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 June 28, 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 04-2053130
(State of (Primary Standard Industrial (I.R.S. Employer
Incorporation) Classification Code Number) Identification No.)
1855 Boston Road
Wilbraham, Massachusetts 01095
(413) 543-2400
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 11, 1998
----- ------------------------------
Common Stock, $.01 par value 7,454,600 shares
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
December 28, June 28,
1997 1998
------------ -------------
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 15,132 $ 15,380
Restricted cash 1,333 1,514
Trade accounts receivable 8,922 8,172
Inventories 15,671 19,919
Deferred income taxes 8,831 8,831
Prepaid expenses and other current assets 6,400 8,083
--------- ---------
TOTAL CURRENT ASSETS 56,289 61,899
INVESTMENT IN JOINT VENTURE 2,970 2,300
PROPERTY AND EQUIPMENT, net 283,944 300,763
INTANGIBLES AND DEFERRED COSTS, net 25,994 25,103
OTHER ASSETS 2,674 1,223
--------- ---------
TOTAL ASSETS $ 371,871 $ 391,288
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 2,875 $ 1,547
Current maturities of capital lease and finance obligations 1,577 1,801
Accounts payable 23,951 34,989
Accrued salaries and benefits 13,804 15,549
Accrued interest payable 2,607 2,607
Insurance reserves 7,248 6,249
Other accrued expenses 20,018 14,706
--------- ---------
TOTAL CURRENT LIABILITIES 72,080 77,448
--------- ---------
DEFERRED INCOME TAXES 42,393 41,764
CAPITAL LEASE AND FINANCE OBLIGATIONS, less current maturities 11,341 10,915
LONG-TERM DEBT, less current maturities 299,084 315,739
OTHER LONG-TERM LIABILITIES 33,334 32,445
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock 74 75
Preferred stock -- --
Additional paid-in capital 137,175 137,529
Accumulated deficit (223,668) (224,695)
Cumulative translation adjustment 58 68
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (86,361) (87,023)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 371,871 $ 391,288
--------- ---------
--------- ---------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
June 29, June 28, June 29, June 28,
1997 1998 1997 1998
--------- --------- --------- ---------
REVENUES $ 178,819 $ 178,746 $ 322,828 $ 330,420
COSTS AND EXPENSES:
Cost of sales 50,660 52,765 92,186 99,006
Labor and benefits 55,372 53,635 104,898 103,887
Operating expenses 39,518 40,298 71,408 73,987
General and administrative expenses 11,085 10,630 22,471 22,050
Stock compensation expense -- 129 -- 354
Write-down of property and equipment 347 68 347 168
Depreciation and amortization 8,330 8,129 16,401 16,085
--------- --------- --------- ---------
OPERATING INCOME 13,507 13,092 15,117 14,883
Interest expense 11,162 7,986 22,238 15,869
Equity in net loss of joint venture 743 354 743 670
--------- --------- --------- ---------
INCOME (LOSS) BEFORE (PROVISION FOR)
BENEFIT FROM INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 1,602 4,752 (7,864) (1,656)
(Provision for) benefit from income taxes (657) (1,806) 3,224 629
--------- --------- --------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 945 2,946 (4,640) (1,027)
Cumulative effect of change in accounting principle, net of
income tax expense of $1,554 -- -- 2,236 --
--------- --------- --------- ---------
NET INCOME (LOSS) $ 945 $ 2,946 $ (2,404) $ (1,027)
--------- --------- --------- ---------
--------- --------- --------- ---------
BASIC NET INCOME (LOSS) PER SHARE:
Income (loss) before cumulative effect of change in
accounting principle $ .38 $ .40 $ (1.88) $ (.14)
Cumulative effect of change in accounting principle, net of
income tax expense -- -- .91 --
--------- --------- --------- ---------
Net income (loss) $ .38 $ .40 $ (.97) $ (.14)
--------- --------- --------- ---------
--------- --------- --------- ---------
DILUTED NET INCOME (LOSS) PER SHARE:
Income (loss) before cumulative effect of change in
accounting principle $ .38 $ .39 $ (1.88) $ (.14)
Cumulative effect of change in accounting principle, net of
income tax expense -- .91
--------- --------- --------- ---------
Net income (loss) $ .38 $ .39 $ (.97) $ (.14)
--------- --------- --------- ---------
--------- --------- --------- ---------
WEIGHTED AVERAGE SHARES:
Basic 2,473 7,450 2,473 7,447
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted 2,473 7,486 2,473 7,447
--------- --------- --------- ---------
--------- --------- --------- ---------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
FRIENDLY ICE CREAM CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited)
(Dollar amounts in thousands)
Common Stock Additional Cumulative
---------------------------- Paid-in Accumulated Translation
Shares Amount Capital Deficit Adjustment Total
------ --------- ------ ------- ---------- -------
Balance,
December 28, 1997 7,441,290 $74 $137,175 $(223,668) $58 $(86,361)
Net loss (1,027) (1,027)
Restricted stock
compensation expense
related to new shares
issued 13,310 1 15 16
Restricted stock
compensation expense
related to original
shares issued 339 339
Translation adjustment 10 10
--------- ---- -------- --------- ---- --------
Balance,
June 28, 1998 7,454,600 $ 75 $137,529 $(224,695) $68 $(87,023)
--------- ---- -------- --------- ---- --------
--------- ---- -------- --------- ---- --------
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
(Unaudited)
(In thousands)
For the Six Months Ended
------------------------
June 29, June 28,
