SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-3930
FRIENDLY ICE CREAM CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 5812.00 04-2053130
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
1855 Boston Road
Wilbraham, Massachusetts 01095
(413) 543-2400
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 7, 1998
----- --------------------------
Common Stock, $.01 par value 7,444,490 shares
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
December 28, March 29,
1997 1998
------------ -------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15,132 $ 14,981
Restricted cash 1,333 1,670
Trade accounts receivable 8,922 7,767
Inventories 15,671 18,687
Deferred income taxes 8,831 8,831
Prepaid expenses and other current assets 6,400 7,867
-------- --------
TOTAL CURRENT ASSETS 56,289 59,803
INVESTMENT IN JOINT VENTURE 2,970 2,654
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization 283,944 290,190
INTANGIBLES AND DEFERRED COSTS 25,994 25,496
OTHER ASSETS 2,674 1,282
-------- --------
TOTAL ASSETS $371,871 $379,425
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 2,875 $ 764
Current maturities of capital lease obligations 1,577 1,602
Accounts payable 23,951 29,799
Accrued salaries and benefits 13,804 15,193
Accrued interest payable 2,607 7,900
Insurance reserves 7,248 7,281
Other accrued expenses 20,018 13,728
-------- --------
TOTAL CURRENT LIABILITIES 72,080 76,267
-------- --------
DEFERRED INCOME TAXES 42,393 39,958
CAPITAL LEASE OBLIGATIONS, less current maturities 11,341 10,941
LONG-TERM DEBT, less current maturities 299,084 309,075
OTHER LONG-TERM LIABILITIES 33,334 33,273
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock 74 74
Preferred stock -- --
Additional paid-in capital 137,175 137,400
Accumulated deficit (223,668) (227,641)
Cumulative translation adjustment 58 78
-------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (86,361) (90,089)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $371,871 $379,425
-------- --------
-------- --------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the Three Months Ended
----------------------------------
March 30, March 29,
1997 1998
---- ----
(unaudited)
REVENUES $144,009 $151,674
COSTS AND EXPENSES:
Cost of sales 41,526 46,241
Labor and benefits 49,526 50,252
Operating expenses 31,890 33,689
General and administrative expenses 11,386 11,420
Stock compensation expense -- 225
Write-down of property and equipment -- 100
Depreciation and amortization 8,071 7,956
------- -------
OPERATING INCOME 1,610 1,791
Interest expense 11,076 7,883
Equity in net loss of joint venture -- 316
------- -------
LOSS BEFORE BENEFIT FROM INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (9,466) (6,408)
Benefit from income taxes 3,881 2,435
------- -------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (5,585) (3,973)
Cumulative effect of change in accounting principle, net
of income tax expense of $1,554 2,236 --
------- -------
NET LOSS $(3,349) $(3,973)
------- -------
------- -------
BASIC AND DILUTED NET LOSS PER SHARE:
Loss before cumulative effect of change in accounting
principle $(2.26) $(0.53)
Cumulative effect of change in accounting principle, net
of income tax expense .91 --
------- -------
Net loss $(1.35) $(0.53)
------- -------
------- -------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Three Months Ended
-----------------------------------
March 30, March 29,
1997 1998
---- ----
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,349) $(3,973)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Cumulative effect of change in accounting principle (2,236) --
Stock compensation expense -- 225
Depreciation and amortization 8,071 7,956
Write-down of property and equipment -- 100
Deferred income tax benefit (3,924) (2,435)
Loss on asset retirements 175 1,167
Equity in net loss of joint venture -- 316
Changes in operating assets and liabilities -
Trade accounts receivable 921 1,155
Inventories (571) (3,016)
Other assets (2,428) (420)
Accounts payable 1,576 5,848
Accrued expenses and other long-term liabilities (2,257) 364
-------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (4,022) 7,287
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,743) (15,066)
Proceeds from sales of property and equipment 311 103
Cash acquired from Restaurant Insurance Corporation, net of cash paid 965 --
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (1,467) (14,963)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 15,877 20,258
Repayments of debt (12,726) (12,378)
Repayments of capital lease and finance obligations (1,646) (375)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,505 7,505
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (16) 20
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,000) (151)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,626 15,132
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $14,626 $14,981
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES
Interest paid $10,084 $ 2,292
Income taxes paid -- 113
Capital lease obligations incurred 897 --
Issuance of note payable in connection with the acquisition of
Restaurant Insurance Corporation 1,000 --
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Interim Financial Information -
The accompanying financial statements as of March 29, 1998 and for the
first quarter ended March 30, 1997 and March 29, 1998 are unaudited, but, in the
opinion of management, include all adjustments which are necessary for a fair
presentation of the financial position and the results of operations and cash
flows of the Company. Such adjustments consist solely of normal recurring
accruals. Operating results for the quarters ended March 30, 1997 and March 29,
1998 are not necessarily indicative of the results that may be expected for the
entire year, in part, due to the seasonality of the business. Historically,
higher revenues and profits are experienced during the second and third fiscal
quarters. The Company's Consolidated Financial Statements, including the notes
thereto, which are contained in the 1997 Annual Report on Form 10-K should be
read in conjunction with these Condensed Consolidated Financial Statements.
