SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended July 2, 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
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
Irvine, California 92612
(Address of principal executive offices)
(Zip Code)
(864) 597-8000
(Registrant's telephone number, including area code)
(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 August 15, 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>
Form 10-Q/A
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRD Acquisition Co.
Condensed Statements of Consolidated and Combined Operations
(Unaudited)
<TABLE>
<CAPTION>
FRD Successor
---------------------------- FRD Predecessor
Quarter One Month Two Months
Ended Ended Ended
July 2, 1997 June 27, 1996 May 23, 1996
------------- ------------- -------------
<S> <C> <C> <C>
(In thousands)
Operating revenue $ 122,419 $ 49,276 $ 76,103
------------- ------------- ------------
Operating expenses:
Product cost 33,251 14,126 21,280
Payroll and benefits 43,366 17,481 29,371
Depreciation and amortization 7,486 2,591 5,445
Management fees to Flagstar 1,224 490 ---
Other 29,790 11,311 22,579
------------- ------------- -------------
115,117 45,999 78,675
------------- -------------- -------------
Operating income 7,302 3,277 (2,572)
------------- -------------- -------------
Other charges:
Interest and debt expense-net 7,495 2,496 727
Other-net 519 92 (5,766)
-------------- -------------- -------------
8,014 2,588 (5,039)
-------------- -------------- -------------
(Loss) income before income taxes (712) 689 2,467
Provision for income taxes 106 196 1,314
-------------- -------------- -------------
Net (loss) income $ (818) $ 493 $ 1,153
============== ============== =============
</TABLE>
See accompanying notes
2
<PAGE>
Form 10-Q/A
FRD Acquisition Co.
Condensed Statements of Consolidated and Combined Operations
(Unaudited)
<TABLE>
<CAPTION>
FRD Successor
------------------------- FRD Predecessor
Two Quarters One Month Five Months
Ended Ended Ended
July 2, 1997 June 27, 1996 May 23, 1996
------------ ------------- ------------
<S> <C> <C> <C>
(In thousands)
Operating Revenue $ 249,454 $ 49,276 $ 195,943
----------- ------------ -----------
Operating expenses:
Product cost 67,365 14,126 54,370
Payroll and benefits 89,731 17,481 74,642
Depreciation and amortization 15,065 2,591 12,371
Management fees to Flagstar 2,494 490 ---
Other 61,705 11,311 52,078
------------ ------------ -----------
236,360 45,999 193,461
----------- ------------ -----------
Operating income 13,094 3,277 2,482
----------- ------------ -----------
Other charges:
Interest and debt expense - net 14,998 2,496 4,658
Other - net 385 92 (5,437)
----------- ------------ -----------
15,383 2,588 (779)
----------- ------------ -----------
(Loss) income before income taxes (2,289) 689 3,261
Provision for income taxes 159 196 2,160
----------- ------------ -----------
Net (loss) income $ (2,448) $ 493 $ 1,101
============ ============ ===========
</TABLE>
See accompanying notes
3
<PAGE>
Form 10-Q/A
FRD Acquisition Co.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
July 2, 1997 December 26, 1996
------------ -----------------
<S> <C> <C>
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 15,742 $ 14,300
Receivables 2,845 5,988
Merchandise and supply inventories 3,434 5,039
Net assets held for sale --- 5,065
Other 3,784 4,468
-------------- --------------
25,805 34,860
-------------- ---------------
Property and equipment 143,733 149,587
Accumulated depreciation (23,807) (14,611)
-------------- --------------
119,926 134,976
-------------- --------------
Other Assets:
Goodwill, net 202,969 205,389
Deferred taxes 11,250 ---
Other 13,949 12,821
-------------- --------------
Total Assets $ 373,899 $ 388,046
============== ==============
</TABLE>
See accompanying notes
4
<PAGE>
Form 10-Q/A
FRD Acquisition Co.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
July 2, 1997 December 26, 1996
------------ -----------------
<S> <C> <C>
(In thousands)
LIABILITIES AND EQUITY
Current Liabilities:
Current maturities of long-term debt $ 19,746 $ 19,578
Accounts payable 14,447 16,897
Accrued payroll and related 14,104 14,189
Accrued insurance 8,178 6,832
Accrued interest 9,468 9,261
Payable to Flagstar 6,796 2,950
Other 17,593 20,512
------------ ----------------
90,332 90,219
------------ ----------------
Long-term Liabilities:
Debt, less current maturities 207,366 218,497
Liability for self-insured claims 8,537 10,142
Other non-current liabilities 1,301 377
------------ -----------------
217,204 229,016
------------ ----------------
Total Liabilities 307,536 319,235
------------ ----------------
Shareholder's Equity:
Common stock: par value $0.10;
1000 shares authorized, issued
and outstanding --- ---
Paid-in-capital 75,000 75,000
Deficit (8,637) (6,189)
------------ ----------------
Total Shareholder's Equity 66,363 68,811
------------ ----------------
Total Liabilities and Equity $ 373,899 $ 388,046
============ ================
</TABLE>
See accompanying notes
5
<PAGE>
Form 10-Q/A
FRD Acquisition Co.
