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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
AMENDMENT NO. 2
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 30, 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 Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
1855 BOSTON ROAD
WILBRAHAM, MASSACHUSETTS 01095
(413) 543-2400
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF CLASS
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K / /.
The aggregate market value of voting stock held by nonaffiliates of the
registrant, based upon the closing sales price of the registrant's common stock
on February 1, 2002 on the American Stock Exchange was $25,078,384. For purpose
of the foregoing calculation only, all members of the Board of Directors and
executive officers of the registrant have been deemed affiliates. The number of
shares of common stock outstanding was 7,352,262 as of February 1, 2002.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of this 10-K incorporates information by reference from the
registrant's definitive proxy statement which will be filed no later than
120 days after December 30, 2001.
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INTRODUCTORY NOTE--RESTATEMENTS
Friendly Ice Cream Corporation (the "Company"), as a result of an
extensive review of its accounting policies determined that its policy for
recording restaurant advertising expense included in operating expenses
although proper for annual reporting, needed to be revised for the Company's
quarterly reporting. Accordingly, Note 21, "Quarterly Financial Data
(unaudited)" to the consolidated financial statements contained in the
Company's 2001 Annual Report on Form 10-K has been restated to reflect this
accounting change. This Form 10-K/A does not modify or update any other
information.
PART I - FINANCIAL INFORMATION
ITEM 4. CONTROLS AND PROCEDURES
As of December 30, 2001, an evaluation was performed under the
supervision and with the participation of the Company's management, including
the CEO and CFO, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Company's management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures were effective as of December 30, 2001.
There have been no significant changes in the Company's internal controls or
in other factors that could significantly affect internal controls subsequent
to December 30, 2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial statements:
For a listing of consolidated financial statements which are
included in this document, see page F-1.
2. Schedules:
The following consolidated financial statement schedule and
Report of Independent Public Accountants thereon is included
pursuant to Item 14(d): Schedule II--Valuation and
Qualifying Accounts. All other schedules for which provision
is made in the applicable accounting regulation of the
Securities and Exchange Commission are not required under
the related instructions or are inapplicable and, therefore,
have been omitted.
(b) Exhibits:
The exhibit index is incorporated by reference herein.
(c) Reports on Form 8-K:
None
1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 V. HOAGLAND
-----------------------------------------
Name: Paul V. Hoagland
Title:SENIOR VICE PRESIDENT, CHIEF
FINANCIAL OFFICER, TREASURER AND ASSISTANT
CLERK
CERTIFICATIONS
I, Donald N. Smith, certify that:
1. I have reviewed this annual report on Form 10-K/A of Friendly Ice Cream
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 30, 2002
/s/ Donald N. Smith
CHIEF EXECUTIVE OFFICER
2
I, Paul V. Hoagland, certify that:
1. I have reviewed this annual report on Form 10-K/A of Friendly Ice Cream
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 30, 2002
/s/ Paul V. Hoagland
CHIEF FINANCIAL OFFICER,
TREASURER AND ASSISTANT CLERK
3
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Report of Independent Public Accountants.................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 30, 2001 and
December 31, 2000....................................... F-3
Consolidated Statements of Operations for the Years Ended
December 30, 2001, December 31, 2000 and January 2,
2000.................................................... F-4
Consolidated Statements of Changes in Stockholders'
Deficit for the Years Ended December 30, 2001,
December 31, 2000 and January 2, 2000................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 30, 2001, December 31, 2000 and January 2,
2000.................................................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
Note: This Report of Independent Public Accountants is a copy of a previously
issued Report of Arthur Andersen LLP, Independent Public Accountants, and it has
not been reissued by Arthur Andersen. This Report was originally filed as part
of the Form 10-K of Friendly Ice Cream Corporation for the fiscal year ended
December 30, 2001, and the consent of Arthur Andersen, dated February 11, 2002,
was filed as an exhibit thereto. The registrant has been unable to obtain a
reissued Report of Arthur Andersen or a currently dated consent to the
incorporation of this previously issued Report of Arthur Andersen into the
Registration Statement on Form S-8, File Nos. 333-40195, 333-40197 and
333-40199, or any subsequent registration statement under the Securities Act of
1933 into which this Form 10-K/A may be incorporated by reference. While the
extent of any resulting limitations on recovery against Arthur Andersen is
unclear, Arthur Andersen may not be liable under Section 11 of the Securities
Act because it has not consented in connection with this filing to being named
an expert in any present or future filing into which this Form 10-K/A may be
incorporated by reference, or the lack of a currently dated consent could limit
the time within which any such action could be brought against Arthur Andersen
for liabilities arising under Section 11 of the Securities Act.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Friendly Ice Cream Corporation:
We have audited the accompanying consolidated balance sheets of Friendly Ice
Cream Corporation (a Massachusetts corporation) and subsidiaries as of
December 30, 2001 and December 31, 2000, and the related consolidated statements
of operations, changes in stockholders' deficit and cash flows for each of the
three years in the period ended December 30, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Friendly Ice Cream
Corporation and subsidiaries as of December 30, 2001 and December 31, 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended December 30, 2001, in conformity with accounting principles
generally accepted in the United States.
As explained in Note 3 to the consolidated financial statements, effective
December 28, 1998, the Company changed its method of accounting for restaurant
pre-opening costs.
/s/ ARTHUR ANDERSEN LLP
---------------------------------------------------------------------------
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 11, 2002
F-2
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 30, DECEMBER 31,
2001 2000
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 16,342 $ 14,584
Restricted cash........................................... -- 1,737
Accounts receivable....................................... 9,969 6,157
Inventories............................................... 12,987 11,570
Deferred income taxes..................................... 7,659 10,395
Prepaid expenses and other current assets................. 3,736 2,799
--------- ---------
TOTAL CURRENT ASSETS........................................ 50,693 47,242
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization.............................................. 169,489 226,865
INTANGIBLE ASSETS AND DEFERRED COSTS, net of accumulated
amortization of $9,077 and $11,142 at December 30, 2001
and December 31, 2000, respectively....................... 21,208 21,529
OTHER ASSETS................................................ 11,172 2,050
--------- ---------
TOTAL ASSETS................................................ $ 252,562 $ 297,686
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 1,068 $ 13,029
Current maturities of capital lease and finance
obligations............................................. 1,851 2,143
Accounts payable.......................................... 20,505 20,100
Accrued salaries and benefits............................. 9,436 10,956
Accrued interest payable.................................. 1,543 3,515
Insurance reserves........................................ 13,333 13,095
Restructuring reserve..................................... 3,056 5,571
Other accrued expenses.................................... 19,260 14,262
--------- ---------
TOTAL CURRENT LIABILITIES................................... 70,052 82,671
--------- ---------
DEFERRED INCOME TAXES....................................... 10,584 13,276
CAPITAL LEASE AND FINANCE OBLIGATIONS, less current
maturities................................................ 6,267 8,223
LONG-TERM DEBT, less current maturities..................... 232,797 275,435
OTHER LONG-TERM LIABILITIES................................. 28,876 18,064
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value; authorized 50,000,000 shares
at December 30, 2001 and December 31, 2000; 7,353,435
and 7,393,857 shares issued and outstanding at
December 30, 2001 and December 31, 2000,
respectively............................................ 74 74
Preferred stock, $.01 par value; authorized 1,000,000
shares at December 30, 2001 and December 31, 2000; no
shares issued and outstanding at December 30, 2001 and
December 31, 2000....................................... -- --
Additional paid-in capital................................ 139,290 138,988
Accumulated deficit....................................... (235,378) (239,045)
--------- ---------
TOTAL STOCKHOLDERS' DEFICIT................................. (96,014) (99,983)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT................. $ 252,562 $ 297,686
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED
----------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
------------ ------------ ----------
REVENUES................................................ $561,873 $598,858 $685,844
COSTS AND EXPENSES:
Cost of sales......................................... 197,846 196,181 206,293
Labor and benefits.................................... 157,312 187,641 228,492
Operating expenses.................................... 115,822 121,951 142,097
General and administrative expenses................... 36,312 41,233 46,413
Restructuring expenses, net (Note 9).................. 636 12,056 --
Relocation of manufacturing and distribution facility
(Note 17)........................................... -- -- 1,175
Write-downs of property and equipment (Note 5)........ 800 20,834 1,913
Depreciation and amortization......................... 29,027 30,750 34,989
Gain on franchise sales of restaurant operations and
properties............................................ (4,591) (5,307) (2,574)
Gains on sales of other property and equipment, net..... (2,021) (5,507) (534)
-------- -------- --------
OPERATING INCOME (LOSS)................................. 30,730 (974) 27,580
Interest expense, net of capitalized interest of $93,
$109 and $397 and interest income of $581, $219 and
$132 for the years ended December 30, 2001,
December 31, 2000 and January 2, 2000, respectively 27,310 31,053 33,694
Recovery of write-down of joint venture (Note 19)....... -- -- (896)
-------- -------- --------
INCOME (LOSS) BEFORE (PROVISION FOR) BENEFIT FROM INCOME
TAXES, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE........................ 3,420 (32,027) (5,218)
(Provision for) benefit from income taxes............... (300) 21,221 5,937
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.............. 3,120 (10,806) 719
Extraordinary item, net of income tax expense of $380
(Note 20)............................................. 547 -- --
Cumulative effect of change in accounting principle, net
of income tax benefit of $222 (Note 3)................ -- -- (319)
-------- -------- --------
NET INCOME (LOSS)....................................... $ 3,667 $(10,806) $ 400
======== ======== ========
BASIC AND DILUTED INCOME (LOSS) PER SHARE:
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle............ $ 0.43 $ (1.45) $ 0.09
Extraordinary item, net of income tax expense......... 0.07 -- --
Cumulative effect of change in accounting principle,
net of income tax benefit........................... -- -- (0.04)
-------- -------- --------
Net income (loss)..................................... $ 0.50 $ (1.45) $ 0.05
======== ======== ========
WEIGHTED AVERAGE SHARES:
Basic................................................. 7,363 7,429 7,491
======== ======== ========
Diluted............................................... 7,398 7,429 7,499
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(DOLLARS IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
-------------------- PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT INCOME TOTAL
--------- -------- ---------- ----------- ------------- --------
BALANCE, DECEMBER 27, 1998............. 7,461,600 $75 $137,896 $(228,639) $ 67 $(90,601)
--------- --- -------- --------- ---- --------
Comprehensive income (loss):
Net income........................... -- -- -- 400 -- 400
Translation adjustment............... -- -- -- -- (67) (67)
--------- --- -------- --------- ---- --------
Total comprehensive income (loss)...... -- -- -- 400 (67) 333
Stock compensation expense............. 19,092 -- 563 -- -- 563
--------- --- -------- --------- ---- --------
BALANCE, JANUARY 2, 2000............... 7,480,692 75 138,459 (228,239) -- (89,705)
Net loss and comprehensive loss........ -- -- -- (10,806) -- (10,806)
Shares forfeited in connection with
Restricted Stock Plan................ (86,835) (1) 1 -- -- --
Stock compensation expense............. -- -- 528 -- -- 528
--------- --- -------- --------- ---- --------
BALANCE, DECEMBER 31, 2000............. 7,393,857 74 138,988 (239,045) -- (99,983)
Net income and comprehensive income.... -- -- -- 3,667 -- 3,667
Shares forfeited in connection with
Restricted Stock Plan................ (41,422) -- -- -- -- --
Stock options exercised................ 1,000 -- 4 -- -- 4
Stock compensation expense............. -- -- 298 -- -- 298
--------- --- -------- --------- ---- --------
BALANCE, DECEMBER 30, 2001............. 7,353,435 $74 $139,290 $(235,378) $ -- $(96,014)
========= === ======== ========= ==== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED
----------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
------------ ------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ 3,667 $(10,806) $ 400
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Extraordinary item, net of income tax expense.......... (547) -- --
Cumulative effect of change in accounting principle,
net of income tax benefit............................ -- -- 319
Stock compensation expense............................. 298 528 563
Relocation of manufacturing and distribution
facility............................................. -- -- 1,033
Depreciation and amortization.......................... 29,027 30,750 34,989
Write-downs of property and equipment.................. 800 20,834 1,913
Deferred income tax benefit............................ (336) (21,209) (5,815)
Gain on asset retirements and sales.................... (6,184) (7,785) (1,974)
Recovery of write-down of joint venture................ -- -- (69)
Changes in operating assets and liabilities:
Accounts receivable.................................. (3,308) (2,234) 1,642
Inventories.......................................... (1,417) (218) 4,208
Other assets......................................... (5,461) 3,687 (1,825)
Accounts payable..................................... 405 (5,973) (387)
Accrued expenses and other long-term liabilities..... (1,472) (10,535) (446)
--------- -------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES...... 15,472 (2,961) 34,551
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment...................... (13,922) (18,773) (41,388)
Proceeds from sales of property and equipment............ 56,675 43,822 17,463
Proceeds from sale of joint venture...................... -- -- 1,150
--------- -------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES...... 42,753 25,049 (22,775)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings................................. 134,405 125,000 109,000
Repayments of debt....................................... (184,749) (142,641) (117,979)
Payments related to deferred financing costs............. (4,048) -- --
Repayments of capital lease and finance obligations...... (2,079) (1,925) (1,759)
Stock options exercised.................................. 4 -- --
--------- -------- ---------
NET CASH USED IN FINANCING ACTIVITIES.................... (56,467) (19,566) (10,738)
--------- -------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................. -- -- (67)
--------- -------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................ 1,758 2,522 971
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............. 14,584 12,062 11,091
--------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR................... $ 16,342 $ 14,584 $ 12,062
========= ======== =========
SUPPLEMENTAL DISCLOSURES:
Cash paid (refunded) during the year for:
Interest............................................... $ 28,433 $ 30,436 $ 31,131
Income taxes........................................... 239 56 (387)
Capital lease obligations incurred....................... -- 3,674 --
Capital lease obligations terminated..................... 170 984 62
Notes received from sales of property and equipment...... 4,250 577 600
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
In September 1988, The Restaurant Company ("TRC") and another investor
acquired Friendly Ice Cream Corporation ("FICC"). Subsequent to the acquisition,
Friendly Holding Corporation ("FHC") was organized to hold the outstanding
common stock of FICC, and in March 1996, FHC was merged into FICC. Additionally,
in March 1996, TRC distributed its shares of FICC's voting common stock to TRC's
shareholders and FICC deconsolidated from TRC.
