SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NO. 0-3930
--------------------------
FRIENDLY ICE CREAM CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 5812 04-2053130
(State of (Primary Standard Industrial (I.R.S. Employer
Incorporation) Classification Code Number) Identification No.)
1855 BOSTON ROAD
WILBRAHAM, MASSACHUSETTS 01095
(413) 543-2400
(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes / X / No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MAY 11, 1999
----- --------------------------
Common Stock, $.01 par value 7,500,000 shares
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 28, December 27,
1999 1998
--------- ----------
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 11,551 $ 11,091
Restricted cash 2,463 2,211
Trade accounts receivable 4,228 5,566
Inventories 17,100 15,560
Deferred income taxes 7,061 7,061
Prepaid expenses and other current assets 5,835 6,578
--------- ----------
TOTAL CURRENT ASSETS 48,238 48,067
PROPERTY AND EQUIPMENT, net 301,775 300,159
INTANGIBLES AND DEFERRED COSTS, net 24,617 25,178
OTHER ASSETS 1,342 1,144
--------- ----------
TOTAL ASSETS $ 375,972 $ 374,548
--------- ----------
--------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 6,305 $ 4,023
Current maturities of capital lease and finance obligations 1,689 1,677
Accounts payable 27,849 26,460
Accrued salaries and benefits 15,319 14,206
Accrued interest payable 7,397 2,593
Insurance reserves 8,640 9,116
Other accrued expenses 14,659 20,649
--------- ----------
TOTAL CURRENT LIABILITIES 81,858 78,724
--------- ----------
DEFERRED INCOME TAXES 32,652 37,188
CAPITAL LEASE AND FINANCE OBLIGATIONS, less current maturities 9,319 9,745
LONG-TERM DEBT, less current maturities 320,776 311,061
OTHER LONG-TERM LIABILITIES 28,332 28,431
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock 75 75
Preferred stock -- --
Additional paid-in capital 138,058 137,896
Accumulated deficit (235,166) (228,639)
Accumulated other comprehensive income 68 67
--------- ----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (96,965) (90,601)
--------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 375,972 $ 374,548
--------- ----------
--------- ----------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
For the Three Months Ended
---------------------------
March 28, March 29,
1999 1998
-------- --------
REVENUES $145,683 $151,674
COSTS AND EXPENSES:
Cost of sales 44,188 46,241
Labor and benefits 50,364 50,252
Operating expenses 33,384 33,689
General and administrative expenses 11,763 11,420
Stock compensation expense 162 225
Write-downs of property and equipment 286 100
Depreciation and amortization 8,229 7,956
Gain on sales of restaurant operations (256) --
-------- --------
OPERATING (LOSS) INCOME (2,437) 1,791
Interest expense, net 8,335 7,883
(Recovery of write-down of) equity in net loss of joint venture (250) 316
-------- --------
LOSS BEFORE BENEFIT FROM INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE
(10,522) (6,408)
Benefit from income taxes 4,314 2,435
-------- --------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (6,208) (3,973)
Cumulative effect of change in accounting principle, net of
income tax benefit of $222 ( 319) --
-------- --------
NET LOSS $ (6,527) $(3,973)
-------- --------
-------- --------
BASIC AND DILUTED NET LOSS PER SHARE:
Loss before cumulative effect of change in accounting
principle $(0.83) $(0.53)
Cumulative effect of change in accounting principle, net of
income tax benefit (0.04) --
-------- --------
Net loss $(0.87) $(0.53)
-------- --------
-------- --------
WEIGHTED AVERAGE BASIC AND DILUTED SHARES 7,482 7,443
-------- --------
-------- --------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Three Months Ended
-----------------------------
March 28, March 29,
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,527) $(3,973)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Cumulative effect of change in accounting principle 319 --
Stock compensation expense 162 225
Depreciation and amortization 8,229 7,956
Write-downs of property and equipment 286 100
Deferred income tax benefit (4,314) (2,435)
Loss on asset retirements 97 1,167
Equity in joint venture loss -- 316
Changes in operating assets and liabilities:
Trade accounts receivable 1,338 1,155
Inventories (1,540) (3,016)
Other assets (1,407) (420)
Accounts payable 1,389 5,848
Accrued expenses and other long-term liabilities (648) 364
-------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (2,616) 7,287
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (11,349) (15,066)
Proceeds from sales of property and equipment 1,691 103
Proceeds from sale of joint venture 1,150 --
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (8,508) (14,963)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 26,000 20,258
Repayments of debt (14,003) (12,378)
Repayments of capital lease and finance obligations (414) (375)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,583 7,505
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1 20
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 460 (151)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,091 15,132
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $11,551 $14,981
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES:
Interest paid $3,213 $2,292
Income taxes paid 2 113
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(Dollar amounts in thousands)
For The Three Months Ended
--------------------------
March 28, March 29,
1999 1998
---- ----
NET LOSS $(6,527) $(3,973)
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Currency translation effects 1 20
------- -------
OTHER COMPREHENSIVE INCOME 1 20
------- -------
COMPREHENSIVE LOSS $(6,526) $(3,953)
------- -------
------- -------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
INTERIM FINANCIAL INFORMATION -
The accompanying financial statements as of March 28, 1999 and for the
first quarter ended March 28, 1999 and March 29, 1998 are unaudited, but, in the
opinion of management, include all adjustments which are necessary for a fair
presentation of the financial position and the results of operations, cash flows
and comprehensive income (loss) of Friendly Ice Cream Corporation and
subsidiaries (unless the context indicates otherwise, the "Company"). Such
adjustments consist solely of normal recurring accruals. Operating results for
the three month periods ended March 28, 1999 and March 29, 1998 are not
necessarily indicative of the results that may be expected for the entire year
due, in part, to the seasonality of the business. Historically, higher revenues
and operating income have been experienced during the second and third fiscal
quarters. The Company's Consolidated Financial Statements, including the notes
thereto, which are contained in the 1998 Annual Report on Form 10-K should be
read in conjunction with these Condensed Consolidated Financial Statements.