Statements of Consolidated and Combined Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
FRD Successor
--------------------------- FRD Predecessor
Two Quarters One Month Five Months
Ended Ended Ended
July 2, 1997 June 27, 1996 May 23, 1996
------------ ------------- --------------
<S> <C> <C> <C>
(In thousands)
Cash Flows From Operating Activities:
Net (loss) income $ (2,448) $ 493 $ 1,101
Adjustments to reconcile (loss)income to cash
flows from operating activities:
Depreciation and amortization of property
and intangibles 15,065 2,591 12,371
Amortization of deferred financing costs 678 --- ---
Loss (gain) on disposition of assets (3) 12 (5,738)
Deferred tax (benefit) provision (3,741) 20 ---
Decrease (increase) in assets:
Receivables 2,742 (46) 1,676
Merchandise and supply inventories 1,605 29 68
Other current assets (211) (111) (485)
Other assets (1,706) (139) 1,251
Increase (decrease) in liabilities:
Accounts payable (2,447) (5,059) (4,762)
Accrued payroll and related (85) --- ---
Payable to Flagstar 3,846 490 ---
Other accrued liabilities (2,020) 1,939 (2,290)
Self insurance reserves (259) (214) 2,133
Other non-current liabilities 549 --- ---
----------- ------------ ------------
Net cash flows provided by operating activities 11,565 5 5,325
----------- ------------ ------------
Cash Flows From Investing Activities:
Purchase of property (4,121) (311) (2,216)
Proceeds from disposition of property 5,354 59 20,087
----------- ------------ ------------
Net cash flows provided by (used in) investing activities 1,233 (252) 17,871
----------- ------------ ------------
</TABLE>
See accompanying notes
6
<PAGE>
Form 10-Q/A
FRD Acquisition Co.
Statements of Consolidated and Combined Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
FRD Successor
----------------------- FRD Predecessor
Two Quarters One Month Five Months
Ended Ended Ended
July 2, 1997 June 27, 1996 May 23, 1996
------------- ------------- ---------------
<S> <C> <C> <C>
(In thousands)
Cash Flows From Financing Activities:
Principal debt payments, net (11,354) (206) (81,755)
Deferred financing costs (2) --- ---
Borrowing on credit facilities --- 57,400 ---
Transfer of cash to FRI --- (53,949) ---
Net intercompany and equity activity --- --- 54,050
------------ ------------ --------------
Net cash flows provided by (used in) financing activities (11,356) 3,245 (27,705)
------------ ------------ --------------
Increase (decrease) in cash and cash equivalents 1,442 2,998 (4,509)
Cash and Cash Equivalents at:
Beginning of period 14,300 988 5,497
------------ ------------- --------------
End of period $ 15,742 $ 3,986 $ 988
============ ============= ==============
</TABLE>
See accompanying notes
7
<PAGE>
Form 10-Q/A
FRD Acquisition Co.
Notes to Consolidated And Combined Financial Statements
July 2, 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 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 and represents the final revision to the
purchase price allocation.
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 two quarters ended July 2, 1997 and June 27,
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 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 two quarters ended July 2, 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
8
<PAGE>
Form 10-Q/A
the last Thursday of the calendar year to the last Wednesday of the calendar
year. Due to timing of this change, the Company's first fiscal quarter includes
an extra six days in comparison to the prior year quarter.
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 restated to 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 the asset disposition on February 26, 1997, the Company was
required by the FRI-M Credit Facility to make a mandatory $3.4 million partial
prepayment on February 27, 1997 of the $4.0 million FRI-M term loan payment due
on February 28, 1997. Additionally, during March 1997, the Company sold a
restaurant unit for cash proceeds of $0.4 million. In accordance with the FRI-M
Credit Facility such proceeds were also used to prepay the term loan.