1997 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,404) $ (1,027)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Cumulative effect of change in accounting principle (2,236) --
Stock compensation expense -- 354
Depreciation and amortization 16,401 16,085
Write-down of property and equipment 347 168
Deferred income tax benefit (3,224) (629)
Loss on asset retirements 777 1,091
Equity in net loss of joint venture 743 670
Changes in operating assets and liabilities:
Trade accounts receivable (1,015) 750
Inventories (2,345) (4,248)
Other assets (3,199) (543)
Accounts payable 5,499 11,038
Accrued expenses and other long-term liabilities 281 (5,455)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,625 18,254
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (8,810) (33,936)
Proceeds from sales of property and equipment 919 1,402
Proceeds from sales and maturities of investment securities 73 --
Cash acquired from Restaurant Insurance Corporation, net of cash paid 965 --
Advances to joint venture (1,400) --
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (8,253) (32,534)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 29,191 39,258
Repayments of debt (28,893) (23,931)
Repayments of capital lease and finance obligations (3,395) (810)
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (3,097) 14,517
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2) 11
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,727) 248
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,626 15,132
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 16,899 $ 15,380
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 20,063 $ 15,334
Income taxes paid -- 374
Capital lease obligations incurred 2,057 608
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 June 28, 1998 and for the
periods ended June 29, 1997 and June 28, 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 Friendly Ice Cream Corporation and subsidiaries (the Company). Such
adjustments consist solely of normal recurring accruals. Operating results for
the three and six month periods ended June 29, 1997 and June 28, 1998 are not
necessarily indicative of the results that may be expected for the entire year
due, in part, to the seasonality of the business. Historically, higher revenues
and 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 June 28, 1998 were (in thousands):
December 28, June 28,
1997 1998
--------- ---------
Raw materials $ 2,011 $ 3,069
Goods in process 136 146
Finished goods 13,524 16,704
--------- ---------
Total $15,671 $19,919
--------- ---------
--------- ---------
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. In 1998, the Company issued an
additional 13,310 shares 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. During the three months and six months
ended June 28, 1998, the Company recorded stock compensation expense of
approximately $129,000 and $354,000, respectively, related to such stock
issuances. The Company is recognizing compensation cost over the estimated
vesting period. There was no stock compensation expense for the same periods of
1997.
3. 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 have been restated and all earnings per share data
presented are in accordance with SFAS No. 128 and SAB No.
98.
Basic earnings per share is calculated by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is calculated by dividing income
available to common stockholders by the weighted average number of shares of
common stock and common stock equivalents outstanding during the period. Common
stock equivalents are dilutive stock options that are assumed exercised for
calculation purposes.
5
Presented below is the reconciliation between basic earnings per share
and diluted earnings per share for the three months and six months ended June
29, 1997 and June 28, 1998 (in thousands, except per share data).
For the Three Months Ended
--------------------------
Basic Diluted
----- -------
June 29, 1997 June 28,1998 June 29,1997 June 28, 1998
------------- ------------ ------------- -------------
Net income (loss)
applicable to common
stock $ 945 $2,946 $ 945 $2,946
------ ------ ------ ------
------ ------ ------ ------
Average number of
common shares
outstanding during
the period 2,473 7,450 2,473 7,450
Adjustments:
Exercise of stock options -- -- -- 36
------ ------ ------ ------
Average number of
shares outstanding 2,473 7,450 2,473 7,486
------ ------ ------ ------
------ ------ ------ ------
Net income (loss)
per common share $ .38 $ .40 $ .38 $ .39
------ ------ ------ ------
------ ------ ------ ------
For the Six Months Ended
------------------------
Basic Diluted
----- -------
June 29, 1997 June 28, 1998 June 29, 1997 June 28, 1998
------------- ------------ ------------- -------------
Net income (loss)
applicable to common
stock $(2,404) $(1,027) $(2,404) $(1,027)
------- ------- ------- -------
------- ------- ------- -------
Average number of
common shares
outstanding during
the period 2,473 7,447 2,473 7,447
Adjustments:
Exercise of stock options -- -- -- --
------- ------- ------- -------
Average number of
shares outstanding 2,473 7,447 2,473 7,447
------- ------- ------- -------
------- ------- ------- -------
Net income (loss)
per common share $ (.97) $ (.14) $ (.97) $ (.14)
------- ------- ------- -------
------- ------- ------- -------
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 June 28, 1998, deferred
preopening costs were approximately $363,000 and $321,000, 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.
