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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1997
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
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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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.01 par value Nasdaq National Market
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K /X/.
The aggregate market value of voting stock held by nonaffiliates of the
registrant, based upon the closing sales price of the registrant's common stock
on March 11, 1998 on the National Market tier of the Nasdaq Stock Market, Inc.,
was $120,190,627. For purpose of the foregoing calculation only, all members of
the Board of Directors and executive officers of the registrant have been deemed
affiliates. The number of shares of common stock outstanding is 7,441,290 as of
March 11, 1998.
Documents incorporated by reference:
Part III of this 10-K incorporates information by reference from the
registrant's definitive proxy statement which will be filed no later than 120
days after December 28, 1997.
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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, weather impact on the Company's businesses, exposure to
commodity prices, risks associated with the food service industry, the ability
to retain and attract new employees, government regulations, the Company's high
geographic concentration in the Northeast and conditions needed to meet
re-imaging and new opening targets. 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.
PART I
ITEM 1. BUSINESS
ORGANIZATION
Friendly's, founded in 1935, was publicly held from 1968 until January 1979,
at which time it was acquired by Hershey Foods Corporation ("Hershey"). In 1988,
The Restaurant Company ("TRC"), an investor group led by Donald Smith, the
Company's current Chairman, Chief Executive Officer and President, acquired
Friendly's from Hershey (the "TRC Acquisition"). In November 1997, the Company
completed a public offering of 5,000,000 shares (approximately 70%) of its
common stock for gross proceeds of $90 million and a public offering of $200
million of Senior Notes (collectively, "the Offerings"). Concurrent with the
Offerings, the Company entered into a new senior secured credit facility
consisting of (i) a $90 million term loan, (ii) a $55 million revolving credit
facility and (iii) a $15 million letter of credit facility (collectively, the
"New Credit Facility"). Proceeds from the Offerings and New Credit Facility
(collectively, the "Recapitalization") were primarily used to repay amounts
outstanding under the Company's existing credit facilities and thereby lengthen
the average maturity of the Company's indebtedness, reduce interest expense and
increase the Company's liquidity and operating and financial flexibility.
Unless the context indicates otherwise, (i) references herein to
"Friendly's" or the "Company" refer to Friendly Ice Cream Corporation, its
predecessors and its consolidated subsidiaries, (ii) references herein to "FICC"
refer to Friendly Ice Cream Corporation and not its subsidiaries and (iii) as
used herein, "Northeast" refers to the Company's core markets which include
Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York,
Pennsylvania, Rhode Island and Vermont. The Company's fiscal years ended January
2, 1994, January 1, 1995, December 31, 1995, December 29, 1996 and December 28,
1997 are referred to herein as 1993, 1994, 1995, 1996 and 1997, respectively.
GENERAL
Friendly's is the leading full-service restaurant operator and has a leading
position in premium frozen dessert sales in the Northeast. The Company owns and
operates 662 and franchises 34 full-service restaurants and manufactures a
complete line of packaged frozen desserts distributed through more than 5,000
supermarkets and other retail locations in 15 states. Friendly's offers its
customers a unique dining experience by serving a variety of high-quality,
reasonably-priced breakfast, lunch and dinner items, as well as its signature
frozen desserts, in a fun and casual neighborhood setting. For the year ended
December 28, 1997, Friendly's generated $667.5 million in total revenues and
$72.4 million in EBITDA (as defined herein) and incurred $39.3 million of
interest expense. During the same period, management estimates that over $223
million of total revenues were from the sale of approximately 21 million gallons
of frozen desserts.
1
Friendly'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 day-parts. The menu currently features over 100 items comprised of a broad
selection of breakfast, lunch, dinner and afternoon and evening snack items.
Breakfast items include specialty omelettes and breakfast combinations featuring
eggs, pancakes and bacon or sausage. Breakfasts generally range from $2.00 to
$6.00 and account for approximately 12% of average restaurant revenues. Lunch
and dinner items include a line of wrap sandwiches, entree salads, soups,
super-melts, specialty burgers, appetizers including quesadillas, mozzarella
cheese sticks and "Fronions", and stir-fry, chicken, pot pie, tenderloin steak
and seafood entrees. These lunch and dinner items generally range from $4.00 to
$9.00, and these day-parts account for approximately 53% of average restaurant
revenues. Entree selections are complemented by Friendly's premium frozen
desserts, including the Fribble-Registered Trademark-, the Company's signature
thick shake, Happy Ending-Registered Trademark- Sundaes, Candy
Shoppe-Registered Trademark- Sundaes, the Wattamelon Roll-Registered Trademark-
and fat-free Sorbet Smoothies. The Company's frozen desserts are an important
component of the Company's snack day-part which accounts for 35% of average
restaurant revenues.
Despite the Company's capital constraints, management implemented a number
of initiatives to restore and improve operational and financial efficiencies.
From the date of the TRC Acquisition through 1994, the Company (i) implemented a
major revitalization of its restaurants, (ii) repositioned the Friendly's
concept from a sandwich and ice cream shoppe to a full-service, family-oriented
restaurant with broader menu and day-part appeal, (iii) elevated customer
service levels by recruiting more qualified managers and expanding the Company's
training program, (iv) disposed of 123 under-performing restaurants and (v)
capitalized upon the Company's strong brand name recognition by initiating the
sale of Friendly's unique line of packaged frozen desserts through retail
locations.
Beginning in 1994, the Company began implementing several growth initiatives
including (i) testing and implementing a program to expand the Company's
domestic distribution network by selling frozen desserts and other menu items
through non-traditional locations, (ii) distributing frozen desserts
internationally by introducing dipping stores in South Korea and the United
Kingdom and (iii) implementing a franchising strategy to extend profitably the
Friendly's brand without the substantial capital required to build new
restaurants.
CAPITAL INVESTMENT PROGRAM
A significant component of the Company's capital investment program is the
FOCUS 2000 initiative which is designed to establish a consistent, enhanced
Friendly's brand image across the Company's entire restaurant operations. The
Company's capital spending strategy seeks to increase comparable restaurant
revenues and restaurant cash flow through the on-going revitalizing and
re-imaging of existing restaurants and to increase total restaurant revenues
through the addition of new restaurants. The following illustrates the key
components of the Company's capital spending program.
RESTAURANT RE-IMAGING. The Company completed the re-imaging of 43
restaurants in 1997 at an estimated cost of $153,000 per restaurant (not
including costs related to development of the prototype). This cost typically
includes interior and exterior redecoration and a new exterior lighting package.
The Company believes that efficiencies and economics associated with remodeling
a large number of restaurants will reduce the average cost of the re-imaging in
1998 and beyond. The Company expects to complete the re-imaging of approximately
138 restaurants during 1998.
NEW RESTAURANT CONVERSION AND CONSTRUCTION. The Company converted one
restaurant in 1997 at a cost of approximately $500,000. The Company constructed
two new restaurants in 1997 at a cost of approximately $900,000 per restaurant,
excluding land and pre-opening expenses. The Company expects to complete the
conversion or construction of approximately 11 restaurants during 1998.
2
SEATING CAPACITY EXPANSION PROGRAM. Since the TRC Acquisition and through
December 28, 1997, the Company has expanded seating capacity by an average of 50
seats at 28 restaurants at an average cost of $290,000 per restaurant. The
Company completed the expansion of seven restaurants in 1997 at an average cost
of $244,000 per restaurant. This cost typically includes adding 50 seats per
restaurant, relocating certain equipment and increasing parking capacity where
necessary. The Company expects to complete the expansion of approximately four
restaurants during 1998.
INSTALLATION OF RESTAURANT AUTOMATION SYSTEMS. Since the TRC Acquisition
and through December 28, 1997, the Company has installed touch-screen point of
sale ("POS") register systems in approximately 340 restaurants at an average
cost of $34,000 per restaurant. These POS register systems are designed to
improve revenue realization, food cost management and labor scheduling while
increasing the speed and accuracy of processing customer orders. The Company
expects to install POS register systems in approximately 50 restaurants during
1998.
FRANCHISING PROGRAM
The Company recently initiated a franchising strategy to expand its
restaurant presence in under-penetrated markets, accelerate restaurant growth in
new markets, increase marketing and distribution efficiencies and preempt
competition by acquiring restaurant locations in the Company's targeted markets.
With the substantial completion of the Company's restaurant revitalization
program, the development and initial deployment of its two new freestanding
restaurant prototypes and the successful introduction of its new dinner line,
the Company believes it is in a position to maximize the value of its brand
appeal to prospective franchisees. The Company's wholly owned subsidiary,
Friendly's Restaurants Franchise, Inc. ("FRFI") commenced operations in 1996 for
the purpose of franchising various restaurant concepts. Since it began
operations, FRFI has developed and now offers a franchise program for both
Friendly's restaurants and Friendly's Cafes. The Company seeks franchisees who
have related business experience, capital adequacy to build-out the Friendly's
concept and no operations which have directly competitive restaurant or food
concepts.
On July 14, 1997, the Company entered into a long-term agreement granting
DavCo Restaurants, Inc. ("DavCo"), a franchisor of more than 230 Wendy's
restaurants, exclusive rights to operate, manage and develop Friendly's
full-service restaurants in the franchising region of Maryland, Delaware, the
District of Columbia and northern Virginia (the "DavCo Agreement"). Pursuant to
the DavCo Agreement, DavCo has purchased certain assets and rights in 34
existing Friendly's restaurants in this franchising region, has committed to
open an additional 74 restaurants over the next six years and, subject to the
fulfillment of certain conditions, has further agreed to open 26 additional
restaurants, for a total of 100 new restaurants in this franchising region over
the next ten years. DavCo will also manage under contract 13 other Friendly's
locations in this franchising region with an option to acquire these restaurants
in the future. Friendly's receives (i) a royalty based on franchised restaurant
revenues and (ii) revenues and earnings from the sale to DavCo of Friendly's
frozen desserts and other products. DavCo is required to purchase from
Friendly's all of the frozen desserts to be sold in these restaurants.
The Company does not have significant experience in franchising restaurants
and there can be no assurance that the Company will continue to successfully
locate and attract suitable franchisees or that such franchisees will have the
business abilities or sufficient access to capital to open restaurants or will
operate restaurants in a manner consistent with the Company's concept and
standards or in compliance with franchise agreements. The success of the
Company's franchising program will also be dependent upon certain other factors,
certain of which are not within the control of the Company or its franchisees,
including the availability of suitable sites on acceptable lease or purchase
terms, permitting and regulatory compliance and general economic and business
conditions.
3
CARRYOUT OPERATIONS
Through dedicated carryout areas, Friendly's restaurants offer the Company's
full line of frozen desserts and certain of its food menu items. Reserved
parking is available at many of the Company's free-standing restaurants to
facilitate quick carryout service. Approximately 15% of the Company's average
freestanding restaurant revenues are derived from its carryout business with a
significant portion of these sales occurring during the afternoon and evening
snack periods. Of this 15%, approximately 5% comes from sales of packaged frozen
desserts in display cases within its restaurants.
RETAIL OPERATIONS
In 1989, the Company extended its premium packaged frozen dessert line from
its restaurants into retail locations. The Company offers a branded product line
that includes approximately 60 half gallon varieties featuring premium ice cream
shoppe flavors and unique sundae combinations, low and no fat frozen yogurt, low
fat ice cream and sherbet. Specialty flavors include Royal Banana Split,
Cappuccino Dream-TM- and Caramel Fudge Nut Blast-TM-, and proprietary products
include the Jubilee Roll-Registered Trademark-, Wattamelon
Roll-Registered Trademark- and Friendly's branded ice cream cakes and pies. The
Company also licenses from Hershey the right to feature certain candy brands
including Almond Joy-Registered Trademark-, Mr. Goodbar-Registered Trademark-,
Reese's Pieces-Registered Trademark-, Reese's-Registered Trademark- Peanut
Butter Cups and York-Registered Trademark- Peppermint Patties on packaged sundae
cups and pints.
The Company focuses its marketing and distribution efforts in areas where it
has higher restaurant penetration and consumer awareness. During the initial
expansion of its retail business in 1989 and 1990, Albany, Boston and
Hartford/Springfield were primary markets of opportunity. The Company added the
New York and Philadelphia markets to its retail distribution efforts in 1992 and
1993.
The Company expects to continue building its retail distribution business in
its current retail markets. In these markets, the Company intends to increase
shelf space with existing accounts and add new accounts by (i) capitalizing on
its integrated restaurant and retail consumer advertising and promotion
programs, (ii) continuing new product introductions and (iii) improving trade
merchandising initiatives. Additionally, the Company expects to continue to
selectively enter new markets where its brand awareness is high according to
market surveys.
The Company has developed a broker/distributor network designed to protect
product quality through proper product handling and to enhance the merchandising
of the Company's frozen desserts. The Company's experienced sales force manages
this network to serve specific retailer needs on a market-by-market basis. In
addition, the Company's retail marketing and sales departments coordinate market
development plans and key account management programs.
NON-TRADITIONAL LOCATIONS
In order to capitalize on both planned and impulse purchases, the Company is
leveraging the Friendly's brand name and enhancing consumer awareness by
introducing modified formats of the Friendly's concept into non-traditional
locations. These modified formats include (i) Friendly's Cafe, a quick service
concept offering frozen desserts and a limited menu, (ii) Friendly's branded ice
cream shoppes offering freshly-scooped and packaged frozen desserts and (iii)
Friendly's branded display cases and novelty carts with packaged single-serve
frozen desserts. The first Friendly's Cafe opened in October 1997. The Company
supplies frozen desserts to non-traditional locations such as colleges and
universities, sports facilities, amusement parks, secondary school systems and
business cafeterias directly or through selected vendors pursuant to multi-year
license agreements.
INTERNATIONAL OPERATIONS
The Company, through its FII subsidiary, has a master license agreement with
a South Korean enterprise to develop Friendly's "Great American" ice cream
shoppes offering freshly-scooped and
4
packaged frozen desserts. As of December 28, 1997, the licensee and its
sublicensees were operating 23 ice cream shoppes. FII also has various licensing
arrangements with several companies in the United Kingdom under which certain of
the Company's frozen desserts are distributed in the United Kingdom. The
Company's strategy in the United Kingdom is to sell Friendly's branded frozen
deserts in full and quick-service restaurants, movie theaters, railway and bus
stations, shopping malls and airport locations pursuant to license agreements.
Non-restaurant locations will vary from full dipping stations to sundae station
kiosks or sundae carts. In addition, the Company's products will be distributed
to selected retailers for resale. In addition, the Company is a 50% partner in a
joint venture in Shanghai, China which has manufactured and distributed frozen
desserts on a limited basis. The joint venture is currently seeking additional
distribution for its products in China. In markets where a capital investment by
the Company is required to introduce its brand, the Company seeks to monetize
such investment by entering into franchising or licensing arrangements, and
subsequently to redeploy its capital, if necessary, into new international
markets.
The Company's international operations are subject to various risks,
including changing political and economic conditions, currency fluctuations,
trade barriers, trademark rights, adverse tax consequences, import tariffs,
customs and duties and government regulations. Government regulations, relating
to, among other things, the preparation and sale of food, building and zoning
requirements, wages, working conditions and the Company's relationship with its
employees, may vary widely from those in the United States. There can be no
assurance that the Company will be successful in maintaining or expanding its
international operations.
MARKETING
The Company's marketing strategy is to continue to strengthen Friendly's
brand equity and further capitalize on its strong customer awareness to
profitably build revenues across all businesses. The primary advertising
message, built around its "Leave room for the ice cream-TM-" slogan, focuses on
introducing new lunch and dinner products or line extensions in combination with
unique frozen desserts. Management utilizes this strategy to encourage consumer
trial of new products and increase the average guest check while reinforcing
Friendly's unique food-with-ice-cream experience. The Company's
food-with-ice-cream promotions also build sales of packaged frozen desserts in
its restaurants and in retail locations.
The Company's media plan is designed to build awareness and increase trial
among key target audiences while optimizing spending by market based on media
cost efficiencies. The Company classifies markets based upon restaurant
penetration and the resulting advertising and promotion costs per restaurant.
The Company's 19 most highly-penetrated markets are supported with regular spot
television advertisements from March through December. The Company augments its
marketing efforts in these markets with radio advertising to target the
breakfast day-part or to increase the frequency of the promotional message. In
addition, the Company supports certain of these highly-penetrated markets
(Albany, Boston, Hartford-Springfield and Providence) during the peak summer
season with additional television media focusing on freshly-scooped and packaged
frozen desserts. In its secondary markets, the Company utilizes more
cost-effective local store marketing initiatives such as radio, direct mail and
newspaper advertising. All of the Company's markets are supported with an
extensive promotional coupon program.
The Company believes that its integrated restaurant and retail marketing
efforts provide significant support for the development of its retail business.
Specifically, the retail business benefits from the awareness and trial of
Friendly's product offerings generated by 32 weeks of food-with-ice-cream
advertising and couponing efforts. The Company believes that this approach
delivers a significantly higher level of consumer exposure and usage compared to
the Company's packaged frozen dessert competitors which have only retail
distribution. In turn, sales of the Company's products through more than 5,000
retail locations, supported by trade merchandising efforts, build incremental
awareness and usage of Friendly's which management believes benefits the
restaurants. Advertising and promotion expenditures were approximately $21
million for 1997.
5
CERTAIN RISKS ASSOCIATED WITH THE FOOD SERVICE INDUSTRY
Food service businesses are often affected by changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns, the cost and availability of labor, purchasing power, availability of
products and the type, number and location of competing restaurants. The Company
could also be substantially adversely affected by publicity resulting from food
quality, illness, injury or other health concerns or alleged discrimination or
other operating issues stemming from one location or a limited number of
locations, whether or not the Company is liable. In addition, factors such as
increased cost of goods, regional weather conditions and the potential scarcity
of experienced management and hourly employees may also adversely affect the
food service industry in general and the results of operations and financial
condition of the Company.
MANUFACTURING
The Company produces substantially all of its frozen desserts in two
Company-owned manufacturing plants which employ a total of approximately 300
people. The Wilbraham, Massachusetts plant occupies approximately 41,000 square
feet of manufacturing space while the Troy, Ohio plant utilizes approximately
18,000 square feet. During 1997, the combined plants operated at an average
capacity of 67.0% and produced (i) over 17.0 million gallons of ice cream,
sherbets and yogurt in bulk, half-gallons and pints, (ii) nine million sundae
cups, (iii) 1.4 million frozen dessert rolls, pies and cakes and (iv) more than
1.2 million gallons of fountain syrups and toppings. The Company, through its
Shanghai, China joint venture, also owns a 13,000 square foot ice cream
manufacturing facility. The quality of the Company's products is important, both
to sustain Friendly's image and to enable the Company to satisfy customer
expectations. Wherever possible, the Company "engineers in" quality by
installing modern processes such as computerized mix-making equipment and
monitoring devices to ensure all storage tanks and rooms are kept at proper
temperatures for maximum quality.
PURCHASING AND DISTRIBUTION
The basic raw materials for the Company's frozen desserts are dairy products
and sugar. The Company's purchasing department purchases other food products,
such as coffee, in large quantities. Although the Company generally does not
hedge its positions in any of these commodities, it may opportunistically
purchase some of these items in advance of a specific need. As a result, the
Company is subject to the risk of substantial and sudden price increases,
shortages or interruptions in supply of such items, which could have a material
adverse effect on the Company.
In conjunction with the Company's product development department, the
Company's purchasing department evaluates the cost and quality of all major food
items on a quarterly basis and purchases these items through numerous vendors
with which it has long-term relationships. The Company contracts with vendors on
an annual, semiannual, or monthly basis depending on the item and the
opportunities within the marketplace. In order to promote competitive pricing
and uniform vendor specifications, the Company contracts directly for such
products as produce, milk and bread and other commodities and services. The
Company also minimizes the cost of all restaurant capital equipment by
purchasing directly from manufacturers or pooling volumes with master
distributors.