In November 1997, FICC completed a public offering of five million shares of
its common stock (the "Common Stock Offering") for net proceeds of $81,900,000
and a public offering of $200,000,000 of Senior Notes (the "Senior Notes")
(collectively, the "Offerings"). Concurrent with the Offerings, FICC entered
into a new senior secured credit facility consisting of (i) $90,000,000 of term
loans, (ii) a $55,000,000 revolving credit facility and (iii) a $15,000,000
letter of credit facility (collectively, the "Old Credit Facility"). Proceeds
from the Offerings and the Old Credit Facility were primarily used to repay the
$353,700,000 outstanding under FICC's then existing credit facility
(collectively, the "Recapitalization").
In December 2001, the Company completed a financial restructuring plan (the
"Refinancing Plan") which included the repayment of the $64,545,000 outstanding
on the Old Credit Facility, and the repurchase of approximately $21,300,000 in
Senior Notes with the proceeds from $55,000,000 in long-term mortgage financing
(the "Mortgage Financing") and a $33,700,000 sale and leaseback transaction (the
"Sale/Leaseback Financing"). In addition, FICC secured a new $30,000,000
revolving credit facility of which up to $20,000,000 is available to support
letters of credit. The $30,000,000 commitment less issued letters of credit is
available for borrowing to provide working capital and for other corporate needs
(the "New Credit Facility"). In connection with the Mortgage Financing, three
new limited liability corporations ("LLCs") were organized. Friendly Ice Cream
Corporation is the sole member of each LLC.
References herein to "Friendly's" or the "Company" refer to Friendly Ice
Cream Corporation, its predecessor and its consolidated subsidiaries; references
herein to "FICC" refer to Friendly Ice Cream Corporation and not its
subsidiaries; and as used herein, "Northeast" refers to the Company's core
markets, which include Connecticut, Maine, Massachusetts, New Hampshire, New
Jersey, New York, Pennsylvania, Rhode Island and Vermont.
2. NATURE OF OPERATIONS
As of December 30, 2001, Friendly's owned and operated 393 full-service
restaurants and franchised 161 restaurants and six non-traditional units. The
Company manufactures and distributes a full line of frozen dessert products.
These products are distributed to Friendly's restaurants, supermarkets and other
retail locations in 17 states. The restaurants offer a wide variety of
breakfast, lunch and dinner menu items as well as frozen dessert products. For
the years ended December 30, 2001, December 31, 2000 and January 2, 2000,
restaurant sales were approximately 80%, 85% and 90%, respectively, of the
Company's revenues. As of December 30, 2001, December 31, 2000 and January 2,
2000, approximately 89%, 89% and 88%, respectively, of the Company-owned
restaurants were located in the Northeast United States. As a result, a severe
or prolonged economic recession in this geographic area may adversely affect the
Company more than certain of its competitors which are more geographically
diverse.
F-7
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--
The consolidated financial statements include the accounts of FICC and its
wholly owned subsidiaries after elimination of intercompany accounts and
transactions.
FISCAL YEAR--
Friendly's fiscal year ends on the last Sunday in December, unless that day
is earlier than December 27, in which case the fiscal year ends on the following
Sunday. The fiscal year ended January 2, 2000 included 53 weeks. All other years
presented include 52 weeks.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS--
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Future facts and circumstances could alter management's
estimates with respect to the carrying values of long-lived assets and the
adequacy of insurance and restructuring reserves.
REVENUE RECOGNITION--
The Company recognizes restaurant revenue upon receipt of payment from the
customer and retail revenue upon shipment of product. Franchise royalty income,
based on net sales of franchisees, is payable monthly and is recorded on the
accrual method. Initial franchise fees are recorded as revenue upon completion
of all significant services, generally upon opening of the restaurant.
CASH AND CASH EQUIVALENTS--
The Company considers all investments with an original maturity of three
months or less when purchased to be cash equivalents.
ACCOUNTS RECEIVABLE--
Accounts receivable are net of allowances for doubtful accounts totaling
$588,000 and $413,000 as of December 30, 2001 and December 31, 2000,
respectively.
F-8
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVENTORIES--
Inventories are stated at the lower of first-in, first-out cost or market.
Inventories at December 30, 2001 and December 31, 2000 were (in thousands):
DECEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
Raw materials....................................... $ 1,269 $ 1,307
Goods in process.................................... 73 66
Finished goods...................................... 11,645 10,197
------- -------
Total............................................... $12,987 $11,570
======= =======
RESTRICTED CASH--
Restaurant Insurance Corporation ("RIC"), an insurance subsidiary, was
required by the reinsurer of RIC to hold assets in trust whose value is at least
equal to certain of RIC's outstanding estimated insurance claim liabilities.
Accordingly, as of December 31, 2000, cash of approximately $1,737,000 was
restricted. There was no restricted cash as of December 30, 2001.
PROPERTY AND EQUIPMENT--
Property and equipment are carried at cost. Depreciation of property and
equipment is computed using the straight-line method over the following
estimated useful lives:
Buildings--30 years
Building improvements and leasehold improvements--lesser of lease term or
20 years
Equipment--3 to 10 years
At December 30, 2001 and December 31, 2000, property and equipment included
(in thousands):
DECEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
Land................................................ $ 33,635 $ 53,907
Buildings and improvements.......................... 82,005 113,719
Leasehold improvements.............................. 38,294 36,737
Assets under capital leases......................... 11,057 12,717
Equipment........................................... 234,243 252,788
Construction in progress............................ 5,845 5,698
--------- ---------
Property and equipment.............................. 405,079 475,566
Less: accumulated depreciation and amortization..... (235,590) (248,701)
--------- ---------
Property and equipment, net......................... $ 169,489 $ 226,865
========= =========
Major renewals and betterments are capitalized. Replacements and maintenance
and repairs which do not extend the lives of the assets are charged to
operations as incurred.
F-9
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
LONG-LIVED ASSETS--
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews its license agreement for the
right to use various trademarks and tradenames (see Note 4) for impairment on a
quarterly basis. The Company recognizes an impairment has occurred when the
carrying value of the license agreement exceeds the estimated future
undiscounted cash flows of the trademarked products.
The Company reviews each restaurant property quarterly to determine which
properties will be disposed of, if any. This determination is made based on poor
operating results, deteriorating property values and other factors. In addition,
the Company reviews all restaurants with negative cash flow for impairment on a
quarterly basis. The Company recognizes an impairment has occurred when the
carrying value of property reviewed exceeds its estimated fair value, which is
estimated based on the Company's experience selling similar properties and local
market conditions, less costs to sell for properties to be disposed of.
RESTAURANT PRE-OPENING COSTS--
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities." SOP No. 98-5 requires entities to expense as incurred all start-up
and pre-opening 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, on December 28, 1998, the Company expensed
previously deferred restaurant pre-opening costs of approximately $541,000. This
transaction was reflected as a cumulative effect of a change in accounting
principle of $319,000, net of the income tax benefit of $222,000, in the
accompanying consolidated statement of operations for the year ended January 2,
2000.
OTHER ASSETS--
Other assets includes notes receivable of $4,397,000 (see Notes 10 and
17) and $680,000, which are net of allowances for doubtful accounts totaling
$914,000 and $520,000 as of December 30, 2001 and December 31, 2000,
respectively. Also included in other assets as of December 30, 2001 and
December 31, 2000 are payments made to the fronting insurance carrier of
approximately $1,000,000 to establish a loss escrow fund for policy years from
September 2, 1991 through September 2, 2000.
INSURANCE RESERVES--
The Company is self-insured through retentions or deductibles for the
majority of its workers' compensation, automobile, general liability, employer's
liability, product liability and group health insurance programs. Self-insurance
amounts vary up to $500,000 per occurrence. Insurance with third parties, some
of which is then reinsured through RIC, is in place for claims in excess of
these self-insured amounts. RIC assumed 100% of the risk from $500,000 to
$1,000,000 per occurrence through September 2, 2000 for the Company's workers'
compensation, general liability, employer's liability and product liability
insurance. Subsequent to September 2, 2000, the Company discontinued its use of
RIC as a captive insurer for new claims. The Company and RIC's liability for
estimated incurred
F-10
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
losses are actuarially determined and recorded in the accompanying consolidated
financial statements on an undiscounted basis.
INCOME TAXES--
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns. A valuation allowance
is recorded for deferred tax assets whose realization is not likely.
ADVERTISING--
The Company expenses advertising costs as incurred. For the years ended
December 30, 2001, December 31, 2000 and January 2, 2000, advertising expenses
were approximately $19,687,000, $17,955,000 and $21,508,000, respectively.
EARNINGS PER SHARE--
Basic earnings per share is calculated by dividing net income (loss) by the
weighted average number of common shares outstanding during the year. Diluted
earnings per share is calculated by dividing net income (loss) by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the year. Common stock equivalents are dilutive stock options
and warrants that are assumed exercised for calculation purposes. The number of
common stock options which could dilute basic earnings per share in the future,
that were not included in the computation of diluted earnings per share because
to do so would have been antidilutive, was 538,000, 503,000 and 157,000 for the
years ended December 30, 2001, December 31, 2000 and January 2, 2000,
respectively.
Presented below is the reconciliation between basic and diluted weighted
average shares (in thousands):
FOR THE YEARS ENDED
----------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
------------ ------------ ----------
Basic weighted average number of shares
outstanding............................. 7,363 7,429 7,491
Assumed exercise of stock options......... 35 -- 8
----- ----- -----
Diluted weighted average number of shares
outstanding............................. 7,398 7,429 7,499
===== ===== =====
STOCK-BASED COMPENSATION--
The Company accounts for stock-based compensation for employees under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and elected the disclosure-only alternative under SFAS No. 123,
"Accounting for Stock-Based Compensation."
F-11
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS--
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 modifies the rules for
accounting for the impairment or disposal of long-lived assets. The new rules
are effective for the Company on December 31, 2001. Management does not believe
that the impact of adopting SFAS No. 144 will have a material effect on the
Company's consolidated financial statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangibles." SFAS No. 142 modifies the rules for accounting for goodwill and
other intangible assets. The new rules become effective on December 31, 2001.
The impact of adopting SFAS No. 142 will not have any effect on the Company's
consolidated financial statements and the Company will continue to amortize its
license agreement related to certain trademarked products over the term of the
license agreement.
In April 2001, the FASB 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."