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 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 are included in operating expenses and
totaled $0.6 million and $1.2 million for the quarter and two quarters ended
July 2, 1997. Payment of the fees to Flagstar cannot occur unless certain
financial targets are met as described in the Senior Note indenture and the
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 Financial Restructuring
On March 17, 1997, FCI announced that it had reached an agreement in principle
on the terms of a financial restructuring plan with an ad hoc committee
representing holders of both its 11 3/8% Senior Subordinated Debentures due 2003
and its 11.25% Senior Subordinated Debentures due 2004. In conjunction with such
plan, FCI decided to pursue a restructuring of its debt and preferred stock
through "prepackaged" bankruptcy filings to be made under Chapter 11 of Title 11
of the United States Code ("the
9
<PAGE>
Form 10-Q/A
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 and joined
Flagstar Holdings, Inc. ("Holdings"), a wholly-owned subsidiary of Flagstar
which filed its voluntary petition June 23, 1997. FCI and Flagstar's operating
subsidiaries; Denny's Holdings, Inc., Spartan Holdings, Inc. and the Company
(and their respective subsidiaries), are not included in the Chapter 11
proceedings.
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
Junior Subordinated 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.
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 advances and letters of credit. FCI has entered into a written
commitment letter pursuant to which it has received a commitment from Chase for
a $200 million senior secured revolving credit facility (the "Exit Facility")
for the benefit of FCI's operating subsidiaries, which facility will refinance
the DIP Facility upon the emergence of FCI from Chapter 11 and be used
thereafter for working capital advances and 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 July 2, 1997 and the results of operations for the
10
<PAGE>
Form 10-Q/A
quarter and two quarters ended July 2, 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 subsidiary,
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.
11
<PAGE>
Form 10-Q/A
Results of Operations
As discussed herein, operating results for the two quarters ended June 27, 1996
reflect the sum of the one month ended June 27, 1996 (FRD Successor) and the
five months ended May 23, 1996 (FRD Predecessor).
Quarter Ended July 2, 1997 Compared to Quarter Ended June 27, 1996
The table below summarizes restaurant activity for the quarter ended July 2,
1997.
<TABLE>
<CAPTION>
Ending Units Units Units Ending Units Ending Units
4/2/97 Opened Closed 7/02/97 6/27/96
<S> <C> <C> <C> <C> <C>
Coco's
Company owned 184 2 (1) 185 184
Franchised units 5 2 -- 7 6
International licenses 281 5 -- 286 261
---- ---- ---- ---- ----
470 9 (1) 478 451
---- ---- ---- ---- ----
Carrows
Company owned 158 -- (2) 156 162
Franchised units 1 -- -- 1 ---
---- ---- ---- ---- ----
159 -- (2) 157 162
---- ---- ---- ---- ----
629 9 (3) 635 613
==== ==== ===== ==== ====
</TABLE>
<TABLE>
<CAPTION>
COCO'S
Quarter Ended %
($ in millions, except average unit and -------------- ------------------ Increase/
comp. store data) July 2, 1997 June 27, 1996 (Decrease)
------------ ------------- ----------
<S> <C> <C> <C>
Net company sales $ 67.6 $ 68.5 (1.3)
Franchise and foreign licensing revenue 1.4 1.0 40.0
------------ -------------
Total revenue 69.0 69.5 (0.7)
Operating expenses 64.3 69.2 (7.1)
------------ -------------
Operating income $ 4.7 $ 0.3 NM
------------ =============
Average unit sales
Company operated $ 367,400 $ 370,900 (0.9)
Franchise $ 434,000 $ 427,300 1.6
COMPARABLE STORE DATA (COMPANY-OPERATED):
Comparable store sales decrease (1.5%) (2.8%)
Average guest check (a) $ 6.73 $ 6.90 (2.5)
</TABLE>
NM = Not Meaningful
(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 for the quarter ending July 2, 1997 decreased $0.9
12
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Form 10-Q/A
million (1.3%) as compared to the prior year comparable quarter. This decrease
reflects a decrease in comparable store sales driven by a decrease in average
check, slightly offset by an increase in customer counts. In addition, the
Company experienced a net increase of one company owned unit from the comparable
quarter in 1996.
FRANCHISE AND FOREIGN LICENSING REVENUE increased by $0.4 million (40.0%)for the
second quarter of 1997 as compared to the prior year quarter. This increase is a
result of one additional domestic franchise unit as well as an increase in the
number of foreign licenses from 261 at June 27, 1996 to 286 at July 2, 1997.
Coco's OPERATING EXPENSES for the second quarter of 1997 decreased by $4.9
million (7.1%) as compared to the prior year quarter. This decrease not only
reflects the impact of approximately $1.6 million in non-recurring adjustments
which increased legal and worker's compensation expenses in the prior year
quarter but also reflects savings in product and labor costs due to increased
focus by operations on minimizing product waste and reducing kitchen prep labor.
Such cost savings were achieved despite the impact of Federal and state minimum
wage increases and increased commodity prices for coffee and bacon.
