result of the costs associated with the Company's decision to
reorganize its restaurant field and headquarters organizations in conjunction
with the closing of 81 under-performing restaurants and the planned closing of
an additional 70 restaurants over the next 24 months. Included in these costs
are severance, rent on closed restaurants until lease termination, utilities and
real estate taxes, demarking, lease termination, environmental and other
miscellaneous costs.
23
WRITE-DOWNS OF PROPERTY AND EQUIPMENT:
Write-downs of property and equipment were $0.7 million and $0.1 million
for the three months ended October 1, 2000 and September 26, 1999, respectively.
Write-downs of property and equipment were $19.0 million and $0.7 million for
the nine months ended October 1, 2000 and September 26, 1999, respectively. The
increase in write-downs is primarily the result of the non-cash write-down of
the 81 under-performing restaurants which were closed at the end of March 2000
and the non-cash write-down of an additional 70 restaurants which will be closed
over the next 24 months to their estimated net realizable value.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization decreased $1.5 million, or 16.9%, to $7.4
million for the third quarter ended October 1, 2000 from $8.9 million for the
same quarter in 1999. Depreciation and amortization as a percentage of total
revenues was 4.6% for the third quarter of 2000 and for the same quarter in
1999.
Depreciation and amortization decreased $2.5 million, or 9.7%, to $23.2
million for the nine months ended October 1, 2000 from $25.7 million for the
same period in 1999. Depreciation and amortization as a percentage of total
revenues was 5.0% for the nine months ended October 1, 2000 and for the same
period in 1999.
LOSS (GAIN) ON SALES OF RESTAURANT OPERATIONS AND PROPERTIES:
Loss on sales of restaurant operations and properties for the third
quarter ended October 1, 2000 was $0.1 million compared to a gain on sales of
restaurant operations and properties of $1.6 million for the third quarter ended
September 26, 1999. The decrease was the result of the sale of the land and
buildings associated with 13 previously franchised restaurants to the Company's
largest franchisee for the third quarter ended September 26, 1999. The gain on
sales of restaurant operations and properties for the nine months ended October
1, 2000 was $1.9 million compared to the gain on sales of restaurant operations
and properties for the nine months ended September 26, 1999 of $2.5 million. The
Company recognized a gain of $1.4 million associated with the sale of 29
restaurants to a franchisee on January 19, 2000. The Company also sold certain
assets and rights in eight other restaurants to three additional franchisees
resulting in a gain of $0.7 million during the nine months ended October 1,
2000. The gain on the sales of restaurant operations and properties for the nine
months ended September 26, 1999 represented the income related to the sale of
the equipment and operating rights for three existing restaurants to three
franchisees along with the sale of the land and buildings associated with 13
previously franchised restaurants to the Company's largest franchisee. On
October 2, 2000, the Company entered into an agreement granting Kessler Family
LLC ("Kessler"), an existing franchisee, non-exclusive rights to operate and
develop Friendly's full-service restaurants in the franchising region of Elmira,
Binghamton, Utica and Watertown, New York (the "Second Kessler Agreement").
Pursuant to the Second Kessler Agreement, Kessler purchased certain assets and
rights in 12 existing Friendly's restaurants and has an option to open an
additional eight restaurants over the next six years. Gross proceeds from the
sale were approximately $8,100,000, of which $370,000 was for franchise fees for
the initial 12 restaurants. The $370,000 will be recorded as revenue in the year
ending December 31, 2000. The Company will recognize a gain of approximately
$3,600,000 related to the sale of the assets for the 12 existing franchised
locations in the fourth quarter of fiscal 2000.
GAINS ON SALES OF OTHER PROPERTY AND EQUIPMENT:
The gains on sales of other property and equipment were $1.0 million and
$0.1 million for the three months ended October 1, 2000 and September 26, 1999,
respectively. The gains on sales of other property and equipment were $2.0
million and $0.5 million for the nine months ended October 1, 2000 and September
26, 1999, respectively. The increase in these gains is the result of the Company
selling restaurant properties over the course of the year in connection with its
restructuring plan.
INTEREST EXPENSE, NET:
Interest expense, net of capitalized interest and interest income,
decreased by $0.6 million, or 7.3%, to $7.6 million for the third quarter ended
October 1, 2000 from $8.2 million for the same quarter in 1999. The decrease is
primarily impacted by the decrease in the average outstanding balance on the
term loans for the third quarter ended October 1, 2000 compared to the third
quarter ended September 26, 1999. Since September 26, 1999, the Company has made
$8.2 million of scheduled principal payments and has used $25.7 million of asset
sale proceeds to reduce the amount outstanding on the term loans.
