-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NpGmldfX+NTOB3iUuOpJb2KxNtxUaQ496saKgKRegH9vOz3STJxt46YoQXO8iBrr DLQSEO3wFAT29XJCpwof/w== 0001047469-99-011353.txt : 19990426 0001047469-99-011353.hdr.sgml : 19990426 ACCESSION NUMBER: 0001047469-99-011353 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981227 FILED AS OF DATE: 19990325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRIENDLY ICE CREAM CORP CENTRAL INDEX KEY: 0000039135 STANDARD INDUSTRIAL CLASSIFICATION: 5812 IRS NUMBER: 042053130 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13579 FILM NUMBER: 99572845 BUSINESS ADDRESS: STREET 1: 1855 BOSTON ROAD CITY: WILBRAHAM STATE: MA ZIP: 01095 BUSINESS PHONE: 4135432400 MAIL ADDRESS: STREET 1: 1855 BOSTON ROAD CITY: WILBRAHAM STATE: MA ZIP: 01095 10-K 1 10-K - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15() OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 27, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15() OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 0-3930 ------------------------ FRIENDLY ICE CREAM CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 5812 04-2053130 (State of (Primary Standard Industrial (I.R.S. Employer Incorporation) Classification Code Number) Identification No.)
1855 BOSTON ROAD WILBRAHAM, MASSACHUSETTS 01095 (413) 543-2400 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) 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 March 17, 1999 on the National Market tier of the Nasdaq Stock Market, Inc., was $39,685,584. 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 is 7,474,401 as of March 17, 1999. 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 27, 1998. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS ORGANIZATION Friendly's, founded in 1935, was publicly held from 1968 until January 1979, at which time it was acquired by Hershey Foods Corporation ("Hershey"). In 1988, The Restaurant Company ("TRC"), an investor group led by Donald Smith, the Company's current Chairman and Chief Executive Officer, acquired Friendly's from Hershey (the "TRC Acquisition"). In November 1997, the Company completed a public offering of 5,000,000 shares (approximately 70%) of its common stock for gross proceeds of $90 million and a public offering of $200 million of Senior Notes (collectively, the "Offerings"). Unless the context indicates otherwise: (i) references herein to "Friendly's" or the "Company" refer to Friendly Ice Cream Corporation, its predecessors and its consolidated subsidiaries; (ii) references herein to "FICC" refer to Friendly Ice Cream Corporation and not its subsidiaries; and (iii) 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. The Company's fiscal years ended December 27, 1998, December 28, 1997, December 29, 1996, December 31, 1995 and January 1, 1995 are referred to herein as 1998, 1997, 1996, 1995 and 1994, respectively. GENERAL The Company owns and operates 646 restaurants, franchises 42 full-service restaurants and 11 cafes and manufactures a complete line of packaged frozen desserts distributed through more than 5,000 supermarkets and other retail locations in 16 states. Friendly's offers its customers a unique dining experience by serving a variety of high-quality, reasonably-priced breakfast, lunch and dinner items, as well as its signature frozen desserts, in a fun and casual neighborhood setting. For the year ended December 27, 1998, Friendly's generated $678.1 million in total revenues and $63.5 million in EBITDA (as defined herein) and incurred $31.8 million of interest expense. During the same period, management estimates that over $226.2 million of total revenues were from the sale of approximately 20 million gallons of frozen desserts. Friendly'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. Breakfast items include specialty omelettes and breakfast combinations featuring eggs, pancakes and bacon or sausage. Breakfasts generally range from $2.00 to $6.00 and account for approximately 12% of average restaurant revenues. Lunch and dinner items include a line of wrap sandwiches, entree salads, soups, super-melts, specialty burgers, appetizers including quesadillas, mozzarella cheese sticks and "Fronions," and stir-fry, chicken, pot pie, tenderloin steak and seafood entrees. These lunch and dinner items generally range from $4.00 to $9.00, and these dayparts account for approximately 54% of average restaurant revenues. Entree selections are complemented by Friendly's premium frozen desserts, including the Fribble-Registered Trademark-, the Company's signature thick shake, Happy Ending-Registered Trademark- Sundaes, Candy Shoppe-Registered Trademark- Sundaes, the Wattamelon Roll-Registered Trademark- and fat-free Sorbet Smoothies. The Company's frozen desserts are an important component of the Company's snack dayparts which accounts for 34% of average restaurant revenues. Despite the Company's capital constraints, management has implemented a number of initiatives to restore and improve operational and financial efficiencies. From the date of the TRC Acquisition through 1994, the Company (i) implemented a major revitalization of its restaurants, (ii) repositioned the Friendly's concept from a sandwich and ice cream shoppe to a full-service, family-oriented restaurant with broader menu and daypart appeal, (iii) elevated customer service levels by recruiting more qualified managers and expanding the Company's training program, (iv) disposed of 144 under-performing restaurants and 1 (v) capitalized upon the Company's strong brand name recognition by initiating the sale of Friendly's unique line of packaged frozen desserts through retail locations. Beginning in 1994, the Company began implementing several growth initiatives including (i) testing and implementing a program to expand the Company's domestic distribution network by selling frozen desserts and other menu items through non-traditional locations and (ii) implementing a franchising strategy to extend profitably the Friendly's brand without the substantial capital required to build new restaurants. CAPITAL INVESTMENT PROGRAM A significant component of the Company's capital investment program is the FOCUS 2000 initiative which is designed to establish a consistent, enhanced Friendly's brand image across the Company's entire restaurant operations. The Company's capital spending strategy seeks to increase comparable restaurant revenues and restaurant cash flow through the on-going revitalization and re-imaging of existing restaurants and to increase total restaurant revenues through the addition of new restaurants. The following illustrates the key components of the Company's capital spending program. RESTAURANT RE-IMAGING. The Company completed the re-imaging of 142 restaurants in 1998 at an estimated cost of $145,000 per restaurant (not including costs related to development of the prototype). This cost typically includes an interior redecoration and a new exterior package. The Company believes that efficiencies and economics associated with remodeling a large number of restaurants will reduce the average cost of the re-imaging in 1999 and beyond. The Company expects to complete the re-imaging of approximately 96 restaurants during 1999. NEW RESTAURANT CONVERSION AND CONSTRUCTION. The Company converted one restaurant in 1998 at a cost of approximately $633,000. The Company constructed six new restaurants in 1998 at a cost of approximately $964,000 per restaurant, excluding land and pre-opening expenses. The Company expects to complete the conversion or construction of approximately ten restaurants during 1999. SEATING CAPACITY EXPANSION PROGRAM. Beginning with the TRC Acquisition through December 27, 1998, the Company has expanded seating capacity by approximately 50 seats at 30 restaurants at an average cost of $291,000 per restaurant. The Company completed the expansion of two restaurants in 1998 at an average cost of $308,000 per restaurant. This cost typically includes adding 50 seats per restaurant, relocating certain equipment, an interior redecoration and a new exterior package and increasing parking capacity where necessary. The Company expects to complete the expansion of one restaurant during 1999. INSTALLATION OF RESTAURANT AUTOMATION SYSTEMS. Beginning with the TRC Acquisition through December 27, 1998, the Company has installed touch-screen point of sale ("POS") register systems in approximately 345 Company owned restaurants and 39 franchised locations. The majority of these systems were installed at an average cost of $34,000 per restaurant, although the most recent installations average approximately $28,000. These POS register systems are designed to improve revenue realization, food cost management and labor scheduling while increasing the speed and accuracy of processing customer orders. The Company expects to install POS register systems in approximately 50 Company-owned existing restaurants during 1999 and in every new unit. FRANCHISING PROGRAM The Company has initiated a franchising strategy to expand its restaurant presence in under-penetrated markets, accelerate restaurant growth in new markets, increase marketing and distribution efficiencies and preempt competition by acquiring restaurant locations in the Company's targeted markets. With the substantial completion of the Company's restaurant revitalization program, the development and initial deployment of its two new freestanding restaurant prototypes and the successful introduction of its new dinner line, the Company believes it is in a position to maximize the value of its brand appeal to 2 prospective franchisees. The Company's wholly owned subsidiary, Friendly's Restaurants Franchise, Inc. ("FRFI") commenced operations in 1996 for the purpose of franchising various restaurant concepts. Since it began operations, FRFI has developed and now offers a franchise program for both Friendly's restaurants and Friendly's cafes. The Company generally seeks franchisees who have related business experience, capital adequacy to build-out the Friendly's concept and no operations which have directly competitive restaurant or food concepts. On July 14, 1997, the Company entered into a long-term agreement granting DavCo Restaurants, Inc. ("DavCo"), a franchisor of more than 230 Wendy's restaurants, exclusive rights to operate, manage and develop Friendly's full-service restaurants in the franchising region of Maryland, Delaware, the District of Columbia and northern Virginia (the "DavCo Agreement"). Pursuant to the DavCo Agreement, DavCo purchased certain assets and rights in 34 existing Friendly's restaurants in this franchising region, committed to open an additional 74 restaurants over the next six years and, subject to the fulfillment of certain conditions, further agreed to open 26 additional restaurants, for a total of 100 new restaurants in this franchising region over the next ten years. Friendly's receives (i) a royalty based on franchised restaurant revenues and (ii) revenues and earnings from the sale to DavCo of Friendly's frozen desserts and other products. DavCo is required to purchase from Friendly's all of the frozen desserts to be sold in these restaurants. In fiscal 1998, DavCo opened four new locations pursuant to the DavCo Agreement. The Company franchised four additional restaurants and ten cafes in fiscal 1998 to other franchisees (see Notes 14 and 15 of Notes to Consolidated Financial Statements). The Company does not have significant experience in franchising restaurants and there can be no assurance that the Company will continue to successfully locate and attract suitable franchisees or that such franchisees will have the business abilities or sufficient access to capital to open restaurants or will operate restaurants in a manner consistent with the Company's concept and standards or in compliance with franchise agreements. The success of the Company's franchising program will also be dependent upon certain other factors, certain of which are not within the control of the Company or its franchisees, including the availability of suitable sites on acceptable lease or purchase terms, permitting and regulatory compliance and general economic and business conditions. RESTAURANT CARRYOUT OPERATIONS Through dedicated carryout areas, Friendly's restaurants offer the Company's full line of frozen desserts and certain of its food menu items. Reserved parking is available at many of the Company's free-standing restaurants to facilitate quick carryout service. Approximately 15% of the Company's average freestanding restaurant revenues are derived from its carryout business with a significant portion of these sales occurring during the afternoon and evening snack periods. In addition, approximately 5% of revenues come from sales of packaged frozen desserts in display cases within its restaurants. FOODSERVICE RETAIL OPERATIONS In 1989, the Company extended its premium packaged frozen dessert line from its restaurants into retail locations. The Company offers a branded product line that includes approximately 60 half gallon varieties featuring premium ice cream shoppe flavors and unique sundae combinations, low and no fat frozen yogurt, low fat ice cream and sherbet. Specialty flavors include Royal Banana Split, Cappuccino Dream-TM- and Caramel Fudge Nut Blast-TM-, and proprietary products include the Jubilee Roll-Registered Trademark-, Wattamelon Roll-Registered Trademark- and Friendly's branded ice cream cakes and pies. The Company also licenses from Hershey the right to feature certain candy brands including Almond Joy-Registered Trademark-, Mr. Goodbar-Registered Trademark-, Reese's Pieces-Registered Trademark-, Reese's-Registered Trademark- Peanut Butter Cups and York-Registered Trademark- Peppermint Patties on packaged sundae cups and pints. The Company focuses its marketing and distribution efforts in areas where it has higher restaurant penetration and consumer awareness. During the initial expansion of its retail business in 1989 and 1990, Albany, Boston and Hartford/Springfield were primary markets of opportunity. The Company added the 3 New York and Philadelphia markets to its retail distribution efforts in 1992 and 1993. Subsequently, distribution was expanded into the Ohio, Pittsburgh, Baltimore/Washington and Richmond markets. The Company expects to continue building its retail distribution business in its current retail markets. In these markets, the Company intends to increase shelf space with existing accounts and add new accounts by (i) capitalizing on its integrated restaurant and retail consumer advertising and promotion programs, (ii) continuing new product introductions and (iii) improving trade merchandising initiatives. Additionally, the Company expects to continue to selectively enter new markets where its brand awareness is high according to market surveys. The Company has developed a broker/distributor network designed to protect product quality through proper product handling and to enhance the merchandising of the Company's frozen desserts. The Company's experienced sales force manages this network to serve specific retailer needs on a market-by-market basis. In addition, the Company's retail marketing and sales departments coordinate market development plans and key account management programs. FOODSERVICE NON-TRADITIONAL LOCATIONS In order to capitalize on both planned and impulse purchases, the Company is leveraging the Friendly's brand name and enhancing consumer awareness by introducing modified formats of the Friendly's concept into non-traditional locations. These modified formats include (i) Friendly's Cafe, a quick service concept offering frozen desserts and a limited menu, (ii) Friendly's branded ice cream shoppes offering freshly-scooped and packaged frozen desserts and (iii) Friendly's branded display cases and novelty carts with packaged single-serve frozen desserts. The first Friendly's Cafe opened in October 1997 and a total of 11 are now open. The Company supplies frozen desserts to non-traditional locations such as colleges and universities, sports facilities, amusement parks, secondary school systems and business cafeterias directly or through selected vendors pursuant to multi-year franchise or license agreements. INTERNATIONAL OPERATIONS The Company, through its Friendly's International, Inc. subsidiary, has a master license agreement with a South Korean enterprise to develop Friendly's "Great American" ice cream shoppes offering freshly-scooped and packaged frozen desserts. As of December 27, 1998, the licensee and its sublicensees were operating 11 ice cream shoppes. In 1998, the Company announced that it was discontinuing its international investments in China and the United Kingdom (see Note 18 of Notes to Consolidated Financial Statements). MARKETING The Company's marketing strategy is to continue to strengthen Friendly's brand equity and further capitalize on its strong customer awareness to profitably build revenues across all businesses. The primary advertising message promotes Friendly's unique ice cream offerings to introduce new lunch and dinner products or line extensions. Management utilizes this strategy to encourage consumer trial of new products and increase the average guest check while reinforcing Friendly's unique food-with-ice cream experience. The Company's food-with-ice cream promotions also build sales of packaged frozen desserts in its restaurants and in retail locations. The Company's media plan is designed to build awareness and increase trial among key target audiences while optimizing spending by market based on media cost efficiencies. The Company classifies markets based upon restaurant penetration and the resulting advertising and promotion costs per restaurant. The Company's 19 most highly-penetrated markets are supported with regular spot television advertisements from March through December. The Company augments its marketing efforts in these 4 markets with radio advertising to target the breakfast daypart or to increase the frequency of the promotional message. In addition, the Company supports certain of these highly-penetrated markets (Albany, Boston, Hartford/Springfield and Providence) during the peak summer season with additional television media focusing on freshly-scooped and packaged frozen desserts. In its secondary markets, the Company utilizes targeted local store marketing initiatives such as radio, direct mail and newspaper advertising. All of the Company's markets are supported with an extensive promotional coupon program. The Company believes that its integrated restaurant and retail marketing efforts provide significant support for the development of its retail business. Specifically, the retail business benefits from the awareness and trial of Friendly's product offerings generated by 34 weeks per year of food-with-ice-cream advertising and couponing efforts. The Company believes that this approach delivers a significantly higher level of consumer exposure and usage compared to the Company's packaged frozen dessert competitors which have only retail distribution. In turn, sales of the Company's products through more than 5,000 retail locations, supported by trade merchandising efforts, build incremental awareness and usage of Friendly's which management believes benefits the restaurants. Advertising and promotion expenditures were approximately $21 million for 1998. CERTAIN RISKS ASSOCIATED WITH THE FOOD SERVICE INDUSTRY Food service businesses are often affected by changes in consumer tastes, national, regional and local economic conditions, demographic trends, traffic patterns, the cost and availability of labor, purchasing power, availability of products and the type, number and location of competing restaurants. The Company could also be substantially adversely affected by publicity resulting from food quality, illness, injury or other health concerns or alleged discrimination or other operating issues stemming from one location or a limited number of locations, whether or not the Company is liable. In addition, factors such as increased cost of goods, regional weather conditions and the potential scarcity of experienced management and hourly employees may also adversely affect the foodservice industry in general and the results of operations and financial condition of the Company. MANUFACTURING The Company produces substantially all of its frozen desserts in two Company-owned manufacturing plants which employ a total of approximately 300 people. The Wilbraham, Massachusetts plant occupies approximately 41,000 square feet of manufacturing space while the Troy, Ohio plant (see Purchasing and Distribution) utilizes approximately 18,000 square feet. During 1998, the combined plants operated at an average capacity of 61.2% and produced (i) over 17.0 million gallons of ice cream, sherbets and yogurt in bulk, half-gallons and pints, (ii) 8.3 million sundae cups, (iii) 1.1 million frozen dessert rolls, pies and cakes and (iv) 1.2 million gallons of fountain syrups and toppings. The quality of the Company's products is important, both to sustain Friendly's image and to enable the Company to satisfy customer expectations. Wherever possible, the Company "engineers in" quality by installing modern processes such as computerized mix-making equipment and monitoring devices to ensure all storage tanks and rooms are kept at proper temperatures for maximum quality. PURCHASING AND DISTRIBUTION The basic raw materials for the Company's frozen desserts are dairy products and sugar. The Company's purchasing department purchases other food products, such as coffee, in large quantities. Although the Company generally does not hedge its positions in any of these commodities, it may opportunistically purchase some of these items in advance of a specific need. As a result, the Company is subject to the risk of substantial and sudden price increases, such as with the price of cream in 1998, shortages or interruptions in supply of such items, which could have a material adverse effect on the Company. 5 In conjunction with the Company's product development department, the Company's purchasing department evaluates the cost and quality of all major food items on a quarterly basis and purchases these items through numerous vendors with which it has long-term relationships. The Company contracts with vendors on an annual, semiannual, or monthly basis depending on the item and the opportunities within the marketplace. In order to promote competitive pricing and uniform vendor specifications, the Company contracts directly for such products as produce, milk and bread and other commodities and services. The Company also minimizes the cost of all restaurant capital equipment by purchasing directly from manufacturers or pooling volumes with master distributors. The Company owns two distribution centers and leases a third which allow the Company to control quality, costs and inventory from the point of purchase through restaurant delivery. The Company distributes most product lines to its restaurants, and its packaged frozen desserts to its retail customers, from warehouses in Chicopee and Wilbraham, Massachusetts and Troy, Ohio with a combined non-union workforce of approximately 200 employees. The Company's truck fleet delivers all but locally-sourced produce, milk and selected bakery products to its restaurants at least weekly, and during the highest sales periods, delivers to over 50% of Friendly's restaurants twice per week. The Chicopee, Wilbraham and Troy warehouses encompass 54,000 square feet, 109,000 square feet and 42,000 square feet, respectively. The Company believes that these distribution facilities operate at or above industry standards with respect to timeliness and accuracy of deliveries. The Company has distributed its products since its inception to protect the product integrity of its frozen desserts. The Company delivers products to its restaurants on its own fleet of tractors and trailers which display large-scale images of the Company's featured products. The entire fleet is specially built to be compatible with storage access doors, thus protecting frozen desserts from "temperature shock." Recently acquired trailers have an innovative design which provides individual temperature control for three distinct compartments. To provide additional economies to the Company, the truck fleet backhauls on over 50% of its delivery trips, bringing the Company's purchased raw materials and finished products back to the distribution centers. RELOCATION OF TROY OPERATIONS On December 1, 1998, the Company announced plans to relocate its manufacturing and distribution operations from Troy, Ohio to Wilbraham, Massachusetts and York, Pennsylvania and sell the Troy, Ohio facility. The facility in York, Pennsylvania, which will be leased by the Company, is being constructed and will be an approximately 86,000 square foot distribution and office facility. The Company plans to sell the Troy, Ohio facility after its closing in May 1999 (see Note 16 of Notes to Consolidated Financial Statements). HUMAN RESOURCES AND TRAINING The average Friendly's restaurant employs between two and four salaried team members, which may include one General Manager, one Assistant Manager, one Guest Service Supervisor and one Manager-in-Training. The General Manager is directly responsible for day-to-day operations. General Managers report to a District Manager who typically has responsibility for an average of seven restaurants. District Managers report to a Division Manager who typically has responsibility for approximately 50 restaurants. Division Managers report to a Regional Vice President who typically has responsibility for six or seven Division Managers covering approximately 325 restaurants. The average Friendly's restaurant is staffed with four to twenty employees per shift, including the salaried restaurant management. Shift staffing levels vary by sales volume level, building configuration and time of day. The average restaurant typically utilized approximately 39,000 hourly-wage labor hours in 1998 in addition to salaried management. 6 In March 1998, the Company began to test a "Friendly's University" staff training program. In 1999, this initiative will be implemented throughout the chain so that, over time, Friendly's restaurant waitpersons will receive more than 30 hours of classroom and field instruction. EMPLOYEES The total number of employees at the Company varies between 24,000 and 28,000 depending on the season of the year. As of December 27, 1998, the Company employed approximately 24,000 employees, of which approximately 23,000 were employed in Friendly's restaurants (including approximately 100 in field management), approximately 500 were employed at the Company's two manufacturing and three distribution facilities and approximately 500 were employed at the Company's corporate headquarters and other offices. None of the Company's employees is a party to a collective bargaining agreement. LICENSES AND TRADEMARKS The Company is the owner or licensee of the trademarks and service marks (the "Marks") used in its business. The Marks "Friendly-Registered Trademark-" and "Friendly's-Registered Trademark-" are owned by the Company pursuant to registrations with the U.S. Patent and Trademark office. Upon the sale of the Company by Hershey in 1988, all of the Marks used in the Company's business at that time which did not contain the word "Friendly" as a component of such Marks (the "1988 Non-Friendly Marks"), such as Fribble-Registered Trademark-, Fishamajig-Registered Trademark- and Clamboat-Registered Trademark- were licensed by Hershey to the Company. The 1988 Non-Friendly Marks license has a term of 40 years expiring on September 2, 2028. Such license included a prepaid license fee for the term of the license which is renewable at the Company's option for an additional term of 40 years and has a license renewal fee of $20.0 million. Hershey also entered into non-exclusive licenses with the Company for certain candy trademarks used by the Company in its frozen dessert sundae cups (the "Cup License") and pints (the "Pint License"). The Cup License and Pint License automatically renew for unlimited one-year terms subject to certain nonrenewal rights held by both parties. Hershey is subject to a noncompete provision in the sundae cup business for a period of two years if the Cup License is terminated by Hershey without cause, provided that the Company maintains its current level of market penetration in the sundae cup business. However, Hershey is not subject to a noncompete provision if it terminates the Pint License without cause. The Company also has a non-exclusive license agreement with Leaf, Inc. ("Leaf") for use of the Heath-Registered Trademark- Bar candy trademark. The term of the royalty-free Leaf license continues indefinitely subject to termination by Leaf upon 60 days notice. Excluding the Marks subject to the licenses with Hershey and Leaf, the Company is the owner of its Marks. COMPETITION The restaurant business is highly competitive and is affected by changes in the public's eating habits and preferences, population trends and traffic patterns, as well as by local and national economic conditions affecting consumer spending habits, many of which are beyond the Company's control. Key competitive factors in the industry are the quality and value of the food products offered, quality and speed of service, attractiveness of facilities, advertising, name brand awareness and image and restaurant location. Each of the Company's restaurants competes directly or indirectly with locally-owned restaurants as well as restaurants with national or regional images and, to a limited extent, restaurants operated by its franchisees. A number of the Company's significant competitors are larger or more diversified and have substantially greater resources than the Company. The Company's retail operations compete with national and regional manufacturers of frozen desserts, many of which have greater financial resources and more established channels of distribution than the Company. Key competitive factors in the retail food business include brand awareness, access to retail locations, price and quality. 7 GOVERNMENT REGULATION The Company is subject to various Federal, state and local laws affecting its business. Each Friendly's restaurant is subject to licensing and regulation by a number of governmental authorities, which include health, safety, sanitation, building and fire agencies in the state or municipality in which the restaurant is located. Difficulties in obtaining or failures to obtain required licenses or approvals, or the loss of such licenses and approvals once obtained, can delay, prevent the opening of, or close, a restaurant in a particular area. The Company is also subject to Federal and state environmental regulations, but these have not had a material adverse effect on the Company's operations. The Company's relationship with its current and potential franchisees is governed by the laws of the several states which regulate substantive aspects of the franchisor-franchisee relationship. Substantive state laws that regulate the franchisor-franchisee relationship presently exist or are being considered in a significant number of states, and bills will likely be introduced in Congress which would provide for Federal regulation of substantive aspects of the franchisor-franchisee relationship. These current and proposed franchise relationship laws limit, among other things, the duration and scope of non-competition provisions, the ability of a franchisor to terminate or refuse to renew a franchise and the ability of a franchisor to designate sources of supply. The Company's restaurant operations are also subject to Federal and state laws governing such matters as wages, hours, working conditions, civil rights and eligibility to work. Some states have set minimum wage requirements higher than the Federal level. In September 1997, the second phase of an increase in the minimum wage was implemented in accordance with the Federal Fair Labor Standards Act of 1996. Significant numbers of hourly personnel at the Company's restaurants are paid at rates related to the Federal minimum wage and, accordingly, increases in the minimum wage will increase labor costs at the Company's restaurants. Other governmental initiatives such as mandated health insurance, if implemented, could adversely affect the Company as well as the restaurant industry in general. The Company is also subject to the Americans with Disabilities Act of 1990, which, among other things, may require certain minor renovations to its restaurants to meet federally-mandated requirements. The cost of these renovations is not expected to be material to the Company. FORWARD LOOKING STATEMENTS Statements contained herein that are not historical facts, constitute "forward looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. All forward looking statements are subject to risks and uncertainties which could cause results to differ materially from those anticipated. These factors include the Company's highly competitive business environment, exposure to commodity prices, risks associated with the foodservice industry, the ability to retain and attract new employees, government regulations, the Company's high geographic concentration in the Northeast and its attendant weather pattern, conditions needed to meet re-imaging and new opening and franchising targets and risks associated with improved service and other initiatives. Other factors that may cause actual results to differ from the forward looking statements contained herein and that may affect the Company's prospects in general are included in the Company's other filings with the Securities and Exchange Commission. 8 ITEM 2. PROPERTIES The table below identifies the location of the 682 restaurants operating as of December 27, 1998.
