FRD ACQUISITION CO, 10-K405, 1998-03-31

FRD ACQUISITION CO
10-K405, 1998-03-31
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the fiscal year ended December 31, 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)

<TABLE>
<S> <C>
DELAWARE 57-1040952
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
3355 MICHELSON DRIVE, SUITE 350
IRVINE, CA 92612
(Address of principal executive offices) (Zip code)
</TABLE>

Registrant's telephone number, including area code: (864) 597-8000
------------------------
Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
<S> <C>
None None
</TABLE>

------------------------
Securities registered pursuant to Section 12(g) of the Act: None

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 _

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. [X]

As of March 16, 1998, 1,000 shares of registrant's common stock, $0.10 par
value per share, were outstanding, all of which are owned by the registrant's
parent, Advantica Restaurant Group, Inc.

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
(I)(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE
REDUCED DISCLOSURE FORMAT.
================================================================================
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TABLE OF CONTENTS

<TABLE>
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PAGE
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<S> <C> <C>
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 7
Item 6. Selected Financial Data..................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 15
Item 8. Financial Statements and Supplementary Data................. 15
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 15

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 15
Item 11. Executive Compensation...................................... 15
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 15
Item 13. Certain Relationships and Related Transactions.............. 15

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 17

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE......... F-1

SIGNATURES.............................................................
</TABLE>

FORWARD-LOOKING STATEMENTS

The forward-looking statements included in the "Business," "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" sections, which reflect management's best judgment
based on factors currently known, involve risks and uncertainties. Words such as
"expects," "anticipates," "believes," "intends," and "hopes," variations of such
words, and similar expressions are intended to identify such forward-looking
statements. Actual results could differ materially from those anticipated in
these forward-looking statements as a result of a number of factors, including,
but not limited to, the factors discussed in such sections and those set forth
in the cautionary statements contained in Exhibit 99 to this Form 10-K. (See
Exhibit 99 -- Safe Harbor Under the Private Securities Litigation Reform Act of
1995.) Forward-looking information provided by the Company in such sections
pursuant to the safe harbor established under the Private Securities Litigation
Reform Act of 1995 should be evaluated in the context of these factors.
<PAGE> 3

PART I

ITEM 1. BUSINESS

INTRODUCTION

FRD Acquisition Co. ("FRD" or, together with its subsidiaries and including
its predecessor, as applicable, the "Company") was incorporated in February 1996
as a wholly-owned subsidiary of Flagstar Corporation ("Flagstar"), a wholly-
owned subsidiary of Flagstar Companies, Inc. ("FCI") (which changed its name to
Advantica Restaurant Group, Inc. ("Advantica") on January 7, 1998). 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
consideration for all of the outstanding stock of FRI-M Corporation ("FRI-M"),
the former subsidiary of Family Restaurants, Inc. ("FRI"), which owns the Coco's
and Carrows chains.

The Company is one of the nation's leading operators of family-style
restaurants. As of year end, the Company operated 318 restaurants owned or
leased by the Company and franchised 31 restaurants, principally under the
Coco's and Carrows names. Approximately 76% of the Company-owned restaurants are
located in California which management believes makes the Company one of the
largest family-style restaurant operators in California, both in terms of sales
volume and number of restaurants. Coco's and Carrows restaurants were founded
more than 25 years ago and have developed excellent name recognition and a loyal
customer base. In addition to its domestic operations, as of year end the
Company was the licensor of 298 Coco's restaurants, primarily in Japan and South
Korea.

In the financial statements and selected financial data included herein,
reference to "FRI Predecessor" refers to the period of ownership of FRI-M by
Restaurant Enterprises Group, Inc. ("REG") prior to January 27, 1994. Reference
to "FRD Predecessor" refers to the period of ownership of FRI-M by FRI
commencing January 27, 1994, giving effect to information concerning events
occurring upon FRI's emergence from a Chapter 11 Bankruptcy Code reorganization
(the "FRI Reorganization"), through May 23, 1996. "FRD Successor" refers to the
period of ownership of FRI-M by FRD subsequent to May 23, 1996.

The FRI Predecessor and FRD Predecessor combined financial statements for
the periods indicated represent the financial position and operations of FRI-M,
as a wholly-owned subsidiary of FRI (or its predecessor), and certain
subsidiaries of FRI-M including those restaurants that made up the Family
Restaurant Division and the FRD Commissary, both of which were divisions of FRI.
The Family Restaurant Division primarily consisted of the Coco's and Carrows
restaurant concepts. The FRI-M combined financial statements exclude the
financial position and operations of FRI-MRD Corporation, a wholly owned
subsidiary of FRI-M which was not acquired by FRD.

On January 7, 1998 (the "Effective Date"), FCI and Flagstar emerged from
proceedings under Chapter 11 of Title 11 of the United States Code (the
"Bankruptcy Code") pursuant to FCI and Flagstar's Amended Joint Plan of
Reorganization dated as of November 7, 1997 (the "Plan") (as further described
in Note 15 to the Consolidated and Combined Financial Statements included in
this Form 10-K). On the Effective Date, Flagstar merged with and into FCI, the
surviving corporation, and FCI changed its name to Advantica Restaurant Group,
Inc. The bankruptcy proceedings began when FCI, Flagstar and Flagstar Holdings,
Inc. ("Holdings") filed voluntary petitions for relief under the Bankruptcy Code
in the Bankruptcy Court for the District of South Carolina. Holdings filed its
petition on June 27, 1997, and Flagstar and FCI both filed their petitions on
July 11, 1997. FCI's operating subsidiaries, including the Company, did not file
bankruptcy petitions and were not parties to the Chapter 11 proceedings.

RESTAURANTS

The Company's restaurants offer an extensive menu of moderately-priced
breakfast, lunch and dinner items and are typically open either 18 or 24 hours a
day. Both Coco's and Carrows restaurants provide casual sit-down dining
experiences and emphasize consistently high quality food with an excellent
price-to-value relationship and friendly, efficient service. The Company
generated approximately 25%, 34% and 41% of its 1997 revenues from the
breakfast, lunch and dinner day parts, respectively.

While the Coco's and Carrows concepts appeal to many of the same broad-based
customers, they are positioned, as described below, to target two distinct
groups within the mid-scale family-style category. Through this dual
positioning, the Company capitalizes on various demographic and industry trends
while achieving economies of scale for the two chains of restaurants.

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COCO'S

Coco's is a bakery restaurant chain operating primarily in California,
Arizona and Texas, as well as Japan and South Korea. Coco's ranks among the top
ten chains in the family-style category based on U.S. systemwide sales, and
currently consists of 178 Company-owned, 17 domestic franchised and 298
international licensed restaurants.

Coco's is positioned to appeal to a younger, more contemporary customer who
is more quality oriented than cost conscious and who seeks a wide variety of
unique menu items that are not typically offered at family-style restaurants.
Coco's customers are more often white-collar professionals who are 25-54 years
of age and have annual incomes in excess of $50,000. Coco's has developed a
strong following among this customer base through its creative menus, new
product development and execution capabilities, quality of food and consistent,
traditional "dinner house style" service. Coco's service is evolving in order to
better compete with the casual dining restaurants by focusing more on a "fun"
dining experience. In addition, Coco's has successfully implemented an
in-restaurant and takeout bakery business which reinforces the concept's quality
food image and offers high margin products such as pies, muffins, cakes and
cookies.

Lunch and dinner dayparts are Coco's strongest, comprising 37% and 38% of
1997 sales, respectively. In 1997, the average check was $6.77, with average
annual unit sales of approximately $1.5 million. Positioned at the upper end of
the family-style restaurant category, Coco's competes most directly with Marie
Callender's and Mimi's Cafe.

In 1990, the Company established a wholly-owned subsidiary, CFC Franchising
Company ("CFC"), to franchise Coco's restaurants in the United States. Through
1996, management pursued limited domestic franchising expansion and only five
such Coco's franchised restaurants were opened prior to 1997. In 1997, the
Company converted four Carrows units to Coco's Company-owned units and opened 12
new franchised units -- six of these units were previously Company-owned and
operated and six were new development. The Company intends to continue expanding
its franchising efforts in order to increase its market share, establish a
presence in new areas and further penetrate existing markets. Management
believes that franchising represents an opportunity to achieve additional growth
with low investment risk for the Coco's concept. The initial fee for a single
Coco's franchise is $35,000 and the current royalty payment rate is 4% of net
sales.

As of December 31, 1997 the Company licensed 298 Coco's restaurants abroad,
reflecting a foreign presence that is among the largest of any United
States-based, non-fast food restaurant chain. This presence was established
primarily through a 1979 licensing agreement with Kasumi Stores K.K. and Coco's
Japan Co., Ltd. (collectively, "Kasumi"). Under the terms of this licensing
agreement, Kasumi has the exclusive right through February 4, 2010, to use the
Coco's restaurant concept in Japan, and a non-exclusive right to do so in
certain other Asian countries. This agreement also gives Kasumi access to
certain training procedures and technical information concerning the operation
of such restaurants. At December 31, 1997, 260 Coco's were in operation in Japan
under the agreement with Kasumi. In addition to the Kasumi agreement, other
foreign licensing agreements exist in South Korea and the Middle East.

CARROWS

Carrows is a regional mid-scale family-style restaurant chain operating
primarily in seven western states. Carrows currently consists of 140
Company-owned units and 14 domestic franchises.

In contrast to Coco's, Carrows caters to a slightly older clientele with
more conservative tastes in food. Carrows' customers typically have traditional
values and seek more homestyle tastes in food as well as dependable service at
reasonable prices. Carrows is in the upper-middle price range of the
family-style restaurant category and competes most directly with Denny's, IHOP,
Baker's Square and Lyons. Carrows' primary target market consists of customers
who are 35-64 years of age, while its secondary target market is senior
citizens. Carrows has developed a strong reputation as a restaurant that serves
quality, traditional food at affordable prices in a familiar setting while
providing especially friendly service. This service, along with Carrows'
emphasis on larger portions and traditional American entrees, enables Carrows to
appeal to its targeted customers.

Lunch and dinner day parts are Carrows' strongest, comprising 30% and 45% of
1997 sales, respectively. In 1997, the average guest check was $6.53, with
average annual unit sales of approximately $1.4 million.

SITE SELECTION

The Company's franchise development group is responsible for identifying and
securing new franchise locations. The franchise development group works closely
with real estate brokers in the Company's existing markets who are familiar with
the Company's needs and selection criteria. In general, the Company's
restaurants are located in high-traffic commercial areas with a substantial
surrounding residential base within a three-mile radius. The commercial traffic
typically provides the

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Company's weekday breakfast and lunch clientele while the residential traffic
accounts for a majority of the Company's dinner and weekend business. The
Company believes that the location and concentration of its restaurants allow it
to realize certain economies of scale in advertising, distribution and field
supervision. Sites are evaluated on the basis of a variety of factors, including
demographic data, land use and environmental restrictions, competition in the
area, ease of access, visibility, availability of parking and proximity to a
major traffic generator such as a shopping mall, office complex, stadium or
university.

RESTAURANT LAYOUT

The Company's restaurants average in size between 4,900 and 5,600 square
feet of floor space. Approximately 60% of each restaurant's space is dedicated
to dining room and customer areas, while 40% is dedicated to back room, kitchen
and storage areas. All of the Company's Coco's restaurants have in-house
bakeries. Most of the Company's restaurants do not have full bars but serve beer
and wine at the table. Seating is a combination of both tables and booths. Every
restaurant has a waiting area where customers may be seated while waiting for
tables or booths to open. Since most restaurants are located in high-volume
shopping centers, the Company's restaurants have ample parking spaces to support
their respective guest counts.

OPERATIONS AND MANAGEMENT

RESTAURANT MANAGEMENT AND EMPLOYEE STRUCTURE. The Company's restaurant
management field structure is currently comprised of six regional directors of
operations (three for each concept), who each oversee approximately six to
eleven district managers. Each district manager, in turn, oversees five to nine
restaurants. A general manager, associate manager and assistant manager are
employed at each restaurant to manage day-to-day operations, including customer
relations, food service, cost control, restaurant maintenance, hiring and
training of restaurant employees, and the implementation of all Company
policies. Coco's and Carrows restaurants typically operate with a staff of 40
employees for low volume restaurants to 70 employees for high volume
restaurants. The average restaurant employs approximately 45 to 55 employees,
and a majority of the restaurant level employees work part-time.

The Company recognizes the importance of its personnel in providing
customers with a quality dining experience. As a result, the Company offers its
employees extensive training and opportunities for promotion, as well as
incentive-based compensation. The success of these endeavors allows the Company
to enjoy employee turnover rates that the Company believes are below industry
averages and to benefit from a staff of highly experienced employees. The
Company's restaurant general managers average approximately nine years of
experience with the Company.

TRAINING. Both Coco's and Carrows provide formal training programs for new
managers and hourly employees of the Company's restaurants. Exceptional general
managers are identified as "Executive Training Managers" and are responsible for
management trainees in their geographic regions. Management training includes
nine weeks with Executive Training Managers for Coco's (because of the bakery
concept) and eight weeks for Carrows. Hourly employees are trained by the
respective restaurant managers and each shift employs hourly employees who have
been certified to assist in the training of other employees.

QUALITY CONTROL. Coco's and Carrows have developed programs and systems
that ensure the safety, quality, and consistency of key ingredients, menu items
and operations. The major components of these programs include a supplier/
distributor quality assurance program that audits ingredients and suppliers to
ensure compliance with specifications, and a restaurant food safety program
which is responsible for maintaining communications with regulatory agencies and
proactively managing risk situations.

MENUS

COCO'S MENU STRATEGY. The Company's menu strategy for Coco's is to (i)
serve a high quality and variety of American cuisine with emphasis on new or
trend-establishing fare with special attention given to plate presentation in
order to communicate a price-to-value relationship; (ii) utilize high quality
food products, including fresh fish, fresh baked muffins, dinner breads, etc.,
to communicate the increasing strength of those product lines in the
marketplace; and (iii) improve sales and profits by strategic menu offerings
which appeal to a target market of families. The Company continues to position
the brand as a "step ahead and a step above" competitors in the family segment.
This positioning is being accomplished with minimal capital investment by
utilizing in-restaurant changes to products, promotions, menus, signage and
awnings. The Company redesigned the Coco's menu in February 1998. With this
redesigned menu, Coco's is in a better strategic position in its primary
markets. Enhancement and increased visibility of Coco's bakery capabilities will
also add to its strategic positioning.
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CARROWS MENU STRATEGY. The Company's menu strategy for Carrows is to (i)
serve a consistent quality and variety of traditional American cuisine, with an
emphasis on signature items and product execution; (ii) provide an excellent
price-to-value relationship through the amount of food offered for the money;
(iii) leverage the high quality of its food products to achieve increased
margins from its menu items; and (iv) generate sales and profits in the
breakfast and dinner day parts through the strong marketing of breakfast
specials and high quality dinner items, such as prime rib and seafood, which are
not generally available in family restaurants. In 1996, Carrows introduced a
variety of breakfast, lunch and dinner entrees with regional American flavors
that support its classic All-American positioning.