INVENTORIES -
Inventories are stated at the lower of first-in, first-out cost or
market. Inventories at March 29, 1999 and December 27, 1998 were (in thousands):
March 28, December 27,
1999 1998
------- -------
Raw materials $1,561 $1,983
Goods in process 246 145
Finished goods 15,293 13,432
------ ------
Total $17,100 $15,560
------- -------
------- -------
2. EARNINGS (LOSS) PER SHARE
Basic net loss per share is calculated by dividing loss available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted net loss per share is calculated by dividing loss
available to common stockholders by the weighted average number of shares of
common stock and common stock equivalents outstanding during the period. Common
stock equivalents are dilutive stock options that are assumed exercised for
calculation purposes. The number of common stock equivalents which could dilute
basic net loss per share in the future, that were not included in the
computation of diluted net loss per share because to do so would have been
antidilutive, was 2,027 for the three months ended March 28, 1999. There were no
common stock equivalents which could dilute basic net loss per share for the
three months ended March 29, 1998.
3. RESTAURANT PREOPENING COSTS
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 requires entities to expense as incurred all
start-up and preopening costs that are not otherwise capitalizable as long-lived
assets and is effective for fiscal years beginning after December 15, 1998. In
accordance with this statement, the Company expensed, in the three months ended
March 28, 1999, previously deferred restaurant preopening costs of approximately
$541,000 as of December 28, 1998. This transaction is reflected as a cumulative
effect of a change in accounting principle of $319,000, net of the income tax
benefit of $222,000.
4. COMPREHENSIVE INCOME
The following represents accumulated other comprehensive loss (in
thousands):
March 28, December 27, March 29,
1999 1998 1998
--------- ------------ ---------
Currency translation effects $68 $67 $78
--- --- ---
--- --- ---
5
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. SEGMENT REPORTING
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," during 1998. SFAS No. 131 established
standards for reporting information about operating segments in annual and
interim financial reports. It also established standards for related disclosures
about products and services and geographic areas. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision-maker, or
decision-making group, in deciding how to allocate resources and in assessing
performance. The Company's chief operating decision-maker is the Chairman and
Chief Executive Officer of the Company. The Company's operating segments include
restaurant, foodservice, franchise and international operations. The revenues
from these segments include both sales to unaffiliated customers and
intersegment sales, which generally are accounted for on a basis consistent with
sales to unaffiliated customers. Intersegment sales and other intersegment
transactions have been eliminated in the accompanying consolidated financial
statements. The Company does not allocate general and administrative expenses
associated with its headquarters operations to any business segment. These costs
include general and administrative expenses of the following functions: legal,
accounting, personnel not directly related to a segment, information systems and
other headquarters activities.
Foodservice operations manufactures frozen dessert products and
distributes such manufactured products and purchased finished goods to the
Company's restaurants and franchised operations. Additionally, it sells frozen
dessert products to distributors and retail and institutional locations.
The accounting policies of the operating segments are the same as
those described in the summary of significant accounting policies in the
Company's Form 10-K for the year ended December 27, 1998, except that the
financial results for the foodservice operating segment, prior to
intersegment eliminations, have been prepared using a management approach,
which is consistent with the basis and manner in which the Company's
management internally reviews financial information for the purpose of
assisting in making internal operating decisions. The Company evaluates
performance based on stand-alone operating segment loss before income taxes
and generally accounts for intersegment sales and transfers as if the sales
or transfers were to third parties, that is, at current market prices.
EBITDA represents net loss before (i) cumulative effect of change in
accounting principle, net of income taxes, (ii) benefit from (provision for)
income taxes, (iii) (recovery of write-down of) equity in net loss of joint
venture, (iv) interest expense, net, (v) depreciation and amortization and (vi)
non-cash write-downs and all other non-cash items plus cash distributions from
unconsolidated subsidiaries.
March 28, March 29,
1999 1998
--------- --------
(in thousands)
Revenues:
Restaurant $130,228 $135,220
Foodservice 52,591 55,871
Franchise 1,064 812
International 23 198
-------- --------
Total $183,906 $192,101
-------- --------
-------- --------
Intersegment revenues:
Restaurant $ -- $ --
Foodservice (38,223) (40,427)
Franchise -- --
International -- --
-------- --------
Total $(38,223) $(40,427)
-------- --------
-------- --------
External revenues:
Restaurant $130,228 $135,220
Foodservice 14,368 15,444
Franchise 1,064 812
International 23 198
-------- --------
Total $145,683 $151,674
-------- --------
-------- --------
6
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. SEGMENT REPORTING (CONTINUED)
March 28, March 29,
1999 1998
------- -------
(in thousands)
EBITDA:
Restaurant $9,895 $12,948
Foodservice 2,739 3,571
Franchise 572 421
International (57) (199)
Corporate (6,909) (6,669)
------- -------
Total $6,240 $10,072
------- -------
------- -------
Interest expense, net $8,335 $7,883
------- -------
------- -------
(Recovery of write-down of) equity
in net loss of joint venture $(250) $316
------- -------
------- -------
Income (loss) before income taxes and cumulative effect of
change in accounting principle:
Restaurant $3,274 $6,636
Foodservice 1,875 2,822
Franchise 426 275
International 193 (525)
Corporate (16,290) (15,616)
-------- --------
Total $(10,522) $(6,408)
------- -------
------- -------
Depreciation and amortization:
Restaurant $6,335 $6,212
Foodservice 864 749
Franchise 146 146
International - 10
Corporate 884 839
------- -------
Total $8,229 $7,956
------- -------
------- -------
Identifiable assets:
Restaurant $262,965 $255,946
Foodservice 39,524 41,661
Franchise 12,612 10,934
International 169 4,236
Corporate 60,702 66,648
------- -------
Total $375,972 $379,425
------- -------
------- -------
Capital expenditures, including capitalized leases:
Restaurant $9,546 $13,293
Foodservice 982 936
Corporate 821 837
International - -
- -
------- -------
Total $11,349 $15,066
------- -------
------- -------
7
6. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND FOR HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that each
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the statement of operations, and requires that a company formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. SFAS No. 133 cannot be applied retroactively. Management has not
yet quantified the impact of adopting SFAS No. 133 on the Company's financial
statements and has not determined the timing or method of the Company's adoption
of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings and
other comprehensive income (loss).
