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 April 1, 2001
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 APRIL 29, 2001
Common Stock, $.01 par value 7,364,283 shares
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
April 1, December 31,
2001 2000
---- ----
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $8,769 $14,584
Restricted cash 775 1,737
Accounts receivable, net 5,559 6,157
Inventories 14,080 11,570
Deferred income taxes 10,395 10,395
Prepaid expenses and other current assets 2,278 2,799
----- -----
TOTAL CURRENT ASSETS 41,856 47,242
------ ------
PROPERTY AND EQUIPMENT, net 218,674 226,865
INTANGIBLES AND DEFERRED COSTS, net 21,185 21,529
OTHER ASSETS 3,240 2,050
----- -----
TOTAL ASSETS $284,955 $297,686
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt $8,771 $13,029
Current maturities of capital lease and finance obligations 2,053 2,143
Accounts payable 19,633 20,100
Accrued salaries and benefits 11,485 10,956
Accrued interest payable 8,685 3,515
Insurance reserves 13,191 13,095
Restructuring reserve 4,844 5,571
Other accrued expenses 14,753 14,262
------ ------
TOTAL CURRENT LIABILITIES 83,415 82,671
------ ------
DEFERRED INCOME TAXES 10,880 13,276
CAPITAL LEASE AND FINANCE OBLIGATIONS, less current maturities 7,741 8,223
LONG-TERM DEBT, less current maturities 269,066 275,435
OTHER LONG-TERM LIABILITIES 16,946 18,064
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock 74 74
Additional paid-in capital 139,081 138,988
Accumulated deficit (242,248) (239,045)
--------- ---------
TOTAL STOCKHOLDERS' DEFICIT (103,093) (99,983)
--------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $284,955 $297,686
======== ========
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
--------------------------
April 1, April 2,
2001 2000
---- ----
REVENUES $126,078 $144,180
COSTS AND EXPENSES:
Cost of sales 42,060 44,822
Labor and benefits 39,676 48,176
Operating expenses 27,453 30,951
General and administrative expenses 9,332 11,376
Restructuring costs - 12,057
Write-downs of property and equipment - 17,672
Depreciation and amortization 7,552 8,421
Gain on franchise sales of restaurant operations and properties - (2,087)
(Gain) loss on dispositions of other property and equipment (1,981) 464
------- -------
OPERATING INCOME (LOSS) 1,986 (27,672)
Interest expense, net 7,585 7,938
------- -------
LOSS BEFORE BENEFIT FROM INCOME TAXES (5,599) (35,610)
Benefit from income taxes 2,396 17,100
------- -------
NET LOSS AND COMPREHENSIVE LOSS $(3,203) $(18,510)
======= =======
BASIC AND DILUTED NET LOSS PER SHARE $(0.43) $(2.48)
======= ======
WEIGHTED AVERAGE BASIC AND DILUTED SHARES 7,376 7,471
======= ======
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
--------------------------
April 1, April 2,
2001 2000
----- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,203) $(18,510)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock compensation expense 93 141
Depreciation and amortization 7,552 8,421
Write-downs of property and equipment - 17,672
Deferred income tax benefit (2,396) (17,100)
Gain on asset retirements and sales (1,981) (2,380)
Changes in operating assets and liabilities:
Accounts receivable 598 (434)
Inventories (2,510) (3,499)
Other assets 37 3,834
Accounts payable (467) (992)
Accrued expenses and other long-term liabilities 4,441 7,490
----- -----
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,164 (5,357)
----- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,026) (2,227)
Proceeds from sales of property and equipment 5,246 16,740
----- ------
NET CASH PROVIDED BY INVESTING ACTIVITIES 3,220 14,513
----- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 8,000 33,000
Repayments of debt (18,627) (41,801)
Repayments of capital lease and finance obligations (572) (451)
----- ------
NET CASH USED IN FINANCING ACTIVITIES (11,199) (9,252)
------ ------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,815) (96)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14,584 12,062
------ ------
CASH AND CASH EQUIVALENTS, END OF PERIOD $8,769 $11,966
====== =======
SUPPLEMENTAL DISCLOSURES:
Cash paid (refunded) during the period for:
Interest $2,136 $2,609
Income taxes 2 (21)
Capital lease obligations terminated - 659
Notes received from the sale of property and equipment - 577
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
INTERIM FINANCIAL INFORMATION -
The accompanying condensed consolidated financial statements as of
April 1, 2001 and for the first quarter ended April 1, 2001 and April 2, 2000
are unaudited, but, in the opinion of management, include all adjustments which
are necessary for a fair presentation of the consolidated financial position,
results of operations, cash flows and comprehensive loss of Friendly Ice Cream
Corporation ("FICC") and subsidiaries (unless the context indicates otherwise,
collectively the "Company"). Such adjustments consist solely of normal recurring
accruals. Operating results for the three month period ended April 1, 2001 and
April 2, 2000 are not necessarily indicative of the results that may be expected
for the entire year due, in part, to the seasonality of the Company's business.
Historically, higher revenues and operating income have been experienced during
the second and third fiscal quarters. The Company's Consolidated Financial
Statements, including the notes thereto, which are contained in the 2000 Annual
Report on Form 10-K should be read in conjunction with these Condensed
Consolidated Financial Statements.