EITF Issue No. 00-25 is effective for quarters beginning after December 15,
2001, with prior financial statements restated if practicable. EITF Issue
No. 00-25 requires that consideration from a vendor to a retailer be recorded as
a reduction in revenue unless certain criteria are met. Arrangements within the
scope of this Issue include slotting fees, cooperative advertising arrangements
and buy-downs. As a result of EITF Issue No. 00-25, certain costs previously
recorded as expense have been reclassified and offset against revenue. The
Company adopted EITF Issue No. 00-25 on October 1, 2001. As a result, the
Company recorded retail selling expenses of $1,856,000, $881,000 and $1,028,000
as reductions in retail revenue for the years ended December 30, 2001,
December 31, 2000 and January 2, 2000, respectively. Revenues prior to the
adoption date were reclassified to conform with the current presentation.
In May 2000, the Emerging Issues Task Force issued EITF Issue 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 Issue No. 00-14 on July 3, 2000.
As a result, in the prior years, the Company reclassified certain retail selling
expenses against retail revenue, for periods prior to the adoption date, to
conform with the current presentation.
In 2001, the EITF codified and expanded its consensus opinions in EITF Issue
No. 00-25 and EITF Issue No. 00-14, as well as aspects of EITF Issue No. 00-22,
"Accounting for Points and Certain Other Time-Based Sales Incentive Offers, and
Offers for Free Products or Services to be Delivered in the Future", which are
now all encompassed in EITF Issue No. 01-09, "Accounting for Consideration Given
by a Vendor to a Customer or a Reseller of the Vendor's Products." EITF Issue
No. 01-09 did not generally result in any changes to the effective dates of the
previously reached consensus opinions.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS No. 137, "Accounting for
Derivatives and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133." SFAS No. 133 established 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
F-12
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 in earnings. The cumulative effect upon adoption as of January 1,
2001 of approximately $77,000 was recorded as income in the accompanying
consolidated statement of operations as cost of sales. It was not separately
reported as a cumulative effect of change in accounting principle since the
amount is not significant. Additionally, net losses of approximately $163,000
were recorded during the year ended December 30, 2001 related to the change in
fair value. The fair market value of derivatives at December 30, 2001 was
approximately $22,000.
RECLASSIFICATIONS--
Certain prior year amounts have been reclassified to conform with current
year presentation.
4. INTANGIBLE ASSETS AND DEFERRED COSTS
Intangible assets and deferred costs, net of accumulated amortization, as of
December 30, 2001 and December 31, 2000, were (in thousands):
DECEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
Marks license agreement for the right to use various
trademarks and service marks amortized over its
40-year life on a straight-line basis............. $12,433 $12,900
Deferred financing costs amortized over the terms of
the related loans on an effective yield basis..... 7,990 7,973
Other............................................... 785 656
------- -------
Intangible assets and deferred costs, net........... $21,208 $21,529
======= =======
Upon the sale of the Company by Hershey Foods Corporation ("Hershey") in
1988, all of the trademarks and service marks (the "Marks") used in the
Company's business at that time which did not contain the word "Friendly" as a
component of such Marks were licensed by Hershey to the Company. The Marks
license agreement is being amortized over its term of 40 years, which expires on
September 2, 2028. The Company reviews the estimated future cash flows related
to each trademarked product on a quarterly basis to determine whether any
impairment has occurred. For the years ended December 30, 2001, December 31,
2000 and January 2, 2000, no impairments have been recorded.
5. WRITE-DOWNS OF PROPERTY AND EQUIPMENT
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 (see Note 9). The 151 restaurants in the restructuring were
F-13
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. WRITE-DOWNS OF PROPERTY AND EQUIPMENT (CONTINUED)
generally lower sales volume units operating in markets in which management
believes the Company has a strong market penetration. The Company determined
that the carrying values of certain of these properties exceeded their estimated
fair values less costs to sell. Accordingly, the carrying values of 69 of the 81
locations closed at the end of March 2000 were reduced by an aggregate of
$7,800,000 and the carrying values of 64 of the 70 locations which were to be
disposed of over the next 24 months were reduced by an aggregate of $9,200,000
during the year ended December 31, 2000. In addition to these properties, during
the year ended December 31, 2000, it was determined that the carrying values of
an additional 12 properties exceeded their estimated fair values less costs to
sell. The carrying values of these 12 properties were reduced by an aggregate of
$2,700,000 and the carrying values of eight properties leased to Davco
Restaurants, Inc ("Davco") were reduced by an aggregate of $1,100,000 (see
Note 10). During the year ended December 30, 2001, it was determined that the
carrying values of nine properties exceeded their estimated fair values less
costs to sell. The carrying values of these nine properties were reduced by an
aggregate of $800,000. During the year ended January 2, 2000, the carrying
values of 19 properties were reduced by an aggregate of $1,913,000.
As of December 30, 2001, the Company had sold 63 of the 151 properties
related to the March 2000 restructuring and terminated its lease obligations at
49 properties. During the year ended December 30, 2001, the Company made the
decision to continue to operate 25 of the 70 properties that were to be closed
over the following 24 months. Accordingly, the properties and related assets are
no longer held for sale and the Company began depreciating the properties again.
At December 30, 2001 and December 31, 2000, the carrying value of the remaining
14 and 73 properties to be disposed of related to the March 2000 restructuring
was $1,000,000 and $7,000,000, respectively, and is reflected in the
accompanying consolidated balance sheets as property and equipment, net. As a
result of the sales of closed properties from the restructuring, the Company
recognized gains of approximately $1,800,000 and $5,600,000 for the years ended
December 30, 2001 and December 31, 2000, respectively. Based on information
currently available, management believes that the carrying value of the
remaining 14 properties to be disposed of as of December 30, 2001 is realizable.
At December 30, 2001 and December 31, 2000 there were 16 and 83 properties
held for disposition, which included 14 and 73 properties related to the
March 2000 restructuring.
The aggregate operating loss for the properties held for disposition as of
December 30, 2001 was $757,000 and $1,008,000 for the years ended December 30,
2001 and December 31, 2000, respectively. The aggregate carrying value of the
properties held for disposition at December 30, 2001 and December 31, 2000 was
approximately $1,008,000 and $8,946,000, respectively, which is included in
property and equipment, net in the accompanying consolidated balance sheets.
F-14
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEBT
Debt at December 30, 2001 and December 31, 2000 consisted of the following
(in thousands):
DECEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
Senior Notes, 10 1/2%, due December 1, 2007......... $178,727 $200,000
New Credit Facility:
Revolving credit loans, due December 17, 2004..... -- --
Mortgage loans, due February 1, 2002 through
January 1, 2022................................... 55,000 --
Old Credit Facility:
Revolving credit loans............................ -- 50,000
Term loans:
Tranche A....................................... -- 6,873
Tranche B....................................... -- 19,866
Tranche C....................................... -- 11,725
Other............................................... 138 --
-------- --------
233,865 288,464
Less: current portion............................... (1,068) (13,029)
-------- --------
Total long-term debt................................ $232,797 $275,435
======== ========
Principal payments due as of December 30, 2001, were as follows (in
thousands):
YEAR AMOUNT
---- --------
2002........................................................ $ 1,068
2003........................................................ 1,017
2004........................................................ 1,107
2005........................................................ 1,238
2006........................................................ 1,367
Thereafter.................................................. 228,068
--------
Total....................................................... $233,865
========
In November 1997, the Company entered into a credit facility which included
revolving credit loans, term loans and letters of credit (the "Old Credit
Facility"). The Company had executed several amendments to the Old Credit
Facility. The most recent amendment occurred on March 19, 2001. All of the then
existing financial covenants were amended and a new financial covenant was added
requiring minimum cumulative consolidated EBITDA, as defined, on a monthly
basis. Additionally, interest rates on term loans, borrowings under the
revolving credit facility and issued letters of credit increased 0.25% and an
automatic increase in the interest rates occurred on August 2, 2001 of 0.25%.
Also due to the March 19, 2001 amendment, the maturity dates of all obligations
under the Old Credit Facility became November 15, 2002.
In July 2001, Tranche A of the term loans was prepaid and extinguished.
Accordingly, the Company wrote off the related unamortized financing costs of
$374,000 ($220,000, net of the related income tax benefit), which is included in
extraordinary item, net of income taxes, in the consolidated statement of
operations for the year ended December 30, 2001.
F-15
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEBT (CONTINUED)
In December 2001, the Company successfully completed a financial
restructuring plan (the "Refinancing Plan") which included the repayment of
$64,545,000 outstanding under the Old Credit Facility and the repurchase of
approximately $21,300,000 in Senior Notes for $17,000,000 with the proceeds from
$55,000,000 in long-term mortgage financing (the "Mortgage Financing") and a
$33,700,000 sale and leaseback transaction (the "Sale/Leaseback Financing", see
Note 7). In addition, FICC secured a new $30,000,000 revolving credit facility
of which up to $20,000,000 is available to support letters of credit. The
$30,000,000 commitment less issued letters of credit is available for borrowing
to provide working capital and for other corporate needs (the "New Credit
Facility"). As of December 30, 2001, $15,373,000 was available for additional
borrowing under the New Credit Facility. In connection with the Refinancing
Plan, the Company wrote off unamortized financing costs and incurred other
direct expenses totaling $3,400,000 ($2,000,000, net of tax), which are included
in extraordinary items, net of income taxes, in the consolidated statement of
operations for the year ended December 30, 2001.
The $200,000,000 Senior Notes issued in connection with the November 1997
Recapitalization (the "Senior Notes") are unsecured senior obligations of FICC,
guaranteed on an unsecured senior basis by FICC's Friendly's Restaurants
Franchise, Inc. subsidiary, but are effectively subordinated to all secured
indebtedness of FICC, including the indebtedness incurred under the New Credit
Facility. The Senior Notes mature on December 1, 2007. Interest on the Senior
Notes is payable at 10.50% per annum semi-annually on June 1 and December 1 of
each year. In connection with the Refinancing Plan, FICC repurchased
approximately $21,300,000 in aggregate principal amount of the Senior Notes for
$17,000,000. The gain of $4,300,000 ($2,500,000, net of tax) was recorded as an
extraordinary item in the consolidated statement of operations for the year
ended December 30, 2001. The remaining Senior Notes are redeemable, in whole or
in part, at FICC's option any time on or after December 1, 2002 at redemption
prices from 105.25% to 100.00%, based on the redemption date.
Three new limited liability corporations ("LLCs") were organized in
connection with the Mortgage Financing. FICC is the sole member of each LLC and
the LLCs are consolidated in the accompanying consolidated financial statements.
FICC sold 75 of its operating Friendly's restaurants to the LLCs in exchange for
the proceeds from the Mortgage Financing. Promissory notes were issued for each
of the 75 properties. Each LLC is a borrower under the Mortgage Financing.
The Mortgage Financing requires the Company to maintain a fixed charge
coverage ratio, as defined, of at least 1.10 to 1 and each LLC to maintain a
fixed charge coverage ratio, as defined, on an aggregate restaurant basis of at
least 1.25 to 1.
The Mortgage Financing has a maturity date of January 1, 2022 and is
amortized over 20 years. Interest on $10,000,000 of the Mortgage Financing is
variable and is the sum of the 30-day LIBOR rate in effect (1.87375% at
December 30, 2001) plus 6% on an annual basis. Changes in the interest rate are
calculated monthly with the monthly payment amount adjusted annually. Changes in
the monthly payment amounts owed due to interest rate changes are reflected in
the principal balances which are reamortized over the remaining life of the
mortgages. The remaining $45,000,000 of the Mortgage Financing bears interest at
a fixed annual rate of 10.16%. Each promissory note may be prepaid in full. The
variable rate notes are subject to prepayment penalties during the first five
years. The fixed rate notes may not be prepaid without the Company providing the
note holders with a yield maintenance premium.
F-16
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEBT (CONTINUED)
The New Credit Facility is secured by substantially all of the assets of
FICC and two of its six subsidiaries, Friendly's Restaurants Franchise Inc. and
Friendly's International Inc., and both subsidiaries guaranty FICC's obligations
under the New Credit Facility. The New Credit Facility expires on December 17,
2004. As of December 30, 2001, there were no revolving credit loans outstanding.
The revolving credit loans bear interest at the Company's option at either
(a) the Base Rate plus the applicable margin as in effect from time to time (the
"Base Rate") (7.25% at December 30, 2001), or (b) the Eurodollar rate plus the
applicable margin as in effect from time to time (the "Eurodollar Rate") (6.34%
at December 30, 2001).
As of December 30, 2001 and December 31, 2000, total letters of credit
issued were approximately $14,627,000 and $10,199,000, respectively. During the
years ended December 30, 2001, December 31, 2000 and January 2, 2000, there were
no drawings against the letters of credit.