7. CLOSING OF INTERNATIONAL OPERATIONS
Effective October 15, 1998, Friendly's International, Inc. ("FII"),
a subsidiary of the Company, entered into an agreement that provided for the
sale of the Company's 50% equity interest in its China joint venture to the
joint venture partner and the settlement of FICC's advances to the joint
venture for an aggregate of approximately $2.3 million in notes and $335,000
of equipment. On February 25, 1999, FII received an initial payment of
approximately $1.1 million and arranged for the shipment of the equipment to
the United States. At that time, the Company believed that collection of any
additional funds after February 25, 1999 from the joint venture partner under
the terms of the settlement agreement was not probable due to the financial
condition of the joint venture partner and restrictions on the transfer of
funds from China. Accordingly, the Company recorded a write-down of
approximately $3.5 million as of December 27, 1998 to reduce the Company's
remaining investment in and advances to the joint venture to the $1.1 million
which was received in February 1999. On March 17, 1999 the Company received
an additional $250,000 from the joint venture partner. These additional
proceeds were reflected as income in the first quarter ended March 28, 1999.
If any of the $0.9 million still due under the terms of the sale agreement
are received by the Company, such amount will be recorded as income by the
Company at such time.
8. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Friendly Ice Cream Corporation's ("FICC") obligation related to the
$200 million Senior Notes are guaranteed fully and unconditionally by one of
FICC's wholly owned subsidiaries. There are no restrictions on FICC's ability to
obtain dividends or other distributions of funds from this subsidiary, except
those imposed by applicable law. The following supplemental financial
information sets forth, on a condensed consolidating basis, balance sheets,
statements of operations and statements of cash flows for Friendly Ice Cream
Corporation (the "Parent Company"), Friendly's Restaurants Franchise, Inc. (the
"Guarantor Subsidiary") and Friendly's International, Inc., Friendly Holding
(UK) Limited, Friendly Ice Cream (UK) Limited and Restaurant Insurance
Corporation (collectively, the "Non-guarantor Subsidiaries"). Separate complete
financial statements and other disclosures of the Guarantor Subsidiary as of
March 28, 1999 and March 29, 1998 and for the periods ended March 28, 1999 and
March 29, 1998 are not presented because management has determined that such
information is not material to investors.
Investments in subsidiaries are accounted for by the Parent Company on
the equity method for purposes of the supplemental consolidating presentation.
Earnings of the subsidiaries are, therefore, reflected in the Parent Company's
investment accounts and earnings. The principal elimination entries eliminate
the Parent Company's investments in subsidiaries and intercompany balances and
transactions.
8
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 28, 1999
(Unaudited)
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
---------- ---------- ------------- ------------- ------------
Assets
Current assets:
Cash and cash equivalents $ 9,328 $ 321 $ 1,902 $ -- $ 11,551
Restricted cash -- -- 2,463 -- 2,463
Trade accounts receivable 4,034 168 26 -- 4,228
Inventories 17,003 -- 97 -- 17,100
Deferred income taxes 6,783 -- 278 -- 7,061
Prepaid expenses and other current
assets 9,024 -- 6,535 (9,724) 5,835
--------- --------- --------- --------- ---------
Total current assets 46,172 489 11,301 (9,724) 48,238
Deferred income taxes -- 503 1,024 (1,527) --
Property and equipment, net 301,775 -- -- -- 301,775
Intangibles and deferred costs, net 24,617 -- -- -- 24,617
Investments in subsidiaries 1,168 -- -- (1,168) --
Other assets 426 2,548 5,730 (7,362) 1,342
--------- --------- --------- --------- ---------
Total assets $ 374,158 $ 3,540 $ 18,055 $ (19,781) $ 375,972
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current maturities of long-term
obligations $ 12,494 $ -- $ -- $ (4,500) $ 7,994
Accounts payable 27,849 -- -- -- 27,849
Accrued expenses 40,144 631 10,463 (5,223) 46,015
--------- --------- --------- --------- ---------
Total current liabilities 80,487 631 10,463 (9,723) 81,858
Deferred income taxes 34,179 -- -- (1,527) 32,652
Long-term obligations, less current
maturities 334,909 -- -- (4,814) 330,095
Other long-term liabilities 21,548 1,746 7,587 (2,549) 28,332
Stockholders' equity (deficit) (96,965) 1,163 5 (1,168) (96,965)
--------- --------- --------- --------- ---------
Total liabilities and stockholders'
equity (deficit) $ 374,158 $ 3,540 $ 18,055 $ (19,781) $ 375,972
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
9
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 28, 1999
(Unaudited)
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
---------- ------------- ------------- ------------ ------------
Revenues $ 145,164 $ 495 $ 24 $ -- $ 145,683
Costs and expenses:
Cost of sales 44,171 -- 17 -- 44,188
Labor and benefits 50,364 -- -- -- 50,364
Operating expenses and write-downs of
property and equipment 33,726 -- (56) -- 33,670
General and administrative expenses 11,337 426 -- -- 11,763
Stock compensation expense 162 -- -- -- 162
Depreciation and amortization 8,229 -- -- -- 8,229
Gain on sales of restaurant operations (256) -- -- -- (256)
Interest expense (income) 8,515 -- (180) -- 8,335