FREESTANDING OTHER FRANCHISED TOTAL STATE RESTAURANTS RESTAURANTS (A) RESTAURANTS RESTAURANTS - - --------------------------------------------------------- --------------- ------------------- --------------- --------------- COMPANY-OWNED/LEASED ------------------------------------ Connecticut.............................................. 49 19 -- 68 Delaware................................................. -- -- 6 6 Florida.................................................. 13 2 -- 15 Maine.................................................... 11 -- -- 11 Maryland................................................. 3 5 22 30 Massachusetts............................................ 115 37 -- 152 Michigan................................................. 1 -- -- 1 New Hampshire............................................ 14 6 -- 20 New Jersey............................................... 47 16 -- 63 New York................................................. 131 30 -- 161 Ohio..................................................... 52 2 -- 54 Pennsylvania............................................. 51 12 2 65 Rhode Island............................................. 8 -- -- 8 Vermont.................................................. 8 2 -- 10 Virginia................................................. 10 2 6 18 --- --- --- --- Total.................................................... 513 133 36 682 --- --- --- --- --- --- --- ---
- - ------------------------ (a) Includes primarily malls and strip centers. The 545 freestanding restaurants (including 32 franchised restaurants) range in size from approximately 2,400 square feet to approximately 5,000 square feet. The 137 mall and strip center restaurants (including four franchised restaurants) range in size from approximately 2,200 square feet to approximately 3,800 square feet. Of the 646 restaurants operated by the Company at December 27, 1998, the Company owned the buildings and the land for 275 restaurants, owned the buildings and leased the land for 147 restaurants, and leased both the buildings and the land for 224 restaurants. The Company's leases generally provide for the payment of fixed monthly rentals and related occupancy costs (e.g., property taxes and insurance). Additionally, most mall and strip center leases require the payment of common area maintenance charges and incremental rent of between 3.0% and 6.0% of the restaurant's sales. In addition to the Company's restaurants, the Company owns (i) an approximately 260,000 square foot facility on 46 acres in Wilbraham, Massachusetts which houses the corporate headquarters, a manufacturing facility and a warehouse, (ii) an approximately 77,000 square foot office, manufacturing and warehouse facility on 13 acres in Troy, Ohio and (iii) an approximately 18,000 square foot restaurant construction and maintenance service facility located in Wilbraham, Massachusetts. The Company leases (i) an approximately 60,000 square foot distribution facility in Chicopee, Massachusetts, (ii) an approximately 38,000 square foot restaurant construction and maintenance support facility in Ludlow, Massachusetts and (iii) on a short-term basis, space for its division and regional offices, its training and development center and other support facilities. The Company announced on December 1, 1998 that it was relocating its manufacturing and distribution facility from Troy, Ohio to Wilbraham, Massachusetts and York, Pennsylvania. The facility in York, Pennsylvania, which will be leased by the Company, is being constructed and will be an approximately 86,000 square foot distribution and office facility. The Company plans to sell the Troy, Ohio facility after its closing in May 1999 (see Note 16 of Notes to Consolidated Financial Statements). 9 ITEM 3. LEGAL PROCEEDINGS From time to time the Company is named as a defendant in legal actions arising in the ordinary course of its business. The Company is not party to any pending legal proceedings other than routine litigation incidental to its business. The Company does not believe that the resolutions of these claims should have a material adverse effect on the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS None EXECUTIVE OFFICERS The executive officers of the Company and their respective ages and positions with the Company are as follows: DONALD N. SMITH, 58, has been Chairman and Chief Executive Officer of the Company since September 1988. Mr. Smith also served as the Company's President from September, 1988 to December, 1998. Mr. Smith has also been Chairman of the Board and Chief Executive Officer of Perkins Management Company, Inc. ("PMC"), the general partner of a limited partnership operating a family restaurant chain known as Perkins Family Restaurants, since 1986. In October, 1998, Mr. Smith also became Chief Operating Officer of PMC. Prior to joining PMC, Mr. Smith was President and Chief Executive Officer for Diversifoods, Inc. from 1983 to October 1985. From 1980 to 1983, Mr. Smith was Senior Vice President of PepsiCo., Inc. and was President of its Food Service Division. He was responsible for the operations of Pizza Hut Inc. and Taco Bell Corp., as well as North American Van lines, Lee Way Motor Freight, Inc., PepsiCo Foods International and La Petite Boulangerie. Prior to 1980, Mr. Smith was President and Chief Executive Officer of Burger King Corporation and Senior Executive Vice President and Chief Operations Officer for McDonald's Corporation. JOHN L. CUTTER, 54, has been President and Chief Operating Officer since December, 1998. Prior to joining the Company, Mr. Cutter served as Chief Operating Officer at Boston Chicken, Inc. from 1997 through October, 1998. From 1993 through 1997, he served as Chief Executive Officer and President of Boston Chicken Golden Gate, LLC, a franchisee of Boston Chicken, Inc. From 1991 through 1993, Mr. Cutter held the position of President and Chief Operating Officer for Nanco Restaurants, Inc. Prior to 1991, Mr. Cutter held the position of Group President at American Restaurant Group/SAGA. PAUL J. MCDONALD, 55, has served as the Company's Senior Executive Vice President, Chief Financial Officer, Treasurer and Assistant Clerk since February, 1999. Mr. McDonald has been employed in various capacities with the Company since 1976, including Chief Administrative Officer from February, 1996 to January, 1999, Director of Management Information Systems, Vice President/Controller, Vice President Corporate Development and Vice President, Finance and Chief Financial Officer. Mr. McDonald is a certified public accountant. GERALD E. SINSIGALLI, 59, has been President, Foodservice Division of the Company since January 1989. Mr. Sinsigalli has been employed in various capacities with the Company since 1965. Mr. Sinsigalli's duties have included District and Division Manager, Director and Vice President of Operations and Senior Vice President. DENNIS J. ROBERTS, 50, has been Senior Vice President, Restaurant and Franchise Operations of the Company since February, 1999. Mr. Roberts has been employed in various capacities with the Company since 1969, including Senior Vice President, Restaurant Operations from January, 1996 to February, 1999, Restaurant, District and Division Manager, Regional Training Manager, Director and Vice President of Restaurant Operations. 10 SCOTT D. COLWELL, 41, has been Vice President, Marketing of the Company since January 1996. Mr. Colwell has been employed in various capacities with the Company since 1982 including Director, New Business Development; Senior Director, Marketing and Sales and Senior Director, Retail Business. GARRETT J. ULRICH, 48, has been Vice President, Human Resources since September 1991. Mr. Ulrich held the position of Vice President, Human Resources for Dun & Bradstreet Information Services, North America from 1988 to 1991. From 1978 to 1988, Mr. Ulrich held various Human Resource executive and managerial positions at Pepsi Cola Company, a division of PepsiCo. AARON B. PARKER, 41, has been Associate General Counsel and Clerk of the Company since August, 1997. He served as Associate General Counsel and Assistant Clerk of the Company since 1989. He also served as the Company's Managing Director of International Business from 1994 to 1996. Mr. Parker served as Special Counsel to TRC from 1986 to 1996. Mr. Parker served as Associate General Counsel of PMC from 1986 through 1988. Prior to joining TRC and PMC, Mr. Parker was in private practice with the law firm of Wildman, Harrold, Allen, Dixon & McDonnell. ALLAN J. OKSCIN, 47, has been Corporate Controller since 1989 and has been employed in various capacities with the Company since 1977. Mr. Okscin's duties have included Assistant Controller and several managerial positions in Financial Reporting, Financial Services, and Internal Auditing. Mr. Okscin is a certified public accountant. 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock trades under the symbol FRND and is traded on the Nasdaq National Market. The following table sets forth the closing high and low sale price per share of the Company's common stock for the period from the initial public offering (November 14, 1997) to December 27, 1998: MARKET PRICE OF COMMON STOCK
1998 HIGH LOW - - ------------------------------------------------------------------------ --------- --------- First Quarter........................................................... $ 20.50 $ 11.00 Second Quarter.......................................................... 26.50 15.375 Third Quarter........................................................... 17.00 4.625 Fourth Quarter.......................................................... 10.1875 5.50 1997 HIGH LOW - - ------------------------------------------------------------------------ --------- --------- Fourth Quarter.......................................................... $ 17.375 $ 11.375
The number of shareholders of record of the Company's common stock as of March 17, 1999 was 440. The Company currently intends to retain its earnings to finance future growth and, therefore, does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. Any determination as to the payment of dividends will depend upon the future results of operations, capital requirements and financial condition of the Company and its subsidiaries and such other facts as the Board of Directors of the Company may consider, including any contractual or statutory restrictions on the Company's ability to pay dividends. The Company's credit facility and the Indenture relating to its Senior Notes each limit the Company's ability to pay dividends on its Common Stock, and the Company is currently prohibited from paying any dividends (other than stock dividends) under these provisions (See Note 7 of Notes to Consolidated Financial Statements). The Company has not paid any dividends in the last two years. ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION The following table sets forth selected consolidated historical financial information of FICC and its consolidated subsidiaries which has been derived from the Company's audited Consolidated Financial Statements for each of the five most recent fiscal years ending December 27, 1998. This information should be read in conjunction with the Consolidated Financial Statements and related Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere herein. See Note 3 of Notes to Consolidated Financial Statements for a discussion of the basis of the presentation and significant accounting policies of the consolidated historical financial information set forth below. No dividends were declared or paid for any period presented.
FISCAL YEAR (A) ---------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: Restaurant......................................... $ 595,308 $ 593,671 $ 596,675 $ 593,570 $ 589,383 Foodservice(retail and institutional).............. 78,718 70,254 53,464 55,507 41,631 Franchise.......................................... 3,769 2,375 -- -- -- International...................................... 301 1,247 668 72 -- ---------- ---------- ---------- ---------- ---------- Total revenues....................................... 678,096 667,547 650,807 649,149 631,014 ---------- ---------- ---------- ---------- ----------
12
FISCAL YEAR (A) ---------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Costs and expenses: Cost of sales...................................... 204,884 197,627 191,956 192,600 179,793 Labor and benefits................................. 211,581 208,364 209,260 214,625 211,838 Operating expenses................................. 153,822 148,966 143,163 143,854 132,010 General and administrative expenses................ 44,326 42,191 42,721 40,705 38,434 Stock compensation expense (b)..................... 722 8,407 -- -- -- Expenses associated with Recapitalization (c)...... -- 718 -- -- -- Relocation of manufacturing and distribution facility (d)..................................... 945 -- -- -- -- Non-cash write-downs (e)........................... 1,132 770 227 7,352 -- Depreciation and amortization...................... 33,449 31,692 32,979 33,343 32,069 Gain on sales of restaurant operations (f)........... (1,005) (2,283) -- -- -- ---------- ---------- ---------- ---------- ---------- Operating income..................................... 28,240 31,095 30,501 16,670 36,870 Interest expense, net (g)............................ 31,838 39,303 44,141 41,904 45,467 Equity in net loss and other write-downs associated with joint venture (h)............................. 4,828 1,530 -- -- -- ---------- ---------- ---------- ---------- ---------- Loss before benefit from (provision for) income taxes and cumulative effect of change in accounting principle.......................................... (8,426) (9,738) (13,640) (25,234) (8,597) Benefit from (provision for) income taxes............ 3,455 3,993 5,868 (33,419) 4,661 Cumulative effect of change in accounting principle, net of income tax expense(i)....................... -- 2,236 -- -- -- ---------- ---------- ---------- ---------- ---------- Net loss............................................. $ (4,971) $ (3,509) $ (7,772) $ (58,653) $ (3,936) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Basic and diluted loss per share: Loss before cumulative effect of change in accounting principle............................. $ (0.67) $ (1.86) $ (3.60) $ (52.46) $ (3.52) Cumulative effect of change in accounting principle, net of income tax expense............. -- 0.72 -- -- -- ---------- ---------- ---------- ---------- ---------- Net loss........................................... $ (0.67) $ (1.14) $ (3.60) $ (52.46) $ (3.52) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- OTHER DATA: EBITDA (j)........................................... $ 63,543 $ 72,363 $ 63,707 $ 57,365 $ 68,939 Net cash provided by operating activities............ 32,865 22,118 26,163 27,790 38,381 Net cash used in investing activities................ (48,320) (23,437) (20,308) (18,166) (28,032) Net cash provided by (used in) financing activities......................................... 11,405 (2,160) (10,997) 176 (7,899) Capital expenditures: Cash............................................... $ 51,172 $ 31,638 $ 24,217 $ 19,092 $ 29,507 Non-cash (k)....................................... 608 2,227 5,951 3,305 7,767 ---------- ---------- ---------- ---------- ---------- Total capital expenditures........................... $ 51,780 $ 33,865 $ 30,168 $ 22,397 $ 37,274 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
13
DECEMBER 27, DECEMBER 28, DECEMBER 29, DECEMBER 31, JANUARY 1, 1998 1997 1996 1995 1995 ------------ ------------ ------------ ------------ ----------- BALANCE SHEET DATA: Working capital (deficit)................. $ (30,657) $ (15,791) $ (20,700) $ (14,678) $ (35,856) Total assets.............................. $ 374,548 $ 371,871 $ 360,126 $ 370,292 $ 374,669 Total long-term debt and capital lease obligations, excluding current maturities.............................. $ 320,806 $ 310,425 $ 385,977 $ 389,144 $ 369,549 Total stockholders' equity (deficit)...... $ (90,601) $ (86,361) $ (173,156) $ (165,534) $ (106,901)
- - ------------------------ (a) All fiscal years presented include 52 weeks of operations. (b) Represents stock compensation expense arising out of the issuance of certain shares of common stock to management and the vesting of certain shares of restricted stock previously issued to management (see Note 13 of Notes to Consolidated Financial Statements). (c) Includes payroll taxes associated with the stock compensation discussed in (b) and the write-off of deferred financing costs as a result of the Recapitalization in 1997. (d) Represents estimated costs associated with the relocation of manufacturing and distribution operations from Troy, Ohio to Wilbraham, Massachusetts and York, Pennsylvania (see Note 16 of Notes to Consolidated Financial Statements). (e) Includes non-cash write-downs of approximately $220 in 1998 related to equipment write-downs as a result of the closing of the Company's United Kingdom operations and $3,346 in 1995 related to a postponed debt restructuring. All other non-cash write-downs relate to property and equipment to be disposed of in the normal course of the Company's operations (see Notes 3, 6 and 18 of Notes to Consolidated Financial Statements). (f) Represents gains recorded in connection with sales of equipment and operating rights to franchisees (see Notes 14 and 15 of Notes to Consolidated Financial Statements). (g) Interest expense is net of capitalized interest of $525, $250, $49, $62 and $176 and interest income of $278, $338, $318, $390 and $187 for 1998, 1997, 1996, 1995 and 1994, respectively. (h) Includes a $3,486 write-down in 1998 of the investment in and advances to the joint venture to net realizable value based on the Company's decision to discontinue its direct investment in the joint venture. The Company's share of the joint venture's loss in 1998 was $1,342 (see Note 18 of Notes to Consolidated Financial Statements). (i) Relates to a change in accounting principle for pensions (see Note 10 of Notes to Consolidated Financial Statements). (j) EBITDA represents consolidated net loss before (i) cumulative effect of change in accounting principle, net of income tax expense, (ii) benefit from (provision for) income taxes, (iii) equity in net loss and other write-downs associated with joint venture, (iv) interest expense, net, (v) depreciation and amortization and (vi) non-cash write-downs and all other non-cash items, plus cash distributions from unconsolidated subsidiaries. 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 from operations or other traditional indications of a company's operating performance. (k) Non-cash capital expenditures represent the cost of assets acquired through the incurrence of capital lease obligations. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE HEREIN. OVERVIEW Friendly's owns and operates 646 restaurants, franchises 42 restaurants and 11 cafes and distributes a full line of frozen desserts through more than 5,000 supermarkets and other retail locations in 16 states. The Company was publicly held from 1968 until January 1979, at which time it was acquired by Hershey Foods Corporation ("Hershey"). Under Hershey's ownership, the number of Company restaurants increased from 601 to 849. Hershey subsequently sold the Company in September 1988 to The Restaurant Company ("TRC") in a highly-leveraged transaction (the "TRC Acquisition"). Beginning in 1989, the new management focused on improving operating performance through revitalizing and renovating restaurants, upgrading and expanding the menu and improving management hiring, training, development and retention. Also in 1989, the Company introduced its signature frozen desserts into retail locations in the Northeast. Since the beginning of 1989, 33 new restaurants have been opened while 199 under-performing restaurants have been closed. The high leverage associated with the TRC Acquisition has severely impacted the liquidity and profitability of the Company. As of December 27, 1998, the Company had a stockholders' deficit of $90.6 million. Cumulative interest expense of $421.8 million since the TRC Acquisition has significantly contributed to the deficit. The Company's net loss in 1998 of $5.0 million included $31.8 million of interest expense. The degree to which the Company is leveraged could have important consequences, including the following: (i) potential impairment of the Company's ability to obtain additional financing in the future; (ii) because borrowings under the Company's credit facility in part bear interest at floating rates, the Company could be adversely affected by any increase in prevailing rates; (iii) the Company is more leveraged than certain of its principal competitors, which may place the Company at a competitive disadvantage; and (iv) the Company's substantial leverage may limit its ability to respond to changing business and economic conditions and make it more vulnerable to a downturn in general economic conditions. The Company's revenue, EBITDA and operating income have improved significantly since the TRC Acquisition. Despite the closing of 166 restaurants (net of restaurants opened) since the beginning of 1989, restaurant revenues have increased 6.8% from $557.3 million in 1989 to $595.3 million in 1998, while average revenue per restaurant has increased 38.2% from $665,000 to $919,000 during the same period. Foodservice operations manufactures frozen dessert products and distributes such manufactured products and purchased finished goods to the Company's restaurants and franchised operations. Additionally, it sells frozen dessert products to distributors and retail and institutional locations. Foodservice (retail and institutional), franchise and international revenues have also increased from $1.4 million in 1989 to $82.8 million in 1998. In addition, EBITDA has increased 34% from $47.4 million in 1989 to $63.5 million in 1998, while operating income has increased from $4.1 million to $28.2 million over the same period. As a result of the positive impact of the Company's revitalization program, the closing of under-performing restaurants, the growth of foodservice and other businesses and the commencement in July 1997 of the Company's franchising program, period-to-period comparisons may not be meaningful. Despite these improvements in operating performance, and primarily as a result of its high leverage and interest expense, the Company has reported net losses of $5.0 million, $3.5 million, $7.8 million, $58.7 million and $3.9 million for 1998, 1997, 1996, 1995 and 1994, respectively. The Company's revenues are derived primarily from the operation of full-service restaurants, the distribution and sale of frozen desserts through retail and institutional locations and its newly created franchising initiative. 15 RESULTS OF OPERATIONS The operating results of the Company expressed as a percentage of total revenues are set forth below:
FISCAL YEAR ------------------------------- 1998 1997 1996 --------- --------- --------- Revenues: Restaurant........................................................................... 87.8% 88.9% 91.7% Foodservice (retail and institutional)............................................... 11.6 10.5 8.2 Franchise............................................................................ 0.6 0.4 -- International........................................................................ -- 0.2 0.1 --------- --------- --------- Total revenues......................................................................... 100.0 100.0 100.0 Costs and expenses: Cost of sales........................................................................ 30.2 29.6 29.5 Labor and benefits................................................................... 31.2 31.2 32.2 Operating expenses................................................................... 22.7 22.3 22.0 General and administrative expenses.................................................. 6.5 6.3 6.5 Stock compensation expense........................................................... 0.1 1.3 -- Expenses associated with Recapitalization............................................ -- 0.1 -- Relocation of manufacturing and distribution facility................................ 0.1 -- -- Write-downs of property and equipment................................................ 0.2 0.1 -- Depreciation and amortization........................................................ 4.9 4.8 5.1 Gain on sales of restaurant operations................................................. (0.1) (0.3) -- --------- --------- --------- Operating income....................................................................... 4.2 4.6 4.7 Interest expense, net.................................................................. 4.7 5.9 6.8 Equity in net loss and other write-downs associated with joint venture................. 0.7 0.2 -- --------- --------- --------- Loss before benefit from income taxes and cumulative effect of change in accounting principle............................................................................ (1.2) (1.5) (2.1) Benefit from income taxes.............................................................. 0.5 0.6 0.9 Cumulative effect of change in accounting principle, net of income tax expense......... -- 0.4 -- --------- --------- --------- Net loss............................................................................... (0.7)% (0.5)% (1.2)% --------- --------- --------- --------- --------- ---------
1998 COMPARED TO 1997 REVENUES: Total revenues increased $10.6 million, or 1.6%, to $678.1 million in 1998 from $667.5 million in 1997. Restaurant revenues increased $1.6 million, or 0.3%, to $595.3 million in 1998 from $593.7 million in 1997. Comparable restaurant revenues increased 3.3%. The increase in restaurant revenues was due to the introduction of higher-priced lunch and dinner entrees, selected menu price increases, a shift in sales mix to higher-priced items, a milder winter in the 1998 period which allowed for favorable traffic comparisons and the re-imaging of 142 restaurants under the Company's Focus 2000 program. The increase in restaurant revenues was partially offset by the closing of 21 underperforming restaurants. There were seven new restaurants opened in 1998. In addition, the increase was partially offset by the sale of 36 restaurants to franchisees, which resulted in a $17.2 million reduction in restaurant revenues. Restaurant revenues were also reduced by $1.9 million due to the close-down days associated with the construction of the Company's re-imaging project. Foodservice (retail and institutional) revenues increased by $8.4 million, or 11.9%, to $78.7 million in 1998 from $70.3 million in 1997. The increase was primarily due to an increase in retail sales in existing markets. International revenues decreased $0.9 million to $0.3 million in 1998 from $1.2 million in 1997. Franchise revenues increased $1.4 million or 58% to $3.8 million in 1998 16 from $2.4 million in 1997. The increase is primarily the result of an increase in the number of franchised units and initial fees associated with 1998 franchise transactions (see Notes 14 and 15 of Notes to Consolidated Financial Statements). COST OF SALES: Cost of sales increased $7.3 million, or 3.7%, to $204.9 million in 1998 from $197.6 million in 1997. Cost of sales as a percentage of total revenues increased to 30.2% in 1998 from 29.6% in 1997. Results were significantly impacted by an unprecedented increase in the cost of dairy raw materials, specifically fresh cream. The total impact to the Company due to the cost of dairy raw materials was an increase in cost of sales of approximately $6.9 million. To compensate for this increase, the Company increased prices on certain packaged ice cream products, modified promotional strategies and currently is continuing to evaluate ways to manage dairy cost pressures over the long term. The higher food cost as a percentage of total revenue was also due to the increases in non-restaurant sales, which carry a higher food cost compared to restaurant sales. In addition, 1998 included $0.2 million of inventory write-downs associated with the Company's United Kingdom operations. LABOR AND BENEFITS: Labor and benefits increased $3.2 million, or 1.5%, to $211.6 million in 1998 from $208.4 million in 1997. Labor and benefits as a percentage of total revenues was 31.2% for the years ended December 27, 1998 and December 28, 1997. Although labor expenses increased, they remained at the same percentage of total revenues primarily due to an increase in foodservice (retail and institutional) revenues as a percent of total revenues as these revenues have no associated labor and benefits cost and lower workers' compensation insurance and pension costs. The higher labor costs, as a percentage of restaurant revenues, are a result of the Company's emphasis on improving guest service by increasing labor at the restaurant level as a prelude to a major 1999 service initiative, which is anticipated to result in increased labor costs. OPERATING EXPENSES: Operating expenses increased $4.8 million, or 3.2%, to $153.8 million in 1998 from $149.0 million in 1997. Operating expenses as a percentage of total revenues increased to 22.7% in 1998 from 22.3% in 1997. This increase was primarily due to higher foodservice retail selling expenses, which resulted in higher foodservice retail sales. GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses increased $2.1 million, or 5.0%, to $44.3 million in 1998 from $42.2 million in 1997. General and administrative expenses as a percentage of total revenues increased to 6.5% in 1998 from 6.3% in 1997. The increase was primarily due to Year 2000 training costs, higher relocation expenses and fringe benefit expenses. The increases were partially offset by lower incentive compensation costs and reduced management fees paid to TRC as a result of the deconsolidation (see Note 9 of Notes to Consolidated Financial Statements). EBITDA: As a result of the above, EBITDA decreased $8.9 million, or 12.2%, to $63.5 million in 1998 from $72.4 million in 1997. EBITDA as a percentage of total revenues decreased to 9.4% in 1998 from 10.8% in 1997. 17 STOCK COMPENSATION EXPENSE: Stock compensation expense represents stock compensation arising out of the issuance of certain shares of common stock to management and the vesting of certain shares of restricted stock issued to management (see Note 13 of Notes to Consolidated Financial Statements). RELOCATION OF MANUFACTURING AND DISTRIBUTION FACILITY: Relocation of manufacturing and distribution facility expense relates to costs expected to be paid in connection with the relocation of manufacturing and distribution operations from Troy, Ohio to Wilbraham, Massachusetts and York, Pennsylvania (see Note 16 of Notes to Consolidated Financial Statements). EXPENSES ASSOCIATED WITH RECAPITALIZATION: In 1997, expenses associated with Recapitalization included payroll taxes associated with stock compensation and the write-off of deferred financing costs related to the Company's previous credit facility (see Note 5 of Notes to Consolidated Financial Statements). WRITE-DOWNS OF PROPERTY AND EQUIPMENT: Write-downs of property and equipment increased $0.3 million to $1.1 million in 1998 from $0.8 million in 1997. The increase is primarily the result of $0.2 million of United Kingdom equipment write-downs in 1998. DEPRECIATION AND AMORTIZATION: Depreciation and amortization increased $1.7 million, or 5.4%, to $33.4 million in 1998 from $31.7 million in 1997. Depreciation and amortization as a percentage of total revenues increased to 4.9% in 1998 from 4.8% in 1997. The increase was attributable to the Company's re-imaging projects. There were 142 units which were re-imaged in the year ended December 27, 1998 in addition to the full year depreciation impact for the 43 units which were re-imaged in the year ended December 28, 1997. Offsetting these increases was the net reduction in total restaurants of 14 units from December 28, 1997. GAIN ON SALES OF RESTAURANT OPERATIONS: Gain on sales of restaurant operations decreased $1.3 million, or 57%, to $1.0 million in 1998 from $2.3 million in 1997. The decrease was due to the gain recognized in 1998 from the sale of equipment and operating rights for two locations compared to the gain recognized in 1997 from the sale of equipment and operating rights for 34 locations (see Notes 14 and 15 of Notes to Consolidated Financial Statements). INTEREST EXPENSE, NET: Interest expense, net of capitalized interest and interest income, decreased by $7.5 million, or 19.1%, to $31.8 million in 1998 from $39.3 million in 1997. The decrease in interest expense was due to the reduction of debt, including capital lease obligations, and interest rates associated with the Company's Recapitalization in November 1997 (see Note 7 of Notes to Consolidated Financial Statements). EQUITY IN NET LOSS AND OTHER WRITE-DOWNS ASSOCIATED WITH JOINT VENTURE: The equity in net loss and other write-downs associated with the China joint venture increased $3.3 million to $4.8 million in 1998 from $1.5 million in 1997. The increase was primarily the result of the $3.5 million write-off of the investment in and advances to the joint venture based on the Company's decision to discontinue its direct investment in the joint venture. The Company's share of the joint venture's loss in 1998 was $1.3 million (see Note 18 of Notes to Consolidated Financial Statements). 18 BENEFIT FROM INCOME TAXES: The benefit from income taxes was $3.5 million, or 41%, in 1998 compared to $4.0 million, or 41%, in 1997 (see Note 9 of Notes to Consolidated Financial Statements). CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET: In 1997, the Company revised the method used in determining the return-on-asset component of annual pension expense as described in Note 10 of Notes to Consolidated Financial Statements. The cumulative effect of this change was $2.2 million, net of income tax expense of $1.6 million. NET LOSS: Net loss was $5.0 million in 1998 compared to a net loss of $3.5 million in 1997 for the reasons discussed above. 1997 COMPARED TO 1996 REVENUES: Total revenues increased $16.7 million, or 2.6%, to $667.5 million in 1997 from $650.8 million in 1996. Restaurant revenues decreased $3.0 million, or 0.5%, to $593.7 million in 1997 from $596.7 million in 1996. Comparable restaurant revenues increased 2.9%. The increase in comparable restaurant revenues was due to the introduction of higher-priced lunch and dinner entrees, selected menu price increases, a shift in sales mix to higher-priced items, the re-imaging of 43 restaurants under the Company's Focus 2000 program, the revitalization of 12 restaurants, building expansions at seven restaurants and a milder winter in the 1997 period, which allowed for favorable traffic comparisons. The increase was partially offset by the sale of 34 restaurants to a franchisee, which resulted in a $14.5 million reduction in restaurant revenues, and the closing of 15 under-performing restaurants. Foodservice (retail and institutional) and international revenues increased by $17.4 million, or 32.2%, to $71.5 million in 1997 from $54.1 million in 1996. The increase was primarily due to a more effective sales promotion program. Franchise revenues were $2.4 million in 1997 compared to none in 1996. The increase is a result of the consummation of a franchise agreement on July 14, 1997 (see Note 15 of Notes to Consolidated Financial Statements). COST OF SALES: Cost of sales increased $5.6 million, or 2.9%, to $197.6 million in 1997 from $192.0 million in 1996. Cost of sales as a percentage of total revenues increased to 29.6% in 1997 from 29.5% in 1996. The increase was due to an increase in food costs at the foodservice level. The increase was partially offset by a 0.4% reduction in food costs at the restaurant level as a result of reduced promotional discounts. LABOR AND BENEFITS: Labor and benefits decreased $0.9 million, or 0.4%, to $208.4 million in 1997 from $209.3 million in 1996. Labor and benefits as a percentage of total revenues decreased to 31.2% in 1997 from 32.2% in 1996. The decrease was due to an increase in foodservice's retail and institutional and other revenues as a percentage of total revenues as these revenues have no associated labor and benefits cost and lower workers' compensation insurance and pension costs. OPERATING EXPENSES: Operating expenses increased $5.8 million, or 4.1%, to $149.0 million in 1997 from $143.2 million in 1996. Operating expenses as a percentage of total revenues increased to 22.3% in 1997 from 22.0% in 1996. The increase was due to higher advertising expenditures in 1997 partially offset by reduced costs for snow removal and the allocation of fixed costs over higher total revenues in 1997. 