INVENTORIES -
Inventories are stated at the lower of first-in, first-out cost or
market. Inventories as of April 1, 2001 and December 31, 2000 were as follows
(in thousands):
April 1, December 31,
2001 2000
---- ----
Raw materials $1,657 $1,307
Goods in process 139 66
Finished goods 12,284 10,197
------ ------
Total $14,080 $11,570
======= ======
DEBT -
Since 1997, the Company has entered into several amendments related to
covenant violations on its credit facility. In March 2001, under the terms of
the seventh amendment, covenant requirements, interest rates and principal
payments were revised. The credit facility matures in November 2002 and
principal payments of approximately $14,948,000 are due on the term loans in
2001. The Company is in the process of exploring various refinancing
alternatives and has engaged Banc of America Securities LLC for assistance in
this process. The Company believes that based on the terms of the seventh
amendment, the Company has adequate cash and availability on its revolving
credit facility to meet its obligations through June 30, 2002. Additionally, the
Company believes that it can comply with the revised covenant requirements under
the amendment.
RECLASSIFICATIONS -
Certain prior year amounts have been reclassified to conform with
current year presentation.
2. NET LOSS PER SHARE
Basic net loss per share is calculated by dividing loss available to
common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share is calculated by
dividing earnings available to common stockholders by the weighted average
number of shares of common stock and common stock equivalents outstanding during
the period. Common stock equivalents are dilutive stock options that are assumed
exercised for calculation purposes. There were no common stock equivalents which
were excluded from diluted earnings (loss) per share for the three months ended
April 2, 2000 and there were 4,000 common stock equivalents which were excluded
from diluted earnings (loss) per share for the three months ended April 1, 2001
since the effect was antidilutive.
4
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. SEGMENT REPORTING
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision-maker, or decision-making group, in deciding how to allocate
resources and in assessing performance. The Company's chief operating
decision-maker is the Chairman of the Board and Chief Executive Officer of the
Company. The Company's operating segments include restaurant, foodservice and
franchise. The revenues from these segments include both sales to unaffiliated
customers and intersegment sales, which generally are accounted for on a basis
consistent with sales to unaffiliated customers. Intersegment sales and other
intersegment transactions have been eliminated in the accompanying condensed
consolidated financial statements.
The Company's restaurants target families with children and adults who
desire a reasonably-priced meal in a full-service setting. The Company's menu
offers a broad selection of freshly-prepared foods which appeal to customers
throughout all dayparts. The menu currently features over 100 items comprised of
a broad selection of breakfast, lunch, dinner and afternoon and evening snack
items. Foodservice operations manufactures frozen dessert products and
distributes such manufactured products and purchased finished goods to the
Company's restaurants and franchised operations. Additionally, it sells frozen
dessert products to distributors and retail and institutional locations. The
Company's franchise segment includes a royalty based on franchise restaurant
revenue. In addition, the Company receives rental income from various franchised
restaurants. The Company does not allocate general and administrative expenses
associated with its headquarters operations to any business segment. These costs
include general and administrative expenses of the following functions: legal,
accounting, personnel not directly related to a segment, information systems and
other headquarters activities.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies except that the
financial results for the foodservice operating segment, prior to intersegment
eliminations, have been prepared using a management approach, which is
consistent with the basis and manner in which the Company's management
internally reviews financial information for the purpose of assisting in making
internal operating decisions. The Company evaluates performance based on
stand-alone operating segment income (loss) before income taxes and generally
accounts for intersegment sales and transfers as if the sales or transfers were
to third parties, that is, at current market prices.
5
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. SEGMENT REPORTING (CONTINUED)
EBITDA represents net loss before (i) cumulative effect of change in
accounting principle, net of income taxes, (ii) benefit from income taxes, (iii)
interest expense, net, (iv) depreciation and amortization and (v) write-downs
and all other non-cash items plus cash distributions from unconsolidated
subsidiaries. The Company has included information concerning EBITDA in this
Form 10-Q because it believes that such information is used by certain investors
as one measure of a company's historical ability to service debt. EBITDA should
not be considered as an alternative to, or more meaningful than, earnings (loss)
from operations or other traditional indications of a company's operating
performance.
For the Three Months Ended
--------------------------
April 1, April 2,
2001 2000
---- ----
(in thousands)
Revenues:
Restaurant $107,145 $125,423
Foodservice (retail and institutional) 48,181 54,993
Franchise 1,561 2,277
-------- --------
Total $156,887 $182,693
======== ========
Intersegment revenues:
Restaurant $ - $ -
Foodservice (retail and institutional) (30,809) (38,513)
Franchise - -
-------- --------
Total $(30,809) $(38,513)
======== ========
External revenues:
Restaurant $107,145 $125,423
Foodservice (retail and institutional) 17,372 16,480
Franchise 1,561 2,277
-------- --------
Total $126,078 $144,180
======== ========
6
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. SEGMENT REPORTING (CONTINUED)
For the Three Months Ended
--------------------------
April 1, April 2,
2001 2000
---- ----
(in thousands)
EBITDA:
Restaurant $8,767 $7,468
Foodservice (retail and institutional) 3,079 5,518
Franchise 494 938
Corporate (4,593) (4,928)
Gain on property and equipment, net 1,884 1,623
Restructuring costs - (12,057)
------ --------
Total $9,631 $(1,438)
====== ========
Interest expense, net $7,585 $7,938
====== ======
(Loss) income before benefit from income taxes:
Restaurant $3,721 $1,433
Foodservice (retail and institutional) 2,225 4,659
Franchise 434 855
Corporate (13,863) (14,451)
Gain on property and equipment, net 1,884 (16,049)
Restructuring costs - (12,057)
------ --------
Total $(5,599) $(35,610)
====== ========
Depreciation and amortization:
Restaurant $5,046 $6,035
Foodservice (retail and institutional) 854 859
Franchise 60 83
Corporate 1,592 1,444
------ --------
Total $7,552 $8,421
====== ========
April 1, December 31,
2001 2000
---- ----
(in thousands)
Total assets:
Restaurant $194,853 $199,223
Foodservice (retail and institutional) 33,607 33,880
Franchise 4,076 3,745
Corporate 52,419 60,838
-------- --------
Total $284,955 $297,686
======== ========
Capital expenditures:
Restaurant $1,301 $18,245
Foodservice (retail and institutional) 490 2,667
Corporate 235 1,535
-------- --------
Total $2,026 $22,447
======== ========
7
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
4. NEW ACCOUNTING PRONOUNCEMENTS
In April 2001, the Financial Accounting Standards Board reached
consensus on Emerging Issues Task Force ("EITF") Issue No. 00-25, "Accounting
for Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products," which is effective for quarters beginning
after December 15, 2001, with prior financial statements restated if
practicable. This Issue addresses whether consideration from a vendor to a
retailer is (a) an adjustment of the selling prices of the vendor's products to
the retailer and, therefore, should be deducted from revenue when recognized in
the vendor's income statement or (b) a cost incurred by the vendor for assets or
services provided by the retailer to the vendor and, therefore, should be
included as a cost or an expense when recognized in the vendor's income
statement. Arrangements within the scope of this Issue include slotting fees,
cooperative advertising arrangements and buy-downs. Management has not yet
quantified the impact of implementing Issue No. 00-25 on the Company's financial
statements.