Inventories -
Inventories are stated at the lower of first-in, first-out cost or
market. Inventories at December 28, 1997 and March 29, 1998 were (in thousands):
December 28, March 29,
1997 1998
---- ----
Raw Materials $2,011 $2,302
Goods in Process 136 293
Finished Goods 13,524 16,092
------- -------
Total $15,671 $18,687
------- -------
------- -------
2. STOCK COMPENSATION EXPENSE
In connection with the Company's recapitalization in November 1997, 312,575
shares of common stock were issued to certain directors and employees under the
Company's 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. During the three months ended March 29, 1998, the Company
recorded stock compensation expense of $225,000 related to such stock issuances.
3. BASIC AND DILUTED EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share", which established new standards for computing and presenting earnings
per share. Additionally, on February 4, 1998, the Securities and Exchange
Commission released Staff Accounting Bulletin ("SAB") No. 98 on computations of
earnings per share, which changed the guidance on how common stock transactions
prior to or in connection with an initial public offering are treated in
earnings per share computations. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997 and SAB No. 98 was
effective on February 4, 1998. Accordingly, all period earnings per
share data presented has been
5
restated and all earnings per share data presented is in accordance with
SFAS No. 128 and SAB No. 98.
Weighted average common shares outstanding were 2,472,887 and 7,443,365 for
the three months ended March 30, 1997 and March 29, 1998, respectively.
4. RESTAURANT PREOPENING COSTS
In 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs
of Start-Up Activities". The SOP requires entities to expense as incurred all
start-up and preopening costs that are not otherwise capitalizable as
long-lived assets and is effective for fiscal years beginning after December
15, 1998 with earlier application encouraged.
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 28, 1997 and March 29, 1998, deferred
preopening costs were approximately $363,000 and $323,000, respectively. 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.
5. COMPREHENSIVE INCOME
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. Effective
December 28, 1997, the Company adopted SFAS No. 130. The Company's comprehensive
income was not materially different than the Company's net loss for all periods
presented. The only adjustment to the Company's net loss related to foreign
currency translation, net of an income tax (benefit) expense of ($11,000) and
$12,000 for the three months ended March 30, 1997 and March 29, 1998,
respectively.
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company's Senior Notes are guaranteed by Friendly's Restaurants
Franchise, Inc. 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"). 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.