RESEARCH AND DEVELOPMENT. The Company develops approximately 25 to 35 new
products each year and reviews its menus regularly to replace slow-moving items
with new products. New products are placed into a limited number of restaurants
for testing to determine consumer acceptance of the product as well as
operational feasibility. Products which are successful are then introduced into
all restaurants as a flyer handout or as a "special" or promotion. These items
remain on promotion for 8-12 weeks, at which point the most successful items are
added to the next menu. While research and development activities are extremely
important to the Company's business, amounts expended for these activities are
not material.

MARKETING

Media advertising is a large part of the integrated process that the Company
uses to market its concepts. The Company also uses its menu strategy,
interior/exterior building design, employee uniforms, style of service, and
specialized promotions to help differentiate itself from its competition. Media
advertising for both Coco's and Carrows is primarily product oriented, featuring
high margin, special entrees presented and priced to convey high value. Coco's
advertising typically features dinner entrees while also mentioning its pie
selections. Carrows advertising focuses on the breakfast and dinner day parts.
Both concepts reinforce the idea that they are the restaurant of choice for all
dining occasions (i.e., breakfast, lunch, dinner, families, seniors, healthy
options).

RAW MATERIAL SOURCES AND AVAILABILITY

The Company uses Advantica's purchasing department to obtain high-quality
ingredients at the most favorable prices and to make centralized purchasing
arrangements for the main ingredients, supplies and equipment needs of all
Coco's and Carrows restaurants. Advantica's size provides the Company with
significant purchasing power which often enables it to obtain products at more
favorable prices from several nationally recognized distributors.

On January 19, 1998, the Company became subject to a distribution agreement
with Proficient Food Company ("PFC") (a former subsidiary of Advantica that was
sold in 1995 to Meadowbrook Meat Company, Inc. ("MBM") and with which
Advantica's other restaurant concepts also have distribution agreements).
Pursuant to the agreement, MBM will distribute and supply certain products to
the Company for the next eight years. Although there are no volume requirements,
the agreement requires that named products be purchased through MBM unless MBM
is unable to make delivery within a reasonable period.

The Company believes that satisfactory sources of supply are generally
available for all items regularly used by its restaurants and has not
experienced any material shortages of food, equipment, or other products which
are necessary to restaurant operations.

SEASONALITY

The Company's business is moderately seasonal. Restaurant sales are
generally greater in the second and third calendar quarters (April through
September) than in the first and fourth calendar quarters (October through
March). Occupancy and other operating costs, which remain relatively constant,
have a disproportionately negative effect on operating results during quarters
with lower restaurant sales.

TRADEMARKS AND SERVICE MARKS

The Company, either directly or through its wholly-owned subsidiaries, has
registered certain trademarks and service marks with the United States Patent
and Trademark office and in international jurisdictions. The Company regards its
trademarks and service marks as important to the identification of its
restaurants and believes they are of material importance to the conduct of its
business. Domestic trademark and service mark registrations are renewable at
various intervals from 10 to 20 years, while international trademark and service
mark registrations have various durations from five to

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20 years. The Company generally intends to renew trademarks and service marks
which come up for renewal. The Company owns or has rights to all trademarks it
believes are material to its restaurant operations.

COMPETITION

The restaurant industry is highly competitive and affected by many factors.
Restaurants compete on the basis of name recognition and advertising, the price,
quality and perceived value of their food offerings, the quality and speed of
their service, convenience and the attractiveness of their facilities.

Management believes the Company's principal competitive strengths include
its restaurants' brand name recognition; restaurant locations; the value,
variety and quality of food products served; the quality and training of its
employees; and the Company's market penetration, which has resulted in economies
of scale in a variety of areas, including advertising, distribution and field
supervision.

ECONOMIC, MARKET AND OTHER CONDITIONS

The restaurant industry is affected by many factors, including changes in
national, regional and local economic conditions affecting consumer spending,
changes in socio-demographic characteristics of areas in which restaurants are
located, changes in consumer tastes and preferences, increases in the number of
restaurants generally and in particular areas and unfavorable trends in regional
weather conditions.

GOVERNMENT REGULATION

The Company and its franchisees are subject to various local, state and
Federal laws and regulations governing various aspects of the restaurant
business, including, but not limited to, health, sanitation, environmental
matters, safety, disabled persons' access to its restaurant facilities, the sale
of alcoholic beverages and hiring and employment practices. The operation of the
Company's franchise system is also subject to regulations enacted by a number of
states and to rules promulgated by the Federal Trade Commission. The Company
believes that it is in material compliance with applicable laws and regulations,
but it cannot predict the effect on operations of the enactment of additional
requirements in the future. The cost of compliance with government regulations
has not had a material impact on the operations of the Company.

The Company is subject to Federal and state laws governing matters such as
minimum wages, overtime and other working conditions. At December 31, 1997,
approximately 58% of the Company's employees were paid at minimum wage.
Accordingly, increases in the minimum wage or decreases in the allowable tip
credit (which reduces the minimum wage paid to tipped employees in certain
states) increase the Company's labor costs. This is especially true in
California, where there is no tip credit. The California minimum wage increased
from $4.25 to $5.00 per hour on March 1, 1997 and increased to $5.75 on March 1,
1998. Also, the Federal minimum wage increased from $4.25 per hour to $4.75 per
hour on October 1, 1996 and increased again to $5.15 per hour on September 1,
1997. Employers must pay the higher of the Federal or state minimum wage. The
Company has attempted to offset increases in the minimum wage through pricing
and various cost control efforts; however, there can be no assurance that the
Company or its franchisees can continue to pass on such cost increases to its
customers in the future.

ENVIRONMENTAL MATTERS

Federal, state and local environmental laws and regulations have not
historically had a material impact on the operations of the Company; however,
the Company cannot predict the effect on its operations of possible future
environmental legislation or regulations.

EMPLOYEES

At December 31, 1997, the Company had a total of approximately 15,000
employees, none of which were covered by union contracts. Many of the Company's
restaurant employees work part-time and many are paid at or slightly above
minimum wage levels. The Company has experienced no significant work stoppages
and believes that its relationship with its employees is satisfactory.

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ITEM 2. PROPERTIES

At December 31, 1997, the Company operated 318 restaurants in nine states.
Approximately 76% of the restaurants are located in California. Most of the
restaurants are free-standing units ranging from 4,900 to 5,600 square feet
allowing them to accommodate 120 to 180 guests. The number and location of the
Company's restaurants as of December 31, 1997 are presented below:

<TABLE>
<CAPTION>
COCO'S CARROWS
------------------- -------------------
FRANCHISED/ FRANCHISED/
STATE/COUNTRY OWNED LICENSED OWNED LICENSED
- ------------- ----- ----------- ----- -----------
<S> <C> <C> <C> <C>
Arizona..................................................... 21 2 5 --
California.................................................. 128 15 115 3
Colorado.................................................... 5 -- -- --
Indiana..................................................... 3(a) -- -- --
Missouri.................................................... 2 -- -- --
Nevada...................................................... -- -- 7(b) 1
New Mexico.................................................. -- -- 4 --
North Carolina.............................................. -- -- -- 1
Oregon...................................................... -- -- -- 8
Texas....................................................... 13(a) -- 9 --
Washington.................................................. 6 -- -- 1
Japan....................................................... -- 260 -- --
South Korea................................................. -- 37 -- --
Other International......................................... -- 1 -- --
--- --- --- --
Total..................................................... 178 315 140 14
=== === === ==
</TABLE>

- ---------------

(a) These units are jojos restaurants, which are similar in format to Coco's.

(b) Includes one Jeremiah's restaurant, a midscale family-steak restaurant.

Of the 318 restaurants operated by the Company as of December 31, 1997, the
Company owned the land and building for five, owned the building and leased the
land for 49, and leased both the land and building for the remaining 264
restaurants. Most of the leases provide for the payment of a base rent or
approximately 5% to 6% of gross sales, whichever is greater.

Substantially all of the Company's properties and assets are pledged to
secure indebtedness under the Credit Agreement. See "Certain Relationships and
Related Transactions -- The Credit Agreement."

ITEM 3. LEGAL PROCEEDINGS

The Company is from time to time involved in routine litigation incidental
to the conduct of its business. The Company believes that no currently pending
litigation to which it is a party will have a material adverse effect on its
liquidity, financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

FRD is a wholly-owned subsidiary of Advantica. As a result, there is no
established public trading market for the Company's common stock and all per
share data is omitted. As of March 16, 1998, 1,000 shares of FRD's common stock
were outstanding, all of which are owned by Advantica.

Dividends were not paid by the Company during 1996 or 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 8 to the accompanying
Consolidated and Combined Financial Statements of the Company regarding certain
restrictions on the payment of dividends.

ITEM 6. SELECTED FINANCIAL DATA

Set forth below are certain selected financial data of FRD Successor for the
fiscal year ended December 31, 1997 and the seven-month period ended December
26, 1996, of FRD Predecessor for the five-month period ended May 23, 1996 and
fiscal years 1995 and 1994 and of FRI Predecessor for fiscal year 1993. The
following should be read in conjunction with the Consolidated and Combined
Financial Statements and Notes thereto presented elsewhere herein and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Because FRD is a wholly-owned subsidiary of Advantica, per share
data is not meaningful and has been omitted.

<TABLE>
<CAPTION>
FRD FRD FRI
SUCCESSOR PREDECESSOR PREDECESSOR
--------------------- ----------------------------------- -----------
SEVEN FIVE
YEAR MONTHS MONTHS YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DEC. 31, DEC. 26, MAY 23, DEC. 31, DEC. 25, DEC. 26,
1997(A) 1996 1996 1995(A) 1994(B) 1993
(In thousands, except ratios) --------- --------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA:
Operating revenues............. $492,493 $295,044 $ 195,943 $ 505,619 $510,102 $492,077
Operating income............... 27,086 11,947 2,482 32,025 31,192 30,522
Interest and debt expenses..... 29,597 17,680 4,658(c) 16,515(c) 6,934(c) 4,594
Net income (loss).............. (2,178) (6,189) 1,101 4,724 10,111 15,236
Ratio of earnings to fixed
charges (d)................. .8x .7x 1.7x 1.7x 3.9x 6.6x
OTHER DATA:
EBITDA (e)..................... 61,567 33,403
Net cash flows provided by
operating activities........ 17,087 21,205 5,325 45,873 33,466 22,253
Net cash flows (used in)
provided by investing
activities.................. (2,895) (130,802) 17,871 (15,905) (23,753) (13,724)
Net cash flows (used in)
provided by financing
activities.................. (19,441) 122,909 (27,705) (28,691) (8,242) (7,476)
</TABLE>

<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF AS OF
DEC. 31, DEC. 26, DEC. 31, DEC. 25, DEC. 26,
1997 1996 (H) 1995 1994 1993
--------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital deficiency (f). $(68,658) $(55,736) $(110,979) $(106,223) $(46,293)
Net property................... 117,329 134,976 146,042 165,285 78,471
Total assets................... 371,528 388,046 332,847 350,993 135,843
Long-term debt, excluding
current portion............. 195,652 218,497 27,502 32,499 34,605
Stockholder's equity (g)....... 66,633 68,811 152,601 192,354 31,852
</TABLE>

- ---------------

(a) Fiscal 1997 and 1995 represent 53-week periods.

7
<PAGE> 10

(b) Data presented for 1994 include one month of financial information for FRI
Predecessor prior to the FRI Reorganization and eleven months of financial
information for FRD Predecessor following the FRI Reorganization. In January
1994, FRI's predecessor corporation, REG, completed the FRI Reorganization
and applied the provisions of the AICPA's Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code" ("SOP 90-7"). Pursuant to SOP 90-7, REG qualified for fresh start
reporting as of January 27, 1994 and, accordingly, all assets and
liabilities of FRI were restated to current value at the date of
reorganization. FRI obtained an appraisal of the assets and liabilities of
FRI and FRD Predecessor establishing the reorganization value (i.e., fair
value) of the assets and liabilities. FRI utilized the results of this
appraisal to implement fresh start reporting, which resulted in a
reorganization value in excess of amounts allocable to identifiable assets
of $155.5 million to FRD Predecessor at January 27, 1994. For the eleven
months ended December 25, 1994, FRD Predecessor's operating statement and
selected operating data consisted of operating revenues of $466.0 million,
operating income of $29.5 million, interest and debt expenses of $6.5
million, net income of $9.4 million and ratio of earnings to fixed charges
of 3.9x. For the one month ended January 26, 1994, FRI Predecessor's
operating statement and selected operating data consisted of operating
revenues of $44.1 million, operating income of $1.6 million, interest and
debt expenses of $0.5 million, net income of $0.7 million and ratio of
earnings to fixed charges of 3.7x.

(c) Includes $4.3 million, $13.1 million and $3.0 million of interest related to
FRD Predecessor's outstanding balance under the working capital portion of
FRI's credit agreement used to fund operating cash flow needs for all of
FRI's subsidiaries for the five months ended May 23, 1996 and fiscal years
1995 and 1994, respectively.

(d) For purposes of computing the ratio of earnings to fixed charges, "fixed
charges" consist of interest on debt, amortization of deferred financing
costs and the interest element in rental payments under operating and
capital leases (estimated to be one third). "Earnings" consist of income
from operations before income taxes, plus fixed charges.

(e) EBITDA is defined by the Company as operating income before Advantica
management fees, depreciation, amortization and restructuring and impairment
charges and is a key internal measure used to evaluate the amount of cash
flow available for debt repayment and funding of additional investments.
EBITDA is not a measure defined by generally accepted accounting principles
and should not be considered as an alternative to net income or cash flow
data prepared in accordance with generally accepted accounting principles,
or as a measure of a company's profitability or liquidity. The Company's
measure of EBITDA may not be comparable to similarly titled measures
reported by other companies; accordingly, EBITDA of the predecessor
companies is not presented.

(f) The Company historically operates with a 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) cash from
sales is usually received before related accounts payable for food, beverage
and supplies become due.

(g) The predecessor financial information presented represents a combination of
certain subsidiaries and divisions of FRI and does not represent a legal
entity. Therefore, stockholder's equity represents the net activity with
FRI.

(h) The December 26, 1996 data reflects the impact of the acquisition of FRI-M
by FRD, including, but not limited to, the issuance of $156.9 million of
senior notes, a $56.0 million term loan and the impact of the application of
purchase accounting.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

The Company's Management's Discussion and Analysis should be read in
conjunction with "Selected Financial Data" and the Consolidated and Combined
Financial Statements and other more detailed financial information appearing
elsewhere herein.

8
<PAGE> 11

RESULTS OF OPERATIONS

As discussed herein, operating results for the year ended December 31, 1997
reflect the operations of FRD Successor, and operating results for the year
ended December 26, 1996 reflect the sum of the seven months ended December 26,
1996 (FRD Successor) and the five months ended May 23, 1996 (FRD Predecessor).
Operating results for the year ended December 31, 1995 reflect the operations of
FRD Predecessor.