19 GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses decreased $0.5 million, or 1.2%, to $42.2 million in 1997 from $42.7 million in 1996. General and administrative expenses as a percentage of total revenues decreased to 6.3% in 1997 from 6.5% in 1996. This decrease was due to reductions in pension costs and the elimination of field management positions associated with the closing of 15 restaurants since the end of 1996. EBITDA: As a result of the above, EBITDA increased $8.7 million, or 13.7%, to $72.4 million in 1997 from $63.7 million in 1996. EBITDA as a percentage of total revenues increased to 10.8% in 1997 from 9.8% in 1996. STOCK COMPENSATION EXPENSE: Stock compensation expense represents stock compensation arising out of the issuance of certain shares of common stock to management and the vesting of certain shares of restricted stock issued to management (see Note 13 of Notes to Consolidated Financial Statements). EXPENSES ASSOCIATED WITH RECAPITALIZATION: Expenses associated with Recapitalization included payroll taxes associated with the stock compensation discussed above and the write-off of deferred financing costs related to the Company's previous credit facility (see Note 5 of Notes to Consolidated Financial Statements). WRITE-DOWNS OF PROPERTY AND EQUIPMENT: Write-downs of property and equipment increased $0.6 million to $0.8 million in 1997 from $0.2 million in 1996. DEPRECIATION AND AMORTIZATION: Depreciation and amortization decreased $1.3 million, or 3.9%, to $31.7 million in 1997 from $33.0 million in 1996. Depreciation and amortization as a percentage of total revenues decreased to 4.8% in 1997 from 5.1% in 1996. The decrease was due to the closing of 15 restaurants since the end of 1996. GAIN ON SALE OF RESTAURANT OPERATIONS: Gain on sale of restaurant operations represents the income related to the sale of the equipment and operating rights for 34 existing locations to a franchisee (see Note 15 of Notes to Consolidated Financial Statements). INTEREST EXPENSE, NET: Interest expense, net of capitalized interest and interest income, decreased by $4.8 million, or 10.9%, to $39.3 million in 1997 from $44.1 million in 1996. The decrease in interest expense was due to the write-off of interest no longer payable under the Company's previous credit facility as well as a reduction in interest expense on capital lease obligations as a result of lower amounts outstanding in 1997 (see Note 7 of Notes to Consolidated Financial Statements). EQUITY IN NET LOSS AND OTHER WRITE-DOWNS ASSOCIATED WITH JOINT VENTURE: The equity in net loss and other write-downs associated with joint venture of $1.5 million in 1997 represents the Company's 50% share of the China joint venture's net loss for such period. Sales for the joint venture were minimal during the 1997 period. 20 BENEFIT FROM INCOME TAXES: The benefit from income taxes was $4.0 million, or 41%, in 1997 compared to a benefit of $5.9 million, or 43%, in 1996 (see Note 9 of Notes to Consolidated Financial Statements). CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET: In 1997, the Company revised the method used in determining the return-on-asset component of annual pension expense as described in Note 10 of Notes to Consolidated Financial Statements. The cumulative effect of this change was $2.2 million, net of income tax expense of $1.6 million. NET LOSS: Net loss was $3.5 million in 1997 compared to a net loss of $7.8 million in 1996 for the reasons discussed above. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity and capital resources are cash generated from operations and borrowings under its revolving credit facility. Net cash provided by operating activities was $32.9 million in 1998, $22.1 million in 1997 and $26.2 million in 1996. Accounts payable increased approximately $2.5 million from December 28, 1997 to December 27, 1998. The increase was primarily due to the timing of payments made between the years ended December 27, 1998 and December 28, 1997. Accrued expenses and other long-term liabilities decreased $3.1 million from December 28, 1997 to December 27, 1998, of which approximately $1.9 million was due to expenses paid in the early part of 1998 related to the Company's Recapitalization. In addition, the Company's pension obligation was reduced by $1.6 million from December 28, 1997 and there was a decrease in accrued interest on the Senior Notes from December 28, 1997 to December 27, 1998 of $0.8 million related to the timing of when payments were made in 1997 versus 1998. Offsetting these decreases was an increase of approximately $0.9 million related to store construction and maintenance costs at December 27, 1998 over December 28, 1997. Available borrowings under the revolving credit facility were $30.0 million as of December 27, 1998. Additional sources of liquidity consist of capital and operating leases for financing leased restaurant locations (in malls and shopping centers and land or building leases), restaurant equipment, manufacturing equipment, distribution vehicles and computer equipment. Additionally, sales of under-performing existing restaurant properties and other assets (to the extent of the Company's and its subsidiaries' debt instruments, if any, permit) are sources of cash. The amounts of debt financing that the Company will be able to incur under capital leases and for property and casualty insurance financing and the amount of asset sales are limited by the terms of its credit facility and Senior Notes (see Note 7 of Notes to Consolidated Financial Statements). The Company requires capital principally to maintain existing restaurant and plant facilities, to continue to renovate and re-image existing restaurants, to convert restaurants, to construct new restaurants and for general corporate purposes. Since the TRC Acquisition and through December 27, 1998, the Company has spent $339.1 million on capital expenditures, including capitalized leases, of which $108.1 million was for the renovation of restaurants under its revitalization and re-imaging programs. Net cash used in investing activities was $48.3 million in 1998, $23.4 million in 1997 and $20.3 million in 1996. Capital expenditures for restaurant operations, including capitalized leases, were approximately $43.7 million in 1998, $28.9 million in 1997 and $22.7 million in 1996. Capital expenditures were offset by proceeds from the sale of property and equipment of $2.9 million, $5.0 million and $8.4 million in 1998, 1997 and 1996, respectively. The Company also uses capital to repay borrowings when cash is sufficient to allow for net repayments. Net cash provided by financing activities was $11.4 million in 1998. Net cash used in financing 21 activities to repay borrowings was $14.6 million in 1997 excluding the effect of the Recapitalization, which resulted in proceeds of $200 million from the issuance of Senior Notes, $90 million from term loans and $90 million from the Common Stock Offering. These proceeds were used to pay the balances outstanding under the previous credit facility, certain capital lease obligations and fees and expenses related to the Recapitalization. Net cash used in financing activities was $11.0 million in 1996. The Company had a working capital deficit of $30.7 million as of December 27, 1998. The Company is able to operate with a substantial working capital deficit because: (i) restaurant operations are conducted primarily on a cash (and cash equivalent) basis with a low level of accounts receivable; (ii) rapid turnover allows a limited investment in inventories; and (iii) cash from sales is usually received before related accounts for food, supplies and payroll become due. The $200 million Senior Notes issued in connection with the Company's November 1997 Recapitalization are unsecured, senior obligations of FICC, guaranteed on an unsecured, senior basis by FICC's Friendly's Restaurant 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. The 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%. The redemption price is based on the redemption date. Prior to December 1, 2000, FICC may redeem up to $70 million of the Senior Notes at 110.50% with the proceeds of one or more equity offerings, as defined. The Company entered into the New Credit Facility in November 1997 in connection with its Recapitalization. The New Credit Facility includes $90 million in term loans (the "Term Loans"), a $55 million revolving credit facility (the "Revolving Credit Facility") and a $15 million letter of credit facility (the "Letter of Credit Facility"). The New Credit Facility is collateralized by substantially all of FICC's assets and by a pledge of FICC's shares of certain of its subsidiaries' stock. Effective December 27, 1998, the New Credit Facility was amended. In connection with this amendment, certain covenants were changed and interest rates on borrowings were increased. The per annum interest rates on drawings under the Revolving Credit Facility increased 0.25% and 0.50% for Eurodollar and ABR loans, respectively. The per annum interest rates on Tranches A, B and C of Eurodollar Term Loans increased 0.25% and the per annum interest rates on ABR Term Loans increased 0.50%, 0.25% and 0.25% for Tranches A, B and C, respectively. The per annum interest rate on amounts issued but undrawn under the Letter of Credit Facility increased 0.25% (see Note 7 of Notes to Consolidated Financial Statements). References herein to the New Credit Facility shall mean as amended on December 27, 1998. Annual principal payments due under the Term Loans will total $4.0 million, $9.1 million, $10.8 million, $12.6 million, $16.0 million, $17.4 million and $20.1 million in 1999 through 2005, respectively. In addition to the scheduled amortization, the Term Loans will be permanently reduced in certain circumstances (see Note 7 of Notes to Consolidated Financial Statements). The Revolving Credit Facility matures on November 15, 2002. The New Credit Facility imposes significant operating and financial restrictions on the Company's ability to, among other things, incur indebtedness, create liens, sell assets, engage in mergers or consolidations, pay dividends and engage in certain transactions with affiliates. The New Credit Facility limits the amount which the Company may spend on capital expenditures and requires the Company to comply with certain financial covenants (see Note 7 of Notes to Consolidated Financial Statements). The Company anticipates requiring capital in the future principally to maintain existing restaurant and plant facilities, to continue to renovate and re-image existing restaurants, to convert restaurants and to construct new restaurants. Capital expenditures for 1999 are anticipated to be $43.0 million in the aggregate, of which $34.2 million will be spent on restaurant operations. The Company's actual 1999 capital expenditures may vary from the estimated amounts set forth herein. 22 In addition, the Company may need capital in connection with commitments to purchase approximately $86.7 million of raw materials, food products and supplies used in the normal course of business and its self-insurance through retentions or deductibles of the majority of its workers' compensation, automobile, general liability and group health insurance programs. The Company's self-insurance obligations may exceed its reserves (see Notes 12 and 15 of Notes to Consolidated Financial Statements). The Company believes that the combination of the funds anticipated to be generated from operating activities and borrowing availability under the New Credit Facility will be sufficient to meet the Company's anticipated operating and capital requirements for the foreseeable future. IMPACT OF YEAR 2000 The Year 2000 Issue is the result of computer programs historically being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal day-to-day operations. The Company has developed a comprehensive plan to address the Year 2000 Issue. The plan addresses three main phases: (a) information systems; (b) embedded chips; and (c) supply chain readiness (including customers as well as inventory and non-inventory suppliers). To oversee the process, the Company has established a Steering Committee comprised of executives and chaired by the Company's Senior Executive Vice President, Chief Financial Officer and Treasurer. The Committee reports regularly to the Board of Directors and the Audit Committee. The Company retained the services of a third party consultant with Year 2000 expertise to evaluate the Company's Year 2000 plan and make recommendations. As of December 27, 1998, the Company is vigorously remediating software and hardware deficiencies caused by the Year 2000 Issue and is at various stages of completion. Major business systems are currently being addressed and in some cases are already complete, as in the case of the Company's financial reporting, accounts payable and manufacturing and distribution systems. Human resource systems are currently being remediated and are on schedule to be completed by the latter part of 1999. The Company will perform Year 2000 integrated testing for system interoperability in the second and third quarters of 1999. The Company continues to believe that with modifications to existing software and conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications or conversions are not made, or are not completed timely on the remaining critical business systems, the Year 2000 Issue could have a material impact on the operations of the Company. Based on the work completed to date, the Company continues to anticipate that remediation will be substantially completed prior to December 1999. Substantial progress has been made in the certification of restaurant systems and hardware. The Company has completed an inventory of restaurant hardware, and various remediation strategies have been identified and successfully tested for all classes of equipment. A detailed plan for retrofits has been completed. The retrofits should essentially be complete by June 1999. Software for non-compliant point of sale systems has been successfully remediated and tested. Revised point of sale software should be in all restaurants in March 1999. Other key restaurant software applications have also been certified. The remaining software applications are not expected to pose major problems and will be addressed in the second quarter of 1999. However, further testing of all applications will continue throughout the year. Embedded chip technology poses the most difficult challenge. The Company's focus has been directed at the manufacturing and distribution operations. As of December 27, 1998, all critical manufacturing functions have been evaluated and questionable equipment hardware is continually remediated in order to be compliant. The issues that currently remain open are non-critical in nature and should not impair the 23 Company's ability to conduct business. The Company continues to monitor its communications environment both internally and externally and will react as developments occur. The Company continues to take vigorous steps to monitor Year 2000 supply chain readiness by evaluating written assurances from over 325 business-critical suppliers. As of December 27, 1998, the Company is aggressively evaluating a small number of suppliers that the Company believes may not be compliant by December 1999. The Company also continues to identify alternate sources wherever appropriate. If any of the Company's suppliers or customers do not, or if the Company itself does not, successfully deal with the Year 2000 Issue, the Company could experience delays in receiving or sending goods that would increase its costs and that could cause the Company to lose business and even customers and could subject the Company to claims for damages. Problems with the Year 2000 Issue could also result in delays in the Company invoicing its customers or in the Company receiving payments from them that would affect the Company's liquidity. Problems with the Year 2000 Issue could affect the activities of the Company's customers to the point that their demand for the Company's products is reduced. The severity of these possible problems would depend on the nature of the problem and how quickly it could be corrected or an alternative implemented, which is unknown at this time. In the extreme, such problems could bring the Company to a standstill. As the Company enters into 1999, it will continue to evaluate the business environment and will develop contingency plans for systems and resources in order to conduct its normal day-to-day business operations. As previously noted, some risks of the Year 2000 Issue are beyond the control of the Company, its suppliers and customers. For example, no preparations or contingency plan will protect the Company from a down-turn in economic activity caused by the possible ripple effect throughout the entire economy that could be caused by problems of others with the Year 2000 Issue. The Company's total Year 2000 project cost includes the estimated costs and time associated with the impact of third party Year 2000 Issues based on presently available information. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and would not have an adverse effect on the Company's systems. The Company will utilize both internal and external resources to reprogram, or replace, and test the software for the system improvement and Year 2000 modifications. The total cost of the system improvement and the Year 2000 project is being funded through operating cash flows. Of the total project cost, approximately $4.5 million is attributable to the purchase of new software and hardware which will be capitalized. The remaining $1.3 million, which will be expensed as incurred, is not expected to have a material effect on the results of operations. To date, the Company has incurred approximately $3.1 million ($0.6 million expensed and $2.5 million capitalized for new systems) related to system improvements and the Year 2000 project. The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. NET OPERATING LOSS CARRYFORWARDS As of December 27, 1998, the Company has a Federal net operating loss ("NOL") carryforward of $40.6 million. Because of a change of ownership of the Company under Section 382 of the Internal 24 Revenue Code on March 26, 1996 (see Note 9 of Notes to Consolidated Financial Statements), $28.0 million of the NOL carryforward can be used only to offset current or future taxable income to the extent that any additional net unrealized built-in gains which existed at March 26, 1996 are recognized by March 26, 2001. The Common Stock Offering in November 1997 resulted in the Company having another change of ownership under Section 382 of the Internal Revenue Code. Accordingly, in tax years ending after the Common Stock Offering, the Company is limited in how much of its NOLs it can utilize. The amount of NOL's which may be used each year prior to any built-in gains being triggered is approximately $2.4 million. The NOLs expire, if unused, between 2001 and 2018. In addition, the NOL carryforwards are subject to adjustment upon review by the Internal Revenue Service (see Note 9 of Notes to Consolidated Financial Statements). INFLATION The inflationary factors which have historically affected the Company's results of operations include increases in the costs of cream, sweeteners, purchased food, labor and other operating expenses. Approximately 16% of wages paid in the Company's restaurants are impacted by changes in the Federal or state minimum hourly wage rate. Accordingly, changes in the Federal or states minimum hourly wage rate directly affect the Company's labor cost. The Company is able to minimize the impact of inflation on occupancy costs by owning the underlying real estate for approximately 43% of its restaurants. The Company and the restaurant industry typically attempt to offset the effect of inflation, at least in part, through periodic menu price increases and various cost reduction programs. However, no assurance can be given that the Company will be able to offset such inflationary cost increases in the future. SEASONALITY Due to the seasonality of frozen dessert consumption, and the effect from time to time of weather on patronage of the restaurants, the Company's revenues and EBITDA are typically higher in its second and third quarters. GEOGRAPHIC CONCENTRATION Approximately 86% of the Company-owned restaurants are located, and substantially all of its retail sales are generated, in the Northeast. As a result, a severe or prolonged economic recession or changes in demographic mix, employment levels, population density, weather, real estate market conditions or other factors specific to this geographic region may adversely affect the Company more than certain of its competitors which are more geographically diverse. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS The Company has market risk exposure to interest rates on its fixed and variable rate debt obligations. The Company manages the exposure on the Term Loans, as defined, through the use of an interest rate swap arrangement. Refer to Note 7 of Notes to Consolidated Financial Statements for a summary of the terms of the Company's debt obligations and interest rate swap arrangement, including the fair values of such amounts. The Company does not enter into contracts for trading purposes. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA For a listing of consolidated financial statements which are included in this document, see page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 25 PART III ITEM 10. DIRECTORS OF THE REGISTRANT Information regarding directors and Section 16(a) Compliance is incorporated herein by reference from the Sections entitled "Proposal 1-Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's definitive proxy statement which will be filed no later than 120 days after December 27, 1998. ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference from the Sections entitled "Proposal 1--Election of Directors-- Director Compensation" and "Executive Compensation" of the Company's definitive proxy statement which will be filed no later than 120 days after December 27, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference from the Section entitled "Stock Ownership" of the Company's definitive proxy statement which will be filed no later than 120 days after December 27, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference from the Section entitled "Executive Compensation-Certain Relationships and Related Transactions" of the Company's definitive proxy statement which will be filed no later than 120 days after December 27, 1998. 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
26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRIENDLY ICE CREAM CORPORATION By: Name: Paul J. McDonald Title: SENIOR EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER, TREASURER AND ASSISTANT CLERK
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated.
NAME TITLE (CAPACITY) DATE - - -------------------------------------------- -------------------------------------------- ---------------------- Chairman of the Board and Chief Executive March 24, 1999 ---------------------------------- Officer (Principal Executive Officer and Donald N. Smith Director) Senior Executive Vice President, Chief March 24, 1999 Financial Officer, Treasurer and Assistant ---------------------------------- Clerk (Principal Financial and Accounting Paul J. McDonald Officer) Director March 24, 1999 ---------------------------------- Charles A. Ledsinger, Jr. Director March 24, 1999 ---------------------------------- Steven L. Ezzes Director March 24, 1999 ---------------------------------- Burton J. Manning Director March 24, 1999 ---------------------------------- Michael J. Daly
27 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 generally accepted auditing standards, the consolidated balance sheets of Friendly Ice Cream Corporation and subsidiaries (collectively, the Company) as of December 27, 1998 and December 28, 1997, and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 27, 1998, included in this Form 10-K, and have issued our report thereon dated February 12, 1999 (except for the matter discussed in Note 18 of Notes to Consolidated Financial Statements, as to which the date is February 25, 1999). 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. ARTHUR ANDERSEN LLP Hartford, Connecticut February 12, 1999 28 ANNUAL REPORT ON FORM 10-K ITEM 14(D) SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS FRIENDLY ICE CREAM CORPORATION FOR THE YEAR ENDED DECEMBER 27, 1998(1)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - - ----------------------------------------------- ------------- ---------------------------- ------------- ----------- BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING COSTS AND OTHER AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (2) OF PERIOD - - ----------------------------------------------- ------------- ------------- ------------- ------------- ----------- Reserves deducted in the balance sheet from the assets to which they relate: Reserve for relocation of manufacturing and $ -- $ 945 $ -- $ -- $ 945 distribution facility........................ ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
- - ------------------------ (1) Schedule is not applicable for 1996 or 1997. (2) The charges to the accounts are for the purposes for which the reserves were created. 29 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 27, 1998 and December 28, 1997................................ F-3 Consolidated Statements of Operations for the Years Ended December 27, 1998, December 28, 1997 and December 29, 1996................................................................ F-4 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended December 27, 1998, December 28, 1997 and December 29, 1996.......................................................... F-5 Consolidated Statements of Cash Flows for the Years Ended December 27, 1998, December 28, 1997 and December 29, 1996................................................................ F-6 Notes to Consolidated Financial Statements................................................................. F-7
F-1 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 and subsidiaries as of December 27, 1998 and December 28, 1997, and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 27, 1998. 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 generally accepted auditing standards. 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 27, 1998 and December 28, 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 27, 1998 in conformity with generally accepted accounting principles. As explained in Note 10 of Notes to Consolidated Financial Statements, effective December 30, 1996, the Company changed its method of calculating the market-related value of pension plan assets used in determining the return-on-asset component of annual pension expense and the cumulative net unrecognized gain or loss subject to amortization. ARTHUR ANDERSEN LLP Hartford, Connecticut February 12, 1999 (except for the matter discussed in Note 18, as to which the date is February 25, 1999) F-2 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 27, DECEMBER 28, 1998 1997 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents.......................................................... $ 11,091 $ 15,132 Restricted cash.................................................................... 2,211 1,333 Accounts receivable................................................................ 5,566 8,922 Inventories........................................................................ 15,560 15,671 Deferred income taxes.............................................................. 7,061 8,831 Prepaid expenses and other current assets.......................................... 6,578 6,400 ------------ ------------ TOTAL CURRENT ASSETS................................................................. 48,067 56,289 INVESTMENT IN JOINT VENTURE.......................................................... -- 2,970 PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization............. 300,159 283,944 INTANGIBLES AND DEFERRED COSTS, net of accumulated amortization of $6,525 and $4,519 at December 27, 1998 and December 28, 1997, respectively........................... 25,178 25,994 OTHER ASSETS......................................................................... 1,144 2,674 ------------ ------------ TOTAL ASSETS......................................................................... $ 374,548 $ 371,871 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current maturities of long-term debt............................................... $ 4,023 $ 2,875 Current maturities of capital lease and finance obligations........................ 1,677 1,577 Accounts payable................................................................... 26,460 23,951 Accrued salaries and benefits...................................................... 14,206 13,804 Accrued interest payable........................................................... 2,593 2,607 Insurance reserves................................................................. 9,116 7,248 Other accrued expenses............................................................. 20,649 20,018 ------------ ------------ TOTAL CURRENT LIABILITIES............................................................ 78,724 72,080 ------------ ------------ DEFERRED INCOME TAXES................................................................ 37,188 42,393 CAPITAL LEASE AND FINANCE OBLIGATIONS, less current maturities....................... 9,745 11,341 LONG-TERM DEBT, less current maturities.............................................. 311,061 299,084 OTHER LONG-TERM LIABILITIES.......................................................... 28,431 33,334 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT): Common Stock, $.01 par value; authorized 50,000,000 shares at December 27, 1998 and December 28, 1997; 7,461,600 and 7,441,290 shares issued and outstanding at December 27, 1998 and December 28, 1997, respectively............................ 75 74 Preferred Stock, $.01 par value; authorized 1,000,000 shares at December 27, 1998 and December 28, 1997; -0- shares issued and outstanding at December 27, 1998 and December 28, 1997................................................................ -- -- Additional paid-in capital......................................................... 137,896 137,175 Accumulated deficit................................................................ (228,639) (223,668) Accumulated other comprehensive income............................................. 67 58 ------------ ------------ TOTAL STOCKHOLDERS' EQUITY (DEFICIT)................................................. (90,601) (86,361) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)................................. $ 374,548 $ 371,871 ------------ ------------ ------------ ------------
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 27, DECEMBER 28, DECEMBER 29, 1998 1997 1996 ------------- ------------- ------------- REVENUES........................................................................... $ 678,096 $ 667,547 $ 650,807 COSTS AND EXPENSES: Cost of sales.................................................................... 204,884 197,627 191,956 Labor and benefits............................................................... 211,581 208,364 209,260 Operating expenses............................................................... 153,822 148,966 143,163 General and administrative expenses.............................................. 44,326 42,191 42,721 Stock compensation expense (Note 13)............................................. 722 8,407 -- Expenses associated with Recapitalization (Note 5)............................... -- 718 -- Relocation of manufacturing and distribution facility (Note 16).................. 945 -- -- Write-downs of property and equipment (Note 6)................................... 1,132 770 227 Depreciation and amortization.................................................... 33,449 31,692 32,979 Gain on sales of restaurant operations (Notes 14 and 15)........................... (1,005) (2,283) -- ------------- ------------- ------------- OPERATING INCOME................................................................... 28,240 31,095 30,501 Interest expense, net of capitalized interest of $525, $250 and $49 and interest income of $278, $338 and $318 for the years ended December 27, 1998, December 28, 1997 and December 29, 1996, respectively (Note 7)................................ 31,838 39,303 44,141 Equity in net loss and other write-downs associated with joint venture (Note 18)... 4,828 1,530 -- ------------- ------------- ------------- LOSS BEFORE BENEFIT FROM INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE........................................................................ (8,426) (9,738) (13,640) Benefit from income taxes.......................................................... 3,455 3,993 5,868 ------------- ------------- ------------- LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.................... (4,971) (5,745) (7,772) Cumulative effect of change in accounting principle, net of income tax expense of $1,554 (Note 10)................................................................. -- 2,236 -- ------------- ------------- ------------- NET LOSS........................................................................... $ (4,971) $ (3,509) $ (7,772) ------------- ------------- ------------- ------------- ------------- ------------- BASIC AND DILUTED LOSS PER SHARE: Loss before cumulative effect of change in accounting principle.................. $ (0.67) $ (1.86) $ (3.60) Cumulative effect of change in accounting principle, net of income tax expense... -- 0.72 -- ------------- ------------- ------------- Net loss......................................................................... $ (0.67) $ (1.14) $ (3.60) ------------- ------------- ------------- ------------- ------------- ------------- PRO FORMA AMOUNTS ASSUMING PENSION METHOD IS RETROACTIVELY APPLIED (Note 10): Net loss......................................................................... $ (4,971) $ (5,745) $ (7,214) ------------- ------------- ------------- ------------- ------------- ------------- Basic and diluted net loss per share............................................. $ (0.67) $ (1.86) $ (3.34) ------------- ------------- ------------- ------------- ------------- ------------- WEIGHTED AVERAGE BASIC AND DILUTED SHARES.......................................... 7,452 3,087 2,161 ------------- ------------- ------------- ------------- ------------- -------------
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' EQUITY (DEFICIT) (DOLLAR AMOUNTS IN THOUSANDS)
COMMON STOCK ----------------------------------------------- COMMON STOCK CLASS A CLASS B ADDITIONAL ---------------------- ---------------------- ----------------------- PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT --------- ----------- --------- ----------- ---------- ----------- ----------- ------------- BALANCE, DECEMBER 31, 1995.................... -- $ -- 1,090,969 $ 11 -- $ -- $ 46,842 $ (212,387) --------- ----- --------- ----- ---------- ----- ----------- ------------- Comprehensive (loss) income: Net loss................ -- -- -- -- -- -- -- (7,772) Translation adjustment.. -- -- -- -- -- -- -- -- --------- ----- --------- ----- ---------- ----- ----------- ------------- Total comprehensive (loss) income.................. -- -- -- -- -- -- -- (7,772) --------- ----- --------- ----- ---------- ----- ----------- ------------- Issuance of common stock to lenders.............. -- -- -- -- 1,187,503 12 38 -- Proceeds from exercise of warrants................ -- -- 71,527 1 -- -- 21 -- Stock compensation expense................. -- -- 122,888 1 -- -- 4 -- --------- ----- --------- ----- ---------- ----- ----------- ------------- BALANCE, DECEMBER 29, 1996.................... -- -- 1,285,384 13 1,187,503 12 46,905 (220,159) --------- ----- --------- ----- ---------- ----- ----------- ------------- Comprehensive loss: Net loss................ -- -- -- -- -- -- -- (3,509) Translation adjustment.. -- -- -- -- -- -- -- -- --------- ----- --------- ----- ---------- ----- ----------- ------------- Total comprehensive loss.. -- -- -- -- -- -- -- (3,509) --------- ----- --------- ----- ---------- ----- ----------- ------------- Shares returned to FICC at no cost in connection with the Offerings (Note 13)..................... -- -- (766,782) (8) -- -- -- -- Conversion of Class A Common Stock and Class B Common Stock to Common Stock................... 1,706,105 17 (518,602) (5) (1,187,503) (12) -- -- Proceeds from Common Stock Offering, net of expenses of $8,087...... 5,000,000 50 -- -- -- -- 81,870 -- Stock compensation expense................. 735,185 7 -- -- -- -- 8,400 -- --------- ----- --------- ----- ---------- ----- ----------- ------------- BALANCE, DECEMBER 28, 1997.................... 7,441,290 74 -- -- -- -- 137,175 (223,668) --------- ----- --------- ----- ---------- ----- ----------- ------------- Comprehensive (loss) income: Net loss................ -- -- -- -- -- -- -- (4,971) Translation adjustment.. -- -- -- -- -- -- -- -- --------- ----- --------- ----- ---------- ----- ----------- ------------- Total comprehensive (loss) income.................. -- -- -- -- -- -- -- (4,971) --------- ----- --------- ----- ---------- ----- ----------- ------------- Stock compensation expense................. 20,310 1 -- -- -- -- 721 -- --------- ----- --------- ----- ---------- ----- ----------- ------------- BALANCE, DECEMBER 27, 1998.................... 7,461,600 $ 75 -- $ -- -- $ -- $ 137,896 $ (228,639) --------- ----- --------- ----- ---------- ----- ----------- ------------- --------- ----- --------- ----- ---------- ----- ----------- ------------- ACCUMULATED OTHER COMPREHENSIVE INCOME TOTAL ----------------- --------- BALANCE, DECEMBER 31, 1995.................... $ -- $(165,534) ----- --------- Comprehensive (loss) income: Net loss................ -- (7,772) Translation adjustment.. 73 73 ----- --------- Total comprehensive (loss) income.................. 73 (7,699) ----- --------- Issuance of common stock to lenders.............. -- 50 Proceeds from exercise of warrants................ -- 22 Stock compensation expense................. -- 5 ----- --------- BALANCE, DECEMBER 29, 1996.................... 73 (173,156) ----- --------- Comprehensive loss: Net loss................ -- (3,509) Translation adjustment.. (15) (15) ----- --------- Total comprehensive loss.. (15) (3,524) ----- --------- Shares returned to FICC at no cost in connection with the Offerings (Note 13)..................... -- (8) Conversion of Class A Common Stock and Class B Common Stock to Common Stock................... -- -- Proceeds from Common Stock Offering, net of expenses of $8,087...... -- 81,920 Stock compensation expense................. -- 8,407 ----- --------- BALANCE, DECEMBER 28, 1997.................... 58 (86,361) ----- --------- Comprehensive (loss) income: Net loss................ -- (4,971) Translation adjustment.. 9 9 ----- --------- Total comprehensive (loss) income.................. 9 (4,962) ----- --------- Stock compensation expense................. -- 722 ----- --------- BALANCE, DECEMBER 27, 1998.................... $ 67 $ (90,601) ----- --------- ----- ---------