Recovery of write-down of joint venture (250) -- -- -- (250)
---------- ------------- ------------- ------------ ------------
(Loss) income before benefit from
(provision for) income taxes, cumulative
effect of change
in accounting principle and equity in net
income of consolidated subsidiaries (10,834) 69 243 -- (10,522)
Benefit from (provision for) income taxes 4,424 (28) (82) -- 4,314
---------- ------------- ------------- ------------ ------------
(Loss) income before cumulative effect of
change in accounting principle and equity in
net income of consolidated subsidiaries (6,410) 41 161 -- (6,208)
Cumulative effect of change in accounting
principle (319) -- -- -- (319)
---------- ------------- ------------- ------------ ------------
(Loss) income before equity in net income of
consolidated subsidiaries (6,729) 41 161 -- (6,527)
Equity in net income of consolidated
subsidiaries 202 -- -- (202) --
---------- ------------- ------------- ------------ ------------
Net (loss) income $ (6,527) $ 41 $ 161 $ (202) $ (6,527)
---------- ------------- ------------- ------------ ------------
---------- ------------- ------------- ------------ ------------
10
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 28, 1999
(Unaudited)
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
-------- ---------- ------------- ------------ ------------
Net cash (used in) provided by operating
activities $ (2,927) $ 268 $ 43 $ -- $ (2,616)
-------- ---------- ------------- ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (11,349) -- -- -- (11,349)
Proceeds from sales of property and
equipment 1,691 -- -- -- 1,691
Return of advance from joint venture 1,150 -- -- -- 1,150
-------- ---------- ------------- ------------ ------------
Net cash used in investing activities (8,508) -- -- -- (8,508)
-------- ---------- ------------- ------------ ------------
Cash flows from financing activities:
Proceeds from borrowings 26,000 -- -- -- 26,000
Repayments of obligations (14,417) -- -- -- (14,417)
-------- ---------- ------------- ------------ ------------
Net cash provided by financing activities 11,583 -- -- -- 11,583
-------- ---------- ------------- ------------ ------------
Effect of exchange rate changes on cash -- -- 1 -- 1
-------- ---------- ------------- ------------ ------------
Net increase in cash and cash equivalents 148 268 44 -- 460
Cash and cash equivalents, beginning of
period 9,180 53 1,858 -- 11,091
-------- ---------- ------------- ------------ ------------
Cash and cash equivalents, end of period $ 9,328 $ 321 $ 1,902 $ -- $ 11,551
-------- ---------- ------------- ------------ ------------
-------- ---------- ------------- ------------ ------------
Supplemental disclosures:
Interest paid (received) $ 3,393 $ -- $ (180) $ -- $ 3,213
Income taxes (received) paid (87) 1 88 -- 2
11
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 29, 1998
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
-------- ---------- ------------- ------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 12,067 $ 446 $ 2,468 $ -- $ 14,981
Restricted cash -- -- 1,670 -- 1,670
Trade accounts receivable 6,905 126 736 -- 7,767
Inventories 18,180 -- 507 -- 18,687
Deferred income taxes 8,831 -- -- -- 8,831
Prepaid expenses and other current
assets 11,544 2,066 6,324 (12,067) 7,867
--------- --------- --------- --------- ---------
Total current assets 57,527 2,638 11,705 (12,067) 59,803
Deferred income taxes -- 478 504 (982) --
Investment in joint venture -- -- 2,654 -- 2,654
Property and equipment, net 290,005 -- 185 -- 290,190
Intangibles and deferred costs, net 25,496 -- -- -- 25,496
Investments in subsidiaries 3,687 -- -- (3,687) --
Other assets 363 -- 8,528 (7,609) 1,282
--------- --------- --------- --------- ---------
Total assets $ 377,078 $ 3,116 $ 23,576 $ (24,345) $ 379,425
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current maturities of long-term
obligations $ 6,766 $ -- $ -- $ (4,400) $ 2,366
Accounts payable 29,799 -- -- -- 29,799
Accrued expenses 40,159 871 10,739 (7,667) 44,102
--------- --------- --------- --------- ---------
Total current liabilities 76,724 871 10,739 (12,067) 76,267
Deferred income taxes 40,841 -- 99 (982) 39,958
Long-term obligations, less current
maturities 327,625 -- -- (7,609) 320,016
Other long-term liabilities 21,977 1,397 9,899 -- 33,273
Stockholders' equity (deficit) (90,089) 848 2,839 (3,687) (90,089)
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity
(deficit) $ 377,078 $ 3,116 $ 23,576 $ (24,345) $ 379,425
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
12
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 29, 1998
(Unaudited)
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Revenues $ 151,172 $ 303 $ 199 $ -- $ 151,674
Costs and expenses:
Cost of sales 46,065 -- 176 -- 46,241
Labor and benefits 50,252 -- -- -- 50,252
Operating expenses and write-downs of
property and equipment 33,798 (9) -- 33,789
General and administrative expenses 11,022 300 98 -- 11,420
Stock compensation expense 225 -- -- -- 225
Depreciation and amortization 7,946 -- 10 -- 7,956
Interest expense 8,118 -- (235) -- 7,883
Equity in net loss of joint venture -- -- 316 -- 316
--------- ---------- ------------- ------------ ------------
(Loss) income before benefit from
(provision for) income taxes and equity
in net loss of consolidated subsidiaries (6,254) 3 (157) -- (6,408)
Benefit from (provision for) income taxes 2,383 (1) 53 -- 2,435
--------- ---------- ------------- ------------ ------------