1997 RESTAURANT UNIT ACTIVITY

<TABLE>
<CAPTION>
ENDING UNITS ENDING
UNITS UNITS CLOSED/ UNIT UNITS
12/26/96 OPENED SOLD CONVERSIONS 12/31/97
-------- ------ ------- ----------- --------
<S> <C> <C> <C> <C> <C>
Coco's
Company-owned......................................... 183 4 (3) (6) 178
Franchised units...................................... 5 6 -- 6 17
International licensees............................... 278 26 (6) -- 298
----- --- ---- ---- -----
466 36 (9) -- 493
Carrows
Company-owned......................................... 160 -- (8) (12) 140
Franchised units...................................... -- 2 -- 12 14
----- --- ---- ---- -----
160 2 (8) -- 154
----- --- ---- ---- -----
Total.............................................. 626 38 (17) -- 647
===== === ==== ==== =====
</TABLE>

RESTAURANT OPERATIONS

<TABLE>
<CAPTION>
1997(a) 1996 1995(a)
COCO'S -------- -------- --------
<S> <C> <C> <C>
(In thousands, except comparable store data)
U.S. systemwide sales....................................... $288,128 $278,506 $290,504
======== ======== ========
Net company sales........................................... $275,774 $269,903 $282,251
Franchise and foreign licensing revenue..................... 4,283 3,792 4,371
-------- -------- --------
Total revenue..................................... 280,057 273,695 $286,622
========
Operating expenses.......................................... 264,398 265,315 (b)
-------- --------
Operating income............................................ $ 15,659 $ 8,380 (b)
======== ========
Average annual unit sales:
Company-owned............................................. $ 1,492 $ 1,462 $ 1,506
Franchise................................................. $ 1,728 $ 1,719 $ 1,884
Comparable store data (Company-owned):
Comparable store sales decrease........................... 0.0% (1.6)% (5.0)%
Average check............................................. $ 6.77 $ 6.80 $ 6.72
Operated units:
Company-owned............................................. 178(c) 183(c) 188(c)
Franchised................................................ 17 5 6
International licensed.................................... 298 278 252
-------- -------- --------
Total............................................. 493 466 446
======== ======== ========
</TABLE>

- ---------------

(a) Fiscal 1997 and 1995 represent 53-week periods.

(b) Information not available at the concept level. See presentation of combined
Coco's and Carrows operating results, 1996 vs. 1995, following the separate
discussions of Coco's and Carrows 1997 vs. 1996 results.

1997 VS. 1996

Coco's NET COMPANY SALES for 1997 increased $5.9 million (2.2%) as compared
to 1996. This increase reflects an estimated $4.8 million impact from the
additional six days in the 1997 reporting period compared to the prior year

9
<PAGE> 12

comparable period due to the change in the fiscal year. In addition, four
Carrows units were converted to Coco's restaurants during 1997, contributing
$3.3 million in sales. Offsetting these increases is the impact of a decrease of
nine Company-owned stores in 1997. Coco's comparable store sales were flat in
1997 as compared to 1996. FRANCHISE AND FOREIGN LICENSING REVENUE increased by
$0.5 million (12.9%) for 1997 as compared to 1996. This increase is a result of
the net increase of 20 foreign licensed units as well as 12 additional domestic
franchise units in the current year.

Coco's OPERATING EXPENSES for 1997 decreased by $0.9 million (0.3%) as
compared to the prior year. This decrease is primarily a result of savings in
product and labor costs due to an increased operations focus on cost controls,
waste reduction and labor initiatives and $1.9 million of gains on sales of
restaurants, compared to no gains recorded in 1996. In addition, the prior year
included non-recurring adjustments of approximately $1.6 million, which
increased legal and workers' compensation expenses. No comparable charges are
included in the current year period. These decreases were largely offset by the
impact of an additional six days in the 1997 reporting period as compared to the
prior year comparable period due to the change in the fiscal year, the increase
in Federal and state minimum wage rates and the impact of Advantica's management
fees of $2.8 million in 1997 compared to $1.6 million in 1996.

OPERATING INCOME for Coco's increased to $15.7 million in 1997 as a result
of the factors noted above.

<TABLE>
<CAPTION>
1997(A) 1996 1995(A)
CARROWS -------- -------- --------
<S> <C> <C> <C>
(In thousands, except comparable store data)
U.S. systemwide sales....................................... $215,215 $217,292 $218,997
======== ======== ========
Net company sales........................................... $211,818 $217,292 $218,997
Franchise and foreign licensing revenue..................... 618 -- --
-------- -------- --------
Total revenue............................................... 212,436 217,292 $218,997
========
Operating expenses.......................................... 201,009 211,244 (b)
-------- --------
Operating income............................................ $ 11,427 $ 6,048 (b)
======== ========
Average annual unit sales:
Company-owned............................................. $ 1,362 $ 1,343 $ 1,372
Comparable store data (Company-owned):
Comparable store sales increase (decrease)................ (1.7)% 0.1% (0.2)%
Average check............................................. $ 6.49 $ 6.25 $ 6.09
Operated units:
Company-owned............................................. 140 160 161
Franchised................................................ 14 -- --
-------- -------- --------
Total.................................................. 154 160 161
======== ======== ========
</TABLE>

- ---------------

(a)Fiscal 1997 and 1995 represent 53-week periods.

(b)Information not available at the concept level. See presentation of combined
Coco's and Carrows operating results, 1996 vs. 1995, following the separate
discussions of Coco's and Carrows 1997 vs. 1996 results.

1997 VS. 1996

Carrows' NET COMPANY SALES decreased $5.5 million (2.5%) for 1997 as
compared to 1996 in spite of an estimated $3.8 million impact from the
additional six days in the 1997 reporting period in comparison to the prior year
comparable period due to the change in the fiscal year. The sales decrease is
primarily the result of a 20-unit decrease in Company-owned restaurants, 12 of
which were converted to franchise units. It also reflects a decrease in
comparable store sales reflecting a decrease in traffic, partially offset by an
increase in average guest check. FRANCHISE AND FOREIGN LICENSING REVENUE for
1997 is $0.6 million, reflecting the opening of 14 domestic franchise units.

Carrows' OPERATING EXPENSES decreased $10.2 million (4.8%) for 1997 as
compared to 1996, despite the impact of an additional six days in the 1997
reporting period as compared to the prior year comparable period due to the
change in the fiscal year, increases in the Federal and state minimum wage rates
and the impact of Advantica's management fees of $2.1 million in the current
year compared to $1.3 million in 1996. The decrease in expenses as compared with
the prior year reflects the impact of approximately $1.5 million of
non-recurring adjustments which increased legal and workers' compensation
expenses in 1996, as well as savings in product and labor costs in 1997 due to
increased focus by operations on

10
<PAGE> 13

cost control, waste reduction and labor initiatives. In addition, operating
expenses in 1997 include $3.3 million of gains on sales of restaurants, compared
to no gains recorded in 1996.

OPERATING INCOME for Carrows increased to $11.4 million in 1997 as a result
of the factors noted above.

1996 VS. 1995

The following information for the years ended December 26, 1996 and December
31, 1995 is provided for analysis purposes only as it includes information for
periods prior to the Company's acquisition of Coco's and Carrows on May 23,
1996:

COCO'S AND CARROWS

<TABLE>
<CAPTION>
1996 1995
(In thousands) -------- --------
<S> <C> <C>
Net company sales..................................... $487,194 $501,248
Franchise and foreign licensing revenue............... 3,793 4,371
-------- --------
Total revenue......................................... 490,987 505,619
Operating expenses.................................... 476,558 473,594
-------- --------
Operating income...................................... $ 14,429 $ 32,025
======== ========
</TABLE>

NET COMPANY SALES for the 12 months ended December 26, 1996 decreased $14.1
million (2.8%) as compared to the 12 months ended December 31, 1995. This
decrease can be attributed to several factors, the most significant being the
impact of an extra week of sales in the prior year (approximately $7.0 million)
which was a 53-week period in comparison to 1996, which was a 52-week period. In
addition, the Company experienced a six-unit decrease in the number of Company-
owned restaurants accompanied by a decline in comparable store sales for Coco's
of 1.6%, offset, in part, by a slight increase at Carrows of 0.1%. Customer
counts for Coco's and Carrows decreased during the 1996 period by 2.6% as
compared to the prior year period. Such decrease is primarily due to a general
softness in the mid-scale restaurant segment. These decreases are partially
offset by increases in guest check average of 1.0% at Coco's and 2.8% at Carrows
which are mainly driven by suggestive selling of promoted dessert items as well
as a slight price increase taken in the fourth quarter to offset the negative
impact of the Federal minimum wage increase.

FRANCHISE AND FOREIGN LICENSING REVENUE decreased by $0.6 million in 1996 as
compared to 1995. This decrease is primarily due to a stronger dollar versus the
yen in 1996 as compared with 1995 and a lower royalty rate under Coco's foreign
license agreement effective February 1995. These decreases were partially offset
by an increase in the number of franchisees and foreign licensees from 257 in
1995 to 283 in 1996.

OPERATING EXPENSES for the 12 months ended December 26, 1996 increased $3.0
million (0.6%) as compared to the 12 months ended December 31, 1995. This
increase reflects decreased expenses due to the decrease in operating revenue
noted above, offset by increases in workers' compensation expense ($2.0
million), depreciation and amortization ($2.5 million), management fees payable
to Advantica ($3.0 million) and other operating expenses ($5.0 million). The
increase in worker's compensation expense is due mainly to revised claim loss
estimates, while the increase in depreciation and amortization is due
principally to a full year's depreciation being recorded on prior year property
additions. The management fees payable to Advantica of $3.0 million are pursuant
to the management services agreement between the Company and Advantica, dated
May 24, 1996. Under such agreement, the Company is charged a management services
fee by Advantica equal to 1% of total revenues. The other operating expense
increase is primarily due to increases in rent ($1.9 million) in connection with
several sale/leaseback transactions that occurred in the first quarter of 1995,
expenses of $2.0 million related to the information systems conversion which
began subsequent to the acquisition by Advantica and litigation reserves ($1.1
million) established during the five months ended May 23, 1996, for various
litigation facing the Company. The impact of revaluing assets in conjunction
with the May 23, 1996 acquisition was not significant on operating earnings, due
to the relatively longer life assigned to goodwill of FRD Successor as compared
to the reorganization value of FRD Predecessor and the relatively minor
adjustments to the carrying values of fixed assets.

OPERATING INCOME for the 12 months ended December 26, 1996 decreased $17.6
million (54.9%) as compared to the 12 months ended December 31, 1995 due to the
revenue decrease and expense increase noted above.

11
<PAGE> 14

FRD CONSOLIDATED

1997 VS. 1996

CONSOLIDATED INTEREST AND DEBT EXPENSE increased $7.3 million for the 12
months ended December 31, 1997 as compared to the 12 months ended December 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 (BENEFIT) PROVISION FOR INCOME TAXES resulting from the loss from
continuing operations for the year ended December 31, 1997 reflects an estimated
annual effective income tax rate of approximately (64%) for 1997 compared to a
provision for 1996 which reflects an approximate rate of 8%. The change in the
effective income tax rate from the prior year can be attributed to the deferred
income tax benefits related to the reduction in the 1996 valuation allowance and
income tax credits related to employer-paid social security ("FICA") taxes.

REORGANIZATION ITEMS incurred by the Company in 1997 include professional
fees and other expenditures related to the Advantica bankruptcy and the planned
"push down" of fresh start reporting from Advantica.

The decrease in CONSOLIDATED NET LOSS of $2.9 million in comparison to the
prior year is due to a combination of the above described items.

EXPOSURE TO CURRENCY FLUCTUATIONS

The Company is the licensor of Coco's restaurants in Japan and South Korea
through licensing agreements. The royalty due to the Company relative to the
Japan agreement is paid annually in yen and is based on sales attributable to
such Coco's. Because the royalty is paid annually in March, the Company bears
the risk that exchange rate fluctuations could have an unfavorable impact on
this receivable. At December 31, 1997 and December 26, 1996, the Company had
$2.1 million and $2.8 million, respectively, due under this arrangement.

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 1997 fiscal year includes
an extra six days in comparison to the prior fiscal year.

ACCOUNTING CHANGES

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components in the financial statements. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required. The Company is in the process of determining its preferred
presentation format under the new standard. The adoption of SFAS 130 will have
no impact on the Company's consolidated results of operations, financial
position or cash flows and will be implemented by the Company in the fourth
quarter of 1998.

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS 131 is effective for financial
statements for fiscal years beginning after December 15, 1997. Financial
statement disclosures for prior periods are required to be restated. The Company
is in the process of evaluating the disclosure requirements. The adoption of
SFAS 131 will have no impact on the Company's consolidated results of
operations, financial position or cash flows and will be implemented by the
Company in the fourth quarter of 1998.

1996 VS. 1995

INTEREST AND DEBT EXPENSE increased $5.8 million (35.3%) in 1996 as compared
to 1995. This increase is due to the long-term debt incurred in connection with
the acquisition of FRI-M, effective May 23, 1996 and because of the revaluation
of the liability associated with capitalized lease obligations.

12
<PAGE> 15

OTHER NON-OPERATING INCOME, NET, totaled $5.4 million in 1996 as compared to
other non-operating expense, net, of $4.1 million in 1995. The 1996
non-operating income, net, is principally the result of a $5.9 million gain on
the sale of one Carrows restaurant in Las Vegas, Nevada during the five months
ended May 23, 1996. The non-operating expense, net, in 1995 relates principally
to the loss on the sale of forward hedge contracts.

The decrease in NET INCOME of $9.8 million in comparison to the prior year
is due to a combination of the above described items.

LIQUIDITY AND CAPITAL RESOURCES

In connection with the acquisition of FRI-M, the Company entered into a
credit agreement (the "Credit Agreement") on May 23, 1996 which provides for a
$56 million term loan (the "Term Loan") and a $35 million working capital and
letter of credit facility (the "Revolving Credit Facility"). At December 31,
1997, the amount of the Term Loan outstanding was $40.0 million and the Company
had no outstanding working capital borrowings; however, letters of credit
outstanding were $19.8 million. Such facility is unavailable to Advantica and
its other subsidiaries.

Also in connection with the acquisition, FRD issued $156.9 million principal
amount of 12 1/2% Series B Senior Notes due 2004 (the "Senior Notes"). The
Senior Notes mature on July 15, 2004.

The Credit Agreement and indenture under which the Senior Notes have been
issued contain a number of restrictive covenants which, among other things
(subject to certain exceptions), limit FRD and its subsidiaries with respect to
incurrence of debt, existence of liens, investments and joint ventures, the
declaration or payment of dividends, the making of guarantees and other
contingent obligations, mergers, the sale of assets, capital expenditures and
material changes in their business. In addition, the Credit Agreement contains
certain financial covenants including provisions for the maintenance of a
minimum level of interest coverage (as defined), limitations on ratios of
indebtedness (as defined) to earnings before interest, taxes, depreciation and
amortization (EBITDA), maintenance of a minimum level of EBITDA and limitations
on annual capital expenditures.

The Company was in compliance with the terms of the Credit Agreement at
December 31, 1997. Under the most restrictive provision of the Credit Agreement
(the ratio of indebtedness to EBITDA), at December 31, 1997, the Company could
incur approximately $4.7 million of additional indebtedness.

