SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended October 1, 1997, or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___________ to
___________
Commission file number 333-07601
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FRD ACQUISITION CO.
(Exact name of registrant as specified in its charter)
Delaware 57-1040952
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3355 Michelson Dr., Suite 350
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Irvine, California 92612
(Address of principal executive offices)
(Zip Code)
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(864) 597-8000
(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed
since last report)
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 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 [ ]
As of November 14, 1997, 1,000 shares of the registrant's Common Stock, par
value $0.10 per share, were outstanding, all of which were owned by the
registrant's parent, Flagstar Corporation.
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRD Acquisition Co.
Condensed Statements of Consolidated Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
October 1, 1997 September 26, 1996
--------------- ------------------
(In thousands)
<S> <C> <C>
Operating revenue $ 121,766 $ 122,132
------------- -------------
Operating expenses:
Product cost 33,631 34,784
Payroll and benefits 42,942 43,064
Depreciation and amortization 7,294 7,459
Management fees and costs allocated
from Flagstar 1,843 1,224
Other 30,575 29,784
------------- -------------
116,285 116,315
------------- -------------
Operating income 5,481 5,817
------------- -------------
Other charges:
Interest and debt expense - net 7,203 7,612
Other - net 23 58
------------- -------------
7,226 7,670
------------- -------------
Loss before income taxes (1,745) (1,853)
(Benefit from) provision for income taxes (2,299) 264
------------- -------------
Net income (loss) $ 554 $ (2,117)
============= =============
</TABLE>
See accompanying notes
2
<PAGE>
FRD Acquisition Co.
Condensed Statements of Consolidated and Combined Operations
(Unaudited)
<TABLE>
<CAPTION>
FRD Successor FRD Predecessor
Three Quarters Four Months Five Months
Ended Ended Ended
October 1, 1997 September 26, 1996 May 23, 1996
--------------- ------------------ --------------
(In thousands)
<S> <C> <C> <C>
Operating revenue $ 371,220 $ 171,408 $ 195,943
--------------- --------------- -------------
Operating expenses:
Product cost 100,996 48,910 54,370
Payroll and benefits 132,673 60,546 74,642
Depreciation and amortization 22,359 10,051 12,371
Management fees and costs allocated
from Flagstar 5,584 1,714 ---
Other 91,033 41,095 52,078
--------------- --------------- -------------
352,645 162,316 193,461
--------------- --------------- -------------
Operating income 18,575 9,092 2,482
--------------- --------------- -------------
Other charges:
Interest and debt expense - net 22,201 10,108 4,658
Other - net 408 149 (5,437)
--------------- --------------- -------------
22,609 10,257 (779)
--------------- --------------- -------------
(Loss) income before income taxes (4,034) (1,165) 3,261
(Benefit from) provision for income taxes (2,140) 460 2,160
--------------- --------------- -------------
Net (loss) income $ (1,894) $ (1,625) $ 1,101
=============== =============== =============
</TABLE>
See accompanying notes
3
<PAGE>
FRD Acquisition Co.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
October 1, 1997 December 26, 1996
--------------- -----------------
<S> <C> <C>
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 4,142 $ 14,300
Receivables 3,660 5,988
Merchandise and supply inventories 3,463 5,039
Net assets held for sale -- 5,065
Other 2,815 4,468
--------- ---------
14,080 34,860
--------- ---------
Property and equipment 147,000 149,587
Accumulated depreciation (29,504) (14,611)
--------- ---------
117,496 134,976
--------- ---------
Other Assets:
Goodwill, net 189,390 205,389
Deferred taxes 23,420 --
Other 13,516 12,821
--------- ---------
226,326 218,210
--------- ---------
Total Assets $ 357,902 $ 388,046
========= =========
</TABLE>
See accompanying notes
4
<PAGE>
FRD Acquisition Co.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
October 1, 1997 December 26, 1996
--------------- -----------------
<S> <C> <C>
(In thousands)
LIABILITIES AND EQUITY
Current Liabilities:
Current maturities of long-term debt $ 22,427 $ 19,578
Accounts payable 13,480 16,897
Accrued payroll and related 13,874 14,189
Accrued insurance 5,281 6,832
Accrued interest 4,378 9,261
Payable to Flagstar 8,534 2,950
Other 13,010 20,512
--------- ---------
80,984 90,219
--------- ---------
Long-term Liabilities:
Debt, less current maturities 201,531 218,497
Liability for self-insured claims 7,121 10,142
Other non-current liabilities 1,349 377
--------- ---------
210,001 229,016
--------- ---------
Total Liabilities 290,985 319,235
--------- ---------
Shareholder's Equity:
Common stock: par value $0.10; 1000 shares
authorized, issued and outstanding -- --
Paid-in-capital 75,000 75,000
Deficit (8,083) (6,189)
--------- ---------
Total Shareholder's Equity 66,917 68,811
--------- ---------
Total Liabilities and Equity $ 357,902 $ 388,046
========= =========
</TABLE>
See accompanying notes
5
<PAGE>
FRD Acquisition Co.