The Company owns two distribution centers and leases a third which allow the
Company to control quality, costs and inventory from the point of purchase
through restaurant delivery. The Company distributes most product lines to its
restaurants, and its packaged frozen desserts to its retail customers, from
warehouses in Chicopee and Wilbraham, Massachusetts and Troy, Ohio with a
combined non-union workforce of approximately 250 employees. The Company's truck
fleet delivers all but locally-sourced produce, milk and selected bakery
products to its restaurants at least weekly, and during the highest-sales
periods, delivers to over 50% of Friendly's restaurants twice-per-week. The
Chicopee, Wilbraham and Troy warehouses encompass 54,000 square feet, 109,000
square feet and 42,000 square feet, respectively. The
6
Company believes that these distribution facilities operate at or above industry
standards with respect to timeliness and accuracy of deliveries.
The Company has distributed its products since its inception to protect the
product integrity of its frozen desserts. The Company delivers products to its
restaurants on its own fleet of tractors and trailers which display large-scale
images of the Company's featured products. The entire fleet is specially built
to be compatible with storage access doors, thus protecting frozen desserts from
"temperature shock." Recently acquired trailers have an innovative design which
provides individual temperature control for three distinct compartments. To
provide additional economies to the Company, the truck fleet backhauls on over
50% of its delivery trips, bringing the Company's purchased raw materials and
finished products back to the distribution centers.
HUMAN RESOURCES AND TRAINING
The average Friendly's restaurant employs between two and four salaried team
members, which may include one General Manager, one Assistant Manager, one Guest
Service Supervisor and one Manager-in-Training. The General Manager is directly
responsible for day-to-day operations. General Managers report to a District
Manager who typically has responsibility for an average of seven restaurants.
District Managers report to a Division Manager who typically has responsibility
for approximately 50 restaurants. Division Managers report to a Regional Vice
President who typically has responsibility for six or seven Division Managers
covering approximately 350 restaurants.
The average Friendly's restaurant is staffed with four to ten employees per
shift, including the salaried restaurant management. Shift staffing levels vary
by sales volume level, building configuration and time of day. The average
restaurant typically utilized approximately 38,500 hourly-wage labor hours in
1997 in addition to salaried management.
EMPLOYEES
The total number of employees at the Company varies between 24,000 and
28,000 depending on the season of the year. As of December 28, 1997, the Company
employed approximately 24,000 employees, of which approximately 23,000 were
employed in Friendly's restaurants (including approximately 110 in field
management), approximately 550 were employed at the Company's two manufacturing
and three distribution facilities and approximately 450 were employed at the
Company's corporate headquarters and other offices. None of the Company's
employees is a party to a collective bargaining agreement.
LICENSES AND TRADEMARKS
The Company is the owner or licensee of the trademarks and service marks
(the "Marks") used in its business. The Marks "Friendly-Registered Trademark-"
and "Friendly's-Registered Trademark-" are owned by the Company pursuant to
registrations with the U.S. Patent and Trademark office.
Upon the sale of the Company by Hershey in 1988, all of the Marks used in
the Company's business at that time which did not contain the word "Friendly" as
a component of such Marks (the "1988 Non-Friendly Marks"), such as
Fribble-Registered Trademark-, Fishamajig-Registered Trademark- and
Clamboat-Registered Trademark- were licensed by Hershey to the Company. The 1988
Non-Friendly Marks license has a term of 40 years expiring on September 2, 2028.
Such license included a prepaid license fee for the term of the license which is
renewable at the Company's option for an additional term of 40 years and has a
license renewal fee of $20.0 million.
Hershey also entered into non-exclusive licenses with the Company for
certain candy trademarks used by the Company in its frozen dessert sundae cups
(the "Cup License") and pints (the "Pint License"). The Cup License and Pint
License automatically renew for unlimited one-year terms subject to certain
nonrenewal rights held by both parties. Hershey is subject to a noncompete
provision in the sundae cup business for a period of two years if the Cup
License is terminated by Hershey without cause, provided that
7
the Company maintains its current level of market penetration in the sundae cup
business. However, Hershey is not subject to a noncompete provision if it
terminates the Pint License without cause.
The Company also has a non-exclusive license agreement with Leaf, Inc.
("Leaf") for use of the Heath-Registered Trademark- Bar candy trademark. The
term of the royalty-free Leaf license continues indefinitely subject to
termination by Leaf upon 60 days notice. Excluding the Marks subject to the
licenses with Hershey and Leaf, the Company is the owner of its Marks.
COMPETITION
The restaurant business is highly competitive and is affected by changes in
the public's eating habits and preferences, population trends and traffic
patterns, as well as by local and national economic conditions affecting
consumer spending habits, many of which are beyond the Company's control. Key
competitive factors in the industry are the quality and value of the food
products offered, quality and speed of service, attractiveness of facilities,
advertising, name brand awareness and image and restaurant location. Each of the
Company's restaurants competes directly or indirectly with locally-owned
restaurants as well as restaurants with national or regional images, and to a
limited extent, restaurants operated by its franchisees. A number of the
Company's significant competitors are larger or more diversified and have
substantially greater resources than the Company. The Company's retail
operations compete with national and regional manufacturers of frozen desserts,
many of which have greater financial resources and more established channels of
distribution than the Company. Key competitive factors in the retail food
business include brand awareness, access to retail locations, price and quality.
GOVERNMENT REGULATION
The Company is subject to various federal, state and local laws affecting
its business. Each Friendly's restaurant is subject to licensing and regulation
by a number of governmental authorities, which include health, safety,
sanitation, building and fire agencies in the state or municipality in which the
restaurant is located. Difficulties in obtaining or failures to obtain required
licenses or approvals, or the loss of such licenses and approvals once obtained,
can delay, prevent the opening of, or close, a restaurant in a particular area.
The Company is also subject to Federal and state environmental regulations, but
these have not had a material adverse effect on the Company's operations.
The Company's relationships with its current and potential franchisees is
governed by the laws of its several states which regulate substantive aspects of
the franchisor-franchisee relationship. Substantive state laws that regulate the
franchisor-franchisee relationship presently exist or are being considered in a
substantial number of states, and bills have been introduced in Congress (one of
which is now pending) which would provide for Federal regulation of substantive
aspects of the franchisor-franchisee relationship. These current and proposed
franchise relationship laws limit, among other things, the duration and scope of
non-competition provisions, the ability of a franchisor to terminate or refuse
to renew a franchise and the ability of a franchisor to designate sources of
supply.
The Company's restaurant operations are also subject to Federal and state
laws governing such matters as wages, hours, working conditions, civil rights
and eligibility to work. Some states have set minimum wage requirements higher
than the Federal level, and the Federal government recently increased the
Federal minimum wage. In September 1997, the second phase of an increase in the
minimum wage was implemented in accordance with the Federal Fair Labor Standards
Act of 1996. Significant numbers of hourly personnel at the Company's
restaurants are paid at rates related to the Federal minimum wage and,
accordingly, increases in the minimum wage will increase labor costs at the
Company's restaurants. Other governmental initiatives such as mandated health
insurance, if implemented, could adversely affect the Company as well as the
restaurant industry in general. The Company is also subject to the Americans
with Disabilities Act of 1990, which, among other things, may require certain
minor renovations to its restaurants to meet federally-mandated requirements.
The cost of these renovations is not expected to be material to the Company.
8
ITEM 2. PROPERTIES
The table below identifies the location of the 696 restaurants operating as
of December 28, 1997.
COMPANY-OWNED/LEASED
------------------------------------
FREESTANDING OTHER FRANCHISED TOTAL
STATE RESTAURANTS RESTAURANTS (A) RESTAURANTS (B) RESTAURANTS
- ----------------------------------------------------- --------------- ------------------- ------------------- ---------------
Connecticut.......................................... 49 20 -- 69
Delaware............................................. -- 1 6 7
Florida.............................................. 13 2 -- 15
Maine................................................ 10 -- -- 10
Maryland............................................. 3 7 22 32
Massachusetts........................................ 116 37 -- 153
Michigan............................................. 1 -- -- 1
New Hampshire........................................ 14 6 -- 20
New Jersey........................................... 47 18 -- 65
New York............................................. 130 33 -- 163
Ohio................................................. 57 3 -- 60
Pennsylvania......................................... 52 13 -- 65
Rhode Island......................................... 8 -- -- 8
Vermont.............................................. 8 2 -- 10
Virginia............................................. 10 2 6 18
--
--- --- ---
Total................................................ 518 144 34 696
--
--
--- --- ---
--- --- ---
- ------------------------
(a) Includes primarily malls and strip centers.
(b) The franchised restaurants (representing 30 freestanding and four other
restaurants have been leased or subleased to DavCo pursuant to the DavCo
Agreement.
The 548 freestanding restaurants, including 30 franchised to DavCo, range in
size from approximately 2,600 square feet to approximately 5,000 square feet.
The 148 mall and strip center restaurants, including four franchised to DavCo,
average approximately 3,000 square feet. Of the 662 restaurants operated by the
Company at December 28, 1997, the Company owned the buildings and the land for
279 restaurants, owned the buildings and leased the land for 146 restaurants,
and leased both the buildings and the land for 237 restaurants. The Company's
leases generally provide for the payment of fixed monthly rentals and related
occupancy costs (e.g., property taxes, common area maintenance and insurance).
Additionally, most mall and strip center leases require the payment of common
area maintenance charges and incremental rent of between 3.0% and 6.0% of the
restaurant's sales.
In addition to the Company's restaurants, the Company owns (i) an
approximately 260,000 square foot facility on 46 acres in Wilbraham,
Massachusetts which houses the corporate headquarters, a manufacturing facility
and a warehouse, (ii) an approximately 77,000 square foot office, manufacturing
and warehouse facility on 13 acres in Troy, Ohio and (iii) an approximately
18,000 square foot restaurant construction and maintenance service facility
located in Wilbraham, Massachusetts. The Company leases (i) an approximately
60,000 square foot distribution facility in Chicopee, Massachusetts, (ii) an
approximately 38,000 square foot restaurant construction and maintenance support
facility in Ludlow, Massachusetts and (iii) on a short-term basis, space for its
division and regional offices, its training and development center and other
support facilities.
ITEM 3. 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
9
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 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
A special meeting of the shareholders of FICC was held on October 24, 1997
at FICC's offices at which the following actions were taken:
Item 1. Approval of Restated Articles of Organization of FICC which (a)
authorizes 50,000,000 shares of Common Stock and 1,000,000 shares of "blank
check" Preferred Stock; (b) provides for a classified Board of Directors;
(c) provides for the removal of directors only for cause upon the
affirmative vote of (i) the holders of at least a majority of the shares
entitled to vote or (ii) a majority of the directors then in office; and (d)
provides for the Board of Directors to fix the exact number of directors and
to fill any vacancies by a vote of a majority of the directors then in
office. Such Restated Articles of Organization became effective on November
14, 1997.
Item 2. Approval of Restated By-laws of FICC which (a) provides that a
shareholder seeking to have any business conducted at a meeting of
shareholders give notice to the Company prior to the scheduled meeting; (b)
provides that a special shareholders meeting may be called only by the Board
of Directors, Chairman or President of FICC; (c) provides for a classified
Board of Directors; (d) provides for the removal of directors only for cause
upon the affirmative vote of (i) the holders of at least a majority of the
shares entitled to vote or (ii) a majority of the directors then in office;
(e) provides for the Board of Directors to fix the exact number of directors
and to fill any vacancies by a vote of a majority of the directors then in
office; and (f) provides that the anti-takeover provisions contained in the
Restated By-laws may not be amended by the shareholders except upon the
affirmative vote of two-thirds of the shares entitled to vote on any matter.
Such Restated By-laws became effective on November 14, 1997.
Item 3. Approval of FICC's Stock Option Plan.
Item 4. Approval of FICC's Restricted Stock Plan.
Item 5. The election of Michael J. Daly and Burton J. Manning as Class I
Directors, each for a term commencing on November 14, 1997 to serve until
the 1998 Annual Meeting and until his successor is duly elected and
qualified, Steven L. Ezzes and Charles A. Ledsinger, Jr. as Class II
Directors, each for a term commencing on November 14, 1997 to serve until
the 1999 Annual Meeting and Donald N. Smith as the Class III Director, for a
term commencing on November 14, 1997 to serve until the 2000 Annual Meeting
and until his successor is duly elected and qualified.
Shareholders of record at the close of business on October 15, 1997 were
entitled to vote at such special meeting. Only Class A Common Shareholders were
entitled to vote on all 5 items described above. The Class B Common Shareholders
were entitled to vote on items 1, 2 and 5.
Of the 1,391.647 Class A Common Stock shares issued and outstanding as of
the record date, 1,035.917 were entitled to vote by being present in person or
by proxy. All 1,285.67 shares of Class B Common Stock issued and outstanding as
of the record date were present by proxy and entitled to vote. Items 1, 2 and 5
were approved by the Class A and Class B shareholders by collectively voting
2,321.59 shares in favor of such proposals. Items 3 and 4 were approved by Class
A shareholders voting 1,035.917 shares in favor of such proposals. There were no
abstentions, votes against, votes withheld or broker non-votes with respect to
any of the proposals or nominees.
10
EXECUTIVE OFFICERS
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of FICC and their respective ages and positions with
the Company are as follows:
DONALD N. SMITH, 57, has been Chairman, Chief Executive Officer and
President since September 1988. Mr. Smith has also been Chairman of the Board
and Chief Executive Officer of TRC and Perkins Management Company, Inc. ("PMC"),
a subsidiary of TRC, since November 1985. Prior to joining TRC, Mr. Smith was
President and Chief Executive Officer for Diversifoods, Inc. from 1983 to
October 1985. From 1980 to 1983, Mr. Smith was Senior Vice President, PepsiCo.,
Inc. and was President of its Food Service Division. He was responsible for the
operations of Pizza Hut Inc. and Taco Bell Corp., as well as North American Van
Lines, Lee Way Motor Freight, Inc., PepsiCo. Foods International and LaPetite
Boulangerie. Prior to 1980, Mr. Smith was President and Chief Executive Officer
of Burger King Corporation and Senior Executive Vice President and Chief
Operations Officer for McDonald's Corporation.
PAUL MCDONALD, 54, has been Senior Executive Vice President, Chief
Administrative Officer and Assistant Clerk since January 1996. Mr. McDonald has
been employed in various capacities with the Company since 1976. Mr. McDonald
has held the positions of Director of Management Information Systems, Vice
President/Controller, Vice President Corporate Development and Vice President,
Finance and Chief Financial Officer. Mr. McDonald is a certified public
accountant.
JOSEPH A. O'SHAUGHNESSY, 62, has been Senior Executive Vice President since
October 1988. Mr. O'Shaughnessy has been employed in various capacities with the
Company since 1957. Mr. O'Shaughnessy's duties have included District and
Division Manager, Director and Vice President of Operations and Executive Vice
President.
GERALD E. SINSIGALLI, 59, has been President, FoodService Division of the
Company since January 1989. Mr. Sinsigalli has been employed in various
capacities with the Company since 1965. Mr. Sinsigalli's duties have included
District and Division Manager, Director and Vice President of Operations and
Senior Vice President.
DENNIS J. ROBERTS, 49, has been Senior Vice President, Restaurant
Operations of the Company since January 1996. Mr. Roberts has been employed in
various capacities with the Company since 1969. Mr. Roberts' duties have
included Restaurant, District and Division Manager, Regional Training Manager,
Director and Vice President of Restaurant Operations.
SCOTT D. COLWELL, 40, has been Vice President, Marketing of the Company
since January 1996. Mr. Colwell has been employed in various capacities with the
Company since 1982 including Director, New Business Development; Senior
Director, Marketing and Sales and Senior Director, Retail Business.
HENRY V. PETTIS III, 52, has been employed by the Company since 1990 and
became Vice President, Franchising and Operations Services in 1996. Mr. Pettis
was President and Chief Executive Officer of Florida Food Industries from 1988
to 1990.
GEORGE G. ROLLER, 50, has been Vice President, Finance and Chief Financial
Officer and Treasurer of the Company since January 1996. Mr. Roller was Vice
President and Treasurer of the Company from 1989 until January 1996. Mr. Roller
is a certified public accountant.
GARRETT J. ULRICH, 47, has been Vice President, Human Resources since
September 1991. Mr. Ulrich held the position of Vice President, Human Resources
for Dun & Bradstreet Information Services, North America from 1988 to 1991. From
1978 to 1988, Mr. Ulrich held various Human Resource executive and managerial
positions at Pepsi Cola Company, a division of PepsiCo.
11
AARON B. PARKER, 40, has been Associate General Counsel and Clerk of the
Company since August, 1997. He served as Associate General Counsel and Assistant
Clerk of the Company since 1989. He also served as the Company's Managing
Director of International Business from 1994 to 1996. Mr. Parker served as
Special Counsel to TRC from 1986 to 1996. Mr. Parker served as Associate General
Counsel of PMC from 1986 through 1988. Prior to joining TRC and PMC, Mr. Parker
was in private practice with the law firm of Wildman, Harrold, Allen, Dixon &
McDonnell.
ALLAN J. OKSCIN, 46, has been Corporate Controller since 1989. Mr. Okscin
has been employed in various capacities with the Company since 1977. Mr.
Okscin's duties have included Assistant Controller and several managerial
positions in Financial Reporting, Financial Services, and Internal Auditing, as
well as Supervisor of Corporate Accounting. Prior to joining the Company, Mr.
Okscin worked for Coopers & Lybrand. Mr. Okscin is a certified public
accountant.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
FICC's common stock trades under the symbol FRND and is listed on the Nasdaq
National Market. The following table sets forth the closing high and low sale
price per share of the Company's common stock for the period from the Company's
initial public offering (November 14, 1997) to December 28, 1997. Prior to
November 14, 1997, no established public trading market existed for the Common
Stock.
MARKET PRICE OF COMMON STOCK
1997 HIGH LOW
- --------------------------------------------------------- --------- ---------
Fourth Quarter........................................... $ 17 3/8 $ 11 3/8
The number of shareholders of record of FICC's common stock as of March 10,
1998 was 267.
The Company currently intends to retain its earnings to finance future
growth and, therefore, does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. Any determination as to the payment of
dividends will depend upon the future results of operations, capital
requirements and financial condition of the Company and its subsidiaries and
such other facts as the Board of Directors of the Company may consider,
including any contractual or statutory restrictions on the Company's ability to
pay dividends. The Company's New Credit Facility and the Indenture relating to
its Senior Notes each limit the Company's ability to pay dividends on its Common
Stock.
In conjunction with the Recapitalization in November 1997, certain of the
Company's lenders under its previous credit facility received 706,655 shares of
Common Stock in exchange for the shares of Class B common stock previously held
by them. Such shares of Common Stock were issued pursuant to an exemption under
Section 3(a)(9) of the Securities Act of 1933.
The following information is reported pursuant to Item 701(f) of Regulation
S-K:
FICC filed registration statements (the "Registration Statements") on Form
S-1 with the Securities and Exchange Commission which became effective on
November 14, 1997 (Registration Nos. 333-34633 and 333-34635).
The public offering of five million shares of FICC's Common Stock, par value
$.01 per share, and the public offering of $200 million of FICC's 10.5% Senior
Notes due 2007 (collectively, the "Offerings") pursuant to these Registration
Statements commenced on November 14, 1997 and terminated after the sale of all
securities registered.
The Offerings were for the account of FICC, as follows:
Number of Shares Registered and Sold.......................... 5,000,000
Number of Senior Notes Registered and Sold.................... 200,000
Aggregate Price of Common Stock Registered and Sold........... $90,000,000
Aggregate Price of Senior Notes Registered and Sold........... $200,000,000
The managing underwriters for the Offerings were NationsBanc Montgomery
Securities, Inc., Piper Jaffray Inc. and Tucker Anthony Incorporated for the
Common Stock offering and Societe Generale Securities Corporation, Donaldson,
Lufkin & Jenrette Securities Corporation and NationsBanc Montgomery Securities,
Inc. for the Senior Note offering.