At December 31, 1997, scheduled maturities of long-term debt, including
capitalized lease obligations, for the next five years and thereafter are as
follows (in thousands):

<TABLE>
<S> <C>
1998........................................................ $ 23,457
1999........................................................ 23,431
2000........................................................ 3,136
2001........................................................ 2,934
2002........................................................ 2,527
Thereafter.................................................. 163,624
--------
$219,109
========
</TABLE>

The Company's principal capital requirements are those associated with
opening new restaurants and remodeling and maintaining its existing restaurants
and facilities. During 1997, total capital expenditures were approximately $15.6
million. Of the total capital expenditures, approximately $0.7 million were
financed through capital leases. Capital expenditures during 1998 are expected
to total approximately $14.0 million; however, the Company is not committed to
spending this amount and could spend less if circumstances warrant.

At December 31, 1997 and December 26, 1996, the Company had working capital
deficits, exclusive of net assets held for sale, of $68.7 million and $60.8
million, respectively. The Company is able to operate with a substantial working
capital deficiency because: (i) restaurant operations are conducted 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 the Credit
Agreement to finance its daily restaurant operations.

13
<PAGE> 16

IMPACT OF BANKRUPTCY PETITIONS ON FRANCHISING

The operation of the Company's franchise system is subject to laws 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 ("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 it
would be appropriate for the Company's franchising subsidiaries (Carrows and
Coco's) 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 1997.

Due to the Bankruptcy Court's approval of the Plan by order entered on
November 12, 1997, management decided that it would be appropriate for the
Company's franchising subsidiaries again 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 November 1997.

IMPACT OF THE YEAR 2000 ISSUE

The Year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software which uses two
digits to define the applicable year 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 or engage in normal business
activities.

Advantica has performed an assessment of the impact of the Year 2000 issue
and determined that a significant portion of its software applications will need
to be modified or replaced so that its computer systems will properly utilize
dates beyond December 31, 1999. Advantica presently believes that with
modifications to existing software and conversions to new software, the impact
of the Year 2000 issue can be mitigated. However, if such modification or
conversions are not made, or are not completed timely, the Year 2000 issue could
have a material impact on the operations of the Company.

For the most part, Advantica intends to replace existing systems to mitigate
the impact of the Year 2000 issue and will utilize both external and internal
resources to do so. In this regard, Advantica expects to spend approximately $20
million in both 1998 and 1999 to develop or purchase new software, the majority
of which will be capitalized. Expenditures associated with the Year 2000 which
will be expensed when incurred are expected to be immaterial in both years. The
related amounts capitalized or expensed by the Company are expected to be
immaterial in both years.

During 1998, Advantica intends to communicate with its significant suppliers
and franchisees to determine the extent to which it is vulnerable to those third
parties' failure to remediate their own Year 2000 issue. Advantica's current
estimate of costs associated with the Year 2000 issue excludes the potential
impact of the Year 2000 issue on third parties. There can be no guarantee that
the systems of other companies on which the Company's systems rely will be
converted timely, or that a failure to convert by another company, or a
conversion that is incompatible with the Company's systems, would not have a
material adverse effect on the Company.

The Company believes, based on available information, that it will be able
to manage its Year 2000 transition without any material adverse effect on its
business operations. However, the costs of the project and the ability of
Advantica to complete it on a timely basis are based on management's best
estimates, which were derived based on assumptions of future events including
the availability of certain resources, third party modification plans and other
factors. There can be no guarantee that these estimates will be achieved and
actual results may differ materially from those plans. 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.

14
<PAGE> 17

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

On January 28, 1997, the registrant had a market capitalization of $2.5
billion or less and accordingly, such disclosures are not required in this
Annual Report on Form 10-K. Such disclosures will be included in filings that
include financial statements for fiscal years ended after June 15, 1998.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Index to Financial Statements and Financial Statement Schedule which
appears on page F-1 herein.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is omitted pursuant to General
Instruction (I)(2)(c) of Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is omitted pursuant to General
Instruction (I)(2)(c) of Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is omitted pursuant to General
Instruction (I)(2)(c) of Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is omitted pursuant to General
Instruction (I)(2)(c) of Form 10-K.

DESCRIPTION OF INDEBTEDNESS

The following summary of the principal terms of the current indebtedness of
the Company does not purport to be complete and is qualified in its entirety by
reference to the documents governing such indebtedness, including the
definitions of certain terms therein, which have been filed as exhibits to this
1997 Annual Report on Form 10-K. Whenever particular provisions of such
documents are referred to herein, such provisions are incorporated herein by
reference and the statements are qualified in their entirety by such reference.

THE CREDIT AGREEMENT

In connection with the acquisition of FRI-M by FRD, the Credit Agreement was
entered into as of May 23, 1996 among FRD, as guarantor, FRI-M, as borrower (the
"Borrower"), Bankers Trust Company, The Chase Manhattan Bank (formerly Chemical
Bank) and Citicorp USA, Inc., as Co-Syndication Agents (collectively, the
"Co-Agents"), Credit Lyonnais New York Branch, as Administrative Agent and the
other lenders party thereto (collectively, the "Banks"). The Credit Agreement
provides for a $56 million Term Loan and a $35 million working capital facility
(the "Revolving Credit Facility"), which is also available for letters of
credit. Proceeds from the Term Loan were used by FRD for the acquisition of all
of the outstanding shares of capital stock of FRI-M and its subsidiaries, and to
pay the transactions costs associated therewith. Proceeds from the Revolving
Credit Facility are to be used for working capital requirements and other
general corporate purposes, which may include the making of intercompany loans
to any of the Borrower's wholly-owned subsidiaries for their own working capital
and other general corporate purposes. Letters of credit may be issued under the
Revolving Credit Facility for the purpose of supporting (i) workers'
compensation liabilities of the Borrower or any of its subsidiaries; (ii) the
obligations of third party insurers of the Borrower or any of its subsidiaries;
and (iii) certain other obligations of the Borrower and its subsidiaries.

Principal installments of the Term Loan are payable quarterly as follows: $4
million per quarter for four consecutive quarters beginning February 28, 1997;
$5 million for four consecutive quarters beginning February 28, 1998; $6 million
on February 28, 1999; and $7 million for two consecutive quarters beginning May
31, 1999. All amounts owing under the Term Loan are required to be repaid on
August 31, 1999. At December 31, 1997, the amount of the Term Loan outstanding
was

15
<PAGE> 18

$40.0 million. The commitment to make loans or issue letters of credit pursuant
to the Revolving Credit Facility expires, and all amounts outstanding under the
Revolving Credit Facility must be repaid, on August 31, 1999. All borrowings
under the Credit Agreement accrue interest at a variable rate based on a base
rate (as defined therein) or an adjusted Eurodollar rate (8.4375% at December
31, 1997).

The Credit Agreement requires the Borrower to make mandatory prepayments in
certain circumstances out of its Consolidated Excess Cash Flow (as defined
therein), out of cash proceeds of certain asset sales, out of assets distributed
to the Company, the Borrower or any of Borrower's direct or indirect
subsidiaries (each, a "Loan Party") in connection with an employee benefit plan
termination and out of net cash proceeds received by a Loan Party from certain
other sources. Any mandatory partial prepayment of the Term Loan shall be
applied to installments scheduled to be paid during the 12 months immediately
following the date of such prepayment, with any excess being applied ratably to
the scheduled installments of the Term Loan.

The Credit Agreement contains certain restrictive covenants which, among
other things, limit (subject to certain exceptions) the Borrower and its
subsidiaries with respect to (a) incurrence of debt; (b) the existence of liens;
(c) investments and joint ventures; (d) the declaration or payment of dividends;
(e) the making of guarantees and other contingent obligations; (f) the amendment
or waiver of certain related agreements; (g) mergers, consolidations,
liquidations and sales of assets (including sale and leaseback transactions);
(h) payment obligations under leases; (i) transactions with shareholders and
affiliates; (j) the sale, assignment, pledge or other disposition of shares of
Borrower or its subsidiaries by Borrower or its subsidiaries; (k) capital
expenditures; and (l) material changes in their business.

The Credit Agreement also imposes on FRD, the Borrower and its subsidiaries
certain financial tests and minimum ratios which, among other things, require
that Borrower (a) shall not permit the ratio determined on the last day of each
fiscal quarter for such quarter and, as applicable, the three preceding quarters
("Rolling Period") then ended of Consolidated Adjusted EBITDA (as defined
therein) to Consolidated Interest Expense (as defined therein) to be less than
levels increasing from 1.85:1.00 on December 31, 1997 to 2.10:1.00 on September
23, 1999 and each fiscal quarter end thereafter; (b) permit the ratio determined
on the last day of each fiscal quarter for the Rolling Period then ended of
Consolidated Total Debt (as defined therein) to Consolidated Adjusted EBITDA (as
defined) to exceed a level varying from 4.35:1.00 on December 31, 1997 to
3.65:1.00 on September 23, 1999 and each fiscal quarter end thereafter; and (c)
shall not permit Consolidated Adjusted EBITDA determined on the last day of each
fiscal quarter for the Rolling Period then ended to be less than an amount
increasing from $49.0 million for the four fiscal quarters ending December 31,
1997 to $49.5 million for the Rolling Period ending June 25, 1998 and each
Rolling Period thereafter.

FRD and all of the Borrower's subsidiaries have guaranteed the obligations
of the Borrower under the Credit Agreement and the other Loan Documents (as
defined therein). All of the issued and outstanding common stock of the Borrower
and its subsidiaries has been pledged as security for the obligations of the
Company under the Credit Agreement and the other Loan Documents. The obligations
of the Borrower under the Credit Agreement and the other Loan Documents are
secured by substantially all assets of the Borrower and its subsidiaries.

THE SENIOR NOTES

In connection with the acquisition of FRI-M, FRD issued $156.9 million
principal amount of 12 1/2% Senior Notes due 2004 (the "Senior Notes"). Interest
on the Senior Notes accrues at the rate of 12 1/2% per annum and will be payable
semi-annually in arrears on January 15 and July 15, commencing on July 15, 1996.
They will mature on July 15, 2004. The Senior Notes are senior, unsecured,
general obligations of the Company and rank senior in right of payment to all
existing and future subordinated indebtedness of the Company and rank pari passu
in right of payment with all existing and future unsubordinated indebtedness of
the Company. The Senior Notes are effectively subordinated to secured
indebtedness of the Company, including borrowings under the Credit Agreement, to
the extent of the value of the Company's assets securing such indebtedness.
Borrowings under the Credit Agreement are secured by substantially all of the
Company's assets. The Company on a stand-alone basis does not currently have any
outstanding senior indebtedness other than the Senior Notes and its guaranty of
FRI-M's borrowings under the Credit Agreement. As of December 31, 1997, FRI-M
had no outstanding borrowings under the Revolving Credit Facility; however, the
amount of the Term Loan outstanding under the Credit Agreement was $40.0 million
and letters of credit outstanding were $19.8 million. (The Senior Notes are
structurally subordinated to all indebtedness of the Borrower (as defined
above), including its indebtedness under the Credit Agreement.)

16
<PAGE> 19

The Senior Notes are not redeemable at the Company's option prior to May 23,
2001. Thereafter, the Senior Notes are subject to redemption at the option of
the Company, in whole or in part, at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest to the applicable redemption date, if redeemed during the 12-month
period beginning on May 23 of the years indicated below:

<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2001........................................................ 105.0%
2002........................................................ 102.5%
2003 and thereafter......................................... 100.0%
</TABLE>

Notwithstanding the foregoing, at any time prior to May 23, 1999, the
Company may also redeem up to $50 million aggregate principal amount of the
Senior Notes, at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest thereon to the
applicable redemption date, with the Net Cash Proceeds (as defined) from one
Initial Public Equity Offering (as defined) of the Company, if redeemed during
the 12-month period ending on May 23 of the years indicated below; provided that
at least $60 million in aggregate principal amount of the Senior Notes
originally issued remain outstanding immediately after such redemption and
provided, further, that such redemption occurs within 60 days of the date of
receipt of such Net Cash Proceeds:

<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
1997........................................................ 110.00%
1998........................................................ 108.75%
1999........................................................ 107.50%
</TABLE>

PART IV

ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) (1) Financial Statements:
See the Index to Financial Statements and Financial Statement Schedule
which appears on page F-1 hereof.

(2) Financial Statement Schedules:
See the Index to Financial Statements and Financial Statement Schedule
which appears on page F-1 hereof.

(3) Exhibits:
Certain of the exhibits to this report, indicated by an asterisk, are
hereby incorporated by reference to other documents on file with the
Commission with which they are physically filed, to be a part hereof as
of their respective dates.

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
*3.1 Certificate of Incorporation of FRD (incorporated by
reference to Exhibit 3.1 to Registration Statements on Forms
S-1 and S-4 dated as of September 6, 1996 (No. 333-07601) of
FRD (the "FRD Form S-4")).
*3.2 Bylaws of FRD (incorporated by reference to Exhibit 3.2 to
the FRD Form S-4).
*3.2.1 Amendment to the Bylaws of FRD, dated May 24, 1996
(incorporated by reference to Exhibit 3.2.1. to the 1996
Form 10-K of FRD, File No. 333-07601).
*4.1 Indenture dated as of May 23, 1996 between FRD and the Bank
of New York, as Trustee (the "Indenture") (incorporated by
reference to Exhibit 4.1 to the FRD Form S-4).
*4.1.1 Form of First Supplemental Indenture to the Indenture dated
as of August 23, 1996 (incorporated by reference to Exhibit
4.1.1 to the FRD Form S-4).
*4.2 Stock Purchase Agreement dated as of March 1, 1996 by and
among Flagstar, FCI, FRD, and FRI (incorporated by reference
to Exhibit 4.2 to the FRD Form S-4).
*4.3 Registration Rights Agreement dated as of May 23, 1996
between FRD and FRI (the "Registration Rights Agreement")
(incorporated by reference to Exhibit 4.3 to the FRD Form
S-4).
*4.3.1 First Amendment to Registration Rights Agreement, dated as
of August 23, 1996 (incorporated by reference to Exhibit
4.3.1 to the FRD Form S-4).
</TABLE>

17
<PAGE> 20

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
*10.1 Credit Agreement dated as of May 23, 1996 by and among FRD,
as Guarantor, FRI-M as Borrower, the Financial Institutions
listed therein, as lenders, Bankers Trust Company, Chemical
Bank and Citicorp USA, Inc., as co-syndication agents, and
Credit Lyonnais New York Branch, as administrative agent
(the "Credit Agreement") (incorporated by reference to
Exhibit 10.1 to the FRD Form S-4).
*10.1.1 First Amendment to the Credit Agreement, dated as of July 1,
1996 (incorporated by reference to Exhibit 10.1.1 to FRD's
quarterly report on Form 10-Q for the period ending
September 26, 1996 (the "1996 Form 10-Q")).
*10.1.2 Second Amendment to the Credit Agreement, dated November 19,
1996 (incorporated by reference to Exhibit 4.24 to the 1996
Form 10-K of FCI, File No. 0-18051).
*10.1.3 Third Amendment to the Credit Agreement, dated March 7, 1997
(incorporated by reference to Exhibit 4.2 to FCI's quarterly
report on Form 10-Q for the period ending April 2, 1997).
*10.1.4 Fourth Amendment to the Credit Agreement, dated July 9, 1997
(incorporated by reference to Exhibit 4.1 to FCI's quarterly
report on Form 10-Q for the period ended October 1, 1997).
*10.2 Tax Sharing and Allocation Agreement dated as of May 23,
1996 among FCI and the Company (incorporated by reference to
Exhibit 10.2 to the FRD Form S-4).
*10.3 Management Services Agreement dated as of May 24, 1996
between FRD and Flagstar (incorporated by reference to
Exhibit 10.3 to the FRD Form S-4).
*10.4 Technical Assistance and License Agreement, dated as of
April 14, 1995, between Coco's Restaurant, Inc. and Coco's
Japan Co., Ltd (incorporated by reference to Exhibit 10.5 to
the FRD Form S-4).
*10.5 Advantica Restaurant Group Stock Option Plan, as adopted
January 28, 1998 (incorporated by reference to Exhibit 10.48
to Amendment No. 1 to the Registration Statement on Form S-1
(No. 333-45811) of Advantica (the "Advantica S-1")).
*10.6 Advantica Restaurant Group Officer Stock Option Plan, as
adopted January 28, 1998 (incorporated by reference to
Exhibit 10.49 to the Advantica S-1).
27 Financial Data Schedule (for SEC use only).
99 Safe Harbor Under the Private Securities Litigation Reform
Act of 1995.
</TABLE>

- ---------------

* Certain of the exhibits to this Annual Report on Form 10-K, indicated by an
asterisk, are hereby incorporated by reference to other documents on file
with the Commission with which they are physically filed, to be part hereof
as of their respective dates.