In May 2000, the Emerging Issues Task Force issued EITF No. 00-14,
"Accounting for Certain Sales Incentives," which provides guidance on the
recognition, measurement and income statement classification for sales
incentives offered voluntarily by a vendor without charge to customers that can
be used in, or that are exercisable by a customer as a result of, a single
exchange transaction. The Company adopted EITF No. 00-14 on July 3, 2000. As a
result, the Company has reclassified certain retail selling expenses against
retail revenue for the three months ended April 2, 2000 to conform with the
current period presentation.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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. Since the
Company's commodity option contracts do not meet the criteria for hedge
accounting, changes in the value of the commodity option contracts are
recognized monthly in earnings. The cumulative effect upon adoption of
approximately $77,000 has been recorded as income in the accompanying Condensed
Consolidated Statement of Operations. It is not separately reported as a
cumulative effect since the effect is not significant. Additional income of
approximately $129,000 was recorded during the first quarter of 2001. The
unrealized gain on derivatives at April 1, 2001 was approximately $206,000.
8
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
5. RESTRUCTURING PLAN
In March 2000, the Company's Board of Directors approved a
restructuring plan that provided for the immediate closing of 81 restaurants at
the end of March 2000 and the disposition of an additional 70 restaurants over
the next 24 months. The 70 locations will remain in operation until they are
sold, subleased or closed prior to March 2002. In connection with the
restructuring plan, the Company eliminated approximately 150 management and
administrative positions in the field organization and at corporate
headquarters. As a result of this plan, the Company reported a pre-tax
restructuring charge of approximately $12,057,000 for severance pay, rent,
utilities and real estate taxes, demarking, lease termination costs and certain
other costs associated with the closing of the locations, along with a pre-tax
write-down of property and equipment for these locations of approximately
$17,008,000 in the first quarter ended April 2, 2000.
The following represents the restructuring reserve activity (in
thousands):
Costs Paid
During the
Balance as of Quarter Ended Balance as of
December 31, 2000 April 1, 2001 April 1, 2001
----------------- ------------- -------------
Severance pay $74 $(74) $-
Rent 3,585 (278) 3,307
Utilities and real estate taxes 1,105 (210) 895
Demarking 138 (12) 126
Lease termination costs 120 - 120
Inventory 5 (5) -
Other 544 (148) 396
------ ------ ------
Total $5,571 $(727) $4,844
====== ====== ======
The write-down of property and equipment consisted of $7.8 million for
the 81 locations closed at the end of March 2000 and $9.2 million for the 70
locations to be disposed of over the following 24 months. At April 1, 2001 the
aggregate carrying amount of the remaining 65 properties to be disposed of was
$5.8 million. At April 2, 2000, the aggregate carrying value of the 151
properties to be disposed of was $18.9 million. These amounts are reflected in
the condensed consolidated balance sheets as property and equipment, net.
9
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
6. SALES OF RESTAURANT OPERATIONS AND PROPERTIES TO FRANCHISEES
On April 13, 2001, the Company executed an agreement granting J&B
Restaurants Partners of Long Island Holding Co., LLC ("J&B") certain limited
exclusive rights to operate and develop Friendly's full-service restaurants in
the franchising regions of Nassau and Suffolk Counties in Long Island, New York
(the "J&B Agreement"). Pursuant to the J&B Agreement, J&B purchased certain
assets and rights in 31 existing Friendly's restaurants and committed to open an
additional 29 restaurants over the next 12 years. The transaction price was
approximately $19,950,000, of which approximately $4,250,000 was received in a
note. The cash proceeds were used to prepay approximately $4,711,000 on the term
loans with the remaining balance being applied to the revolving credit facility.
The 5-year note bears interest at an annual rate of 11% using a 20-year
amortization schedule. Payments are due monthly through the five years with a
balloon payment due at the end of five years.
On January 19, 2000, the Company entered into an agreement granting
Kessler Family LLC ("Kessler") non-exclusive rights to operate and develop
Friendly's full-service restaurants in the franchising region of Rochester,
Buffalo and Syracuse, New York (the "Kessler Agreement"). Pursuant to the
Kessler Agreement, Kessler purchased certain assets and rights in 29 existing
Friendly's restaurants and committed to open an additional 15 restaurants over
the next seven years. Gross proceeds from the sale were approximately
$13,300,000 of which $735,000 was for franchise fees for the initial 29
restaurants. The $735,000 was recorded as revenue in the first quarter ending
April 2, 2000. The Company recognized a gain of approximately $1,400,000 related
to the sale of the assets for the 29 locations in the first quarter ending April
2, 2000. The Company also sold certain assets and rights in six other
restaurants to two additional franchisees resulting in a gain of $687,000.