13
The following amounts of expenses were incurred for FICC's account in
connection with the issuance and distribution of the securities registered for
each category listed below:
DIRECT OR INDIRECT PAYMENT TO
DIRECTORS, OFFICERS, GENERAL
PARTNERS OF THE ISSUER OR THEIR
ASSOCIATES; TO PERSONS OWNING TEN
PERCENT OR MORE OF ANY CLASS OF DIRECT OR
EQUITY SECURITIES OF THE ISSUER; INDIRECT PAYMENT
AND TO AFFILIATES TO THE ISSUER TO OTHERS
----------------------------------- ----------------
Underwriting discounts and commissions......................... $ 0 $ 12,300,000
Finders' Fees.................................................. 0 0
Expenses paid to or for underwriters........................... 0 0
Other Expenses................................................. 0 2,225,000
--
----------------
Total Expenses................................................. $ 0 $ 14,525,000
--
--
----------------
----------------
Net offering proceeds to FICC from the Offerings after total expenses were
$275,475,000. All $275,475,000 of this amount was used for the refinancing of
FICC's previous credit facility and to repay certain capital lease obligations.
Prior to the Offerings, the bank lenders under such credit facility were the
holders of 48% of the then outstanding equity securities of FICC and nominated
two members of FICC's Board of Directors. Upon completion of the Offerings, such
lenders owned 9.9% of the outstanding Common Stock and such two directors were
replaced. The use of proceeds reported herein does not represent a material
change from the use of proceeds described in the prospectuses for the Offerings.
14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated historical financial
information of FICC and its consolidated subsidiaries which has been derived
from the Company's audited Consolidated Financial Statements for the five most
recent fiscal years ended December 28, 1997. This information should be read in
conjunction with the Consolidated Financial Statements and related Notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere herein. See Note 3 of Notes to Consolidated
Financial Statements for a discussion of the basis of the presentation and
significant accounting policies of the consolidated historical financial
information set forth below. No stock dividends were declared or paid for any
period presented.
FISCAL YEAR (A)
----------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant......................................... $ 580,161 $ 589,383 $ 593,570 $ 596,675 $ 593,671
Retail, institutional and other.................... 30,472 41,631 55,579 54,132 67,236
Franchise.......................................... -- -- -- -- 6,640
---------- ---------- ---------- ---------- ----------
Total revenues....................................... 610,633 631,014 649,149 650,807 667,547
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales...................................... 170,431 179,793 192,600 191,956 197,627
Labor and benefits................................. 209,522 211,838 214,625 209,260 208,364
Operating expenses................................. 120,626 132,010 143,854 143,163 148,770
General and administrative expenses................ 40,851 38,434 40,705 42,721 42,387
Stock compensation expense (b)..................... -- -- -- -- 8,407
Other expenses associated with Recapitalization
(c).............................................. -- -- -- -- 718
Non-cash write-downs (d)........................... 25,552 -- 7,352 227 770
Depreciation and amortization...................... 35,535 32,069 33,343 32,979 31,692
Gain on sale of restaurant operations................ -- -- -- -- 2,283
---------- ---------- ---------- ---------- ----------
Operating income..................................... 8,116 36,870 16,670 30,501 31,095
Interest expense, net (e)............................ 38,786 45,467 41,904 44,141 39,303
Equity in net loss of joint venture.................. -- -- -- -- 1,530
---------- ---------- ---------- ---------- ----------
Loss before benefit from (provision for) income taxes
and cumulative effect of changes in accounting
principles......................................... (30,670) (8,597) (25,234) (13,640) (9,738)
Benefit from (provision for) income taxes............ 11,470 4,661 (33,419) 5,868 3,993
Cumulative effect of changes in accounting
principles, net of income taxes (f)................ (42,248) -- -- -- 2,236
---------- ---------- ---------- ---------- ----------
Net loss............................................. $ (61,448) $ (3,936) $ (58,653) $ (7,772) $ (3,509)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Basic Net Loss Per Share:
Loss before cumulative effect of change in
accounting principle............................. $ (56.68) $ (3.52) $ (52.46) $ (3.60) $ (1.85)
Cumulative effect of change in accounting
principle, net of income tax expense............. -- -- -- -- 0.72
---------- ---------- ---------- ---------- ----------
Net Loss........................................... $ (56.68) $ (3.52) $ (52.46) $ (3.60) $ (1.13)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
15
FISCAL YEAR (A)
----------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
OTHER DATA:
EBITDA (g)........................................... $ 69,203 $ 68,939 $ 57,365 $ 63,707 $ 72,363
---------- ---------- ---------- ---------- ----------
Net cash provided by operating activities............ $ 42,877 $ 38,381 $ 27,790 $ 26,163 $ 22,118
---------- ---------- ---------- ---------- ----------
Capital expenditures:
Cash............................................... $ 37,361 $ 29,507 $ 19,092 $ 24,217 $ 31,638
Non-cash (h)....................................... 7,129 7,767 3,305 5,951 2,227
---------- ---------- ---------- ---------- ----------
Total capital expenditures........................... $ 44,490 $ 37,274 $ 22,397 $ 30,168 $ 33,865
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 29, DECEMBER 28,
1994 1995 1995 1996 1997
----------- ----------- ------------ ------------ ------------
BALANCE SHEET DATA:
Working capital (deficit).................. $ (27,919) $ (35,856) $ (14,678) $ (20,700) $ (15,791)
Total assets............................... 365,330 374,669 370,292 360,126 371,871
Total long-term debt and capital lease
obligations, excluding current
maturities............................... 363,028 369,549 389,144 385,977 310,425
Total stockholders' deficit................ $ (102,965) $ (106,901) $ (165,534) $ (173,156) $ (86,361)
- ------------------------
(a) All fiscal years presented include 52 weeks of operations except 1993 which
includes 53 weeks of operations.
(b) Represents stock compensation expense arising out of the issuance of certain
shares of common stock to management and the vesting of certain shares of
restricted stock previously issued to management (see Note 13 of Notes to
Consolidated Financial Statements).
(c) Includes payroll taxes associated with the Stock compensation discussed
above and the write-off of deferred financing costs related to the Old
Credit Facility (see Note 5 of Notes to Consolidated Financial Statements).
(d) Includes non-cash write-downs of approximately $16,337 in 1993 related to a
trademark license agreement as a result of new product development and the
replacement of certain trademarked menu items and $3,346 in 1995 related to
a postponed debt restructuring. All other non-cash write-downs relate to
property and equipment disposed of in the normal course of the Company's
operations (see Notes 3, 5 and 6 of Notes to Consolidated Financial
Statements).
(e) Interest expense, net is net of capitalized interest of $156, $176, $62,
$49, and $250 and interest income of $240, $187, $390, $318, and $338 for
1993, 1994, 1995, 1996 and 1997, respectively.
(f) Includes non-cash items, net of related income taxes, as a result of
adoption of accounting pronouncements related to income taxes of $30,968,
post-retirement benefits other than pensions of $4,140 and post-employment
benefits of $7,140 in 1993 and $2,236 in 1997 related to a change in
accounting principle for pensions (see Note 10 of Notes to Consolidated
Financial Statements).
(g) EBITDA represents consolidated net income (loss) before (i) cumulative
effect of changes in accounting principles, net of income taxes, (ii)
(provision for) benefit from income taxes, (iii) 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, each determined in
accordance with GAAP. The Company has included information concerning EBITDA
in this Form 10-K because it believes that such information is used by
certain investors as one measure of an issuer's historical ability to
service debt. EBITDA should not be considered as an alternative to, or more
meaningful than, earnings from operations or other traditional indications
of an issuer's operating performance.
(h) Non-cash capital expenditures represent the cost of assets acquired through
the incurrence of capital lease obligations.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE
HEREIN.
OVERVIEW
Friendly's owns and operates 662 restaurants, franchises 34 restaurants and
distributes a full line of frozen desserts through more than 5,000 supermarkets
and other retail locations in 15 states. The Company was publicly held from 1968
until January 1979 at which time it was acquired by Hershey Foods Corporation
("Hershey"). Under Hershey's ownership, the number of Company restaurants
increased from 601 to 849. Hershey subsequently sold the Company in September
1988 to The Restaurant Company ("TRC") in a highly-leveraged transaction (the
"TRC Acquisition").
Beginning in 1989, the new management focused on improving operating
performance through revitalizing and renovating restaurants, upgrading and
expanding the menu and improving management hiring, training, development and
retention. Also in 1989, the Company introduced its signature frozen desserts
into retail locations in the Northeast. Since the beginning of 1989, 26 new
restaurants have been opened while 178 under-performing restaurants have been
closed.
The high leverage associated with the TRC Acquisition has severely impacted
the liquidity and profitability of the Company. As of December 28, 1997, the
Company had a stockholders' deficit of $86.4 million. Cumulative interest
expense of $390.0 million since the TRC Acquisition has significantly
contributed to the deficit. The Company's net loss in 1997 of $3.5 million
included $39.3 million of interest expense. The degree to which the Company is
leveraged could have important consequences, including the following: (i)
potential impairment of the Company's ability to obtain additional financing in
the future, (ii) because borrowings under the Company's New Credit Facility in
part bear interest at floating rates, the Company could be adversely affected by
any increase in prevailing rates, (iii) the Company is more leveraged than
certain of its principal competitors, which may place the Company at a
competitive disadvantage and (iv) the Company's substantial leverage may limit
its ability to respond to changing business and economic conditions and make it
more vulnerable to a downturn in general economic conditions.
The Company's revenue, EBITDA and operating income have improved
significantly since the TRC Acquisition. Despite the closing of 152 restaurants
(net of restaurants opened) since the beginning of 1989, restaurant revenues
have increased 6.5% from $557.3 million in 1989 to $593.7 million in 1997, while
average revenue per restaurant has increased 30.4% from $665,000 to $867,000
during the same period. Retail, institutional and other revenues and franchise
revenues have also increased from $1.4 million in 1989 to $73.8 million in 1997.
In addition, EBITDA has increased 52.7% from $47.4 million in 1989 to $72.4
million in 1997, while operating income has increased from $4.1 million to $31.1
million over the same period. As a result of the positive impact of the
Company's revitalization program, the closing of under-performing restaurants,
the growth of the retail, institutional and other businesses and the
commencement in July 1997 of the Company's franchising program, period to period
comparisons may not be meaningful. Despite these improvements in operating
performance, and primarily as a result of its high leverage and interest
expense, the Company has reported net losses of $61.4 million, $3.9 million,
$58.7 million, $7.8 million and $3.5 million for 1993, 1994, 1995, 1996 and
1997, respectively.
The Company's revenues are derived primarily from the operation of
full-service restaurants and from the distribution and sale of frozen desserts
through retail locations. In addition, the Company derives a small amount of
revenue from the sale of frozen desserts in South Korea and the United Kingdom
under various distribution and licensing arrangements. Furthermore, the Company
is a 50% partner in a joint venture in Shanghai, China which has manufactured
and distributed frozen desserts on a limited basis. The joint venture is
currently seeking to establish additional distribution for its products in
China.
17
On July 14, 1997, the Company entered into a long-term agreement with DavCo
Restaurants, Inc. ("DavCo") pursuant to which the Company received $8.2 million
in cash for the sale of certain non-real property assets and in payment of
franchise and development fees, and receives (i) a royalty based on franchised
restaurant revenues and (ii) revenues and earnings from the sale to DavCo of
Friendly's frozen desserts and other products (the "DavCo Agreement"). The
Company anticipates receiving similar fees and royalty streams in connection
with future franchising arrangements.
Cost of sales includes direct food costs, the Company's costs to manufacture
frozen desserts and the Company's costs to distribute frozen desserts and other
food products to its restaurants, franchisees and its retail, institutional and
other customers. Retail, institutional and other revenues have higher food costs
as a percentage of sales than restaurant revenues. Labor and benefits include
labor and related payroll expenses for restaurant employees. Operating expenses
include all other restaurant-level expenses including supplies, utilities,
maintenance, insurance and occupancy-related expenses, the costs associated with
retail, institutional and other revenues and franchise revenues including
salaries for sales personnel and other selling expenses and advertising costs.
General and administrative expenses include costs associated with restaurant
field supervision and the Company's headquarters personnel. Non-cash write-downs
include the write-downs of long-lived assets and certain intangible assets when
circumstances indicate that the carrying amount of an asset may not be
recoverable (see Notes 3 and 6 of Notes to Consolidated Financial Statements).
Interest expense, net is net of capitalized interest and interest income.
RESULTS OF OPERATIONS
The operating results of the Company expressed as a percentage of total
revenues are set forth below:
FISCAL YEAR
-------------------------------
1995 1996 1997
--------- --------- ---------
Revenues:
Restaurant.................................................................... 91.4% 91.7% 88.9%
Retail, institutional and other............................................... 8.6 8.3 10.1
Franchise..................................................................... 0.0 0.0 1.0
--------- --------- ---------
Total revenues.................................................................. 100.0 100.0 100.0
--------- --------- ---------
Costs and expenses:
Cost of sales................................................................. 29.7 29.5 29.6
Labor and benefits............................................................ 33.1 32.2 31.2
Operating expenses............................................................ 22.2 22.0 22.3
General and administrative expenses........................................... 6.2 6.5 6.4
Stock compensation expense.................................................... 0.0 0.0 1.3
Other expenses associated with recapitalization............................... 0.0 0.0 0.1
Non-cash write-downs.......................................................... 1.1 0.0 0.1
Depreciation and amortization................................................. 5.1 5.1 4.7
Gain on sale of restaurant operations........................................... 0.0 0.0 0.3
--------- --------- ---------
Operating income................................................................ 2.6 4.7 4.6
Interest expense, net........................................................... 6.5 6.8 5.9
Equity in net loss of joint venture............................................. 0.0 0.0 0.2
--------- --------- ---------
Loss before (provision for) benefit from income taxes and cumulative effect of
change in accounting principle................................................ (3.9) (2.1) (1.5)
(Provision for) benefit from income taxes....................................... (5.1) 0.9 0.6
Cumulative effect of change in accounting principle, net of income tax
expense....................................................................... 0.0 0.0 0.4
--------- --------- ---------
Net loss........................................................................ (9.0)% (1.2)% (0.5)%
--------- --------- ---------
--------- --------- ---------
18
1997 COMPARED TO 1996
REVENUES--Total revenues increased $16.7 million, or 2.6%, to $667.5 million
in 1997 from $650.8 million in 1996. Restaurant revenues decreased $3.0 million,
or 0.5%, to $593.7 million in 1997 from $596.7 million in 1996. Comparable
restaurant revenues increased 2.9%. The increase in comparable restaurant
revenues was due to the introduction of higher-priced lunch and dinner entrees,
selected menu price increases, a shift in sales mix to higher-priced items, the
re-imaging of 43 restaurants under the Company's FOCUS 2000 program, the
revitalization of 12 restaurants, building expansions at seven restaurants and a
milder winter in the 1997 period, which allowed for favorable traffic
comparisons. The increase was partially offset by the sale of 34 restaurants to
DavCo, which resulted in a $14.5 million reduction in restaurant revenues, and
the closing of 15 under-performing restaurants. Retail, institutional and other
revenues increased by $13.1 million, or 24.2%, to $67.2 million in 1997 from
$54.1 million in 1996. The increase was primarily due to a more effective sales
promotion program. Franchise revenue was $6.6 million in 1997 compared to none
in 1996. The increase is a result of the consummation of the DavCo Agreement on
July 14, 1997 (see Note 15 of Notes to Consolidated Financial Statements).
COST OF SALES--Cost of sales increased $5.6 million, or 2.9%, to $197.6
million in 1997 from $192.0 million in 1996. Cost of sales as a percentage of
total revenues increased to 29.6% in 1997 from 29.5% in 1996. The increase was
due to an increase in food costs at the retail and institutional level. The
increase was partially offset by a 0.4% reduction in food costs at the
restaurant level despite higher guest check averages reflecting reduced
promotional discounts which results in lower food costs.
LABOR AND BENEFITS--Labor and benefits decreased $0.9 million, or 0.4%, to
$208.4 million in 1997 from $209.3 million in 1996. Labor and benefits as a
percentage of total revenues decreased to 31.2% in 1997 from 32.2% in 1996. The
decrease was due to an increase in retail, institutional and other revenues as a
percent of total revenues as these revenues have no associated labor and
benefits cost and lower workers' compensation insurance and pension costs (see
Note 10 of Notes to Consolidated Financial Statements).
OPERATING EXPENSES--Operating expenses increased $5.6 million, or 3.9%, to
$148.8 million in 1997 from $143.2 million in 1996. Operating expenses as a
percentage of total revenues increased to 22.3% in 1997 from 22.0% in 1996. The
increase was due to higher advertising expenditures in 1997 partially offset by
reduced costs for snow removal and the allocation of fixed costs over higher
total revenues in 1997.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
decreased $0.3 million, or 0.7%, to $42.4 million in 1997 from $42.7 million in
1996. General and administrative expenses as a percentage of total revenues
decreased to 6.4% in 1997 from 6.5% in 1996. This decrease was due to reductions
in pension costs and the elimination of field management positions associated
with the closing of 15 restaurants since the end of 1996.
GAIN ON SALE OF RESTAURANT OPERATIONS--Gain on sale of restaurant operations
represents the income related to the sale of the equipment and operating rights
for the 34 existing locations franchised to DavCo (see Note 15 of Notes to
Consolidated Financial Statements).
EBITDA--As a result of the above, EBITDA increased $8.7 million, or 13.7%,
to $72.4 million in 1997 from $63.7 million in 1996. EBITDA as a percentage of
total revenues increased to 10.8% in 1997 from 9.8% in 1996.
STOCK COMPENSATION EXPENSE--Stock compensation expense represents stock
compensation arising out of the issuance of certain shares of common stock to
management and the vesting of certain shares of restricted stock previously
issued to management (see Note 13 of Notes to Consolidated Financial
Statements).
OTHER EXPENSES ASSOCIATED WITH RECAPITALIZATION--Other expenses associated
with recapitalization includes payroll taxes associated with the stock
compensation discussed above and the write-off of deferred
19
financing costs related to the Company's previous credit facility (see Note 5 of
Notes to Consolidated Financial Statements).
NON-CASH WRITE-DOWNS--Non-cash write-downs increased $0.6 million to $0.8
million in 1997 from $0.2 million in 1996.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization decreased $1.3
million, or 3.9%, to $31.7 million in 1997 from $33.0 million in 1996.
Depreciation and amortization as a percentage of total revenues decreased to
4.7% in 1997 from 5.1% in 1996. The decrease was due to the closing of 15
restaurants since the end of 1996.
INTEREST EXPENSE, NET--Interest expense, net of capitalized interest and
interest income, decreased by $4.8 million, or 10.9%, to $39.3 million in 1997
from $44.1 million in 1996. The decrease in interest expense was due to the
write-off of interest no longer payable under the Company's previous credit
facility as well as a reduction in interest expense on capital lease obligations
as a result of lower amounts outstanding in 1997 (see Note 7 of Notes to
Consolidated Financial Statements).
EQUITY IN NET LOSS OF JOINT VENTURE--The equity in net loss of the China
joint venture of $1.5 million in 1997 reflected the Company's 50% share of the
China joint venture's net loss for such period. Sales for the joint venture were
minimal during the 1997 period.
BENEFIT FROM INCOME TAXES--The benefit from income taxes was $4.0 million,
or 41%, in 1997 compared to a benefit of $5.9 million, or 43%, in 1996 (see Note
9 of Notes to Consolidated Financial Statements).
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET--In 1997, the
Company revised the method used in determining the return-on-asset component of
annual pension expense as described in Note 10 of Notes to Consolidated
Financial Statements. The cumulative effect of this change was $2.2 million, net
of income tax expense of $1.6 million.