Statements of Consolidated and Combined Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
FRD Successor FRD Predecessor
Three Quarters Four Months Five Months
Ended Ended Ended
October 1, 1997 September 26, 1996 May 23, 1996
--------------- ------------------ ---------------
<S> <C> <C> <C>
(In thousands)
Cash Flows From Operating Activities:
Net (loss) income $ (1,894) $ (1,625) $ 1,101
Adjustments to reconcile (loss) income to cash flows
from operating activities:
Depreciation and amortization of property
and intangibles 22,359 10,051 12,371
Amortization of deferred financing costs 1,017 425 --
Loss (gain) on disposition of assets (97) 134 (5,738)
Deferred tax benefit (3,611) -- --
Decrease (increase) in assets:
Receivables 1,926 (1,059) 1,676
Merchandise and supply inventories 1,576 (12) 68
Other current assets 591 (1,871) (485)
Other assets (1,764) (226) 1,251
Increase (decrease) in liabilities:
Accounts payable (3,413) (2,076) (4,762)
Accrued payroll and related (315) 112 --
Payable to Flagstar 5,584 1,714 --
Other accrued liabilities (11,694) 3,339 (2,290)
Liability for self insurance claims (4,572) 154 2,133
Other non-current liabilities 597 (347) --
-------- --------- --------
Net cash flows provided by operating activities 6,290 8,713 5,325
-------- --------- --------
Cash Flows From Investing Activities:
Purchase of property (7,542) (1,317) (2,216)
Proceeds from disposition of property 5,681 -- 20,087
Acquisition of business -- (128,056) --
-------- --------- --------
Net cash flows (used in) provided by investing activities (1,861) (129,373) 17,871
-------- --------- --------
</TABLE>
See accompanying notes
6
<PAGE>
FRD Acquisition Co.
Statements of Consolidated and Combined Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
FRD Successor FRD Predecessor
Three Quarters Four Months Five Months
Ended Ended Ended
October 1, 1997 September 26, 1996 May 23, 1996
--------------- ------------------ ---------------
<S> <C> <C> <C>
(In thousands)
Cash Flows From Financing Activities:
Principal debt payments, net (14,585) (1,940) (81,755)
Deferred financing costs (2) (4,500) --
Borrowing on credit facilities -- 56,000 --
Equity contribution from Flagstar -- 75,000 --
Net intercompany and equity activity -- -- 54,050
-------- --------- --------
Net cash flows (used in) provided by financing activities (14,587) 124,560 (27,705)
-------- --------- --------
(Decrease) increase in cash and cash equivalents (10,158) 3,900 (4,509)
Cash and Cash Equivalents at:
Beginning of period 14,300 988 5,497
-------- --------- --------
End of period $ 4,142 $ 4,888 $ 988
======== ========= ========
</TABLE>
See accompanying notes
7
<PAGE>
FRD Acquisition Co.
Notes to Consolidated And Combined Financial Statements
October 1, 1997
(Unaudited)
Note 1. Basis of Presentation
FRD Acquisition Co. ("FRD" or, together with its subsidiaries, the "Company")
was incorporated in February 1996 as a wholly-owned subsidiary of Flagstar
Corporation ("Flagstar"), which is a wholly-owned subsidiary of Flagstar
Companies, Inc. ("FCI"). On May 23, 1996, FRD consummated the acquisition of the
Coco's and Carrows restaurant chains consisting of 347 Company-owned units
within the mid-scale family-style dining category. The acquisition price of
$313.4 million was paid in exchange for all of the outstanding stock of FRI-M
Corporation ("FRI-M"), the subsidiary of Family Restaurants, Inc. ("FRI"), which
owns the Coco's and Carrows chains. The acquisition was accounted for using the
purchase method of accounting. In accordance with the purchase method of
accounting, the purchase price has been allocated to the underlying assets and
liabilities of FRI-M based on their estimated respective fair values at the date
of acquisition. During the second quarter of 1997 adjustments were made to
deferred income taxes and property and equipment based on the completion of the
Company's valuation studies relative to such areas. The net impact of such
adjustments on goodwill was immaterial. During the third quarter, FRD
Predecessor (as defined below) finalized its income tax returns for the calendar
year 1996. Such returns included the operations of FRD through May 23, 1996. As
a result, FRD was allocated certain income tax loss carryforwards relating to
periods prior to FRD leaving the consolidated income tax return group of FRD
Predecessor. The tax effect of certain of such benefits, totaling approximately
$12 million, has been recognized as a deferred income tax asset in the third
quarter, with an offsetting adjustment to goodwill arising from the acquisition
of Coco's and Carrows. The remaining amounts of such allocated benefits have not
been recognized since the utilization of such losses is subject to various
limitations. Accordingly, a valuation allowance has been provided against such
benefits.