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
FICC's obligation related to the $200 million Senior Notes is
guaranteed fully and unconditionally by one of FICC's wholly-owned
subsidiaries. There are no restrictions on FICC's ability to obtain dividends or
other distributions of funds from this subsidiary, except those imposed by
applicable law. The following supplemental financial information sets forth, on
a condensed consolidating basis, balance sheets, statements of operations and
statements of cash flows for Friendly Ice Cream Corporation (the "Parent
Company"), Friendly's Restaurants Franchise, Inc. (the "Guarantor Subsidiary")
and Friendly's International, Inc., Friendly Holding (UK) Limited, Friendly Ice
Cream (UK) Limited and Restaurant Insurance Corporation (collectively, the
"Non-guarantor Subsidiaries"). Separate complete financial statements and other
disclosures of the Guarantor Subsidiary as of April 1, 2001 and April 2, 2000,
and for the periods ended April 1, 2001 and April 2, 2000, 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.
10
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF APRIL 1, 2001
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------- ------------ ------------
Assets
Current assets:
Cash and cash equivalents $7,626 $12 $1,154 $(23) $8,769
Restricted cash - - 775 - 775
Accounts receivable, net 4,960 576 - 23 5,559
Inventories 14,080 - - - 14,080
Deferred income taxes 10,258 43 - 94 10,395
Prepaid expenses and other current
assets 6,995 563 3,510 (8,790) 2,278
----- --- ----- ------- -----
Total current assets 43,919 1,194 5,439 (8,696) 41,856
Deferred income taxes - 506 1,327 (1,833) -
Property and equipment, net 218,674 - - - 218,674
Intangibles and deferred costs, net 21,185 - - - 21,185
Investments in subsidiaries 3,640 - - (3,640) -
Other assets 2,325 2,844 6,229 (8,158) 3,240
----- ----- ----- ------- -----
Total assets $289,743 $4,544 $12,995 $(22,327) $284,955
======== ====== ======= ========= ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current maturities of long-term
obligations $14,324 $- $- $(3,500) $10,824
Accounts payable 19,633 - - - 19,633
Accrued expenses 50,210 201 7,637 (5,090) 52,958
------ --- ----- ------- ------
Total current liabilities 84,167 201 7,637 (8,590) 83,415
Deferred income taxes 12,619 - - (1,739) 10,880
Long-term obligations, less current
maturities 282,121 - - (5,314) 276,807
Other long-term liabilities 13,929 1,191 4,870 (3,044) 16,946
Stockholders' equity (deficit) (103,093) 3,152 488 (3,640) (103,093)
-------- ----- --- ------- --------
Total liabilities and stockholders'
equity (deficit) $289,743 $4,544 $12,995 $(22,327) $284,955
======== ====== ======= ========= ========
11
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 1, 2001
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------- ------------ ------------
Revenues $124,885 $1,193 $- $- $126,078
Costs and expenses:
Cost of sales 42,060 - - - 42,060
Labor and benefits 39,676 - - - 39,676
Operating expenses and write-downs of
property and equipment 27,462 - (9) - 27,453
General and administrative expenses 8,173 1,159 - - 9,332
Depreciation and amortization 7,552 - - - 7,552
Gain on dispositions of other property and
equipment (1,981) - - - (1,981)
Interest expense (income) 7,806 - (221) - 7,585
----- - ----- - -----
(Loss) income before benefit from
(provision for) income taxes and
equity in net income of consolidated
subsidiaries (5,863) 34 230 - (5,599)
Benefit from (provision for) income taxes 2,491 (14) (81) - 2,396
----- ---- ---- ---- -----
(Loss) income before equity in net income
of consolidated subsidiaries (3,372) 20 149 - (3,203)
Equity in net income of consolidated
subsidiaries 169 - - (169) -
----- ---- ---- ---- -----
Net (loss) income $(3,203) $20 $149 $(169) $(3,203)
======== === ===== ===== =======
12
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 1, 2001
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------- ------------ ------------
Net cash provided by (used in) operating
activities $1,986 $(21) $1,184 $(985) $2,164
------ ----- ------ ------ ------
Cash flows from investing activities:
Purchases of property and equipment (2,026) - - - (2,026)
Proceeds from sales of property and
equipment 5,246 - - - 5,246
------ ----- ------ ------ ------
Net cash provided by investing activities 3,220 - - - 3,220
------ ----- ------ ------ ------
Cash flows from financing activities:
Proceeds from borrowings 8,000 - - - 8,000
Repayments of obligations (19,199) - - - (19,199)
Reinsurance payments made from deposits - - (962) 962 -
------ ----- ------ ------ ------
Net cash used in financing activities (11,199) - (962) 962 (11,199)
------ ----- ------ ------ ------
Net (decrease) increase in cash and cash
equivalents (5,993) (21) 222 (23) (5,815)
Cash and cash equivalents, beginning of
period 13,619 33 932 - 14,584
------ ----- ------ ------ ------
Cash and cash equivalents, end of period $7,626 $12 $1,154 $(23) $8,769
====== === ====== ===== ======
Supplemental disclosures:
Interest paid (received) $2,357 $- $(221) $- $2,136
Income taxes paid - 2 - - 2
13
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2000
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------- ------------ ------------