(b) No reports on Form 8-K were filed during the quarter ended December 31,
1997.

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.

No annual report or proxy material has been provided to the sole stockholder
of FRD.

18
<PAGE> 21

FRD ACQUISITION CO.

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report -- Deloitte & Touche LLP....... F-2
Independent Auditors' Report -- KPMG Peat Marwick LLP....... F-3
Statements of Consolidated Operations for the Year Ended
December 31, 1997 and the Seven Months Ended December 26,
1996, and Statements of Combined Operations for the Five
Months Ended May 23, 1996 and the Year Ended December 31,
1995...................................................... F-4
Consolidated Balance Sheets as of December 31, 1997 and
December 26, 1996......................................... F-5
Statements of Consolidated Cash Flows for the Year Ended
December 31, 1997 and the Seven Months Ended December 26,
1996 and Statements of Combined Cash Flows for the Five
Months Ended May 23, 1996 and the Year Ended December 31,
1995...................................................... F-6
Notes to Consolidated and Combined Financial Statements..... F-7
Financial Statement Schedule: Condensed Financial
Information of Registrant................................. S-1
</TABLE>

F-1
<PAGE> 22

INDEPENDENT AUDITORS' REPORT

Board of Directors
FRD Acquisition Co.:

We have audited the accompanying consolidated balance sheets of FRD
Acquisition Co. and subsidiaries (the "Company") as of December 31, 1997 and
December 26, 1996 and the related statements of consolidated operations and
consolidated cash flows for the fiscal year ended December 31, 1997 and the
seven months ended December 26, 1996. Our audits also included the financial
statement schedule listed on page F-1. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
and financial statement schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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.

As discussed in Note 1 to the financial statements, on November 12, 1997,
the Bankruptcy Court entered an order confirming the plan of reorganization of
the Company's parent, Advantica Restaurant Group, Inc. (formerly Flagstar
Companies, Inc.), which became effective after the close of business on January
7, 1998. As described in Note 2, the change in ownership of Advantica effected
by the plan of reorganization requires that Advantica apply "fresh-start
reporting" effective January 7, 1998, in accordance with AICPA Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code." Advantica intends to "push down" the impact of fresh start
reporting to its operating subsidiaries, including the Company, which will
result in assets, liabilities and a capital structure not comparable with prior
periods.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1997 and December 26, 1996 and the results of its operations and its cash flows
for the fiscal year ended December 31, 1997 and the seven months ended December
26, 1996 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.

DELOITTE & TOUCHE LLP
Greenville, South Carolina
February 20, 1998

F-2
<PAGE> 23

INDEPENDENT AUDITORS' REPORT

Board of Directors
FRD Acquisition Co.:

We have audited the accompanying combined statements of operations and cash
flows of FRD Acquisition Co. (FRD Predecessor) for the five months ended May 23,
1996 and the year ended December 31, 1995. These combined financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the combined 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 combined financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
FRD Acquisition Co. (FRD Predecessor) for the five months ended May 23, 1996 and
the year ended December 31, 1995, in conformity with generally accepted
accounting principles.

KPMG PEAT MARWICK LLP

Orange County, California
July 25, 1996

F-3
<PAGE> 24

FRD ACQUISITION CO.

STATEMENTS OF CONSOLIDATED (SUCCESSOR) AND COMBINED (PREDECESSOR) OPERATIONS

<TABLE>
<CAPTION>
FRD SUCCESSOR FRD PREDECESSOR
--------------------------- ---------------------------
YEAR SEVEN MONTHS FIVE MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 26, MAY 23, DECEMBER 31,
1997 1996 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(In thousands)
Net company sales................................ $487,593 $292,731 $194,464 $501,248
Franchise and foreign licensing revenue.......... 4,900 2,313 1,479 4,371
-------- -------- -------- --------
Operating revenue................................ 492,493 295,044 195,943 505,619
-------- -------- -------- --------
Operating expenses:
Product cost................................... 133,733 83,519 54,370 143,206
Payroll and benefits........................... 178,721 104,090 74,642 180,922
Depreciation and amortization.................. 29,556 18,506 12,371 28,447
Management fees to Advantica................... 4,925 2,950 -- --
Allocated costs from Advantica................. 2,500 21 -- --
Other.......................................... 115,972 74,011 52,078 121,019
-------- -------- -------- --------
465,407 283,097 193,461 473,594
-------- -------- -------- --------
Operating income................................. 27,086 11,947 2,482 32,025
-------- -------- -------- --------
Other charges (credits):
Interest and debt expense, net................. 29,597 17,680 4,658 16,515
Other, net..................................... 2,975 (4) (5,437) 4,116
-------- -------- -------- --------
32,572 17,676 (779) 20,631
-------- -------- -------- --------
Income (loss) before reorganization items and
taxes.......................................... (5,486) (5,729) 3,261 11,394
Reorganization items............................. 528 -- -- --
-------- -------- -------- --------
Income (loss) before taxes....................... (6,014) (5,729) 3,261 11,394
Provision (benefit) for income taxes............. (3,836) 460 2,160 6,670
-------- -------- -------- --------
Net income (loss)................................ $ (2,178) $ (6,189) $ 1,101 $ 4,724
======== ======== ======== ========
</TABLE>

See notes to consolidated and combined financial statements

F-4
<PAGE> 25

FRD ACQUISITION CO.

CONSOLIDATED BALANCE SHEETS

<S> <C> <C> <C>
DECEMBER 31, PRO FORMA DECEMBER 26,
1997 DECEMBER 31, 1997 1996
-------- -------- --------
(In thousands) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 9,051 $ 9,051 $ 14,300
Receivables............................................ 4,473 4,333 5,988
Receivable from Advantica.............................. 1,870 1,870 --
Merchandise and supply inventories..................... 3,758 3,608 5,039
Net assets held for sale............................... -- -- 5,065
Other.................................................. 9,320 9,320 4,468
-------- -------- --------
28,472 28,182 34,860
-------- -------- --------
Property and equipment................................... 151,675 144,879 149,587
Accumulated depreciation................................. (34,346) -- (14,611)
-------- -------- --------
117,329 144,879 134,976
-------- -------- --------
Other assets:
Goodwill, net.......................................... 186,613 -- 205,389
Other intangibles, net................................. 7,275 41,191 7,895
Deferred taxes......................................... 25,487 13,965 --
Other.................................................. 6,352 7,244 4,926
Reorganization value in excess of amounts allocable to
identifiable assets, net............................ -- 195,901 --
-------- -------- --------
225,727 258,301 218,210
-------- -------- --------
Total assets........................................... $371,528 $431,362 $388,046
======== ======== ========

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Loans payable and current maturities of long-term
debt................................................ $ 23,457 $ 23,457 $ 19,578
Accounts payable....................................... 21,645 21,645 19,571
Accrued salaries and vacation.......................... 12,820 12,820 11,515
Accrued insurance...................................... 4,560 4,560 6,832
Accrued interest....................................... 9,282 9,282 9,261
Payable to Advantica................................... 10,182 10,182 2,950
Other.................................................. 15,184 21,498 20,889
-------- -------- --------
97,130 103,444 90,596
-------- -------- --------
Long-term liabilities:
Debt, less current maturities.......................... 195,652 208,988 218,497
Liability for self-insured claims...................... 9,397 12,097 10,142
Other non-current liabilities.......................... 2,716 13,628 --
-------- -------- --------
207,765 234,713 228,639
-------- -------- --------
304,895 338,157 319,235
-------- -------- --------
Stockholder's Equity:
Common stock: par value $0.10; 1,000 shares authorized,
issued and outstanding.............................. -- -- --
Paid-in-capital........................................ 75,000 93,205 75,000
Deficit................................................ (8,367) -- (6,189)
-------- -------- --------
Total stockholder's equity............................. 66,633 93,205 68,811
-------- -------- --------
Total liabilities and stockholder's equity............. $371,528 $431,362 $388,046
======== ======== ========
</TABLE>

See notes to consolidated and combined financial statements

F-5
<PAGE> 26

FRD ACQUISITION CO.

STATEMENTS OF CONSOLIDATED (SUCCESSOR) AND COMBINED (PREDECESSOR) CASH FLOWS

<TABLE>
<CAPTION>
FRD SUCCESSOR FRD PREDECESSOR
--------------------------- --------------------------
YEAR SEVEN MONTHS FIVE MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 26, MAY 23, DECEMBER 31,
1997 1996 1996 1995
(In thousands) ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)............................... $ (2,178) $ (6,189) $ 1,101 $ 4,724
Adjustments to reconcile net income (loss) to
cash flows from operating activities:
Depreciation and amortization of property and
intangibles.................................. 29,556 18,506 12,371 28,447
Amortization of deferred financing costs........ 1,356 816 -- 4,785
(Gain) loss on disposition of assets............ (4,998) -- (5,738) 2,269
Deferred tax benefit............................ (4,183) -- -- --
Decrease (increase) in assets:
Receivables..................................... 1,115 (2,226) 1,676 1,975
Merchandise and supply inventories.............. 1,281 117 68 --
Other current assets............................ (3,933) (4,105) (485) 775
Other assets.................................... (2,144) (989) 1,251 (2,888)
Increase (decrease) in liabilities:
Accounts payable................................ 2,074 610 (4,762) 4,386
Accrued salaries and vacation................... 1,305 98 -- 766
Payable to Advantica............................ 7,231 2,950 -- --
Other accrued liabilities....................... (7,015) 10,964 (2,290) (2,364)
Liability for self-insurance claims............. (4,887) 624 2,133 2,998
Other non-current liabilities................... 2,507 29 -- --
-------- --------- -------- --------
Net cash flows from operating activities.......... 17,087 21,205 5,325 45,873
-------- --------- -------- --------
Cash Flows from Investing Activities:
Purchase of property............................ (14,941) (2,746) (2,216) (23,771)
Proceeds from disposition of property........... 12,046 -- 20,087 7,866
Acquisition of business......................... -- (128,056) -- --
-------- --------- -------- --------
Net cash flows provided by (used in) investing
activities...................................... (2,895) (130,802) 17,871 (15,905)
-------- --------- -------- --------
Cash flows from Financing Activities:
Principal debt payments, net.................... (19,439) (2,948) (81,755) 15,786
Deferred financing costs........................ (2) (5,143) -- --
Borrowing on credit facilities.................. -- 56,000 -- --
Equity contributions from Advantica............. -- 75,000 -- --
Net intercompany and equity activity............ -- -- 54,050 (44,477)
-------- --------- -------- --------
Net cash flows provided by (used in) financing
activities...................................... (19,441) 122,909 (27,705) (28,691)
-------- --------- -------- --------
Increase (decrease) in cash and cash
equivalents..................................... (5,249) 13,312 (4,509) 1,277
Cash and cash equivalents at:
Beginning of period.......................... 14,300 988 5,497 4,220
-------- --------- -------- --------
End of period................................ $ 9,051 $ 14,300 $ 988 $ 5,497
======== ========= ======== ========
Supplemental Cash Flow Information:
Income taxes paid............................... $ 1,977 $ 80
======== =========
Interest paid................................... $ 27,606 $ 7,219
======== =========
Non-cash financing activities:
Capital lease obligations.................... $ 694 $ 101
======== =========
</TABLE>

See notes to consolidated and combined financial statements

F-6
<PAGE> 27

FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

NOTE 1: ORGANIZATION AND 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"), a wholly-owned subsidiary of Flagstar
Companies, Inc. ("FCI") (which changed its name to Advantica Restaurant Group,
Inc. on January 7, 1998). On May 23, 1996, FRD consummated the acquisition of
the Coco's and Carrows restaurant chains consisting of 347 company-owned units
within the family dining segment. The acquisition price of $313.4 million (which
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), was financed with $125.0 million in cash ($75.0
million of which was provided from Flagstar's cash balances and the remaining
$50.0 million from bank term loans which totaled $56.0 million, with $6 million
being used to pay transaction fees), the issuance of $156.9 million in senior
notes of FRD to FRI (the "Senior Notes"), and the assumption of certain capital
lease obligations of approximately $31.5 million. The acquisition has been
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. The purchase price exceeded the fair
value of the net assets acquired by approximately $195 million, as adjusted. The
resulting goodwill is being amortized on a straight line basis over 40 years.

At December 31, 1997, the Company owned 318 full-service restaurants located
in nine states, with approximately 76% of its restaurants located in California.
FRD restaurants primarily offer moderately-priced breakfast, lunch and dinner
items. Additionally, as of December 31, 1997, the Company was the licensor of
298 restaurants primarily located in Japan and South Korea, and the franchisor
of 31 restaurants in the United States.

In the financial statements included herein, reference to "FRD Predecessor"
refers to the period of ownership of FRI-M by FRI, giving effect to information
about events occurring upon FRI's emergence from a Chapter 11 bankruptcy code
reorganization through May 23, 1996. "FRD Successor" refers to the period of
ownership of FRI-M by FRD subsequent to May 23, 1996.

The FRD Predecessor Company's combined financial statements combine the
financial position and operations of FRI-M, a wholly owned subsidiary of FRI,
and certain subsidiaries including those restaurants that made up the Family
Restaurant Division and including the FRD Commissary, a division of FRI. The
Family Restaurant Division primarily represented the Coco's and Carrows
restaurant concepts. The FRI-M combined financial statements exclude the
financial position and operations of FRI-MRD Corporation, a wholly-owned
subsidiary of the FRI-M Corporation which was not acquired by FRD.

On January 7, 1998 (the "Effective Date"), FCI and Flagstar emerged from
proceedings under Chapter 11 of Title 11 of the United States Code (the
"Bankruptcy Code") pursuant to FCI and Flagstar's Amended Joint Plan of
Reorganization dated as of November 7, 1997 (the "Plan") (as further described
in Note 15). On the Effective Date, Flagstar merged with and into FCI, the
surviving corporation, and FCI changed its name to Advantica Restaurant Group,
Inc. ("Advantica"). The bankruptcy proceedings began when FCI, Flagstar and
Flagstar Holdings, Inc. ("Holdings") filed voluntary petitions for relief under
the Bankruptcy Code in the Bankruptcy Court for the District of South Carolina.
Holdings filed its petition on June 27, 1997, and Flagstar and FCI both filed
their petitions on July 11, 1997. FCI's operating subsidiaries, including the
Company, did not file bankruptcy petitions and were not parties to the above
mentioned Chapter 11 proceedings.