In the financial statements included herein, "FRD Predecessor" refers to the
period of ownership of FRI-M by FRI through May 23, 1996. The FRD Predecessor
combined financial statements combine the financial position and operations of
FRI-M Corporation and certain subsidiaries including those restaurants that made
up the Family Restaurant Division as well as the FRD Commissary, a former
division of FRI. The Family Restaurant Division primarily represented the
restaurants operating as Coco's and Carrows. The "FRD Successor" refers to the
period of ownership of FRI-M by FRD subsequent to May 23, 1996.
The consolidated and combined financial statements of the Company and its
predecessor for the quarter and three quarters ended October 1, 1997 and
September 26, 1996 are unaudited and include all adjustments management believes
are necessary for a fair presentation of the results of operations for such
interim periods. All such adjustments are of a normal and recurring nature. The
interim consolidated and combined financial statements should be read in
conjunction with the Consolidated and Combined Financial Statements and notes
thereto for the year ended December 26, 1996 and the related Management's
Discussion and Analysis of Financial Condition and Results of Operations, both
of which are contained in the FRD Acquisition Co. 1996 Annual Report on Form
10-K (the "FRD 10-K"). The results of operations for the quarter and three
quarters ended October 1, 1997 are not necessarily indicative of the results for
the entire fiscal year ending December 31, 1997.
Certain prior year amounts have been reclassified to conform to the 1997
presentation.
Note 2. Change in Fiscal Year
Effective December 27, 1996, the Company changed its fiscal year end from the
last Thursday of the calendar year to the last Wednesday of the calendar year.
Due to the timing of this change, the Company's first fiscal quarter includes an
extra six days in comparison to the prior year quarter.
8
<PAGE>
Note 3. Property Disposition
On February 26, 1997, the Company sold certain land and building for cash
proceeds of $4.9 million. Because the assets were recorded at fair value in
accordance with purchase accounting at the time of the acquisition, no gain or
loss was recorded relative to this transaction. In conjunction with the sale,
the Company entered into a three year supply agreement under which the buyer
will continue to supply certain products to the Company. There are no volume
requirements relative to this agreement; however, the products named therein
must be purchased exclusively from the buyer.
Note 4. Term Loan Prepayments
As a result of asset dispositions during the three quarters ended October 1,
1997, the Company was required by the FRI-M Credit Agreement to make mandatory
partial prepayments totaling $4.2 million on the FRI-M term loan. In addition,
the Company made a $1.8 million voluntary prepayment out of excess cash in July
1997. Such prepayments are applied to the next scheduled payment.
The FRI-M Credit Facility requires the Company to make mandatory prepayments
equal to 75% of Consolidated Excess Cash Flow (as defined in the FRI-M Credit
Facility agreement) measured on an annual basis. Based on Consolidated Excess
Cash Flow for the year ended December 26, 1996, the Company was required to make
a $5.2 million partial prepayment of its term loan in March 1997, prepaying the
$4.0 million May 28, 1997 payment and a portion of the $4.0 million scheduled
payment due on August 28, 1997.
Note 5. Related Party Transactions
Certain administrative functions are provided for the Company by Flagstar.
Beginning in 1997, the Company is allocated a portion of these expenses based
upon services received. These allocations, which are in addition to fees equal
to one percent of revenues payable to Flagstar under the management service
agreement, are included in operating expenses and totaled $0.6 million and $1.9
million for the quarter and three quarters ended October 1, 1997. Payment of the
fees to Flagstar cannot occur unless certain financial targets are met as
described in the Company's senior note indenture and in the FRI-M Credit
Agreement. Because the Company has not met the financial targets, no payment has
been made relative to these allocations and the related amounts are included in
the payable to Flagstar in the Condensed Consolidated Balance Sheets. Flagstar's
method of allocating these expenses is not the only reasonable method and other
reasonable methods of allocation might produce different results.