6
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 maturitis 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
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
7
Supplemental Condensed Consolidating Statement of Operations
For the Three Months Ended March 30, 1997
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------------ ------------- ---------------- -------------- --------------
Revenues $143,911 $ -- $ 98 $ -- $144,009
Costs and expenses:
Cost of sales 41,434 -- 92 -- 41,526
Labor and benefits 49,526 -- -- -- 49,526
Operating expenses 31,882 101 (93) -- 31,890
General and administrative expenses 11,133 9 244 -- 11,386
Depreciation and amortization 8,071 -- -- -- 8,071
Interest expense 11,079 -- (3) -- 11,076
-------- -------- -------- -------- --------
Loss before benefit from income
taxes, cumulative effect of change
in accounting principle and
equity in net loss of
consolidated subsidiaries (9,214) (110) (142) -- (9,466)
Benefit from income taxes 3,778 45 58 -- 3,881
-------- -------- -------- -------- --------
Loss before cumulative effect of
change in accounting principle
and equity in net loss of
consolidated subsidiaries (5,436) (65) (84) -- (5,585)
Cumulative effect of change in
accounting principle 2,236 -- -- -- 2,236
-------- -------- -------- -------- --------
Loss before equity in net loss of
consolidated subsidiaries (3,200) (65) (84) -- (3,349)
Equity in net loss of
consolidated subsidiaries (149) -- -- 149 --
-------- -------- -------- -------- --------
Net loss $ (3,349) $ (65) $ (84) $149 $ (3,349)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
8
Supplemental Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 30, 1997
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------------ ------------- ---------------- -------------- --------------
Net cash used in operating activities $(3,380) $(177) $ (465) $ -- $(4,022)
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment (2,724) -- (19) -- (2,743)
Proceeds from sales of property
and equipment 311 -- -- -- 311
Cash (paid) received in
acquisition of Restaurant
Insurance Corporation (1,300) -- 2,265 -- 965
Investments in consolidated
subsidiaries (109) -- -- 109 --
-------- -------- -------- -------- --------
Net cash (used in) provided by investing
activities (3,822) -- 2,246 109 (1,467)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Contribution of capital -- 109 -- (109) --
Proceeds from borrowings
(advances to parent) 17,177 -- (1,300) -- 15,877
Repayments of obligations (14,372) -- -- -- (14,372)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities 2,805 109 (1,300) (109) 1,505
-------- -------- -------- -------- --------
Effect of exchange rate changes on
cash -- -- (16) -- (16)
-------- -------- -------- -------- --------
Net (decrease) increase in cash and
cash equivalents (4,397) (68) 465 -- (4,000)
Cash and cash equivalents, beginning
of period 17,754 268 604 -- 18,626
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period $13,357 $200 $1,069 $ -- $14,626
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Supplemental disclosures:
Interest paid $10,084 $ -- $ -- $ -- $10,084
Capital lease obligations incurred 897 -- -- -- 897
Issuance of note payable in connection
with the acquisition of Restaurant
Insurance Corporation 1,000 -- -- -- 1,000
9
Supplemental Condensed Consolidating Balance Sheet
As of March 29, 1998
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------------ ------------- ---------------- -------------- --------------
Assets
Current assets:
Cash and cash equivalents $ 12,067 $ 446 $ 2,468 $ -- $ 14,981
Restricted cash -- -- 1,670 -- 1,670
Trade accounts receivable 6,905 126 736 -- 7,767
Inventories 18,180 -- 507 -- 18,687
Deferred income taxes 8,831 -- -- -- 8,831
Prepaid expenses and other current
assets 11,544 2,066 6,324 (12,067) 7,867
-------- -------- -------- -------- --------
Total current assets 57,527 2,638 11,705 (12,067) 59,803
Deferred income taxes -- 478 504 (982) --
Investment in joint venture -- -- 2,654 -- 2,654
Property and equipment, net 290,005 -- 185 -- 290,190
Intangibles and deferred costs, net 25,496 -- -- -- 25,496
Investments in subsidiaries 3,687 -- -- (3,687) --
Other assets 363 -- 8,528 (7,609) 1,282
-------- -------- -------- -------- --------
Total assets $377,078 $3,116 $23,576 $(24,345) $379,425
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Current maturities of