The following table illustrates comprehensive income (loss) (in
thousands):
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
June 29, 1997 June 28, 1998 June 29, 1997 June 28, 1998
------------- ------------ ------------- ---------------
Net income (loss) $ 945 $ 2,946 $(2,404) $(1,027)
------- ------- ------- -------
Other comprehensive income (loss), net of tax
Currency translation effects 8 (6) (1) 6
Unrealized gain on investment 28 -- 28 --
------- ------- ------- -------
Other comprehensive income (loss) 36 (6) 27 6
------- ------- ------- -------
Comprehensive income (loss) $ 981 $ 2,940 $(2,377) $(1,021)
------- ------- ------- -------
------- ------- ------- -------
6. PENSION AND OTHER POSTRETIREMENT BENEFITS
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits", which becomes effective for
financial statements for fiscal years beginning after December 15, 1997. The
Company is currently evaluating the necessary disclosures associated with the
new pronouncement.
7. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND FOR HEDGING ACTIVITIES
In July 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and for Hedging Activities", which becomes effective for financial
statements for fiscal years beginning after June 15, 1999. The statement
requires that every derivative be recorded on the balance sheet as either an
asset or liability measured at its fair value. The statement requires that
changes in the
6
derivative's fair value be recognized currently in earnings unless specific
hedge accounts criteria are met. The Company is currently evaluating the impact
of SFAS 133 on its financial reporting practices.
8. 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.
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
-------- -------- -------- --------- --------
-------- -------- -------- --------- --------
7
Supplemental Condensed Consolidating Statement of Operations
For the Three Months Ended June 29, 1997
(Unaudited)
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
-------- ---------- ------------- ------------ ------------
Revenues $ 178,619 $ -- $ 200 $ -- $ 178,819
Costs and expenses:
Cost of sales 50,537 -- 123 -- 50,660
Labor and benefits 55,372 -- -- -- 55,372
Operating expenses and write-down of
property and equipment 40,105 (101) (139) -- 39,865
General and administrative expenses 10,704 133 248 -- 11,085
Depreciation and amortization 8,330 -- -- -- 8,330
Interest expense (income) 11,189 -- (27) -- 11,162
Equity in net loss of joint venture -- -- 743 -- 743
--------- ---------- ----------- --------- ---------
Income (loss) before provision for
income taxes and equity in net loss of
consolidated subsidiaries 2,382 (32) (748) -- 1,602
Provision for income taxes (435) (45) (177) -- (657)
--------- ---------- ----------- --------- ---------
Income (loss) before equity in net loss
of consolidated subsidiaries 1,947 (77) (925) -- 945
Equity in net loss of consolidated
subsidiaries (1,002) -- -- 1,002 --
--------- ---------- ----------- --------- ---------
Net income (loss) $ 945 $ (77) $ (925) $ 1,002 $ 945
--------- ---------- ----------- --------- ---------
--------- ---------- ----------- --------- ---------
8
Supplemental Condensed Consolidating Statement of Operations
For the Six Months Ended June 29, 1997
(Unaudited)
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
-------- ---------- ------------- ------------ ------------
Revenues $ 322,530 $ -- $ 298 $ -- $ 322,828
Costs and expenses:
Cost of sales 91,971 -- 215 -- 92,186
Labor and benefits 104,898 -- -- -- 104,898
Operating expenses and write-down of
property and equipment 71,987 -- (232) -- 71,755
General and administrative expenses 21,837 142 492 -- 22,471
Depreciation and amortization 16,401 -- -- -- 16,401
Interest expense (income) 22,268 -- (30) -- 22,238
Equity in net loss of joint venture -- -- 743 -- 743
--------- --------- --------- --------- ---------
Loss before benefit from (provision for)
income taxes, cumulative effect of
change in accounting principle and
equity in net loss of consolidated
subsidiaries (6,832) (142) (890) -- (7,864)
Benefit from (provision for) income taxes 3,343 -- (119) -- 3,224
--------- --------- --------- --------- ---------
Loss before cumulative effect of change
in accounting principle and equity in
net loss of consolidated subsidiaries (3,489) (142) (1,009) -- (4,640)
Cumulative effect of change in
accounting principle 2,236 -- -- -- 2,236
--------- --------- --------- --------- ---------
Loss before equity in net loss of
consolidated subsidiaries (1,253) (142) (1,009) -- (2,404)
Equity in net loss of consolidated
subsidiaries (1,151) -- -- 1,151 --
--------- --------- --------- --------- ---------
Net loss $ (2,404) $ (142) $ (1,009) $ 1,151 $ (2,404)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
9
Supplemental Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 29, 1997
(Unaudited)
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
-------- ---------- ------------- ------------ ------------
Net cash provided by (used in) operating
activities $ 10,283 $ (208) $ (450) $ -- $ 9,625