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 27, DECEMBER 28, DECEMBER 29, 1998 1997 1996 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss............................................................................. $ (4,971) $ (3,509) $ (7,772) Adjustments to reconcile net loss to net cash provided by operating activities: Cumulative effect of change in accounting principle................................ -- (2,236) -- Stock compensation expense......................................................... 722 8,407 -- Non-cash expenses associated with Recapitalization................................. -- 399 -- Relocation of manufacturing and distribution facility.............................. 945 -- -- Depreciation and amortization...................................................... 33,449 31,692 32,979 Write-downs of property and equipment.............................................. 1,132 770 227 Deferred income tax benefit........................................................ (3,435) (4,083) (5,926) Loss (gain) on asset retirements................................................... 123 1,939 (916) Equity in net loss and other write-downs associated with joint venture............. 4,828 1,530 -- Changes in operating assets and liabilities: Accounts receivable.............................................................. 2,110 (3,930) 241 Inventories...................................................................... 111 (526) (66) Other assets..................................................................... (1,596) (7,998) 1,309 Accounts payable................................................................. 2,509 3,178 (199) Accrued expenses and other long-term liabilities................................. (3,062) (3,515) 6,286 ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES............................................ 32,865 22,118 26,163 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment.................................................. (51,172) (31,638) (24,217) Proceeds from sales of property and equipment........................................ 2,852 5,043 8,409 Purchases of investment securities................................................... -- (8,194) -- Proceeds from sales and maturities of investment securities.......................... -- 12,787 -- Acquisition of Restaurant Insurance Corporation, net of cash acquired................ -- (35) -- Advances to and investments in joint venture......................................... -- (1,400) (4,500) ------------ ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES................................................ (48,320) (23,437) (20,308) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from other borrowings....................................................... 69,258 167,548 48,196 Repayments of debt................................................................... (56,133) (438,673) (52,084) Repayments of capital lease and finance obligations.................................. (1,720) (12,955) (7,131) Proceeds from issuance of senior notes............................................... -- 200,000 -- Proceeds from issuance of common stock............................................... -- 81,920 -- Proceeds from exercise of stock purchase warrants.................................... -- -- 22 ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.................................. 11,405 (2,160) (10,997) ------------ ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH.............................................. 9 (15) 78 ------------ ------------ ------------ NET DECREASE IN CASH AND CASH EQUIVALENTS............................................ (4,041) (3,494) (5,064) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR......................................... 15,132 18,626 23,690 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR............................................... $ 11,091 $ 15,132 $ 18,626 ------------ ------------ ------------ ------------ ------------ ------------ SUPPLEMENTAL DISCLOSURES Interest paid........................................................................ $ 30,784 $ 46,040 $ 36,000 Income taxes paid.................................................................... 532 168 -- Capital lease obligations incurred................................................... 608 2,227 5,951 Capital lease obligations terminated................................................. 384 1,587 128 Issuance of common stock to lenders.................................................. -- -- 50
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 for net proceeds of $81.9 million and a public offering of $200 million of Senior Notes (collectively, the "Offerings"). Concurrent with the Offerings, FICC entered into a new senior secured credit facility consisting of (i) $90 million of term loans, (ii) a $55 million revolving credit facility and (iii) a $15 million letter of credit facility (collectively, the "New Credit Facility"). Proceeds from the Offerings and the New Credit facility were primarily used to repay the $353.7 million outstanding under FICC's previous credit facility (collectively, the "Recapitalization"). References herein to "Friendly's" or the "Company" refer to Friendly Ice Cream Corporation, its predecessor and its consolidated subsidiaries. 2. NATURE OF OPERATIONS Friendly's owns and operates 646 full-service restaurants, franchises 42 restaurants and 11 cafes and distributes a full line of frozen dessert products. These products are distributed to Friendly's restaurants and cafes and to more than 5,000 supermarkets and other retail locations in 16 states. The restaurants offer a wide variety of reasonably priced breakfast, lunch and dinner menu items as well as frozen dessert products. For the years ended December 27, 1998, December 28, 1997 and December 29, 1996, restaurant sales were approximately 88%, 89% and 92%, respectively, of the Company's revenues. As of December 27, 1998, December 28, 1997 and December 29, 1996, approximately 86%, 85% and 80%, 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. 3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION-- The consolidated financial statements include the accounts of FICC and its 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. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS-- The preparation of financial statements in conformity with generally accepted accounting principles 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 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 value of long-lived assets and the adequacy of insurance reserves. F-7 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 gross sales of franchisees, is payable monthly and is recorded on the accrual method. Initial franchise fees are recorded 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. INVENTORIES-- Inventories are stated at the lower of first-in, first-out cost or market. Inventories at December 27, 1998 and December 28, 1997 were (in thousands):
DECEMBER 27, DECEMBER 28, 1998 1997 ------------ ------------ Raw materials.................................................... $ 1,983 $ 2,011 Goods in process................................................. 145 136 Finished goods................................................... 13,432 13,524 ------------ ------------ Total............................................................ $ 15,560 $ 15,671 ------------ ------------ ------------ ------------
RESTRICTED CASH-- Restaurant Insurance Corporation ("RIC"), an insurance subsidiary (see Note 4), is 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 27, 1998 and December 28, 1997, cash of approximately $2,211,000 and $1,333,000, respectively, was restricted. PROPERTY AND EQUIPMENT-- Property and equipment are carried at cost except for impaired assets which are carried at fair value less cost to sell (see Note 6). 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 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) At December 27, 1998 and December 28, 1997, property and equipment included (in thousands):
DECEMBER 27, DECEMBER 28, 1998 1997 ------------ ------------ Land............................................................. $ 76,025 $ 76,160 Buildings and improvements....................................... 128,531 119,121 Leasehold improvements........................................... 43,365 40,300 Assets under capital leases...................................... 12,887 12,709 Equipment........................................................ 276,720 247,052 Construction in progress......................................... 11,807 12,551 ------------ ------------ Property and equipment........................................... 549,335 507,893 Less: accumulated depreciation and amortization.................. (249,176) (223,949) ------------ ------------ Property and equipment, net...................................... $ 300,159 $ 283,944 ------------ ------------ ------------ ------------
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. 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 the license agreement for the right to use various trademarks and tradenames (see Note 5) 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 cash flows of the trademarked products. The Company reviews each restaurant property quarterly to determine which properties will be disposed of. This determination is made based on poor operating results, deteriorating property values and other factors. The Company recognizes an impairment has occurred when the carrying value of property 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 (see Note 6). RESTAURANT PREOPENING 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 98-5 requires entities to expense as incurred all start-up and preopening costs that are not otherwise capitalizable as long-lived assets and is effective for fiscal years beginning after December 15, 1998. In accordance with this statement, the Company will expense previously deferred restaurant preopening costs of approximately $319,000 as of December 28, 1998. Such amount, net of any related income tax effects, will be reflected as a cumulative effect of a change in accounting principle in fiscal 1999. INTERNAL USE SOFTWARE-- In accordance with SOP 98-1, "Accounting for The Costs of Computer Software Developed or Obtained for Internal Use," the Company capitalizes costs incurred in the development of internally used software if the criteria under SOP 98-1 have been met. 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) RESTAURANT CLOSURE COSTS-- Restaurant closure costs are recognized when a decision is made to close a restaurant. Restaurant closure costs include writing down the carrying amount of a restaurant's assets to estimated fair market value less costs of disposal and the net present value of any remaining operating lease payments after the expected closure date. INSURANCE RESERVES-- The Company is self-insured through retentions or deductibles for the majority of its workers' compensation, automobile, general 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 (see Note 4), is in place for claims in excess of these self-insured amounts. RIC assumes 100% of the risk from $500,000 to $1,000,000 per occurrence for the Company's worker's compensation, general liability and product liability insurance. The Company's and RIC's liability for estimated incurred losses are actuarially determined and recorded in the accompanying consolidated financial statements on an undiscounted basis (see Note 12). 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 (see Note 9). ADVERTISING-- The Company expenses production and other advertising costs the first time the advertising takes place. For the years ended December 27, 1998, December 28, 1997 and December 29, 1996, advertising expense was approximately $20,985,000, $21,185,000 and $18,231,000, respectively. INTEREST RATE SWAP AGREEMENT-- In connection with the Recapitalization, the Company entered into an interest rate swap agreement. The interest differential to be paid or received is accrued and recorded as an adjustment to interest expense (see Note 7). EARNINGS PER SHARE-- On January 1, 1997, the Company adopted SFAS No. 128, "Earnings Per Share." The adoption of this standard did not have a material impact on the Company's computation of earnings per share. Additionally, on February 4, 1998, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 98 on computations of earnings per share, which changed the guidance on how common stock transactions prior to or in connection with an initial public offering are treated in earnings per share computations. Accordingly, all prior period earnings per share data presented have been restated and all earnings per share data presented are in accordance with SFAS No. 128 and SAB No. 98. Basic earnings per share is calculated by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is 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) calculated by dividing income available to common stockholders by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Common stock equivalents are dilutive stock options and warrants that are assumed exercised for calculation purposes. The number of common stock equivalents 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 5,688 for the year ended December 27, 1998. There were no potentially dilutive common stock equivalents for the years ended December 28, 1997 and December 29, 1996. STOCK-BASED COMPENSATION-- On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 requires the measurement of the fair value of stock options or warrants granted to be included in the statement of operations or that pro forma information related to the fair value be disclosed in the notes to financial statements. The Company continues to account for stock-based compensation for employees under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and elects the disclosure-only alternative under SFAS No. 123. COMPREHENSIVE INCOME-- On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income (net income (loss) together with other non-owner changes in equity) and its components in the financial statements. In accordance with SFAS No. 130, the consolidated financial statements have been reclassified for earlier periods. EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS-- On January 1, 1998, the Company adopted SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits," which standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable and requires additional information on changes in the benefit obligations and fair values of plan assets (see Notes 10 and 11). DERIVATIVE INSTRUMENTS-- In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that each derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the statement of operations, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. SFAS No. 133 cannot be applied retroactively. Management has not yet quantified the impact of adopting SFAS No. 133 on the Company's financial statements and has not determined the timing or method of the Company's adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings and other comprehensive income. 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) RECLASSIFICATIONS-- Certain prior period amounts have been reclassified to conform with the current year presentation. 4. ACQUISITION OF RESTAURANT INSURANCE CORPORATION On March 19, 1997, FICC acquired all of the outstanding shares of common stock of Restaurant Insurance Corporation ("RIC"), a Vermont corporation, from TRC for cash of $1,300,000 and a $1,000,000 promissory note payable to TRC bearing interest at an annual rate of 8.25%. The promissory note and accrued interest of approximately $1,024,000 were paid on June 30, 1997. RIC, which was formed in 1993, reinsures certain Company risks (i.e., workers' compensation, employer's liability, general liability and product liability) from a third party insurer (see Note 12). The acquisition was accounted for as a purchase. Accordingly, the results of operations for RIC for the period subsequent to March 20, 1997 were included in the accompanying consolidated financial statements. No pro forma information is included since the effect of the acquisition is not material. The purchase price was allocated to net assets acquired based on the estimated fair market values at the date of acquisition. The purchase price was allocated as follows (in thousands): Cash and cash equivalents......................................... $ 2,265 Restricted cash and investments................................... 12,061 Receivables and other assets...................................... 3,101 Loss reserves..................................................... (13,231) Deferred income taxes............................................. (11) Other liabilities................................................. (1,885) --------- $ 2,300 --------- ---------
5. INTANGIBLE ASSETS AND DEFERRED COSTS Intangible assets and deferred costs net of accumulated amortization as of December 27, 1998 and December 28, 1997 were (in thousands):
DECEMBER 27, DECEMBER 28, 1998 1997 ------------ ------------ Marks license agreement for the right to use various trademarks and service marks amortized over a 40 year life on a straight line basis..................................................... $ 13,832 $ 14,298 Deferred financing costs amortized over the terms of the related loans on an effective yield basis.............................. 11,346 11,696 ------------ ------------ $ 25,178 $ 25,994 ------------ ------------ ------------ ------------
Upon the sale of the Company by 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 40 years and 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. F-12 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. INTANGIBLE ASSETS AND DEFERRED COSTS (CONTINUED) As a result of the Recapitalization in November 1997, previously deferred financing costs of $399,000 were written off and were included in expenses associated with the Recapitalization in the accompanying consolidated statement of operations for the year ended December 28, 1997. 6. WRITE-DOWNS OF PROPERTY AND EQUIPMENT At December 27, 1998, December 28, 1997 and December 29, 1996, there were 25, 40 and 50 restaurant properties held for disposition, respectively. The restaurants held for disposition generally have poor operating results, deteriorating property values or other adverse conditions. The Company determined that the carrying values of certain of these properties exceeded their estimated fair values less costs to sell. Accordingly, during the year ended December 27, 1998, the carrying values of 9 properties were reduced by an aggregate of $912,000; during the year ended December 28, 1997, the carrying values of 12 properties were reduced by an aggregate of $770,000 and during the year ended December 29, 1996, the carrying values of 6 properties were reduced by an aggregate of $227,000. The Company plans to dispose of the 25 properties by December 31, 2000. The aggregate operating loss, prior to depreciation expense which is not reported at the restaurant level, for the properties held for disposition was $733,000, $1,244,000 and $1,129,000 for the years ended December 27, 1998, December 28, 1997 and December 29, 1996, respectively. The aggregate carrying value of the properties held for disposition at December 27, 1998 and December 28, 1997 was approximately $2,570,000 and $3,050,000, respectively, which is included in property and equipment in the accompanying consolidated balance sheets. In 1998, the Company announced it was discontinuing its United Kingdom operations. As a result, the Company recorded a write-down of $220,000 since the carrying value of the equipment in the United Kingdom exceeded the estimated fair value less costs to sell by $220,000 (see Note 18). 7. DEBT Debt at December 27, 1998 and December 28, 1997 consisted of the following (in thousands):
DECEMBER 27, DECEMBER 28, 1998 1997 ------------ ------------ Senior Notes, 10.50%, due December 1, 2007........................................... $ 200,000 $ 200,000 New Credit Facility: Revolving Credit Facility, due November 15, 2002................................... 25,000 9,000 Term Loans: Tranche A, due April 15, 1999 through November 15, 2002.......................... 34,286 34,286 Tranche B, due April 15, 1999 through November 15, 2004.......................... 34,286 34,286 Tranche C, due April 15, 1999 through November 15, 2005.......................... 21,428 21,428 Insurance premium finance loans, 8.34%-8.75%......................................... -- 2,842 Other................................................................................ 84 117 ------------ ------------ 315,084 301,959 Less: current portion................................................................ (4,023) (2,875) ------------ ------------ Total long-term debt................................................................. $ 311,061 $ 299,084 ------------ ------------ ------------ ------------
F-13 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. DEBT (CONTINUED) Principal payments due under long-term debt as of December 27, 1998 were as follows (in thousands):
YEAR AMOUNT - - ---------------------------------------------------------------------------------- ---------- 1999.............................................................................. $ 4,023 2000.............................................................................. 9,175 2001.............................................................................. 10,843 2002.............................................................................. 37,557 2003.............................................................................. 15,985 Thereafter........................................................................ 237,501 ---------- Total............................................................................. $ 315,084 ---------- ----------
Effective January 1, 1996, the Company and its then existing lenders entered an Amended and Restated Revolving Credit and Term Loan Agreement (the "Agreement"). In connection with the Agreement, the lenders received an aggregate of 1,187,503 shares of FICC's Class B Common Stock. The estimated fair market value of the shares issued of $50,000 was recorded as a deferred financing cost during the year ended December 29, 1996. Under the Agreement, interest accrued on the revolving credit and term loans (collectively, the "Old Credit Facility") at an annual rate of 11.00% with 0.50% of the accrued interest, which was not currently payable, was classified in other long-term liabilities. The deferred interest payable was waived by the lenders in November 1997 since the Old Credit Facility was repaid in full in connection with the Recapitalization in November 1997. Accordingly, approximately $3.6 million of deferred interest was recorded as a reduction in interest expense in November 1997. The $200 million Senior Notes issued in connection with the November 1997 Recapitalization (the "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 Notes mature on December 1, 2007. Interest on the Notes is payable at 10.50% per annum semi-annually on June 1 and December 1 of each year commencing on June 1, 1998. The 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%. The redemption price is based on the redemption date. Prior to December 1, 2000, FICC may redeem up to $70 million of the Notes at 110.50% with the proceeds of one or more equity offerings, as defined. FICC entered into the New Credit Facility in November 1997 in connection with the Recapitalization. The New Credit Facility includes $90 million of term loans (the "Term Loans"), a $55 million revolving credit facility (the "Revolving Credit Facility") and a $15 million letter of credit facility (the "Letter of Credit Facility"). The New Credit Facility is collateralized by substantially all of FICC's assets and by a pledge of FICC's shares of certain of its subsidiaries' stock. Borrowings under the New Credit Facility incurred interest through December 27, 1998, at FICC's option, at either (i) the Eurodollar Rate plus 2.25% per annum or (ii) the ABR rate (the greater of (a) a specified prime rate or (b) the federal funds rate plus 0.50%) plus 0.75% per annum for drawings under the Revolving Credit Facility, 0.50% per annum for amounts undrawn under the Revolving Credit Facility, 0.50% per annum for amounts unissued under the Letter of Credit Facility and 2.50% per annum for amounts issued but undrawn under the Letter of Credit Facility. Borrowings under the Term Loans incurred interest through December 27, 1998, at FICC's option, at either the Eurodollar Rate plus 2.25%, 2.50% and 2.75% or the ABR rate plus 0.75%, 1.00% and 1.25% for Tranches A, B and C, respectively. As F-14 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. DEBT (CONTINUED) of December 27, 1998, the one-month and three-month Eurodollar Rates were 5.63% and 5.28%, respectively. FICC also entered into a three year interest rate swap agreement to hedge the impact of interest rate changes on the Term Loans. The interest rate swap agreement has a notional amount of $90 million and effectively fixed the interest rates on Tranches A, B and C of the Term Loans at 8.25%, 8.50% and 8.75%, respectively, prior to the effect of the amendment described below. The interest rate swap agreement matures on November 20, 2000. Effective December 27, 1998, the New Credit Facility was amended. In connection with this amendment, certain covenants were changed and interest rates on borrowings were increased. The per annum interest rates on drawings under the Revolving Credit Facility increased 0.25% and 0.50% for Eurodollar and ABR loans, respectively. The per annum interest rates on Tranches A, B and C of Eurodollar Term Loans increased 0.25% and the per annum interest rates on ABR Term Loans increased 0.50%, 0.25% and 0.25% for Tranches A, B and C, respectively. The per annum interest rate on amounts issued but undrawn under the Letter of Credit Facility increased 0.25%. FICC paid a fee of approximately $1,077,000 to the lenders in connection with this amendment. References herein to the New Credit Facility shall mean as amended on December 27, 1998. Annual principal payments due under the Term Loans will total $4.0 million, $9.1 million, $10.8 million, $12.6 million, $16.0 million, $17.4 million and $20.1 million in 1999 through 2005, respectively. In addition to the principal payments, the Term Loans will be permanently reduced by (i) specified percentages of each year's Excess Cash Flow (as defined), (ii) specified percentages of the aggregate net cash proceeds from certain issuances of indebtedness and (iii) 100% of the aggregate net cash proceeds from asset sales not in the ordinary course of business (as defined) and certain insurance claim proceeds, in each case in this clause (iii), not re-employed within 180 days in the Company's business. Any such applicable proceeds and Excess Cash Flow shall be applied to the Term Loans in inverse order of maturity. The Revolving Credit Facility matures on November 15, 2002. As of December 27, 1998 and December 28, 1997, total letters of credit issued were $10,535,000 and $14,404,000, respectively. During the years ended December 27, 1998, December 28, 1997 and December 29, 1996, there were no drawings against the letters of credit. The Letter of Credit Facility matures on November 15, 2002. As of December 27, 1998 and December 28, 1997, the unused portion of the revolver was $30,000,000 and $46,000,000, respectively. The total average unused portions of the revolver and letters of credit commitments were $35,708,000, $50,046,000 and $13,955,000 for the year ended December 27, 1998, the period from November 19, 1997 through December 28, 1997 and the period from December 30, 1996 through November 18, 1997, respectively. The Senior Notes and New Credit Facility include 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 and requires the Company to comply with certain F-15 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. DEBT (CONTINUED) financial covenants. The financial covenant requirements, as defined under the New Credit Facility, and actual ratios/amounts as of and for the years ended December 27, 1998 and December 28, 1997 were:
DECEMBER 27, 1998 DECEMBER 28, 1997 ------------------------------ ------------------------------ REQUIREMENT ACTUAL REQUIREMENT ACTUAL -------------- -------------- -------------- -------------- Consolidated leverage ratio...................... 5.25 to 1 4.88 to 1 4.75 to 1 4.33 to 1 Consolidated interest coverage ratio............. 1.50 to 1 1.60 to 1 1.50 to 1 1.91 to 1 Consolidated fixed charge coverage ratio......... 1.30 to 1 1.43 to 1 1.40 to 1 1.65 to 1 Consolidated net worth (deficit)................. $ (98,000,000) $ (90,601,000) $ (95,000,000) $ (86,361,000)
The fair values of FICC's financial instruments at December 27, 1998 and December 28, 1997 were as follows (in thousands):
DECEMBER 27, 1998 DECEMBER 28, 1997 ---------------------- ---------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE ---------- ---------- ---------- ---------- Senior Notes..................................................... $ 200,000 $ 198,000 $ 200,000 $ 203,000 Term Loans....................................................... 90,000 90,000 90,000 90,000 Revolving Credit Facility........................................ 25,000 25,000 9,000 9,000 Other debt....................................................... 84 84 2,959 2,959 Interest rate swap agreement..................................... -- 1,438 -- -- ---------- ---------- ---------- ---------- Total............................................................ $ 315,084 $ 314,522 $ 301,959 $ 304,959 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
The fair value of the Senior Notes was determined based on the actual trade prices as of December 27, 1998 and December 28, 1997. FICC believes that the carrying value of the Term Loans and Revolving Credit Facility as of December 27, 1998 and December 28, 1997 approximated fair value since the obligations have variable interest rates. FICC believes that the carrying value of the other debt as of December 27, 1998 and December 28, 1997 approximated the fair value based on the terms of the obligations and the rates currently available to the FICC for similar obligations. The fair value of the interest rate swap agreement as of December 27, 1998 was determined based on the terms of the agreement and existing market conditions. The Company believes that the fair value of the interest rate swap agreement as of December 28, 1997 was not material. 8. LEASES As of December 27, 1998, December 28, 1997 and December 29, 1996, the Company operated 646, 662 and 707 restaurants, respectively. These operations were conducted in premises owned or leased as follows:
DECEMBER 27, DECEMBER 28, DECEMBER 29, 1998 1997 1996 ----------------- ----------------- ----------------- Land and building owned........................... 275 279 296 Land leased and building owned.................... 147 146 161 Land and building leased.......................... 224 237 250 --- --- --- 646 662 707 --- --- --- --- --- ---
F-16 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. LEASES (CONTINUED) 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. 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. Future minimum lease payments under noncancelable leases with an original term in excess of one year as of December 27, 1998 were (in thousands):
OPERATING CAPITAL YEAR LEASES LEASES - - ------------------------------------------------------------------------ ----------- --------- 1999.................................................................... $ 14,137 $ 3,008 2000.................................................................... 12,662 2,678 2001.................................................................... 10,693 2,116 2002.................................................................... 8,001 1,473 2003.................................................................... 5,945 1,210 Thereafter.............................................................. 25,436 9,991 ----------- --------- Total minimum lease payments............................................ $ 76,874 20,476 ----------- Less: amount representing interest...................................... 9,054 --------- Present value of minimum lease payments................................. $ 11,422 --------- ---------
Capital lease 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 27, 1998 were (in thousands):
YEAR AMOUNT - - ----------------------------------------------------------------------------------- --------- 1999............................................................................... $ 1,677 2000............................................................................... 1,568 2001............................................................................... 1,191 2002............................................................................... 678 2003............................................................................... 488 Thereafter......................................................................... 5,820 --------- Total.............................................................................. $ 11,422 --------- ---------
Rent expense included in the accompanying consolidated financial statements for operating leases was (in thousands):
DECEMBER 27, DECEMBER 28, DECEMBER 29, 1998 1997 1996 ------------ ------------ ------------ Minimum rentals................................... $ 16,484 $ 16,007 $ 16,051 Contingent rentals................................ 1,788 1,762 1,918 ------------ ------------ ------------ Total............................................. $ 18,272 $ 17,769 $ 17,969 ------------ ------------ ------------ ------------ ------------ ------------