long-term obligations $ 6,766 $ -- $ -- $ (4,400) $ 2,366
Accounts payable 29,799 -- -- -- 29,799
Accrued expenses 40,159 871 10,739 (7,667) 44,102
-------- -------- -------- -------- --------
Total current liabilities 76,724 871 10,739 (12,067) 76,267
Deferred income taxes 40,841 -- 99 (982) 39,958
Long-term obligations, less current
maturities 327,625 -- -- (7,609) 320,016
Other liabilities 21,977 1,397 9,899 -- 33,273
Stockholders' equity (deficit) (90,089) 848 2,839 (3,687) (90,089)
-------- -------- -------- -------- --------
Total liabilities and
stockholders' equity (deficit) $377,078 $3,116 $23,576 $(24,345) $379,425
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
10
Supplemental Condensed Consolidating Statement of Operations
For the Three Months Ended March 29, 1998
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------------ ------------- ---------------- -------------- --------------
Revenues $151,172 $303 $ 199 $ -- $151,674
Costs and expenses:
Cost of sales 46,065 -- 176 -- 46,241
Labor and benefits 50,252 -- -- -- 50,252
Operating expenses and
write-down of property and
equipment 33,798 -- (9) -- 33,789
General and administrative expenses 11,022 300 98 -- 11,420
Stock compensation expense 225 -- -- -- 225
Depreciation and
amortization 7,946 -- 10 -- 7,956
Interest expense 8,118 -- (235) -- 7,883
Equity in net loss of joint venture -- -- 316 -- 316
-------- -------- -------- -------- --------
(Loss) income before benefit from
(provision for) income taxes and
equity in net loss of
consolidated subsidiaries (6,254) 3 (157) -- (6,408)
Benefit from (provision for) income
taxes 2,383 (1) 53 -- 2,435
-------- -------- -------- -------- --------
(Loss) income before equity in net
loss of consolidated subsidiaries (3,871) 2 (104) -- (3,973)
Equity in net loss of
consolidated subsidiaries (102) -- -- 102 --
-------- -------- -------- -------- --------
Net (loss) income $ (3,973) $ 2 $(104) $102 $ (3,973)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
11
Supplemental Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 29, 1998
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------------ ------------- ---------------- -------------- --------------
Net cash provided by operating activities $ 6,886 $242 $ 91 $ 68 $ 7,287
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment (15,066) -- -- -- (15,066)
Proceeds from sales of property
and equipment 103 -- -- -- 103
-------- -------- -------- -------- --------
Net cash used in investing activities (14,963) -- -- -- (14,963)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Dividend received (paid) 400 -- (400) -- --
Proceeds from borrowings 20,258 -- -- -- 20,258
Repayments of obligations (12,753) -- -- -- (12,753)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities 7,905 -- (400) -- 7,505
-------- -------- -------- -------- --------
Effect of exchange rate changes on
cash -- -- 20 -- 20
-------- -------- -------- -------- --------
Net (decrease) increase in cash and
cash equivalents (172) 242 (289) 68 (151)
Cash and cash equivalents, beginning
of period 12,239 204 2,757 (68) 15,132
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period $12,067 $446 $2,468 $ -- $14,981
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Supplemental disclosures:
Interest paid $ 2,292 $ -- $ -- $ -- $ 2,292
Income taxes paid 94 19 -- -- 113
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Condensed Consolidated Financial Statements of the Company and the notes thereto
included elsewhere herein.
Safe Harbor Statement
Statements contained herein that are not historical facts constitute
"forward looking statements" as that term is defined in the Private Securities
Litigation Reform Act of 1995. All forward looking statements are subject to
risks and uncertainties which could cause results to differ materially from
those anticipated. These factors include the Company's highly competitive
business environment, 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.
Overview
Friendly's owns and operates 658 restaurants, franchises 34 restaurants
and distributes a full line of frozen dessert products. These products are
distributed to Friendly's restaurants and through more than 5,000 supermarkets
and other retail locations in 15 states. The restaurants offer a wide variety of
reasonably priced breakfast, lunch and dinner menu items as well as the frozen
dessert products.