-------- -------- -------- ------- ----------
Cash flows from investing activities:
Purchases of property and equipment (8,767) -- (43) -- (8,810)
Proceeds from sales of property and
equipment 919 -- -- -- 919
Proceeds from sales and maturities
of investment securities -- 73 73
Cash (paid) received in acquisition
of Restaurant Insurance Corporation (1,300) -- 2,265 -- 965
Advances to Joint Venture (1,400) -- -- -- (1,400)
Investments in consolidated
subsidiaries (142) -- -- 142 --
-------- -------- -------- ------- ----------
Net cash (used in) provided by investing
activities (10,690) -- 2,295 142 (8,253)
-------- -------- -------- ------- ----------
Cash flows from financing activities:
Contribution of capital -- 142 -- (142) --
Proceeds from borrowings (advances to
parent) 30,491 -- (1,300) -- 29,191
Repayments of obligations (32,288) -- -- -- (32,288)
-------- -------- -------- ------- ----------
Net cash (used in) provided by financing
activities (1,797) 142 (1,300) (142) (3,097)
-------- -------- -------- ------- ----------
Effect of exchange rate changes on cash -- -- (2) -- (2)
-------- -------- -------- ------- ----------
Net (decrease) increase in cash and cash
equivalents (2,204) (66) 543 -- (1,727)
Cash and cash equivalents, beginning of
period 17,754 268 604 -- 18,626
-------- -------- -------- ------- ----------
Cash and cash equivalents, end of period $ 15,550 $ 202 $ 1,147 $ -- $ 16,899
-------- -------- -------- ------- ----------
-------- -------- -------- ------- ----------
Supplemental disclosures:
Interest paid $ 20,063 $ -- $ -- $ -- $ 20,063
Capital lease obligations incurred 2,057 -- -- -- 2,057
Issuance of note payable in
connection with the acquisition of
Restaurant Insurance Corporation 1,000 -- -- -- 1,000
10
Supplemental Condensed Consolidating Balance Sheet
As of June 28, 1998
(Unaudited)
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
-------- ---------- ------------- ------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 12,809 $ 137 $ 2,434 -- $ 15,380
Restricted cash -- -- 1,514 -- 1,514
Trade accounts receivable 7,348 231 593 -- 8,172
Inventories 19,394 -- 525 -- 19,919
Deferred income taxes 8,831 -- -- -- 8,831
Prepaid expenses and other current
assets 11,860 1,698 5,151 $ (10,626) 8,083
--------- --------- --------- --------- ---------
Total current assets 60,242 2,066 10,217 (10,626) 61,899
Deferred income taxes -- 456 648 (1,104) --
Investment in joint venture -- -- 2,300 -- 2,300
Property and equipment, net 300,589 -- 174 -- 300,763
Intangibles and deferred costs, net 25,103 -- -- -- 25,103
Investments in subsidiaries 3,571 -- -- (3,571) --
Other assets 299 -- 8,532 (7,608) 1,223
--------- --------- --------- --------- ---------
Total assets $ 389,804 $ 2,522 $ 21,871 $ (22,909) $ 391,288
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Liabilities and Stockholders'
Equity (Deficit)
Current liabilities:
Current maturities of long-term
obligations $ 7,748 $ -- $ -- $ (4,400) $ 3,348
Accounts payable 34,989 -- -- -- 34,989
Accrued expenses 35,752 254 9,331 (6,226) 39,111
--------- --------- --------- --------- ---------
Total current liabilities 78,489 254 9,331 (10,626) 77,448
Deferred income taxes 42,868 -- -- (1,104) 41,764
Long-term obligations, less current
maturities 334,262 -- -- (7,608) 326,654
Other liabilities 21,208 1,384 9,853 -- 32,445
Stockholders' equity (deficit) (87,023) 884 2,687 (3,571) (87,023)
--------- --------- --------- --------- ---------
Total liabilities and stockholders'
equity (deficit) $ 389,804 $ 2,522 $ 21,871 $ (22,909) $ 391,288
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
11
Supplemental Condensed Consolidating Statement of Operations
For the Three Months Ended June 28, 1998
(Unaudited)
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------ ------------ ------------
Revenues $ 178,318 $ 363 $ 65 $ -- $ 178,746
Costs and expenses:
Cost of sales 52,702 -- 63 -- 52,765
Labor and benefits 53,635 -- -- -- 53,635
Operating expenses and write-down of
property and equipment 40,386 -- (20) -- 40,366
General and administrative expenses 10,244 304 82 -- 10,630
Stock compensation expense 129 -- -- -- 129
Depreciation and amortization 8,119 -- 10 -- 8,129
Interest expense (income) 8,219 -- (233) -- 7,986
Equity in net loss of joint venture -- -- 354 -- 354
--------- --------- --------- --------- ---------
Income (loss) before (provision for)
benefit from income taxes and equity in
net loss of consolidated subsidiaries 4,884 59 (191) -- 4,752
(Provision for) benefit from income taxes (1,831) (22) 47 -- (1,806)
--------- --------- --------- --------- ---------
Income (loss) before equity in net loss
of consolidated subsidiaries 3,053 37 (144) -- 2,946
Equity in net loss of consolidated
subsidiaries (107) -- -- 107 --
--------- --------- --------- --------- ---------
Net income (loss) $ 2,946 $ 37 $ (144) $ 107 $ 2,946
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
12
Supplemental Condensed Consolidating Statement of Operations
For the Six Months Ended June 28, 1998
(Unaudited)