F-17 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. INCOME TAXES Prior to March 23, 1996, FICC and its subsidiaries were included in the consolidated Federal income tax return of TRC. Under a tax sharing agreement between TRC and FICC (formerly FHC) (the "TRC/ FICC Agreement"), FICC and its subsidiaries (the "FICC Group") were obligated to pay TRC its allocable share of the TRC group tax liability, determined as if the FICC Group were filing a separate consolidated income tax return. On March 23, 1996, TRC distributed its shares of FICC's voting common stock to TRC's shareholders (see Note 1), the FICC Group deconsolidated from the TRC group and the TRC/FICC Agreement expired. In addition, on March 26, 1996, shares of Class B Common Stock were issued to FICC's lenders (see Note 7) which resulted in an ownership change pursuant to Internal Revenue Code Section 382. Under the TRC/FICC Agreement, Federal net operating loss ("NOL") carryforwards generated by the FICC Group and utilized or allocated to TRC were available to the FICC Group on a separate company basis to carryforward. Pursuant to the TRC/FICC Agreement, as of March 23, 1996, $99,321,000 of carryforwards would have been available to the FICC Group to offset future taxable income of the FICC Group. However, as a result of the deconsolidation from TRC, the deferred tax asset related to the $65,034,000 of NOLs utilized by TRC was written off by the Company in 1996 and 1995. As of December 29, 1996, as a result of the change in ownership and limitations under Section 382 of the Internal Revenue Code, a valuation allowance was placed on $29,686,000 of the $34,287,000 remaining Federal NOL carryforwards generated for the period prior to March 23, 1996. The amount of pre-change NOLs ("Old NOLs") not reserved for as of December 29, 1996 represented the amount of NOLs which had become available as of December 29, 1996 as a result of FICC realizing gains which were unrealized as of the date of the ownership change. Due to restrictions similar to Section 382 in most of the states FICC operates in and short carryforward periods, FICC fully reserved for all state NOL carryforwards generated through March 26, 1996 as of December 29, 1996. For the period from March 27, 1996 to December 29, 1996, FICC generated a net operating loss carryforward of $5,735,000 for which no valuation allowance was provided. During the years ended December 27, 1998 and December 28, 1997, the Company realized gains of $900,000 and $861,000, respectively, which were unrealized as of the date of the first ownership change. Accordingly, the valuation allowance was reduced by approximately $315,000 and $301,000 during the years ended December 27, 1998 and December 28, 1997, respectively. During the years ended December 27, 1998 and December 28, 1997, the Company generated NOLs of approximately $422,000 and $119,000, respectively. As a result, as of December 27, 1998, the Company has aggregate NOL carryforwards of approximately $40.6 million which expire between 2001 and 2018. The Common Stock Offering resulted in the Company having another change of ownership under Section 382 of the Internal Revenue Code in November 1997. As a result, usage of the NOLs generated between the last ownership change and the Common Stock Offering ("New NOLs") is also limited. The amount of NOLs which may be used each year prior to any built-in gains being triggered is approximately $2.4 million. While the limitation on the use of the New NOLs will impact when the New NOLs are utilized, the Company expects all New NOLs to be utilized before they expire. Accordingly, no valuation allowance is required related to any New NOLs as of December 27, 1998. The Company does not believe that it is more likely than not that all Old NOLs will become available through realization of unrealized gains as of the date of the March 1996 ownership change. Accordingly, a valuation allowance has been provided against Old NOLs which have not been made available as of December 27, 1998. As of F-18 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. INCOME TAXES (CONTINUED) December 27, 1998, a valuation allowance has been provided against an aggregate of $28.0 million of Old NOLs. The benefit from income taxes for the years ended December 27, 1998, December 28, 1997 and December 29, 1996 was as follows (in thousands):
DECEMBER 27, DECEMBER 28, DECEMBER 29, 1998 1997 1996 ------------- ------------- ------------- Current benefit (provision): Federal......................................... $ 30 $ -- $ -- State........................................... (10) (86) -- Foreign......................................... -- (21) (58) ------ ------ ------ Total current benefit (provision)................. 20 (107) (58) ------ ------ ------ Deferred benefit: Federal......................................... 3,207 2,291 5,126 State........................................... 228 255 800 ------ ------ ------ Total deferred benefit............................ 3,435 2,546 5,926 ------ ------ ------ Total benefit from income taxes................... $ 3,455 $ 2,439 $ 5,868 ------ ------ ------ ------ ------ ------
A reconciliation of the difference between the statutory Federal income tax rate and the effective income tax rate follows:
DECEMBER 27, DECEMBER 28, DECEMBER 29, 1998 1997 1996 ----------------- ----------------- ----------------- Statutory Federal income tax rate................. 35% 35% 35% State income taxes net of Federal benefit......... 6 6 14 Write-off of NOL carryforwards and tax credits.... -- -- (13) (Increase) decrease in valuation allowance........ (1) (4) 2 Tax credits....................................... 7 12 3 Nondeductible expenses............................ (4) (10) (1) Other............................................. (2) 2 3 -- -- -- Effective tax rate................................ 41% 41% 43% -- -- -- -- -- --
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 which F-19 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. INCOME TAXES (CONTINUED) the differences are expected to reverse. Significant deferred tax assets (liabilities) at December 27, 1998 and December 28, 1997 were as follows (in thousands):
DECEMBER 27, DECEMBER 28, 1998 1997 ------------ ------------ Property and equipment........................................... $ (47,175) $ (47,483) Federal, state and UK NOL carryforwards (net of valuation allowance of $21,272 and $21,151 at December 27, 1998 and December 28, 1997, respectively)............................... 5,329 4,604 Insurance reserves............................................... 4,540 4,534 Inventories...................................................... 1,885 1,811 Accrued pension.................................................. 2,578 3,138 Intangible assets................................................ (5,651) (5,838) Tax credit carryforwards......................................... 3,401 2,234 Other............................................................ 4,966 3,438 ------------ ------------ Net deferred tax liability....................................... $ (30,127) $ (33,562) ------------ ------------ ------------ ------------
10. 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 27, 1998 and December 28, 1997, the reconciliation of the projected benefit obligation was (in thousands):
DECEMBER 27, DECEMBER 28, 1998 1997 ------------ ------------ Beginning of year benefit obligation............................. $ 79,311 $ 76,769 Service cost................................................... 3,515 3,764 Interest cost.................................................. 5,874 5,922 Plan amendments................................................ 4,811 (8,245) Actuarial loss................................................. 6,038 5,694 Disbursements.................................................. (8,671) (4,593) ------------ ------------ End of year benefit obligation................................... $ 90,878 $ 79,311 ------------ ------------ ------------ ------------
In 1997, the 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-20 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. EMPLOYEE BENEFIT PLANS (CONTINUED) The reconciliation of the funded status of the pension plan as of December 27, 1998 and December 28, 1997 included the following components (in thousands):
DECEMBER 27, DECEMBER 28, 1998 1997 ------------ ------------ Projected benefit obligation..................................... $ (90,878) $ (79,311) Fair value of plan assets........................................ 112,621 107,938 ------------ ------------ Funded status.................................................... 21,743 28,627 Unrecognized prior service cost.................................. (8,664) (8,701) Unrecognized net actuarial gain.................................. (18,459) (26,922) ------------ ------------ Net amount recognized............................................ $ (5,380) $ (6,996) ------------ ------------ ------------ ------------
The amount recognized in the accompanying consolidated balance sheets consisted of the following (in thousands):
DECEMBER 27, DECEMBER 28, 1998 1997 ------------- ------------- Accrued benefit cost............................................. $ 5,380 $ 6,996 ------ ------ ------ ------
The reconciliation of fair value of assets of the plan as of December 27, 1998 and December 28, 1997 was (in thousands):
DECEMBER 27, DECEMBER 28, 1998 1997 ------------ ------------ Beginning of year fair value of assets........................... $ 107,938 $ 90,626 Beginning of year adjustment..................................... (2,719) -- Actual return on plan assets..................................... 16,074 21,905 Disbursements.................................................... (8,672) (4,593) ------------ ------------ End of year fair value of assets................................. $ 112,621 $ 107,938 ------------ ------------ ------------ ------------
The components of net pension (benefit) cost for the years ended December 27, 1998, December 28, 1997 and December 29, 1996 were (in thousands):
DECEMBER 27, DECEMBER 28, DECEMBER 29, 1998 1997 1996 ------------ ------------ ------------ Service cost...................................... $ 3,515 $ 3,764 $ 4,202 Interest cost..................................... 5,874 5,922 5,781 Expected return on assets......................... (9,767) (8,143) (7,051) Net amortization: Unrecognized prior service cost................. (956) (409) (409) Unrecognized net actuarial gain................. (282) (611) (242) ------------ ------------ ------------ Net pension (benefit) cost........................ $ (1,616) $ 523 $ 2,281 ------------ ------------ ------------ ------------ ------------ ------------
F-21 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. EMPLOYEE BENEFIT PLANS (CONTINUED) A summary of the Company's key actuarial assumptions as of December 27, 1998, December 28, 1997 and December 29, 1996 follows:
DECEMBER 27, DECEMBER 28, DECEMBER 29, 1998 1997 1996 ------------ ------------ ------------ Discount rate..................................... 6.75% 7.25% 7.75% Salary increase rate.............................. 3.75-5.25% 4.00-5.50% 4.50-6.00% Expected long term rate of return................. 10.5% 10.5% 9.5%
Effective December 30, 1996, FICC changed its method of calculating the market-related value of plan assets used in determining the return-on-asset component of annual pension expense and the cumulative net unrecognized gain or loss subject to amortization. Under the previous accounting method, the calculation of the market-related value of assets reflected amortization of the actual realized and unrealized capital return on assets on a straight-line basis over a five-year period. Under the new method, the calculation of the market-related value of assets reflects the long-term rate of return expected by the Company and amortization of the difference between the actual return (including capital, dividends and interest) and the expected return over a five-year period. The Company believes the new method is widely used in practice and preferable because it results in calculated plan asset values that more closely approximate fair value, while still mitigating the effect of annual market-value fluctuations. Under both methods, only the cumulative net unrecognized gain or loss which exceeds 10% of the greater of the projected benefit obligation or the market-related value of plan assets is subject to amortization. This change resulted in a non-cash benefit for the year ended December 28, 1997 of $2,236,000 (net of taxes of $1,554,000), which represented the cumulative effect of the change related to years prior to fiscal 1997, and $607,000 (net of taxes of $421,000) in lower pension expense for the year ended December 28, 1997 as compared to the previous accounting method. Had this change been applied retroactively, pension expense would have been reduced by $946,000 for the year ended December 29, 1996. 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 27, 1998, December 28, 1997 and December 29, 1996, the Company made matching contributions at the rate of 75% of a participant's first 2% of his/her contributions and 50% of a participant's next 2% of his/her contributions. All employee contributions are fully vested. Employer 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. Contributions and administrative expenses for the Plan were approximately $1,211,000, $1,089,000 and $1,002,000 for the years ended December 27, 1998, December 28, 1997 and December 29, 1996, respectively. 11. 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 55 years of age, and have completed 10 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. F-22 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) 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 accumulated postretirement benefit obligation for the years ended December 27, 1998 and December 28, 1997 is as follows (in thousands):
DECEMBER 27, DECEMBER 28, 1998 1997 ------------- ------------- Beginning of year benefit obligation............................. $ 6,041 $ 5,709 Service cost..................................................... 155 134 Interest cost.................................................... 432 436 Actuarial loss................................................... 344 304 Disbursements.................................................... (528) (542) ------ ------ End of year benefit obligation................................... $ 6,444 $ 6,041 ------ ------ ------ ------
The reconciliation of the funded status of the postretirement plan as of December 27, 1998 and December 28, 1997 included the following components (in thousands):
DECEMBER 27, DECEMBER 28, 1998 1997 ------------ ------------ Accumulated postretirement benefit obligation.................... $ (6,444) $ (6,041) Fair value of plan assets........................................ -- -- ------------ ------------ Funded status.................................................... (6,444) (6,041) Unrecognized prior service cost.................................. (990) (1,051) Unrecognized net actuarial loss (gain)........................... 321 (24) ------------ ------------ Net amount recognized............................................ $ (7,113) $ (7,116) ------------ ------------ ------------ ------------
The amount recognized in the accompanying consolidated balance sheets consisted of the following (in thousands):
DECEMBER 27, DECEMBER 28, 1998 1997 ------------- ------------- Accrued benefit liability........................................ $ 7,113 $ 7,116 ------ ------ ------ ------
The components of net postretirement benefit cost for the years ended December 27, 1998, December 28, 1997 and December 29, 1996 were (in thousands):
DECEMBER 27, DECEMBER 28, DECEMBER 29, 1998 1997 1996 --------------- --------------- --------------- Service cost...................................... $ 155 $ 134 $ 125 Interest cost..................................... 432 436 436 Net amortization of prior service cost............ (62) (62) (62) ----- ----- ----- Net postretirement benefit cost................... $ 525 $ 508 $ 499 ----- ----- ----- ----- ----- -----
F-23 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) A summary of the Company's key actuarial assumptions as of December 27, 1998, December 28, 1997 and December 29, 1996 follows:
DECEMBER 27, DECEMBER 28, DECEMBER 29, 1998 1997 1996 ------------ ------------ ------------ Discount rate..................................... 6.75% 7.25% 7.75% Salary increase rate.............................. 3.75-5.25% 4.00-5.50% 4.00-5.50% Medical cost trend: First year--1998................................ 7.25% 7.25% 7.25% Ultimate........................................ 5.25% 5.25% 5.25% Years to reach ultimate......................... 2 2 2
A one-percentage-point increase in the assumed health care cost trend rate would have increased postretirement benefit expense by approximately $55,000, $51,000 and $49,000 and would have increased the accumulated postretirement benefit obligation by approximately $513,000, $457,000 and $411,000 for the years ended December 27, 1998, December 28, 1997 and December 29, 1996, respectively. A one-percentage-point decrease in the assumed health care cost trend rate would have decreased the postretirement benefit expense by approximately $50,000, $46,000 and $45,000 and would have decreased the accumulated postretirement benefit obligation by approximately $469,000, $419,000 and $378,000 for the years ended December 27, 1998, December 28, 1997 and December 29, 1996, respectively. 12. INSURANCE RESERVES At December 27, 1998, December 28, 1997 and December 29, 1996, insurance reserves of approximately $26,479,000, $26,974,000 and $16,940,000, respectively, had been recorded. Insurance reserves at December 27, 1998 and December 28, 1997 included RIC's reserve for the Company's insurance liabilities of approximately $11,432,000 and $13,793,000, respectively. Reserves at December 27, 1998, December 28, 1997 and December 29, 1996 also included accruals related to postemployment 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 27, DECEMBER 28, DECEMBER 29, 1998 1997 1996 ------------ ------------ ------------ Current........................................... $ 9,116 $ 7,248 $ 3,973 Long-term......................................... 17,363 19,726 12,967 ------------ ------------ ------------ Total............................................. $ 26,479 $ 26,974 $ 16,940 ------------ ------------ ------------ ------------ ------------ ------------
F-24 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. INSURANCE RESERVES (CONTINUED) Following is a summary of the activity in the insurance reserves for the years ended December 27, 1998, December 28, 1997 and December 29, 1996 (in thousands):
DECEMBER 27, DECEMBER 28, DECEMBER 29, 1998 1997 1996 ------------ ------------ ------------ Beginning balance........................................... $ 26,974 $ 16,940 $ 20,847 Provision................................................... 10,388 9,605 8,363 Payments.................................................... (10,883) (12,802) (12,270) Acquisition of RIC.......................................... -- 13,231 -- ------------ ------------ ------------ Ending balance.............................................. $ 26,479 $ 26,974 $ 16,940 ------------ ------------ ------------ ------------ ------------ ------------
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. 13. STOCKHOLDERS' EQUITY (DEFICIT) As of December 29, 1996, three classes of common stock were authorized: Class A (voting), Class B (limited voting) and Class C (non-voting). In connection with the Recapitalization in November 1997, FICC amended its articles of organization to give effect to a 923.6442-to-1 split of Class A Common Stock and Class B Common Stock and authorize a new class of common stock. The accompanying consolidated financial statements have been restated to reflect the stock split. A Stock Rights Plan ("SRP") was adopted by FICC in 1991. Under the SRP, certain eligible individuals were granted rights to purchase shares of voting common stock of FICC for $.01 per share, subject to certain vesting, anti-dilution and exercise requirements. On March 25, 1996, FICC established the Management Stock Plan ("MSP"). The MSP provided for persons with rights granted under the SRP to waive their rights under such plan and receive shares of FICC's Class A Common Stock. Accordingly, in April 1996, all of the participants in the SRP made this election and the SRP rights then outstanding were cancelled and 122,888 shares of Class A Common Stock were issued, of which 61,650 were vested as of December 29, 1996. In April 1996, the fair value of the 122,888 shares of Class A Common Stock issued was approximately $30,700, or $0.25 per share. The estimated fair value of the 20,334 additional shares vested in 1996 of $5,000 was recorded as compensation expense in the year ended December 29, 1996. In connection with the Recapitalization, 766,782 shares of Class A Common Stock were returned to FICC from certain shareholders for no consideration. The shares were returned in accordance with an agreement with the Company's existing lenders as a condition to the Recapitalization. Of such shares, 99,951 shares were issued to FICC's Chief Executive Officer and vested immediately, 371,285 shares were reserved for issuance under a restricted stock plan (the "Restricted Stock Plan") which was adopted by FICC in connection with the Recapitalization, as described below, and 295,546 shares were issued to certain employees under a limited stock compensation program in which a one-time award of common stock was made to certain employees of the Company. The 295,546 shares issued under the limited stock compensation program vested immediately. Additionally, 27,113 shares were issued under the MSP and immediately vested and the remaining 61,238 nonvested shares under the MSP vested. The estimated fair value of $8,407,000 of the (i) 27,113 shares issued and vested under the MSP, (ii) 61,238 shares previously F-25 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) issued under the MSP which vested in connection with the Recapitalization, (iii) 99,951 vested shares issued to FICC's Chief Executive Officer in connection with the Recapitalization and (iv) 295,546 vested shares issued to certain employees was recorded as compensation expense by the Company upon consummation of the Recapitalization in 1997. The Restricted Stock Plan, pursuant to which 371,285 shares are authorized for issuance, 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. In 1997, 312,575 shares of common stock were issued to directors and employees under the Restricted Stock Plan. In 1998, the Company issued an additional 20,310 shares under the Restricted Stock Plan. The shares vest at 12.50% per year with accelerated vesting of an additional 12.50% per year 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 27, 1998 and December 28, 1997, the Company recorded stock compensation expense of approximately $722,000 and $8,407,000, respectively. 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 are authorized for issuance. 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 27, 1998, 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 10 years from the date of grant and vest over five years. A summary of the status of the Company's Stock Option Plan as of December 27, 1998 and December 28, 1997 and changes during the years ended on those dates is presented below:
WEIGHTED- AVERAGE NUMBER OF EXERCISE SHARES PRICE ----------- ------------- Options outstanding at December 29, 1996........................... -- $ -- Granted.......................................................... 162,150 17.38 Forfeited........................................................ (1,400) 17.38 ----------- Options outstanding at December 28, 1997........................... 160,750 17.38 Granted.......................................................... 81,025 7.99 Forfeited........................................................ (9,260) 17.38 Cancelled........................................................ (69,775) 17.39 ----------- Options outstanding at December 27, 1998........................... 162,740 $ 12.42 ----------- -----------
At December 27, 1998, options were exercisable on 4,550 shares of stock with an exercise price of $17.38. As of December 28, 1997, none of the outstanding options were exercisable. F-26 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) Fair value was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:
1998 1997 ---------------- --------- Risk free interest rate......................................... 4.88%-5.75% 5.96% Expected life................................................... 7 years 7 years Expected volatility............................................. 86.50% 50.00% Dividend yield.................................................. 0.00% 0.00% Fair value...................................................... $5.03-$19.68 $10.39
On November 5, 1998, the Company cancelled 69,775 stock options outstanding (original options granted on November 14, 1997, May 13, 1998 and July 29, 1998 at exercise prices of $17.38, $24.75 and $12.00, respectively) and granted 69,775 new options to the same individuals with an exercise price of $6.38, which was the market value as of the close of the November 5, 1998 business day. The employees whom this affected were middle management members of the Company. No executives or directors of the Company were included. Additionally, the remaining 69,775 options outstanding related to these grant dates will be cancelled and new options issued at the then fair market value if and when certain performance criteria are met. The following table summarizes information related to outstanding options as of December 27, 1998:
OPTIONS OUTSTANDING - - --------------------------------------------------------------------------- WEIGHTED-AVERAGE NUMBER REMAINING RANGE OF OUTSTANDING AS OF CONTRACTUAL LIFE WEIGHTED AVERAGE EXERCISE PRICES DECEMBER 27, 1998 (YEARS) EXERCISE PRICE - - ------------------ ----------------- ----------------- ----------------- $4.95--$7.43 69,775 9.9 $ 6.38 9.90--12.38 3,475 9.6 12.00 17.33--19.80 86,840 8.9 17.38 22.28--24.75 2,650 9.4 24.75 ------- ----- 162,740 9.3 12.42 ------- ----- ------- -----
The Company applies APB No. 25 and related interpretations in accounting for its plans. Accordingly, 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 loss and basic net loss per share for the years ended December 27, 1998 and December 28, 1997 would have been the following pro forma amounts:
DECEMBER 27, DECEMBER 28, 1998 1997 ------------- ------------- Loss before cumulative effect of change in accounting principle.................... $ (5,023,000) $ (5,149,000) Cumulative effect of change in accounting principle................................ -- 2,236,000 ------------- ------------- Net loss........................................................................... $ (5,023,000) $ (2,913,000) ------------- ------------- ------------- ------------- Basic net loss per share: Loss before cumulative effect of change in accounting principle.................... $ (0.67) $ (1.66) Cumulative effect of change in accounting principle................................ -- 0.72 ------------- ------------- Net loss per share................................................................. $ (0.67) $ (0.94) ------------- ------------- ------------- -------------
F-27 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) Pursuant to a stockholder rights plan (the "Stockholder Rights Plan") 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. In 1991, one of the Company's lenders was issued warrants for 13,836 shares of FICC's Class A Common Stock at an exercise price of $32.16 per share. These warrants expired on September 2, 1998. None of these warrants had been exercised. In 1991, certain officers of FICC purchased 97,906 shares of Class A Common Stock and warrants convertible into an additional 71,527 shares of voting common stock for an aggregate purchase price of $55,550. These warrants were exercised on April 19, 1996 at an aggregate exercise price of $22,000. 14. RELATED PARTY TRANSACTIONS On October 12, 1998, the Company entered into a franchise agreement with The Ice Cream Corporation ("TICC"), as franchisee, 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 and Chief Executive Officer of the Company. Pursuant to the TICC Agreement, TICC purchased at fair market value certain assets and rights in two existing Friendly's restaurants, has committed to open an additional 10 restaurants over the next six years and has an option to purchase an additional three restaurants. Proceeds from the sale were approximately $1,547,700, of which $57,000 was for initial franchise fees for the two initial restaurants, $125,000 for franchise fees for certain of the additional restaurants described above and $25,000 for the option to purchase two additional existing restaurants. The $57,000 was recorded as revenue in the year ended December 27, 1998 and the option fees will be recorded as income as additional restaurants are purchased. The Company recognized income of approximately $1.0 million related to the sale of the equipment and operating rights for the two existing franchised locations in the year ended December 27, 1998. The franchisee is required by the terms of the TICC Agreement to purchase from the Company all of the frozen dessert products it sells in the franchised restaurants. The Company subleases the real estate to TICC. FICC's Chairman is an officer of the general partner of a subsidiary of TRC. The Company entered into subleases for certain land, buildings and equipment from the subsidiary of TRC. For the years ended December 27, 1998, December 28, 1997 and December 29, 1996, rent expense related to the subleases was approximately $309,000, $279,000 and $278,000, respectively. On March 19, 1997, FICC acquired all of the outstanding shares of common stock of Restaurant Insurance Corporation ("RIC") from TRC (see Note 4). Prior to the acquisition, RIC assumed, from a third party insurance company, reinsurance premiums related to insurance liabilities of the Company of approximately $4,198,000 for the year ended December 29, 1996. In addition, RIC had reserves of approximately $13,038,000 related to Company claims at December 29, 1996. TRC Realty Co. (a subsidiary of TRC) entered into a ten-year operating lease for an aircraft, for use by both the Company and Perkins Family Restaurants, L.P. ("Perkins"), a subsidiary of TRC. The F-28 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. RELATED PARTY TRANSACTIONS (CONTINUED) Company shares equally with Perkins in reimbursing TRC Realty Co. for leasing, tax and insurance expenses. In addition, the Company also incurs actual usage costs. Total expense for the years ended December 27, 1998, December 28, 1997 and December 29, 1996 was approximately $691,000, $610,000 and $590,000, respectively. The Company purchased certain food products used in the normal course of business from a division of Perkins. For the years ended December 27, 1998, December 28, 1997 and December 29, 1996, purchases were approximately $945,000, $975,000 and $1,425,000, respectively. TRC provided FICC with certain management services for which TRC was reimbursed approximately $110,000, $824,000 and $800,000 for the years ended December 27, 1998, December 28, 1997 and December 29, 1996, respectively. The 1997 charges were reduced by a $350,000 refund from TRC for prior years. Expenses were charged to FICC on a specific identification basis. FICC believes the allocation method used was reasonable and approximated the amount that would have been incurred on a stand-alone basis had FICC been operated as an unaffiliated entity. In March 1996, the Company's pension plan acquired three restaurant properties from the Company. The land, buildings and improvements were purchased by the plan at their appraised value of $2,043,000 and are located in Connecticut, Vermont and Virginia. Simultaneously with the purchase, the pension plan leased back the three properties to the Company at an aggregate annual base rent of $214,000 for the first five years and $236,000 for the following five years. With respect to these transactions the pension plan was represented by independent legal and financial advisors. The transaction was recorded by the Company as a direct financing lease since the Company has the right to repurchase the properties at fair market value. 15. 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 financial position or future operating results. The Company has commitments to purchase approximately $86,700,000 of raw materials, food products and supplies used in the normal course of business that cover periods of one to twenty-four months. Most of these commitments are noncancelable. On July 14, 1997, the Company entered into an agreement which conditionally granted a franchisee exclusive rights to operate, manage and develop Friendly's full-service restaurants in the franchising region of Maryland, Delaware, the District of Columbia and northern Virginia (the "Agreement"). Pursuant to the Agreement, the franchisee purchased certain assets and rights in 34 existing Friendly's restaurants in this franchising region, committed to open an additional 74 restaurants over the next six years and, subject to the fulfillment of certain conditions, further agreed to open 26 additional restaurants, for a total of 100 new restaurants in this franchising region over the next ten years. Gross proceeds from the sale were approximately $8,488,000 of which $860,000 was for initial franchise fees for the 34 initial restaurants, $500,000 was for development rights and $930,000 was for franchise fees for certain of the additional restaurants described above. The $860,000 was recorded as revenue in the year ended December 28, 1997, and the development rights and franchise fees received will be amortized into income over the initial ten-year term of the Agreement and as additional restaurants are opened, respectively. The Company recognized income of $2,283,000 related to the sale of the equipment and operating rights for the 34 existing franchised locations in the year ended December 28, 1997. The proceeds were allocated between F-29 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. COMMITMENTS AND CONTINGENCIES (CONTINUED) the assets sold and the development rights by the Company and the franchisee based on the estimated fair market values. The franchisee is required by the terms of the Agreement to purchase from the Company all of the frozen dessert products it sells in the franchised restaurants. As of December 27, 1998, the franchisee had opened four new units. 16. RELOCATION OF MANUFACTURING AND DISTRIBUTION FACILITY On December 1, 1998, the Company announced a plan to relocate its manufacturing and distribution operations from Troy, Ohio to Wilbraham, Massachusetts and York, Pennsylvania. As of December 27, 1998, the Company accrued certain costs and expenses associated with the closedown of its Troy facility. Those costs are as follows: Severance pay..................................................... $ 536,000 Utility costs..................................................... 140,000 Real estate taxes................................................. 87,000 Outside storage................................................... 80,000 Outplacement services............................................. 50,000 Additional exit costs (plant maintenance, security and travel).... 52,000 --------- Total........................................................... $ 945,000 --------- ---------
The severance pay benefits were communicated to the affected employees on December 17, 1998. As a result of this plan, the Company anticipates that approximately 197 individuals will have their employment terminated. The groups of employees to be affected are comprised of: Manufacturing......................... 103 Distribution.......................... 90 Office support........................ 4 --- 197 --- ---
Management has not yet determined which, if any, office support employees will be relocated to York, Pennsylvania. 17. SEGMENT REPORTING The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," during 1998. SFAS No. 131 established standards for reporting information about operating segments in annual and interim financial reports. It also established standards for related disclosures about products and services and geographic areas. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision-maker is the Chairman and Chief Executive Officer of the Company. The Company's operating segments include restaurant, foodservice, franchise and international operations. The revenues from these segments include both sales to unaffiliated customers and intersegment sales, which generally are accounted for on a basis consistent with sales to unaffiliated customers. Intersegment sales and other intersegment transactions have been eliminated in the accompanying consolidated financial statements. F-30 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SEGMENT REPORTING (CONTINUED) Foodservice operations manufactures frozen dessert products and distributes such manufactured products and purchased finished goods to the Company's restaurants and franchised operations. Additionally, it sells frozen dessert products to distributors and retail and institutional locations. The Company does not allocate general and administrative expenses associated with its headquarters operations to any business segment. These costs include general and administrative expenses of the following functions: legal, accounting, personnel not directly related to a segment, information systems and other headquarters activities. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies except that the financial results for the foodservice operating segment, prior to intersegment eliminations, have been prepared using a management approach, which is consistent with the basis and manner in which the Company's management internally reviews financial information for the purpose of assisting in making internal operating decisions. The Company evaluates performance based on stand-alone operating segment 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 consolidated net loss before (i) cumulative effect of change in accounting principle, net of income tax expense, (ii) benefit from (provision for) income taxes, (iii) equity in net loss and other write-downs associated with joint venture, (iv) interest expense, net, (v) depreciation and amortization and (vi) non-cash write-downs and all other non-cash items plus cash distributions from unconsolidated subsidiaries.