(Loss) income before equity in net loss
of consolidated subsidiaries (3,871) 2 (104) -- (3,973)
Equity in net loss of consolidated
subsidiaries (102) -- -- 102 --
--------- ---------- ------------- ------------ ------------
Net (loss) income $ (3,973) $ 2 $ (104) $ 102 $ (3,973)
--------- ---------- ------------- ------------ ------------
--------- ---------- ------------- ------------ ------------
13
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 29, 1998
(Unaudited)
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Net cash provided by operating activities $ 6,886 $ 242 $ 91 $ 68 $ 7,287
--------- ---------- ------------- ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (15,066) -- -- -- (15,066)
Proceeds from sales of property and
equipment 103 -- -- -- 103
--------- ---------- ------------- ------------ ------------
Net cash used in investing activities (14,963) -- -- -- (14,963)
--------- ---------- ------------- ------------ ------------
Cash flows from financing activities:
Dividend received (paid) 400 -- (400) -- --
Proceeds from borrowings 20,258 -- -- -- 20,258
Repayments of long-term obligations (12,753) -- -- -- (12,753)
--------- ---------- ------------- ------------ ------------
Net cash provided by (used in) financing
activities 7,905 -- (400) -- 7,505
--------- ---------- ------------- ------------ ------------
Effect of exchange rate changes on cash -- -- 20 -- 20
--------- ---------- ------------- ------------ ------------
Net (decrease) increase in cash and cash
equivalents (172) 242 (289) 68 (151)
Cash and cash equivalents, beginning of
period 12,239 204 2,757 (68) 15,132
--------- ---------- ------------- ------------ ------------
Cash and cash equivalents, end of period $ 12,067 $ 446 $ 2,468 $ -- $ 14,981
--------- ---------- ------------- ------------ ------------
--------- ---------- ------------- ------------ ------------
Supplemental disclosures:
Interest paid $ 2,292 $ -- $ -- $ -- $ 2,292
Income taxes paid 94 19 -- -- 113
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 28, 1999 AND
MARCH 29, 1998
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO
INCLUDED ELSEWHERE HEREIN.
SAFE HARBOR STATEMENT
Statements contained herein that are not historical facts, constitute
"forward looking statements" as that term is defined in the Private Securities
Litigation Reform Act of 1995. All forward looking statements are subject to
risks and uncertainties which could cause results to differ materially from
those anticipated. These factors include the Company's highly competitive
business environment, exposure to commodity prices, risks associated with the
foodservice industry, the ability to retain and attract new employees,
government regulations, the Company's high geographic concentration in the
Northeast and its attendant weather pattern, conditions needed to meet
re-imaging and new opening and franchising targets and risks associated with
improved service and other initiatives. Other factors that may cause actual
results to differ from the forward looking statements contained herein and that
may affect the Company's prospects in general are included in the Company's
other filings with the Securities and Exchange Commission.
OVERVIEW
As of March 28, 1999, Friendly's owns and operates 641 restaurants,
franchises 45 restaurants and 9 cafes and distributes a full line of frozen
dessert products. These products are distributed to Friendly's restaurants and
cafes and to more than 5,000 supermarkets and other retail locations in 15
states. The restaurants offer a wide variety of reasonably priced breakfast,
lunch and dinner menu items as well as the frozen dessert products.
15
RESULTS OF OPERATIONS
The operating results of the Company expressed as a percentage of total
revenues are set forth below:
(Unaudited)
For the Three Months Ended
----------------------------
March 28, March 29,
1999 1998
--------- ---------
Revenues:
Restaurant 89.4% 89.2%
Foodservice (retail and institutional) 9.9 10.2
Franchise 0.7 0.5
International -- 0.1
--------- ---------
Total revenues 100.0 100.0
--------- ---------
Costs and expenses:
Cost of sales 30.3 30.5
Labor and benefits 34.6 33.1
Operating expenses 22.9 22.2
General and administrative expenses 8.1 7.5
Stock compensation expense 0.1 0.1
Write-downs of property and equipment 0.2 0.1
Depreciation and amortization 5.7 5.3
Gain on sales of restaurant operations (0.2) --
--------- ---------
Operating (loss) income (1.7) 1.2
Interest expense, net 5.7 5.2
(Recovery of write-down of) equity in net loss of joint venture (0.2) 0.2
--------- ---------
Loss before benefit from income taxes and cumulative effect of
change in accounting principle (7.2) (4.2)
Benefit from income taxes 3.0 1.7
Cumulative effect of change in accounting principle, net of
income tax benefit (0.2) --
--------- ---------
Net loss (4.4)% (2.5)%
--------- ---------
--------- ---------
16
REVENUES:
Total revenues decreased $6.0 million, or 4.0%, to $145.7 million for the
first quarter ended March 28, 1999 from $151.7 million for the same quarter in
1998. Restaurant revenues decreased $5.0 million, or 3.7%, to $130.2 million for
the first quarter of 1999 from $135.2 million for the same quarter in 1998.
Comparable restaurant revenues decreased 3.8%. This decrease included a 5.3%
decline in revenues for restaurants which have not yet been reimaged. Comparable
restaurant revenues increased 6.9% for the first quarter ended March 29, 1998.