As of the Effective Date of the Plan, Advantica will adopt fresh start
reporting pursuant to the guidance provided by the American Institute of
Certified Public Accountants (the "AICPA") in its Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7"). Fresh start reporting assumes that a new reporting entity has been
created and requires assets and liabilities be adjusted to their fair values as
of the Effective Date in conformity with the procedures specified by Accounting
Principles Board Opinion No. 16, "Business Combinations" ("APB 16"). In
conjunction with the revaluation of assets and liabilities, a reorganization
value for the entity is determined which generally approximates the fair value
of the entity before considering debt and approximates the amount a buyer would
pay for the assets of the entity after reorganization. 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 tangible or identified intangible assets of the emerging entity, such
amount is reported as "reorganization value in excess of amounts allocable to
identifiable assets." Advantica intends to amortize such amount over a five-year
amortization period. Advantica intends to "push down" the impact of fresh start
reporting to its operating subsidiaries, including the Company. As a result, the

F-7
<PAGE> 28
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION -- Continued
Company's financial statements issued subsequent to the Effective Date will not
be comparable with those prepared before emergence, including the historical
financial statements in this annual report.

The following unaudited pro forma financial information shows the results of
operations of the Company as though the reorganization and adoption of fresh
start reporting discussed above had occurred as of December 27, 1996. These
results reflect the amortization of the increase in intangible assets as a
result of the application of fresh start reporting over the estimated useful
lives of the related asset, including reorganization value in excess of amounts
allocable to identifiable assets over a five-year period; trade names over a
40-year period; and franchise rights over estimated average remaining terms of 9
to 15 years. These results also reflect the impact on interest expense of the
amortization of premium on long-term debt (See Unaudited Pro Forma Information
in Note 2 for further information).

<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
DECEMBER 31, 1997
-----------------
(UNAUDITED)
<S> <C>
(In millions)
Revenue................................................. $492.5
Net loss................................................ (36.8)
</TABLE>

The pro forma financial information presented above does not purport to be
indicative of either (i) the results of operations, had the reorganization and
the adoption of fresh start reporting taken place on December 27, 1996, or (ii)
future results of operations.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting policies and methods of their application that significantly
affect the determination of financial position, cash flows and results of
operations are as follows:

Consolidated Financial Statements. Consolidated Financial Statements
include the accounts of the Company and its subsidiaries. Certain prior year
amounts have been reclassified to conform to the current year presentation.

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 1997 fiscal
year includes an extra six days in comparison to the prior fiscal year. The 1997
and 1995 fiscal years include 53 weeks of operations. The 1996 fiscal year
includes 52 weeks. The five months ended May 23, 1996 include 21 weeks, while
the seven months ended December 26, 1996 include 31 weeks.

Financial Statement Estimates. 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 disclosures of contingent assets and liabilities at the date of
the financial statements and the amounts of revenues and expenses during the
period reported. Actual results could differ from those estimates.

Cash and Cash Equivalents. The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.

Inventories. Inventories consist primarily of food and liquor and are
stated at the lower of cost (first-in, first-out) or market.

Pre-Opening Costs. The Company capitalizes certain direct incremental costs
incurred in conjunction with the opening of restaurants and amortizes such costs
over a 12-month period beginning one month after the date of opening. (See
discussion of New Accounting Standards below).

Property and Depreciation. Owned property is stated at appraised value at
acquisition date or cost and is depreciated on a straight-line basis over
estimated useful lives (buildings principally over 20 to 30 years and furniture,
fixtures and equipment over three to eight years). Prior to the acquisition
date, owned property and equipment of FRD Predecessor was depreciated on a
straight-line basis over estimated lives ranging from 25 to 35 years for
buildings and 3 to 10 years for furniture, fixtures and equipment. Leasehold
improvements are amortized on a straight-line basis over the shorter of

F-8
<PAGE> 29
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
estimated useful lives or the terms of related leases. Property under
capitalized leases is amortized over the terms of the leases using the
straight-line method.

Goodwill. The excess of the purchase price over the fair value of the net
assets acquired and certain trademarks are being amortized over their estimated
useful life of 40 years on a straight-line basis. The Company assesses the
recoverability of goodwill by projecting future net income, before the effect of
amortization of intangibles, over the remaining amortization period of such
assets. Accumulated amortization of the excess of the purchase price over the
net assets acquired amounted to approximately $8.1 million at December 31, 1997
and $3.1 million at December 26, 1996.

Other Intangible Assets. Other intangible assets consist of primarily
franchise operating rights, which represent values assigned to the franchise and
licensing agreements based on royalty income streams. Franchise operating rights
as of December 31, 1997 and December 26, 1996 are being amortized on a
straight-line basis over approximately 14 years, which is the estimated
remaining useful life at the date of the acquisition (May 23, 1996). Prior to
the acquisition date, franchise operating rights for FRD Predecessor were
amortized on a straight line basis over 15 years. At December 31, 1997 and
December 26, 1996, accumulated amortization of franchise operating rights
totaled approximately $1.0 million and $0.4 million, respectively.

Deferred Financing Costs. Costs related to the issuance of debt are
deferred and amortized as a component of interest and debt expense using the
interest method over the terms of the respective debt issues.

Income Taxes. The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). The Company is included in the consolidated Federal and
certain state income tax returns of Advantica. As a result of the tax sharing
agreement with Advantica, the Advantica current Federal and the applicable state
consolidated income tax liabilities are allocated to the Company based on their
current Federal and state income tax liability as if they were filing separate
Federal and state income tax returns.

The accompanying predecessor combined financial statements for the periods
prior to May 23, 1996 combine the accounts of certain subsidiaries and divisions
and exclude some operations of the combined entities. Some combined entities
have not been taxable entities, but all have been included in the consolidated
income tax returns of the predecessor parent.

See Note 9 for a further description of the accounting for income taxes.

Self-Insurance Reserves. Through June 30, 1997, the Company was primarily
self-insured, as was the FRD Predecessor, for workers' compensation and general
liability risks which are supplemented by stop-loss type insurance policies. The
FRD Predecessor reflected workers' compensation and general liability reserves
at their estimated undiscounted amounts. In conjunction with the May 23, 1996
acquisition, the Company recorded its self-insurance liabilities for estimated
incurred losses at their estimated present value as of May 23, 1996 based on
expected loss payment patterns determined by independent actuaries. As of July
1, 1997, the Company changed to a guaranteed cost program to cover workers'
compensation insurance. The total discounted self-insurance liabilities recorded
at December 31, 1997 and December 26, 1996 were $13.6 million and $16.2 million,
reflecting a 5% discount rate for 1997 and a 4% discount rate for 1996. The
related undiscounted amount at such dates were $15.3 million and $18.3 million,
respectively.

Franchise and License Fees. Initial franchise and license fees are
recognized when all of the material obligations have been performed and
conditions have been satisfied, typically when operations have commenced.
Continuing fees, based upon a percentage of net sales, are recorded as income on
a monthly basis.

Gains on Sales of Company-Owned Restaurants. Gains on the sales of
Company-owned restaurants to franchisees are recognized in accordance with
Statement of Financial Accounting Standards Statement No. 66, "Accounting for
Sales of Real Estate." In this regard, gains on such sales are recognized when
the cash proceeds from the sale exceed 20% of the sales price. During the year
ended December 31, 1997, the Company recognized gains related to sales of
Company-owned restaurants of approximately $5.2 million. Such gains are included
as a reduction of other operating expenses in the accompanying Statement of
Consolidated Operations. No gains on sales of Company-owned restaurants were
included as a reduction of operating expenses for the years ended December 31,
1995 and 1996. Cash proceeds received from sales of Company-owned restaurants
totaled $7.4 million for the year ended December 31, 1997. Deferred gains and
the non-cash portion of proceeds related to such transactions are not
significant.

F-9
<PAGE> 30
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Advertising. Production costs for radio and television advertising are
expensed as of the date the commercials are initially aired. Advertising expense
totaled $16.3 million for the year ended December 31, 1997 and $9.9 million for
the seven months ended December 26, 1996, $6.7 million for the five months ended
May 23, 1996 and $16.3 million for the year ended December 31, 1995. Prepaid
advertising included in the Consolidated Balance Sheets totaled $0.5 million and
$0.1 million at December 31, 1997 and December 26, 1996, respectively.

Cash Overdrafts. The Company has included in accounts payable on the
accompanying balance sheets cash overdrafts totaling $7.6 million at December
31, 1997 and December 26, 1996.

Foreign Currency Exposure. The Company is the licensor of Coco's
restaurants in several foreign countries. Royalties due to the Company are paid
in foreign currency based on sales attributable to such Coco's. The receivable
balance at December 31, 1997 primarily represented ten months of Coco's Japan
royalties expected to be received in March 1998. Because this royalty is paid
annually, the Company has potential exposure that exchange rates may fluctuate
causing an unfavorable impact on the receivable balance. At December 31, 1997
and December 26, 1996, the net royalty receivable amounted to $2.2 million and
$2.8 million, respectively.

Unaudited Pro Forma Information. In accordance with the principles of SOP
90-7, the reorganization will result in the application of fresh start reporting
which results in the revaluation of assets and liabilities to estimated current
fair value. The revaluation reflects adjustments for fresh start reporting,
which include (i) the adjustment of property, net to estimated fair value, (ii)
the write-off of unamortized goodwill, and establishment of estimated fair value
of other intangible assets (primarily franchise rights and tradenames), (iii)
the establishment of reorganization value in excess of amounts allocable to
identifiable assets, (iv) the increase in value of debt to reflect estimated
fair value, (v) the recognition of liabilities associated with severance and
other exit costs, and the adjustments to self-insured claims and contingent
liabilities reflecting a change in methodology, and (vi) the adjustment to
reflect the new value of common shareholder's equity based on reorganization
value, which was determined by estimating the fair value of the Company. The
fair value of identifiable assets and liabilities has been determined based on
certain valuations and other studies which are not yet completed. Because the
current valuation is preliminary in nature, further adjustments may be required.

New Accounting Standards. In June 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for
reporting and display of comprehensive income and its components in the
financial statements. SFAS 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company is in the process of
determining its preferred presentation format under the new standard. The
adoption of SFAS 130 will have no impact on the Company's consolidated results
of operations, financial position or cash flows and will be implemented by the
Company in the fourth quarter of 1998.

In March 1998, the AIPCA issued Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP
98-1"), which provides guidance on accounting for the costs of computer software
developed or obtained for internal use. SOP 98-1 requires external and internal
direct costs of developing or obtaining internal-use software to be capitalized
as a long-lived asset and also requires training costs included in the purchase
price of computer software and costs associated with research and development to
be expensed as incurred. In addition, in the second quarter of 1998, the AICPA
is expected to issue a statement of position which provides additional guidance
on the financial reporting of start-up costs, requiring costs of start-up
activities to be expensed as incurred.

F-10
<PAGE> 31
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Both statements of position are effective for fiscal years beginning after
December 15, 1997. In accordance with the adoption of fresh start reporting upon
emergence from bankruptcy (See Note 1), the Company will adopt both statements
of position as of January 7, 1998. The adoption of the statement of position
relative to start-up costs at January 7, 1998 will result in the write-off of
previously capitalized pre-opening costs totaling $0.1 million. Subsequent to
the Effective Date, pre-opening costs will be expensed as incurred. The adoption
of SOP 98-1 at January 7, 1998 will result in the write-off of previously
capitalized direct costs of obtaining computer software associated with research
and development totaling $0.4 million. Subsequent to the Effective Date, similar
costs will be expensed as incurred.

NOTE 3: RECEIVABLES

A summary of receivables follows (in thousands):

<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Trade, principally credit cards......................... $ 801 $1,521
License and franchise fees and related receivables,
net................................................... 2,351 2,840
Receivable from distributors............................ -- 709
Other................................................... 1,321 918
------ ------
$4,473 $5,988
====== ======
</TABLE>

NOTE 4: OTHER CURRENT ASSETS

A summary of other current assets follows (in thousands):

<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Prepaid rent............................................ $1,889 $2,006
Prepaid other........................................... 3,207 2,462
Note receivable......................................... 188 --
Amount in escrow from sale of units..................... 4,036 --
------ ------
$9,320 $4,468
====== ======
</TABLE>

NOTE 5: NET ASSETS HELD FOR SALE

Net Assets Held for Sale at December 26, 1996 represent one restaurant unit
and the White Road Facility in California, which includes the FRD Commissary.
The assets are recorded at their estimated fair value less costs to sell. These
assets were sold during 1997. Because the assets were recorded at estimated fair
values in accordance with purchase accounting at the time of the acquisition, no
gain or loss was recorded relative to the transactions.

NOTE 6: PROPERTY AND EQUIPMENT

A summary of property and equipment follows (in thousands):

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land.................................................. $ 2,383 $ 2,383
Buildings and improvements............................ 96,731 91,251
Furniture, fixtures and equipment..................... 48,041 55,121
Projects under construction........................... 4,520 832
-------- --------
151,675 149,587
Less accumulated depreciation and amortization........ (34,346) (14,611)
-------- --------
$117,329 $134,976
======== ========
</TABLE>

Property under capitalized leases in the amount of $31.9 million and $31.2
million at December 31, 1997 and December 26, 1996, respectively, is included in
buildings and improvements. Accumulated amortization of property under

F-11
<PAGE> 32
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6: PROPERTY AND EQUIPMENT -- Continued
capital leases amounted to $9.0 million and $3.6 million at December 31, 1997
and December 26, 1996, respectively. Capital leases primarily relate to the
building on certain restaurants properties. The land portions of these leases
are accounted for as operating leases.

A majority of the capitalized and operating leases have original terms of 25
years, and substantially all of these leases expire in the year 2005 or later.
Most leases have renewal options. The leases generally provide for payment of
minimum annual rent, real estate taxes, insurance and maintenance and, in most
cases, contingent rent, calculated as a percentage of sales, in excess of
minimum rent. The total amount of contingent rent under capitalized leases for
the year ended December 31, 1997, the seven months ended December 26, 1996, the
five months ended May 23, 1996 and the year ended December 31, 1995 was $2.3
million, $1.7 million, $0.8 million and $3.1 million, respectively. Total rental
expense for all operating leases comprised the following (in thousands):

<TABLE>
<CAPTION>
YEAR SEVEN MONTHS FIVE MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 26, MAY 23, DECEMBER 31,
1997 1996 1996 1995
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Minimum rent...................................... $23,536 $ 9,801 $6,530 $13,911
Contingent rent................................... 3,975 2,800 1,386 2,245
Sublease rent..................................... (93) (150) (29) (321)
------- ------- ------ -------
$27,418 $12,451 $7,887 $15,835
======= ======= ====== =======
</TABLE>

At December 31, 1997, the present value of capitalized lease obligations and
the future minimum lease payments on noncancelable operating leases were (in
thousands):

<TABLE>
<CAPTION>
CAPITAL LEASES
--------------------------------
MINIMUM LEASE MINIMUM SUBLEASE OPERATING MINIMUM SUBLEASE
DUE IN: PAYMENTS RECEIPTS LEASES RECEIPTS
- ------- ------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
1998....................................... $ 5,994 $ 630 $ 16,329 $ 854
1999....................................... 5,557 577 15,734 824
2000....................................... 4,862 574 14,928 767
2001....................................... 4,286 459 13,845 659
2002....................................... 3,610 285 12,312 583
Thereafter................................. 6,989 644 80,679 3,703
------- ------ -------- ------
Total minimum lease payments..... 31,298 $3,169 $153,827 $7,390
====== ======== ======
Less imputed interest...................... 9,086
-------
Present value of minimum lease
payments....................... $22,212
=======
</TABLE>

Payments for certain FRD operating leases are being made by FRI in
accordance with the provisions of the Stock Purchase Agreement. As such, these
payments have been excluded from the amount of minimum lease payments and
minimum sublease receipts reported above.