NET LOSS--Net loss was $3.5 million in 1997 compared to a net loss of $7.8
million in 1996 for the reasons discussed above.
1996 COMPARED TO 1995
REVENUES--Total revenues increased $1.7 million, or 0.3%, to $650.8 million
in 1996 from $649.1 million in 1995. Restaurant revenues increased $3.1 million,
or 0.5%, to $596.7 million in 1996 from $593.6 million in 1995. Comparable
restaurant revenues increased by 1.8%. The increase in restaurant revenues and
comparable restaurant revenues was due to the introduction of higher-priced
lunch and dinner entrees in the fourth quarter of 1996, selected menu price
increases, a shift in sales mix to higher priced items, the opening of three new
restaurants, the revitalization of 16 restaurants and building expansions at
four existing locations. The increase was partially offset by the closing of 31
restaurants in 1996. Retail, institutional and other revenues declined by $1.5
million, or 2.7%, to $54.1 million in 1996 from $55.6 million in 1995. The
decrease was primarily attributable to the effects of a reduction in promotional
activities.
COST OF SALES--Cost of sales decreased $0.6 million, or 0.3%, to $192.0
million in 1996 from $192.6 million in 1995. Cost of sales as a percentage of
total revenues decreased to 29.5% in 1996 from 29.7% in 1995. The decrease was
due to a 0.2% reduction in food costs at the restaurant level as a result of
reduced waste in food preparation.
LABOR AND BENEFITS--Labor and benefits decreased $5.3 million, or 2.5%, to
$209.3 million in 1996 from $214.6 million in 1995. Labor and benefits as a
percentage of total revenues decreased to 32.2% in 1996 from 33.1% in 1995. The
decrease was due to a 1.1% reduction in labor and benefits as a percentage of
restaurant revenues as a result of an improvement in labor utilization and lower
group and workers' compensation insurance costs. The decrease was offset by a
0.3% reduction in retail, institutional and other revenues as a percentage of
total revenues as these revenues have no associated labor and benefits.
20
OPERATING EXPENSES--Operating expenses decreased $0.7 million, or 0.5%, to
$143.2 million in 1996 from $143.9 million in 1995. Operating expenses as a
percentage of total revenues decreased in 1996 to 22.0% from 22.2% in 1995. The
decrease was due to the allocation of fixed costs over higher total revenues.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased $2.0 million, or 4.9%, to $42.7 million in 1996 from $40.7 million in
1995. General and administrative expenses as a percentage of total revenues
increased to 6.5% in 1996 from 6.2% in 1995. This increase was due to an
increase in management bonuses and the annual merit-based salary increases,
partially offset by reductions in group medical insurance claims and the
elimination of field management positions associated with the closing of 31
restaurants in 1996. General and administrative expenses, exclusive of
management bonuses, increased $0.3 million in 1996.
EBITDA--As a result of the above, EBITDA increased by $6.3 million, or
11.0%, to $63.7 million in 1996 from $57.4 million in 1995. EBITDA as a
percentage of total revenues increased to 9.8% in 1996 from 8.8% in 1995.
NON-CASH WRITE-DOWNS--Non-cash write-downs decreased $7.2 million to $0.2
million in 1996 from $7.4 million in 1995. The decrease was due to a reduction
in the carrying value of properties held for disposition of $0.2 million in 1996
and $4.0 million in 1995. In 1995, the Company also incurred a non-cash
write-down of $3.3 million relating to costs resulting from a postponed debt
refinancing. (see Notes 3, 5 and 6 of Notes to Consolidated Financial
Statements).
DEPRECIATION AND AMORTIZATION--Depreciation and amortization decreased $0.3
million, or 0.9%, to $33.0 million in 1996 from $33.3 million in 1995. The
decrease was due to lower amortization of debt restructuring costs, partially
offset by an increase in depreciation due to the addition of three restaurants
and the ongoing implementation of the Company's revitalization program.
Depreciation and amortization as a percentage of total revenues was 5.1% for
both periods.
INTEREST EXPENSE, NET--Interest expense, net of capitalized interest and
interest income, increased by $2.2 million, or 5.3%, to $44.1 million in 1996
from $41.9 million in 1995. The increase was due to an increase in the interest
rate on the Company's bank debt as a result of the debt restructuring effective
January 1, 1996.
(PROVISION FOR) BENEFIT FROM INCOME TAXES--The benefit from income taxes was
$5.9 million in 1996 as compared to a provision for income taxes of $33.4
million in 1995. The benefit from income taxes of $5.9 million in 1996
represented the statutory federal and state tax benefit of the Company's loss
partially offset by the impact of the federal and state tax valuation
allowances. The income tax provision of $33.4 million in 1995 resulted primarily
from the anticipated deconsolidation from TRC. As a result, the deferred tax
asset of approximately $19 million related to the net operating losses ("NOLs")
utilized by TRC as of December 31, 1995 was written off in 1995. Additionally,
as a result of the anticipated change in ownership and Section 382 limitation, a
valuation allowance in 1995 was placed on all Federal NOL carryforwards
generated through December 31, 1995 (see Note 9 of Notes to Consolidated
Financial Statements).
NET LOSS--As a result of the above, net loss decreased by $50.9 million, or
86.7%, to a net loss of $7.8 million in 1996 from a net loss of $58.7 million in
1995.
LIQUIDITY AND CAPITAL RESOURCES
In November 1997, FICC completed a common stock offering (the "Common Stock
Offering"). The Common Stock Offering included the sale of five million shares
of common stock by FICC to the public and provided the Company with net proceeds
of $81.9 million. Concurrently with the Common Stock Offering, FICC issued $200
million of 10.5% Senior Notes to the public and the Company entered into a new
senior secured credit facility consisting of (i) a $90 million term loan, (ii) a
$55 million revolving credit facility and (iii) a $15 million letter of credit
facility (collectively, the "New Credit Facility"). Proceeds from
21
the Common Stock Offering, Senior Notes and New Credit Facility were primarily
used to repay $353.7 million outstanding under the Company's previous credit
facility (the "Old Credit Facility"). These transactions are referred to herein,
collectively, as the "Recapitalization". The Company currently intends to retain
its earnings to finance future growth and, therefore, does not anticipate paying
any cash dividends on its Common Stock in the foreseeable future. In addition,
the New Credit Facility and the Indenture relating to the Senior Notes each
limit the Company's ability to pay dividends on its Common Stock.
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 $22.1 million in 1997, $26.2
million in 1996 and $27.8 million in 1995. Available borrowings under the
revolving credit facility were $46 million as of December 28, 1997.
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 the New Credit Facility and the
Senior Notes (see Note 7 of Notes to Consolidated Financial Statements).
The Company requires capital principally to maintain existing restaurant and
plant facilities, to continue to renovate and re-image existing restaurants, to
convert restaurants, to construct new restaurants and for general corporate
purposes. Since the TRC Acquisition and through December 28, 1997, the Company
has spent $287.3 million on capital expenditures, including $87.2 million on the
renovation of restaurants under its revitalization and re-imaging programs.
Net cash used in investing activities was $23.4 million in 1997, $20.3
million in 1996 and $18.2 million in 1995. Capital expenditures for restaurant
operations, including capitalized leases, were approximately $27.2 million in
1997, $22.6 million in 1996 and $14.5 million in 1995. Capital expenditures were
offset by proceeds from the sale of property and equipment of $5.0 million, $8.4
million and $0.9 million in 1997, 1996 and 1995, respectively.
The Company also uses capital to repay borrowings when cash is sufficient to
allow for net repayments. Net cash used in financing activities to repay
borrowings was $14.6 million in 1997, excluding the effect of the
Recapitalization, which resulted in proceeds of $200 million from the issuance
of Senior Notes, $90 million from a term loan and $90 million from the Common
Stock Offering which were used to pay the balances outstanding on the Old Credit
Facility, certain capital lease obligations and fees and expenses related to the
Recapitalization. Net cash used in financing activities to repay borrowings was
$11.0 million in 1996 as compared to net cash provided by financing activities
of $0.2 million in 1995.
The Company had a working capital deficit of $15.8 million as of December
28, 1997. 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 accounts for food, supplies and payroll become
due.
The $200 million Senior Notes issued in connection with the Company's
November 1997 Recapitalization are unsecured, senior obligations of FICC,
guaranteed on an unsecured, senior basis by FICC's Friendly's Restaurant
Franchise, Inc. subsidiary, but are effectively subordinated to all secured
indebtedness of FICC, including the indebtedness incurred under the New Credit
Facility. The Senior Notes mature on December 1, 2007. Interest on the Senior
Notes is payable at 10.5% per annum semi-annually on June 1 and December 1 of
each year commencing on June 1, 1998. The Senior Notes are redeemable, in whole
or in part, at FICC's option any time on or after December 1, 2002 at redemption
prices from 105.25% to
22
100.00%. The redemption price is based on the redemption date. Prior to December
1, 2000, FICC may redeem up to $70 million of the Senior Notes at 110.50% with
the proceeds of one or more equity offerings, as defined.
The Company entered into the New Credit Facility in November 1997 in
connection with its Recapitalization. The New Credit Facility includes a $90
million term loan (the "Term Loan"), a $55 million revolving credit facility
(the "Revolving Credit Facility") and a $15 million letter of credit facility
(the "Letter of Credit Facility"). The New Credit Facility is collateralized by
substantially all of FICC's assets and by a pledge of FICC's shares of certain
of its subsidiaries' stock.
Borrowings under the New Credit Facility bear interest, at the Company's
option, at either (i) the Eurodollar Rate plus 2.25% or (ii) the ABR rate (the
greater of (a) a specified prime rate or (b) the federal funds rate plus 0.50%)
plus 0.75% per annum for drawings under the Revolving Credit Facility and the
Letter of Credit Facility, 0.50% per annum for amounts undrawn under the
Revolving Credit Facility and 2.25% per annum for amounts issued but undrawn
under the Letter of Credit Facility. Borrowings under the Term Loan bear
interest at the Company's option, at either the Eurodollar Rate plus 2.25%,
2.50% and 2.75% or the ABR plus 0.75%, 1.00% and 1.25% for Tranche A, B and C,
respectively. The Company entered into a three year interest rate swap agreement
to hedge the impact of interest rate changes on the Term Loan. The interest rate
swap agreement has a notional amount of $90 million and effectively fixes the
interest rate on Tranches A, B and C of the Term Loan at 8.25%, 8.50% and 8.75%,
respectively.
The Term Loan requires quarterly amortization payments beginning on April
15, 1999 through 2005. Annual amortization amounts will total $4.0 million, $9.1
million, $10.8 million, $12.6 million, $16.0 million, $17.4 million and $20.1
million in 1999 through 2005, respectively. In addition to the scheduled
amortization, the Term Loan would be permanently reduced by (i) specified
percentages of each year's Excess Cash Flow (as defined in the New Credit
Facility), (ii) specified percentages of the aggregate net cash proceeds from
certain issuances of indebtedness and (iii) 100% of the aggregate net cash
proceeds from asset sales not in the ordinary course of business and certain
insurance claim proceeds, in each case in this clause (iii), not re-employed
within 180 days in the Company's business, exclusive of up to $7.5 million of
aggregate net proceeds received from asset sales subsequent to the closing
relating to the New Credit Facility. Any such applicable proceeds and Excess
Cash Flow shall be applied to the Term Loan in inverse order of maturity. The
Revolving Credit Facility matures on November 15, 2002.
The New 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 New Credit
Facility limits the amount which the Company may spend on capital expenditures
and requires the Company to comply with certain financial covenants (see Note 7
of Notes to Consolidated Financial Statements).
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 1998 are anticipated to be $49.8 million
in the aggregate, of which $41.2 million will be spent on restaurant operations.
The Company's actual 1998 capital expenditures may vary from the estimated
amounts set forth herein.
In addition, the Company may need capital in connection with commitments as
of December 28, 1997 to purchase $52 million of raw materials, food products and
supplies used in the normal course of business and its self-insurance through
retentions or deductibles of the majority of its workers' compensation,
automobile, general liability and group health insurance programs. The Company's
self-insurance obligations may exceed its reserves (see Notes 12 and 15 of Notes
to Consolidated Financial Statements).
The Company has developed a plan to ensure its systems are compliant with
the requirements to process transactions in the year 2000. The majority of the
Company's internal information systems are in
23
the process of being replaced with fully-compliant new systems. The total cost
of the software and implementation is estimated to be $2-$3 million which will
be capitalized as incurred. The new system implementation is expected to be
completed by December 1999. The costs of the Year 2000 project and the date on
which the Company plans to complete 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 plans.
The Company believes that the combination of the funds anticipated to be
generated from operating activities and borrowing availability under the New
Credit Facility will be sufficient to meet the Company's anticipated operating
and capital requirements for the foreseeable future.
NET OPERATING LOSS CARRYFORWARDS
As of December 28, 1997, the Company has a federal net operating loss
("NOL") carryforward of $39.4 million. Because of a change of ownership of the
Company under Section 382 of the Internal Revenue Code on March 26, 1996 (see
Note 9 of Notes to Consolidated Financial Statements), $34.3 million of the NOL
carryforward can be used only to offset current or future taxable income to the
extent that net unrealized built-in gains which existed at March 26, 1996 are
recognized by March 26, 2001. The Common Stock Offering resulted in the Company
having another change of ownership under Section 382 of the Internal Revenue
Code. Accordingly, in tax years ending after the Common Stock Offering, the
Company is limited in how much of its NOLs it can utilize. The amount of NOL's
which may be used each year prior to any built in gains being triggered is
approximately $2.4 million. The NOLs expire, if unused, between 2001 and 2012.
In addition, the NOL carryforwards are subject to adjustment upon review by the
Internal Revenue Service (see Note 9 of Notes to Consolidated Financial
Statements).
INFLATION
The inflationary factors which have historically affected the Company's
results of operations include increases in cost of milk, sweeteners, purchased
food, labor and other operating expenses. Approximately 16% of wages paid in the
Company's restaurants are impacted by changes in the federal or state minimum
hourly wage rate. Accordingly, changes in the federal or states minimum hourly
wage rate directly affect the Company's labor cost. The Company is able to
minimize the impact of inflation on occupancy costs by owning the underlying
real estate for approximately 42% of its restaurants. The Company and the
restaurant industry typically attempt to offset the effect of inflation, at
least in part, through periodic menu price increases and various cost reduction
programs. However, no assurance can be given that the Company will be able to
offset such inflationary cost increases in the future.
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 85% 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.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For a listing of consolidated financial statements which are included in
this document, see page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS OF THE REGISTRANT
Information regarding directors is incorporated herein by reference from the
Section entitled "Proposal 1--Election of Directors" of FICC's definitive proxy
statement which will be filed no later than 120 days after December 28, 1997.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Section entitled "Executive
Compensation" of FICC's definitive proxy statement which will be filed no later
than 120 days after December 28, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Section entitled "Stock Ownership"
of FICC's definitive proxy statement which will be filed no later than 120 days
after December 28, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Section entitled "Executive
Compensation--Certain Relationships and Related Transactions" of FICC's
definitive proxy statement which will be filed no later than 120 days after
December 28, 1997.
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial statements:
For a listing of consolidated financial statements which are included in this
document, see page F-1.
2. Financial statement schedules:
No schedules are required because either the required information is not present or
is not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the consolidated financial
statements or the notes thereto.
(b) Exhibits:
The exhibits listed in the accompanying index are filed as part of this report.
EXHIBITS
3.1 Restated Articles of Organization of Friendly Ice Cream Corporation (the "Company").
(Incorporated by reference from Exhibit 3.1 to the Company's Registration Statement
on Form S-1 (Reg. No. 333-34633) filed with the Securities and Exchange Commission
(the "Commission") on August 29, 1997).
3.2 Amended and Restated By-laws of the Company.
4.1 Stockholder and Registration Rights Agreement of the Company, as amended.
(Incorporated by reference from Exhibit 4.1 to the Company's Registration Statement
on Form S-1 (Reg. No. 333-34633) filed with the Commission on August 29, 1997).
4.2 Registration Rights Agreement between the Company and Donald N. Smith. (Incorporated
by reference from Exhibit 4.2 to the Company's Registration Statement on Form S-1
(Reg. No. 333-34633) filed with the Commission on August 29, 1997).
4.3 Rights Agreement between the Company and The Bank of New York, a Rights Agent.
(Incorporated by reference from Exhibit 4.3 to the Company's Registration Statement
on Form S-1 (Reg. No. 333-34633) filed with the Commission on August 29, 1997).
4.4 Form of Common Stock Certificate. (Incorporated by reference from Exhibit 4.3 to the
Company's Registration Statement on Form S-1 (Reg. No. 333-34633) filed with the
Commission on August 29, 1997).
10.1 Credit Agreement among the Company, Societe Generale, New York Branch and certain
other banks and financial institutions.
10.2 Senior Note Indenture between Friendly Ice Cream Corporation, Friendly's Restaurants
Franchise, Inc. and The Bank of New York, as Trustee.
10.3 The Company's Stock Option Plan. (Incorporated by reference from Exhibit 10.3 to the
Company's Registration Statement on Form S-1 (Reg. No. 333-34633) filed with the
Commission on August 29, 1997).
10.4 The Company's Restricted Stock Plan. (Incorporated by reference from Exhibit 10.4 to
the Company's Registration Statement on Form S-1 (Reg. No. 333-34633) filed with the
Commission on August 29, 1997).
10.5 Agreement relating to the Company's Limited Stock Compensation Program.
26
10.6 Development Agreement between Friendly Ice Cream Corporation and FriendCo
Restaurants, Inc. (Incorporated by reference from Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (Reg. No. 333-34633) filed with the Commission on
August 29, 1997).
10.7 Franchise Agreement between Friendly's Restaurants Franchise, Inc. and FriendCo
Restaurants, Inc. (Incorporated by reference from Exhibit 10.7 to the Company's
Registration Statement on Form S-1 (Reg. No. 333-34633) filed with the Commission on
August 29, 1997).
10.8 Management Agreement between Friendly Ice Cream Corporation and FriendCo Restaurants,
Inc. (Incorporated by reference from Exhibit 10.8 to the Company's Registration
Statement on Form S-1 (Reg. No. 333-34633) filed with the Commission on August 29,
1997).
10.9 Purchase and Sale Agreement between Friendly Ice Cream Corporation and FriendCo
Restaurants, Inc. (Incorporated by reference from Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (Reg. No. 333-34633) filed with the Commission on
August 29, 1997).
10.10 Software License Agreement between Friendly's Restaurants Franchise, Inc. and
FriendCo Restaurants, Inc. (Exhibits 10.6 through 10.10, collectively, the "DavCo
Agreement") (Incorporated by reference from Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (Reg. No. 333-34633) filed with the Commission on
August 29, 1997).
10.11 Sublease between SSP Company, Inc. and the Company, as amended, for the Chicopee,
Massachusetts Distribution Center. (Incorporated by reference from Exhibit 10.11 to
the Company's Registration Statement on Form S-1 (Reg. No. 333-34633) filed with the
Commission on August 29, 1997).
10.12 Master License and Distribution Agreement for the Territory of Korea between
Friendly's International, Inc. and Hansung Enterprise Co., Ltd. (Incorporated by
reference from Exhibit 10.12 to the Company's Registration Statement on Form S-1
(Reg. No. 333-34633) filed with the Commission on August 29, 1997).
10.13 TRC Management Contract between the Company and The Restaurant Company. (Incorporated
by reference from Exhibit 10.13 to the Company's Registration Statement on Form S-1
(Reg. No. 333-34633) filed with the Commission on August 29, 1997).
10.14 License Agreement between the Company and Hershey Foods Corporation for 1988
Non-Friendly Marks. (Incorporated by reference from Exhibit 10.14 to the Company's
Registration Statement on Form S-1 (Reg. No. 333-34633) filed with the Commission on
August 29, 1997).
21.1 Subsidiaries of the Company. (Incorporated by reference from Exhibit 21.1 to the
Company's Registration Statement on Form S-1 (Reg. No. 333-34633) filed with the
Commission on August 29, 1997).