Note 6. FCI and Flagstar Financial Restructuring
On March 17, 1997, FCI and Flagstar announced that they had reached an agreement
in principle on the terms of a financial restructuring plan with an ad hoc
committee representing holders of both of Flagstar's 11 3/8% Senior Subordinated
Debentures due 2003 and 11.25% Senior Subordinated Debentures due 2004. In
conjunction with such plan, FCI and Flagstar decided to pursue a restructuring
of their debt and equity through "prepackaged" bankruptcy filings to be made
under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code")
by FCI and Flagstar. On July 11, 1997 FCI and Flagstar filed separate voluntary
petitions for reorganization under the Bankruptcy Code in the United States
Bankruptcy Court for the District of South Carolina (the "Bankruptcy Court") and
joined Flagstar Holdings, Inc. ("Holdings"), a wholly-owned subsidiary of
Flagstar which filed its voluntary petition June 27, 1997. FCI's and Flagstar's
operating subsidiaries, Denny's Holdings, Inc., Spartan Holdings, Inc. and the
Company (and their respective subsidiaries), are not parties to and are
unaffected by these Chapter 11 proceedings. On November 12, 1997, the Bankruptcy
Court entered an order confirming an Amended Joint Plan of Reorganization of FCI
and Flagstar.
As of the effective date of FCI's and Flagstar's emergence from bankruptcy, FCI
and Flagstar will adopt "fresh start" reporting pursuant to the guidance
provided by the AICPA's Statement of Position 90-7, Financial Reporting By
Entities In Reorganization Under the Bankruptcy Code" ("SOP 90-7"). Under "fresh
start" reporting, the reorganization value of the entity is allocated to the
entity's assets. If any portion of the reorganization value cannot be attributed
to specific
9
<PAGE>
tangible or identified intangible assets of the emerging entity, such amount is
to be reported as "reorganization value in excess of amounts allocable to
identifiable assets". Such amounts will be amortized over a five year
amortization period. FCI and Flagstar intend to "push down" the impact of "fresh
start" reporting to their operating subsidiaries, including FRD. As a result,
the Company's financial statements issued subsequent to FCI's and Flagstar's
emergence from bankruptcy will not be comparable with those prepared before
emergence, including the historical financial statements in this quarterly
report.
On March 17, 1997, in connection with the financial restructuring plan discussed
above, Flagstar elected not to make the $7.1 million interest payment due and
payable as of that date to holders of its 11 3/8% Senior Subordinated
Debentures. In addition, on May 1, 1997, also in connection with the financial
restructuring plan discussed above, Flagstar elected not to make the $40.6
million and $5.0 million interest payments due and payable as of that date to
holders of its 11.25% Senior Subordinated Debentures and its 10% Convertible
Debentures (formerly referred to as Flagstar 10% Convertible Junior Debentures),
respectively. As a result of these nonpayments, and as a result of continuation
of such nonpayments for 30 days past their respective due dates, Flagstar is in
default under the terms of the indentures governing such debentures. During the
pendency of Flagstar's bankruptcy proceeding, Flagstar also missed the $14.5
million interest payment due September 15, 1997 on its 10 3/4% Senior Notes and
the $7.1 million interest payment due September 15, 1997 on its 11 3/8%
Debentures.
On July 11, 1997, FCI entered into a $200 million debtor-in-possession financing
facility (the "DIP Facility") between FCI, Flagstar, Holdings, certain
subsidiaries of Flagstar (excluding the Company) and the Chase Manhattan Bank
("Chase") for working capital and general corporate purposes and for letters of
credit. FCI and Flagstar have entered into a written commitment letter pursuant
to which they have received a commitment from Chase for a $200 million senior
secured revolving credit facility (the "Exit Facility") for the benefit of their
operating subsidiaries (excluding the Company), which facility will refinance
the DIP Facility upon the emergence of FCI and Flagstar from Chapter 11 and be
used thereafter for working capital and general corporate purposes and for
letters of credit.
The DIP Facility is guaranteed by certain operating subsidiaries of FCI
(excluding the Company) and generally is secured by liens on the same collateral
that secured FCI's obligations under FCI's Credit Agreement. The Exit Facility
will have the benefit of similar guarantees and collateral security (and FCI's
guarantee and additional liens on FCI's corporate headquarters in Spartanburg,
South Carolina and accounts receivable). The closing of the Exit Facility is
subject, among other conditions, to negotiations of definitive agreements with
Chase and the initial borrowing thereunder having been made on or before July
11, 1998, the date that is twelve months after the date on which FCI commenced
its Chapter 11 case.
Note 7. Earnings (Loss) Per Common Share
As described in Note 1, FRD is a wholly-owned subsidiary of Flagstar.
Accordingly, per share data is not meaningful and has been omitted for all
periods.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is intended to highlight significant changes in
financial position as of October 1, 1997 and the results of operations for the
quarter and three quarters ended October 1, 1997 as compared to the
corresponding 1996 periods.