The New Credit Facility has an annual "clean-up" provision which obligates
the Company to repay in full all revolving credit loans on or before
September 30 (or, if September 30 is not a business day, as defined, then the
next business day) of each year and maintain a zero balance on such revolving
credit for at least 30 consecutive days, to include September 30, immediately
following the date of such repayment.
As of December 30, 2001 and December 31, 2000, the unused portion of the
revolving credit commitments was $15,373,000 and $9,801,000, respectively. The
total average unused portions of the revolving credit commitments were
$15,243,000 for the period from January 1, 2001 through December 18, 2001,
$15,373,000 for the period from December 19, 2001 through December 30, 2001,
$23,932,000 and $23,385,000 for the years ended December 31, 2000 and
January 2, 2000, respectively.
The New Credit Facility includes certain restrictive covenants including
limitations on indebtedness, limitations on restricted payments such as
dividends and stock repurchases and limitations on sales of assets and of
subsidiary stock. Additionally, the New Credit Facility limits the amount which
the Company may spend on capital expenditures, restricts the use of proceeds, as
defined, from asset sales and requires the Company to comply with certain
financial covenants. The financial covenant requirements, as defined under the
New Credit Facility, and actual ratios/amounts as of and for the period ended
December 30, 2001 were:
DECEMBER 30, 2001
-----------------------------
REQUIREMENT ACTUAL
------------- -------------
Leverage ratio................................. 4.25 to 1 3.96 to 1
Interest coverage ratio........................ 2.20 to 1 2.31 to 1
Fixed charge coverage ratio.................... 1.15 to 1 1.26 to 1
Consolidated tangible net worth (deficit)...... $(120,000,000) $(117,222,000)
Permitted capital expenditures (a)............. $ 14,000,000 $ 12,672,000
Consolidated EBITDA (b)........................ $ 60,000,000 $ 63,253,000
------------------------
(a) The New Credit Facility's definition of permitted capital expenditures in
the revolving credit agreement differs from the Company's total capital
expenditures.
F-17
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEBT (CONTINUED)
(b) The New Credit Facility's definition of consolidated EBITDA in the revolving
credit agreement allows non-cash losses and capitalized interest to be added
back to net income (loss) which differs from the Company's internal EBITDA
computation presented elsewhere herein.
The fair values of the Company's long-term debt at December 30, 2001 and
December 31, 2000 were as follows (in thousands):
DECEMBER 30, 2001 DECEMBER 31, 2000
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
Senior Notes........................ $178,727 $175,081 $200,000 $115,000
Mortgage loans...................... 55,000 55,000 -- --
Term loans.......................... -- -- 38,464 38,464
Revolving credit loans.............. -- -- 50,000 50,000
Other loans......................... 138 138 -- --
-------- -------- -------- --------
Total............................... $233,865 $230,219 $288,464 $203,464
======== ======== ======== ========
The Company believes the carrying value of the Company's financial
instruments other than long-term debt approximated their respective fair values
as of December 30, 2001 and December 31, 2000. The fair value of the Senior
Notes was determined based on the actual trade prices occurring closest to
December 30, 2001 and December 31, 2000. The Company believes that the carrying
values of the term loans and revolving credit loans under the Old Credit
Facility as of December 31, 2000 approximated fair value since the obligations
had variable interest rates. The Company believes that the carrying value of the
Mortgage Financing as of December 30, 2001 approximated the fair value based on
the proximity of the transaction to the fiscal year end. The Company believes
that the carrying value of the other debt as of December 30, 2001 approximated
the fair value based on the terms of the obligation and the rates then currently
available to the Company for similar obligations.
7. LEASES
As of December 30, 2001, December 31, 2000 and January 2, 2000, the Company
operated 393, 449 and 618 restaurants, respectively. These operations were
conducted in premises owned or leased as follows:
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
------------ ------------ ----------
Land and building owned................... 114 178 256
Land leased and building owned............ 97 117 144
Land and building leased.................. 182 154 218
--- --- ---
393 449 618
=== === ===
Restaurants in shopping centers are generally leased for a term of 10 to
20 years. Leases of freestanding restaurants generally are for a 15 or 20 year
lease term and provide for renewal options for three or four five-year renewals
at the then current fair market value. Some leases provide for minimum payments
plus a percentage of sales in excess of stipulated amounts. Additionally, the
Company leases certain equipment over lease terms from three to seven years.
F-18
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LEASES (CONTINUED)
In connection with the 2001 Refinancing Plan, in December 2001, the Company
entered into and accounted for the Sale/Leaseback Financing, which provided
approximately $33,700,000 of proceeds to the Company. The Company sold 44
properties operating as Friendly's Restaurants and entered into a master lease
with the buyer to lease the 44 properties for an initial term of 20 years under
a triple net lease. There are four five-year renewal options and lease payments
are subject to escalator provisions every five years based upon increases in the
Consumer Price Index. The December 2001 agreement provided the Company the
option to repurchase properties in certain default situations, as defined. In
January 2002 the Company entered into an amended agreement for no consideration
which eliminated the buy back provision. The amended agreement was effective
December 19, 2001. In accordance with SFAS No. 66, "Accounting for Sales of Real
Estate" and SFAS No. 98, "Accounting for Leases", the Company recognized losses
of $428,000 on two properties which was included in gains on sales of other
properties and equipment, net in the accompanying consolidated statement of
operations for the year ended December 30, 2001. The gain of $11,377,000 on the
remaining 42 properties was deferred and was included in other accrued expenses
and other long-term liabilities in the accompanying consolidated balance sheet
as of December 30, 2001. The deferred gain will be amortized in proportion to
the rent charged to expense over the initial lease term.
Future minimum lease payments under noncancelable leases with an original
term in excess of one year as of December 30, 2001 were (in thousands):
CAPITAL
LEASES AND
OPERATING FINANCE
YEAR LEASES OBLIGATIONS
---- --------- -----------
2002.................................................... $ 16,589 $ 2,616
2003.................................................... 15,166 1,884
2004.................................................... 14,495 1,056
2005.................................................... 12,895 1,032
2006.................................................... 10,899 785
Thereafter.............................................. 85,400 4,866
-------- -------
Total future minimum lease payments..................... $155,444 12,239
========
Less amounts representing interest...................... (4,121)
-------
Present value of minimum lease payments................. 8,118
Less current maturities of capital lease and finance
obligations........................................... (1,851)
-------
Long-term maturities of capital lease and finance
obligations........................................... $ 6,267
=======
F-19
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LEASES (CONTINUED)
Capital lease and finance obligations reflected in the accompanying
consolidated balance sheets have effective interest rates ranging from 8.00% to
12.00% and are payable in monthly installments through 2016. Maturities of such
obligations as of December 30, 2001 were (in thousands):
YEAR AMOUNT
---- --------
2002........................................................ $1,851
2003........................................................ 1,317
2004........................................................ 572
2005........................................................ 600
2006........................................................ 415
Thereafter.................................................. 3,363
------
Total....................................................... $8,118
======
Rent expense included in the accompanying consolidated statements of
operations for operating leases was (in thousands):
FOR THE YEARS ENDED
----------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
------------ ------------ ----------
Minimum rentals........................... $16,004 $17,356 $18,301
Contingent rentals........................ 1,139 1,217 2,146
------- ------- -------
Total..................................... $17,143 $18,573 $20,447
======= ======= =======
8. INCOME TAXES
Prior to March 23, 1996, FICC and its subsidiaries were included in the
consolidated federal income tax return of TRC. On March 23, 1996, FICC
deconsolidated from TRC. Subsequently, certain shares of the Company's common
stock were issued to FICC's lenders, which resulted in an ownership change
pursuant to Internal Revenue Code Section 382, on March 26, 1996.
As a result of the change of ownership and limitations under Section 382 of
the Internal Revenue Code, the portion of the total federal Net Operating Loss
("NOL") carryforwards that were generated prior to March 26, 1996 ("Old NOLs")
could only be used to offset current or future income to the extent that an
equivalent amount of net unrealized built-in-gains, which existed at March 26,
1996, were recognized by March 25, 2001. As a result of this limitation, as of
January 2, 2000, a valuation allowance of $7,454,000 existed against the
deferred tax asset resulting from $21,298,000 of federal NOLs generated prior to
March 26, 1996.
During the year ended December 31, 2000 the Company realized gains in excess
of $21,298,000, which were unrealized as of the date of the first ownership
change. Accordingly, the valuation allowance on federal Old NOLs of $7,454,000
was eliminated during the year ended December 31, 2000. As of December 30, 2001,
the Company had aggregate federal NOL carryforwards of approximately
$13,000,000, which expire between 2010 and 2019. As of December 30, 2001 and
December 31, 2000, full valuation allowances of $11,295,000 and $11,583,000,
respectively, existed related to state NOL carryforwards due to restrictions on
the usage of state NOL carryforwards and short carryforward periods for certain
states.
F-20
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The (provision for) benefit from income taxes for the years ended
December 30, 2001, December 31, 2000 and January 2, 2000 were as follows (in
thousands):
FOR THE YEARS ENDED
----------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
------------ ------------ ----------
Current (provision) benefit:
Federal................................. $(295) $ 38 $ 104
State................................... (341) (26) 18
----- ------- ------
Total current (provision) benefit......... (636) 12 122
----- ------- ------
Deferred (provision) benefit:
Federal................................. (498) 19,214 5,718
State................................... 454 1,995 319
----- ------- ------
Total deferred (provision) benefit........ (44) 21,209 6,037
----- ------- ------
Total (provision for) benefit from income
taxes................................... $(680) $21,221 $6,159
===== ======= ======
A reconciliation of the difference between the statutory federal income tax
rate and the effective income tax rate follows:
FOR THE YEARS ENDED
----------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
------------ ------------ ----------
Statutory federal income tax rate......... 35% 35% 35%
State income taxes net of federal
benefit................................. 6 6 6
Effect of change in valuation allowance... (7) 23 40
Tax credits............................... (23) 3 15
Nondeductible expenses.................... 4 (1) (4)
Other..................................... 1 -- 15
--- -- ---
Effective tax rate........................ 16% 66% 107%
=== == ===
Deferred tax assets and liabilities are determined as the difference between
the financial statement and tax bases of the assets and liabilities multiplied
by the enacted tax rates in effect for the year in
F-21
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
which the differences are expected to reverse. Significant deferred tax assets
(liabilities) at December 30, 2001 and December 31, 2000 were as follows (in
thousands):
DECEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
Property and equipment.............................. $(23,448) $(31,181)
Net operating loss carryforwards (net of valuation
allowance of $11,295 and $11,583 at December 30,
2001 and December 31, 2000, respectively)......... 4,757 14,020
Insurance reserves.................................. 8,245 6,878
Inventories......................................... 269 1,370
Pension............................................. (2,164) 284
Intangible assets................................... (5,098) (5,287)
Tax credit carryforwards............................ 7,869 6,262
Deferred gain....................................... 4,489 --
Other............................................... 2,156 4,773
-------- --------
Net deferred tax liability.......................... $ (2,925) $ (2,881)
======== ========
9. RESTRUCTURINGS
On October 10, 2001, the Company eliminated approximately 70 positions at
corporate headquarters. The purpose of the reduction was to streamline functions
and reduce redundancy amongst its business segments. In addition, approximately
30 positions in the restaurant construction and fabrication areas were
eliminated by December 30, 2001. The Company believes the outsourcing of such
activities will be more cost effective in the future. Annual salaries and fringe
benefits associated with these 100 positions was approximately $5,600,000. As a
result of the elimination of the positions and the outsourcing of certain
functions, the Company reported a pre-tax restructuring charge of approximately
$2,536,000 for severance, rent and unusable construction supplies due solely to
the outsourcing in the year ended December 30, 2001.
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. 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 the March 2000 plan,
the Company reported a pre-tax restructuring charge of approximately $12,056,000
for severance, 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 year ended December 31, 2000. Due
to earlier than anticipated lease terminations, the Company reduced this reserve
by $1,900,000 during the year ended December 30, 2001.