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------ ------------ ------------
Revenues $ 329,490 $ 666 $ 264 $ $ 330,420
Costs and expenses:
Cost of sales 98,767 -- 239 -- 99,006
Labor and benefits 103,887 -- -- -- 103,887
Operating expenses and write-down of
property and equipment 74,184 -- (29) -- 74,155
General and administrative expenses 21,266 604 180 -- 22,050
Stock compensation expense 354 -- -- -- 354
Depreciation and amortization 16,065 -- 20 -- 16,085
Interest expense (income) 16,337 -- (468) -- 15,869
Equity in net loss of joint venture -- -- 670 -- 670
--------- --------- --------- ------------ ---------
(Loss) income before benefit from
(provision for) income taxes and equity
in net loss of consolidated subsidiaries (1,370) 62 (348) -- (1,656)
Benefit from (provision for) income taxes 552 (23) 100 -- 629
--------- --------- --------- ------------ ---------
(Loss) income before equity in net loss
of consolidated subsidiaries (818) 39 (248) -- (1,027)
Equity in net loss of consolidated
subsidiaries (209) -- -- 209 --
--------- --------- --------- ------------ ---------
Net (loss) income $ (1,027) $ 39 $ (248) $ 209 $ (1,027)
--------- --------- --------- ------------ ---------
--------- --------- --------- ------------ ---------
13
Supplemental Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 28, 1998
(Unaudited)
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------ ------------ ------------
Net cash provided by (used in) operating
activities $ 18,187 $ (67) $ 66 $ 68 $ 18,254
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment (33,936) -- -- -- (33,936)
Proceeds from sales of property and
equipment 1,402 -- -- -- 1,402
-------- -------- -------- -------- --------
Net cash used in investing activities (32,534) -- -- -- (32,534)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Dividend received (paid) 400 -- (400) -- --
Proceeds from borrowings 39,258 -- -- -- 39,258
Repayments of obligations (24,741) -- -- -- (24,741)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities 14,917 -- (400) -- 14,517
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash -- -- 11 -- 11
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents 570 (67) (323) 68 248
Cash and cash equivalents, beginning of
period 12,239 204 2,757 (68) 15,132
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period $ 12,809 $ 137 $ 2,434 $ -- $ 15,380
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Supplemental disclosures:
Interest paid (received) $ 15,859 $ -- $ (525) $ -- $ 15,334
Income taxes (received) paid (771) 810 335 -- 374
Capital lease and finance
obligations incurred 608 -- -- -- 608
14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 28, 1998 AND
JUNE 29, 1997
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 651 restaurants, franchises 34 restaurants
and 3 cafes and distributes a full line of frozen dessert products. These
products are distributed to Friendly's restaurants and through more than 5,000
supermarkets and other retail locations in 15 states. The restaurants offer a
wide variety of reasonably priced breakfast, lunch and dinner menu items as well
as the frozen dessert products. The Company continues to expand its franchising
program as evidenced by the recent signing of two new franchisees in Myrtle
Beach, South Carolina and Tannersville, Pennsylvania.
15
Results of Operations
The operating results of the Company expressed as a percentage of total
revenues are set forth below:
(Unaudited)
For the Three For the Six
Months Ended Months Ended
------------------- -------------------
June 29, June 28, June 29, June 28,
1997 1998 1997 1998
---- ---- ---- ----
Revenues:
Restaurant 89.8% 87.8% 91.2% 88.4%
Retail, institutional and other 10.2 10.2 8.8 9.6
Franchise -- 2.0 -- 2.0
------ ------ ------- -------
Total revenues 100.0 100.0 100.0 100.0
------ ------ ------- -------
Costs and expenses:
Cost of sales 28.3 29.5 28.5 30.0
Labor and benefits 31.0 30.0 32.5 31.4
Operating expenses 22.1 22.5 22.1 22.4
General and administrative expenses 6.2 6.0 7.0 6.7
Stock compensation expense -- 0.1 -- 0.1
Non-cash write-downs 0.2 -- 0.1 --
Depreciation and amortization 4.7 4.6 5.1 4.9
------ ------ ------- -------
Operating income 7.5 7.3 4.7 4.5
Interest expense, net 6.2 4.5 6.9 4.8
Equity in net loss of joint venture 0.4 0.2 0.2 0.2
------ ------ ------- -------
Income (loss) before (provision for) benefit
from income taxes and cumulative
effect of change in accounting
principle 0.9 2.6 (2.4) (0.5)
(Provision for) benefit from income taxes (0.4) (1.0) 1.0 0.2
Cumulative effect of change in accounting
principle, net of income tax expense -- -- 0.7 --
------ ------ ------- -------
Net income (loss) 0.5% 1.6% (0.7)% (0.3)%
------ ------ ------- -------
------ ------ ------- -------
16
Revenues:
Total revenues decreased $0.1 million, or 0.1%, to $178.7 million for the
second quarter ended June 28, 1998 from $178.8 million for the same quarter in
1997. Restaurant revenues decreased $3.5 million, or 2.2%, to $157.0 million for
the second quarter of 1998 from $160.5 million for the same quarter in 1997.