The forward-looking statements included in Management's Discussion and Analysis
of Financial Condition and Results of Operations, which reflect management's
best judgment based on factors currently known, involve risks, uncertainties,
and other factors which may cause the actual performance of FRD, its
subsidiaries, and underlying concepts to be materially different from the
performance indicated or implied by such statements. Such factors include, among
others: competitive pressures from within the restaurant industry; the level of
success of the Company's operating initiatives and advertising and promotional
efforts, including the initiatives and efforts specifically mentioned herein;
adverse publicity; changes in business strategy or development plans; terms and
availability of capital; regional weather conditions; overall changes in the
general economy, particularly at the retail level; and other factors included in
the discussion below, or in the Management's Discussion and Analysis and in
Exhibit 99 to the Company's Annual Report on Form 10-K for the period ended
December 26, 1996.
10
<PAGE>
Results of Operations
As discussed herein, operating results for the three quarters ended September
26, 1996 reflect the sum of the four months ended September 26, 1996 (FRD
Successor) and the five months ended May 23, 1996 (FRD Predecessor).
Quarter Ended October 1, 1997 Compared to Quarter Ended September 26, 1996
The table below summarizes restaurant activity for the quarter ended October 1,
1997.
<TABLE>
<CAPTION>
Units Converted
Units From Company
Ending Units Units Closed/ to Franchise Ending Units Ending Units
7/2/97 Opened Sold (Turnkey) 10/1/97 9/26/96
------------ ------ ------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Coco's
Company owned 185 1 -- -- 186 184
Franchised units 7 1 -- -- 8 6
International licenses 286 6 -- -- 292 266
--- --- --- --- --- ---
478 8 -- -- 486 456
--- --- --- --- --- ---
Carrows
Company owned 156 -- (2) (1) 153 162
Franchised units 1 1 -- 1 3 --
--- --- --- --- --- ---
157 1 (2) -- 156 162
--- --- --- --- --- ---
635 9 (2) -- 642 618
=== === === === === ===
</TABLE>
<TABLE>
<CAPTION>
COCO'S
($ in millions, except average unit and Quarter Ended %
comp. store data ----------------------------- Increase/
October 1, 1997 September 26,1996 (Decrease)
--------------- ----------------- ---------
<S> <C> <C> <C>
Net company sales $ 68.2 $ 66.2 3.0
Franchise and foreign licensing revenue 1.1 1.1 --
--------- ---------
Total revenue 69.3 67.3 3.0
Operating expenses 66.3 64.2 3.3
--------- ---------
Operating income $ 3.0 $ 3.1 (3.2)
========= =========
Average unit sales
Company operated $ 366,500 $ 356,900 2.7
Franchise $ 441,700 $ 448,100 (1.4)
COMPARABLE STORE DATA (COMPANY-OPERATED):
Comparable store sales increase 2.7% (3.1%)
Average guest check (a) $ 6.79 $ 6.75 0.6
</TABLE>
(a) The method for determining weekly customer traffic and average
guest check was changed in September 1996 in order to better conform to
Flagstar's methodology. Amounts for periods prior to September 1996
have not been restated. Relative to Coco's, the new method will
generally result in higher weekly traffic counts and lower average
guest checks than calculated under the previous method.
11
<PAGE>
Coco's NET COMPANY SALES for the quarter ending October 1, 1997 increased $2.0
million (3.0%) as compared to the prior year comparable quarter. This increase
is due primarily to an increase in comparable store sales which reflects an
increase in average check as well as an increase in guest counts. In addition,
the Company experienced an increase of two Company-owned units from the
comparable quarter in 1996.
FRANCHISE AND FOREIGN LICENSING REVENUE was essentially flat for the third
quarter of 1997 as compared to the prior year quarter, in spite of two
additional domestic franchise units in 1997 as well as an increase in the number
of foreign licenses from 266 at September 26, 1996 to 292 at October 1, 1997.
The increase in royalty revenue from the additional domestic franchise units and
foreign licenses was offset by lower royalties as a result of lower sales
experienced by the Japan and Korea units due to economic conditions in those
countries.
Coco's OPERATING EXPENSES for the third quarter of 1997 increased by $2.1
million (3.3%) as compared to the prior year quarter, reflecting the impact on
expenses of the increase in net company revenue and the impact of Federal and
state minimum wage rate increases. Such increases were somewhat offset by
reduced product costs due to increased focus on portion size and minimizing
waste.
OPERATING INCOME for Coco's for the quarter ended October 1, 1997 as compared to
the prior year quarter decreased $0.1 million due to the factors noted above.