Assets
Current assets:
Cash and cash equivalents $13,619 $33 $932 $- $14,584
Restricted cash - - 1,737 - 1,737
Accounts receivable, net 5,649 508 - - 6,157
Inventories 11,570 - - - 11,570
Deferred income taxes 10,258 43 - 94 10,395
Prepaid expenses and other current assets 7,435 551 4,057 (9,244) 2,799
----- --- ----- ------- -----
Total current assets 48,531 1,135 6,726 (9,150) 47,242
Deferred income taxes - 506 1,327 (1,833) -
Property and equipment, net 226,865 - - - 226,865
Intangible assets and deferred costs, net 21,529 - - - 21,529
Investments in subsidiaries 3,500 - - (3,500) -
Other assets 1,135 3,614 5,729 (8,428) 2,050
----- ----- ----- ------- -----
Total assets $301,560 $5,255 $13,782 $(22,911) $297,686
======== ====== ======= ========= ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current maturities of long-term
obligations $19,172 $- $- $(4,000) $15,172
Accounts payable 20,100 - - - 20,100
Accrued expenses 43,683 648 8,082 (5,014) 47,399
------ --- ----- ------- ------
Total current liabilities 82,955 648 8,082 (9,014) 82,671
Deferred income taxes 15,015 - - (1,739) 13,276
Long-term obligations, less current
maturities 288,472 - - (4,814) 283,658
Other liabilities 15,101 1,475 5,332 (3,844) 18,064
Stockholders' equity (deficit) (99,983) 3,132 368 (3,500) (99,983)
-------- ----- --- ------- --------
Total liabilities and stockholders' equity
(deficit) $301,560 $5,255 $13,782 $(22,911) $297,686
======== ====== ======= ========= ========
14
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 2, 2000
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------- ------------ ------------
Revenues $142,306 $1,874 $- $- $144,180
Costs and expenses:
Cost of sales 44,822 - - - 44,822
Labor and benefits 48,176 - - - 48,176
Operating expenses and write-downs of
property and equipment 48,683 - (60) - 48,623
General and administrative expenses 10,950 426 - - 11,376
Restructuring costs 12,057 - - - 12,057
Depreciation and amortization 8,421 - - - 8,421
Gain on franchise sales of restaurant
operations and properties (2,087) - - - (2,087)
Loss on dispositions of other property and
equipment 464 - - - 464
Interest expense (income) 8,110 - (172) - 7,938
----- ------ ----- ----- -----
(Loss) income before benefit from
(provision for) income taxes and
equity in net income of consolidated
subsidiaries (37,290) 1,448 232 - (35,610)
Benefit from (provision for) income taxes 17,774 (593) (81) - 17,100
----- ------ ----- ----- -----
(Loss) income before equity in net income of
consolidated subsidiaries (19,516) 855 151 - (18,510)
Equity in net income of consolidated
subsidiaries 1,006 - - (1,006) -
----- ------ ----- ------- --------
Net (loss) income $(18,510) $855 $151 $(1,006) $(18,510)
========= ====== ===== ======= ========
15
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 2, 2000
(In thousands)
Parent Guarantor Non-guarantor
Company Subsidiary Subsidiaries Eliminations Consolidated
------- ---------- ------------- ------------ ------------
Net cash (used in) provided by operating
activities $(5,724) $36 $1,080 $(749) $(5,357)
------- --- ------ ----- -------
Cash flows from investing activities:
Purchases of property and equipment (2,227) - - - (2,227)
Proceeds from sales of property and
equipment 16,740 - - - 16,740
------- --- ------ ----- -------
Net cash provided by investing activities 14,513 - - - 14,513
------- --- ------ ----- -------
Cash flows from financing activities:
Proceeds from borrowings 33,000 - - - 33,000
Repayments of obligations (42,252) - - - (42,252)
Reinsurance deposits received - - 800 (800) -
Reinsurance payments made from deposits - - (1,549) 1,549 -
------- --- ------ ----- -------
Net cash used in financing activities (9,252) - (749) 749 (9,252)
------- --- ------ ----- -------
Net (decrease) increase in cash and cash
equivalents (463) 36 331 - (96)
Cash and cash equivalents, beginning of
period 9,674 14 2,374 - 12,062
------- --- ------ ----- -------
Cash and cash equivalents, end of period $9,211 $50 $2,705 $- $11,966
====== === ====== ===== =======
Supplemental disclosures:
Interest paid (received) $2,966 $- $(357) $- $2,609
Income taxes (refunded) paid (928) 823 84 - (21)
Capital lease obligations terminated 659 - - - 659
Notes received from the sale of
property and equipment 577 - - - 577
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO
INCLUDED ELSEWHERE HEREIN.
FORWARD LOOKING STATEMENTS
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, uncertainty with respect to the Company's ability to
refinance its existing debt facilities, exposure to commodity prices, risks
associated with the foodservice industry, the ability to retain and attract new
employees, government regulations, the Company's high geographic concentration
in the Northeast and its attendant weather patterns, conditions needed to meet
re-imaging and new opening and franchising targets and 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 April 1, 2001, the Company owned and operated 438 restaurants and
franchised 123 restaurants and five cafes. The Company distributes a full line
of frozen dessert products to Friendly's restaurants and through more than 3,500
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.