NOTE 7: OTHER ASSETS

A summary of other assets follows (in thousands):

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Debt issuance costs, net............................. $ 3,014 $ 4,327
Other................................................ 3,338 599
------- -------
$ 6,352 $ 4,926
======= =======
</TABLE>

F-12
<PAGE> 33
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8: DEBT

Long-term debt, including capitalized lease obligations, is comprised of the
following (in thousands):

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
12 1/2% Senior Notes due July 15, 2004, interest
payable semi-annually............................ $156,897 $156,897
Term Loan, principal payable quarterly............. 40,000 56,000
Capitalized lease obligations...................... 22,212 25,034
Other.............................................. -- 144
-------- --------
Total.............................................. 219,109 238,075
Less current maturities............................ (23,457) (19,578)
-------- --------
$195,652 $218,497
======== ========
</TABLE>

In connection with the acquisition of FRI-M, the Company entered into a
credit agreement (the "Credit Agreement") on May 23, 1996 which provides for a
$56.0 million term loan (the "Term Loan") and a $35.0 million revolving credit
facility (the "Revolving Credit Facility"), which is also available for letters
of credit. At December 31, 1997, the amount of the Term Loan outstanding was
$40.0 million and the Company had no outstanding working capital borrowings;
however, letters of credit outstanding were $19.8 million. Principal
installments of the term loan are payable quarterly as follows: $4 million per
quarter for four consecutive quarters beginning February 28, 1997; $5 million
for four consecutive quarters beginning February 28, 1998; $6 million on
February 28, 1999; and $7 million for two consecutive quarters beginning May 31,
1999. The Revolving Credit Facility expires, and all amounts outstanding under
the facility must be repaid, on August 31, 1999. All borrowings under the Credit
Agreement accrue interest at a variable rate based on a base rate or an adjusted
Eurodollar rate (8.4375% at December 31, 1997) and are secured by the issued and
outstanding stock, as well as substantially all the assets, of FRD and its
subsidiary.

The Credit Agreement and indenture under which the Senior Notes have been
issued contain a number of restrictive covenants which, among other things,
limit (subject to certain exceptions) FRD and its subsidiaries with respect to
incurrence of debt, existence of liens, investments and joint ventures, the
declaration or payment of dividends, the making of guarantees and other
contingent obligations, mergers, the sale of assets, capital expenditures and
material changes in their business. In addition, the Credit Agreement contains
certain financial covenants including provisions for the maintenance of a
minimum level of interest coverage (as defined), limitations on ratios of
indebtedness (as defined) to earnings before interest, taxes, depreciation and
amortization (EBITDA), maintenance of a minimum level of EBITDA and limitations
on annual capital expenditures.

Aggregate annual maturities during the next five years and thereafter of
long-term debt are as follows (in thousands):

The estimated fair value of the Company's long-term debt (excluding capital
lease obligations of $22.2 million) is $210.2 million at December 31, 1997. Such
amount is based on market quotations.

F-13
<PAGE> 34
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 9: INCOME TAXES

A summary of the provision for (benefit from) income taxes for the year
ended December 31, 1997 and the seven months ended December 26, 1996 is as
follows (in thousands):

<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 DECEMBER 26, 1996
------------------ -----------------
<S> <C> <C>
Current:
Federal.......................... $ (140) $199
State, foreign and other......... 487 261
------- ----
347 460
------- ----
Deferred:
Federal.......................... (4,144) --
State, foreign and other......... (39) --
------- ----
(4,183) --
------- ----
Total provision for
(benefit from) income
taxes.................. $(3,836) $460
======= ====
</TABLE>

The pro forma provision for income taxes in the combined financial
statements for the five months ended May 23, 1996 and the year ended December
31, 1995 are equal to 40% of income before taxes, excluding the amortization of
certain intangible assets.

Subsequent to May 23, 1996, the Company joined with Advantica in the filing
of consolidated federal and certain consolidated state income tax returns. The
Company is a party to a tax-sharing agreement with Advantica that provides for
the Company to pay to Advantica the amount of the current income tax liability
the Company would have had if the Company had filed separate federal and state
income tax returns.

The following represents the approximate tax effect of each significant type
of temporary difference and carryforward giving rise to deferred income tax
assets or liabilities as of December 31, 1997 and December 26, 1996:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 26,
1997 1996
------------ ------------
<S> <C> <C>
(In thousands)
Deferred tax assets:
Self-insurance reserves.................. $ 5,248 $ 6,679
Amortization of intangible assets........ 4,974 5,636
Capitalized leases....................... -- 1,445
Other accruals and reserves.............. 4,108 4,368
General business credit carryforwards.... 4,302 --
Capital loss carryforwards............... 10,280 --
Net operating loss carryforwards......... 15,010 --
Alternative minimum tax credit
carryforwards......................... 56 100
Less: valuation allowance.................. (14,800) (8,665)
-------- -------
Total deferred tax assets.................. 29,178 9,563
-------- -------
Deferred tax liabilities:
Depreciation of fixed assets............. 3,498 9,563
Intangible assets........................ 193 --
-------- -------
Total deferred tax liabilities............. 3,691 9,563
-------- -------
Total deferred income tax assets........... $ 25,487 $ --
======== =======
</TABLE>

While there can be no assurance that the Company will generate any earnings
or any specific level of earnings in future years, management believes it is
more likely than not that the Company will realize the majority of the benefit
of the existing net deferred tax assets at December 31, 1997 based on the
Company's current, historical and future pretax earnings.

F-14
<PAGE> 35
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 9: INCOME TAXES -- Continued
Deferred tax assets result from the recognition of certain net operating loss
carryforwards and other deferred tax assets resulting from the acquisition of
FRI-M. The recognition of these acquired deferred tax assets has been reflected
in the excess of the purchase price over the fair value of the net assets
acquired (See Note 1).

The difference between the statutory federal income tax rate and the
effective tax rate for the year ended December 31, 1997 and the seven months
ended December 26, 1996 is as follows:

<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS ENDED
DECEMBER 31, DECEMBER 26,
1997 1996
------------ ------------------
<S> <C> <C>
Statutory rate.............................................. 35% 35%
Difference:
State, foreign and other taxes, net of federal income tax
benefit................................................ (7) (3)
Amortization of goodwill.................................. (33) (21)
FICA tip credits.......................................... 72 --
Non-deductible wages related to the FICA tip credits...... (25) --
Decrease (increase) in the valuation allowance............ 19 (19)
Other..................................................... 3 --
--- ---
Effective tax rate.......................................... 64% (8)%
=== ===
</TABLE>

At December 31, 1997 the Company has available, for purposes of its tax
sharing agreement with Advantica, alternative minimum tax ("AMT") credits of
approximately $56,000. Such AMT credits may be carried forward indefinitely. The
Company also has regular and alternative minimum tax net operating loss
carryovers of approximately $38 million and $6 million, respectively. In
addition, the Company has capital loss carryovers of approximately $26 million
and FICA tip credit carryovers of approximately $4 million. The FICA tip credit
carryovers expire in 2011 and 2012.

In connection with the purchase of FRI-M in 1996, the Company acquired
certain income tax attributes which may be used to offset only the separate
taxable income of FRI-M and its subsidiaries. Approximately $35 million of
regular net operating loss carryforwards and $30 million of regular and AMT
capital loss carryforwards were acquired in the purchase of FRI-M. Due to
FRI-M's ownership changes in January 1994 and again in May 1996, FRI-M's ability
to utilize these loss carryforwards, which arose prior to the ownership changes,
is limited. Approximately $2 million of the acquired regular net operating loss
carryforwards were utilized to offset 1996 post-acquisition taxable income. The
annual limitation for the utilization of approximately $22 million of the
acquired net operating loss carryforwards which were generated after January
1994 is approximately $4 million. The remaining $11 million of the Company's net
operating loss carryforwards which were generated prior to January 1994 can be
utilized only to offset any pre-January 1994 built-in-gains which are recognized
in certain future periods. These net operating loss carryforwards expire
principally in 2006 through 2010. FRI-M's capital loss carryforward of $26
million can be utilized only to offset capital gains generated by the Company or
its subsidiaries. The Company's capital loss carryforwards are also subject to
the same $4 million annual limitation as the net operating losses generated
after January 1994. In 1997, the Company recognized approximately $4 million of
capital gains which were utilized to offset some of the capital loss carryover.
The remaining capital loss carryforward of approximately $26 million will expire
in 2000.

NOTE 10: EMPLOYEE BENEFIT PLANS

In connection with the acquisition, certain employees of the Company became
eligible to participate in incentive compensation plans sponsored by Advantica
which provide for awards to management employees based on meeting or exceeding
certain performance targets as defined by such plans. Total expense for these
plans included in the Statement of Consolidated Operations was $3.4 million for
the year ended December 31, 1997 and $2.6 million for the seven months ended
December 26, 1996.

Certain Company employees became eligible to participate in Advantica's
401(k) defined contribution plan on April 1, 1997, whereby eligible employees
can elect to contribute from 1% - 15% of their compensation to the plan. The
Company makes matching contributions, with certain limitations. The amount
charged to income under this plan was approximately $18,000 for the year ended
December 31, 1997.

F-15
<PAGE> 36
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10: EMPLOYEE BENEFIT PLANS -- Continued
FRI maintained several incentive compensation and related plans for
executives and key operating personnel, including restaurant and field
management of its subsidiaries, including FRD Predecessor. Total expenses for
these plans included in the Statement of Combined Operations were $2.5 million
for the five months ended May 23, 1996 and $2.2 million for the year ended
December 31, 1995.

FRD Predecessor participated in savings and investment plans sponsored by
FRI. Substantially all of FRD Predecessor's salaried employees were eligible to
participate in the plans. Total expenses under such plans included in the
statements of combined operations were $12,400 for the five months ended May 23,
1996 and $159,000 for the year ended December 31, 1995.

Effective with the acquisition, FRI-M employees may no longer participate in
FRI benefit plans.

During 1996, certain employees of FRD were granted stock options under FCI's
1989 Stock Option Plan (the "1989 Plan") which is described below. Advantica and
FRD have adopted the disclosure-only provisions of Financial Accounting
Standards Board Statement 123, "Accounting for Stock Based Compensation" ("SFAS
123"), while continuing to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for their stock-based compensation plans. Under
APB 25, because the exercise price of the Company's employee stock options
equals or exceeds the market price of the underlying stock on the date of grant,
no compensation expense is recognized.

The 1989 Plan permits a Committee of the Board of Directors to grant options
to key employees of Advantica and its subsidiaries to purchase shares of Old
Common Stock (as defined in Note 15) at a stated price established by the
Committee. Such options are exercisable at such time or times either in whole or
part, as determined by the Committee. The 1989 Plan authorizes grants of up to
6.5 million common shares. The exercise price of each option equals or exceeds
the market price of Old Common Stock on the date of grant. Options granted to
officer level employees vest at a rate of 20% per annum beginning on the first
anniversary date of the grant. Options granted to non-officer level employees
prior to August 13, 1996 vest at a rate of 25% per annum. Those granted on
August 13, 1996 or subsequent thereto vest at a rate of 20% per annum. If not
exercised, all options expire ten years from the date of grant.

On December 13, 1996, the outstanding $6.00 options of certain officers and
senior staff, representing approximately 307,400 outstanding options, were
repriced to $1.25 per share, the closing price of the Old Common Stock on
December 12, 1996. The repricing did not impact the option vesting schedules.

During January 1997, a total of 291,000 options relative to the 1989 Plan
were issued. Options forfeited during the year totaled approximately 1,070,000.
No options were exercised during the year. On the Effective Date of FCI's
emergence from bankruptcy, pursuant to the Plan, FCI's Old Common Stock was
canceled, extinguished and retired. As a result, all stock options outstanding
as of that date, including those under the 1989 Plan, were effectively canceled.
Due to the insignificant quantity of options issued during 1997 and the fact
that all options were issued at an exercise price which exceeded the market
price of the Old Common Stock upon issuance and through January 7, 1998, the
date upon which all outstanding options were effectively canceled, the effect on
the accompanying Statement of Consolidated Operations for the year ended
December 31, 1997 of the compensation expense calculated under SFAS 123 related
to such issuance is not material and, accordingly, is not presented.

Pro forma information regarding net income is required by SFAS 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that statement. FRD is a wholly owned subsidiary
of Advantica and accordingly, per share date is not meaningful and has not been
provided. The fair value of the options granted in 1996 was estimated at the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: divided yield of 0.0%; expected volatility of
0.438; risk-free interest rate of 5.7%; and a weighted average expected life of
the options of 8.9 years.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Such pro forma
disclosures are not presented because the impact on the Company's net income for
the year ended December 31, 1997 and the seven months ended December 26, 1996
would have been immaterial if the options granted during that period had been
accounted for in accordance with SFAS 123.

F-16
<PAGE> 37
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10: EMPLOYEE BENEFIT PLANS -- Continued
A summary of the 1989 Plan as it relates to options granted to FRD employees
as of December 26, 1996 and changes during the seven months ended December 26,
1996 is presented below. This summary and the following summary of information
about stock options outstanding are not updated for 1997 activity as discussed
above, based on the insignificance of such activity and the cancellation of all
stock option plans relative to the Old Common Stock effective January 7, 1998.

<TABLE>
<CAPTION>
OPTIONS WEIGHTED-AVERAGE
(IN THOUSANDS) EXERCISE PRICE
-------------- ----------------
<S> <C> <C>
Outstanding at May 24, 1996................................. $ 60,000 $6.00
Granted:
Exercise price equals market price........................ 35,400 2.75
Exercise price exceeds market price....................... 557,800 3.38
Exercised
Forfeited/Expired........................................... (334,800) 5.66
--------- -----
Outstanding at December 26, 1996............................ $ 318,400 $1.41
========= =====
Options exercisable December 26, 1996....................... $ 12,000 $1.25
========= =====
Weighted-average fair value of options granted during the
year:
Exercise price equals market price........................ $ 1.76
Exercise price exceeds market price....................... $ 1.06
</TABLE>

Options outstanding at May 24, 1996 represent options granted to former
Flagstar employees who are now FRD employees.