F-22
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RESTRUCTURINGS (CONTINUED)
The following represents the reserve and related costs associated with the
March 2000 and October 2001 restructurings (in thousands):
FOR THE YEAR ENDED DECEMBER 31, 2000
-----------------------------------------
RESTRUCTURING
RESERVE AS OF
EXPENSE COSTS PAID DECEMBER 31, 2000
-------- ---------- -----------------
Severance pay............................................ $ 1,503 $(1,429) $ 74
Rent..................................................... 5,490 (1,905) 3,585
Utilities and real estate taxes.......................... 1,632 (527) 1,105
Demarking................................................ 760 (622) 138
Lease termination costs.................................. 718 (598) 120
Environmental costs...................................... 404 (404) --
Inventory................................................ 111 (106) 5
Equipment................................................ 727 (727) --
Outplacement services.................................... 160 (160) --
Other.................................................... 551 (7) 544
------- ------- ------
Total.................................................... $12,056 $(6,485) $5,571
======= ======= ======
FOR THE YEAR ENDED DECEMBER 30, 2001
-------------------------------------------------------------------------
RESTRUCTURING RESTRUCTURING
RESERVE AS OF RESERVE RESERVE AS OF
DECEMBER 31, 2000 EXPENSE COSTS PAID REDUCTION DECEMBER 30, 2001
----------------- -------- ---------- --------- -----------------
Severance pay.................... $ 74 $1,186 $ (753) $ 9 $ 516
Rent............................. 3,585 440 (1,169) (1,538) 1,318
Utilities and real estate
taxes.......................... 1,105 -- (583) (337) 185
Demarking........................ 138 -- (138) -- --
Lease termination costs.......... 120 -- (120) -- --
Environmental costs.............. -- -- -- -- --
Inventory........................ 5 -- (5) -- --
Equipment........................ -- 515 (35) -- 480
Outplacement services............ -- 143 (103) (34) 6
Other............................ 544 252 (245) -- 551
------ ------ ------- ------- ------
Total............................ $5,571 $2,536 $(3,151) $(1,900) $3,056
====== ====== ======= ======= ======
Based on information currently available, management believes that the
restructuring reserve as of December 30, 2001 is adequate and not excessive.
F-23
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. FRANCHISE TRANSACTIONS
On September 14, 2001, the Company entered into an agreement granting Revere
Restaurant Group, Inc. ("Revere") certain limited exclusive rights to operate
and develop Friendly's full-service restaurants in designated areas within
Lehigh and Northampton counties, Pennsylvania (the "Revere Agreement"). Pursuant
to the Revere Agreement, Revere purchased certain assets and rights in six
existing Friendly's restaurants and committed to open an additional four
restaurants over the next seven years. The president of Revere is a former
employee of the Company. Gross proceeds from the sale were approximately
$3,400,000 of which approximately $200,000 was for franchise fees for the
initial six restaurants. The $200,000 was recorded as revenue in the year ended
December 30, 2001. The Company also recognized a gain of approximately $300,000
related to the sale of the assets for the six locations in the year ended
December 30, 2001.
On April 13, 2001, the Company entered into an agreement granting J&B
Restaurants Partners of Long Island Holding Co., LLC and its subsidiaries
("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. Gross proceeds from the sale were approximately $19,950,000, of which
approximately $4,250,000 was received in a note and $940,000 was for franchise
fees for the initial 31 restaurants. The $940,000 was recorded as revenue in the
year ended December 30, 2001. The Company recognized a gain of approximately
$4,300,000 related to the sale of the assets for the 31 locations in the year
ended December 30, 2001. 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 loans, in each case under the Old Credit Facility. The 5-year
note receivable bears interest at an annual rate of 11% using a 20-year
amortization schedule. Payments are due monthly through the first five years
with a balloon payment due at the end of five years. The Company also sold
certain assets and rights in two other restaurants to an additional franchisee
resulting in a loss of $16,000.
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 year ended December 31, 2000. The
Company recognized a gain of approximately $1,400,000 related to the sale of the
assets for the 29 locations in the year ended December 31, 2000. The Company
also sold certain assets and rights in six other restaurants to two additional
franchisees resulting in a gain of $687,000.
On October 2, 2000, the Company entered into an agreement granting Kessler
non-exclusive rights to operate and develop Friendly's full-service restaurants
in the franchising region of Elmira, Binghamton, Utica and Watertown, New York
(the "Second Kessler Agreement"). Pursuant to the Second Kessler Agreement,
Kessler purchased certain assets and rights in 12 existing Friendly's
restaurants and has an option to open an additional eight restaurants over the
next six years. Gross proceeds from the sale were approximately $8,100,000, of
which $370,000 was for franchise fees for the initial 12 restaurants. The
$370,000 was recorded as revenue in the year ended December 31, 2000. The
Company recognized a gain of approximately $3,600,000 related to the sale of the
assets for the 12 locations in the year ended December 31, 2000. During the year
ended December 30, 2001, the
F-24
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. FRANCHISE TRANSACTIONS (CONTINUED)
Company recognized an additional gain of approximately $200,000 since the
estimates for remaining closing costs exceeded actual payments.
In 2000, the Company and its first franchisee, Davco, agreed to terminate
Davco's rights as the exclusive developer of new Friendly's restaurants in
Maryland, Delaware, the District of Columbia and northern Virginia, effective
December 28, 2000. Accordingly, the deferred development fees of $1,029,000 were
recorded as revenue in 2000. Additionally, Davco has the right to close up to 16
existing franchised locations and will operate the remaining 32 locations under
their respective existing franchise agreements until such time as a new
franchisee is found for those locations. The existing franchise agreements for
the 32 locations were modified as of December 29, 2001 to allow early
termination subject to liquidated damages on 22 of the 32 franchise agreements.
Effective August 6, 2001, Davco transferred its rights to three franchised
locations to a third party. Davco closed two units during the year ended
December 30, 2001.
11. EMPLOYEE BENEFIT PLANS
Substantially all of the employees of the Company are covered by a
non-contributory defined benefit cash balance pension plan. Plan benefits are
based on years of service and participant compensation during their years of
employment. The Company accrues the cost of its pension plan over its employees'
service lives.
Under the cash balance plan, a nominal account for each participant is
established. The Company makes an annual contribution to each participant's
account based on current wages and years of service. Each account earns a
specified rate of interest which is adjusted annually. Plan expenses may also be
paid from the assets of the plan.
For the years ended December 30, 2001 and December 31, 2000, the
reconciliation of the projected benefit obligation was (in thousands):
DECEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
Beginning of year benefit obligation................ $81,876 $79,175
Service cost...................................... 2,841 3,145
Interest cost..................................... 6,247 6,251
Actuarial loss.................................... 2,780 3,146
Disbursements..................................... (8,401) (9,841)
------- -------
End of year benefit obligation...................... $85,343 $81,876
======= =======
In 1997, pension benefits were reduced to certain employees. In 1998, death
benefits were increased. The effect of these amendments is being amortized over
the remaining employee service period of active plan participants.
F-25
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
The reconciliation of the funded status of the pension plan as of
December 30, 2001 and December 31, 2000 included the following components (in
thousands):
DECEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
Projected benefit obligation........................ $ 85,343 $ 81,876
Fair value of plan assets........................... 100,123 113,577
-------- --------
Funded status....................................... 14,780 31,701
Unrecognized prior service cost..................... (4,402) (5,207)
Unrecognized net actuarial gain..................... (4,701) (26,200)
-------- --------
Prepaid benefit cost................................ $ 5,677 $ 294
======== ========
The reconciliation of the fair value of assets of the plan as of
December 30, 2001 and December 31, 2000 was (in thousands):
DECEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
Beginning of year fair value of assets.............. $113,577 $124,614
Actual return on plan assets........................ (4,664) (1,682)
Disbursements....................................... (8,401) (9,841)
Other............................................... (389) 486
-------- --------
End of year fair value of assets.................... $100,123 $113,577
======== ========
The components of net pension benefit for the years ended December 30, 2001,
December 31, 2000 and January 2, 2000 were (in thousands):
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
------------ ------------ ----------
Service cost.............................. $ 2,841 $ 3,145 $ 4,090
Interest cost............................. 6,247 6,251 6,269
Expected return on assets................. (12,177) (11,628) (10,291)
Net amortization:
Unrecognized prior service cost......... (805) (805) (805)
Unrecognized net actuarial gain......... (1,489) (1,899) --
-------- -------- --------
Net pension benefit....................... $ (5,383) $ (4,936) $ (737)
======== ======== ========
A summary of the Company's key actuarial assumptions as of December 30,
2001, December 31, 2000 and January 2, 2000 follows:
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
------------ ------------ ----------
Discount rate............................. 7.25% 7.50% 8.00%
Salary increase rate...................... 3.75-5.25% 3.75-5.25% 3.75-5.25%
Expected long-term rate of return......... 10.0% 10.5% 10.5%
F-26
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company's Employee Savings and Investment Plan (the "Plan") covers all
eligible employees and is intended to be qualified under Sections 401(a) and
401(k) of the Internal Revenue Code. For the years ended December 30, 2001 and
December 31, 2000, the Company made matching contributions at the rate of 75% of
the first 2% of the participant's contributions and 50% of the next 4% of the
participant's contributions for employees of certain job classifications. For
other employees of the Company, the Company made matching contributions at the
rate of 75% of the first 2% of the participant's contributions and 50% of the
next 2% of the participant's contributions. All employee contributions are fully
vested. Company contributions are vested at the completion of five years of
service or at retirement, death, disability or termination at age 65 or over, as
defined by the Plan. Company contributions and administrative expenses for the
Plan were approximately $837,000, $974,000 and $1,083,000 for the years ended
December 30, 2001, December 31, 2000 and January 2, 2000, respectively.
12. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides health care and life insurance benefits to certain
groups of employees upon retirement. Eligible employees may continue their
coverages if they are receiving a pension benefit, are at least 55 years of age
and have completed ten years of service. The plan requires contributions for
health care coverage from participants who retired after September 1, 1989. Life
insurance benefits are non-contributory. Benefits under the plan are provided
through the Company's general assets.
The Company accrues the cost of postretirement benefits over the years
employees provide services to the date of their full eligibility for such
benefits. The reconciliation of the accumulated postretirement benefit
obligation for the years ended December 30, 2001 and December 31, 2000 is as
follows (in thousands):
DECEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
Beginning of year benefit obligation................ $6,038 $5,589
Service cost........................................ 176 152
Interest cost....................................... 444 438
Actuarial loss...................................... 715 350
Disbursements....................................... (575) (491)
------ ------
End of year benefit obligation...................... $6,798 $6,038
====== ======
F-27
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
The reconciliation of the funded status of the postretirement plan as of
December 30, 2001 and December 31, 2000 included the following components (in
thousands):
DECEMBER 30, DECEMBER 31,
2001 2000
------------- -------------
Accumulated postretirement benefit obligation....... $(6,798) $(6,038)
Fair value of plan assets........................... -- --
------- -------
Funded status....................................... (6,798) (6,038)
Unrecognized prior service cost..................... (804) (866)
Unrecognized net actuarial loss (gain).............. 519 (195)
------- -------
Accrued benefit liability........................... $(7,083) $(7,099)
======= =======
The components of the net postretirement benefit cost for the years ended
December 30, 2001, December 31, 2000 and January 2, 2000 were (in thousands):
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
------------ ------------ ----------
Service cost.............................. $176 $152 $180
Interest cost............................. 444 438 430
Net amortization of prior service cost.... (61) (62) (62)
---- ---- ----
Net postretirement benefit cost........... $559 $528 $548
==== ==== ====
A summary of the Company's key actuarial assumptions as of December 30,
2001, December 31, 2000 and January 2, 2000 follows:
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
------------ ------------ ----------
Discount rate............................. 7.25% 7.50% 8.00%
Salary increase rate...................... 3.75-5.25% 3.75-5.25% 3.75-5.25%
Medical cost trend:
First year.............................. 9.50% 5.25% 6.25%
Ultimate................................ 5.50% 5.25% 5.25%
Years to reach ultimate................. 4 1 2
A one-percentage-point increase in the assumed health care cost trend rate
would have increased postretirement benefit expense by approximately $64,000,
$58,000 and $60,000 and would have increased the accumulated postretirement
benefit obligation by approximately $617,000, $518,000 and $454,000 for the
years ended December 30, 2001, December 31, 2000 and January 2, 2000,
respectively. A one-percentage-point decrease in the assumed health care cost
trend rate would have decreased the postretirement benefit expense by
approximately $58,000, $52,000 and $54,000 and would have decreased the
accumulated postretirement benefit obligation by approximately $558,000,
$470,000 and $414,000 for the years ended December 30, 2001, December 31, 2000
and January 2, 2000, respectively.
F-28
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INSURANCE RESERVES
At December 30, 2001 and December 31, 2000, insurance reserves of
approximately $30,562,000 and $28,339,000, respectively, had been recorded.