REVENUES:
Total revenues decreased $18.1 million, or 12.6%, to $126.1 million for
the first quarter ended April 1, 2001 from $144.2 million for the same quarter
in 2000. Restaurant revenues decreased $18.3 million, or 14.6%, to $107.1
million for the first quarter of 2001 from $125.4 million for the same quarter
in 2000. Restaurant revenues decreased by $19.7 million due to the closing of
133 under-performing restaurants and the re-franchising of 49 additional
locations over the past 15 months. Closing of restaurants accounted for $14.2
million of the restaurant revenue decline and re-franchising reduced restaurant
revenues by an additional $5.5 million. Partially offsetting this decrease was a
1.0% increase in comparable restaurant revenues. Revenues from the one location
open less than one year were $0.4 million. Foodservice (product sales to
franchisees, retail and institutional) revenues increased by $0.9 million, or
5.5%, to $17.4 million for the first quarter of 2001 from $16.5 million for the
same quarter in 2000. The increase was due to the increase in the number of
franchised units. Revenues from foodservice retail supermarket customers were
lower in the current quarter when compared to same quarter in 2000. The
Company's foodservice division sells a variety of products to the Company's
franchisees and ice cream products to supermarkets and other retail locations.
Franchise revenues decreased $0.7 million, or 30.4%, to $1.6 million for the
three months ended April 1, 2001 from $2.3 million for the three months ended
April 2, 2000. The decrease is due to a reduction of $1.0 million in initial
fees from new franchised locations as 41 new locations were added in the first
quarter of 2000 and only one new location was added in the same period in 2001.
There were 128 franchised units (including cafes) open at April 1, 2001 compared
to 109 franchised units open at April 2, 2000.
COST OF SALES:
Cost of sales decreased $2.7 million, or 6.0%, to $42.1 million for the
first quarter ended April 1, 2001 from $44.8 million for the same quarter in
2000. Cost of sales as a percentage of total revenues increased to 33.3% for the
first quarter of 2001 from 31.1% for the same quarter in 2000. The higher food
cost as a percentage of total revenue was partially due to a shift in sales mix
from Company-owned restaurant sales to foodservice sales. Foodservice sales to
franchisees and retail customers have a higher food cost as a percentage of
revenue than sales in Company-owned restaurants to restaurant patrons. The cost
of cream, the principle ingredient used in making ice cream, was higher in the
first quarter of 2001 when compared to the first quarter of 2000 and contributed
to the rise in cost of sales as a percentage of total revenues, especially in
foodservice's retail supermarket business. The Company believes that cream
prices will continue to rise and will peak during the summer months. To minimize
risk, hedging opportunities and alternative supply sources will be pursued.
Additionally, the Company intends to raise prices to its retail customers.
17
LABOR AND BENEFITS:
Labor and benefits decreased $8.5 million, or 17.6%, to $39.7 million for
the first quarter ended April 1, 2001 from $48.2 million for the same quarter in
2000. Labor and benefits as a percentage of total revenues decreased to 31.5%
for the first quarter of 2001 from 33.4% for the same period in 2000. The lower
labor cost as a percentage of total revenue is partially the result of revenue
increases derived from additional franchised locations, which do not have any
associated restaurant labor and benefits. In addition, the closing of 133
under-performing Company-owned units over the past 15 months improved the
relationship of restaurant labor and benefits to restaurant sales as well as to
total revenues. Partially offsetting the decreases were higher group insurance
costs in 2001 when compared to the same period in 2000.
OPERATING EXPENSES:
Operating expenses decreased $3.5 million, or 11.3%, to $27.5 million for
the first quarter ended April 1, 2001 from $31.0 million for the same quarter in
2000. Operating expenses as a percentage of total revenues were 21.8% and 21.5%
for the first quarters ended April 1, 2001 and April 2, 2000, respectively. The
increase as a percentage of total revenues resulted from higher advertising and
promotional expenses, utility costs and snowplowing costs in the 2001 quarter
when compared to the 2000 quarter.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses were $9.3 million and $11.4 million
for the first quarters ended April 1, 2001 and April 2, 2000, respectively.
General and administrative expenses as a percentage of total revenues decreased
to 7.4% in the first quarter of 2001 from 7.9% for the same period in 2000. The
decrease is primarily the result of the elimination of certain management and
administrative positions associated with the Company's announcement of the
immediate closing of 81 restaurants and the planned closing of 70 additional
restaurants in March 2000.
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 income taxes (iii) interest expense, net, (iv) depreciation and
amortization and (v) write-downs and all other non-cash items plus cash
distributions from unconsolidated subsidiaries) increased $11.0 million, or
786.0%, to $9.6 million for the first quarter ended April 1, 2001 from $(1.4)
million for the same quarter in 2000. EBITDA as a percentage of total revenues
was 7.6% and (0.9)% for the first quarters of 2001 and 2000, respectively. The
increase was primarily the result of the restructuring costs of $12.1 million
recorded during the first quarter ended April 2, 2000 partially offset by the
impact of the increased gains of $0.4 million on the sales of restaurant
operations and properties. The Company has included information concerning
EBITDA in this Form 10-Q because it believes that such information is used by
certain investors as one measure of a company's historical ability to service
debt. EBITDA should not be considered as an alternative to, or more meaningful
than, earnings (loss) from operations or other traditional indications of a
company's operating performance.
RESTRUCTURING COSTS:
Restructuring costs were $12.1 million for the first quarter ended April
2, 2000 as a result of the costs associated with the Company's decision to
reorganize its restaurant field and headquarters organizations in conjunction
with the closing of 81 under-performing restaurants and the planned closing of
an additional 70 restaurants over the next 24 months. Included in these costs
are severance, rent on closed units until lease termination, utilities and real
estate taxes, demarking, lease termination, environmental and other
miscellaneous costs.