23.1 Consent of Arthur Andersen LLP
24.1 Power of attorney. Included on Form 10-K Signature Page.
27.1 Financial Data Schedule
(c) Reports on Form 8-K
None.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
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/ GEORGE G. ROLLER
-----------------------------------------
Name: George G. Roller
Title: VICE PRESIDENT, FINANCE,
CHIEF FINANCIAL OFFICER AND TREASURER
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
George G. Roller and Aaron B. Parker, and each of them, the true and lawful
attorneys-in-fact and agents of the undersigned, with full power of substitution
and resubstitution, for and in the name, place and stead of the undersigned, in
any and all capacities, to sign any and all amendments to this annual report on
Form 10-K, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, and hereby
grants to such attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute, or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
NAME TITLE (CAPACITY) DATE
- ------------------------------ -------------------------- -------------------
/s/ DONALD N. SMITH Chairman of the Board, March 25, 1998
- ------------------------------ Chief
Donald N. Smith Executive Officer and
President
(Principal Executive
Officer and
Director)
/s/ GEORGE G. ROLLER Vice President, Finance, March 25, 1998
- ------------------------------ Chief
George G. Roller Financial Officer and
Treasurer
(Principal Financial and
Accounting Officer)
/s/ CHARLES A. LEDSINGER, Director March 25, 1998
JR.
- ------------------------------
Charles A. Ledsinger, Jr.
/s/ STEVEN L. EZZES Director March 25, 1998
- ------------------------------
Steven L. Ezzes
/s/ BURTON J. MANNING Director March 25, 1998
- ------------------------------
Burton J. Manning
/s/ MICHAEL J. DALY Director March 25, 1998
- ------------------------------
Michael J. Daly
28
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
Report of Independent Public Accountants................................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 29, 1996 and December 28, 1997................................ F-3
Consolidated Statements of Operations for the Years ended December 31, 1995, December 29, 1996 and
December 28, 1997...................................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended December 31,
1995, December 29, 1996 and December 28, 1997.......................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, December 29, 1996 and
December 28, 1997...................................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Friendly Ice Cream Corporation:
We have audited the accompanying consolidated balance sheets of Friendly Ice
Cream Corporation and subsidiaries as of December 29, 1996 and December 28,
1997, and the related consolidated statements of operations, changes in
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 28, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Friendly Ice Cream
Corporation and subsidiaries as of December 29, 1996 and December 28, 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 28, 1997 in conformity with generally accepted
accounting principles.
As explained in Note 10 of Notes to Consolidated Financial Statements,
effective December 30, 1996, the Company changed its method of calculating the
market-related value of pension plan assets used in determining the
return-on-asset component of annual pension expense and the cumulative net
unrecognized gain or loss subject to amortization.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 5, 1998
F-2
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 29, DECEMBER 28,
1996 1997
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................................... $ 18,626 $ 15,132
Restricted cash.................................................................... -- 1,333
Trade accounts receivable.......................................................... 4,992 8,922
Inventories........................................................................ 15,145 15,671
Deferred income taxes.............................................................. 12,375 8,831
Prepaid expenses and other current assets.......................................... 1,658 6,400
------------ ------------
TOTAL CURRENT ASSETS................................................................. 52,796 56,289
INVESTMENT IN JOINT VENTURE.......................................................... 4,500 2,970
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization............. 286,161 283,944
INTANGIBLES AND DEFERRED COSTS, net of accumulated amortization of $4,790 and $4,519
at December 29, 1996 and December 28, 1997, respectively........................... 16,019 25,994
OTHER ASSETS......................................................................... 650 2,674
------------ ------------
TOTAL ASSETS......................................................................... $ 360,126 $ 371,871
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt............................................... $ 1,289 $ 2,875
Current maturities of capital lease obligations.................................... 6,353 1,577
Accounts payable................................................................... 20,773 23,951
Accrued salaries and benefits...................................................... 13,855 13,804
Accrued interest payable........................................................... 9,838 2,607
Insurance reserves................................................................. 3,973 7,248
Other accrued expenses............................................................. 17,415 20,018
------------ ------------
TOTAL CURRENT LIABILITIES............................................................ 73,496 72,080
------------ ------------
DEFERRED INCOME TAXES................................................................ 48,472 42,393
CAPITAL LEASE OBLIGATIONS, less current maturities................................... 14,182 11,341
LONG-TERM DEBT, less current maturities.............................................. 371,795 299,084
OTHER LONG-TERM LIABILITIES.......................................................... 25,337 33,334
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 6, 7, 8, 10, 11, 12 and 15)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value -
Common Stock, authorized -0- and 50,000,000 shares at December 29, 1996 and
December 28, 1997, respectively; -0- and 7,441,290 shares issued and outstanding
at December 29, 1996 and December 28, 1997, respectively........................ -- 74
Class A Common Stock, 1,285,384 and -0- shares issued and outstanding at December
29, 1996 and December 28, 1997, respectively.................................... 13 --
Class B Common Stock, 1,187,503 and -0- shares issued and outstanding at December
29, 1996 and December 28, 1997, respectively.................................... 12 --
Class C Common Stock, -0- shares issued and outstanding at December 29, 1996 and
December 28, 1997............................................................... -- --
Preferred Stock, $.01 par value; authorized -0- and 1,000,000 shares at December
29, 1996 and December 28, 1997, respectively; -0- shares issued and outstanding
at December 29, 1996 and December 28, 1997....................................... -- --
Additional paid-in capital......................................................... 46,905 137,175
Accumulated deficit................................................................ (220,159) (223,668)
Cumulative translation adjustment.................................................. 73 58
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)................................................. (173,156) (86,361)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)................................. $ 360,126 $ 371,871
------------ ------------
------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED
----------------------------------------
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
------------ ------------ ------------
REVENUES.............................................................. $ 649,149 $ 650,807 $ 667,547
COSTS AND EXPENSES:
Cost of sales....................................................... 192,600 191,956 197,627
Labor and benefits.................................................. 214,625 209,260 208,364
Operating expenses.................................................. 143,854 143,163 148,770
General and administrative expenses................................. 40,705 42,721 42,387
Stock compensation expense (Note 13)................................ -- -- 8,407
Expenses associated with Recapitalization (Note 5).................. -- -- 718
Debt restructuring expenses (Note 5)................................ 3,346 -- --
Write-down of property and equipment (Note 6)....................... 4,006 227 770
Depreciation and amortization....................................... 33,343 32,979 31,692
Gain on sale of restaurant operations (Note 15)....................... -- -- 2,283
------------ ------------ ------------
OPERATING INCOME...................................................... 16,670 30,501 31,095
Interest expense, net of capitalized interest of $62, $49 and $250 and
interest income of $390, $318 and $338 for the years ended December
31, 1995, December 29, 1996 and December 28, 1997, respectively
(Note 7)............................................................ 41,904 44,141 39,303
Equity in net loss of joint venture................................... -- -- 1,530
------------ ------------ ------------
LOSS BEFORE (PROVISION FOR) BENEFIT FROM INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............................ (25,234) (13,640) (9,738)
(Provision for) benefit from income taxes............................. (33,419) 5,868 3,993
------------ ------------ ------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE....... (58,653) (7,772) (5,745)
Cumulative effect of change in accounting principle, net of income tax
expense of $1,554 (Note 10)......................................... -- -- 2,236
------------ ------------ ------------
NET LOSS.............................................................. $ (58,653) $ (7,772) $ (3,509)
------------ ------------ ------------
------------ ------------ ------------
BASIC NET LOSS PER SHARE:
Loss before cumulative effect of change in accounting principle..... $ (52.46) $ (3.60) $ (1.85)
Cumulative effect of change in accounting principle, net of income
tax expense....................................................... -- -- 0.72
------------ ------------ ------------
Net loss............................................................ $ (52.46) $ (3.60) $ (1.13)
------------ ------------ ------------
------------ ------------ ------------
PRO FORMA AMOUNTS ASSUMING NEW PENSION METHOD IS RETROACTIVELY APPLIED
(Note 10):..........................................................
Net loss............................................................ $ (58,134) $ (7,214) $ (5,745)
------------ ------------ ------------
------------ ------------ ------------
Basic net loss per share............................................ $ (52.00) $ (3.34) $ (1.85)
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLAR AMOUNTS IN THOUSANDS)
COMMON STOCK
----------------------------------------------------------------------
COMMON STOCK CLASS A CLASS B ADDITIONAL
---------------------- ---------------------- ---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
--------- ----------- --------- ----------- --------- ----------- ----------- ------------
BALANCE, JANUARY 1, 1995......... -- $ -- 1,090,969 $ 11 -- $ -- $ 46,822 $ (153,734)
Net loss....................... -- -- -- -- -- -- -- (58,653)
Contribution of capital........ -- -- -- -- -- -- 20 --
--------- ----- --------- --- --------- ----- ----------- ------------
BALANCE, DECEMBER 31, 1995....... -- -- 1,090,969 11 -- -- 46,842 (212,387)
Net loss....................... -- -- -- -- -- -- -- (7,772)
Issuance of common stock to
lenders...................... -- -- -- -- 1,187,503 12 38 --
Proceeds from exercise of
warrants..................... -- -- 71,527 1 -- -- 21 --
Compensation expense associated
with management stock plan... -- -- 122,888 1 -- -- 4 --
Translation adjustment......... -- -- -- -- -- -- -- --
--------- ----- --------- --- --------- ----- ----------- ------------
BALANCE, DECEMBER 29, 1996....... -- -- 1,285,384 13 1,187,503 12 46,905 (220,159)
Net loss....................... -- -- -- -- -- -- -- (3,509)
Shares returned to FICC at no
cost in connection with the
Offerings (Note 13).......... -- -- (766,782) (8) -- -- -- --
Conversion of Class A Common
Stock and Class B Common
Stock to Common Stock........ 1,706,105 17 (518,602) (5) (1,187,503) (12) -- --
Proceeds from common stock
offering, net of expenses of
$8,087....................... 5,000,000 50 -- -- -- -- 81,870 --
Stock compensation expense..... 735,185 7 -- -- -- -- 8,400 --
Translation adjustment......... -- -- -- -- -- -- -- --
--------- ----- --------- --- --------- ----- ----------- ------------
BALANCE, DECEMBER 28, 1997....... 7,441,290 $ 74 -- $ -- -- $ -- $ 137,175 $ (223,668)
--------- ----- --------- --- --------- ----- ----------- ------------
--------- ----- --------- --- --------- ----- ----------- ------------
CUMULATIVE
TRANSLATION
ADJUSTMENT TOTAL
--------------- ---------
BALANCE, JANUARY 1, 1995......... $ -- $(106,901)
Net loss....................... -- (58,653)
Contribution of capital........ -- 20
----- ---------
BALANCE, DECEMBER 31, 1995....... -- (165,534)
Net loss....................... -- (7,772)
Issuance of common stock to
lenders...................... -- 50
Proceeds from exercise of
warrants..................... -- 22
Compensation expense associated
with management stock plan... -- 5
Translation adjustment......... 73 73
----- ---------
BALANCE, DECEMBER 29, 1996....... 73 (173,156)
Net loss....................... -- (3,509)
Shares returned to FICC at no
cost in connection with the
Offerings (Note 13).......... -- (8)
Conversion of Class A Common
Stock and Class B Common
Stock to Common Stock........ -- --
Proceeds from common stock
offering, net of expenses of
$8,087....................... -- 81,920
Stock compensation expense..... -- 8,407
Translation adjustment......... (15) (15)
----- ---------
BALANCE, DECEMBER 28, 1997....... $ 58 $ (86,361)
----- ---------
----- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED
----------------------------------------
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................ $ (58,653) $ (7,772) $ (3,509)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Cumulative effect of change in accounting principle............... -- -- (2,236)
Stock compensation expense........................................ -- -- 8,407
Non-cash expenses associated with Recapitalization................ -- -- 399
Depreciation and amortization..................................... 33,343 32,979 31,692
Write-down of property and equipment.............................. 4,006 227 770
Deferred income tax expense (benefit)............................. 33,419 (5,926) (4,083)
Loss (gain) on asset retirements.................................. 595 (916) 1,939
Equity in net loss of joint venture............................... -- -- 1,530
Changes in operating assets and liabilities:
Trade accounts receivable....................................... 679 241 (3,930)
Inventories..................................................... (1,044) (66) (526)
Other assets.................................................... 587 1,309 (7,998)
Accounts payable................................................ (1,714) (199) 3,178
Accrued expenses and other long-term liabilities................ 16,572 6,286 (3,515)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................... 27,790 26,163 22,118
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................................. (19,092) (24,217) (31,638)
Proceeds from sales of property and equipment....................... 926 8,409 5,043
Purchases of investment securities.................................. -- -- (8,194)
Proceeds from sales and maturities of investment securities......... -- -- 12,787
Acquisition of Restaurant Insurance Corporation, net of cash
acquired.......................................................... -- -- (35)
Advances to and investments in joint venture........................ -- (4,500) (1,400)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES............................... (18,166) (20,308) (23,437)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution of capital............................................. 20 -- --
Proceeds from exercise of stock purchase warrants................... -- 22 --
Proceeds from issuance of common stock.............................. -- -- 81,920
Proceeds from issuance of senior notes.............................. -- -- 200,000
Proceeds from other borrowings...................................... 80,162 48,196 167,548
Repayments of debt.................................................. (72,713) (52,084) (438,673)
Repayments of capital lease and finance obligations................. (7,293) (7,131) (12,955)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................. 176 (10,997) (2,160)
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............................... -- 78 (15)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. 9,800 (5,064) (3,494)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.......................... 13,890 23,690 18,626
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR................................ $ 23,690 $ 18,626 $ 15,132
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES
Interest paid....................................................... $ 25,881 $ 36,000 $ 46,040
Income taxes paid................................................... -- -- 168
Capital lease obligations incurred.................................. 3,305 5,951 2,227
Capital lease obligations terminated................................ 288 128 1,587
Conversion of accrued interest payable to debt...................... 14,503 -- --
Issuance of common stock to lenders................................. -- 50 --
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 29, 1996 AND DECEMBER 28, 1997
1. ORGANIZATION
In September 1988, The Restaurant Company ("TRC") and another investor
acquired Friendly Ice Cream Corporation ("FICC"). Subsequent to the acquisition,
Friendly Holding Corporation ("FHC") was organized to hold the outstanding
common stock of FICC and in March 1996, FHC was merged into FICC. Additionally,
in March 1996, TRC distributed its shares of FICC's voting common stock to TRC's
shareholders and FICC deconsolidated from TRC.
In November 1997, FICC completed a public offering of five million shares of
its common stock for net proceeds of $81.9 million and a public offering of $200
million of Senior Notes (collectively, the "Offerings"). Concurrent with the
Offerings, the Company entered into a new senior secured credit facility
consisting of (i) a $90 million term loan, (ii) a $55 million revolving credit
facility and (iii) a $15 million letter of credit facility (collectively, the
"New Credit Facility"). Proceeds from the Offerings and New Credit Facility were
primarily used to repay the $353.7 million outstanding under the Company's
previous credit facility (collectively, the "Recapitalization").
References herein to "Friendly's" or the "Company" refer to Friendly Ice
Cream Corporation, its predecessor and its consolidated subsidiaries.
2. NATURE OF OPERATIONS
Friendly's owns and operates full-service restaurants in fifteen states. The
restaurants offer a wide variety of reasonably priced breakfast, lunch and
dinner menu items as well as frozen dessert products. The Company manufactures
substantially all of the frozen dessert products it sells, which are also
distributed through supermarkets and other retail locations. The Company also
franchises restaurants. For the years ended December 31, 1995, December 29, 1996
and December 28, 1997, restaurant sales were approximately 91%, 92% and 89%,
respectively, of the Company's revenues. As of December 31, 1995, December 29,
1996 and December 28, 1997, approximately 80%, 80% and 85%, respectively, of the
Company-owned restaurants were located in the Northeast United States. As a
result, a severe or prolonged economic recession in this geographic area may
adversely affect the Company more than certain of its competitors which are more
geographically diverse.
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION --
The consolidated financial statements include the accounts of FICC and its
subsidiaries after elimination of intercompany accounts and transactions.
FISCAL YEAR --
Friendly's fiscal year ends on the last Sunday in December, unless that day
is earlier than December 27 in which case the fiscal year ends on the following
Sunday.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS --
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
F-7
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Future facts and circumstances could alter management's estimates with respect
to the carrying value of long-lived assets and the adequacy of insurance
reserves.
REVENUE RECOGNITION --
The Company recognizes restaurant revenue upon receipt of payment from the
customer and retail revenue upon shipment of product. Franchise royalty income,
based on gross sales of franchisees, is payable monthly and is recorded on the
accrual method as earned. Initial franchise fees are recorded upon completion of
all significant services, generally upon opening of the restaurant.
CASH AND CASH EQUIVALENTS --
The Company considers all investments with an original maturity of three
months or less when purchased to be cash equivalents.
INVENTORIES -
Inventories are stated at the lower of first-in, first-out cost or market.
Inventories at December 29, 1996 and December 28, 1997 were (in thousands):
DECEMBER 29, DECEMBER 28,
1996 1997
----------------- -----------------
Raw Materials.......................................... $ 1,436 $ 2,011
Goods in Process....................................... 58 136
Finished Goods......................................... 13,651 13,524
------- -------
Total.................................................. $ 15,145 $ 15,671
------- -------
------- -------
INVESTMENT IN JOINT VENTURE --
In February 1996, the Company and another entity entered into a joint
venture, Shanghai Friendly Food Co., Ltd., a Chinese corporation. The Company
has a 50% ownership interest in the venture. The joint venture commenced
operations in April 1997. The Company accounts for its investment in the joint
venture using the equity method. As of December 28, 1997, the Company had a note
receivable for $1.4 million from the joint venture. The note bears interest at
11% per annum and matures on January 15, 1999. As of December 28, 1997, the
Company also had net receivables of $1,323,442 from the joint venture related to
transactions with the joint venture, which amount includes accrued interest of
$109,083 on the note receivable.
RESTRICTED CASH --
Restaurant Insurance Corporation ("RIC"), an insurance subsidiary (see Note
4), is required by the reinsurer of RIC to hold assets in trust whose value is
at least equal to certain of RIC's outstanding estimated insurance claim
liabilities. Accordingly, as of December 28, 1997, cash of $1,333,000 was
restricted.
F-8
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PROPERTY AND EQUIPMENT --
Property and equipment are carried at cost except for impaired assets which
are carried at fair value less cost to sell (see Note 6). Depreciation of
property and equipment is computed using the straight-line method over the
following estimated useful lives:
Buildings--30 years
Building improvements and leasehold improvements--20 years
Equipment--3 to 10 years
At December 29, 1996 and December 28, 1997, property and equipment included
(in thousands):
DECEMBER 29, DECEMBER 28,
1996 1997
----------------- -----------------
Land................................................... $ 75,004 $ 76,160
Buildings and Improvements............................. 112,359 119,121
Leasehold Improvements................................. 39,120 40,300
Assets Under Capital Leases............................ 42,893 12,709
Equipment.............................................. 216,536 247,052
Construction In Progress............................... 6,424 12,551
----------------- -----------------
Property and Equipment................................. 492,336 507,893
Less: Accumulated Depreciation and Amortization........ (206,175) (223,949)
----------------- -----------------
Property and Equipment, net............................ $ 286,161 $ 283,944
----------------- -----------------
----------------- -----------------
Major renewals and betterments are capitalized. Replacements and maintenance
and repairs which do not extend the lives of the assets are charged to
operations as incurred.
LONG-LIVED ASSETS --
Effective January 2, 1995, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" which had no impact.
The Company reviews the license agreement for the right to use various
trademarks and tradenames (see Note 5) for impairment on a quarterly basis. The
Company recognizes an impairment has occurred when the carrying value of the
license agreement exceeds the estimated future cash flows of the trademarked
products.