DECEMBER 27, DECEMBER 28, DECEMBER 29, 1998 1997 1996 ------------ ------------ ------------ (IN THOUSANDS) Revenues: Restaurant................................................ $ 595,308 $ 593,671 $ 596,675 Foodservice............................................... 256,829 245,346 229,495 Franchise................................................. 3,769 2,375 -- International............................................. 301 1,247 668 ------------ ------------ ------------ Total................................................... $ 856,207 $ 842,639 $ 826,838 ------------ ------------ ------------ ------------ ------------ ------------ Intersegment revenues: Restaurant................................................ $ -- $ -- $ -- Foodservice............................................... (178,111) (175,092) (176,031) Franchise................................................. -- -- -- International............................................. -- -- -- ------------ ------------ ------------ Total................................................... $ (178,111) $ (175,092) $ (176,031) ------------ ------------ ------------ ------------ ------------ ------------ External revenues: Restaurant................................................ $ 595,308 $ 593,671 $ 596,675 Foodservice............................................... 78,718 70,254 53,464 Franchise................................................. 3,769 2,375 -- International............................................. 301 1,247 668 ------------ ------------ ------------ Total................................................... $ 678,096 $ 667,547 $ 650,807 ------------ ------------ ------------ ------------ ------------ ------------
F-31 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SEGMENT REPORTING (CONTINUED)
DECEMBER 27, DECEMBER 28, DECEMBER 29, 1998 1997 1996 ------------ ------------ ------------ (IN THOUSANDS) EBITDA: Restaurant................................................ $ 70,771 $ 73,952 $ 74,727 Foodservice............................................... 17,659 20,035 13,747 Franchise................................................. 1,423 1,240 (340) International............................................. (1,191) (1,127) (1,825) Other..................................................... 184 755 -- Corporate................................................. (25,303) (22,492) (22,602) ------------ ------------ ------------ Total................................................... $ 63,543 $ 72,363 $ 63,707 ------------ ------------ ------------ ------------ ------------ ------------ Interest expense, net....................................... $ 31,838 $ 39,303 $ 44,141 ------------ ------------ ------------ ------------ ------------ ------------ Equity in net loss and other write-downs associated with joint venture............................................. $ 4,828 $ 1,530 $ -- ------------ ------------ ------------ ------------ ------------ ------------ Income (loss) before income taxes and cumulative effect of change in accounting principle: Restaurant................................................ $ 43,218 $ 48,012 $ 46,035 Foodservice............................................... 14,663 17,186 11,241 Franchise................................................. 938 179 (340) International............................................. (6,295) (2,707) (1,845) Other..................................................... 184 755 -- Corporate................................................. (61,134) (73,163) (68,731) ------------ ------------ ------------ Total................................................... $ (8,426) $ (9,738) $ (13,640) ------------ ------------ ------------ ------------ ------------ ------------ Depreciation and amortization: Restaurant................................................ $ 26,641 $ 25,489 $ 28,465 Foodservice............................................... 2,996 2,849 2,506 Franchise................................................. 485 1,061 -- International............................................. 56 50 20 Corporate................................................. 3,271 2,243 1,988 ------------ ------------ ------------ Total................................................... $ 33,449 $ 31,692 $ 32,979 ------------ ------------ ------------ ------------ ------------ ------------ Identifiable assets: Restaurant................................................ $ 262,353 $ 244,457 $ 254,000 Foodservice............................................... 45,111 49,703 48,995 Franchise................................................. 11,713 11,404 200 International............................................. 1,485 5,887 5,588 Other..................................................... 6,690 6,786 166 Corporate................................................. 47,196 53,634 51,177 ------------ ------------ ------------ Total................................................... $ 374,548 $ 371,871 $ 360,126 ------------ ------------ ------------ ------------ ------------ ------------
F-32 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SEGMENT REPORTING (CONTINUED)
DECEMBER 27, DECEMBER 28, DECEMBER 29, 1998 1997 1996 ------------ ------------ ------------ (IN THOUSANDS) Capital expenditures, including capitalized leases: Restaurant................................................ $ 43,697 $ 28,966 $ 22,741 Foodservice............................................... 5,277 3,655 6,278 Corporate................................................. 2,806 1,244 1,149 ------------ ------------ ------------ Total................................................... $ 51,780 $ 33,865 $ 30,168 ------------ ------------ ------------ ------------ ------------ ------------
18. CLOSING OF INTERNATIONAL OPERATIONS Effective October 15, 1998, Friendly's International, Inc. ("FII"), a subsidiary of the Company, entered into an agreement that provided for the sale of the Company's 50% equity interest in its China joint venture to the joint venture partner and the settlement of FICC's advances to the joint venture for an aggregate of approximately $2.3 million in notes and $335,000 of equipment. On February 25, 1999, FII received an initial payment of approximately $1.1 million and arranged for the shipment of the equipment to the United States. The Company believes that collection of the remaining $1.2 million due under the terms of the settlement agreement is not probable due to the financial condition of the joint venture partner and restrictions on the transfer of funds from China. Accordingly, the Company recorded a write-down of approximately $3.5 million as of December 27, 1998 to eliminate the Company's remaining investment in and advances to the joint venture. If any additional proceeds are received by the Company, such amount will be recorded as income by the Company at such time. Additionally, in 1998 the Company determined that it would discontinue its direct investment in the United Kingdom. Accordingly, the Company has recognized an impairment loss of $468,000 to reduce the related assets to their estimated net realizable value. Following is a summary of the write-down recorded for the United Kingdom operations during the year ended December 27, 1998: Inventory......................................... $ 230,000 Equipment......................................... 220,000 Accounts receivable............................... 18,000 --------- $ 468,000 --------- ---------
In addition, $150,000 of costs and expenses associated with the discontinuation of the United Kingdom operations were accrued as of December 27, 1998. 19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION FICC's obligation related to the $200 million Senior Notes are guaranteed fully and unconditionally by one of FICC's wholly owned subsidiaries. There are no restrictions on FICC's ability to obtain dividends or other distributions of funds from this subsidiary, except those imposed by applicable law. The following supplemental financial information sets forth, on a condensed consolidating basis, balance sheets, statements of operations and statements of cash flows for Friendly Ice Cream Corporation (the "Parent Company"), Friendly's Restaurants Franchise, Inc. (the "Guarantor Subsidiary") and Friendly's International, Inc., Friendly Holding (UK) Limited, Friendly Ice Cream (UK) Limited and Restaurant Insurance Corporation (collectively, the "Non-guarantor Subsidiaries"). Separate complete financial statements and F-33 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) other disclosures of the Guarantor Subsidiary as of December 27, 1998 and December 28, 1997 and for the years ended December 27, 1998 and December 28, 1997 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-34 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 27, 1998 (IN THOUSANDS)
NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ----------- ----------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents..................... $ 9,180 $ 53 $ 1,858 $ -- $ 11,091 Restricted cash............................... -- -- 2,211 -- 2,211 Accounts receivable........................... 5,370 175 21 -- 5,566 Inventories................................... 15,445 -- 115 -- 15,560 Deferred income taxes......................... 6,783 -- 278 -- 7,061 Prepaid expenses and other current assets..... 8,657 2,434 7,461 (11,974) 6,578 ---------- ----------- ----------- ------------ ------------ Total current assets............................ 45,435 2,662 11,944 (11,974) 48,067 Deferred income taxes........................... -- 503 1,024 (1,527) -- Property and equipment, net..................... 300,159 -- -- -- 300,159 Intangibles and deferred costs, net............. 25,178 -- -- -- 25,178 Investments in subsidiaries..................... 965 -- -- (965) -- Other assets.................................... 222 -- 5,736 (4,814) 1,144 ---------- ----------- ----------- ------------ ------------ Total assets.................................... $ 371,959 $ 3,165 $ 18,704 $ (19,280) $ 374,548 ---------- ----------- ----------- ------------ ------------ ---------- ----------- ----------- ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current maturities of long- term obligations................................. $ 10,200 $ -- $ -- $ (4,500) $ 5,700 Accounts payable.............................. 26,460 -- -- -- 26,460 Accrued expenses.............................. 42,035 574 11,429 (7,474) 46,564 ---------- ----------- ----------- ------------ ------------ Total current liabilities....................... 78,695 574 11,429 (11,974) 78,724 Deferred income taxes........................... 38,715 -- -- (1,527) 37,188 Long-term obligations, less current maturities.................................... 325,620 -- -- (4,814) 320,806 Other liabilities............................... 19,530 1,469 7,432 -- 28,431 Stockholders' equity (deficit).................. (90,601) 1,122 (157) (965) (90,601) ---------- ----------- ----------- ------------ ------------ Total liabilities and stockholders' equity (deficit)..................................... $ 371,959 $ 3,165 $ 18,704 $ (19,280) $ 374,548 ---------- ----------- ----------- ------------ ------------ ---------- ----------- ----------- ------------ ------------
F-35 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 27, 1998 (IN THOUSANDS)
NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ----------- ----------- ------------- ------------ Revenues........................................ $ 676,093 $ 1,703 $ 300 $ -- $ 678,096 Costs and expenses: Cost of sales................................. 204,364 -- 520 -- 204,884 Labor and benefits............................ 211,581 -- -- -- 211,581 Operating expenses and write-downs of property and equipment............................... 154,715 -- 239 -- 154,954 General and administrative expenses........... 42,637 1,233 456 -- 44,326 Stock compensation expense.................... 722 -- -- -- 722 Relocation of manufacturing and distribution facility.................................... 945 -- -- -- 945 Depreciation and amortization................. 33,393 -- 56 -- 33,449 Gain on sale of restaurant operations........... (1,005) -- -- -- (1,005) Interest expense (income)....................... 32,746 -- (908) -- 31,838 Equity in net loss and other write-downs associated with joint venture................. 1,168 -- 3,660 -- 4,828 ---------- ----------- ----------- ------ ------------ (Loss) income before benefit from (provision for) income taxes and equity in net loss of consolidated subsidiaries..................... (5,173) 470 (3,723) -- (8,426) Benefit from (provision for) income taxes....... 2,616 (193) 1,032 -- 3,455 ---------- ----------- ----------- ------ ------------ (Loss) income before equity in net loss of consolidated subsidiaries..................... (2,557) 277 (2,691) -- (4,971) Equity in net loss of consolidated subsidiaries.................................. (2,414) -- -- 2,414 -- ---------- ----------- ----------- ------ ------------ Net (loss) income............................... $ (4,971) $ 277 $ (2,691) $ 2,414 $ (4,971) ---------- ----------- ----------- ------ ------------ ---------- ----------- ----------- ------ ------------
F-36 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 27, 1998 (IN THOUSANDS)
NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ----------- ----------- --------------- ------------ Net cash provided by (used in) operating activities..................................... $ 33,456 $ (151) $ (508) $ 68 $ 32,865 ----------- ----- ----------- --- ------------ Cash flows from investing activities: Purchases of property and equipment............ (51,172) -- -- -- (51,172) Proceeds from sales of property and equipment.................................... 2,852 -- -- -- 2,852 ----------- ----- ----------- --- ------------ Net cash used in investing activities............ (48,320) -- -- -- (48,320) ----------- ----- ----------- --- ------------ Cash flows from financing activities: Dividends received (paid)...................... 800 -- (800) -- -- Proceeds from borrowings....................... 69,258 -- -- -- 69,258 (Repayments of obligations) reimbursements from parent....................................... (58,253) -- 400 -- (57,853) ----------- ----- ----------- --- ------------ Net cash provided by (used in) financing activities..................................... 11,805 -- (400) -- 11,405 ----------- ----- ----------- --- ------------ Effect of exchange rate changes on cash.......... -- -- 9 -- 9 ----------- ----- ----------- --- ------------ Net (decrease) increase in cash and cash equivalents.................................... (3,059) (151) (899) 68 (4,041) Cash and cash equivalents, beginning of year..... 12,239 204 2,757 (68) 15,132 ----------- ----- ----------- --- ------------ Cash and cash equivalents, end of year........... $ 9,180 $ 53 $ 1,858 $ -- $ 11,091 ----------- ----- ----------- --- ------------ ----------- ----- ----------- --- ------------ Supplemental disclosures: Interest paid (received)....................... $ 31,752 $ -- $ (968) $ -- $ 30,784 Income taxes (received) paid................... (811) 810 533 -- 532 Capital lease obligations incurred............. 608 -- -- -- 608 Capital lease obligations terminated........... 384 -- -- -- 384
F-37 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 28, 1997 (IN THOUSANDS)
NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ----------- ----------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents..................... $ 12,239 $ 204 $ 2,757 $ (68) $ 15,132 Restricted cash............................... -- -- 1,333 -- 1,333 Accounts receivable........................... 8,054 130 738 -- 8,922 Inventories................................... 15,165 -- 506 -- 15,671 Deferred income taxes......................... 8,831 -- -- -- 8,831 Prepaid expenses and other current assets..... 7,096 2,326 7,428 (10,450) 6,400 ---------- ----------- ----------- ------------ ------------ Total current assets............................ 51,385 2,660 12,762 (10,518) 56,289 Deferred income taxes........................... -- 479 352 (831) -- Investment in joint venture..................... -- -- 2,970 -- 2,970 Property and equipment, net..................... 283,749 -- 195 -- 283,944 Intangibles and deferred costs, net............. 25,994 -- -- -- 25,994 Investments in subsidiaries..................... 3,769 -- -- (3,769) -- Other assets.................................... 1,754 -- 8,528 (7,608) 2,674 ---------- ----------- ----------- ------------ ------------ Total assets.................................... $ 366,651 $ 3,139 $ 24,807 $ (22,726) $ 371,871 ---------- ----------- ----------- ------------ ------------ ---------- ----------- ----------- ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current maturities of long-term obligations..... $ 8,852 $ -- $ -- $ (4,400) $ 4,452 Accounts payable.............................. 23,951 -- -- -- 23,951 Accrued expenses.............................. 36,820 885 12,090 (6,118) 43,677 ---------- ----------- ----------- ------------ ------------ Total current liabilities....................... 69,623 885 12,090 (10,518) 72,080 Deferred income taxes........................... 43,224 -- -- (831) 42,393 Long-term obligations, less current maturities.................................... 318,033 -- -- (7,608) 310,425 Other liabilities............................... 22,132 1,409 9,793 -- 33,334 Stockholders' equity (deficit).................. (86,361) 845 2,924 (3,769) (86,361) ---------- ----------- ----------- ------------ ------------ Total liabilities and stockholders' equity (deficit)..................................... $ 366,651 $ 3,139 $ 24,807 $ (22,726) $ 371,871 ---------- ----------- ----------- ------------ ------------ ---------- ----------- ----------- ------------ ------------
F-38 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 28, 1997 (IN THOUSANDS)
NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ----------- ----------- ------------- ------------ Revenues........................................ $ 665,380 $ 1,459 $ 708 $ -- $ 667,547 Costs and expenses: Cost of sales................................. 197,057 -- 570 -- 197,627 Labor and benefits............................ 208,364 -- -- -- 208,364 Operating expenses and write-downs of property and equipment............................... 150,348 -- (612) -- 149,736 General and administrative expenses........... 40,698 607 886 -- 42,191 Stock compensation expense.................... 8,407 -- -- -- 8,407 Expenses associated with Recapitalization..... 718 -- -- -- 718 Depreciation and amortization................. 31,642 -- 50 -- 31,692 Gain on sale of restaurant operations........... (2,283) -- -- -- (2,283) Interest expense (income)....................... 39,489 -- (186) -- 39,303 Equity in net loss of joint venture............. -- -- 1,530 -- 1,530 ---------- ----------- ----------- ------ ------------ (Loss) income before benefit from (provision for) income taxes, cumulative effect of change in accounting principle and equity in net loss of consolidated subsidiaries.................. (9,060) 852 (1,530) -- (9,738) Benefit from (provision for) income taxes....... 4,562 (349) (220) -- 3,993 ---------- ----------- ----------- ------ ------------ (Loss) income before cumulative effect of change in accounting principle and equity in net loss of consolidated subsidiaries.................. (4,498) 503 (1,750) -- (5,745) Cumulative effect of change in accounting principle..................................... 2,236 -- -- -- 2,236 ---------- ----------- ----------- ------ ------------ (Loss) income before equity in net loss of consolidated subsidiaries..................... (2,262) 503 (1,750) -- (3,509) Equity in net loss of consolidated subsidiaries.................................. (1,247) -- -- 1,247 -- ---------- ----------- ----------- ------ ------------ Net (loss) income............................... $ (3,509) $ 503 $ (1,750) $ 1,247 $ (3,509) ---------- ----------- ----------- ------ ------------ ---------- ----------- ----------- ------ ------------
F-39 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 28, 1997 (IN THOUSANDS)
NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ----------- ----------- ------------- ------------ Net cash provided by (used in) operating activities.................................... $ 15,007 $ (206) $ 7,385 $ (68) $ 22,118 ---------- ----- ----------- ----- ------------ Cash flows from investing activities: Purchases of property and equipment........... (31,572) -- (66) -- (31,638) Proceeds from sales of property and equipment................................... 5,043 -- -- -- 5,043 Purchases of investment securities............ -- -- (8,194) -- (8,194) Proceeds from sales and maturities of investment securities....................... -- -- 12,787 -- 12,787 Cash (paid) received in acquisition of Restaurant Insurance Corporation............ (2,300) -- 2,265 -- (35) Advances to joint venture..................... (1,400) -- -- -- (1,400) Investments in consolidated subsidiaries...... (142) -- -- 142 -- ---------- ----- ----------- ----- ------------ Net cash (used in) provided by investing activities.................................... (30,371) -- 6,792 142 (23,437) ---------- ----- ----------- ----- ------------ Cash flows from financing activities: Contribution of capital....................... -- 142 -- (142) -- Proceeds from issuance of common stock........ 81,920 -- -- -- 81,920 Proceeds from issuance of senior notes........ 200,000 -- -- -- 200,000 Proceeds from borrowings (advances to parent)..................................... 179,957 -- (12,409) -- 167,548 (Repayments of obligations) reimbursements from parent................................. (452,028) -- 400 -- (451,628) ---------- ----- ----------- ----- ------------ Net cash provided by (used in) financing activities.................................... 9,849 142 (12,009) (142) (2,160) ---------- ----- ----------- ----- ------------ Effect of exchange rate changes on cash......... -- -- (15) -- (15) ---------- ----- ----------- ----- ------------ Net (decrease) increase in cash and cash equivalents................................... (5,515) (64) 2,153 (68) (3,494) Cash and cash equivalents, beginning of year.... 17,754 268 604 -- 18,626 ---------- ----- ----------- ----- ------------ Cash and cash equivalents, end of year.......... $ 12,239 $ 204 $ 2,757 $ (68) $ 15,132 ---------- ----- ----------- ----- ------------ ---------- ----- ----------- ----- ------------ Supplemental disclosures: Interest paid................................. $ 46,040 $ -- $ -- $ -- $ 46,040 Income taxes paid............................. 147 -- 21 168 Capital lease obligations incurred............ 2,227 -- -- -- 2,227 Capital lease obligations terminated.......... 1,587 -- -- -- 1,587
F-40
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. 4.1 Credit Agreement among the Company, Societe Generale, New York Branch and certain other banks and financial institutions ("Credit Agreement"). (Incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1997, File No. 0-3930.). 4.2 First Amendment to Credit Agreement 4.3 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 10.2 to the Registrants's Annual Report on Form 10-K for the fiscal year ended December 28, 1997, File No. 0-3930.). 4.4 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 Agreement relating to the Company's Limited Stock Compensation Program.* (Incorporated by reference to Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1997, File No. 0-3930.). 10.4 Development Agreement between Friendly Ice Cream Corporation and FriendCo Restaurants, Inc. (Incorporated by reference from Exhibit 10.4 to the Company's Registration Statement on Form S-1, Reg. No. 333-34633). 10.5 Franchise Agreement between Friendly's Restaurants Franchise, Inc. and FriendCo Restaurants, Inc. (Incorporated by reference from Exhibit 10.5 to the Company's Registration Statement on Form S-1, Reg. No. 333-34633). 10.6 Management Agreement between Friendly Ice Cream Corporation and FriendCo Restaurants, Inc. (Incorporated by reference from Exhibit 10.6 to the Company's Registration Statement on form S-1, Reg. No. 333-34633). 10.7 Purchase and Sale Agreement between Friendly Ice Cream Corporation and FriendCo Restaurants, Inc. (Incorporated by reference from Exhibit 10.7 to the Company's Registration Statement on Form S-1, Reg. No. 333-34633). 10.8 Software License Agreement between Friendly's Restaurants Franchise, Inc. and FriendCo Restaurants, Inc. (Exhibits 10.4 through 10.8, collectively, the "DavCo Agreement") (Incorporated by reference from Exhibit 10.8 to the Company's Registration Statement on Form S-1, Reg. No. 333-34633). 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 Company and TRC Realty Co.
F-41
EXHIBIT INDEX ---------------------------------------------------------------------------------------------------------- 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). 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 27.1 Financial Data Schedule * -- Management Contract or Compensatory Plan or Arrangement
F-42 EX-3.2 2 EX-3.2 Exhibit 3.2 AMENDED AND RESTATED BY-LAWS of FRIENDLY ICE CREAM CORPORATION Amended as of July 29, 1998 TABLE OF CONTENTS
Page SECTION 1 OFFICES ...................................................................................1 Section 1.1 Registered Office..................................................................1 Section 1.2 Other Offices......................................................................1 SECTION 2 STOCKHOLDERS................................................................................1 Section 2.1 Time and Place of Meetings.........................................................1 Section 2.2 Annual Meetings....................................................................1 Section 2.3 Special Meetings...................................................................1 Section 2.4 Notice of Meetings.................................................................1 Section 2.5 Waiver of Notice...................................................................2 Section 2.6 Fixing of Record Date..............................................................2 Section 2.7 Stockholders' List of Meeting......................................................2 Section 2.8 Quorum; Adjournment................................................................3 Section 2.9 Voting Requirements................................................................3 Section 2.10 Proxies............................................................................3 Section 2.11 Notice of Stockholder Business.....................................................4 Section 2.12 Conduct of Meetings................................................................4 Section 2.13 Inspectors of Election.............................................................5 Section 2.14 Informal Action by Stockholders....................................................5 SECTION 3 DIRECTORS...................................................................................6 Section 3.1 General Powers.....................................................................6 Section 3.2 Number, Qualification, Tenure and Removal..........................................6 Section 3.3 Vacancies; Resignations............................................................6 Section 3.4 Place of Meetings..................................................................6 Section 3.5 Regular Meetings...................................................................6 Section 3.6 Special Meetings...................................................................6 Section 3.7 Notice.............................................................................7 Section 3.8 Waiver of Notice...................................................................7 Section 3.9 Quorum.............................................................................7 Section 3.10 Manner of Acting...................................................................7 Section 3.11 Committees.........................................................................7 Section 3.12 Organization.......................................................................7 Section 3.13 Action without Meeting.............................................................8 Section 3.14 Attendance by Telephone............................................................8 Section 3.15 Compensation.......................................................................8 Section 3.16 Presumption of Assent..............................................................8 Section 3.17 Notification of Nominations........................................................8
SECTION 4 OFFICERS ..................................................................................10 Section 4.1 Enumeration.......................................................................10 Section 4.2 Salaries..........................................................................10 Section 4.3 Term of Office....................................................................10 Section 4.4 Chairman..........................................................................10 Section 4.5 President.........................................................................10 Section 4.6 Vice President....................................................................10 Section 4.7 Clerk.............................................................................10 Section 4.8 Assistant Clerk...................................................................11 Section 4.9 Treasurer.........................................................................11 Section 4.10 Assistant Treasurer...............................................................11 Section 4.11 Other Duties......................................................................11 SECTION 5 CERTIFICATES OF STOCK AND OTHER STOCKHOLDER MATTERS........................................11 Section 5.1 Form..............................................................................11 Section 5.2 Replacement.......................................................................12 Section 5.3 Transfer..........................................................................12 Section 5.4 Stock Ledger Determinative of Dividend Distributions and Voting Entitlement.......12 SECTION 6 INDEMNIFICATION............................................................................12 Section 6.1 Right to Indemnification..........................................................12 Section 6.2 Settlements.......................................................................13 Section 6.3 Notification and Defense of Proceedings...........................................13 Section 6.4 Advance of Expenses...............................................................14 Section 6.5 Certain Presumptions and Determinations...........................................14 Section 6.6 Remedies..........................................................................15 Section 6.7 Contract Right; Subsequent Amendment..............................................15 Section 6.8 Other Rights......................................................................15 Section 6.9 Partial Indemnification...........................................................15 Section 6.10 Insurance.........................................................................16 Section 6.11 Merger or Consolidation...........................................................16 Section 6.12 Savings Clause....................................................................16 Section 6.13 Subsequent Legislation............................................................16 Section 6.14 Indemnification of Others.........................................................16 SECTION 7 DIVIDENDS..................................................................................16 Section 7.1 Declaration of Dividends..........................................................16 Section 7.2 Reserves for Dividends............................................................16
SECTION 8 GENERAL PROVISIONS.........................................................................17 Section 8.1 Fiscal Year.......................................................................17 Section 8.2 Corporate Seal....................................................................17 Section 8.3 Corporation Checks................................................................17 Section 8.4 Protection of Corporate Books.....................................................17 Section 8.5 Control Share Acquisitions........................................................17 SECTION 9 AMENDMENTS.................................................................................17 Section 9.1 Amendments of By-Laws.............................................................17