Interest expense, net of capitalized interest and interest income,
decreased by $1.4 million, or 5.6%, to $23.5 million for the nine months ended
October 1, 2000 from $24.9 million for the same period in 1999. The decrease is
primarily impacted by the decrease in the average outstanding balance on the
term loans for the nine months ended October 1, 2000 compared to the nine months
ended September 26, 1999.
24
RECOVERY OF WRITE-DOWN OF JOINT VENTURE:
During the fourth quarter ended December 27, 1998, the Company sold its
50% interest in its China joint venture and recorded a write-down of $3.5
million to eliminate the Company's remaining investment in and advances to the
joint venture. During the first nine months ended September 26, 1999, the
Company reported a $0.9 million payment from the sale which was received on
March 17, 1999, as income.
(PROVISION FOR) BENEFIT FROM INCOME TAXES:
The provision for income taxes was $0.4 million, or 11.6%, for the third
quarter ended October 1, 2000 compared to a provision for income taxes of $2.2
million, or 30.2%, for the third quarter ended September 26, 1999. The benefit
from income taxes was $16.8 million, or 57.8% for the nine months ended October
1, 2000, compared to the provision for $0.2 million, or 7.8%, for the nine
months ended September 26, 1999. The Company records income taxes based on the
effective rate expected for the year with any changes in the valuation allowance
reflected in the period of change. The sales of the land and buildings which
were previously closed as a result of the restructuring and additional sales to
franchisees during the nine months ended October 1, 2000 and September 26, 1999
favorably impacted the provision for income taxes as it triggered built-in gains
which allowed for a reduction in the valuation allowance on certain net
operating loss carryforwards.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET:
In accordance with Statement of Position 98-5, the Company recognized $0.3
million of expense, net of income tax benefit, in the nine months ended
September 26, 1999 related to previously deferred restaurant pre-opening costs.
NET INCOME (LOSS):
Net income was $3.2 million and $5.2 million for the third quarters ended
October 1, 2000 and September 26, 1999, respectively. Net loss was $12.3 million
for the nine months ended October 1, 2000 and net income was $1.9 million for
the nine months ended September 26, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and capital resources are
cash generated from operations and borrowings under its revolving credit
facility. Net cash provided by operating activities was $7.7 million in the nine
months ended October 1, 2000 and $34.6 million in the nine months ended
September 26, 1999. During the nine months ended October 1, 2000, accounts
receivable increased approximately $1.9 million primarily due to increased
Foodservice retail supermarket sales along with the increase in volume of
Foodservice product sales to franchisees. Inventories increased $2.2 million as
a result of increased retail promotional activity expected for the fourth
quarter. Other assets decreased $2.7 million primarily due to a $2.2 million
reduction in premium receivables associated with the Company's captive insurance
company. In addition, prepaid rent decreased approximately $0.8 million as a
result of the reduction of Company owned restaurants from the sale of
restaurants to franchisees and restaurant closings. Accrued expenses decreased
$1.8 million from January 2, 2000 to October 1, 2000. The decrease was primarily
attributable to the $1.4 million of payments made on year-end accruals for
restaurant construction and maintenance, a $2.2 million decrease in unearned
premiums in the Company's captive insurance company, a $1.2 million reduction in
the gift certificate liability as a result of redemptions of year-end gift
certificate sales, a $2.6 million reduction of the accrued pension obligation as
a result of the Plan's overfunded status and a $3.3 million reduction in
insurance reserves for workers compensation and general liability claims.
Offsetting the decrease in accrued expenses was the establishment of
restructuring reserves associated with management's restructuring plan and the
fiscal 2000 bonus accrual. Available borrowings under the revolving credit
facility were $30.0 million as of October 1, 2000.
Additional sources of liquidity consist of capital and operating leases
for financing leased restaurant locations (in malls and shopping centers and
land or building leases), restaurant equipment, manufacturing equipment,
distribution vehicles and computer equipment. Additionally, sales of
under-performing existing restaurant properties and other assets (to the extent
the Company's and its subsidiaries' debt instruments, if any, permit) are
sources of cash. The amounts of debt financing that the Company will be able to
incur under capital leases and for property and casualty insurance financing and
the amount of asset sales by the Company are limited by the terms of its credit
facility and Senior Notes. The Company's credit facility was amended on
September 28, 2000. The Consolidated leverage ratio was increased from 4.20 to
4.70 and the Consolidated interest coverage ratio was reduced from 1.70 to 1.50.
The cost of the amendment was approximately $150,000.