OPERATING INCOME for Coco's for the quarter ended July 2, 1997 as compared to
the prior year quarter increased $4.4 million due to the factors noted above.
<TABLE>
<CAPTION>
CARROWS
Quarter Ended %
($ in millions, except average unit and --------------------------------- Increase/
comp. store data) July 2, 1997 June 27, 1996 (Decrease)
------------ ------------- ----------
<S> <C> <C> <C>
Net company sales $ 53.3 $ 55.9 (4.6)
Franchise revenue 0.1 --- ---
------------ -------------
Total revenue 53.4 55.9 (4.5)
Operating expenses 50.8 55.5 (8.5)
------------ -------------
Operating income $ 2.6 $ 0.4 NM
============ =============
Average unit sales
Company operated $ 339,600 $ 343,600 (1.2)
COMPARABLE STORE DATA: (COMPANY-OPERATED)
Comparable store sales (decrease) increase (3.2%) 1.2%
Average guest check (a) $ 6.50 $ 6.30 3.2
</TABLE>
NM = Not Meaningful
(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 $2.6 million (4.6%) for the quarter ended
July 2, 1997 as compared to the prior year comparable quarter,
13
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Form 10-Q/A
reflecting the impact of a six unit decrease in the number of company-operated
restaurants and a decrease in comparable store sales. The decline in comparable
store sales reflects a decrease in guest counts, partially offset by an increase
in average check. Carrows opened its first domestic franchise location in the
first quarter of 1997.
Carrows' OPERATING EXPENSES for the quarter ended July 2, 1997 decreased by $4.7
million (8.5%) as compared to the prior year quarter. This decrease reflects not
only the impact of approximately $1.5 million of non-recurring adjustments which
increased legal and worker's compensation expenses in the prior year quarter but
also reflects savings in product and labor costs due to increased focus by
operations on minimizing product waste and reducing kitchen prep labor. Such
cost savings were achieved despite the impact of the Federal and state minimum
wage increases and increased commodity prices for coffee and bacon.
OPERATING INCOME for Carrows for the quarter ended July 2, 1997 as compared to
the prior year quarter increased $2.2 million due to the factors noted above.
FRD CONSOLIDATED
CONSOLIDATED INTEREST AND DEBT EXPENSE increased $4.3 million for the quarter
ended July 2, 1997 as compared to the prior year quarter. 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.
During the quarter ended July 2, 1997, the Company's provision for taxes was
reduced by $1.1 million as a result of a reduction in the valuation allowance
related to its deferred tax assets.
The increase in CONSOLIDATED NET LOSS of $2.5 million in comparison to the prior
year quarter is due to a combination of the above described items.
14
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Form 10-Q/A
Two Quarters Ended July 2, 1997 Compared to Two Quarters Ended June 27,
1996
<TABLE>
<CAPTION>
COCO'S
Two Quarters Ended %
($ in millions, except average unit and ------------------------------- Increase/
comp. store data) July 2, 1997 June 27, 1996 (Decrease)
------------ ------------- ----------
<S> <C> <C> <C>
Net company sales $ 138.5 $ 135.2 2.4
Franchise and foreign licensing revenue 2.0 1.8 11.1
------------ -------------
Total revenue 140.5 137.0 2.5
Operating expenses 132.2 133.6 (1.0)
------------ -------------
Operating income $ 8.3 $ 3.4 NM
============ =============
Average unit sales
Company operated $ 753,000 $ 728,100 3.4
Franchise $ 874,900 $ 836,800 4.6
COMPARABLE STORE DATA (COMPANY-OPERATED):
Comparable store sales decrease (1.1%) (1.7%)
Average guest check (a) $ 6.66 $ 6.81 (2.2)
</TABLE>
NM = Not Meaningful
(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 $3.3 million (2.4%) for the two quarters
ended July 2, 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,
somewhat offset by a decrease in comparable store sales. The decrease in
comparable store sales was driven by a decrease in average check slightly offset
by an increase in customer counts.
FRANCHISE AND FOREIGN LICENSING REVENUE increased by $0.2 million(11.1%) for the
two quarters ended July 2, 1997 as compared to the prior year comparable period.
This increase is a result of one additional domestic franchise unit as well as
an increase in the number of foreign licenses from 261 at June 27, 1996 to 286
at July 2, 1997.
Coco's OPERATING EXPENSES for the two quarters ended July 2, 1997 decreased by
$1.4 million (1.0%) 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. The expense decrease reflects not only the impact of
approximately $1.6 million of non-recurring adjustments which increased legal
and worker's compensation expenses in the prior year comparable period but also
reflects significant savings in product and labor costs due to an increased
operations focus on cost controls, waste reduction and labor initiatives. Such
cost savings were achieved despite increases in the Federal and state minimum
wages.