WRITE-DOWNS OF PROPERTY AND EQUIPMENT:
Write-downs of property and equipment were $17.7 million for the first
quarter ended April 2, 2000. The write-downs were primarily the result of the
non-cash write-down of the 81 under-performing restaurants which were closed at
the end of March 2000 and the non-cash write-down of the additional 70
restaurants which will be closed over the next 24 months to their estimated net
realizable value. As of April 1, 2001, 36 of these 70 restaurants have been
closed.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization decreased $0.8 million, or 9.5%, to $7.6
million for the first quarter ended April 1, 2001 from $8.4 million for the same
quarter in 2000. Depreciation and amortization as a percentage of total revenues
was 5.9% for the first quarter ended April 1, 2001 compared to 5.8% for the
first quarter ended April 2, 2000.
18
GAIN ON FRANCHISE SALES OF RESTAURANT OPERATIONS AND PROPERTIES:
On January 19, 2000, the Company entered into an agreement granting
Kessler Family LLC ("Kessler") non-exclusive rights to operate and develop
Friendly's full-service restaurants in the franchising region of Rochester,
Buffalo and Syracuse, New York (the "Kessler Agreement"). Pursuant to the
Kessler Agreement, Kessler purchased certain assets and rights in 29 existing
Friendly's restaurants and committed to open an additional 15 restaurants over
the next seven years. Gross proceeds from the sale were approximately
$13,300,000 of which $735,000 was for franchise fees for the initial 29
restaurants. The $735,000 was recorded as revenue in the first quarter ending
April 2, 2000. The Company recognized a gain of approximately $1,400,000 related
to the sale of the assets for the 29 locations in the first quarter ending April
2, 2000. The Company also sold certain assets and rights in six other
restaurants to two additional franchisees resulting in a gain of $687,000.
(GAIN) LOSS ON SALES OF OTHER PROPERTY AND EQUIPMENT:
The (gain) loss on sales of other property and equipment was $(2.0)
million and $0.5 million for the quarters ended April 1, 2001 and April 2, 2000,
respectively. The gain in the 2001 quarter resulted from the sale of 11 closed
locations during the first quarter ending April 1, 2001. The loss for the
quarter ended April 2, 2000 resulted from normal retirements.
INTEREST EXPENSE, NET:
Interest expense, net of capitalized interest and interest income,
decreased by $0.3 million, or 3.8%, to $7.6 million for the first quarter ended
April 1, 2001 from $7.9 million for the same quarter in 2000. The decrease is
primarily due to a reduction in the average outstanding debt. Total outstanding
debt, including capital leases, was reduced from $305.8 million at April 2, 2000
to $287.6 million at April 1, 2001.
BENEFIT FROM INCOME TAXES:
The benefit from income taxes was $2.4 million, or 43%, and $17.1 million,
or 48.0%, for the first quarters ended April 1, 2001 and April 2, 2000,
respectively. The Company records income taxes based on the effective rate
expected for the year with any changes in valuation allowance reflected in the
period of change. The sale of the land and buildings to franchisees during the
first quarter ended April 2, 2000 favorably impacted the provision for income
taxes as it triggered built-in gains, which allowed for a reduction in the
valuation allowance on certain net operating loss carryforwards.
NET LOSS:
Net loss was $3.2 million and $18.5 million for the first quarters ended
April 1, 2001 and April 2, 2000, 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 $2.2 million for the
three months ended April 1, 2001. Net cash used in operating activities was $5.4
million for the three months ended April 2, 2000. Inventories increased $2.5
million primarily as a result of anticipated increased retail sales. Accrued
expenses and other long-term liabilities increased $4.4 million from December
31, 2000 to April 1, 2001 primarily due to a $5.2 million increase in accrued
interest on the Senior Notes due to four months accrued at April 1, 2001
compared to one month accrued at December 31, 2000. This increase was offset by
$1.0 million of payments made against the captive insurance company's reserves
for workers compensation claims. Available borrowings under the revolving credit
facility were $8.0 million as of April 1, 2001.
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 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 provided by investing activities was $3.2 million in the three
months ended April 1, 2001 compared to $14.5 million in the three months ended
April 2, 2000. Capital expenditures were approximately $2.0 million and $2.2
million for the three months ended April 1, 2001 and April 2, 2000,
respectively. Proceeds from the sales of property and equipment were $5.2
million and $16.7 million in the three months ended April 1, 2001 and April 2,
2000, respectively. The decrease in proceeds was due to the receipt of $16.6
million in 2000 related to sales of restaurants to franchisees. There were no
such sales in 2001.
19
Net cash used in financing activities was $11.2 million and $9.3
million in the three months ended April 1, 2001 and April 2, 2000, respectively.
The Company had a working capital deficit of $41.6 million as of April
1, 2001. The Company is able to operate with a substantial working capital
deficit because: (i) restaurant operations are conducted primarily on a cash
(and cash equivalent) basis with a low level of accounts receivable; (ii) rapid
turnover allows a limited investment in inventories and (iii) cash from sales is
usually received before related expenses for food, supplies and payroll are
paid.
The Company's credit facility imposes significant operating and
financial restrictions on the Company's ability to, among other things, incur
indebtedness, create liens, sell assets, engage in mergers or consolidations,
pay dividends and engage in certain transactions with affiliates. The credit
facility limits the amount which the Company may spend on capital expenditures
and requires the Company to comply with certain financial covenants. The
Company's credit facility also restricts the use of proceeds from asset sales.
Proceeds, as defined in the credit agreement and subject to certain exceptions,
in excess of stated maximum allowable amounts must be used to permanently reduce
outstanding obligations under the credit facility. During the three months ended
April 1, 2001, the Company received $4.9 million of asset sale proceeds which
were used to reduce the amount outstanding on the term loans.
The Company entered into its existing credit facility in November 1997.
Since 1997, the Company has executed several amendments to the credit facility.