Insurance reserves at December 30, 2001 and December 31, 2000 included RIC's
reserve for the Company's insurance liabilities of approximately $7,830,000 and
$9,332,000, respectively. Reserves also included accruals related to post
employment benefits and postretirement benefits other than pensions. While
management believes these reserves are adequate, it is reasonably possible that
the ultimate liabilities will exceed such estimates.
Classification of the reserves was as follows (in thousands):
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
------------ ------------ ----------
Current................................... $13,333 $13,095 $ 9,748
Long-term................................. 17,229 15,244 17,246
------- ------- -------
Total..................................... $30,562 $28,339 $26,994
======= ======= =======
Following is a summary of the activity in the insurance reserves for the
years ended December 30, 2001, December 31, 2000 and January 2, 2000 (in
thousands):
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
------------ ------------ ----------
Beginning balance......................... $28,339 $ 26,994 $ 26,479
Provision................................. 11,825 15,437 12,903
Payments.................................. (9,602) (14,092) (12,388)
------- -------- --------
Ending balance............................ $30,562 $ 28,339 $ 26,994
======= ======== ========
The provision for insurance reserves each year is actuarially determined and
reflects amounts for the current year as well as revisions in estimates to open
reserves for prior years. Payments include amounts paid on open claims for all
years.
14. STOCKHOLDERS' DEFICIT
In connection with the Recapitalization, FICC adopted a Restricted Stock
Plan (the "Restricted Stock Plan"), pursuant to which 371,285 shares are
authorized for issuance. The Restricted Stock Plan provides for the award of
common stock, the vesting of which is subject to conditions and limitations
established by the Board of Directors.
Such conditions may include continued employment with the Company or the
achievement of performance measures. Upon the award of common stock, the
participant has the rights of a stockholder, including but not limited to the
right to vote such stock and the right to receive any dividends paid on such
stock. The Board of Directors, in its sole discretion, may designate employees
and persons providing material services to the Company as eligible for
participation in the Restricted Stock Plan.
F-29
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCKHOLDERS' DEFICIT (CONTINUED)
A summary of the shares issued under the Restricted Stock Plan is presented
below:
NUMBER OF
SHARES
-------
Shares outstanding at December 27, 1998..................... 332,885
Granted................................................... 82,008
Forfeited................................................. (62,916)
-------
Shares outstanding at January 2, 2000....................... 351,977
Forfeited................................................. (86,835)
-------
Shares outstanding at December 31, 2000..................... 265,142
Forfeited................................................. (41,422)
-------
Shares outstanding at December 30, 2001..................... 223,720
=======
The shares issued vest on a straight-line basis over eight years or on an
accelerated basis if certain performance criteria are met. The Company is
recording the fair value of the shares issued at the issuance dates as
compensation expense over the estimated vesting periods. During the years ended
December 30, 2001, December 31, 2000, and January 2, 2000, the Company recorded
stock compensation expense of approximately $298,000, $529,000 and $563,000,
respectively, which is included in general and administrative expenses in the
accompanying consolidated statements of operations.
In connection with the Recapitalization, the Board of Directors adopted a
stock option plan (the "Stock Option Plan"), pursuant to which 395,000 shares of
common stock options were authorized for issuance. On March 27, 2000 the Board
of Directors amended the Stock Option Plan to increase the shares available by
439,970 options. On October 24, 2001 the Board of Directors again amended the
Stock Option Plan to increase the shares available by 200,000 options. The Stock
Option Plan provides for the issuance of nonqualified stock options and
incentive stock options (which are intended to satisfy the requirements of
Section 422 of the Internal Revenue Code) and stock appreciation rights. As of
December 30, 2001, no stock appreciation rights had been issued. The Board of
Directors will determine the employees who will receive awards under the Stock
Option Plan and the terms of such awards. The exercise price of a stock option
or stock appreciation right shall not be less than the fair market value of one
share of common stock on the date the stock option or stock appreciation right
is granted. The options expire ten years from the date of grant. Options issued
prior to March 26, 2000 vest over five years, options issued subsequent to that
date vest over three years.
F-30
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCKHOLDERS' DEFICIT (CONTINUED)
A summary of the status of the Company's Stock Option Plan is presented
below:
WEIGHTED-AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- ----------------
Options outstanding at December 27, 1998...... 162,740 $12.42
Granted..................................... 170,850 5.85
Forfeited................................... (20,760) 10.49
--------
Options outstanding at January 2, 2000........ 312,830 9.09
Granted..................................... 548,040 3.71
Forfeited................................... (143,744) 6.65
--------
Options outstanding at December 31, 2000...... 717,126 5.46
Granted..................................... 274,820 2.47
Forfeited................................... (189,117) 4.96
Exercised................................... (1,000) 3.88
--------
Options outstanding at December 30, 2001...... 801,829 $ 4.55
========
At December 30, 2001, December 31, 2000 and January 2, 2000, options were
exercisable on 221,748, 76,618 and 33,390 shares of stock with a weighted
average exercise price of $6.56, $10.50 and $13.23, respectively.
The following table summarizes information related to outstanding options as
of December 30, 2001:
WEIGHTED-AVERAGE
REMAINING WEIGHTED-
NUMBER OUTSTANDING AS OF CONTRACTUAL LIFE AVERAGE
RANGE OF EXERCISE PRICES DECEMBER 30, 2001 (YEARS) EXERCISE PRICE
--------------------------- ------------------------ ---------------- --------------
$ 0.00 - $2.48............. 216,220 9.4 $ 2.16
2.48 - 4.95............. 417,731 8.4 3.72
4.95 - 7.43............. 108,834 6.9 5.87
7.43 - 9.90............. 6,044 6.7 9.31
9.90 - 12.38............. 550 6.6 12.00
17.33 - 19.80............. 50,600 5.6 17.38
22.28 - 24.75............. 1,850 6.4 24.75
-------
801,829 8.3 $ 4.55
=======
The Company applies APB No. 25 and related Interpretations in accounting for
its plans. Under APB No. 25, no compensation cost has been recognized for its
Stock Option Plan. Had compensation cost for the Company's stock plans been
determined consistent with SFAS No. 123, the Company's net
F-31
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCKHOLDERS' DEFICIT (CONTINUED)
income (loss) and basic and diluted net income (loss) per share for the years
ended December 30, 2001, December 31, 2000 and January 2, 2000, would have been
the following pro forma amounts:
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
------------ ------------ ----------
PRO FORMA:
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle................... $2,747,000 $(10,971,000) $287,000
Extraordinary item, net of income tax
expense................................ 547,000 -- --
Cumulative effect of change in accounting
principle, net of income tax benefit... -- -- (319,000)
---------- ------------ --------
Net income (loss)........................ $3,294,000 $(10,971,000) $(32,000)
========== ============ ========
Basic and diluted income (loss) per
share:
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle................... $ 0.37 $ (1.48) $ 0.04
Extraordinary item, net of income tax
expense................................ 0.07 -- --
Cumulative effect of change in accounting
principle, net of income tax benefit... -- -- (0.04)
---------- ------------ --------
Net income (loss) per share.............. $ 0.44 $ (1.48) $ --
========== ============ ========
Fair value was estimated on the grant date using the Black-Scholes option
pricing model with the following assumptions:
2001 2000 1999
------------ ------------ ------------
Risk free interest rate........... 4.24%-5.26% 5.24%-6.85% 5.66%-7.09%
Expected life..................... 6 years 7 years 7 years
Expected volatility............... 85.30% 82.32% 79.14%
Dividend yield.................... 0.00% 0.00% 0.00%
Fair value........................ $1.44-$3.18 $1.98-$3.56 $3.87-$7.15
Pursuant to a stockholder rights plan (the "Stockholder Rights Plan") that
FICC adopted in connection with the Recapitalization, the Board of Directors
declared a dividend distribution of one purchase right (a "Right") for each
outstanding share of common stock. The Stockholder Rights Plan provides, in
substance, that should any person or group (other than certain management and
affiliates) acquire 15% or more of FICC's common stock, each Right, other than
Rights held by the acquiring person or group, would entitle its holder to
purchase a specified number of shares of common stock for 50% of their then
current market value. Until a 15% acquisition has occurred, the Rights may be
redeemed by FICC at any time prior to the termination of the Stockholder Rights
Plan.
F-32
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. RELATED PARTY TRANSACTIONS
On October 12, 1998, Friendly's entered into an agreement with The Ice Cream
Corporation ("TICC") which conditionally granted TICC exclusive rights to
purchase and develop Friendly's full-service restaurants in the Lancaster and
Chester counties of Pennsylvania (the "TICC Agreement"). The owners of TICC are
family members of the Chairman of the Board of Directors and Chief Executive
Officer of FICC. Pursuant to the TICC Agreement, TICC purchased at fair market
value certain assets and rights in two existing restaurants and committed to
open an additional ten restaurants by October 11, 2004 with an option to
purchase an additional three restaurants. TICC paid to Friendly's $125,000 for
development fees for certain of the additional restaurants discussed above and
$25,000 for the option to purchase two additional existing restaurants. On
March 21, 2001, TICC and Friendly's agreed to terminate their development
agreement and TICC forfeited their exclusive development rights. The $112,500 of
unearned development fees were offset against the amounts due from TICC for
product purchases.
FICC's Chairman of the Board and Chief Executive Officer is an officer of
TRC. FICC entered into subleases for certain land, buildings and equipment from
a subsidiary of TRC. For the years ended December 30, 2001, December 31, 2000
and January 2, 2000, rent expense related to the subleases was approximately
$219,000, $312,000 and $302,000, respectively. On May 11, 2001, FICC purchased
the first lease position from the master lessee for one of these properties for
$100,000 and terminated the sublease with the subsidiary of TRC for
approximately $52,000.
In 1994, TRC Realty LLC (a subsidiary of TRC) entered into a ten-year
operating lease for an aircraft for use by both the Company and TRC (which
operates restaurants using the trademark Perkins Restaurant and Bakery
("Perkins")). In 1999, this lease was cancelled and TRC Realty LLC entered into
a new ten-year operating lease for a new aircraft. The Company shares
proportionately with Perkins in reimbursing TRC Realty LLC for leasing, tax and
insurance expenses. In addition, the Company also incurs actual usage costs.
Total expense for the years ended December 30, 2001, December 31, 2000 and
January 2, 2000 was approximately $686,000, $927,000 and $568,000, respectively.
The Company purchased certain food products used in the normal course of
business from a division of TRC. For the years ended December 30, 2001,
December 31, 2000 and January 2, 2000, purchases were approximately $618,000,
$759,000 and $967,000, respectively.
In July 2000, the pension plan sold a restaurant property located in
Waldorf, Maryland to an independent third party. The Company, the occupant of
the property, bought out the remaining full term of the lease for approximately
$69,000. As a result of the sale, the pension plan realized a loss of
approximately $108,000 in fiscal 2000.
In August 1999, the pension plan sold a restaurant property located in
Randallstown, Maryland, to an independent third party. As a result of the sale,
the pension plan realized a loss of $107,500 in 1999. The Company then
contributed $107,500 to the pension plan, in settlement of its ongoing
obligations under the lease. The Company received an opinion from outside legal
counsel to the pension plan verifying that the transaction complied with the
Employee Retirement Income Security Act of 1974 because it fell within a
recognized exemption to 406(a)(1).
In June 1999, the Company sold a restaurant business (excluding the related
property which was owned by the pension plan), located in Mt. Laurel, New
Jersey, to a franchisee of Friendly's Restaurants Franchise, Inc., a subsidiary
of FICC. Under the original lease agreement between the
F-33
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. RELATED PARTY TRANSACTIONS (CONTINUED)
Company and the pension plan, the Company leased the restaurant from the pension
plan for approximately $63,000 per annum through June 2001. In conjunction with
the Company's sale of the restaurant business to the franchisee, the Company
subleased the property, with all of its rights, to the franchisee for an
aggregate annual amount of $77,000 through July 31, 2001. Under the terms of the
sublease agreement, the pension plan received rental income directly from the
franchisee. On March 30, 2001, the franchisee exercised an option to purchase
the property directly from the pension plan at fair market value of
approximately $712,000.
16. COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal proceedings arising in the ordinary
course of business which management believes, after consultation with legal
counsel, will not have a material adverse effect on the Company's consolidated
financial position or future operating results.
As of December 30, 2001, the Company has commitments to purchase
approximately $104,356,000 of raw materials, food products and supplies used in
the normal course of business that cover periods of one to 12 months. Most of
these commitments are noncancelable.