Comparable restaurant revenues increased 3.6%. The decrease in restaurant
revenues was primarily impacted by the closing of 21 under-performing
restaurants, offset by the opening of 6 new restaurants since the end of the
second quarter ended June 29, 1997, and the July 1997 sale of 34 restaurants to
DavCo Restaurants, Inc. ("DavCo") in connection with the commencement of the
Company's franchising program. Second quarter restaurant revenues were also
reduced by $1.0 million due to the close down days associated with the
construction of the Company's re-imaging projects. The sale of 34 units to Davco
resulted in an $8.4 million reduction in restaurant revenues in the second
quarter of 1998 compared to the second quarter of 1997. Retail, institutional
and other revenues decreased by $0.1 million, or 0.5%, to $18.2 million for the
second quarter of 1998 from $18.3 million for the same quarter in 1997. The
decrease was primarily due to a decline in international sales. Franchise
revenue was $3.6 million for the second quarter of 1998. There was no franchise
revenue for the second quarter of 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").
Total revenues increased $7.6 million, or 2.4%, to $330.4 million for the
six months ended June 28, 1998 from $322.8 million for the same period in 1997.
Restaurant revenues decreased $2.3 million, or 0.8%, to $292.2 million in 1998
from $294.5 million for the same period in 1997. Comparable restaurant revenues
increased 5.1%. The decrease in restaurant revenues was primarily impacted by
the closing of 21 under-performing restaurants, offset by the opening of 6 new
restaurants since the end of the second quarter ended June 29, 1997, and the
July 1997 sale of 34 restaurants to DavCo in connection with the commencement of
the Company's franchising program. Restaurant revenues were also reduced by $1.9
million due to the close down days associated with the construction of the
Company's re-imaging projects. The sale of the 34 units to DavCo resulted in a
$15.3 million reduction in restaurant revenues in the six months of 1998
compared to the same period in 1997. Retail, institutional and other revenues
increased by $3.4 million, or 12%, to $31.7 million for the six months ended
June 28, 1998 from $28.3 million for the six months ended June 29, 1997. The
increase was primarily due to an increase in retail sales in existing markets,
offset by a decline in international sales. Franchise revenue was $6.6 million
for the six months ended June 28, 1998. There was no franchise revenue for the
six months ended June 29, 1997. The increase is a result of the consummation of
the DavCo agreement described above.
Cost of sales:
Cost of sales increased $2.1 million, or 4.1%, to $52.8 million for the
second quarter ended June 28, 1998 from $50.7 million for the same quarter in
1997. Cost of sales as a percentage of total revenues increased to 29.5% for the
second quarter of 1998 from 28.3% for the same quarter in 1997. The higher food
cost as a percentage of total revenue was partly due to the increase in
franchise revenues which carry a higher food cost than restaurant revenues. This
shift increased the cost of sales as a percentage of total revenue by 0.6%. The
remaining 0.6% relates largely to an increase in the cost of cream, the
principal ingredient in ice cream, the introduction of improved kids menu items,
higher produce costs and additional restaurant promotional activity in the 1998
period. Results were significantly impacted by an unprecedented increase in the
cost of dairy raw materials, specifically fresh cream. As of the end of June,
the market price of domestic butter, the benchmark used to determine cream
prices had increased 56% from the end of April, with 34% of the increase
occurring from the end of May. To compensate for this increase, the Company has
increased prices on certain packaged ice cream products, modified promotion
strategies and continues to evaluate ways to manage dairy cost pressures over
the long term.
Cost of sales increased $6.8 million, or 7.4%, to $99.0 million for the
six months ended June 28, 1998 from $92.2 million for the same period in 1997.
Cost of sales as a percentage of total revenues increased to 30.0% for the six
months in 1998 from 28.5% for the same period in 1997. The higher food cost as a
percentage of total revenue was partly due to the increases in non-restaurant
sales, which carry a higher food cost compared to restaurant sales. This shift
increased the cost of sales as a percentage of total revenue by 0.9%. The
remaining 0.6% relates largely to an increase in the cost of cream, the
principal ingredient in ice cream, higher produce costs and greater restaurant
promotional activity in the 1998 period. Results were significantly impacted by
an unprecedented increase in the cost of dairy raw materials, specifically fresh
cream. As of the end of June, the market price of domestic butter, the benchmark
used to determine cream prices had increased 56% from the end of April, with 34%
of the increase occurring from the end of May. To compensate for this increase,
the Company has increased prices on certain packaged ice cream products,
modified promotion strategies and continues to evaluate ways to manage dairy
cost pressures over the long term.
Labor and benefits:
Labor and benefits decreased $1.8 million, or 3.2%, to $53.6 million for
the second quarter ended June 28, 1998 from $55.4 million for the same quarter
in 1997. Labor and benefits as a percentage of total revenues decreased to 30.0%
for the second quarter in 1998 from 31.0% for the same quarter in 1997. The
decrease was primarily due to the inclusion of franchise revenues in the 1998
period since these revenues have no associated labor and benefits cost and lower
restaurant pension and workers' compensation costs.