13
Results of Operations
The operating results of the Company expressed as a percentage of total
revenues are set forth below:
For the Three Months Ended
------------------------------
March 30, March 29,
1997 1998
---- ----
(unaudited)
Revenues:
Restaurant 93.1% 89.2%
Retail, institutional and other 6.9 8.8
Franchise -- 2.0
------ ------
Total revenues 100.0 100.0
------ ------
Costs and expenses:
Cost of sales 28.8 30.5
Labor and benefits 34.4 33.1
Operating expenses 22.2 22.2
General and administrative expenses 7.9 7.5
Stock compensation expense -- 0.1
Non-cash write-downs -- 0.1
Depreciation and amortization 5.6 5.3
------ ------
Operating income 1.1 1.2
Interest expense, net 7.7 5.2
Equity in net loss of joint venture -- 0.2
------ ------
Loss before benefit from income taxes and
cumulative effect of change in
accounting principle (6.6) (4.2)
Benefit from income taxes 2.7 1.7
Cumulative effect of change in accounting
principle, net of income tax
expense 1.6 --
------ ------
Net loss (2.3)% (2.5)%
------ ------
------ ------
14
First Quarter 1998 Compared to First Quarter 1997
Revenues - Total revenues increased $7.7 million, or 5.3%, to $151.7
million for the first quarter ended March 29, 1998 from $144.0 million for
the same quarter in 1997. Restaurant revenues increased $1.2 million, or
0.9%, to $135.2 million in 1998 from $134.0 million in 1997. Comparable
restaurant revenues increased 6.9%. The increase in restaurant revenues was
due to the benefits associated with the reimaging of 113 restaurants, the
opening of five new restaurants, the chainwide roll-out of a new Kid's menu
and a mild winter in the Company's operating areas. These increases were
partially offset by the closing of 17 under-performing restaurants and the
July 1997 sale of 34 restaurants to DavCo Restaurants, Inc. ("DavCo") a
franchisor of more than 230 Wendy's restaurants ("DavCo") in connection with
the commencement of the Company's franchising program, which sale resulted in
a $6.9 million reduction in restaurant revenues in the first quarter of 1998.
Retail, institutional and other revenues increased by $3.5 million, or 35.0%,
to $13.5 million for the first quarter of 1998 from $10.0 million for the
same quarter in 1997. The increase was primarily due to a more effective
sales promotion program. Franchise revenue was $3.0 million for the first
quarter of 1998. There were no franchise revenues for the first quarter 1997.
The increase is a result of the consummation of a long-term agreement on July
14, 1997 granting DavCo 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").
Cost of sales - Cost of sales increased $4.7 million, or 11.3%, to $46.2
million for the first quarter ended March 29, 1998 from $41.5 million for the
same quarter in 1997. Cost of sales as a percentage of total revenues increased
to 30.5% for the first quarter of 1998 from 28.8% for the same quarter in 1997.
The higher food cost as a percentage of total revenue was primarily due to the
increases in non-restaurant sales which carry a higher food cost than restaurant
sales. This shift increased the cost of sales as a percentage of total revenue
by 1.2%. The remaining 0.5% relates largely to additional restaurant promotional
activity in the 1998 period.
Labor and benefits - Labor and benefits increased $0.8 million, or 1.6%, to
$50.3 million for the first quarter ended March 29, 1998 from $49.5 million for
the same quarter in 1997. Labor and benefits as a percentage of total revenues
decreased to 33.1% for the first quarter in 1998 from 34.4% for the same quarter
in 1997. 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.
Operating expenses - Operating expenses increased $1.8 million, or 5.6%, to
$33.7 million for the first quarter ended March 29, 1998 from $31.9 million for
the same quarter in 1997. This increase was primarily due to higher retail
selling expenses resulting in higher retail sales as discussed above. Operating
expenses as a percentage of total revenues was 22.2% for both the first quarter
in 1998 and 1997.
General and administrative expenses - General and administrative expenses
were $11.4 million for each of the first quarters in 1998 and 1997. General and
administrative expenses as a percentage of total revenues decreased to 7.5% in
the first quarter of 1998 from 7.9% in 1997.
EBITDA - As a result of the above, EBITDA (earnings before interest, taxes,
depreciation and amortization, stock compensation and other non-cash items)
increased $0.4 million, or 4.1%, to $10.1 million for the first quarter ended
15
March 29, 1998 from $9.7 million for the same quarter in 1997. EBITDA as a
percentage of total revenues was 6.7% for both the first quarter in 1998 and
1997.
Stock compensation expense - Stock compensation expense represents stock
compensation arising out of the vesting of certain shares of restricted stock
previously issued to management. Stock compensation expense was $.2 million for
the first quarter ended March 29, 1998. There was no stock compensation expense
in the first quarter of 1997.
Non-cash write-downs - Non-cash write-downs were $0.1 million for the
first quarter ended March 29, 1998. There were no non-cash write-downs in the
first quarter of 1997.
Depreciation and amortization - Depreciation and amortization decreased
$0.1 million, or 1.2%, to $8.0 million for the first quarter ended March 29,
1998 from $8.1 million for the same quarter in 1997. Depreciation and
amortization as a percentage of total revenues decreased to 5.3% for the first
quarter in 1998 from 5.6% in 1997. The decrease was due to the closing of 20
restaurants since the end of the first quarter ended March 30, 1997.