The Company reviews each restaurant property quarterly to determine which
properties should be disposed of. This determination is made based on poor
operating results, deteriorating property values and other factors. The Company
recognizes an impairment has occurred when the carrying value of property
exceeds its estimated fair value, which is estimated based on the Company's
experience selling similar properties and local market conditions, less costs to
sell (see Note 6).
F-9
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
RESTAURANT PREOPENING COSTS --
In April 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued an exposure draft
entitled "Reporting on the Costs of Start-Up Activities". The proposed
accounting standard contained in this draft would require entities to expense as
incurred all start-up and preopening costs that are not otherwise capitalizable
as long-lived assets. If adopted by the AICPA, this new accounting standard
would be effective for fiscal years beginning after December 15, 1998 with
earlier application encouraged. The comment period for the exposure draft ended
in July 1997, and the AICPA is expected to issue a final pronouncement on this
standard during the first quarter of 1998.
Consistent with the practice of many restaurant entities, the Company defers
its restaurant preopening costs and amortizes them over the twelve month period
following the opening of each respective restaurant beginning in the first full
month of operation. At December 29, 1996 and December 28, 1997, deferred
preopening costs were approximately $184,000 and $363,000, respectively. If the
new accounting principle is adopted by the AICPA, the Company will implement the
new policy as of the beginning of 1999. The implementation will involve the
recognition of the cumulative effect of the change in accounting principle
required by the new standard as a one-time charge against earnings, net of any
related income tax effect, as of the beginning of 1999.
RESTAURANT CLOSURE COSTS --
Restaurant closure costs are recognized when a decision is made to close a
restaurant. Restaurant closure costs include writing down the carrying amount of
a restaurant's assets to estimate fair market value, less costs of disposal, and
the net present value of any remaining operating lease payments after the
expected closure date.
INSURANCE RESERVES --
The Company is self-insured through retentions or deductibles for the
majority of its workers' compensation, automobile, general liability, product
liability and group health insurance programs. Self-insurance amounts vary up to
$500,000 per occurrence. Insurance with third parties, some of which is then
reinsured through RIC (see Note 4), is in place for claims in excess of these
self-insured amounts. RIC assumes 100% of the risk from $500,000 to $1,000,000
per occurrence for the Company's worker's compensation, general liability and
product liability insurance. The Company's and RIC's liability for estimated
incurred losses are actuarially determined and recorded in the accompanying
consolidated financial statements on an undiscounted basis.
INCOME TAXES --
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", which
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. A valuation allowance is recorded for deferred tax
assets whose realization is not likely.
F-10
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
ADVERTISING --
The Company expenses production and other advertising costs the first time
the advertising takes place. For the years ended December 31, 1995, December 29,
1996 and December 28, 1997, advertising expense was approximately $17,459,000,
$18,231,000 and $20,990,000, respectively.
INTEREST RATE SWAP AGREEMENT --
In connection with the Recapitalization, the Company entered into an
interest rate swap agreement. The interest differential to be paid or received
is accrued and recorded as an adjustment to interest expense (see Note 7).
EARNINGS PER SHARE --
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share", which established new standards for
computing and presenting earnings per share. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997.
Accordingly, all period earnings per share data presented is in accordance with
SFAS No. 128.
Pursuant to the requirements of the Securities and Exchange Commission,
common stock issued at prices below the public offering price during the twelve
months immediately preceding the initial public offering in November 1997 (see
Note 13) are included in the calculation of weighted average common shares
outstanding. Weighted average common shares outstanding were 1,118,082,
2,161,124 and 3,110,874 for the years ended December 31, 1995, December 29, 1996
and December 28, 1997, respectively.
STOCK-BASED COMPENSATION --
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation" which was adopted by FICC effective January 1, 1996.
SFAS No. 123 requires the measurement of the fair value of stock options or
warrants granted to be included in the statement of operations or that pro forma
information related to the fair value be disclosed in the notes to financial
statements. The Company has determined that it will continue to account for
stock-based compensation for employees under Accounting Principles Board Opinion
No. 25 and elect the disclosure-only alternative under SFAS No. 123.
NEW ACCOUNTING PRONOUNCEMENTS --
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of comprehensive
income (net income (loss) together with other non-owner changes in equity) and
its components in a full set of general purpose financial statements. SFAS No.
130 is effective for financial statements issued for periods beginning after
December 15, 1997 and earlier application is permitted. The Company's
comprehensive income is not materially different than the Company's net loss for
all periods presented.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which requires disclosures for each
segment of an enterprise that are similar to those required under current
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. SFAS No. 131 is effective for financial
statements issued for periods
F-11
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
beginning after December 15, 1997 and earlier application is encouraged. Under
the terms of the new standard, the Company will report segment information for
restaurant, retail and franchise operations when material.
4. ACQUISITION OF RESTAURANT INSURANCE CORPORATION
On March 19, 1997, FICC acquired all of the outstanding shares of common
stock of Restaurant Insurance Corporation ("RIC"), a Vermont corporation, from
TRC for cash of $1,300,000 and a $1,000,000 promissory note payable to TRC
bearing interest at an annual rate of 8.25%. The promissory note and accrued
interest of approximately $1,024,000 was paid on June 30, 1997. RIC, which was
formed in 1993, reinsures certain Company risks (i.e. workers' compensation,
employer's liability, general liability and product liability) from a third
party insurer (see Note 12).
The acquisition was accounted for as a purchase. Accordingly, the results of
operations for RIC for the period subsequent to March 20, 1997 are included in
the accompanying consolidated financial statements. No pro forma information is
included since the effect of the acquisition is not material. The purchase price
was allocated to net assets acquired based on the estimated fair market values
at the date of acquisition. The purchase price was allocated as follows (in
thousands):
Cash and Cash Equivalents.......................................... $ 2,265
Restricted Cash and Investments.................................... 12,061
Receivables and Other Assets....................................... 3,101
Loss Reserves...................................................... (13,231)
Deferred Income Taxes.............................................. (11)
Other Liabilities.................................................. (1,885)
---------
$ 2,300
---------
---------
F-12
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INTANGIBLE ASSETS AND DEFERRED COSTS
Intangible assets and deferred costs net of accumulated amortization as of
December 29, 1996 and December 28, 1997 were (in thousands):
DECEMBER 29, DECEMBER 28,
1996 1997
------------ ------------
License agreement for the right to use various trademarks and tradenames amortized
over a 40 year life on a straight line basis....................................... $ 14,764 $ 14,298
Deferred financing costs amortized over the terms of the related loans on an
effective yield basis.............................................................. 1,255 11,696
------------ ------------
$ 16,019 $ 25,994
------------ ------------
------------ ------------
As a result of the Recapitalization in November 1997, previously deferred
financing costs of $399,000 were written-off and are included in expenses
associated with the Recapitalization in the accompanying consolidated statement
of operations for the year ended December 28, 1997.
In November 1994, FHC filed a Form S-1 Registration Statement and in 1995
elected not to proceed with the registration. Accordingly, previously deferred
costs totaling $3,346,000 related to this registration were expensed during the
year ended December 31, 1995.
6. WRITE-DOWN OF PROPERTY AND EQUIPMENT
At December 31, 1995, December 29, 1996 and December 28, 1997, there were
81, 50 and 40 restaurant properties held for disposition, respectively. The
restaurants held for disposition generally have poor operating results,
deteriorating property values or other adverse factors. The Company determined
that the carrying values of certain of these properties exceeded their estimated
fair values less costs to sell. Accordingly, during the year ended December 31,
1995, the carrying values of 51 properties were reduced by an aggregate of
$4,006,000; during the year ended December 29, 1996, the carrying values of 6
properties were reduced by an aggregate of $227,000 and during the year ended
December 28, 1997, the carrying values of 12 properties were reduced by an
aggregate of $770,000. The Company plans to dispose of the 40 properties by
December 31, 1998. The operating loss, prior to depreciation expense which is
not reported at the restaurant level, for the properties held for disposition
was $1,972,000, $1,129,000 and $1,351,000 for the years ended December 31, 1995,
December 29, 1996 and December 28, 1997, respectively. The carrying value of the
properties held for disposition at December 31, 1995, December 29, 1996 and
December 28, 1997 was approximately $7,491,000, $4,642,000 and $3,050,000,
respectively which is included in property and equipment in the accompanying
consolidated balance sheets.
F-13
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT
Debt at December 29, 1996 and December 28, 1997 consisted of the following
(in thousands):
DECEMBER 29, DECEMBER 28,
1996 1997
------------ ------------
Senior Notes, 10.5%, due December 1, 2007........................ $ -- $ 200,000
New Credit Facility:
Revolving Credit Facility, due November 15, 2002............... -- 9,000
Term Loan:
Tranche A, due November 15, 2002............................. -- 34,286
Tranche B, due November 15, 2004............................. -- 34,286
Tranche C, due November 15, 2005............................. -- 21,428
Old Credit Facility:
Revolving Credit Loans, 11%.................................... 36,605 --
Term Loans, 11%................................................ 335,073 --
Insurance Premium Finance Loans, 8.34%-8.35% as of December 29,
1996 and 8.34%-8.75% as of December 28, 1997; due July 10,
1998-November 2, 1998 1,259 2,842
Other............................................................ 147 117
------------ ------------
373,084 301,959
Less: Current Portion............................................ 1,289 2,875
------------ ------------
Total Long-Term Debt............................................. $ 371,795 $ 299,084
------------ ------------
------------ ------------
Principal payments due under long-term debt as of December 28, 1997 are as
follows (in thousands):
YEAR AMOUNT
- ---------------------------------------------------------------------------------- ----------
1998.............................................................................. $ 2,875
1999.............................................................................. 37
2000.............................................................................. 47
2001.............................................................................. --
2002.............................................................................. 43,286
2003 and Thereafter............................................................... 255,714
----------
Total............................................................................. $ 301,959
----------
----------
Effective January 1, 1991, the Company and its lenders entered into an
Amended and Restated Revolving Credit and Term Loan Agreement (the "Agreement")
and effective January 1, 1996, the Agreement was again amended and restated (the
"Amendment"). In connection with the Amendment, revolving credit loans and term
loans totaling $373,622,000 at December 31, 1995 were converted to revolving
credit loans of $38,549,000 and term loans of $335,073,000. In connection with
the Amendment, the lenders received an aggregate of 1,187,503 shares of FICC's
Class B Common Stock. The estimated fair market value of the shares issued of
$50,000 was recorded as a deferred financing cost during the year ended December
29, 1996. Commencing January 1, 1996, interest accrued on the revolving credit
and term loans (collectively, the "Old Credit Facility") at an annual rate of
11% with .5% of the accrued interest, which was not currently payable,
classified in other long-term liabilities. The deferred interest payable was
F-14
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
waived by the lenders since the Old Credit Facility was repaid in full in
connection with the Recapitalization in November 1997. Accordingly,
approximately $3.6 million of deferred interest was recorded as a reduction in
interest expense in November 1997.
The $200 million Senior Notes issued in connection with the November 1997
Recapitalization (the "Notes") are unsecured, senior obligations of FICC,
guaranteed on an unsecured, senior basis by FICC's Friendly's Restaurants
Franchise, Inc. subsidiary, but are effectively subordinated to all secured
indebtedness of FICC, including the indebtedness incurred under the New Credit
Facility. The Notes mature on December 1, 2007. Interest on the Notes is payable
at 10.5% per annum semi-annually on June 1 and December 1 of each year
commencing on June 1, 1998. The Notes are redeemable, in whole or in part, at
FICC's option any time on or after December 1, 2002 at redemption prices from
105.25% to 100.00%. The redemption price is based on the redemption date. Prior
to December 1, 2000, FICC may redeem up to $70 million of the Notes at 110.50%
with the proceeds of one or more equity offerings, as defined.
The Company entered into the New Credit Facility in November 1997 in
connection with the Recapitalization. The New Credit Facility includes a $90
million term loan (the "Term Loan"), a $55 million revolving credit facility
(the "Revolving Credit Facility") and a $15 million letter of credit facility
(the "Letter of Credit Facility"). The New Credit Facility is collateralized by
substantially all of FICC's assets and by a pledge of FICC's shares of certain
of its subsidiaries' stock.
Borrowings under the New Credit Facility bear interest, at the Company's
option, at either (i) the Eurodollar Rate plus 2.25% or (ii) the ABR rate (the
greater of (a) a specified prime rate or (b) the federal funds rate plus 0.50%)
plus 0.75% per annum for drawings under the Revolving Credit Facility and the
Letter of Credit Facility, 0.50% per annum for amounts undrawn under the
Revolving Credit Facility and 2.25% per annum for amounts issued but undrawn
under the Letter of Credit Facility. Borrowings under the Term Loan bear
interest at the Company's option, at either the Eurodollar Rate plus 2.25%,
2.50% and 2.75% or the ABR plus 0.75%, 1.00% and 1.25% for Tranche A, B and C,
respectively. The Company entered into a three year interest rate swap agreement
to hedge the impact of interest rate changes on the Term Loan. The interest rate
swap agreement has a notional amount of $90 million and effectively fixes the
interest rate on Tranches A, B and C of the Term Loan at 8.25%, 8.50% and 8.75%,
respectively (see Note 3).
Annual amortization amounts under the Term Loan will total $4.0 million,
$9.1 million, $10.8 million, $12.6 million, $16.0 million, $17.4 million and
$20.1 million in 1999 through 2005, respectively. In addition to the scheduled
amortization, the Term Loan would be permanently reduced by (i) specified
percentages of each year's Excess Cash Flow (as defined in the New Credit
Facility), (ii) specified percentages of the aggregate net cash proceeds from
certain issuances of indebtedness and (iii) 100% of the aggregate net cash
proceeds from asset sales not in the ordinary course of business and certain
insurance claim proceeds, in each case in this clause (iii), not re-employed
within 180 days in the Company's business, exclusive of up to $7.5 million of
aggregate net proceeds received from asset sales subsequent to the closing
relating to the New Credit Facility. Any such applicable proceeds and Excess
Cash Flow shall be applied to the Term Loan in inverse order of maturity. The
Revolving Credit Facility matures on November 15, 2002.
Prior to the Recapitalization, under the terms of the Amendment, FICC had a
commitment from a bank to issue letters of credit totaling $5,815,000 through
May 1, 1998. As of December 29, 1996 and December 28, 1997, total letters of
credit issued were $4,390,000 and $14,404,000 under the Old Credit
F-15
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
Facility and the New Credit Facility, respectively. During the years ended
December 31, 1995, December 29, 1996 and December 28, 1997, there were no
drawings against the letters of credit.
At December 29, 1996 and December 28, 1997, the unused portion of the
revolver was $13,395,000 (Old Credit Facility) and $46,000,000 (New Credit
Facility), respectively. The total average unused portions of the revolver and
letters of credit commitments was $10,685,000, $12,796,000 and $13,955,000 for
the years ended December 31, 1995 and December 29, 1996 and the period from
December 30, 1996 through November 18, 1997, respectively. The average unused
portions of the revolver and letters of credit commitments for the period from
November 19, 1997 through December 28, 1997 was $50,046,000.
The Senior Notes and New Credit Facility include certain restrictive
covenants including limitations on indebtedness, limitations on restricted
payments such as dividends and stock repurchases and limitations on sales of
assets and of subsidiary stock. Additionally, the New Credit Facility also
includes certain financial covenants. The financial covenant requirements, as
defined under the New Credit Facility, and actual ratios/amounts as of and for
the twelve months ended December 28, 1997 were:
REQUIREMENT ACTUAL
--------------- ---------------
Consolidated Leverage Ratio................................. 4.75 to 1 4.33 to 1
Consolidated Interest Coverage Ratio........................ 1.50 to 1 1.91 to 1
Consolidated Fixed Charge Coverage Ratio.................... 1.40 to 1 1.65 to 1
Consolidated Net Worth (Deficit)............................ $(95,000,000) $(86,361,000)
The fair value of the Company's financial instruments at December 28, 1997
was as follows (in thousands):
CARRYING AMOUNT FAIR VALUE
---------------- ----------
Senior Notes.................................................... $ 200,000 $ 203,000
Term Loan....................................................... 90,000 90,000
Revolving Credit Facility....................................... 9,000 9,000
Other Debt...................................................... 2,959 2,959
Interest Rate Swap Agreement.................................... -- --
-------- ----------
Total........................................................... $ 301,959 $ 304,959
-------- ----------
-------- ----------
The fair value of the Senior Notes was determined based on the actual trade
price for a trade that occurred on December 28, 1997. The Company believes that
the carrying value of the Revolving Credit Facility and Term Loan as of December
28, 1997 approximated fair value since the obligations have a variable interest
rate and the obligations were issued in November 1997. The Company believes that
the carrying value of the other debt as of December 28, 1997 approximates the
fair value based on the terms of the obligations and the rates currently
available to the Company for similar obligations. Additionally, the Company
believes that the fair value of the interest rate swap agreement (see Note 3) is
not material as of December 28, 1997, since the agreement was entered into in
November 1997 and interest rates were not significantly different at December
28, 1997.
FICC's revolving credit and term loans under the Old Credit Facility were
not publicly traded and prices and terms of the few transactions which were
completed were not available to FICC. Since no information was available on
prices of completed transactions, the terms of the loans were complex and the
F-16
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
relative risk involved was difficult to evaluate, management believes it is not
practical to estimate the fair value of the loans under the Old Credit Facility
as of December 29, 1996.
8. LEASES
As of December 31, 1995, December 29, 1996 and December 28, 1997, the
Company operated 735, 707 and 662 restaurants, respectively. These operations
were conducted in premises owned or leased as follows:
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
----------------- ----------------- -----------------
Land and Building Owned........................... 313 296 279
Land Leased and Building Owned.................... 164 161 146
Land Leased and Building Leased................... 258 250 237
--- --- ---
735 707 662
--- --- ---
--- --- ---
Restaurants in shopping centers are generally leased for a term of 10 to 20
years. Leases of freestanding restaurants generally are for a 15 or 20 year
lease term and provide for renewal options for three or four five-year renewals.
Most leases provide for minimum payments plus a percentage of sales in excess of
stipulated amounts. Additionally, the Company leases certain restaurant
equipment over lease terms from three to seven years.
Future minimum lease payments under noncancelable leases with an original
term in excess of one year as of December 28, 1997 were (in thousands):
OPERATING CAPITAL
YEAR LEASES LEASES
- ------------------------------------------------------------------------ ----------- ---------
1998.................................................................... $ 12,767 $ 3,131
1999.................................................................... 11,796 2,963
2000.................................................................... 10,428 2,588
2001.................................................................... 8,511 2,138
2002.................................................................... 5,920 1,522
2003 and Thereafter..................................................... 16,853 11,206
----------- ---------
Total Minimum Lease Payments............................................ $ 66,275 23,548
-----------
-----------
Less: Amount Representing Interest 10,630
---------
Present Value of Minimum Lease Payments $ 12,918
---------
---------
F-17
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LEASES (CONTINUED)
Capital lease obligations reflected in the accompanying consolidated balance
sheets have effective rates ranging from 8% to 12% and are payable in monthly
installments through 2016. Maturities of such obligations at December 28, 1997
were (in thousands):
YEAR AMOUNT
- ----------------------------------------------------------------------------------- ---------
1998............................................................................... $ 1,577
1999............................................................................... 1,632
2000............................................................................... 1,470
2001............................................................................... 1,205
2002............................................................................... 724
2003 and Thereafter................................................................ 6,310
---------
Total.............................................................................. $ 12,918
---------
---------
Rent expense included in the accompanying consolidated financial statements
for operating leases was (in thousands):
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
------------ ------------ ------------
Minimum Rentals................................... $ 15,175 $ 16,051 $ 16,007
Contingent Rentals................................ 2,012 1,918 1,762
------------ ------------ ------------
Total............................................. $ 17,187 $ 17,969 $ 17,769
------------ ------------ ------------
------------ ------------ ------------
9. INCOME TAXES
Prior to March 23, 1996, FICC and its subsidiaries were included in the
consolidated Federal income tax return of TRC. Under a tax sharing agreement
between TRC and FICC (formerly FHC) (the "TRC/ FICC Agreement"), FICC and its
subsidiaries (the "FICC Group") were obligated to pay TRC its allocable share of
the TRC group tax liability, determined as if the FICC Group were filing a
separate consolidated income tax return.