25
Net cash provided by investing activities was $18.3 million in the nine
months ended October 1, 2000. Net cash used in investing activities was $24.0
million in the nine months ended September 26, 1999. Capital expenditures for
restaurant operations, excluding capital leases, were approximately $12.8
million and $36.8 million for the nine months ended October 1, 2000 and
September 26, 1999, respectively. The decrease in capital expenditures was
primarily due to the reduction in new units, replacements and re-imaging
projects. Proceeds from the sale of property and equipment were $31.1 million
and $11.6 million in the nine months ended October 1, 2000 and September 26,
1999, respectively. The increase in proceeds from the sales of property and
equipment is primarily due to $16.6 million of proceeds received as a result of
sales of restaurants to franchisees and disposal of properties in connection
with restructuring.
Net cash used in financing activities was $29.0 million in the nine
months ended October 1, 2000 compared to $3.9 million for the nine months ended
September 26, 1999. Since September 26, 1999, the Company has made $8.2 million
of scheduled principal payments and has used $25.7 million of asset sale
proceeds to reduce the amount outstanding on the term loans.
The Company had a working capital deficit of $55.5 million as of
October 1, 2000. The Company is able to operate with a substantial working
capital deficit because: (i) restaurant operations are conducted primarily on a
cash (and cash equivalent) basis with a low level of accounts receivable; (ii)
rapid turnover allows a limited investment in inventories and (iii) cash from
sales is usually received before related expenses for food, supplies and payroll
are paid.
The Company's credit facility imposes significant operating and
financial restrictions on the Company's ability to, among other things, incur
indebtedness, create liens, sell assets, engage in mergers or consolidations,
pay dividends and engage in certain transactions with affiliates. The credit
facility limits the amount which the Company may spend on capital expenditures
and requires the Company to comply with certain financial covenants. The
Company's credit facility also restricts the use of proceeds from asset sales.
Proceeds, as defined in the credit agreement, in excess of stated maximum
allowable amounts must be used to permanently reduce outstanding obligations
under the credit facility. Prepayments are applied first to the term loans in
inverse order of maturity and secondly, to permanently reduce the revolving
credit commitment. During the period from July 3, 2000 through December 31,
2000, the Company may retain up to a maximum of $3.0 million of net proceeds
from any asset sales to be invested into additional capital expenditures.
The Company anticipates requiring capital in the future principally to
maintain existing restaurant and plant facilities, to continue to renovate and
re-image existing restaurants, to convert restaurants and to construct new
restaurants. Capital expenditures for 2000 are anticipated to be $24.6 million
in the aggregate, of which $18.2 million will be spent on restaurant operations.
The Company's actual 2000 capital expenditures may vary from these estimated
amounts. The Company believes that the combination of the funds anticipated to
be generated from operating activities and borrowing availability under the
credit facility will be sufficient to meet the Company's anticipated operating
requirements, capital requirements and obligations associated with the
restructuring.
SEASONALITY
Due to the seasonality of frozen dessert consumption and the effect
from time to time of weather on patronage in its restaurants, the Company's
revenues and EBITDA are typically higher in its second and third quarters.
GEOGRAPHIC CONCENTRATION
Approximately 89% of the Company owned restaurants are located, and
substantially all of its retail sales are generated, in the Northeast. As a
result, a severe or prolonged economic recession or changes in demographic mix,
employment levels, population density, weather, real estate market conditions or
other factors specific to this geographic region may adversely affect the
Company more than certain of its competitors which are more geographically
diverse.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company's market risk exposure
since the filing of the Annual Report on Form 10K.
26
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) An annual meeting of Company's shareholders was held on May 10, 2000.
(b) Not applicable.
(c) The election of one nominee for director of the Company was voted upon at
the meeting. The number of affirmative votes and the number of votes
withheld with respect to such approval is as follows:
NOMINEE AFFIRMATIVE VOTES VOTES WITHHELD
Donald N. Smith 5,839,557 942,782
The results of the voting to approve the appointment of Arthur Andersen LLP
to audit the accounts of the Company and its subsidiaries for 2000 are as
follows:
FOR AGAINST ABSTAIN
6,747,888 27,301 7,150
There were no matters voted upon at the Company's annual meeting to which
broker non-votes applied.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) No report on Form 8-K was filed during the three months and nine months
ended October 1, 2000.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRIENDLY ICE CREAM CORPORATION
By: /s/ PAUL J. KELLEY
--------------------------
Name: Paul J. Kelley
Title: Senior Vice President,
Chief Financial Officer, Treasurer and
Assistant Clerk