17
Labor and benefits decreased $1.0 million, or 1%, to $103.9 million for
the six months ended June 28, 1998 from $104.9 million for the same period in
1997. Labor and benefits as a percentage of total revenues decreased to 31.4%
for the six months in 1998 from 32.5% for the same period in 1997. The decrease
was due to an increase in retail, institutional, franchise and other revenues as
a percent of total revenues as these revenues have no associated labor and
benefits cost and lower restaurant pension and workers' compensation costs.
Operating expenses:
Operating expenses increased $0.8 million, or 2.0%, to $40.3 million for
the second quarter ended June 28, 1998 from $39.5 million for the same quarter
in 1997. This increase was primarily due to increased trade promotion
expenditures in the retail frozen dessert business driven by competitive
pressures. Despite higher selling expense, retail revenues were relatively the
same in both quarters. Operating expenses as a percentage of total revenues were
22.5% and 22.1% for the second quarter ended June 28, 1998 and June 29, 1997,
respectively.
Operating expenses increased $2.6 million, or 3.6%, to $74.0 million for
the six months ended June 28, 1998 from $71.4 million for the same period in
1997. This increase was primarily due to higher retail selling expenses which
resulted in higher retail sales. Operating expenses as a percentage of total
revenues were 22.4% and 22.1% for the six months ended June 28, 1998 and June
29, 1997, respectively.
General and administrative expenses:
General and administrative expenses were $10.6 million and $11.1 million
for the second quarter ended June 28, 1998 and June 29, 1997, respectively. The
decrease related to a lower bonus provision in the current year and a reduction
in field employees resulting from 49 less restaurants from the end of the second
quarter in 1997. General and administrative expenses as a percentage of total
revenues decreased to 6.0% in the second quarter of 1998 from 6.2% for the same
quarter in 1997.
General and administrative expenses were $22.0 million and $22.5 million
for the six months ended June 28, 1998 and June 29, 1997, respectively. The
decrease related to a lower bonus provision in the current year and a reduction
in field employees resulting from 49 less restaurants from the end of the second
quarter in 1997. General and administrative expenses as a percentage of total
revenues decreased to 6.7% in the six months of 1998 from 7.0% for the same
period in 1997.
EBITDA:
As a result of the above, EBITDA (earnings before interest, taxes,
depreciation and amortization, stock compensation and other non-cash items)
decreased $0.8 million, or 3.6%, to $21.4 million for the second quarter ended
June 28, 1998 from $22.2 million for the same quarter in 1997. EBITDA as a
percentage of total revenues was 12.0% and 12.4% for the second quarter in 1998
and 1997, respectively.
EBITDA decreased $0.4 million, or 1.3%, to $31.5 million for the six
months ended June 28, 1998 from $31.9 million for the same period in 1997.
EBITDA as a percentage of total revenues was 9.5% and 9.9% for the six months
ended June 28, 1998 and June 29, 1997, respectively.
Stock compensation expense:
Stock compensation expense represents stock compensation arising out of
the vesting of certain shares of restricted stock previously issued to
management. Stock compensation expense was $0.1 million and $0.3 million for the
second quarter and six months ended June 28, 1998, respectively. There was no
stock compensation expense for the second quarter and six months ended June 29,
1997.
Non-cash write-downs on property and equipment:
Non-cash write-downs on property and equipment were $0.1 million and $0.3
million for the second quarter ended June 28, 1998 and June 29, 1997,
respectively. Non-cash write-downs on property and equipment were $0.2 million
and $0.3 million for the six months ended June 28, 1998 and June 29, 1997,
respectively.
Depreciation and amortization:
Depreciation and amortization decreased $0.2 million, or 2.4%, to $8.1
million for the second quarter ended June 28, 1998 from $8.3 million for the
same quarter in 1997. Depreciation and amortization as a percentage of total
revenues decreased to 4.6% for the
18
second quarter in 1998 from 4.7% for the same quarter in 1997. The decrease was
due to the closing of 21 restaurants, offset by the opening of 6 new restaurants
and the reimaging of 180 restaurants since the end of the second quarter ended
June 29, 1997.
Depreciation and amortization decreased $0.3 million, or 1.8%, to $16.1
million for the six months ended June 28, 1998 from $16.4 million for the same
period in 1997. Depreciation and amortization as a percentage of total revenues
decreased to 4.9% for the six months in 1998 from 5.1% for the same period in
1997. The decrease was due to the closing of 21 restaurants, offset by the
opening of 6 new restaurants and the reimaging of 180 restaurants since the end
of the second quarter ended June 29, 1997.
Interest expense, net:
Interest expense, net of capitalized interest and interest income,
decreased by $3.2 million, or 28.6%, to $8.0 million for the second quarter
ended June 28, 1998 from $11.2 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.