The closing of 21 underperforming restaurants from the end of the first quarter
ended March 29, 1998 resulted in a decrease in restaurant sales of $2.0 million.
In addition, restaurant sales decreased by $0.8 million due to the impact of
franchising four Company restaurants since the end of the first quarter of 1998.
Unfavorable weather in the first quarter ended March 28, 1999 compared to the
first quarter ended March 29, 1998 also had a negative impact on sales. Revenues
from the six new restaurants opened since March 29, 1998 and the 106 reimaged
restaurants during this period had a favorable impact on the quarter on quarter
comparison. The Company opened two new restaurants in the three months ended
March 28, 1999. Foodservice (retail and institutional) and other revenues
decreased by $1.2 million, or 7.7%, to $14.4 million for the first quarter of
1999 from $15.6 million for the same quarter in 1998. The decrease relates
primarily to a decline in retail sales in the Mid-Atlantic market. Franchise
revenue increased $0.3 million, or 38%, to $1.1 million for the first quarter of
1999 from $0.8 million for the same quarter in 1998. The increase is primarily
the result of the increase in the number of franchised restaurants. There were
45 franchised restaurants as of March 28, 1999 compared to 34 franchised
restaurants as of March 29, 1998.
COST OF SALES:
Cost of sales decreased $2.0 million, or 4.3%, to $44.2 million for the
first quarter ended March 28, 1999 from $46.2 million for the first quarter
ended March 29, 1998. Cost of sales as a percentage of total revenues decreased
to 30.3% for the first quarter of 1999 from 30.5% for the same quarter in 1998.
The cost of dairy raw materials, specifically fresh cream, was higher during the
first quarter of 1999 when compared to the same period in 1998. Approximately
0.1% of the decrease in food cost as a percentage of total revenue was primarily
due to the increase in franchise revenues, which do not have any associated food
costs.
LABOR AND BENEFITS:
Labor and benefits increased $0.1 million, or 0.2%, to $50.4 million for
the first quarter ended March 28, 1999 from $50.3 million for the same quarter
in 1998. Labor and benefits as a percentage of total revenues increased to 34.6%
for the first quarter in 1999 from 33.1% for the same quarter in 1998. The
higher labor cost as a percentage of revenues is primarily the result of the
Company's emphasis on improving guest service by increasing staffing levels at
the restaurants.
OPERATING EXPENSES:
Operating expenses decreased $0.3 million, or 0.9%, to $33.4 million for
the first quarter ended March 28, 1999 from $33.7 million for the same quarter
in 1998. Operating expenses as a percentage of total revenues increased to 22.9%
for the first quarter ended March 28, 1999 from 22.2% for the first quarter
ended March 29, 1998. The increase as a percentage of revenues was primarily
related to an increase in snow removal and weather related costs, a maintenance
initiative to improve restaurant standards and an increase in restaurant
advertising and promotion expenses.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses increased $0.4 million, or 3.5%, to
$11.8 million for the first quarter ended March 28, 1999 from $11.4 million
for the same quarter in 1998 primarily due to higher relocation and
consulting expenses. General and administrative expenses as a percentage of
total revenues were 8.1% and 7.5% for the first quarters ended March 28, 1999
and March 29, 1998, respectively. The increase as a percentage of total
revenues was primarily the result of the decrease in revenues.
EBITDA:
As a result of the above, EBITDA (EBITDA represents net loss before (i)
cumulative effect of change in accounting principle, net of income taxes, (ii)
benefit from (provision for) income taxes, (iii) (recovery of write-down of)
equity in net loss of joint venture, (iv) interest expense, net, (v)
depreciation and amortization and (vi) non-cash write-downs and all other
non-cash items plus cash distributions from unconsolidated subsidiaries)
decreased $3.9 million, or 38.6%, to $6.2 million for the first quarter ended
March 28, 1999 from $10.1 million for the same quarter in 1998. EBITDA as a
percentage of total revenues was 4.3% and 6.7% for the first quarter of 1999 and
1998, respectively.
STOCK COMPENSATION EXPENSE:
Stock compensation expense represents stock compensation arising out of
the vesting of certain shares of restricted stock previously issued to
management. Stock compensation expense was $0.2 million for the first quarter of
1999 and 1998.
17
NON-CASH WRITE-DOWNS ON PROPERTY AND EQUIPMENT:
Non-cash write-downs on property and equipment were $0.3 million and $0.1
million for the first quarters ended March 28, 1999 and March 29, 1998,
respectively.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization increased $0.2 million, or 2.5%, to $8.2
million for the first quarter ended March 28, 1999 from $8.0 million for the
same quarter in 1998. Depreciation and amortization as a percentage of total
revenues increased to 5.7% for the first quarter in 1999 from 5.3% for the same
quarter in 1998. The increase was primarily attributable to the Company's 34
restaurants reimaged during the first quarter ended March 28, 1999 and 72
restaurants reimaged during the last nine months of 1998.
GAIN ON SALES OF RESTAURANT OPERATIONS:
Gain on sales of restaurant operations for the first quarter ended March
28, 1999 represented the income related to the sale of the equipment and
operating rights for two existing locations sold to franchisees.
INTEREST EXPENSE, NET:
Interest expense, net of capitalized interest and interest income,
increased by $0.4 million, or 5.0%, to $8.3 million for the first quarter ended
March 28, 1999 from $7.9 million for the same quarter in 1998. The increase in
interest expense was due to the increase in the average outstanding balance on
the revolver during the first quarter ended March 28, 1999 compared to the first
quarter ended March 29, 1998 along with the increase in interest rates
associated with the credit agreement that was amended in the latter part of the
year ended December 27, 1998.