<TABLE>
<CAPTION>
CARROWS
($ in millions, except average unit and Quarter Ended %
and comp. store data) ------------------------------ Increase/
October 1, 1997 September 26, 1996 (Decrease)
--------------- ------------------ ----------
<S> <C> <C> <C>
Net company sales $ 52.4 $ 54.8 (4.4)
Franchise revenue 0.1 --- ---
--------- ---------
Total revenue 52.5 54.8 (4.2)
Operating expenses 49.9 52.1 (4.2)
--------- ---------
Operating income $ 2.6 $ 2.7 (3.7)
========= =========
Average unit sales
Company operated $ 339,500 $ 341,000 (0.4)
COMPARABLE STORE DATA: (COMPANY-OPERATED):
Comparable store sales decrease (0.3%) (3.3%)
Average guest check (a) $ 6.52 $ 6.22 4.8
</TABLE>
(a) The method for determining weekly customer traffic and average
guest check was changed in September 1996 in order to better conform to
Flagstar's methodology. Amounts for periods prior to September 1996
have not been restated. Relative to Carrows, the new method will
generally result in lower weekly traffic counts and higher average
guest checks than calculated under the previous method.
Carrows' NET COMPANY SALES decreased $2.4 million (4.4%) as compared to the
prior year comparable quarter, reflecting the impact of a nine-unit decrease in
the number of Company-owned restaurants as well as a slight decrease in
comparable store sales. The decline in comparable store sales reflects a
decrease in guest counts partially offset by an increase in average guest check.
Carrows opened its second and third domestic franchise locations in the third
quarter of 1997.
12
<PAGE>
Carrows' OPERATING EXPENSES for the quarter ended October 1, 1997 decreased by
$2.2 million (4.2%) as compared to the prior year quarter reflecting the impact
of nine fewer Company-owned units and a reduction in product costs during the
quarter as a result of increased focus on waste reduction. Such decreases were
somewhat offset by the impact of the Federal and state minimum wage rate
increases.
OPERATING INCOME for Carrows for the quarter ended October 1, 1997 as compared
to the prior year quarter decreased $0.1 million due to the factors noted above.
FRD CONSOLIDATED
CONSOLIDATED INTEREST AND DEBT EXPENSE decreased $0.4 million for the quarter
ended October 1, 1997 as compared to the prior year quarter. This decrease is
due primarily to a lower level of principal outstanding on the Company's bank
term loan during the 1997 period.
THE PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations for the
quarter has been computed based on management's estimate of the annual effective
income tax rate applied to income (loss) before taxes. The Company recorded an
income tax benefit reflecting an effective income tax rate of approximately
(131.7%) for the 1997 third quarter compared to a provision for the comparable
1996 quarter reflecting an approximate rate of 14.2%. The change in the
effective income tax rate from the prior year can be attributed to the
recognition of deferred income tax benefits related to certain income tax loss
carryforwards that were allocated to the Company from FRD Predecessor upon the
finalization, in the current year quarter, of FRD Predecessor's income tax
returns for calendar year 1996. In addition, the Company recognized certain
deferred income tax benefits related to the reduction in the valuation allowance
which was originally established in the Company's opening balance sheet and
income tax credits related to employer-paid social security taxes.
The increase in CONSOLIDATED NET INCOME of $2.7 million in comparison to the
prior year quarter is due to a combination of the above described items.
Three Quarters Ended October 1, 1997 Compared to Three Quarters Ended
September 26, 1996
<TABLE>
<CAPTION>
COCO'S
($ in millions, except average unit and Three Quarters Ended %
comp. store data) ------------------------------ Increase/
October 1, 1997 September 26, 1996 (Decrease)
--------------- ------------------ ----------
<S> <C> <C> <C>
Net company sales $ 206.7 $ 201.5 2.6
Franchise and foreign licensing revenue 3.1 2.8 10.7
---------- ----------
Total revenue 209.8 204.3 2.7
Operating expenses 198.5 197.9 0.3
---------- ----------
Operating income $ 11.3 $ 6.4 76.6
========== ==========
Average unit sales
Company operated $1,119,400 $1,117,500 0.2
Franchise $1,323,900 $1,285,000 3.0
COMPARABLE STORE DATA (COMPANY-OPERATED):
Comparable store sales increase (decrease) 0.1% (2.3%)
Average guest check (a) $ 6.70 $ 6.79 (1.3)
</TABLE>
13
<PAGE>
(a) The method for determining weekly customer traffic and average
guest check was changed in September 1996 in order to better conform
to Flagstar's methodology. Amounts for periods prior to September
1996 have not been restated. Relative to Coco's, the new method will
generally result in higher weekly traffic counts and lower average
guest checks than calculated under the previous method.
Coco's NET COMPANY SALES increased $5.2 million (2.6%) for the three quarters
ended October 1, 1997 as compared to the prior year comparable period. This
increase reflects an estimated $4.8 million impact due to the additional six
days in the 1997 period in comparison to the prior year comparable period as
well as a slight increase in comparable store sales. The increase in comparable
store sales was driven by an increase in guest count somewhat offset by a
decrease in average guest check.