On March 23, 1996, TRC distributed its shares of FICC's voting common stock
to TRC's shareholders (see Note 1), the FICC Group deconsolidated from the TRC
group and the TRC/FICC Agreement expired. In addition, on March 26, 1996, shares
of Class B Common Stock were issued to FICC's lenders (See Note 7) which
resulted in an ownership change pursuant to Internal Revenue Code Section 382.
Under the TRC/FICC Agreement, NOLs generated by the FICC Group and utilized
or allocated to TRC were available to the FICC Group on a separate company basis
to carryforward. Pursuant to the TRC/FICC Agreement, as of March 23, 1996,
$99,321,000 of carryforwards would have been available to the FICC Group to
offset future taxable income of the FICC Group. However, as a result of the
deconsolidation from TRC, the deferred tax asset related to the $65,034,000 of
NOLs utilized by TRC was written off. As of December 29, 1996, as a result of
the change in ownership and limitations under Section 382 of the Internal
Revenue Code, a valuation allowance was placed on $29,686,000 of the $34,287,000
remaining Federal NOL carryforwards generated for the period prior to March 23,
1996. The amount of pre-change NOLs ("Old NOLs") not reserved for as of December
29, 1996 represented the amount of NOLs which had become available as of
December 29, 1996 as a result of FICC realizing gains which were
F-18
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
unrealized as of the date of the ownership change. Due to restrictions similar
to Section 382 in most of the states FICC operates in and short carryforward
periods, FICC has fully reserved for all state NOL carryforwards generated
through March 26, 1996 as of December 29, 1996. For the period from March 23,
1996 to December 29, 1996, FICC generated a net operating loss carryforward of
$5,765,000 for which no valuation allowance was provided.
During the year ended December 28, 1997, the Company realized gains of
$861,000 which were unrealized as of the date of the first ownership change.
Accordingly, the valuation allowance was reduced by approximately $300,000 as of
December 28, 1997. During the year ended December 28, 1997, the Company used
approximately $615,000 of Old NOLs to offset current year taxable income. As a
result, as of December 28, 1997, the Company has aggregate NOL carryforwards of
approximately $39.4 million which expire between 2001 and 2012.
The Common Stock Offering resulted in the Company having another change of
ownership under Section 382 of the Internal Revenue Code in November 1997. As a
result, usage of the NOLs generated between the last ownership change and the
Common Stock Offering ("New NOLs") is also limited. The amount of NOLs which may
be used each year prior to any built in gains being triggered is approximately
$2.4 million. While the limitation on the use of the New NOLs will delay when
the New NOLs are utilized, the Company expects all of the New NOLs to be
utilized before they expire. Accordingly, no valuation allowance is required
related to any New NOLs as of December 28, 1997. The Company does not believe
that it is more likely than not that all Old NOLs will become available through
realization of unrealized gains as of the date of the March 1996 ownership
change. Accordingly, a valuation allowance has been provided against Old NOLs
which have not been made available as of December 28, 1997. As of December 28,
1997, a valuation allowance has been provided against an aggregate of $28.8
million of Old NOLs.
The (provision for) benefit from income taxes for the years ended December
31, 1995, December 29, 1996 and December 28, 1997 was as follows (in thousands):
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
------------ ------------- -------------
Current Provision
Federal........................................... $ -- $ -- $ --
State............................................. -- -- (86)
Foreign........................................... -- (58) (21)
------------ ------ ------
Total Current Provision........................... -- (58) (107)
------------ ------ ------
Deferred (Provision) Benefit
Federal........................................... (27,465) 5,126 2,291
State............................................. (5,954) 800 255
Foreign........................................... -- -- --
------------ ------ ------
Total Deferred (Provision) Benefit................ (33,419) 5,926 2,546
------------ ------ ------
Total (Provision For) Benefit From Income Taxes... $ (33,419) $ 5,868 $ 2,439
------------ ------ ------
------------ ------ ------
F-19
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
A reconciliation of the difference between the statutory Federal income tax
rate and the effective income tax rate follows:
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
--------------- ----------------- -----------------
Statutory Federal Income Tax Rate................. 35% 35% 35%
State Income Taxes Net of Federal Benefit......... 11 14 6
Write-off of Intercompany NOL Carryforwards and
Tax Credits..................................... (85) (13) --
(Decrease) Increase in Federal NOL Valuation
Allowance....................................... (57) 10 (4)
Increase in State NOL Valuation Allowance......... (30) (8) --
Tax Credits....................................... 3 3 12
Nondeductible Expenses............................ (1) (1) (10)
Other............................................. (8) 3 2
-- --
---
Effective Tax Rate................................ (132)% 43% 41%
-- --
-- --
---
---
Deferred tax assets and liabilities are determined as the difference between
the financial statement and tax bases of the assets and liabilities multiplied
by the enacted tax rates in effect for the year in which the differences are
expected to reverse. Significant deferred tax assets (liabilities) at December
29, 1996 and December 28, 1997 were as follows (in thousands):
DECEMBER 29, DECEMBER 28,
1996 1997
------------ ------------
Property and Equipment........................................... $ (50,866) $ (47,483)
Federal and State NOL Carryforwards (net of valuation allowance
of $21,220 and $21,151 at December 29, 1996 and December 28,
1997, respectively)............................................ 4,355 4,604
Insurance Reserves............................................... 5,788 4,534
Inventories...................................................... 1,862 1,811
Accrued Pension.................................................. 4,388 3,138
Intangible Assets................................................ (6,037) (5,838)
Tax Credit Carryforwards......................................... 1,001 2,234
Other............................................................ 3,412 3,438
------------ ------------
Net Deferred Tax Liability....................................... $ (36,097) $ (33,562)
------------ ------------
------------ ------------
F-20
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS
Substantially all of the employees of the Company are covered by a
non-contributory defined benefit pension plan. Effective January 1, 1992, the
plan was changed from a traditional defined benefit plan to a defined benefit
cash balance plan. Plan benefits are based on years of service and participant
compensation during their years of employment. The Company accrues the cost of
its pension plan over its employees' service lives.
Under the cash balance plan, a nominal account for each participant is
established. The Company makes an annual contribution to each participant's
account based on current wages and years of service. Each account earns a
specified rate of interest which is adjusted annually. The Company's policy is
to make contributions to the plan which provide for benefits. Plan expenses may
also be paid from the assets of the plan.
For the years ended December 31, 1995, December 29, 1996 and December 28,
1997, net pension expense was (in thousands):
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
------------ ------------ ------------
Service Cost...................................... $ 3,877 $ 4,202 $ 3,764
Interest Cost..................................... 5,420 5,781 5,922
Actual Gain on Plan Assets........................ (17,438) (9,428) (21,905)
Deferral of Asset Gain............................ 10,850 2,377 13,762
Net Amortization of Deferral of Asset Gain........ (770) (651) (1,020)
------------ ------------ ------------
Net Pension Expense............................... $ 1,939 $ 2,281 $ 523
------------ ------------ ------------
------------ ------------ ------------
The funded status of the plan as of December 29, 1996 and December 28, 1997
was (in thousands):
DECEMBER 29, DECEMBER 28,
1996 1997
------------ ------------
Actuarial Present Value of Benefit Obligations:
Vested......................................................... $ 56,752 $ 65,313
Non-vested..................................................... 1,316 1,515
------------ ------------
Accumulated Benefit Obligations.................................. $ 58,068 $ 66,828
------------ ------------
------------ ------------
Projected Benefit Obligations.................................... $ 76,768 $ 79,311
Plan Assets at Market Value...................................... 90,626 107,937
------------ ------------
Plan Assets in Excess of Projected Benefit Obligation............ 13,858 28,626
Unrecognized Prior Service Costs................................. (3,077) (8,700)
Unrecognized Net Gain............................................ (21,044) (26,922)
------------ ------------
Accrued Pension Liability........................................ $ (10,263) $ (6,996)
------------ ------------
------------ ------------
For the years ended December 31, 1995, December 29, 1996 and December 28,
1997, the weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 8.00%, 7.75% and 7.25%,
respectively. The rate of annual increase in future compensation levels used
ranged from 4.5% to 6.0% for the year ended December 31, 1995, from 4.0% to 5.5%
for the year ended December 29, 1996 and 4.0% to 5.5% for the year ended
December 28, 1997, depending on the employee
F-21
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
group. The expected long-term rate of return on plan assets was 9.5% for the
years ended December 31, 1995 and December 29, 1996 and 10.5% for the year ended
December 28, 1997.
Effective December 30, 1996, FICC changed its method of calculating the
market-related value of plan assets used in determining the return-on-asset
component of annual pension expense and the cumulative net unrecognized gain or
loss subject to amortization. Under the previous accounting method, the
calculation of the market-related value of assets reflected amortization of the
actual realized and unrealized capital return on assets on a straight-line basis
over a five-year period. Under the new method, the calculation of the
market-related value of assets reflects the long-term rate of return expected by
the Company and amortization of the difference between the actual return
(including capital, dividends and interest) and the expected return over a
five-year period. The Company believes the new method is widely used in practice
and preferable because it results in calculated plan asset values that more
closely approximate fair value, while still mitigating the effect of annual
market-value fluctuations. Under both methods, only the cumulative net
unrecognized gain or loss which exceeds 10% of the greater of the projected
benefit obligation or the market-related value of plan assets is subject to
amortization. This change resulted in a noncash benefit for the year ended
December 28, 1997 of $2,236,000 (net of taxes of $1,554,000) which represents
the cumulative effect of the change related to years prior to fiscal 1997 and
$607,000 (net of taxes of $421,000) in lower pension expense related to the year
ended December 28, 1997 as compared to the previous accounting method. Had this
change been applied retroactively, pension expense would have been reduced by
$879,000 and $946,000 for the years ended December 31, 1995 and December 29,
1996, respectively.
The Company's Employee Savings and Investment Plan (the "Plan") covers all
eligible employees and is intended to be qualified under Sections 401(a) and
401(k) of the Internal Revenue Code. For the years ended December 31, 1995,
December 29, 1996 and December 28, 1997, the Company made discretionary matching
contributions at the rate of 75% of a participant's first 2% of his/her
contributions and 50% of a participant's next 2% of his/her contributions. All
employee contributions are fully vested. Employer contributions are vested at
the completion of five years of service or at retirement, death, disability or
termination at age 65 or over, as defined by the Plan. Contribution and
administrative expenses for the Plan were approximately $1,086,000, $1,002,000
and $1,089,000 for the years ended December 31, 1995, December 29, 1996 and
December 28, 1997, respectively.
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides health care and life insurance benefits to certain
groups of employees upon retirement. Eligible employees may continue their
coverages if they are receiving a pension benefit, are 55 years of age, and have
completed 10 years of service. The plan requires contributions for health care
coverage from participants who retired after September 1, 1989. Life insurance
benefits are non-contributory. Benefits under the plan are provided through the
Company's general assets.
F-22
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
The Company accrues the cost of postretirement benefits over the years
employees provide services to the date of their full eligibility for such
benefits. The components of the net postretirement benefit cost for the years
ended December 31, 1995, December 29, 1996 and December 28, 1997 were (in
thousands):
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
--------------- --------------- ---------------
Service Cost of Benefits Earned................... $ 105 $ 125 $ 134
Interest Cost on Accumulated Postretirement
Benefit Obligation, net of Amortization......... 478 374 374
----- ----- -----
Net Postretirement Benefit Expense................ $ 583 $ 499 $ 508
----- ----- -----
----- ----- -----
The postretirement benefit liability as of December 29, 1996 and December
28, 1997 included the following components (in thousands):
DECEMBER 29, DECEMBER 28,
1996 1997
------------- -------------
Actuarial Present Value of Postretirement Benefit Obligation:
Retirees......................................................... $ 3,837 $ 3,706
Other Fully Eligible Plan Participants........................... 358 403
Other Active Plan Participants................................... 1,514 1,932
------ ------
Accumulated Postretirement Benefit Obligation.................... 5,709 6,041
Plan Changes..................................................... 1,113 1,051
Unrecognized Net Gain............................................ 328 24
------ ------
Postretirement Benefit Liability................................. $ 7,150 $ 7,116
------ ------
------ ------
The discount rate used to determine the accumulated postretirement benefit
obligation was 8.00%, 7.75% and 7.25% for the years ended December 31, 1995,
December 29, 1996 and December 28, 1997, respectively. The assumed health care
cost trend rate used to measure the accumulated postretirement benefit
obligation was 11.5% gradually declining to 5.5% in 2000 and thereafter for the
year ended December 31, 1995, 9.25% gradually declining to 5.25% in 2000 and
thereafter for the year ended December 29, 1996 and 8.25% gradually declining to
5.25% in 2000 and thereafter for the year ended December 28, 1997. A
one-percentage-point increase in the assumed health care cost trend rate would
have increased the postretirement benefit expense by approximately $55,000,
$49,000 and $51,000, and would have increased the accumulated postretirement
benefit obligation by approximately $478,000, $411,000 and $457,000 for the
years ended December 31, 1995, December 29, 1996 and December 28, 1997,
respectively.
The Company increased the required contributions from participants who
retired after July 31, 1994, for health coverage. This and other plan changes
are being amortized over the expected remaining employee service period of
active plan participants.
F-23
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INSURANCE RESERVES
At December 31, 1995, December 29, 1996 and December 28, 1997, insurance
reserves of approximately $20,847,000, $16,940,000 and $26,974,000,
respectively, had been recorded. Insurance reserves at December 28, 1997
included RIC's reserve for the Company's insurance liabilities of approximately
$13,793,000. Reserves at December 31, 1995, December 29, 1996 and December 28,
1997 also included accruals related to postemployment benefits and
postretirement benefits other than pensions. While management believes these
reserves are adequate, it is reasonably possible that the ultimate liabilities
will exceed such estimates.
Classification of the reserves was as follows (in thousands):
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
------------ ------------ ------------
Current........................................... $ 6,605 $ 3,973 $ 7,248
Long-term......................................... 14,242 12,967 19,726
------------ ------------ ------------
Total............................................. $ 20,847 $ 16,940 $ 26,974
------------ ------------ ------------
------------ ------------ ------------
Following is a summary of the activity in the insurance reserves for the
years ended December 31, 1995, December 29, 1996 and December 28, 1997 (in
thousands):
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
------------ ------------ ------------
Beginning balance................................. $ 23,216 $ 20,847 $ 16,940
Provision......................................... 11,336 8,363 9,605
Payments.......................................... (13,705) (12,270) (12,802)
Acquisition of RIC................................ -- -- 13,231
------------ ------------ ------------
Ending balance.................................... $ 20,847 $ 16,940 $ 26,974
------------ ------------ ------------
------------ ------------ ------------
13. STOCKHOLDERS' EQUITY (DEFICIT)
As of December 29, 1996, three classes of common stock were authorized:
Class A (voting), Class B (limited voting) and Class C (non-voting). In
connection with the Recapitalization in November 1997, FICC amended its articles
of organization to give effect to a 923.6442-to-1 split of Class A Common Stock
and Class B Common Stock and authorize a new class of common stock. The
accompanying consolidated financial statements have been restated to reflect the
stock split.
A Stock Rights Plan ("SRP") was adopted by FICC in 1991. Under the SRP,
certain eligible individuals were granted rights to purchase shares of voting
common stock of FICC for $.01 per share, subject to certain vesting,
anti-dilution and exercise requirements. As of December 31, 1995, the aggregate
number of shares which could have been issued under the SRP was 88,801 of which
41,316 rights were issued and vested. The estimated fair value of the rights
vested was not material and no compensation expense was recorded during the year
ended December 31, 1995. On March 25, 1996, FICC established the Management
Stock Plan ("MSP"). The MSP provided for persons with rights granted under the
SRP to waive their rights under such plan and receive shares of FICC's Class A
Common Stock. Accordingly, in April 1996, all of the participants in the SRP
made this election and the SRP rights then outstanding were canceled and 122,888
shares of Class A Common Stock were issued, of which 61,650 were vested as of
December 29, 1996. In April 1996, the fair value of the 122,888 shares of Class
A Common Stock issued
F-24
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
was approximately $30,700, or $0.25 per share. The estimated fair value of the
20,334 additional shares vested in 1996 of $5,000 was recorded as compensation
expense in the year ended December 29, 1996.
In connection with the Recapitalization, 766,782 shares of Class A Common
Stock were returned to FICC from certain shareholders for no consideration. The
shares were returned in accordance with an agreement with the Company's existing
lenders as a condition to the Recapitalization. Of such shares, 99,951 shares
were issued to FICC's Chief Executive Officer and vested immediately, 371,285
shares were reserved for issuance under a restricted stock plan (the "Restricted
Stock Plan") which was adopted by FICC in connection with the Recapitalization,
as described below, and 295,546 shares were issued to certain employees under a
limited stock compensation program in which a one-time award of common stock was
made to certain employees of the Company. The 295,546 shares issued under the
limited stock compensation program vested immediately. Additionally, 27,113
shares were issued under the MSP and immediately vested and the remaining 61,238
nonvested shares under the MSP vested. The estimated fair value of $8,407,000 of
the (i) 27,113 shares issued and vested under the MSP, (ii) 61,238 shares
previously issued under the MSP which vested in connection with the
Recapitalization, (iii) 99,951 vested shares issued to FICC's Chief Executive
Officer in connection with the Recapitalization and (iv) 295,546 vested shares
issued to certain employees was recorded as compensation expense by the Company
upon consummation of the Recapitalization.
The Restricted Stock Plan, pursuant to which 371,285 shares are authorized
for issuance, provides for the award of common stock, the vesting of which is
subject to conditions and limitations established by the Board of Directors.
Such conditions may include continued employment with the Company or the
achievement of performance measures. Upon the award of common stock, the
participant has the rights of a stockholder, including but not limited to the
right to vote such stock and the right to receive all dividends paid on such
stock. The Board of Directors, in its sole discretion, may designate employees
and persons providing material services to the Company as eligible for
participation in the Restricted Stock Plan. In connection with the
Recapitalization, 312,575 shares of common stock were issued to directors and
employees under the Restricted Stock Plan. The shares vest at 12.5% per year
with accelerated vesting of an additional 12.5% per year if certain performance
criteria are met. No shares had vested as of December 28, 1997. Accordingly, no
compensation expense was recorded related to the Restricted Stock Plan during
the year ended December 28, 1997.
In connection with the Recapitalization, the Board of Directors adopted a
stock option plan (the "Stock Option Plan"), pursuant to which 395,000 shares of
common stock are authorized for issuance. The Stock Option Plan provides for the
issuance of nonqualified stock options and incentive stock options which are
intended to satisfy the requirements of section 422 of the Internal Revenue Code
and stock appreciation rights. The Board of Directors will determine the
employees who will receive awards under the Stock Option Plan and the terms of
such awards. The exercise price of a stock option or stock appreciation right
shall not be less than the fair market value of a share of common stock on the
date the stock option or stock appreciation right is granted. During the year
ended December 28, 1997, the Company granted options to purchase 161,550 shares
of FICC's common stock at an exercise price of $17.38, the fair value of FICC's
common stock on the grant date. The options expire 10 years from the date of
grant and vest over five years. The weighted average fair value as of the grant
date was $10.39 per option. Such fair value was determined using the
Black-Scholes option pricing model assuming a risk free interest rate of 5.96%,
expected dividend yield of 0%, expected life of 7 years and expected volatility
of
F-25
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
50%. During the year ended December 28, 1997, 1,400 options were canceled. As of
December 28, 1997, none of the outstanding options were exercisable.