17. RELOCATION OF MANUFACTURING AND DISTRIBUTION FACILITY
On December 1, 1998, the Company announced a plan to relocate its
manufacturing and distribution operations from Troy, OH to Wilbraham, MA and
York, PA. The Company closed the Troy, OH manufacturing and distribution
facility in May 1999 and transferred the operations to Wilbraham, MA and York,
PA.
In December 1999, the Company sold the Troy, OH manufacturing facility for
cash of $2,200,000 and a seven-year, 7.75% interest-bearing $600,000 note
receivable due January 2007. The Company incurred a total loss on the sale of
the property of $1,033,000 in 1999, which is included in relocation of
manufacturing and distribution facility in the accompanying consolidated
statements of operations.
18. 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.
F-34
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SEGMENT REPORTING (CONTINUED)
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.
On May 1, 2001, foodservice decreased its ice cream pricing to all
restaurants. This resulted in decreased foodservice revenues of 3.2% for the
year ended December 30, 2001.
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.
EBITDA represents net income (loss) before (i) extraordinary item, net of
income tax effect, (ii) cumulative effect of change in accounting principle, net
of income tax effect, (iii) (provision for) benefit from income taxes,
(iv) recovery of write-down of joint venture, (v) interest expense, net,
(vi) depreciation and amortization, (vii) write-downs of property and equipment
and (viii) other non-cash items. The Company has included information concerning
EBITDA in this Form 10-K because it believes that such information is used by
certain investors as one measure of 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 YEARS ENDED
----------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
------------ ------------ ----------
(IN THOUSANDS)
Revenues:
Restaurant............................. $ 447,953 $ 508,976 $ 618,433
Foodservice............................ 234,114 238,992 245,528
Franchise.............................. 9,174 8,710 4,967
International.......................... -- -- 23
--------- --------- ---------
Total................................ $ 691,241 $ 756,678 $ 868,951
========= ========= =========
Intersegment revenues:
Restaurant............................. $ -- $ -- $ --
Foodservice............................ (129,368) (157,820) (183,107)
Franchise.............................. -- -- --
International.......................... -- -- --
--------- --------- ---------
Total................................ $(129,368) $(157,820) $(183,107)
========= ========= =========
F-35
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SEGMENT REPORTING (CONTINUED)
FOR THE YEARS ENDED
----------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
------------ ------------ ----------
(IN THOUSANDS)
External revenues:
Restaurant............................. $ 447,953 $ 508,976 $ 618,433
Foodservice............................ 104,746 81,172 62,421
Franchise.............................. 9,174 8,710 4,967
International.......................... -- -- 23
--------- --------- ---------
Total................................ $ 561,873 $ 598,858 $ 685,844
========= ========= =========
EBITDA:
Restaurant............................. $ 53,986 $ 45,731 $ 56,453
Foodservice............................ 13,496 24,600 26,894
Franchise.............................. 4,359 3,821 2,092
International.......................... -- -- (83)
Corporate.............................. (16,242) (21,854) (19,562)
Gain on property and equipment, net.... 5,892 10,895 1,038
Restructuring costs.................... (636) (12,056) (1,787)
--------- --------- ---------
Total................................ $ 60,855 $ 51,137 $ 65,045
========= ========= =========
Interest expense, net--Corporate......... $ 27,310 $ 31,053 $ 33,694
========= ========= =========
Recovery of write-down of joint venture--
Corporate.............................. $ -- $ -- $ (896)
========= ========= =========
Depreciation and amortization:
Restaurant............................. $ 18,914 $ 20,828 $ 25,901
Foodservice............................ 3,449 3,477 3,656
Franchise.............................. 259 339 567
Corporate.............................. 6,405 6,106 4,865
--------- --------- ---------
Total................................ $ 29,027 $ 30,750 $ 34,989
========= ========= =========
Other non-cash expenses:
Corporate.............................. $ (298) $ (527) $ (563)
Write-downs of property and
equipment............................ (800) (20,834) (1,913)
--------- --------- ---------
Total................................ $ (1,098) $ (21,361) $ (2,476)
========= ========= =========
F-36
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SEGMENT REPORTING (CONTINUED)
FOR THE YEARS ENDED
----------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
------------ ------------ ----------
(IN THOUSANDS)
Income (loss) before income taxes,
extraordinary item and cumulative
effect of change in accounting
principle:
Restaurant............................. $ 35,072 $ 24,903 $ 30,552
Foodservice............................ 10,047 21,123 23,238
Franchise.............................. 4,100 3,482 1,525
International.......................... -- -- 813
Corporate.............................. (50,255) (59,540) (58,684)
Gain (loss) on property and equipment,
net.................................. 5,092 (9,939) (875)
Restructuring costs.................... (636) (12,056) (1,787)
--------- --------- ---------
Total................................ $ 3,420 $ (32,027) $ (5,218)
========= ========= =========
FOR THE YEARS ENDED
---------------------------
DECEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
Capital expenditures, including assets acquired
under capital leases:
Restaurant........................................ $ 10,821 $ 18,245
Foodservice....................................... 2,090 2,667
Corporate......................................... 1,011 1,535
-------- --------
Total........................................... $ 13,922 $ 22,447
======== ========
Total assets:
Restaurant........................................ $148,475 $199,223
Foodservice....................................... 38,474 33,880
Franchise......................................... 7,076 3,745
Corporate......................................... 58,537 60,838
-------- --------
Total........................................... $252,562 $297,686
======== ========
19. CLOSING OF INTERNATIONAL OPERATIONS
Effective October 15, 1998, Friendly's International, Inc. ("FII"), a
subsidiary of FICC, 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 $2,300,000 in notes and $335,000 of equipment. On
February 25, 1999, FII received an initial payment of approximately $1,150,000
and arranged for the shipment of the equipment to the United States.
Accordingly, the Company recorded a write-down of approximately $3,486,000 as of
December 27, 1998 to eliminate the Company's remaining investment in and
advances to the joint venture. During the year ended January 2, 2000, the
Company received from its joint venture partner $827,000 of cash and $69,000 of
equipment as payment for the dissolution of the joint
F-37
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. CLOSING OF INTERNATIONAL OPERATIONS (CONTINUED)
venture partnership, which were recorded as recovery of write-down of joint
venture in the accompanying consolidated statement of operations for the year
ended January 2, 2000.
20. EXTRAORDINARY ITEM, NET OF INCOME TAXES
Extraordinary item, net represents the $4,300,000 gain on the repurchase of
Senior Notes net of (i) $2,900,000 of deferred financing costs which were
expensed as a result of the repayment of Tranche A of the term loans in
July 2001 and the repayment of the Old Credit Facility and the repurchase of
$21,300,000 of Senior Notes in December 2001, (ii) $500,000 of expenses
associated with releasing mortgages, etc. in connection with the repayment of
the Old Credit Facility and (iii) $400,000 of income taxes.
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED
--------------------------------------------------
APRIL 1, JULY 1, SEPTEMBER 30, DECEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2001 2001 2001 2001
---------------------------------------- -------- -------- ------------- ------------
2001 (a)
Revenues (b).................................... $125,719 $151,823 $151,373 $132,958
Operating income................................ 4,136 13,598 9,451 3,545
(Loss) income before extraordinary item (c)..... (1,935) 4,041 1,862 (848)
Net (loss) income............................... (1,935) 4,041 1,641 (80)
Basic and diluted (loss) income per share:
(Loss) income before extraordinary item....... $ (0.26) $ 0.55 $ 0.25 $ (0.11)
======== ======== ======== ========
Net (loss) income............................. $ (0.26) $ 0.55 $ 0.22 $ (0.01)
======== ======== ======== ========
Weighted average shares:
Basic......................................... 7,376 7,364 7,359 7,353
======== ======== ======== ========
Diluted....................................... 7,376 7,370 7,416 7,353
======== ======== ======== ========
APRIL 2, JULY 2, OCTOBER 1, DECEMBER 31,
2000 2000 2000 2000
--------- -------- ------------- -------------
2000 (a)
Revenues (b).................................... $144,089 $159,048 $161,605 $134,116
Operating (loss) income......................... (27,672) 10,853 11,265 4,580
Net (loss) income............................... (18,510) 3,005 3,246 1,453
Basic and diluted (loss) income per share:
Net (loss) income............................. $ (2.48) $ 0.40 $ 0.44 $ 0.19
======== ======== ======== ========
Weighted average shares:
Basic......................................... 7,471 7,438 7,409 7,397
======== ======== ======== ========
Diluted....................................... 7,471 7,498 7,437 7,398
======== ======== ======== ========
------------------------
(a) During the year ended December 30, 2001 the Company recorded restructuring
costs of $2,536,000 as a result of the Company's restructuring plan
announced in October 2001. During the year ended
F-38
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
December 31, 2000, the Company recorded restructuring costs of $12,056,000
and write-downs of property and equipment of $17,008,000 as a result of the
Company's restructuring plan announced in March 2000. The Company reduced
the March 2000 restructuring reserve by $1,900,000 during the year ended
December 30, 2001.
(b) In April 2001, the Emerging Issues Task Force issued EITF No. 00-25,
"Accounting for Consideration from a Vendor to a Retailer in Connection with
the Purchase or Promotion of the Vendor's Products." The Company adopted
EITF No. 00-25 on October 1, 2001 and as a result offset certain retail
selling expenses against retail revenue for all periods presented.
(c) See Note 20 for discussion of the $547,000 extraordinary item, net.
22. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
FICC's obligation related to the 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 FICC (the "Parent Company"), Friendly's Restaurants
Franchise, Inc. (the "Guarantor Subsidiary") and Friendly's
International, Inc., Restaurant Insurance Corporation, and the three new LLC
subsidiaries, Friendly's Realty I, LLC, Friendly's Realty II, LLC and Friendly's
Realty III, LLC (collectively, the "Non-guarantor Subsidiaries"). All of the
LLCs' assets are owned by the LLCs, which are separate entities with separate
creditors which will be entitled to be satisfied out of the LLCs' assets.
Separate complete financial statements and other disclosures of the Guarantor
Subsidiary as of December 30, 2001 and December 31, 2000 and for the years ended
December 30, 2001 and December 31, 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.