15
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Form 10-Q/A
OPERATING INCOME for Coco's for the two quarters ended July 2, 1997 as compared
to the prior year comparable period in 1996 increased $4.9 million due to the
factors noted above.
<TABLE>
<CAPTION>
CARROWS
Two Quarters Ended %
($ in millions, except average unit and --------------------------------- Increase/
comp. store data) July 2, 1997 June 27, 1996 (Decrease)
------------ ------------- ----------
<S> <C> <C> <C>
Net company sales $ 108.8 $ 108.2 0.5
Franchise revenue 0.1 --- ---
------------ -------------
Total revenue 108.9 108.2 0.6
Operating expenses 104.1 105.8 (1.6)
------------ -------------
Operating income $ 4.8 $ 2.4 100.0
============ =============
Average unit sales
Company operated $ 688,900 $ 667,200 3.3
COMPARABLE STORE DATA: (COMPANY-OPERATED)
Comparable store sales increase (decrease) (2.0%) 1.5%
Average guest check (a) $ 6.44 $ 6.19 4.0
</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 increased $0.6 million (0.5%) for the two quarters
ended July 2, 1997 as compared to the prior year comparable period. This
increase reflects an estimated $3.8 million impact due to the additional six
days in the 1997 period in comparison to the prior year comparable period,
somewhat offset by 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. In addition, the Company
experienced a six-unit decrease in the number of Company-operated restaurants.
Carrows opened its first domestic franchise location in the first quarter of
1997.
Carrows' OPERATING EXPENSES decreased $1.7 million (1.6%) for the two quarters
ended July 2, 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. This expense 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 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 wages.
OPERATING INCOME for Carrows increased $2.4 million for the two quarters ended
July 2, 1997 as compared to the prior year comparable period due to the factors
noted above.
FRD CONSOLIDATED
16
<PAGE>
Form 10-Q/A
CONSOLIDATED INTEREST AND DEBT EXPENSE increased $7.8 million for the two
quarters ended July 2, 1997 as compared to the two quarters ended June 27, 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.
During the quarter ended July 2, 1997, the Company's provision for taxes was
reduced by $1.1 million as a result of a reduction in the valuation allowance
related to its deferred tax assets.
The increase in CONSOLIDATED NET LOSS of $4.0 million in comparison to the prior
year quarter is due to a combination of the above described items.
Liquidity and Capital Resources
At July 2, 1997 and December 26, 1996 the Company had working capital deficits
of $64.5 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. The Company intends to
continue to operate with working capital deficiencies and to rely upon
internally generated funds and borrowings under its credit facility to finance
its daily restaurant operations.
For information relating to FCI 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 Bankruptcy Court by FCI and Flagstar on July 11, 1997, management decided
that it would be appropriate for FCI'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. Carrows and Coco's obtained approval and
began selling franchises again in all states in which they have significant
operations in late-July.
17
<PAGE>
Form 10-Q/A
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Exhibit
No. Description
27 Financial Data Schedule
- ---------------------
b. No reports on Form 8-K were filed during the quarter ended July 2,
1997.
18
<PAGE>
Form 10-Q/A
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: September 2, 1997 By: /s/ C. Robert Campbell
------------------------------------------
C. Robert Campbell
Executive Vice President
(Duly authorized officer of
registrant/principal financial officer)
19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of FRD Acquisition Co., as contained in its Form 10-Q/A for
the quarterly period ended July 2, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-03-1997 JAN-01-1997
<PERIOD-END> JUL-02-1997 JUL-02-1997
<CASH> 15,742 0
<SECURITIES> 0 0
<RECEIVABLES> 2,845 0
<ALLOWANCES> 0 0
<INVENTORY> 3,434 0
<CURRENT-ASSETS> 25,805 0
<PP&E> 143,733 0
<DEPRECIATION> (23,807) 0
<TOTAL-ASSETS> 373,899 0
<CURRENT-LIABILITIES> 90,332 0
<BONDS> 207,366 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 66,363 0
<TOTAL-LIABILITY-AND-EQUITY> 373,899 0
<SALES> 0 0
<TOTAL-REVENUES> 122,419 249,454
<CGS> 0 0
<TOTAL-COSTS> 115,117 236,630
<OTHER-EXPENSES> 519 385
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 7,495 14,998
<INCOME-PRETAX> (712) (2,289)
<INCOME-TAX> 106 159
<INCOME-CONTINUING> (818) (2,448)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (818) (2,448)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<PAGE>
</TABLE>