Had compensation cost for the Company's stock plans been determined
consistent with SFAS No. 123, the Company's net loss and basic net loss per
share for the years ended December 29, 1996 and December 28, 1997 would have
been the following pro forma amounts:
DECEMBER 29, DECEMBER 28,
1996 1997
------------- -------------
Loss before cumulative effect of change in accounting
principle..................................................... $ (7,786,000) $ (5,149,000)
Cumulative effect of change in accounting principle............. -- 2,236,000
------------- -------------
Net loss........................................................ $ (7,786,000) $ (2,913,000)
------------- -------------
------------- -------------
Basic net loss per share:
Loss before cumulative effect of change in accounting
principle..................................................... $ (3.60) $ (1.66)
Cumulative effect of change in accounting principle............. -- 0.72
------------- -------------
Net loss per share.............................................. $ (3.60) $ (0.94)
------------- -------------
------------- -------------
Pursuant to a stockholder rights plan (the "Stockholder Rights Plan") FICC
adopted in connection with the Recapitalization, the Board of Directors declared
a dividend distribution of one purchase right (a "Right") for each outstanding
share of common stock. The Stockholder Rights Plan provides, in substance, that
should any person or group (other than certain management and affiliates)
acquire 15% or more of FICC's common stock, each Right, other than Rights held
by the acquiring person or group, would entitle its holder to purchase a
specified number of shares of common stock for 50% of their then current market
value. Until a 15% acquisition has occurred, the Rights may be redeemed by FICC
at any time prior to the termination of the Stockholder Rights Plan.
In 1991, one of the Company's lenders was issued warrants for 13,836 shares
of FICC's Class A Common Stock at an exercise price of $32.16 per share. These
warrants expire on September 2, 1998. As of December 28, 1997, none of these
warrants had been exercised. In 1991, certain officers of FICC purchased 97,906
shares of Class A Common Stock and warrants convertible into an additional
71,527 shares of voting common stock for an aggregate purchase price of $55,550.
These warrants were exercised on April 19, 1996 at an aggregate exercise price
of $22,000.
F-26
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RELATED PARTY TRANSACTIONS
In March 1996, the Company's pension plan acquired three restaurant
properties from the Company. The land, buildings and improvements were purchased
by the plan at their appraised value of $2,043,000 and are located in
Connecticut, Vermont and Virginia. Simultaneous with the purchase, the pension
plan leased back the three properties to the Company at an aggregate annual base
rent of $214,000 for the first five years and $236,000 for the following five
years. The pension plan was represented by independent legal and financial
advisors. The transaction was recorded by the Company as a direct financing
lease since the Company has the right to repurchase the property at fair market
value.
FICC's Chairman and President is an officer of the general partner of a
subsidiary of TRC. The Company entered into subleases for certain land,
buildings, and equipment with the subsidiary of TRC. During the years ended
December 31, 1995, December 29, 1996 and December 28, 1997, rent expense related
to the subleases was approximately $266,000, $278,000, and $279,000,
respectively.
On March 19, 1997, FICC acquired all of the outstanding shares of common
stock of Restaurant Insurance Corporation ("RIC") from TRC (see Note 4). Prior
to the acquisition, RIC assumed, from a third party insurance company,
reinsurance premiums related to insurance liabilities of the Company of
approximately $6,409,000 and $4,198,000 during the years ended December 31, 1995
and December 29, 1996, respectively. In addition, RIC had reserves of
approximately $12,830,000 and 13,038,000 related to Company claims at December
31, 1995 and December 29, 1996, respectively.
TRC Realty Co. (a subsidiary of TRC) entered into a ten year operating lease
for an aircraft, for use by both the Company and Perkins Family Restaurants,
L.P. ("Perkins"), a subsidiary of TRC. The Company shares equally with Perkins
in reimbursing TRC Realty Co. for leasing, tax and insurance expenses. In
addition, the Company also incurs actual usage costs. Total expense for the
years ended December 31, 1995, December 29, 1996 and December 28, 1997 was
approximately $620,000, $590,000 and $610,000, respectively.
The Company purchased certain food products used in the normal course of
business from a division of Perkins. For the years ended December 31, 1995,
December 29, 1996 and December 28, 1997, purchases were approximately
$1,909,000, $1,425,000, and $975,000, respectively.
TRC provided FICC with certain management services for which TRC was
reimbursed approximately $785,000, $800,000 and $824,000 for the years ended
December 31, 1995, December 29, 1996 and December 28, 1997, respectively. The
1997 charges were reduced by a $350,000 refund from TRC for prior years.
Expenses were charged to FICC on a specific identification basis. FICC believes
the allocation method used was reasonable and approximates the amount that would
have been incurred on a stand alone basis had FICC been operated as an
unaffiliated entity.
During the years ended December 29, 1996 and December 28, 1997, FICC paid
approximately $69,000 and $187,000, respectively, for fees and other
reimbursements to certain FICC board of directors' members, two of whom, prior
to the Recapitalization, represented FICC's lenders.
For the years ended December 31, 1995, December 29, 1996 and December 28,
1997, FICC expensed approximately $763,000, $196,000, and $177,000,
respectively, for fees paid to the lenders' agent bank. The expense for the year
ended December 31, 1995 included approximately $563,000 related to the filing of
a Form S-1 Registration Statement (see Note 5).
F-27
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal proceedings arising in the ordinary
course of business which management believes, after consultation with legal
counsel, will not have a material adverse effect on the Company's financial
position or future operating results.
As of December 28, 1997, the Company had commitments to purchase
approximately $52,148,000 of raw materials, food products and supplies used in
the normal course of business that cover periods of one to twenty-four months.
Most of these commitments are noncancelable.
On July 14, 1997, the Company entered into an agreement which conditionally
granted a franchisee exclusive rights to operate, manage and develop Friendly's
full-service restaurants in the franchising region of Maryland, Delaware, the
District of Columbia and northern Virginia (the "Agreement"). Pursuant to the
Agreement, the franchisee purchased certain assets and rights in 34 existing
Friendly's restaurants in this franchising region, has committed to open an
additional 74 restaurants over the next six years and, subject to the
fulfillment of certain conditions, has further agreed to open 26 additional
restaurants, for a total of 100 new restaurants in this franchising region over
the next ten years. Gross proceeds from the sale were approximately $8,488,000,
$860,000 for initial franchise fees for the 34 initial restaurants, $500,000 for
development rights and $930,000 for franchise fees for certain of the additional
restaurants described above. The $860,000 was recorded as revenue in the year
ended December 28, 1997 and the development and franchise fees received will be
amortized into income over the initial ten-year term of the Agreement and as
additional restaurants are opened, respectively. The Company recognized income
of $2,283,000 related to the sale of the equipment and operating rights for the
34 existing franchised locations in the year ended December 28, 1997. The
proceeds were allocated between the assets sold and the development rights by
the Company and the franchisee based on the estimated fair market values. As
part of the Agreement, the franchisee will also manage 14 other Friendly's
restaurants located in the same area with an option to acquire these restaurants
in the future. The franchisee is required by the terms of the Agreement to
purchase from the Company all of the frozen dessert products it sells in the
franchised restaurants.
16. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
FICC's obligation related to the $200 million of 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. ("FII"), Friendly Holding (UK) Limited, Friendly Ice Cream
(UK) Limited and Restaurant Insurance Corporation (collectively, the
"Non-guarantor Subsidiaries"). Since the investment in joint venture was
transferred to FII on December 10, 1997, the equity in net loss of joint venture
and investment in joint venture are included in Non-guarantor Subsidiaries in
the accompanying consolidating financial statements as of and for the years
ended December 28, 1997 and December 29, 1996. Stockholders' equity (deficit),
total assets and net income (loss) of the Non-guarantor Subsidiaries are
insignificant to consolidated amounts as of and for the year ended December 31,
1995. Accordingly, supplemental condensed consolidating financial information is
not presented for such period. Separate complete financial statements and other
disclosures of the Guarantor Subsidiary as of December 29, 1996 and
F-28
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
December 28, 1997 and for the years then ended 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.
F-29
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 28, 1997
(IN THOUSANDS)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.................. $ 12,239 $ 204 $ 2,757 $ (68) $ 15,132
Restricted cash............................ -- -- 1,333 -- 1,333
Trade accounts receivable.................. 8,054 130 738 -- 8,922
Inventories................................ 15,165 -- 506 -- 15,671
Deferred income taxes...................... 8,831 -- -- -- 8,831
Prepaid expenses and other current
assets................................... 7,096 2,326 7,428 (10,450) 6,400
---------- ----------- ------------- ------------ ------------
Total current assets......................... 51,385 2,660 12,762 (10,518) 56,289
Deferred income taxes........................ -- 479 352 (831) --
Investment in joint venture.................. -- -- 2,970 -- 2,970
Property and equipment, net.................. 283,749 -- 195 -- 283,944
Intangibles and deferred costs, net.......... 25,994 -- -- -- 25,994
Investments in subsidiaries.................. 3,769 -- -- (3,769) --
Other assets................................. 1,754 -- 8,528 (7,608) 2,674
---------- ----------- ------------- ------------ ------------
Total assets................................. $ 366,651 $ 3,139 $ 24,807 $ (22,726) $ 371,871
---------- ----------- ------------- ------------ ------------
---------- ----------- ------------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term
obligations................................ $ 8,852 $ -- $ -- $ (4,400) $ 4,452
Accounts payable........................... 23,951 -- -- -- 23,951
Accrued expenses........................... 36,820 885 12,090 (6,118) 43,677
---------- ----------- ------------- ------------ ------------
Total current liabilities.................... 69,623 885 12,090 (10,518) 72,080
Deferred income taxes........................ 43,224 -- -- (831) 42,393
Long-term obligations, less current
maturities................................. 318,033 -- -- (7,608) 310,425
Other liabilities............................ 22,132 1,409 9,793 -- 33,334
Stockholders' equity (deficit)............... (86,361) 845 2,924 (3,769) (86,361)
---------- ----------- ------------- ------------ ------------
Total liabilities and stockholders' equity
(deficit).................................. $ 366,651 $ 3,139 $ 24,807 $ (22,726) $ 371,871
---------- ----------- ------------- ------------ ------------
---------- ----------- ------------- ------------ ------------
F-30
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 28, 1997
(IN THOUSANDS)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------- ------------
Revenues..................................... $ 665,380 $ 1,459 $ 708 $ -- $ 667,547
Costs and expenses:
Cost of sales.............................. 197,057 -- 570 -- 197,627
Labor and benefits......................... 208,364 -- -- -- 208,364
Operating expenses and write-down of
property and equipment................... 150,152 -- (612) -- 149,540
General and administrative expenses........ 40,894 607 886 -- 42,387
Stock compensation expense................. 8,407 -- -- -- 8,407
Expenses associated with
Recapitalization......................... 718 -- -- -- 718
Depreciation and amortization.............. 31,642 -- 50 -- 31,692
Interest expense........................... 39,489 -- (186) -- 39,303
Gain on sale of restaurant operations........ 2,283 -- -- -- 2,283
Equity in net loss of joint venture.......... -- -- 1,530 -- 1,530
---------- ----------- ------------- ------ ------------
(Loss) income before benefit from (provision
for) income taxes, cumulative effect of
change in accounting principle and equity
in net loss of consolidated subsidiaries... (9,060) 852 (1,530) -- (9,738)
Benefit from (provision for) income taxes.... 4,562 (349) (220) -- 3,993
---------- ----------- ------------- ------ ------------
(Loss) income before cumulative effect of
change in accounting principle and equity
in net loss of consolidated subsidiaries... (4,498) 503 (1,750) -- (5,745)
Cumulative effect of change in accounting
principle.................................. 2,236 -- -- -- 2,236
---------- ----------- ------------- ------ ------------
(Loss) income before equity in net loss of
consolidated subsidiaries.................. (2,262) 503 (1,750) -- (3,509)
Equity in net loss of consolidated
subsidiaries............................... (1,247) -- -- 1,247 --
---------- ----------- ------------- ------ ------------
Net (loss) income............................ $ (3,509) $ 503 $ (1,750) $ 1,247 $ (3,509)
---------- ----------- ------------- ------ ------------
---------- ----------- ------------- ------ ------------
F-31
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 28, 1997
(IN THOUSANDS)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------ ------------
Net cash provided by (used in) operating
activities.................................. $ 15,007 $ (206) $ 7,385 $ (68) $ 22,118
---------- ----- ------------- ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment......... (31,572) -- (66) -- (31,638)
Proceeds from sales of property and
equipment................................. 5,043 -- -- -- 5,043
Purchases of investment securities.......... -- -- (8,194) -- (8,194)
Proceeds from sales and maturities of
investment securities..................... -- -- 12,787 -- 12,787
Cash (paid) received in acquisition of
Restaurant Insurance Corporation.......... (2,300) -- 2,265 -- (35)
Advances to joint venture................... (1,400) -- -- -- (1,400)
Investments in consolidated subsidiaries.... (142) -- -- 142 --
---------- ----- ------------- ------------ ------------
Net cash (used in) provided by investing
activities.................................. (30,371) -- 6,792 142 (23,437)
---------- ----- ------------- ------------ ------------
Cash flows from financing activities:
Contribution of capital..................... -- 142 -- (142) --
Proceeds from issuance of common stock...... 81,920 -- -- -- 81,920
Proceeds from issuance of senior notes...... 200,000 -- -- -- 200,000
Proceeds from borrowings (advances to
parent)................................... 179,957 -- (12,409) -- 167,548
(Repayments of obligations) reimbursements
from parent............................... (452,028) -- 400 -- (451,628)
---------- ----- ------------- ------------ ------------
Net cash provided by (used in) financing
activities.................................. 9,849 142 (12,009) (142) (2,160)
---------- ----- ------------- ------------ ------------
Effect of exchange rate changes on cash....... -- -- (15) -- (15)
---------- ----- ------------- ------------ ------------
Net (decrease) increase in cash and cash
equivalents................................. (5,515) (64) 2,153 (68) (3,494)
Cash and cash equivalents, beginning of
period...................................... 17,754 268 604 -- 18,626
---------- ----- ------------- ------------ ------------
Cash and cash equivalents, end of period...... $ 12,239 $ 204 $ 2,757 $ (68) $ 15,132
---------- ----- ------------- ------------ ------------
---------- ----- ------------- ------------ ------------
Supplemental disclosures:
Interest paid............................... $ 46,040 $ -- $ -- $ -- $ 46,040
Income taxes paid........................... 147 -- 21 -- 168
Capital lease obligations incurred.......... 2,227 -- -- -- 2,227
Capital lease obligations terminated........ 1,587 -- -- -- 1,587
F-32
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 29, 1996
(IN THOUSANDS)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................... $ 17,754 $ 268 $ 604 $ -- $ 18,626
Trade accounts receivable................... 4,765 -- 227 -- 4,992
Inventories................................. 14,796 24 325 -- 15,145
Deferred income taxes....................... 12,366 9 -- -- 12,375
Prepaid expenses and other current assets... 4,805 -- 517 (3,664) 1,658
---------- ----- ------------- ------------ ------------
Total current assets.......................... 54,486 301 1,673 (3,664) 52,796
Investment in joint venture................... -- -- 4,500 -- 4,500
Property and equipment, net................... 285,460 522 179 -- 286,161
Intangibles and deferred costs, net........... 16,019 -- -- -- 16,019
Investments in subsidiaries................... 3,531 -- -- (3,531) --
Other assets.................................. 650 -- -- -- 650
---------- ----- ------------- ------------ ------------
Total assets.................................. $ 360,146 $ 823 $ 6,352 $ (7,195) $ 360,126
---------- ----- ------------- ------------ ------------
---------- ----- ------------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term obli-
gations................................... $ 7,642 $ -- $ -- $ -- $ 7,642
Accounts payable............................ 20,773 -- -- -- 20,773
Accrued expenses............................ 44,780 141 3,824 (3,664) 45,081
---------- ----- ------------- ------------ ------------
Total current liabilities..................... 73,195 141 3,824 (3,664) 73,496
Deferred income taxes......................... 48,793 11 (332) -- 48,472
Long-term obligations, less current
maturities.................................. 385,977 -- -- -- 385,977
Other liabilities............................. 25,337 -- -- -- 25,337
Stockholders' equity (deficit)................ (173,156) 671 2,860 (3,531) (173,156)
---------- ----- ------------- ------------ ------------
Total liabilities and stockholders' equity
(deficit)................................... $ 360,146 $ 823 $ 6,352 $ (7,195) $ 360,126
---------- ----- ------------- ------------ ------------
---------- ----- ------------- ------------ ------------
F-33
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 29, 1996
(IN THOUSANDS)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------- ------------
Revenues..................................... $ 650,024 $ 145 $ 638 $ -- $ 650,807
Costs and expenses:
Cost of sales.............................. 191,578 51 327 -- 191,956
Labor and benefits......................... 209,145 115 -- -- 209,260
Operating expenses and write-down of
property and equipment................... 143,046 -- 344 -- 143,390
General and administrative expenses........ 41,061 106 1,554 -- 42,721
Depreciation and amortization.............. 32,953 6 20 -- 32,979
Interest expense........................... 44,141 -- -- -- 44,141
---------- ----- ------------- ------ ------------
Loss before benefit from (provision for)
income taxes and equity in net loss of
consolidated subsidiaries.................. (11,900) (133) (1,607) -- (13,640)
Benefit from (provision for) income taxes.... 5,594 (2) 276 -- 5,868
---------- ----- ------------- ------ ------------
Loss before equity in net loss of
consolidated subsidiaries.................. (6,306) (135) (1,331) -- (7,772)
Equity in net loss of consolidated
subsidiaries............................... (1,466) -- -- 1,466 --
---------- ----- ------------- ------ ------------
Net loss..................................... $ (7,772) $ (135) $ (1,331) $ 1,466 $ (7,772)
---------- ----- ------------- ------ ------------
---------- ----- ------------- ------ ------------
F-34
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 29, 1996
(IN THOUSANDS)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------- ------------
Net cash provided by (used in) operating
activities................................. $ 25,519 $ (38) $ 682 $ -- $ 26,163
---------- ----- ------------- ------ ------------
Cash flows from investing activities:
Purchases of property and equipment........ (24,043) -- (174) -- (24,217)
Proceeds from sales of property and
equipment................................ 8,409 -- -- -- 8,409
Investments in joint venture............... (4,500) -- -- -- (4,500)
Investments in consolidated subsidiaries... (306) -- -- 306 --
---------- ----- ------------- ------ ------------
Net cash used in investing activities........ (20,440) -- (174) 306 (20,308)
---------- ----- ------------- ------ ------------
Cash flows from financing activities:
Contribution of capital.................... -- 306 -- (306) --
Proceeds from exercise of stock purchase
warrants................................. 22 -- -- -- 22
Proceeds from borrowings................... 48,196 -- -- -- 48,196
Repayments of obligations.................. (59,215) -- -- -- (59,215)
---------- ----- ------------- ------ ------------
Net cash (used in) provided by financing
activities................................. (10,997) 306 -- (306) (10,997)
---------- ----- ------------- ------ ------------
Effect of exchange rate changes on cash...... 5 -- 73 -- 78
---------- ----- ------------- ------ ------------
Net (decrease) increase in cash and cash
equivalents................................ (5,913) 268 581 -- (5,064)
Cash and cash equivalents, beginning of
period..................................... 23,667 -- 23 -- 23,690
---------- ----- ------------- ------ ------------
Cash and cash equivalents, end of period..... $ 17,754 $ 268 $ 604 $ -- $ 18,626
---------- ----- ------------- ------ ------------
---------- ----- ------------- ------ ------------
Supplemental disclosures:
Interest paid.............................. $ 36,000 $ -- $ -- $ -- $ 36,000
Capital lease obligations incurred......... 5,923 28 -- -- 5,951
Capital lease obligations terminated....... 128 -- -- -- 128
Issuance of common stock to lenders........ 50 -- -- -- 50
F-35