AMENDED AND RESTATED BY-LAWS of FRIENDLY ICE CREAM CORPORATION SECTION 1 OFFICES SECTION 1.1 REGISTERED OFFICE. The registered office of Friendly Ice Cream Corporation (the "Corporation") shall be in the town of Wilbraham, County of Hampden, Commonwealth of Massachusetts at 1855 Boston Road. SECTION 1.2 OTHER OFFICES. The Corporation may also have offices at such other places both within and without the Commonwealth of Massachusetts as the Board of Directors of the Corporation (the "Board") may from time to time determine or the business of the Corporation may require. SECTION 2 STOCKHOLDERS SECTION 2.1 TIME AND PLACE OF MEETINGS. All meetings of the stockholders for the election of directors or for any other purpose shall be held within the Commonwealth of Massachusetts or, to the extent permitted by the Corporation's Restated Articles of Organization as in effect from time to time (the "Articles of Organization"), elsewhere in the United States. SECTION 2.2 ANNUAL MEETINGS. An annual meeting of stockholders shall be held, within six months after the end of the fiscal year of the Corporation, for the purpose of electing directors to serve on the Board and transacting such other business as may properly be brought before the meeting. The date of the annual meeting shall be determined by the Board. SECTION 2.3 SPECIAL MEETINGS. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by law, may be called only by (i) the Board pursuant to a resolution approved by the affirmative vote of a majority of the Directors then in office, (ii) the Chairman of the Board, if one is elected or (iii) the President. Only those matters set forth in the notice of the special meeting may be considered or acted upon at such special meeting, except as otherwise provided by law. SECTION 2.4 NOTICE OF MEETINGS. Written or printed notice stating the date, time and place of the meeting and, in the case of a special meeting or a meeting for which special notice is 1 required by law, the purposes for which the meeting is called shall be mailed by the Corporation to each stockholder entitled to vote at the meeting and, if required by law, to any other stockholders entitled to receive notice, at the stockholder's address shown in the Corporation's record of stockholders, with postage pre-paid, not less than ten (10) nor more than sixty (60) days before the meeting date, either personally or by mail, by or at the direction of the President, Clerk, or Assistant Clerk, or the officer or persons calling the meeting, to each stockholder of record entitled to vote at such meeting. Notice shall be effective when mailed if it is mailed postage pre-paid and is correctly addressed to the stockholder's address as it appears on the stock transfer books of the Corporation. SECTION 2.5 WAIVER OF NOTICE. A stockholder may at any time waive any notice required by law, these By-Laws or the Corporation's Articles of Organization. The waiver shall be in writing, be signed by the stockholder entitled to the notice and be delivered to the Corporation for inclusion in the minutes for filing with the corporate records. A stockholder's attendance at a meeting waives objection to (i) lack of notice or defective notice of the meeting, unless the stockholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting, and (ii) consideration of a particular matter at the meeting that is not within the purposes described in the meeting notice, unless the stockholder objects to considering the matter when it is presented. SECTION 2.6 FIXING OF RECORD DATE. The Board may fix a future date as the record date to determine the stockholders entitled to notice of a stockholders' meeting, vote, take any other action or receive payment of any share or cash dividend or other distribution. This date shall not be more than sixty (60) days nor, in the case of a meeting, less than ten (10) days before the meeting or action requiring a determination of stockholders. The record date for any meeting, vote or other action of the stockholders shall be the same for all classes of capital stock of the Corporation. If not otherwise fixed by the Board, the record date to determine stockholders entitled to notice of and to vote at an annual or special stockholders' meeting is the close of business on the day before the first notice is first mailed or delivered to a stockholder. If not otherwise fixed by the Board, the record date to determine stockholders entitled to receive payment of any share or cash dividend or other distribution is the close of business on the day the Board authorizes the share or cash dividend or other distribution. SECTION 2.7 STOCKHOLDERS' LIST OF MEETING. After a record date for a meeting is fixed, the Corporation shall prepare an alphabetical list of all stockholders entitled to notice of the stockholders' meeting. The list shall be arranged by classes of capital stock of the Corporation and show the address of and number of shares held by each stockholder. The stockholders' list shall be available for inspection by any stockholder, upon proper demand as may be required by law, beginning two business days after notice of the meeting is given and continuing through the meeting, at the Corporation's principal office or at a place identified in the meeting notice in the city where the meeting will be held. The Corporation shall make the stockholders' list available at the meeting, and any stockholder or the stockholder's agent or attorney shall be entitled to inspect the list at any time during the meeting or any adjournment. Refusal or failure to prepare or make available the stockholder's list does not affect the validity of action taken at the meeting. 2 SECTION 2.8 QUORUM; ADJOURNMENT. (a) Shares issued, outstanding and entitled to vote may take action on a matter at a meeting only if a quorum of these shares exists with respect to that matter. Shares issued, outstanding and entitled to vote as a separate class may take action on a matter at a meeting only if a quorum of those shares exists with respect to that matter. Except as otherwise provided by the Articles of Organization, at any meeting of the stockholders a majority of all shares of stock issued, outstanding and entitled to vote on the record date for such meeting (including shares as to which an abstention has been recorded and shares as to which a nominee has no voting authority as to certain matters brought before the meeting) shall constitute a quorum for the transaction of business. (b) A majority of votes represented at the meeting, although less than a quorum, may adjourn the meeting from time to time to a different time and place without further notice to any stockholder of any adjournment. At an adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted at the meeting originally held. (c) Once a share is represented for any purpose at a meeting, it shall be present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for the adjourned meeting. A new record date must be set if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. SECTION 2.9 VOTING REQUIREMENTS. At all meetings of stockholders, each stockholder shall be entitled to vote, in person or by proxy, the shares of voting stock owned by such stockholder of record on the record date for the meeting. When a quorum is present or represented at any meeting, the affirmative vote of a majority of the shares of stock voted on any matter, question or proposal brought before such meeting shall decide such question, unless the question is one upon which, by express provision of law, by the Articles of Organization or by these By-Laws, a different vote is required, in which case such express provision shall govern and control the decision of such question; provided, however, that any election by stockholders shall be determined by a plurality of the votes cast by the stockholders present or represented and entitled to vote in such election. Shares as to which an abstention has been recorded and shares as to which a nominee has no voting authority as to a particular question or questions brought before the meeting will not be deemed to be voted or cast with respect to such question or questions. SECTION 2.10 PROXIES. A stockholder may vote shares in person or by proxy. A stockholder may appoint a proxy by signing an appointment form either personally or by the stockholder's attorney-in-fact. An appointment of a proxy is effective when received by the Clerk or other officer of the Corporation authorized to tabulate votes. Except as otherwise provided by law, a proxy dated more than six months before the meeting named therein shall be valid and no proxy shall be valid after the final adjournment of such meeting. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by any one of 3 them unless at or prior to the exercise of the proxy the corporation receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a stockholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving its validity shall rest on the challenger. SECTION 2.11 NOTICE OF STOCKHOLDER BUSINESS. 1. At a meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting in accordance with the By-Laws. 2. To be properly brought before a meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board, (b) otherwise properly brought before the meeting by or at the direction of the Board, or (c) otherwise (i) properly be requested to be brought before the meeting by a stockholder of record entitled to vote in the election of directors generally, and (ii) constitute a proper subject to be brought before such meeting. For business to be properly brought before a meeting of stockholders, any stockholder who intends to bring any matter (other than the election of directors) before a meeting of stockholders and is entitled to vote on such matter must deliver written notice of such stockholder's intent to bring such matter before the meeting of stockholders, either by personal delivery or by United States mail, postage pre-paid, to the Clerk of the Corporation. Such notice must be received by the Clerk not later than the following dates: (i) with respect to an annual meeting of stockholders, ninety (90) days in advance of such meeting provided that, unless at least one hundred twenty (120) days advance notice of the meeting date is given, such notice shall be timely if received at least ninety (90) days in advance of the anniversary of the prior year's meeting; and (ii) with respect to any other meeting of stockholders or a special meeting of stockholders, the close of business on the tenth day following the date on which notice of such meeting is first given to stockholders. For purposes of this Section 2.11, notice shall be deemed to first be given to stockholders when disclosure of such date is first made in a press release reported by the Dow Jones News Services, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended. A stockholder's notice to the Clerk shall set forth as to each matter the stockholder proposes to bring before the meeting of stockholders (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder intending to propose such business, (c) the class and number of shares of capital stock of the Corporation which are beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business. No business shall be conducted at a meeting of stockholders except in accordance with the procedures set forth in Section 2.12 of this Article. The chairman of a meeting may, if the facts warrant, determine and declare to the meeting that the business was not properly brought before the meeting and in accordance with the provisions hereof and, if the chairman should so determine, the chairman may so declare to the meeting that any such business not properly brought before the meeting shall not be transacted. SECTION 2.12 CONDUCT OF MEETINGS. The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced 4 at the meeting by the person presiding over the meeting. The Board may adopt by resolution such rules and regulations for the conduct of the meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board, the chairman of any meeting of stockholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board or prescribed by the chairman of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to stockholders of record of the Corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by the Board or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure. SECTION 2.13 INSPECTORS OF ELECTION. The Corporation may, and shall if required by law, in advance of any meeting of stockholders, appoint one or more inspectors of election, who may be employees of the Corporation, to act at the meeting or any adjournment thereof and to make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. In the event that no inspector so appointed or designated is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath to execute faithfully the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector or inspectors so appointed or designated shall (i) ascertain the number of shares of capital stock of the Corporation outstanding and the voting power of each such share, (ii) determine the shares of capital stock of the Corporation represented at the meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares of capital stock of the Corporation represented at the meeting and such inspectors' count of all votes and ballots. Such certification and report shall specify such other information as may be required by law. In determining the validity and counting of proxies and ballots cast at any meeting of stockholders of the Corporation, the inspectors may consider such information as is permitted by applicable law. No person who is a candidate for an office at an election may serve as an inspector at such election. SECTION 2.14 INFORMAL ACTION BY STOCKHOLDERS. Any action required to be taken at a meeting of the stockholders or any other action which may be taken at a meeting of the stockholders, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the stockholders entitled to vote with respect to the subject matter thereof and the written consents are filed with the records of the meetings of the stockholders. 5 SECTION 3 DIRECTORS SECTION 3.1 GENERAL POWERS. The business and affairs of the Corporation shall be managed and controlled by or under the direction of the Board, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law or by Articles of Organization or by these By-Laws directed or required to be exercised or done by the stockholders. SECTION 3.2 NUMBER, QUALIFICATION, TENURE AND REMOVAL. The number of Directors shall be fixed, from time to time, by the Board, in accordance with Article VI of the Articles of Organization. A director shall hold office until the annual meeting for the year in which his or her term expires and until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Directors need not be residents of Massachusetts or stockholders of the Corporation. At any meeting of the stockholders called for the purpose, any Director may be removed from office only for cause by the affirmative vote of a majority of the shares issued, outstanding and entitled to vote in the election of Directors. At any meeting of the Board, any Director may be removed from office only for cause by vote of a majority of the Directors then in office. A Director may be removed for cause only after a reasonable notice and opportunity to be heard before the body proposing to remove him or her. SECTION 3.3 VACANCIES; RESIGNATIONS. Any vacancy on the Board that results from an increase in the number of Directors shall be filled only by a majority of the Directors then in office, provided that a quorum is present, and any other vacancy occurring in the Board shall be filled by a majority of the Directors then in office, even if less than a quorum, or by a sole remaining Director. Any vacancy not filled by the Directors shall be filled by election at an annual meeting or at a special meeting of stockholders called for that purpose. A vacancy that will occur at a specified later date, by reason of a resignation or otherwise, may be filled before the vacancy occurs, but the new Director may not take office until the vacancy occurs. SECTION 3.4 PLACE OF MEETINGS. The Board may hold meetings, both regular and special, either within or without the Commonwealth of Massachusetts. SECTION 3.5 REGULAR MEETINGS. The Board shall hold a regular meeting, to be known as the annual meeting, immediately following each annual meeting of the stockholders. Other regular meetings of the Board shall be held at such time and at such place as shall from time to time be determined by the Board. No notice of regular meetings need be given. SECTION 3.6 SPECIAL MEETINGS. Special meetings of the Board may be called by the Chairman or the President. Special meetings shall also be called by the Clerk on written request of any two Directors. The person or persons authorized to call special meetings of the Board 6 may fix any place in or out of Massachusetts as the place for holding any special meeting of the Board called by them. SECTION 3.7 NOTICE. Notice of the date, time and place of any special meeting of the Board shall be given at least three days prior to the meeting by notice communicated in person, by telephone, telegraph, teletype, other form of wire or wireless communication, mail or private carrier. If written, notice shall be effective at the earliest of (a) when received, (b) its deposit in the United States mail, as evidenced by the postmark, if mailed postage pre-paid and correctly addressed, or (c) on the date shown on the return receipt, if sent by registered or certified mail, return receipt requested and the receipt is signed by or on behalf of the addressee. Notice by all other means shall be deemed effective when received by or on behalf of the Director. Notice of any regular or special meeting need not describe the purposes of the meeting unless required by law or the Articles of Organization. SECTION 3.8 WAIVER OF NOTICE. A Director may at any time waive any notice required by law, these By-Laws or the Articles of Organization. Except as set forth below, the waiver must be in writing, be signed by the Director entitled to the notice, specify the meeting for which notice is waived and be filed with the minutes or corporate records. A Director's attendance at or participation in a meeting waives any required notice to the Director of the meeting unless the Director at the beginning of the meeting, or promptly upon such Director's arrival, objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. SECTION 3.9 QUORUM. A majority of the number of Directors fixed in accordance with Section 3.2 of this Article shall constitute a quorum for the transaction of business at any meeting of the Board. If less than a quorum is present at a meeting, a majority of the Directors present may adjourn the meeting from time to time without further notice. SECTION 3.10 MANNER OF ACTING. The act of the majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board, unless a different number is provided by law, the Articles of Organization or these By-Laws. SECTION 3.11 COMMITTEES. The Board may, by vote of a majority of the Directors then in office appoint from their number one or more committees and delegate to such committees some or all of their powers to the extent permitted by law, the Articles of Organization or these ByLaws. Except as the Board may otherwise determine, any such committee shall be governed in the conduct of its business by the rules governing the conduct of the business of the Board contained in these By-laws and may, by majority vote of the entire committee make other rules for the conduct of its business. The Board shall have power at any time to fill vacancies in any such committees, to change its membership or to discharge the committee. SECTION 3.12 ORGANIZATION. The Chairman, if elected, shall act as chairman at all meetings of the Board. If the Chairman is not elected or, if elected, is not present, the President or, in the absence of the President, a Vice Chairman (who is also a member of the Board and, if more than one, in order designated by the Board or, in the absence of such designation, in order 7 of their election), if any, or if no such Vice Chairman is present, a Director chosen by a majority of the Directors present, shall act as chairman at meetings of the Board. SECTION 3.13 ACTION WITHOUT MEETING. Unless otherwise restricted by the Articles of Organization or these By-Laws, any action required or permitted to be taken at any meeting of the Board may be taken without a meeting, if all members of the Board consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board. SECTION 3.14 ATTENDANCE BY TELEPHONE. Members of the Board, may participate in a meeting of the Board by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. SECTION 3.15 COMPENSATION. The Board shall have the authority to fix the compensation of Directors, which may include their expenses, if any, of attendance at each meeting of the Board. SECTION 3.16 PRESUMPTION OF ASSENT. A Director who is present at a meeting of the Board or a committee of the Board shall be deemed to have assented to the action taken at the meeting unless (a) the Director's dissent or abstention from the action is entered in the minutes of the meeting, (b) the Director delivers a written notice of dissent or abstention to the action to the presiding officer of the meeting before any adjournment of the meeting or to the Corporation immediately after the adjournment of the meeting or (c) the Director objects at the beginning of the meeting or promptly upon such Director's arrival to the holding of the meeting or transacting business at the meeting. The right to dissent or abstain is not available to a Director who voted in favor of the action. SECTION 3.17 NOTIFICATION OF NOMINATIONS. Except for Directors elected pursuant to the provisions of Section 3.3 of this Article, only individuals nominated for election to the Board pursuant to and in accordance with the provision of this Section 3.17 may be elected to and may serve upon the Board of the Corporation. Nominations for the election of Directors may be made by the Board, a Committee thereof or by any stockholder entitled to vote in the election of Directors generally. Subject to the foregoing, only a stockholder of record entitled to vote in the election of Directors generally may nominate one or more persons for election as Directors at a meeting of stockholders and only if written notice of such stockholder's intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage pre-paid, to the Clerk of the Corporation and has been received by the Clerk not later than the following dates: (i) with respect to an election to be held at an annual meeting of stockholders, sixty (60) days in advance of such meeting if such meeting is to be held on a day which is within thirty (30) days preceding the anniversary of the previous year's annual meeting, or ninety (90) days in advance of such meeting if such meeting is to be held on or after the anniversary of the previous year's annual meeting; and (ii) with respect to an election to be held at a special meeting of stockholders for the election of Directors, the close of business on the tenth day following the date on which notice of such meeting is first given to stockholders. For purposes of this Section 3.17, notice shall be deemed to first be given to stockholders when 8 disclosure of such date is first made in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended. Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; and (d) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated, or intended to be nominated, by the Board. To be effective, each notice of intent to make a nomination given hereunder shall be accompanied by the written consent of each nominee to serve as a Director of the Corporation if elected. The chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not properly brought before the meeting in accordance with the provisions hereof and, if the chairman should so determine, declare to the meeting that such nomination was not properly brought before the meeting and shall not be considered. 9 SECTION 4 OFFICERS SECTION 4.1 ENUMERATION. The officers of the Corporation shall be chosen by the Board and shall be a Chairman, President, a Clerk, and a Treasurer. The Board may also elect one or more Vice Chairmen, one or more Vice Presidents, one or more Assistant Clerks and Assistant Treasurers and such other officers and agents as it shall deem appropriate. Any number of offices may be held by the same person. SECTION 4.2 SALARIES. The salaries of all officers of the Corporation shall be fixed by the Board. SECTION 4.3 TERM OF OFFICE. The officers of the Corporation shall be elected at the annual meeting of the Board and shall hold office until their successors are elected and qualified or until their earlier resignation, removal or death. Any officer elected or appointed by the Board may be removed at any time by the Board with or without cause. Any vacancy occurring in any office of the Corporation required by this section shall be filled by the Board, and any vacancy in any other office may be filled by the Board. SECTION 4.4 CHAIRMAN. The Chairman shall preside, when present, at each meeting of the Board and shall perform such other duties and have such powers as the Board may from time to time prescribe. The Chairman shall have general supervision, direction and control of the business and affairs of the Corporation, subject to the control of the Board, shall preside at meetings of stockholders and shall have such other functions, authority and duties as customarily appertain to the office of the chief executive of a business Corporation or as may be prescribed by the Board. SECTION 4.5 PRESIDENT. During any period when there shall be an office of Chairman, the President shall have such functions, authority and duties as may be prescribed by the Board or the Chairman. The President need not be a Director. During any period when there shall not be an office of Chairman, the President shall have the functions, authority and duties provided for the Chairman. SECTION 4.6 VICE PRESIDENT. The Vice President or if there be more than one, the Vice Presidents, shall perform, such duties and have such other powers as may from time to time be prescribed by the Board, the Chairman or the President. SECTION 4.7 CLERK. The Clerk shall keep a record of all proceedings of the stockholders of the Corporation and of the Board, and shall perform like duties for the standing committees when required. The Clerk shall give, or cause to be given, notice, if any, of all meetings of the stockholders and shall perform such other duties as may be prescribed by the Board, the Chairman or the President. The Clerk shall have custody of the corporate seal of the Corporation and the Clerk or in the absence of the Clerk any Assistant Clerk, shall have the authority to affix the same to any instrument requiring it, and when so affixed it may be attested by the signature of 10 the Clerk or an Assistant Clerk. The Board may give general authority to any other officer to affix the seal of the Corporation and to attest such affixing of the seal. The Clerk shall be a resident of the Commonwealth of Massachusetts unless the Corporation has a resident agent in accordance with Massachusetts law. SECTION 4.8 ASSISTANT CLERK. The Assistant Clerk or if there be more than one, the Assistant Clerks in the order determined by the Board (or if there be no such determination, then in order of their election), shall, in the absence of the Clerk or in the event of the Clerk's inability or refusal to act, perform the duties and exercise the powers of the Clerk and shall perform such other duties as may from time to time be prescribed by the Board, the Chairman, or the President. SECTION 4.9 TREASURER. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all monies and other valuable assets in the name and to the credit of the Corporation in such depositories as may be designated by the Board. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the Chairman, the President and the Board, at its regular meetings or when the Board so requires, an account of all transactions as Treasurer and of the financial condition of the Corporation. The Treasurer shall perform such other duties as may from time to time be prescribed by the Board, the Chairman or the President. SECTION 4.10 ASSISTANT TREASURER. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board (or if there be no such determination, then in order of their election), shall, in absence of the Treasurer or in the event of the Treasurer's inability or refusal to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as may from time to time be prescribed by the Board, the Chairman, the President or the Treasurer. SECTION 4.11 OTHER DUTIES. Any officer who is elected or appointed from time to time by the Board and whose duties are not specified in these By-Laws shall perform such duties and have such powers as may be prescribed from time to time by the Board, the Chairman or the President. SECTION 5 CERTIFICATES OF STOCK AND OTHER STOCKHOLDER MATTERS SECTION 5.1 FORM. The shares of the Corporation shall be represented by certificates; PROVIDED, HOWEVER, that the Board may provide by resolution or resolutions that some or all of any or all classes or series of the Corporation's stock shall be uncertificated shares. Certificates of stock in the Corporation, if any, shall be signed by or in the name of the Corporation by the Chairman or the President or a Vice President and by the Treasurer or an Assistant Treasurer of the Corporation. Where a certificate is countersigned by a transfer agent, other than the Corporation or a director, officer or employee of the Corporation, or by a registrar, the signatures of the Chairman, the President or a Vice President and the Treasurer or an Assistant Treasurer 11 may be facsimiles. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, the certificate may be issued by the Corporation with the same effect as if such officer, transfer agent or registrar were such officer, transfer agent or registrar at the date of its issue. SECTION 5.2 REPLACEMENT. In case of the loss, destruction, mutilation or theft of a certificate for any stock of the Corporation, a new certificate of stock or uncertificated shares in place of any certificate therefor issued by the Corporation may be issued upon (x) in the case of a mutilated certificate, surrender of such mutilated certificate to the Corporation, and (y) in the case of a certificate alleged to have been lost, destroyed or stolen, satisfactory proof of such loss, destruction or theft and upon such terms as the Board may prescribe. The Board may in its discretion require the owner of the lost, mutilated, destroyed or stolen certificate, or his legal representative, to give the Corporation a bond, in such sum and in such form and with such surety or sureties as it may direct, to indemnify the Corporation against any claim that may be made against it with respect to a certificate alleged to have been lost, mutilated, destroyed or stolen. SECTION 5.3 TRANSFER. Subject to the restrictions, if any, stated or noted on the certificate, upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate of stock or uncertificated shares in place of any certificate therefor issued by the Corporation to the person entitled thereto, cancel the old certificate and record the transaction on its books. SECTION 5.4 STOCK LEDGER DETERMINATIVE OF DIVIDEND DISTRIBUTIONS AND VOTING ENTITLEMENT. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and other distributions, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to, or interest in, such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the Commonwealth of Massachusetts. SECTION 6 INDEMNIFICATION SECTION 6.1 RIGHT TO INDEMNIFICATION. The Corporation shall indemnify and hold harmless each person who was or is a party or is threatened to be made a party to or is otherwise involved in any threatened, pending or completed action, suit, proceeding or investigation, whether civil, criminal or administrative (a "Proceeding"), by reason of being, having been or having agreed to become, a director or officer of the Corporation, or serving, having served or having agreed to serve, at the request of the Corporation, as a director or officer of, or in a similar capacity with, another organization or in any capacity with respect to any employee benefit plan (any such person being referred to hereafter as an "Indemnitee"), or by reason of any action 12 alleged to have been taken or omitted in such capacity, against all expense, liability and loss (including without limitation reasonable attorneys' fees, judgments, fines, "ERISA" excise taxes or penalties) incurred or suffered by the Indemnitee or on behalf of the Indemnitee in connection with such Proceeding and any appeal therefrom, unless the Indemnitee shall have been adjudicated in such Proceeding not to have acted in good faith in the reasonable belief that his or her action was in the best interest of the Corporation or, to the extent such matter relates to service with respect to an employee benefit plan, in the best interests of the participants or beneficiaries of such employee benefit plan. Notwithstanding anything to the contrary in these By-Laws, except as set forth in Section 6.6 below, the Corporation shall not indemnify or advance expenses to an Indemnitee seeking indemnification in connection with a Proceeding (or part thereof) initiated by the Indemnitee, unless the initiation thereof was approved by the Board. SECTION 6.2 SETTLEMENTS. Subject to compliance by the Indemnitee with the applicable provisions of Section 6.5 below, the right to indemnification conferred in these By-Laws shall include the right to be paid by the Corporation for amounts paid in settlement of any such Proceeding and any appeal therefrom, and all expenses (including attorneys' fees) incurred in connection with such settlement, pursuant to a consent decree or otherwise, unless it is held or determined pursuant to Section 6.5 below that the Indemnitee did not act in good faith in the reasonable belief that his or her action was in the best interest of the Corporation or, to the extent such matter relates to service with respect to an employee benefit plan, in the best interests of the participants or beneficiaries of such employee benefit plan. SECTION 6.3 NOTIFICATION AND DEFENSE OF PROCEEDINGS. The Indemnitee shall notify the Corporation in writing as soon as reasonably practicable of any Proceeding involving the Indemnitee for which indemnity or advancement of expenses is intended to be sought. Any omission to so notify the Corporation shall not relieve it from any liability that it may have to the Indemnitee under these By-Laws unless, and only to the extent that, such omission results in the forfeiture of substantive rights or defenses by the Corporation. With respect to any Proceeding of which the Corporation is so notified, the Corporation shall be entitled but not obligated, to participate therein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to the Indemnitee, except as provided in the last sentence of this Section 6.3. After notice from the Corporation to the Indemnitee of its election so to assume such defense (subject to the limitations in the last sentence of this Section 6.3), the Corporation shall not be liable to the Indemnitee for any fees and expenses of counsel subsequently incurred by the Indemnitee in connection with such Proceeding, other than as provided below in this Section 6.3. The Indemnitee shall have the right to employ his or her own counsel in connection with such Proceeding, but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof at its expense with counsel reasonably acceptable to Indemnitee shall be at the expense of the Indemnitee unless (i) the employment of counsel by the Indemnitee at the Corporation's expense has been authorized by the Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded that there may be a conflict of interest or position on any significant issue between the Corporation and the Indemnitee in the conduct of the defense of such action or (iii) the Corporation shall not in fact have employed counsel reasonably acceptable to the Indemnitee to assume the defense of such Proceeding within a reasonable time after receiving notice thereof, in each of which cases the 13 fees and expenses of counsel for the Indemnitee shall be at the expense of the Corporation, except as otherwise expressly provided in these By-Laws. The Corporation shall not be entitled, without the consent of the Indemnitee, to assume the defense of any Proceeding brought by or in the right of the Corporation or as to which counsel for the Indemnitee shall have reasonably made the conclusion provided for in clause (ii) above. SECTION 6.4 ADVANCE OF EXPENSES. Except as provided in Section 6.3 of these By- Laws, as part of the right to indemnification granted by these By-Laws, any expenses (including attorneys' fees) incurred by an Indemnitee in defending any Proceeding within the scope of Section 6.1 of these By-laws or any appeal therefrom shall be paid by the Corporation in advance of the final disposition of such matter, provided, however, that the payment of such expenses incurred by an Indemnitee in advance of the final disposition of such matter shall be made only upon receipt of a written undertaking by or on behalf of the Indemnitee to repay all amounts so advanced in the event that it shall ultimately be determined that the Indemnitee is not entitled to be indemnified by the Corporation as authorized by Section 6.1 or Section 6.2 of these By-Laws. Such undertaking need not be secured and shall be accepted without reference to the financial ability of the Indemnitee to make such repayment. Such advancement of expenses shall be made by the Corporation promptly following its receipt of written requests therefor by the Indemnitee, accompanied by reasonably detailed documentation, and of the foregoing undertaking. SECTION 6.5 CERTAIN PRESUMPTIONS AND DETERMINATIONS. If, in a Proceeding brought by or in the right of the Corporation, a director or officer of the Corporation is held not liable for monetary damages, whether because that director or officer is relieved of personal liability under the provisions of Article VI, Part B of the Articles of Organization of the Corporation or otherwise, that director or officer shall be deemed to have met the standard of conduct set forth in Section 6.1 and thus to be entitled to be indemnified by the Corporation thereunder. In any adjudicated Proceeding against an Indemnitee brought by reason of the Indemnitee's serving, having served or agreed to serve, at the request of the Corporation, for an organization other than the Corporation in one or more of the capacities indicated in Section 6.1, if the Indemnitee shall not have been adjudicated not to have acted in good faith in the reasonable belief that the Indemnitee's action was in the best interest of such other organization, the Indemnitee shall be deemed to have met the standard of conduct set forth in Section 6.1 and thus be entitled to be indemnified thereunder. An adjudication in such a Proceeding that the Indemnitee did not act in good faith in the reasonable belief that the Indemnitee's action was in the best interest of such other organization shall not create a presumption that the Indemnitee has not met the standard of conduct set forth in Section 6.1. In order to obtain indemnification of amounts paid in settlement pursuant to Section 6.2 of these By-Laws, the Indemnitee shall submit to the Corporation a written request, including in such request such documentation and information as is reasonably available to the Indemnitee and is reasonably necessary to determine whether and to what extent the Indemnitee is entitled to such indemnification. Any such indemnification under Section 6.2 shall be made promptly, and in any event within 60 days after receipt by the Corporation of the written request of the Indemnitee, unless a court of competent jurisdiction holds within such 60-day period that the Indemnitee did not meet the standard of conduct set forth in Section 6.2 or the Corporation determines, by clear and convincing evidence, within such 60-day period that the Indemnitee did not meet such standard. Such determination shall be made by the Board, based 14 on advice of independent legal counsel (who may, with the consent of the Indemnitee, be regular legal counsel to the Corporation). The Corporation and the directors shall be under no obligation to undertake any such determination or to seek any ruling from any court. SECTION 6.6 REMEDIES. The right to indemnification or advances as granted by these By-Laws shall be enforceable by the Indemnitee in any court of competent jurisdiction if the Corporation denies such a request, in whole or in part, or, with respect to indemnification pursuant to Section 6.2, if no disposition thereof is made within the 60-day period referred to above in Section 6.5. Unless otherwise provided by law, the burden of proving that the Indemnitee is not entitled to indemnification or advancement of expenses under these By-Laws shall be on the Corporation. Neither absence of any determination prior to the commencement of such action that indemnification is proper in the circumstances because the Indemnitee has met any applicable standard of conduct, nor an actual determination by the Corporation pursuant to Section 6.5 that the Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Indemnitee has not met the applicable standard of conduct. The Indemnitee's expenses (including reasonable attorneys' fees) incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such Proceeding shall also be paid by the Corporation. SECTION 6.7 CONTRACT RIGHT; SUBSEQUENT AMENDMENT. The right to indemnification and advancement of expenses conferred in these By-Laws shall be a contract right. No amendment, termination or repeal of these By-Laws or of the relevant provisions of Chapter 156B of the Massachusetts General Laws or any other applicable laws shall affect or diminish in any way the rights of any Indemnitee to indemnification or advancement of expenses under the provisions hereof with respect to any Proceeding arising out of or relating to any action, omission, transaction or facts occurring prior to the final adoption of such amendment, termination or repeal, except with the consent of the Indemnitee. SECTION 6.8 OTHER RIGHTS. The indemnification and advancement of expenses provided by these By-Laws shall not be deemed exclusive of any other rights to which an Indemnitee seeking indemnification or advancement of expenses may be entitled under any law (common or statutory), agreement or vote of stockholders or directors or otherwise, both as to action in his or her official capacity and as to action in any other capacity while holding office for the Corporation, and shall continue as to an Indemnitee who has ceased to be a director or officer, and shall inure to the benefit of the estate, heirs, executors and administrators of the Indemnitee. Nothing contained in these By-Laws shall be deemed to prohibit, and the Corporation is specifically authorized to enter into, agreements with any Indemnitee providing indemnification rights and procedures different from those set forth in these By-Laws. SECTION 6.9 PARTIAL INDEMNIFICATION. If an Indemnitee is entitled under any provision of these By-Laws to indemnification by the Corporation for some or a portion of the expenses (including attorneys' fees), judgments, fines or amounts paid in settlement actually and reasonably incurred by the Indemnitee or on his or her behalf in connection with any Proceeding and any appeal therefrom but not, however, for the total amount thereof, the Corporation shall nevertheless indemnify the Indemnitee for the portion of such expenses (including reasonable 15 attorneys' fees), judgments, fines or amounts paid in settlement to which the Indemnitee is entitled. SECTION 6.10 INSURANCE. The Corporation may purchase and maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another organization or employee benefit plan against any expense, liability or loss incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under Chapter 156B of the Massachusetts General Laws. SECTION 6.11 MERGER OR CONSOLIDATION. If the Corporation is merged into or consolidated with another corporation and the Corporation is not the surviving corporation, the surviving corporation shall assume the obligations of the Corporation under these By-Laws with respect to any Proceeding arising out of or relating to any action, omission, transaction or facts occurring on or prior to the date of such merger or consolidation. SECTION 6.12 SAVINGS CLAUSE. If these By-Laws or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify and advance expenses to each Indemnitee as to any expenses (including attorneys' fees), judgments, fines and amounts paid in settlement in connection with any Proceeding, including an action by or in the right of the Corporation, to the fullest extent permitted by any applicable portion of these By-Laws that shall not have been invalidated and to the fullest extent permitted by applicable law. SECTION 6.13 SUBSEQUENT LEGISLATION. If the Massachusetts General Laws are amended after adoption of these By-Laws to expand further the indemnification permitted to Indemnitees, then the Corporation shall indemnify such persons to the fullest extent permitted by the Massachusetts General Laws as so amended. SECTION 6.14 INDEMNIFICATION OF OTHERS. The Corporation may, to the extent authorized from time to time by its Board, grant indemnification rights to employees or agents of the Corporation or other persons serving the Corporation who are not Indemnitees, and such rights may be equivalent to, or greater or less than, those set forth in these By-Laws. SECTION 7 DIVIDENDS SECTION 7.1 DECLARATION OF DIVIDENDS. Dividends may be declared by the Board at any regular or special meeting, pursuant to law and in accordance with the voting requirements stated in these By-Laws. Dividends may be paid in cash, in property or in shares of the Corporation's capital stock. SECTION 7.2 RESERVES FOR DIVIDENDS. