As reported in the media, Friendly’s Ice Cream Corporation (“Friendly’s”), filed petitions for bankruptcy this week in the United States Bankruptcy Court for the District of Delaware.  According to the Declaration of Friendly’s CFO (the “Declaration” or “Decl.”), Friendly’s and four of its affiliates filed petitions for reorganization under Chapter 11 of the Bankruptcy Code.  Relying primarily on the Declaration, this post will look at Friendly’s businesses, why the company filed for bankruptcy as well as what the company’s objectives are now that it is in bankruptcy.

Friendly’s Business

Friendly’s describes itself as a “leading full-service, family-oriented restaurant chain and provider of ice cream products in the Eastern United States.”  Decl. at *2.  Going in to bankruptcy, the company operates 490 restaurants in 16 states.  Aside from its restaurant operations, Friendly’s also manufactures and sells ice cream in supermarkets and other stores.  Id.  Friendly’s owns 250 of its restaurants, whereas the remaining stores operate under franchise agreements.  The company’s franchised stores are operated by 40 independent businesses.  Id. at *5.  Restaurant sales reached over $213 million in the first eight months of this year.  Id.

Friendly’s makes ice cream, syrups and toppings in a manufacturing facility located in Wilbraham, Massachusetts.  Last year the company produced approximately 17 million gallons of ice cream.  Besides making ice cream, Friendly’s also operates a distribution system that provides almost all of the food products and ice creams consumed in the company-owned and franchised stores.  Friendly’s operates two distribution centers – one in Chicopee, Massachusetts and one in York, Pennsylvania.  Decl. at *5.

Events Leading to Bankruptcy

Several factors led Friendly’s decision to file for bankruptcy.  According to the company, the two key reasons for bankruptcy are declining restaurant sales and increasing commodity prices.  Decl. at *9.  Like many of the debtors before it, Friendly’s sales dropped due to the poor economy and a highly competitive food service market.  High unemployment reduces discretionary income.  Less discretionary income means fewer customers are coming in to Friendly’s restaurants.  In 2011, Friendly’s experienced a 5.3 percent drop in sales for its franchised restaurants. During this same time period, sales in Friendly’s company-owned stores dropped 4.5 percent.  Id.

In addition to declining sales, Friendly’s has also had to deal with an increase in commodity prices.  In the last two years, Friendly’s reports that the price of butter (which affects the price of cream) increased by 57.5, whereas the price of milk increased by 22.2 percent.  Decl. at *10.  Increased fuel prices over the last two years have also increased the cost for Friendly’s distribution to restaurants and supermarkets.  Id.

Objectives in Bankruptcy

Friendly’s hopes to sell substantially all of its assets under section 363 of the Bankruptcy Code.  Going in to bankruptcy, the company has a “stalking horse bidder” which will credit bid on Friendly’s assets.  The sale will be open to higher and better offers.  The stalking horse bidder, Sundae Group Holdings I, LLC, has already begun negotiating with Friendly’s management regarding compensation and severance packages.  Decl. at *12.

The Friendly’s Bankruptcy is pending before the Honorable Kevin Gross, Chief Judge of the Delaware Bankruptcy Court, under case no. 11-13167.  Friendly’s is represented by the law firm Kirkland and Ellis.  A copy of Friendly’s Declaration is available here for review.