(RECOVERY OF WRITE-DOWN OF) EQUITY IN NET LOSS OF JOINT VENTURE:
During the fourth quarter ended December 27, 1998, the Company sold its
50% interest in its China joint venture and recorded a write-down of $3.5
million to eliminate the Company's remaining investment in and advances to the
joint venture. During the first quarter ended March 28, 1999, the Company
reported, as income, a $0.3 million payment from the sale which was received on
March 17, 1999. The loss for the first quarter ended March 29, 1998 period
reflects the Company's 50% share of the China joint venture's net loss for the
period.
BENEFIT FROM INCOME TAXES:
The benefit from income taxes was $4.3 million, or 41% of the loss before
benefit from income taxes and cumulative effect of change in accounting
principle, and $2.4 million, or 38% of the loss before benefit from income taxes
and cumulative effect of change in accounting principle, for the first quarter
ended March 28, 1999 and March 29, 1998, respectively. The Company records
income taxes based on the effective rate expected for the year.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET:
In accordance with Statement of Position No. 98-5, the Company recognized
$0.3 million of expense, net of income tax benefit, in the three months ended
March 28, 1999 related to previously deferred restaurant preopening costs.
NET LOSS :
The net loss was $6.5 million and $4.0 million for the first quarter ended
March 28, 1999 and March 29, 1998, respectively.
18
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and capital resources are
cash generated from operations and borrowings under its revolving credit
facility. Net cash used in operating activities was $2.6 million for the three
months ended March 28, 1999. Net cash provided by operating activities was $7.3
million for the three months ended March 29, 1998. Trade accounts receivable
decreased approximately $1.3 million during the first quarter ended March 28,
1999 primarily related to lower Foodservice sales in the first quarter ended
March 28, 1999 compared to the fourth quarter ended December 27, 1998.
Inventories increased $1.5 million primarily related to the impact of
transitioning manufacturing operations from Troy, Ohio to Wilbraham,
Massachusetts during the first quarter ended March 28, 1999. Other assets
increased $1.4 million due to the timing of restaurant rent prepayments of $1.9
million offset by the recognition of premium income of $0.9 million related to
the Company's captive insurance entity. Accounts payable increased approximately
$1.4 million for the three months ended March 28, 1999 from December 27, 1998
primarily related to the timing of payments made. Available borrowings under the
revolving credit facility were $18.0 million as of March 28, 1999.
Additional sources of liquidity consist of capital and operating leases
for financing leased restaurant locations (in malls and shopping centers and
land or building leases), restaurant equipment, manufacturing equipment,
distribution vehicles and computer equipment. Additionally, sales of
under-performing existing restaurant properties and other assets (to the extent
the Company's and its subsidiaries' debt instruments, if any, permit) are
sources of cash. The amounts of debt financing that the Company will be able to
incur under capital leases and for property and casualty insurance financing and
the amount of asset sales are limited by the terms of its credit facility and
Senior Notes.
Net cash used in investing activities was $8.5 million for the three
months ended March 28, 1999 compared to $15.0 million for the three months ended
March 29, 1998. Capital expenditures for restaurant operations were
approximately $9.5 million in the three months of 1999 and $13.3 million in the
same period of 1998. The decrease in capital expenditures was primarily due to
the reimaging of 34 restaurants for the three months ended March 28, 1999
compared to 70 restaurants reimaged for the three months ended March 29, 1998.
Proceeds from the sale of property and equipment were $1.7 million and $0.1
million in 1999 and 1998, respectively.
Net cash provided by financing activities was $11.6 million in the
three months ended March 28, 1999 and $7.5 million in the same period of 1998.
The Company had a working capital deficit of $33.6 million as of March
28, 1999. The Company is able to operate with a substantial working capital
deficit because (i) restaurant operations are conducted primarily on a cash (and
cash equivalent) basis with a low level of accounts receivable, (ii) rapid
turnover allows a limited investment in inventories and (iii) cash from sales is
usually received before related expenses for food, supplies and payroll are
paid.
The Company's credit facility imposes significant operating and
financial restrictions on the Company's ability to, among other things, incur
indebtedness, create liens, sell assets, engage in mergers or consolidations,
pay dividends and engage in certain transactions with affiliates. The credit
facility limits the amount which the Company may spend on capital expenditures
and requires the Company to comply with certain financial covenants. The Company
was in compliance with the covenants as of March 28, 1999.
The Company anticipates requiring capital in the future principally to
maintain existing restaurant and plant facilities, to continue to renovate and
reimage existing restaurants, to convert restaurants and to construct new
restaurants. Capital expenditures for 1999 are anticipated to be $43.0 million
in the aggregate, of which $35.0 million will be spent on restaurant operations.
Sources of liquidity consist of capital and operating leases for financing
leased restaurant locations (in malls and shopping centers and land or building
leases), restaurant equipment, manufacturing equipment, distribution vehicles
and computer equipment. Additionally, sales of under-performing existing
restaurant properties and other assets (to the extent the Company's and its
subsidiaries' debt instruments, if any, permit) are sources of cash. The
Company's actual 1999 capital expenditures may vary from the estimated amounts
set forth herein.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs historically
being written using two digits rather than four to define the applicable year.
Any of the Company's computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal day-to-day operations.