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board 16 from time to time, in its absolute discretion, deems proper as a reserve or reserves to meet contingencies, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Board determines promotes the interest of the Corporation and the Board may modify or abolish any such reserve in the manner in which it was created. SECTION 8 GENERAL PROVISIONS SECTION 8.1 FISCAL YEAR. The fiscal year of the Corporation shall be fixed by resolution of the Board. SECTION 8.2 CORPORATE SEAL. The corporate seal shall be in such form as may be approved from time to time by the Board. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. SECTION 8.3 CORPORATION CHECKS. All checks or other orders for the payment of money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board may from time to time designate. SECTION 8.4 PROTECTION OF CORPORATE BOOKS. As provided under applicable laws of the Commonwealth of Massachusetts, or any successor laws, the Corporation shall make available to the stockholders the books and records of the Corporation, including, without limitation, periodic financial statements of the Corporation. SECTION 8.5 CONTROL SHARE ACQUISITIONS. The provisions of Chapter 110D of the Massachusetts General Laws with respect to the regulation of control share acquisitions shall not apply to this Corporation. SECTION 9 AMENDMENTS SECTION 9.1 AMENDMENTS OF BY-LAWS. Subject to any requirement set forth in the Articles of Organization, these By-Laws may be altered, amended or repealed or new By-Laws may be adopted by the Board or the stockholders; PROVIDED, that Sections 2.3, 2.11, 3.2, 3.3, 3.17, 6.1-6.14, 8.5 and 9.1 of these By-Laws may be amended or repealed only (i) by the affirmative vote of at least two-thirds of the shares of the capital stock then issued and outstanding and entitled to vote or (ii) by the affirmative vote of a majority of the directors then in office. The fact that the power to amend, alter, repeal or adopt the By-Laws has been conferred upon the Board shall not divest the stockholders of the same powers. 17 EX-4.2 3 EX-4.2 Exhibit 4.2 CONFORMED COPY FIRST AMENDMENT FIRST AMENDMENT, dated as of December 27, 1998 (this "AMENDMENT"), to the Credit Agreement, dated as of November 19, 1997 (as amended, supplemented or otherwise modified, the "CREDIT AGREEMENT"), among FRIENDLY ICE CREAM CORPORATION, a Massachusetts corporation (the "BORROWER"), the several banks and other financial institutions or entities parties thereto (the "LENDERS"), and SOCIETE GENERALE, as administrative agent (in such capacity, the "ADMINISTRATIVE AGENT"). W I T N E S S E T H: WHEREAS, pursuant to the Credit Agreement, the Lenders have agreed to make, and have made, extensions of credit to the Borrower; WHEREAS, the Borrower has requested, and upon this Amendment becoming effective, the Lenders will have agreed, that certain provisions of the Credit Agreement be amended in the manner provided for in this Amendment; NOW, THEREFORE, in consideration of the premises and the agreements hereinafter set forth, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS. Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. SECTION 2. AMENDMENTS TO CREDIT AGREEMENT. 2.1 AMENDMENTS TO SECTION 1.1 OF THE CREDIT AGREEMENT. Section 1.1 of the Credit Agreement is hereby amended by deleting therefrom the definitions of the following terms in their respective entireties and substituting in lieu thereof the following definitions: "'APPLICABLE MARGIN': for each Type of Loan, the rate per annum set forth under the relevant column heading below:
Eurodollar ABR Loans Loans ---------- ----- Revolving Credit Loans 2.75% 1.25% Tranche A Term Loans 2.75% 1.25% Tranche B Term Loans 2.75% 1.25% Tranche C Term Loans 3.00% 1.50%;
PROVIDED, that on and after the first Adjustment Date occurring after the completion of four full fiscal quarters of the Borrower after the Closing Date, the Applicable Margin 2 with respect to Revolving Credit Loans and Tranche A Term Loans will be determined pursuant to the Pricing Grid." "'CONSOLIDATED CASH INTEREST EXPENSE": for any period, total cash interest expense (including that attributable to Capital Lease Obligations) of the Borrower and its Subsidiaries for such period with respect to all outstanding Indebtedness of the Borrower and its Subsidiaries (including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs under Interest Rate Protection Agreements to the extent such net costs are allocable to such period in accordance with GAAP); PROVIDED that in no event shall the amendment fees paid in connection with the First Amendment to this Agreement constitute Consolidated Cash Interest Expense." "'CONSOLIDATED EBITDA': for any period, Consolidated Net Income for such period PLUS, without duplication and to the extent reflected as a charge in the statement of such Consolidated Net Income for such period, the sum of (a) income tax expense, (b) interest expense, amortization or writeoff of debt discount and debt issuance costs and commissions, discounts and other fees and charges associated with Indebtedness (including the Loans), (c) depreciation and amortization expense, (d) amortization of intangibles (including, but not limited to, goodwill) and organization costs, (e) any extraordinary, unusual or non-recurring expenses or losses (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, losses on sales of assets outside of the ordinary course of business) and (f) any other non-cash charges, and MINUS, to the extent included in the statement of such Consolidated Net Income for such period, the sum of (a) interest income, (b) any extraordinary, unusual or non-recurring income or gains (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, gains on the sales of assets outside of the ordinary course of business (it being understood that sales of restaurants in an aggregate amount up to $2,500,000 in any fiscal year are deemed to be in the ordinary course of business)) and (c) any other non-cash income, all as determined on a consolidated basis, PROVIDED, that, in calculating Consolidated EBITDA for periods that include any fiscal quarter of the Borrower's 1998 and 1999 fiscal years, any expenses resulting from the closing of the Borrower's Troy, Ohio manufacturing and distribution facility and the termination of its operations in China and the United Kingdom shall be disregarded to the extent that the aggregate amount of such expenses does not exceed $7,500,000." "'EXCESS CASH FLOW': for any fiscal year of the Borrower, the excess, if any, of (a) Consolidated EBITDA for such fiscal year over (b) the sum, without duplication, of (i) the lesser of (x) the aggregate amount actually paid by the Borrower and its Subsidiaries in cash during such fiscal year on account of Capital Expenditures (excluding the principal amount of Indebtedness incurred in connection with such expenditures and any such expenditures financed with the proceeds of any Reinvestment Deferred Amount (but only to the extent such expenditures so financed exceed the amount of Capital Expenditures permitted to be made in such fiscal year from the proceeds of any Reinvestment Deferred Amount in accordance with the provisions of clause (b) of Section 7.7)) and (y) in the case of fiscal years 1999 through 2002, the amount set forth opposite such fiscal year below: 3
Fiscal Year Amount ----------- ------ 1999 $43,000,000 2000 41,500,000 2001 43,500,000 2002 45,500,000
(ii) the aggregate amount of all prepayments of Revolving Credit Loans during such fiscal year to the extent accompanying permanent optional reductions of the Revolving Credit Commitments and all optional prepayments of the Term Loans during such fiscal year, (iii) the aggregate amount of all regularly scheduled principal payments of Funded Debt (including, without limitation, the Term Loans) of the Borrower and its Subsidiaries made during such fiscal year (other than in respect of any revolving credit facility to the extent there is not an equivalent permanent reduction in commitments thereunder), (iv) the aggregate amount actually paid by the Borrower and its Subsidiaries in cash during such fiscal year on account of income taxes and (v) Consolidated Cash Interest Expense for such fiscal year." 2.2 AMENDMENT TO SECTION 2.10(A) OF THE CREDIT AGREEMENT. Section 2.10(a) of the Credit Agreement is hereby amended by inserting, immediately following the percentage "50%" that appears therein, the following parenthetical phrase "(or 100%, if, as of the last day of the fiscal quarter most recently ended prior to the date of such issuance for which financial statements shall have been delivered to the Lenders pursuant to Section 6.1, the Consolidated Leverage Ratio (adjusted to give PRO FORMA effect to such issuance and to any application of the Net Cash Proceeds thereof to repay Indebtedness) shall have been greater than 4 to 1)". 2.3 AMENDMENT TO SECTION 2.10(B) OF THE CREDIT AGREEMENT. Section 2.10(b) of the Credit Agreement is hereby amended by deleting from the proviso thereto the following: "(i) the Borrower may exclude from the requirements of this paragraph the first $7,500,000 of aggregate Net Cash Proceeds from Asset Sales and Recovery Events and (ii)". 2.4 AMENDMENT TO SECTION 6.2 OF THE CREDIT AGREEMENT. Section 6.2 of the Credit Agreement is hereby amended by adding at the end thereof the following new paragraph (i): "(i) within 15 days after the end of each fiscal month, a certificate of an Authorized Signatory setting forth in reasonable detail the aggregate sales revenues of the Borrower and its Subsidiaries for such fiscal month and the calculation of Consolidated EBITDA for such fiscal month." 4 2.5 AMENDMENTS TO SECTION 7.1 OF THE CREDIT AGREEMENT. Section 7.1 of the Credit Agreement is hereby amended by deleting said section in its entirety and substituting in lieu thereof the following: "7.1 FINANCIAL CONDITION COVENANTS. (a) CONSOLIDATED LEVERAGE RATIO. Permit the Consolidated Leverage Ratio as at the last day of any period of four consecutive fiscal quarters of the Borrower (or, if less, the number of full fiscal quarters subsequent to the Closing Date) ending with any fiscal quarter set forth below to exceed the ratio set forth below opposite such fiscal quarter:
Consolidated Fiscal Quarter Leverage Ratio -------------- -------------- Fiscal quarters from and including fourth quarter of fiscal 1997 through and including third quarter of fiscal 1998 4.75 to 1.00 Fourth quarter of fiscal 1998 5.25 to 1.00 First quarter of fiscal 1999 5.90 to 1.00 Second quarter of fiscal 1999 5.50 to 1.00 Third quarter of fiscal 1999 5.00 to 1.00 Fourth quarter of fiscal 1999 4.40 to 1.00 First quarter of fiscal 2000 5.00 to 1.00 Second quarter of fiscal 2000 4.70 to 1.00 Third quarter of fiscal 2000 4.20 to 1.00 Fourth quarter of fiscal 2000 4.10 to 1.00 Fiscal quarters from and including first quarter of fiscal 2001 through and including third quarter of fiscal 2001 4.30 to 1.00 Fourth quarter of fiscal 2001 3.55 to 1.00 Fiscal quarters from and including first quarter of fiscal 2002 through and including third quarter of fiscal 2002 3.75 to 1.00 Fourth quarter of fiscal 2002 3.05 to 1.00 First fiscal quarter of fiscal 2003 and all fiscal quarters thereafter 3.25 to 1.00
5 (b) CONSOLIDATED INTEREST COVERAGE RATIO. Permit the Consolidated Interest Coverage Ratio for any period of four consecutive fiscal quarters of the Borrower (or, if less, the number of full fiscal quarters subsequent to the Closing Date) ending with any fiscal quarter set forth below to be less than the ratio set forth below opposite such fiscal quarter:
Consolidated Fiscal Quarter Leverage Ratio -------------- -------------- Fiscal quarters from and including fourth quarter of fiscal 1997 through and including third quarter of fiscal 1998 1.50 to 1.00 Fourth quarter of fiscal 1998 1.50 to 1.00 First quarter of fiscal 1999 1.30 to 1.00 Second quarter of fiscal 1999 1.40 to 1.00 Third quarter of fiscal 1999 1.50 to 1.00 Fourth quarter of fiscal 1999 1.60 to 1.00 First quarter of fiscal 2000 1.50 to 1.00 Second quarter of fiscal 2000 1.60 to 1.00 Third quarter of fiscal 2000 1.70 to 1.00 Fourth quarter of fiscal 2000 1.75 to 1.00 Fiscal quarters from and including first quarter of fiscal 2001 through and including third quarter of fiscal 2001 1.65 to 1.00 Fourth quarter of fiscal 2001 1.95 to 1.00 Fiscal quarters from and including first quarter of fiscal 2002 through and including 1.85 to 1.00 third quarter of fiscal 2002 Fourth quarter of fiscal 2002 2.10 to 1.00 Fiscal quarters from and including first quarter of fiscal 2003 through and including third quarter of fiscal 2003 2.00 to 1.00 Fourth fiscal quarter of fiscal 2003 and all fiscal quarters thereafter 2.15 to 1.00
6 (c) CONSOLIDATED FIXED CHARGE COVERAGE RATIO. Permit the Consolidated Fixed Charge Coverage Ratio for any period of four consecutive fiscal quarters of the Borrower (or, if less, the number of full fiscal quarters subsequent to the Closing Date) ending with any fiscal quarter set forth below to be less than the ratio set forth below opposite such fiscal quarter:
Consolidated Fixed Fiscal Quarter Charge Coverage Ratio -------------- --------------------- Fiscal quarters from and including fourth quarter of fiscal 1997 through and including third quarter of fiscal 1998 1.40 to 1.00 Fourth quarter of fiscal 1998 1.30 to 1.00 First quarter of fiscal 1999 1.15 to 1.00 Second quarter of fiscal 1999 1.20 to 1.00 Third quarter of fiscal 1999 1.20 to 1.00 Fourth quarter of fiscal 1999 1.25 to 1.00 First quarter of fiscal 2000 1.10 to 1.00 Second quarter of fiscal 2000 1.10 to 1.00 Third quarter of fiscal 2000 1.20 to 1.00 Fourth quarter of fiscal 2000 1.20 to 1.00 Fiscal quarters from and including first quarter of fiscal 2001 through and including third quarter of fiscal 2001 1.10 to 1.00 Fourth quarter of fiscal 2001 1.25 to 1.00 Fiscal quarters from and including first quarter of fiscal 2002 through and including third quarter of fiscal 2002 1.15 to 1.00 Fourth quarter of fiscal 2002 1.30 to 1.00 Fiscal quarters from and including first quarter of fiscal 2003 through and including third quarter of fiscal 2003 1.20 to 1.00 Fourth fiscal quarter of fiscal 2003 and all fiscal quarters thereafter 1.30 to 1.00
7 (d) MAINTENANCE OF NET WORTH. Permit Consolidated Net Worth as of the last day of any fiscal quarter of the Borrower ending during any fiscal year set forth below to be less than the amount set forth below opposite such fiscal year:
Consolidated Fiscal Quarter Net Worth -------------- ------------ Fiscal quarters from and including fourth quarter of fiscal 1997 through and including third quarter of fiscal 1998 ($95,000,000) Fourth quarter of fiscal 1998 ($98,000,000) First quarter of fiscal 1999 ($105,000,000) Second quarter of fiscal 1999 ($100,000,000) Third quarter of fiscal 1999 ($93,500,000) Fourth quarter of fiscal 1999 ($93,000,000) First quarter of fiscal 2000 ($103,500,000) Second quarter of fiscal 2000 ($97,300,000) Third quarter of fiscal 2000 ($88,000,000) Fourth quarter of fiscal 2000 ($86,500,000) Fiscal quarters from and including first quarter of fiscal 2001 through and including third quarter of fiscal 2001 ($91,500,000) Fourth quarter of fiscal 2001 ($75,000,000) Fiscal quarters from and including first quarter of fiscal 2002 through and including third quarter of fiscal 2002 ($80,000,000) Fourth quarter of fiscal 2002 ($55,000,000) Fiscal quarters from and including first quarter of fiscal 2003 through and including third quarter of fiscal 2003 ($60,000,000) Fourth fiscal quarter of fiscal 2003 and all fiscal quarters thereafter ($50,000,000)"
2.6 AMENDMENT TO SECTION 7.6 OF THE CREDIT AGREEMENT. Section 7.6 of the Credit Agreement is hereby amended by deleting paragraph (b) of said Section in its entirety and substituting in lieu thereof the following: 8 "(b) [Intentionally omitted]." 2.7 AMENDMENT TO SECTION 7.7 OF THE CREDIT AGREEMENT. Section 7.7 of the Credit Agreement is hereby amended by deleting said Section in its entirety and substituting in lieu thereof the following: "7.7 LIMITATION ON CAPITAL EXPENDITURES. Make or commit to make (by way of the acquisition of securities of a Person or otherwise) any Capital Expenditure, except (a) Capital Expenditures of the Borrower and its Subsidiaries in the ordinary course of business not exceeding by more than $3,000,000 the Permitted Capital Expenditure Amount for such fiscal year and (b) Capital Expenditures made with the proceeds of any Reinvestment Deferred Amount, provided that the aggregate amount of Capital Expenditures made pursuant to this clause (b) during any fiscal year set forth below shall not exceed the amount set forth opposite such fiscal year below:
Fiscal Year Amount ----------- ------ 1999 $10,000,000 2000 3,000,000 2001 3,000,000 2002 and thereafter 3,000,000,
provided that if the Reinvestment Deferred Amount for any fiscal year set forth in the table above arising out of Asset Sales shall be less than the amount set forth above for such fiscal year, an amount equal to the lesser of (i) such difference and (ii) $3,000,000 shall be added to the amount set forth above for the succeeding fiscal year for the purposes of the immediately preceding proviso (but not for the purposes of this proviso). Anything in this Section to the contrary notwithstanding, (x) if during any fiscal year the amount of Capital Expenditures by the Borrower and its Subsidiaries (other than Capital Expenditures made with the proceeds of any Reinvestment Deferred Amount) shall exceed the Permitted Capital Expenditure Amount for such fiscal year by up to the $3,000,000 amount permitted by clause (a) of the preceding sentence, the Permitted Capital Expenditure Amount for the succeeding fiscal year shall be automatically reduced by an amount equal to such excess and (y) in no event may the aggregate amount of Capital Expenditures during fiscal years 1999 through 2002 exceed $173,500,000." 2.8 AMENDMENTS TO ANNEXES. Annexes A and C to the Credit Agreement are hereby amended to read in their entireties as set forth in Annexes A and C, respectively, hereto. SECTION 3. CONDITIONS TO EFFECTIVENESS. This Amendment shall become effective as of the date set forth above (the "AMENDMENT EFFECTIVE DATE") on the date on which (a) the Borrower and the Required Lenders shall have executed and delivered to the Administrative Agent this Amendment, (b) each Guarantor shall have executed the 9 Acknowledgment and Consent in the form annexed hereto and (c) the Borrower shall have paid to the Administrative Agent, on behalf of each Lender, an amendment fee in an amount equal to .50% (or .75%, in the case of each Lender which shall have executed and delivered its signature page hereto to counsel to the Administrative Agent by noon on Wednesday, December 30, 1998) of the sum of such Lender's Revolving Credit Commitment and Term Loans then outstanding. SECTION 4. REPRESENTATIONS AND WARRANTIES. The representations and warranties made by the Loan Parties in the Loan Documents are true and correct in all material respects on and as of the Amendment Effective Date, before and after giving effect to the effectiveness of this Amendment, as if made on and as of the Amendment Effective Date, except to the extent such representations and warranties expressly relate to a specific earlier date, in which case such representations and warranties were true and correct as of such earlier date. SECTION 5. PAYMENT OF EXPENSES. The Borrower agrees to pay or reimburse the Administrative Agent for all of its reasonable out-of-pocket costs and expenses incurred in connection with this Amendment and any other documents prepared in connection herewith and the transactions contemplated hereby, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent. SECTION 6. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. On and after the Amendment Effective Date, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to "the Credit Agreement", "thereunder", "thereof" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended hereby. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Lender or the Administrative Agent under any of the Loan Documents. Except as expressly amended herein, all of the provisions of the Credit Agreement and the other Loan Documents are and shall remain in full force and effect in accordance with the terms thereof and are hereby in all respects ratified and confirmed. SECTION 7. COUNTERPARTS. This Amendment may be executed by one or more of the parties to this Amendment on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page of this Amendment by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. A set of the copies of this Amendment signed by all the parties shall be lodged with the Borrower and the Administrative Agent. SECTION 8. GOVERNING LAW. This Amendment and the rights and obligations of the parties hereto shall be governed by, and construed and interpreted in accordance with, the law of the State of New York. 10 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. FRIENDLY ICE CREAM CORPORATION By: /s/ Paul J. Mcdonald ------------------------------------------ Title: Senior Executive Vice President and Chief Administrative Officer SOCIETE GENERALE By: /s/ Salvatore Galatioto ------------------------------------------ Title: Managing Director TRANSAMERICA BUSINESS CREDIT CORPORATION By: /s/ Perry Vavoules ------------------------------------------ Title: Senior Vice President SANWA BUSINESS CREDIT CORPORATION By: /s/ Mark Flamm ------------------------------------------ Title: Vice President TORONTO DOMINION (TEXAS), INC. By: /s/ Sonja R. Jordan ------------------------------------------ Title: Vice President 11 BANKBOSTON, N.A. By: /s/ Rod Guinn ------------------------------------------ Title: Division Executive GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Janet K. Williams ------------------------------------------ Title: Duly Authorized Signatory FIRST SOURCE FINANCIAL LLP By: First Source Financial, Inc., its Agent/Manager By: /s/ John P. Thacker ------------------------------------------ Title: Senior Vice President 12 NATIONSBANK, N.A. By: /s/ Richard G. Parkhurst, Jr. ------------------------------------------ Title: Senior Vice President PAMCO CAYMAN LTD. By: Highland Capital Management, L.P. as Collateral Manager By: /s/ Mark Okada ------------------------------------------ Title: Executive Vice President PAM CAPITAL FUNDING, L.P. By: Highland Capital Management, L.P. as Collateral Manager By: /s/ Mark Okada ------------------------------------------ Title: Executive Vice President SENIOR DEBT PORTFOLIO By: First Source Financial, Inc., its Agent/Manager By: /s/ Scott H. Page ------------------------------------------ Title: Vice President FOOTHILL INCOME TRUST, L.P. By: /s/ Karen S. Sandler ------------------------------------------ Title: Managing Partner 14 ACKNOWLEDGMENT AND CONSENT Each of the undersigned corporations as guarantors under the Guarantee and Collateral Agreement, dated as of November 19, 1997, made by the undersigned corporations in favor of the Administrative Agent, for the benefit of the Lenders, hereby (a) consents to the transactions contemplated by this Amendment and (b) acknowledges and agrees that the guarantees (and grants of collateral security therefor) contained in such Guarantee and Collateral Agreement are, and shall remain, in full force and effect after giving effect to this Amendment and all prior modifications to the Credit Agreement. FRIENDLY'S RESTAURANTS FRANCHISE, INC. By: /s/ Paul J. Mcdonald ---------------------------------------------- Title: Chief Administrative Officer, Senior Executive Vice President and Assistant Clerk FRIENDLY'S INTERNATIONAL, INC. By: /s/ Paul J. Mcdonald --------------------------------------------- Title: Vice President, Finance and Assistant Secretary ANNEX A PRICING GRID FOR REVOLVING CREDIT LOANS, TRANCHE A TERM LOANS AND COMMITMENT FEES
Consolidated Applicable Margin Leverage Ratio for Eurodollar Loans Commitment Fee Rate -------------- -------------------- ------------------- greater than equal to $ 4.0 to 1.0 2.750% 0.500% greater than equal to $ 3.5 to 1.0 and less than 4.0 to 1.0 2.500% 0.500% greater than equal to $ 3.0 to 1.0 and less than 3.5 to 1.0 2.375% 0.500% greater than equal to $ 2.5 to 1.0 and less than 3.0 to 1.0 2.125% 0.375% less than 2.5 to 1.0 1.875% 0.375%
Changes in the Applicable Margin with respect to Revolving Loans and Tranche A Loans or in the Commitment Fee Rate resulting from changes in the Consolidated Leverage Ratio shall become effective on the date (the "ADJUSTMENT DATE") on which financial statements are delivered to the Lenders pursuant to Section 6.1 (but in any event not later than the 45th day after the end of each of the first three quarterly periods of each fiscal year or the 90th day after the end of each fiscal year, as the case may be) and shall remain in effect until the next change to be effected pursuant to this paragraph. If any financial statements referred to above are not delivered within the time periods specified above, then, until such financial statements are delivered, the Consolidated Leverage Ratio as at the end of the fiscal period that would have been covered thereby shall for the purposes of this definition be deemed to be greater than 4.0 to 1.0. In addition, at all times while a Default or an Event of Default shall have occurred and be continuing, there shall be no reduction in the Applicable Margin with respect to Revolving Loans and Tranche A Loans or in the Commitment Fee Rate; PROVIDED, HOWEVER, that any applicable reduction shall become effective at such time as no Default or Event of Default shall be continuing. Each determination of the Consolidated Leverage Ratio pursuant to this definition shall be made as at the end of and with respect to the period of four consecutive fiscal quarters of the Borrower ending at the end of the period covered by the relevant financial statements and shall reflect the matters set forth in the proviso to Section 7.1(a). ANNEX C PERMITTED CAPITAL EXPENDITURE GRID
Ratio of Capital Consolidated Consolidated Permitted Fiscal Expenditure EBITDA EBITDA to Capital Year Amount Target Consolidated Expenditure EBITDA Target Percentage - - ------------------------------------------------------------- ---------------------------------------------------------- 1998 $53,000,000 $ 67,700,000 - - ------------------------------------------------------------- 1999 $33,000,000 $ 77,800,000 greater than or equal to $ 0.90 to 1.00 100% - - ------------------------------------------------------------- 2000 $38,500,000 $ 84,800,000 - - ------------------------------------------------------------- ---------------------------------------------------------- 2001 $40,500,000 $ 95,400,000 less than 0.90 to 1.00 80% and greater than or equal to $ 0.80 to 1.00 - - ------------------------------------------------------------- ---------------------------------------------------------- 2002 and thereafter $42,500,000 $105,900,000 less than 0.80 to 1.00 50% - - ------------------------------------------------------------- ----------------------------------------------------------
Changes in the Permitted Capital Expenditure Amount resulting from changes in the Ratio of Consolidated EBITDA to Consolidated EBITDA Target shall become effective on the date (the "PERMITTED CAPITAL EXPENDITURE ADJUSTMENT DATE") on which audited financial statements are delivered to the Lenders pursuant to Section 6.1(a) with respect to any fiscal year, commencing with the Borrower's 1998 fiscal year (but in any event not later than the 90th day after the end of each such fiscal year), and shall remain in effect until the next change to be effected pursuant to this paragraph. If any financial statements are not delivered within the time period specified above, then, until such financial statements are delivered, the Ratio of Consolidated EBITDA to Consolidated EBITDA Target as at the end of the fiscal year that would have been covered thereby shall for the purposes of this definition be deemed to be less than 0.80 to 1.00. Each determination of the Ratio of Consolidated EBITDA to Consolidated EBITDA Target shall be made with respect to the period of four consecutive quarters of the Borrower ending at the end of the fiscal year covered by the relevant financial statements. EX-10.11 4 EX 10.11 Exhibit 10.11 AIRCRAFT REIMBURSEMENT AGREEMENT This Agreement is entered into as of April 14, 1994, among Friendly Ice Cream Corporation, a Massachusetts corporation ("Friendly"), and TRC Realty Co., a Vermont corporation ("Lessee"). R E C I T A L S Lessee has entered into that certain Aircraft Lease Agreement dated as of April 14, 1994 (as amended, supplemented or modified from time to time, the "Lease") with General Electric Capital Corporation ("Lessor") providing for the lease by Lessee from the Lessor of a certain Beechjet 400A aircraft, FAA Registration Mark N998GP and Manufacturer's Serial Number RK-32, together with two Pratt & Whitney JT-15D-5 engines and related accessories and optional equipment (collectively, the "Aircraft"). Friendly is an Affiliate of Lessee, will be using the Aircraft in its business from time to time as permitted by the Lease, and desires under this Agreement to provide for its reimbursement of Lessee for certain costs and expenses of its use of the aircraft. It is hereby agreed as follows: 1. Terms used with initial capital letters in this Agreement and not otherwise defined shall have the respective meanings given thereto in the Lease. The following terms when used in this Agreement shall have the meanings indicated below: "Contract User" shall mean Friendly and any other Affiliate of Lessee which has entered into an Aircraft Reimbursement Agreement with Lessee on substantially the same terms and conditions as are contained in this Agreement. "Fixed Costs" shall mean, with respect to any month, those costs and expenses associated with the possession and use of the Aircraft for such month of the type which are reflected as "Fixed costs" on Exhibit A hereto. "Usage Share" shall mean, with respect to each Contract User, such Contract User's share (expressed as a percentage) of the usage of the Aircraft by all Contract Users during the preceding month, which share shall be determined by dividing the number of hours of use of the Aircraft by such Contract User during such month by the total number of hours of use of the Aircraft during such month by all Contract Users. "Variable Expenses" shall mean, with respect to any month, all costs and expenses incurred in connection with the possession and use of the Aircraft during such month other than Fixed Costs, and shall include, without limitation, those costs and expenses of the type which are reflected as "Variable Expenses" on Exhibit A. 2. Lessee agrees to make the Aircraft available for use by Friendly on request, subject to the availability of the Aircraft and Lessee's customary scheduling requirements. It is understood and agreed, however, that Lessee shall be and remain solely responsible for the possession and use of the Aircraft and for the payment and performance of all obligations under the Lease, and Friendly shall have no responsibility or obligation with respect thereto except for the reimbursement of costs as provided for in Section 4(a) of this Agreement. 3. This Agreement shall be for a term commencing on April 14, 1994 and continuing to and through the Term of the Lease. 4. (a) Friendly shall reimburse Lessee monthly an amount equal to the sum of (a) one-half (1/2) of the Fixed Costs of the Aircraft for the preceding month, and (b) its Usage Share of the Variable Expenses of the Aircraft for the preceding month; provided, however, that if there are more than two Contract Users at any time during the term of this Agreement, the denominator in the fraction in the foregoing clause (a) shall be increased to the total number of Contract Users. (b) For the purposes of this Agreement, Fixed costs and Variable Expenses shall be Lessee's fully allocated costs, as determined by Lessee from its books and records in accordance with generally accepted accounting principles. The gross receipts received by Lessee with respect to any month from the use of the Aircraft by a person other than a Contract User shall be credited to Fixed Costs or Variable Expenses for such month in such consistent manner as Lessee shall in good faith deem appropriate. All determinations of hourly use of the Aircraft by Friendly for each month shall be made by Lessee in accordance with its books and records. (c) The Lessee will bill Friendly monthly, promptly after the last day of the month, for the amount of its reimbursement amount for the Aircraft for the preceding month, which bill will be due and payable within ten (10) days. 5. Lessee, if requested by Friendly shall permit Friendly to audit its books and records relating to the costs and Aircraft usage being reimbursed hereunder. 6. Nothing herein contained shall be construed as constituting a partnership, joint venture or agency between Lessee and Friendly. 7. Each party hereto intends that this Agreement shall not benefit or create any right or cause of action in or on behalf of any person other than the parties hereto. 8. All terms and provisions of this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and the respective successors and assigns; provided, however, that this Agreement may not be assigned by either party hereto without the written consent of the other party (which consent shall not be unreasonably withheld). 9. This Agreement shall be governed by the laws of the State of Illinois. In witness whereof, the parties have signed this Agreement as of the date first above written. FRIENDLY ICE CREAM CORPORATION By: /s/ George G. Roller ----------------------------------- Its: V.P. & Treasurer TRC REALTY CO. By: /s/ Larry W. Browne ----------------------------------- Its: Executive Vice President EXHIBIT A TRC REALTY CO. AIRCRAFT REIMBURSEMENT ALLOCATION FIXED COSTS Lease Payments Pilot (Salaries & Benefits) Pilot Relocation Hangar Rental Property Taxes Letter of Credit Fees Set Up Expenses Other Fees Dues & Subscriptions Supplies Telephone Amortization Insurance VARIABLE EXPENSES Fuel Maintenance Engine Landing Fees Pilot Travel Expenses Catering Costs EX-23.1 5 EX-23-1 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- As independent public accountants, we hereby consent to the incorporation of our report dated February 12, 1999 (except for the matter discussed in Note 18 of Notes to Consolidated Financial Statements, as to which the date is February 25, 1999) for Friendly Ice Cream Corporation and subsidiaries included in this Form 10-K into Friendly Ice Cream Corporation's previously filed Registration Statements (File Nos. 333-40195, 333-40197 and 333-40199) on Form S-8. ARTHUR ANDERSEN LLP Hartford, Connecticut March 24, 1999 EX-27.1 6 EX-27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-27-1998 DEC-27-1998 13,302 0 5,730 164 15,560 48,067 549,335 249,176 374,548 78,724 311,061 0 0 75 (90,676) 374,548 674,327 678,096 204,884 570,287 0 0 31,838 (8,426) 3,455 (4,971) 0 0 0 (4,971) (0.67) (0.67)
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