Interest expense, net - Interest expense, net of capitalized interest and
interest income, decreased by $3.2 million, or 28.8%, to $7.9 million for the
first quarter ended March 29, 1998 from $11.1 million for the same quarter in
1997. The decrease in interest expense was due to the reduction of debt,
including capital lease obligations, and interest rates associated with the
Company's recapitalization in November 1997.
Equity in net loss of joint venture - The equity in net loss of the China
joint venture of $0.3 million in 1998 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 1998 period.
Benefit from income taxes - The benefit from income taxes was $2.4 million,
or 38%, in 1998 compared to a benefit of $3.9 million, or 41%, in 1997. The
reduction in the effective tax rate is primarily the result of general business
tax credits.
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. The cumulative effect of this change was $2.2 million,
net of income tax expense of $1.6 million.
Net loss - Net loss was $4.0 million for the first quarter ended March 29,
1998 compared to a net loss of $3.3 million in 1997 for the reasons discussed
above.
Liquidity and Capital Resources
The Company's primary sources of liquidity and capital resources are cash
generated from operations and borrowings under its revolving credit facility.
Net cash provided by operating activities was $7.3 million in the first quarter
ended March 29, 1998 compared to net cash used in operating activities of $4.0
million in the same quarter of 1997. During the three months ended March 29,
1998, inventories increased by approximately $3 million in preparation for
restaurant promotional campaigns and anticipated increases in retail sales.
Available borrowings under the revolving credit facility were $36 million as of
March 29, 1998.
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Additional sources of liquidity consist of capital and operating leases for
financing leased restaurant locations (in malls and shopping centers and land or
building leases), restaurant equipment, manufacturing equipment, distribution
vehicles and computer equipment. Additionally, sales of under-performing
existing restaurant properties and other assets (to the extent the Company's and
its subsidiaries' debt instruments, if any, permit) are sources of cash. The
amounts of debt financing that the Company will be able to incur under capital
leases and for property and casualty insurance financing and the amount of asset
sales by the Company are limited by the terms of its credit facility and Senior
Notes.
Net cash used in investing activities was $15.0 million in the first
quarter ended March 29, 1998 and $1.5 million in the same quarter of 1997.
Capital expenditures for restaurant operations, including capitalized leases,
were approximately $15.1 million in the first quarter of 1998 and $3.6 million
in the same quarter of 1997. Proceeds from the sale of property and equipment
were $0.1 million and $0.3 million in 1998 and 1997, respectively.
Net cash provided by financing activities was $7.5 million in the first
quarter ended March 29, 1998 and $1.5 million in the same quarter of 1997.
The Company had a working capital deficit of $16.5 million as of March 29,
1998. The Company is able to operate with a substantial working capital deficit
because (i) restaurant operations are conducted primarily on a cash (and cash
equivalent) basis with a low level of accounts receivable, (ii) rapid turnover
allows a limited investment in inventories and (iii) cash from sales is usually
received before related expenses for food, supplies and payroll are paid.
The Company's credit facility imposes significant operating and financial
restrictions on the Company's ability to, among other things, incur
indebtedness, create liens, sell assets, engage in mergers or consolidations,
pay dividends and engage in certain transactions with affiliates. The credit
facility limits the amount which the Company may spend on capital expenditures
and requires the Company to comply with certain financial covenants.
The Company 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.
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 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
revolving credit facility will be sufficient to meet the Company's anticipated
operating and capital requirements for the foreseeable future.
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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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time the Company is named as a defendant in legal actions
arising in the ordinary course of its business. The Company is not party to any
pending legal proceedings other than routine litigation incidental to its
business. The Company does not believe that the resolutions of these claims
should have a material adverse effect on the Company's financial condition or
results of operations.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) No report on Form 8-k was filed during the quarter ended March 29, 1998.
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SIGNATURES
Pursuant to the requirements 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
May 5, 1998 By: /s/ George G. Roller
--------------------------------------
Name: George G. Roller
Title: Vice President, Finance,
Chief Financial Officer
and Treasurer