The Company has developed a comprehensive plan to address the Year 2000
Issue. The plan addresses three main phases: (a) information systems; (b)
embedded chips; and (c) supply chain readiness (including customers as well as
inventory and non-inventory suppliers). To oversee the process, the Company has
established a Steering Committee comprised of executives and chaired
19
by the Company's Senior Executive Vice President, Chief Financial Officer and
Treasurer. The Committee reports regularly to the Board of Directors and the
Audit Committee. The Company retained the services of a third party consultant
with Year 2000 expertise to evaluate the Company's Year 2000 plan and make
recommendations. As of March 28, 1999, the Company is vigorously remediating
software and hardware deficiencies caused by the Year 2000 Issue and is at
various stages of completion. Major business systems are currently being
addressed and in some cases are already complete, as in the case of the
Company's financial reporting, asset management, accounts payable and
manufacturing and distribution systems. Human resource systems are currently
being remediated and are on schedule to be completed by the latter part of 1999.
The Company will perform Year 2000 integrated testing for system
interoperability in the second and third quarters of 1999. The Company continues
to believe that with modifications to existing software and conversions to new
software, the Year 2000 Issue will not pose significant operational problems for
its computer systems. However, if such modifications or conversions are not
made, or are not completed timely on the remaining critical business systems,
the Year 2000 Issue could have a material impact on the operations of the
Company. Based on the work completed to date, the Company continues to
anticipate that remediation will be substantially completed prior to December
1999.
20
Substantial progress has been made in the certification of restaurant
systems and hardware. The Company has completed an inventory of restaurant
hardware, and various remediation strategies have been identified and
successfully tested for all classes of equipment. A detailed plan for retrofits
has been completed. The retrofits should essentially be complete by June 1999.
Software for non-compliant point of sale systems has been successfully
remediated and tested. Revised point of sale software is now installed in all
restaurants. Other key restaurant software applications have also been
certified. The remaining software applications are not expected to pose major
problems and will be addressed in the second quarter of 1999. However, further
testing of all applications will continue throughout the year.
Embedded chip technology poses the most difficult challenge. The
Company's focus has been directed at the manufacturing and distribution
operations. As of March 28, 1999, all critical manufacturing functions have been
evaluated and questionable equipment hardware is continually remediated in order
to be compliant. The issues that currently remain open are non-critical in
nature and should not impair the Company's ability to conduct business. The
Company continues to monitor its communications environment both internally and
externally and will react as developments occur.
The Company continues to take vigorous steps to monitor Year 2000
supply chain readiness by evaluating written assurances from over 325
business-critical suppliers. As of March 28,1999, the Company is aggressively
evaluating a small number of suppliers that the Company believes may not be
compliant by December 1999. The Company also continues to identify alternate
sources wherever appropriate.
If any of the Company's suppliers or customers do not, or if the
Company itself does not, successfully deal with the Year 2000 Issue, the Company
could experience delays in receiving or sending goods that would increase its
costs and that could cause the Company to lose business and even customers and
could subject the Company to claims for damages. Problems with the Year 2000
Issue could also result in delays in the Company invoicing its customers or in
the Company receiving payments from them that would affect the Company's
liquidity. Problems with the Year 2000 Issue could affect the activities of the
Company's customers to the point that their demand for the Company's products is
reduced. The severity of these possible problems would depend on the nature of
the problem and how quickly it could be corrected or an alternative implemented,
which is unknown at this time. In the extreme, such problems could bring the
Company to a standstill.
The Company continues to evaluate the business environment and will
develop contingency plans for systems and resources in order to conduct its
normal day-to-day business operations. As previously noted, some risks of the
Year 2000 Issue are beyond the control of the Company, its suppliers and
customers. For example, no preparations or contingency plan will protect the
Company from a down-turn in economic activity caused by the possible ripple
effect throughout the entire economy that could be caused by problems of others
with the Year 2000 Issue.
The Company's total Year 2000 project cost includes the estimated costs
and time associated with the impact of third party Year 2000 Issues based on
presently available information. However, there can be no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted and would not have an adverse effect on the Company's systems. The
Company will utilize both internal and external resources to reprogram, or
replace, and test the software for the system improvement and Year 2000
modifications. The total cost of the system improvement and the Year 2000
project is being funded through operating cash flows.
Of the total project cost, approximately $4.9 million is attributable
to the purchase of new software and hardware which will be capitalized. The
remaining $1.3 million, which will be expensed as incurred, is not expected to
have a material effect on the results of operations. To date, the Company has
incurred approximately $4.0 million ($0.9 million expensed and $3.1 million
capitalized for new systems) related to system improvements and the Year 2000
project.
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved, and actual results could differ materially
from those anticipated. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties.
21
SEASONALITY
Due to the seasonality of frozen dessert consumption, and the effect
from time to time of weather on patronage in its restaurants, the Company's
revenues and EBITDA are typically higher in its second and third quarters.
GEOGRAPHIC CONCENTRATION
Approximately 87% of the Company-owned restaurants are located, and
substantially all of its retail sales are generated, in the Northeast. As a
result, a severe or prolonged economic recession or changes in demographic mix,
employment levels, population density, weather, real estate market conditions or
other factors specific to this geographic region may adversely affect the
Company more than certain of its competitors which are more geographically
diverse.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is named as a defendant in legal actions
arising in the ordinary course of its business. The Company is not party to any
pending legal proceedings other than routine litigation incidental to its
business. The Company does not believe that the resolutions of these claims
should have a material adverse effect on the Company's financial condition or
results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) No report on Form 8-K was filed during the three months ended March 28,
1999.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRIENDLY ICE CREAM CORPORATION
By: /S/ PAUL J. MCDONALD
--------------------------
Name: Paul J. McDonald
Title: Senior Executive Vice President,
Chief Financial Officer, Treasurer and
Assistant Clerk
22
EXHIBIT INDEX
27.1 Financial Data Schedule
23