FRANCHISE AND FOREIGN LICENSING REVENUE increased by $0.3 million (10.7%) for
the three quarters ended October 1, 1997 as compared to the prior year
comparable period. This increase is a result of two additional domestic
franchise units as well as an increase in the number of foreign licenses from
266 at September 26, 1996 to 292 at October 1, 1997.
Coco's OPERATING EXPENSES for the three quarters ended October 1, 1997 increased
by $0.6 million (0.3%) as compared to the prior year comparable period,
primarily as a result of the impact of an additional six days in the 1997 period
as compared to the prior year comparable period, the increase in Federal and
state minimum wage rates and the impact of five additional months of Flagstar
management fees in the current year period in comparison to the prior year
comparable period. These increases were largely offset by savings in product and
labor costs due to an increased operations focus on cost controls, waste
reduction and labor initiatives. In addition, non-recurring adjustments of
approximately $1.6 million were made in the prior year which increased legal and
workers' compensation expenses. No comparable adjustments were made in the
current year comparable period.
OPERATING INCOME for Coco's for the three quarters ended October 1, 1997 as
compared to the prior year comparable period in 1996 increased $4.9 million due
to the factors noted above.
<TABLE>
<CAPTION>
CARROWS
($ in millions, except average unit and Three Quarters Ended %
comp. store data) ------------------------------ Increase/
October 1, 1997 September 26, 1996 (Decrease)
--------------- ------------------ ----------
<S> <C> <C> <C>
Net company sales $ 161.2 $ 163.0 (1.1)
Franchise revenue 0.2 --- ---
---------- ----------
Total revenue 161.4 163.0 (1.0)
Operating expenses 154.1 157.9 (2.4)
---------- ----------
Operating income $ 7.3 $ 5.1 43.1
========== ==========
Average unit sales
Company operated $1,028,400 $1,044,600 (1.6)
COMPARABLE STORE DATA: (COMPANY-OPERATED):
Comparable store sales decrease (1.5%) (0.4%)
Average guest check (a) $ 6.46 $ 6.20 4.2
</TABLE>
(a) The method for determining weekly customer traffic and average guest
check was changed in September 1996 in order to better conform to
Flagstar's methodology. Amounts for periods prior to September 1996
have not been restated. Relative to Carrows, the new method will
generally result in lower weekly traffic counts and higher average
guest checks than calculated under the previous method.
14
<PAGE>
Carrows' NET COMPANY SALES decreased $1.8 million (1.1%) for the three quarters
ended October 1, 1997 as compared to the prior year comparable period in spite
of an estimated $3.8 million impact due to the additional six days in the 1997
period in comparison to the prior year comparable period. The sales decrease is
primarily the result of a nine-unit decrease in Company-owned restaurants and
also reflects a decrease in comparable store sales. The decrease in comparable
store sales was driven by a decrease in customer counts, slightly offset by an
increase in average guest check. Carrows opened its first domestic franchise
location in the first quarter of 1997, and two additional domestic franchise
locations in the third quarter of 1997.
Carrows' OPERATING EXPENSES decreased $3.8 million (2.4%) for the three quarters
ended October 1, 1997 as compared to the prior year comparable period, despite
the impact of an additional six days in the 1997 period as compared to the prior
year comparable period and the impact of five additional months of Flagstar
management fees in the current year period in comparison to the prior year
comparable period. This expense decrease results primarily from the nine-unit
decrease in Company-owned restaurants. In addition, the decrease reflects the
impact of approximately $1.5 million of non-recurring adjustments which
increased legal and worker's compensation expenses in the prior year comparable
period, and also reflects current period savings in product and labor costs due
to increased focus by operations on cost control, waste reduction and labor
initiatives. Such cost savings were achieved despite increases in Federal and
State minimum wage rates.
OPERATING INCOME for Carrows increased $2.2 million for the three quarters ended
October 1, 1997 as compared to the prior year comparable period due to the
factors noted above.
FRD CONSOLIDATED
CONSOLIDATED INTEREST AND DEBT EXPENSE increased $7.4 million for the three
quarters ended October 1, 1997 as compared to the three quarters ended September
26, 1996. This increase is attributed to the change in the Company's debt
structure related to its acquisition in May 1996. As a result of the
acquisition, the Company obtained a $56.0 million bank term loan and issued
$156.9 million in senior notes.