The most recent amendment occurred on March 19, 2001. All of the existing
financial covenants were amended and a new financial covenant was added
requiring minimum cumulative Consolidated EBITDA, as defined, on a monthly
basis. Interest rates on term loans, borrowings under the revolving credit
facility and issued letters of credit increased 0.25%. In addition, automatic
increases in the interest rates will occur on August 2, 2001, January 2, 2002,
April 1, 2002, July 1, 2002 and October 1, 2002 of 0.25%, 0.50%, 0.25%, 0.25%
and 0.25%, respectively. Interest payments on all ABR loans, Eurodollar loans
and issued letters of credit are required on a monthly basis rather than
quarterly.
Also due to the March 19, 2001 amendment, the maturity dates of Tranche
B and Tranche C of the term loans were changed to November 15, 2002 from their
original maturity dates of November 15, 2004 and November 15, 2005,
respectively. Annual scheduled principal payments due through October 15, 2002
did not change. However, the amendment requires additional minimum cumulative
prepayments on the term loans by the dates specified below as follows:
October 15, 2001 $6,000,000
January 15, 2002 7,500,000
April 15, 2002 8,500,000
July 15, 2002 10,000,000
Any remaining unpaid balances due on Tranches B and C of the term loans will be
paid on November 15, 2002.
FICC paid a fee of approximately $256,000 to the lenders in connection
with this amendment. Also, unless all obligations under the credit facility are
satisfied prior to September 30, 2001, FICC will pay an additional fee of
approximately $512,000 on that date. If all obligations under the credit
facility are satisfied prior to September 30, 2001, the additional fee will be
payable at that time and will be reduced to approximately $128,000.
The Company anticipates requiring capital in the future principally to
maintain existing restaurant and plant facilities and to continue to renovate
and re-image existing restaurants. Capital expenditures for 2001 are anticipated
to be $15.0 million in the aggregate, of which $8.5 million is expected to be
spent on restaurant operations. The Company's actual 2001 capital expenditures
may vary from these estimated amounts. The Company believes that the combination
of the funds anticipated to be generated from operating activities and borrowing
availability under the credit facility will be sufficient to meet the Company's
anticipated operating requirements, capital requirements and obligations
associated with the restructuring.
On April 13, 2001, the Company executed an agreement granting J&B
Restaurants Partners of Long Island Holding Co., LLC ("J&B") certain limited
exclusive rights to operate and develop Friendly's full-service restaurants in
the franchising regions of Nassau and Suffolk Counties in Long Island, New York
(the "J&B Agreement"). Pursuant to the J&B Agreement, J&B purchased certain
assets and rights in 31 existing Friendly's restaurants and committed to open an
additional 29 restaurants over the next 12 years. The transaction price was
approximately $19,950,000, of which approximately $4,250,000 was received in a
note. The cash proceeds were used to prepay approximately $4.7 million on the
term loans with the remaining balance being applied to the revolving credit
facility. The 5-year note bears interest at an annual rate of 11% using a
20-year amortization schedule. Payments are due monthly through the five years
with a balloon payment due at the end of five years.
20
SEASONALITY
Due to the seasonality of frozen dessert consumption, and the effect
from time to time of weather on patronage in its restaurants, the Company's
revenues and EBITDA are typically higher in its second and third quarters.
GEOGRAPHIC CONCENTRATION
Approximately 89% of the Company-owned restaurants are located, and
substantially all of its retail sales are generated, in the Northeast. As a
result, a severe or prolonged economic recession or changes in demographic mix,
employment levels, population density, weather, real estate market conditions or
other factors specific to this geographic region may adversely affect the
Company more than certain of its competitors which are more geographically
diverse.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2001, the Financial Accounting Standards Board reached
consensus on Emerging Issues Task Force ("EITF") Issue No. 00-25, "Accounting
for Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products," which is effective for quarters beginning
after December 15, 2001, with prior financial statements restated if
practicable. This Issue addresses whether consideration from a vendor to a
retailer is (a) an adjustment of the selling prices of the vendor's products to
the retailer and, therefore, should be deducted from revenue when recognized in
the vendor's income statement or (b) a cost incurred by the vendor for assets or
services provided by the retailer to the vendor and, therefore, should be
included as a cost or an expense when recognized in the vendor's income
statement. Arrangements within the scope of this Issue include slotting fees,
cooperative advertising arrangements, and buy-downs. Management has not yet
quantified the impact of implementing Issue No. 00-25 on the Company's financial
statements.
In May 2000, the Emerging Issues Task Force issued EITF No. 00-14,
"Accounting for Certain Sales Incentives," which provides guidance on the
recognition, measurement, and income statement classification for sales
incentives offered voluntarily by a vendor without charge to customers that can
be used in, or that are exercisable by a customer as a result of, a single
exchange transaction. The Company adopted EITF No. 00-14 on July 3, 2000. As a
result, the Company has reclassified certain retail selling expenses against
retail revenue for the three months ended April 2, 2000 to conform with the
current period presentation.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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. Since the
Company's commodity option contracts do not meet the criteria for hedge
accounting, changes in the value of the commodity option contracts are
recognized monthly in earnings. The cumulative effect upon adoption of
approximately $77,000 has been recorded as income in the accompanying condensed
Consolidated Statement of Operations. It is not separately reported as a
cumulative effect since the effect is not significant. Additional income of
approximately $129,000 was recorded during the first quarter of 2001. The
unrealized gain on derivatives at April 1, 2001 was approximately $206,000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company's market risk exposure
since the filing of the Annual Report on Form 10-K.
PART II - OTHER INFORMATION
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibits:
Seventh Amendment to Credit Agreement.
(b) No report on Form 8-K was filed during the three months ended April 1, 2001.
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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: By: /s/
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Name: Paul J. McDonald
Title: Executive Vice President,
Chief Financial Officer
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