F-39
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 30, 2001
(IN THOUSANDS)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents......... $ 15,116 $ 104 $ 1,122 $ -- $ 16,342
Accounts receivable, net.......... 9,468 501 -- -- 9,969
Inventories....................... 12,987 -- -- -- 12,987
Deferred income taxes............. 7,448 99 -- 112 7,659
Prepaid expenses and other current
assets.......................... 8,704 1,002 3,560 (9,530) 3,736
-------- ------ ------- -------- --------
Total current assets................ 53,723 1,706 4,682 (9,418) 50,693
Deferred income taxes............... -- 350 1,327 (1,677) --
Property and equipment, net......... 117,564 -- 51,925 -- 169,489
Intangibles and deferred costs,
net............................... 18,271 -- 2,937 -- 21,208
Investments in subsidiaries......... 5,061 -- -- (5,061) --
Other assets........................ 10,258 4,863 6,229 (10,178) 11,172
-------- ------ ------- -------- --------
Total assets........................ $204,877 $6,919 $67,100 $(26,334) $252,562
======== ====== ======= ======== ========
LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY
Current liabilities:
Current maturities of long-term
obligations..................... $ 5,489 $ -- $ 930 $ (3,500) $ 2,919
Accounts payable.................. 20,505 -- -- -- 20,505
Accrued expenses.................. 43,853 1,042 7,491 (5,758) 46,628
-------- ------ ------- -------- --------
Total current liabilities........... 69,847 1,042 8,421 (9,258) 70,052
Deferred income taxes............... 12,149 -- -- (1,565) 10,584
Long-term obligations, less current
maturities........................ 190,308 -- 54,070 (5,314) 239,064
Other long-term liabilities......... 28,587 1,095 4,330 (5,136) 28,876
Stockholders' (deficit) equity...... (96,014) 4,782 279 (5,061) (96,014)
-------- ------ ------- -------- --------
Total liabilities and stockholders'
(deficit) equity.................. $204,877 $6,919 $67,100 $(26,334) $252,562
======== ====== ======= ======== ========
F-40
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 30, 2001
(IN THOUSANDS)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
Revenues............................ $554,252 $7,621 $ -- $ -- $561,873
Costs and expenses:
Cost of sales..................... 197,846 -- -- -- 197,846
Labor and benefits................ 157,312 -- -- -- 157,312
Operating expenses and write-downs
of property and equipment....... 115,906 191 525 -- 116,622
General and administrative
expenses........................ 31,679 4,633 -- -- 36,312
Restructuring expenses, net....... 636 -- -- -- 636
Depreciation and amortization..... 28,886 -- 141 -- 29,027
Gain on franchise sales of
restaurant operations and
properties........................ (4,591) -- -- -- (4,591)
Gain on sales of other property and
equipment, net.................... (2,021) -- -- -- (2,021)
Interest expense (income)........... 27,866 -- (556) -- 27,310
-------- ------ ---- ------- --------
Income (loss) before benefit from
(provision for) income taxes,
extraordinary item and equity in
net income of consolidated
subsidiaries...................... 733 2,797 (110) -- 3,420
Benefit from (provision for) income
taxes............................. 799 (1,147) 48 -- (300)
-------- ------ ---- ------- --------
Income (loss) before extraordinary
item and equity in net income of
consolidated subsidiaries......... 1,532 1,650 (62) -- 3,120
Extraordinary item, net of income
tax expense....................... 547 -- -- -- 547
-------- ------ ---- ------- --------
Income (loss) before equity in net
income of consolidated
subsidiaries...................... 2,079 1,650 (62) -- 3,667
Equity in net income of consolidated
subsidiaries...................... 1,588 -- -- (1,588) --
-------- ------ ---- ------- --------
Net income (loss)................... $ 3,667 $1,650 $(62) $(1,588) $ 3,667
======== ====== ==== ======= ========
F-41
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 30, 2001
(IN THOUSANDS)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
Net cash provided by operating
activities......................... $ 15,212 $ 71 $ 2,413 $(2,224) $ 15,472
-------- ---- ------- ------- --------
Cash flows from investing activities:
Purchases of property and
equipment........................ (13,922) -- (52,061) 52,061 (13,922)
Proceeds from sales of property and
equipment........................ 108,736 -- -- (52,061) 56,675
Investment in subsidiaries......... (3) -- -- 3 --
-------- ---- ------- ------- --------
Net cash provided by (used in)
investing activities............... 94,811 -- (52,061) 3 42,753
-------- ---- ------- ------- --------
Cash flows from financing activities:
Proceeds from borrowings........... 79,405 -- 55,000 -- 134,405
Repayments of obligations.......... (186,828) -- -- -- (186,828)
Payments related to deferred
financing costs.................. (1,107) -- (2,941) -- (4,048)
Reinsurance deposits received...... -- -- 1,280 (1,280) --
Reinsurance payments made from
deposits......................... -- -- (3,504) 3,504 --
Stock options exercised............ 4 -- -- -- 4
Contribution of capital............ -- -- 3 (3) --
-------- ---- ------- ------- --------
Net cash (used in) provided by
financing activities............... (108,526) -- 49,838 2,221 (56,467)
-------- ---- ------- ------- --------
Net increase in cash and cash
equivalents........................ 1,497 71 190 -- 1,758
Cash and cash equivalents, beginning
of year............................ 13,619 33 932 -- 14,584
-------- ---- ------- ------- --------
Cash and cash equivalents, end of
year............................... $ 15,116 $104 $ 1,122 $ -- $ 16,342
======== ==== ======= ======= ========
Supplemental disclosures:
Interest paid (received)........... $ 29,183 $ -- $ (750) $ -- $ 28,433
Income taxes (received) paid....... (422) 596 65 -- 239
Capital lease obligations
terminated....................... 170 -- -- -- 170
Note received from the sale of
property and equipment........... 4,250 -- -- -- 4,250
F-42
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. 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............... 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'
(DEFICIT) EQUITY
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' (deficit) equity...... (99,983) 3,132 368 (3,500) (99,983)
-------- ------ ------- -------- --------
Total liabilities and stockholders'
(deficit) equity.................. $301,560 $5,255 $13,782 $(22,911) $297,686
======== ====== ======= ======== ========
F-43
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
Revenues............................ $591,719 $7,139 $ -- $ -- $598,858
Costs and expenses:
Cost of sales..................... 196,181 -- -- -- 196,181
Labor and benefits................ 187,641 -- -- -- 187,641
Operating expenses and write-downs
of property and equipment....... 142,504 -- 281 -- 142,785
General and administrative
expenses........................ 36,499 4,734 -- -- 41,233
Restructuring expenses............ 12,056 -- -- -- 12,056
Depreciation and amortization..... 30,750 -- -- -- 30,750
Gain on franchise sales of
restaurant operations and
properties........................ (5,307) -- -- -- (5,307)
Gain on sales of other property and
equipment......................... (5,507) -- -- -- (5,507)
Interest expense (income)........... 31,791 -- (738) -- 31,053
-------- ------ ----- ------- --------
(Loss) income before benefit from
(provision for) income taxes and
equity in net income of
consolidated subsidiaries......... (34,889) 2,405 457 -- (32,027)
Benefit from (provision for) income
taxes............................. 22,372 (986) (165) -- 21,221
-------- ------ ----- ------- --------
(Loss) income before equity in net
income of consolidated
subsidiaries...................... (12,517) 1,419 292 -- (10,806)
Equity in net income of consolidated
subsidiaries...................... 1,711 -- -- (1,711) --
-------- ------ ----- ------- --------
Net (loss) income................... $(10,806) $1,419 $ 292 $(1,711) $(10,806)
======== ====== ===== ======= ========
F-44
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 30, 2000
(IN THOUSANDS)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
Net cash (used in) provided by
operating activities............... $ (1,538) $19 $1,087 $(2,529) $ (2,961)
-------- --- ------ ------- --------
Cash flows from investing activities:
Purchases of property and
equipment........................ (18,773) -- -- -- (18,773)
Proceeds from sales of property and
equipment........................ 43,822 -- -- -- 43,822
-------- --- ------ ------- --------
Net cash provided by investing
activities......................... 25,049 -- -- -- 25,049
-------- --- ------ ------- --------
Cash flows from financing activities:
Proceeds from borrowings........... 125,000 -- -- -- 125,000
Repayments of obligations.......... (144,566) -- -- -- (144,566)
Reinsurance deposits received...... -- -- 2,133 (2,133) --
Reinsurance payments made from
deposits......................... -- -- (4,662) 4,662 --
-------- --- ------ ------- --------
Net cash used in financing
activities......................... (19,566) -- (2,529) 2,529 (19,566)
-------- --- ------ ------- --------
Net increase (decrease) in cash and
cash equivalents................... 3,945 19 (1,442) -- 2,522
Cash and cash equivalents, beginning
of year............................ 9,674 14 2,374 -- 12,062
-------- --- ------ ------- --------
Cash and cash equivalents, end of
year............................... $ 13,619 $33 $ 932 $ -- $ 14,584
======== === ====== ======= ========
Supplemental disclosures:
Interest paid (received)........... $ 31,314 $-- $ (878) $ -- $ 30,436
Income taxes (received) paid....... (1,174) 903 327 -- 56
Capital lease obligations
incurred......................... 3,674 -- -- -- 3,674
Capital lease obligations
terminated....................... 984 -- -- -- 984
Note received from sale of property
and equipment.................... 577 -- -- -- 577
F-45
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of
Friendly Ice Cream Corporation:
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated balance sheets of Friendly Ice Cream
Corporation and subsidiaries as of December 30, 2001 and December 31, 2000, and
the related consolidated statements of operations, changes in stockholders'
deficit and cash flows for each of the three years in the period ended
December 30, 2001, included in this Form 10-K, and have issued our report
thereon dated February 11, 2002. Our audits were made for the purpose of forming
an opinion on the basic financial statements taken as a whole. The accompanying
Schedule II--Valuation and Qualifying Accounts is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. The information reflected in the schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
---------------------------------------------------------------------------
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 11, 2002
F-46
ANNUAL REPORT ON FORM 10-K
ITEM 14(D)
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ----------------------- ---------- ---------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
------------------------------------------ ---------- ---------- ---------- ---------- ---------
2001
Reserve for restructuring costs........... $5,571 $ 636 $ -- $3,151 $3,056
====== ======= ========= ====== ======
Allowance for doubtful accounts--accounts
receivable.............................. $ 413 $ 246 $ -- $ 71 $ 588
====== ======= ========= ====== ======
Allowance for doubtful accounts--notes
receivable.............................. $ 520 $ 414 $ -- $ 20 $ 914
====== ======= ========= ====== ======
2000
Reserve for restructuring costs........... $ -- $12,056 $ -- $6,485 $5,571
====== ======= ========= ====== ======
Allowance for doubtful accounts--accounts
receivable.............................. $ 191 $ 253 $ -- $ 31 $ 413
====== ======= ========= ====== ======
Allowance for doubtful accounts--notes
receivable.............................. $ 100 $ 420 $ -- $ -- $ 520
====== ======= ========= ====== ======
1999
Allowance for doubtful accounts--accounts
receivable.............................. $ 164 $ 42 $ -- $ 15 $ 191
====== ======= ========= ====== ======
Allowance for doubtful accounts--notes
receivable.............................. $ 50 $ 50 $ -- $ -- $ 100
====== ======= ========= ====== ======
Reserve for relocation of manufacturing
and distribution facility............... $ 945 $ 142 $ -- $1,087 $ --
====== ======= ========= ====== ======
F-47
EXHIBIT INDEX
3.1 Restated Articles of Organization of Friendly Ice Cream
Corporation (the "Company"). (Incorporated by reference from
Exhibit 3.1 to the Company's Registration Statement on
Form S-1, Reg. No. 333-34633).
3.2 Amended and Restated By-laws of the Company (Incorporated by
reference to Exhibit 3.2 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 27, 1998,
File No. 0-3930).
4.1 Credit Agreement among the Company, Fleet Bank, N.A and
certain other banks and financial institutions ("Credit
Agreement") dated as of December 17, 2001.**
4.2 Loan Agreement between the Company's subsidiary, Friendly's
Realty I, LLC and G.E Franchise Finance Corporation dated as
of December 17, 2001.**
4.3 Loan Agreement between the Company's subsidiary, Friendly's
Realty II, LLC and G.E Franchise Finance Corporation dated
as of December 17, 2001.**
4.4 Loan Agreement between the Company's subsidiary, Friendly's
Realty III, LLC and G.E Franchise Finance Corporation dated
as of December 17, 2001.**
4.5 Senior Note Indenture between Friendly Ice Cream
Corporation, Friendly's Restaurants Franchise, Inc. and The
Bank of New York, as Trustee (Incorporated by reference to
Exhibit 4.3 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 27, 1998, File
No. 0-3930).
4.6 Rights Agreement between the Company and The Bank of New
York, a Rights Agent (Incorporated by reference from
Exhibit 4.3 to the Company's Registration Statement on
Form S-1, Reg. No. 333-34633).
10.1 The Company's Stock Option Plan (Incorporated by reference
from Exhibit 10.1 to the Company's Registration Statement on
Form S-1, Reg. No. 333-34633).*
10.2 The Company's Restricted Stock Plan (Incorporated by
reference from Exhibit 10.2 to the Company's Registration
Statement on Form S-1, Reg. No. 333-34633).*
10.3 Purchase Agreement between Realty Income Corporation as
buyer and Company as seller dated December 13, 2001.**
10.9 Sublease between SSP Company, Inc. and the Company, as
amended, for the Chicopee, Massachusetts Distribution Center
(Incorporated by reference from Exhibit 10.9 to the
Company's Registration Statement on Form S-1, Reg.
No. 333-34633).
10.10 TRC Management Contract between the Company and The
Restaurant Company (Incorporated by reference from
Exhibit 10.10 to the Company's Registration Statement on
Form S-1, Reg. No. 333-34633).
10.11 Aircraft Reimbursement Agreement between the Company and TRC
Realty Co (Incorporated by reference to Exhibit 10.11 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 27, 1998, File No. 0-3930).
10.12 License Agreement between the Company and Hershey Foods
Corporation for 1988 Non-Friendly Marks (Incorporated by
reference from Exhibit 10.12 to the Company's Registration
Statement on Form S-1, Reg. No. 333-34633).
10.13 Agreement between Company and Gerald E. Sinsigalli executed
October 10, 2001.***
21.1 Subsidiaries of the Company (Incorporated by reference from
Exhibit 21.1 to the Company's Registration Statement on
Form S-1, Reg. No. 333-34633).
23.1 Consent of Arthur Andersen LLP.
99.1 Explanation concerning absence of current Written
Consent of Arthur Andersen LLP.
* --Management Contract or Compensatory Plan or Arrangement
** --Filed with original report
*** --Filed with Form 10-K/A Amendment No. 1