Interest expense, net of capitalized interest and interest income,
decreased by $6.3 million, or 28.4%, to $15.9 million for the six months ended
June 28, 1998 from $22.2 million for the same period 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 was $0.4 million and
$0.7 million for the second quarter ended June 28, 1998 and June 29, 1997,
respectively. The equity in net loss of the China joint venture was $0.7 million
for both the six months ended June 28, 1998 and the six months ended June 29,
1997. These losses reflected the Company's 50% share of the China joint
venture's net loss for such periods.
(Provision for) benefit from income taxes:
The provision for income taxes was $1.8 million, or 38%, and $0.7 million,
or 41%, for the second quarter ended June 28, 1998 and June 29, 1997,
respectively. The benefit from income taxes was $0.6 million, or 38%, and $3.2
million, or 41%, for the six months ended June 28, 1998 and June 29, 1997,
respectively. 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 income (loss):
Net income was $2.9 million and $0.9 million for the six months ended June
28, 1998 and June 29, 1997, respectively. Net loss was $1.0 million and $2.4
million for the six months ended June 28, 1998 and June 29, 1997, respectively.
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 $18.3 million in the six
months ended June 28, 1998 compared to $9.6 million in the same period of 1997.
During the six months ended June 28, 1998, inventories increased by
approximately $4.2 million in preparation for restaurant promotional campaigns
and anticipated increases in retail sales. Accounts payable increased
approximately $11.0 million for the six months ended June 28, 1998. The increase
was primarily due to payables of $5.0 million at June 28, 1998 related to a new
store and costs associated with the Company's Focus 2000 reimaging project. Also
contributing to the increase is the volume and timing of activity associated
with the summer months. Accrued expenses decreased $5.5 million, of which
approximately $1.9 million was due to expenses paid in the early part of 1998
related to the Company's recapitalization accruals from December 28, 1997. The
decrease was also impacted by the recognition of premium income of $2.1 million,
which had been deferred as of December 28, 1997. Additionally, there were
approximately $1.0 million of store construction and maintenance accruals at
December 28, 1997 which have been paid in the six months ended June 28, 1998.
Available borrowings under the revolving credit facility were $28.0 million as
of June 28, 1998.
19
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 $32.5 million in the six
months ended June 28, 1998 and $8.3 million in the same period of 1997. Capital
expenditures were approximately $33.9 million in the six months of 1998 and $8.8
million in the same period of 1997. The increase in capital expenditures was
primarily due to the reimaging of 137 restaurants in 1998. Proceeds from the
sale of property and equipment were $1.4 million and $0.9 million in 1998 and
1997, respectively.
Net cash provided by financing activities was $14.5 million in the six
months ended June 28, 1998 compared to net cash used in financing activities of
$3.1 million in the same period of 1997 primarily related to the funding of
costs associated with the reimaging of 137 restaurants in 1998.
The Company had a working capital deficit of $15.5 million as of June
28, 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 $4 - $6 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.
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 86% 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.
20
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) An annual meeting of Company's shareholders was held on May 12, 1998.
(b) Not applicable.
(c) The election of two nominees for director of the Company was voted upon at
the meeting. The number of affirmative votes and the number of votes
withheld with respect to such approval is as follows:
Nominee Affirmative Votes Votes Withheld
------- ----------------- --------------
Michael J. Daly 5,723,623 386,545
Burton J. Manning 5,724,832 385,336
The results of the voting to ratify the appointment of Arthur Andersen LLP
to audit the accounts of the Company and its subsidiaries for 1998 are as
follows:
For Against Abstain
--- ------- -------
6,104,510 2,360 3,298
There were no matters voted upon at the Company's annual meeting to which
broker non-votes applied.
Item 5. OTHER BUSINESS
Notice to Shareholders of By-Law Amendments
Pursuant to Massachusetts General Laws Annotated, Chapter 156B Sec.17,
the Company is providing notice to its shareholders that its By-laws were
amended at a meeting of the Company's Board of Directors on July 29, 1998. The
amendments relate to advance notice requirements of Company shareholders
interested in presenting a proposal for consideration at the Company's annual
meeting of shareholders. The amendments provide that such notice must be
received by the Company's Clerk 120 days in advance of the annual meeting.
Shareholder Proposals for 1999 Annual Meeting
Pursuant to the requirements of the Securities and Exchange Commission
("SEC"), notice is hereby provided that Company shareholders interest in
presenting shareholder proposals at the Company's annual meeting in 1999 must
comply with the procedures described in the Company's By-laws, as amended on
July 29, 1998 (see summary which will require that among other things, notice of
any shareholder proposal to be presented at the Company's 1999 annual meeting
must be received by the Clerk of the Company no later than ninety (90) days in
advance of such meeting provided that, unless at least one hundred twenty (120)
days advance notice of the meeting date is given, such notice shall be timely if
received at least ninety (90) days in advance of the anniversary of the prior
year's meeting.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) No report on Form 8-K was filed during the three months and six months ended
June 28, 1998.
21
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRIENDLY ICE CREAM CORPORATION
By: /s/ George G. Roller
------------------------
Name: George G. Roller
Title: Vice President, Finance
Chief Financial Officer
And Treasurer
22