THE PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations for the
period has been computed based on management's estimate of the annual effective
income tax rate applied to income (loss) before taxes. The Company recorded an
income tax benefit reflecting an effective income tax rate of approximately
(53%) for the three quarters ended October 1, 1997 compared to a provision for
the comparable 1996 period reflecting an approximate rate of 125%. The change in
the effective income tax rate from the prior year can be attributed to the
recognition of deferred income tax benefits related to certain income tax loss
carryforwards that were allocated to the Company from FRD Predecessor upon the
finalization, in the third quarter, of FRD Predecessor's income tax returns for
calendar year 1996. In addition, the Company recognized certain deferred income
tax benefits related to the reduction in the valuation allowance which was
originally established in the Company's opening balance sheet and income tax
credits related to employer-paid social security taxes.
The increase in CONSOLIDATED NET LOSS of $1.4 million in comparison to the prior
year quarter is due to a combination of the above described items.
Liquidity and Capital Resources
At October 1, 1997 and December 26, 1996 the Company had working capital
deficits of $66.9 million and $55.4 million, respectively. The Company is able
to operate with a substantial working capital deficiency 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) accounts payable for food, beverages, and
supplies usually become due after the receipt of cash from related sales.
15
<PAGE>
For information relating to FCI's and Flagstar's bankruptcy proceedings, see
Note 6 to the Consolidated and Combined Financial Statements.
Impact of Bankruptcy Petitions on Franchising
The operation of the Company's franchise system is subject to regulations
enacted by a number of states, and rules promulgated by the Federal Trade
Commission. Among other things, such regulations require that each franchising
entity annually renew its Uniform Franchise Offering Circular (the "UFOC") which
provides current information about the business. In addition, in the event that
any information in the UFOC becomes misleading, inaccurate or incomplete during
the year, the UFOC must be amended at that time to make appropriate disclosures.
When this occurs, the franchising entity must cease its sale of new franchises
until the UFOC has been updated to make the required disclosures. In some
states, the updated UFOC must be reviewed and approved by a regulatory agency
before the entity can resume franchise sales. Due to the involuntary Chapter 11
proceeding that was filed against Flagstar on June 17, 1997 (which was
subsequently dismissed) and the subsequent filing of voluntary petitions with
the United States Bankruptcy Court by FCI and Flagstar on July 11, 1997,
management decided that it would be appropriate for FCI's and Flagstar's
franchising subsidiaries (including Coco's and Carrows) to update their offering
circulars and to cease sales of new franchises until an updated UFOC had been
prepared and approved by those states that regulate the sale of franchises.
Coco's and Carrows obtained approval and began selling franchises again in all
states in which they have significant operations in late July.
Due to the Bankruptcy Court's approval of the Joint Amended Plan of
Reorganization for FCI and Flagstar on November 7, 1997, management has decided
that it would be appropriate for the Company's franchising subsidiaries to
update their offering circulars and to cease sales of new franchises until an
updated UFOC has been prepared and approved by those states that regulate the
sale of franchises.
16
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. The following are included as exhibits to this report:
Exhibit
No. Description
*10.1.4 Fourth Amendment and Limited Waiver, dated July 9, 1997, to the
Credit Agreement, dated as of May 23, 1996, by and among FRD, FRI-M,
certain lenders and co-agents named therein, and Credit Lyonnais
New York Branch, as administrative agent (incorporated by reference
to Exhibit 4.1 to FCI's quarterly report on Form 10-Q for the period
ended October 1, 1997, File No. 0-18051).
27 Financial Data Schedule
- ---------------------
* Certain of the exhibits to this report, indicated by asterisk, are hereby
incorporated by reference to other documents physically on file with the
Commission, to be part hereof as of their respective dates.
b. No reports on Form 8-K were filed during the quarter ended October 1,
1997.
17
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
FRD ACQUISITION CO.
Date: November 17, 1997 By: /s/ C. Robert Campbell
--------------------------------
C. Robert Campbell
Executive Vice President
(Duly authorized officer of
registrant/principal financial officer)
18
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated and Combined Financial Statements of FRD Acquisition Co.,
as contained in Form 10-Q for the quarterly period ended October 1, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> OCT-01-1997
<CASH> 4,142
<SECURITIES> 0
<RECEIVABLES> 3,660
<ALLOWANCES> 0
<INVENTORY> 3,463
<CURRENT-ASSETS> 14,080
<PP&E> 147,000
<DEPRECIATION> (29,504)
<TOTAL-ASSETS> 357,902
<CURRENT-LIABILITIES> 80,984
<BONDS> 201,531
0
0
<COMMON> 0
<OTHER-SE> 66,917
<TOTAL-LIABILITY-AND-EQUITY> 357,902
<SALES> 0
<TOTAL-REVENUES> 371,220
<CGS> 0
<TOTAL-COSTS> 352,645
<OTHER-EXPENSES> 408
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,201
<INCOME-PRETAX> (4,034)
<INCOME-TAX> (2,140)
<INCOME-CONTINUING> (1,894)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,894)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