Pursuant to the Plan, and shortly after its effective date, Advantica
adopted The Advantica Restaurant Group Stock Option Plan (the "Non-Officer
Plan") and The Advantica Restaurant Group Officer Stock Option Plan (the
"Officer Plan" and, together with the Non-Officer Plan, the "New Stock Option
Plans"). The New Stock Option Plans are designed to facilitate awarding stock
options as incentives to employees and consultants of Advantica.

The New Stock Option Plans shall be administered by the Compensation and
Incentives Committee of the Advantica Board, who shall have sole discretion to
determine the exercise price, term and vesting schedule of options awarded under
such plans. A total of 4,888,888 shares of Advantica Common Stock are authorized
to be issued under these plans.

Under the terms of the plans, optionees who terminate for any reason other
than cause or death will be allowed 60 days after the termination date to
exercise "vested" options. "Vested" options are exercisable for one year when
termination is by a reason other than voluntary termination or for cause. If
termination is for cause, no option shall be exercisable after the termination
date.

In addition to the New Stock Option Plans, Advantica has adopted The
Advantica Restaurant Group Director Stock Option Plan (the "Director Plan"), the
terms of which are substantially similar to the terms of the New Stock Option
Plans. A total of 200,000 shares of Advantica Common Stock are authorized to be
issued under the Director Plan. Both the Director Plan and the Officer Plan are
contingent upon receiving shareholder approval at Advantica's 1998 annual
shareholders' meeting.

NOTE 11: REORGANIZATION ITEMS

Reorganization items include professional fees and other expenditures
incurred by the Company as a result of the Advantica bankruptcy and the planned
"push down" of fresh start reporting from Advantica.

NOTE 12: COMMITMENTS AND CONTINGENCIES

The Company is involved in various litigation matters incidental to their
business. The Company does not believe that any of the claims or actions filed
against it will have a material adverse effect upon the consolidated financial
position and results of operations of the Company.

On February 22, 1996, Advantica entered into an agreement with IBM Global
Services ("IBM") (formerly Integrated Systems Solutions Corporation). The
agreement provides for IBM to manage and operate Advantica's information
systems,

F-17
<PAGE> 38
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 12: COMMITMENTS AND CONTINGENCIES -- Continued
as well as develop and implement new systems and applications to enhance
information technology. Under the agreement, IBM has full oversight
responsibility for the data center operations, applications development and
maintenance, voice and data networking, help desk operations and point-of-sale
technology. In connection with the acquisition of FRI-M, an addendum to the IBM
contract, effective January 2, 1997, was signed for the general purpose of
incorporating FRD into the original agreement. In accordance with the addendum,
the Company is required to pay IBM approximately $54.6 million over ten years.

NOTE 13: SHAREHOLDER'S EQUITY

<TABLE>
<CAPTION>
TOTAL
TOTAL SHAREHOLDER'S
OTHER EQUITY DEFICIT EQUITY (DEFICIT)
------------ ------- ----------------
<S> <C> <C> <C>
(In thousands)
Balance May 24, 1996........................................ $ -- $ -- $ --
Activity:
Capital contribution...................................... 75,000 75,000
Net loss.................................................. -- (6,189) (6,189)
------- ------- -------
Balance December 26, 1996................................... 75,000 (6,189) 68,811
------- ------- -------
Activity:
Net loss.................................................. -- (2,178) (2,178)
------- ------- -------
Balance December 31, 1997................................... $75,000 $(8,367) $66,633
======= ======= =======
</TABLE>

See Note 14 Related Party Transactions for a summary of the combined equity
activity for the five months ended May 23, 1996 and the year ended December 31,
1995.

NOTE 14: RELATED PARTY TRANSACTIONS

During the third and fourth quarter of 1997, the Company sold two of its
operating units to Denny's Inc., another wholly-owned subsidiary of Advantica.
Gross proceeds on the sales amounted to $0.8 million with gains of $0.6 million
included in operating income for the year ended December 31, 1997.

Certain administrative functions are provided for the Company by Advantica.
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 Advantica under the management service
agreement, are included in operating expenses and totaled $2.5 million for the
year ended December 31, 1997. Payment of the fees to Advantica 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 Advantica in
the Consolidated Balance Sheets. Advantica's method of allocating these expenses
is not the only reasonable method and other reasonable methods of allocation
might produce different results. Prior to acquisition of FRI-M by FRD, FRI
provided certain financial, administrative, legal and staff functions and
services to FRI-M, which were allocated based on the number of open and
operating units. Management considered this method to be reasonable. The
management fee for these services was $1.6 million for the five months ended May
23, 1996.

Interest expense associated with the FRI-M Credit Facility was allocated to
the FRI subsidiaries, including FRI-M, during the five months ended May 23, 1996
and the year ended December 31, 1995 based on current liabilities outstanding.

Prior to the acquisition, FRI-M deposited cash in excess of its operating
requirements with FRI, and FRI advanced funds to FRI-M to finance expansion of
its restaurant business. These deposits and advances were made on an
interest-free basis.

Prior to the acquisition, FRI-M was charged premiums by FRI for certain
insurance coverage provided under FRI insurance plans (employee group medical
and life, workers' compensation, general liability and property insurance).
During the five months ended May 23, 1996 and the year ended December 31, 1995
such premium charges amounted to $7.1 million and $12.7 million, respectively.

F-18
<PAGE> 39
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 14: RELATED PARTY TRANSACTIONS -- Continued
A summary of the combined equity activity for the five months ended May 23,
1996 and the year ended December 31, 1995 follows. FRI Predecessor information
is not presented as it is not considered relevant.

<TABLE>
<CAPTION>
FIVE MONTHS ENDED YEAR ENDED
MAY 23, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
(In thousands)
Net combined equity, beginning of period.................... $152,601 $192,354
Allocation of management expenses........................... 1,630 2,634
Pro forma income tax provision.............................. 2,160 6,670
Repayments (borrowings) on revolving credit facility........ 79,815 (15,786)
Self-insurance premium charges.............................. 7,089 12,730
Change in intercompany...................................... (37,745) (50,725)
Net income.................................................. 1,101 4,724
-------- --------
Net combined equity, end of period.......................... $206,651 $152,601
======== ========
</TABLE>

NOTE 15: SUBSEQUENT EVENTS -- FCI FINANCIAL RESTRUCTURING

On January 7, 1998, FCI and Flagstar emerged from proceedings under Chapter
11 of Title 11 of the United States Code (the "Bankruptcy Code") pursuant to FCI
and Flagstar's Plan dated as of November 7, 1997. FCI's operating subsidiaries,
including the Company, did not file bankruptcy petitions and were not parties to
the above mentioned Chapter 11 proceedings.

Material features of the Plan as it became effective as of January 7, 1998,
are as follows:

(a) On the Effective Date, Flagstar merged with and into FCI, the surviving
corporation, and FCI changed its name to Advantica Restaurant Group, Inc.;

(b) The following securities of FCI and Flagstar were canceled, extinguished
and retired as of the Effective Date: (i) Flagstar's 10 7/8% Senior Notes due
2002 and 10 3/4% Senior Notes due 2001 (collectively with the 10 7/8% Senior
Notes due 2002, the "Old Senior Notes"), (ii) Flagstar's 11.25% Senior
Subordinated Debentures due 2004 and 11 3/8% Senior Subordinated Debentures due
2003 (collectively with the 11.25% Senior Subordinated Debentures due 2004 the
"Senior Subordinated Debentures"), (iii) Flagstar's 10% Convertible Junior
Subordinated Debentures due 2014 (the "10% Convertible Debentures"), (iv) FCI's
$2.25 Series A Cumulative Convertible Exchangeable Preferred Stock and (v) FCI's
$.50 par value common stock (the "Old Common Stock");

(c) Advantica had 100 million authorized shares of Common Stock (of which 40
million were deemed issued and outstanding on the Effective Date pursuant to the
Plan subject to completion of the exchange of securities as contemplated by such
plan) and 25 million authorized shares of preferred stock (none of which are
currently outstanding). Pursuant to the Plan of Reorganization, ten percent of
the number of shares of Common Stock issued and outstanding on the Effective
Date, on a fully diluted basis, is reserved for issuance under a new management
stock option program. Additionally, 4 million shares of Common Stock are
reserved for issuance upon the exercise of new warrants expiring January 7, 2005
that were deemed issued and outstanding on the Effective Date and entitle the
holders thereof to purchase in the aggregate 4 million shares of Common Stock at
an exercise price of $14.60 per share (the "Warrants");

(d) Each holder of the Old Senior Notes received such holder's pro rata
portion of 100% of Advantica's 11 1/4% Senior Notes due 2007 (the "New Senior
Notes") in exchange for 100% of the principal amount of such holders' Old Senior
Notes and accrued interest through the Effective Date;

(e) Each holder of the Senior Subordinated Debentures received each holder's
pro rata portion of shares of Common Stock equivalent to 95.5% of the Common
Stock issued on the Effective Date;

(f) Each holder of the 10% Convertible Debentures received such holder's pro
rata portion of (i) shares of Common Stock equivalent to 4.5% of the Common
Stock issued on the Effective Date and (ii) 100% of the Warrants issued on the
Effective Date; and

(g) Advantica refinanced its prior credit facilities by entering into a new
credit facility with The Chase Manhattan Bank ("Chase") and other lenders named
therein, providing Advantica (excluding FRI-M) with a $200 million senior
revolving credit facility (the "Credit Facility").

F-19
<PAGE> 40

SCHEDULE I

FRD ACQUISITION CO.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 26, 1996
(In thousands) ----------------- -----------------
<S> <C> <C>
ASSETS
Deferred financing costs, net of accumulated amortization
1997 -- $208; 1996 -- $81................................. $ 961 $ 1,088
Investment in subsidiary.................................... 305,177 287,362
-------- --------
Total assets................................................ $306,138 $288,450
======== ========
LIABILITIES AND EQUITY
Current liabilities:
Accrued interest.......................................... $ 8,989 $ 8,692
-------- --------
8,989 8,692
Long-term liabilities:
Payable to subsidiary..................................... 73,619 54,050
Notes payable............................................. 156,897 156,897
-------- --------
Total long-term liabilities................................. 230,516 210,947
Equity
Paid-in capital............................................. 75,000 75,000
Deficit..................................................... (8,367) (6,189)
-------- --------
Total stockholder's equity.................................. 66,633 68,811
-------- --------
$306,138 $288,450
======== ========
</TABLE>

S-1
<PAGE> 41

SCHEDULE I

FRD ACQUISITION CO.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR SEVEN MONTHS
ENDED ENDED
DECEMBER 31, 1997 DECEMBER 26, 1996
(In thousands) ----------------- -----------------
<S> <C> <C>
Operating Income............................................ $ -- $ --
Other income (expense):
Equity in net income of subsidiary........................ 17,815 5,465
Interest expense.......................................... (19,993) (11,654)
-------- --------
Total other income (expense)...................... (2,178) (6,189)
-------- --------
Net loss.................................................... $ (2,178) $ (6,189)
======== ========
</TABLE>

S-2
<PAGE> 42

SCHEDULE I

FRD ACQUISITION CO.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR SEVEN MONTHS
ENDED ENDED
DECEMBER 31, 1997 DECEMBER 26, 1996
(In thousands) ----------------- -----------------
<S> <C> <C>
Cash Flows Used in Operating Activities:
Net Loss.................................................. $ (2,178) $ (6,189)
Amortization of deferred financing costs.................. 127 81
Equity in net income from subsidiary...................... (17,815) (5,465)
Increase in accrued interest payable...................... 297 8,692
-------- ---------
Net cash used in operating activities....................... (19,569) (2,881)
Cash Flows Used in Investing Activities:
Acquisition of subsidiary................................. -- (125,000)
-------- ---------
Net cash flows used in investing activities................. -- (125,000)
Cash Flows Provided by Financing Activities:
Increase in payable to subsidiary......................... 19,569 54,050
Deferred financing costs.................................. -- (1,169)
Capital contribution from Advantica....................... -- 75,000
-------- ---------
Net cash flows provided by financing activities............. 19,569 127,881
Net Change in Cash.......................................... -- --
-------- ---------
Cash at Beginning and End of Period......................... $ -- $ --
======== =========
Cash Paid for Interest...................................... $ 19,569 $ 2,881
======== =========
</TABLE>

Notes to Condensed Financial Information

Note 1: The condensed financial information included in this schedule reflects
FRD Acquisition Co.'s investment in FRI-M, its wholly-owned subsidiary, on the
equity method. FRD Acquisition Co. was formed to acquire the stock of FRI-M.
Such acquisition occurred May 23, 1996 and was effected when FRD paid cash of
$125,000,000 and issued notes payable of $150,000,000 (subsequently increased by
$6,896,902).

Note 2: The 12.5% Senior Notes are due July 2004. Interest is payable
semi-annually.

S-3
<PAGE> 43

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

FRD ACQUISITION CO.

By: /s/ RONALD B. HUTCHISON
--------------------------------------
Ronald B. Hutchison
(Executive Vice President)

Date: March 31, 1998

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ CRAIG S. BUSHEY President March 31, 1998
- ----------------------------------------------------- (Principal Executive Officer)
(Craig S. Bushey)

/s/ DAVID O. DEVOY Vice President, Finance and March 31, 1998
- ----------------------------------------------------- Chief Financial Officer
(David O. Devoy) (Principal Financial and
Accounting Officer)

/s/ JAMES B. ADAMSON Director March 31, 1998
- -----------------------------------------------------
(James B. Adamson)

/s/ ROBERT H. ALLEN Director March 31, 1998
- -----------------------------------------------------
(Robert H. Allen)

/s/ RONALD E. BLAYLOCK Director March 31, 1998
- -----------------------------------------------------
(Ronald E. Blaylock)

/s/ VERA KING FARRIS Director March 31, 1998
- -----------------------------------------------------
(Vera King Farris)

/s/ JAMES J. GAFFNEY Director March 31, 1998
- -----------------------------------------------------
(James J. Gaffney)

/s/ IRWIN N. GOLD Director March 31, 1998
- -----------------------------------------------------
(Irwin N. Gold)

/s/ DARRELL JACKSON Director March 31, 1998
- -----------------------------------------------------
(Darrell Jackson)

/s/ ROBERT E. MARKS Director March 31, 1998
- -----------------------------------------------------
(Robert E. Marks)

/s/ CHARLES F. MORAN Director March 31, 1998
- -----------------------------------------------------
(Charles F. Moran)

/s/ ELIZABETH A. SANDERS Director March 31, 1998
- -----------------------------------------------------
(Elizabeth A. Sanders)

/s/ DONALD R. SHEPHERD Director March 31, 1998
- -----------------------------------------------------
(Donald R. Shepherd)
</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS OF FRD ACQUISITION CO., AS
CONTAINED IN FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,051
<SECURITIES> 0
<RECEIVABLES> 6,343
<ALLOWANCES> 0
<INVENTORY> 3,758
<CURRENT-ASSETS> 28,472
<PP&E> 151,675
<DEPRECIATION> (34,346)
<TOTAL-ASSETS> 371,528
<CURRENT-LIABILITIES> 97,130
<BONDS> 195,652
0
0
<COMMON> 0
<OTHER-SE> 66,633
<TOTAL-LIABILITY-AND-EQUITY> 371,528
<SALES> 0
<TOTAL-REVENUES> 492,493
<CGS> 0
<TOTAL-COSTS> 465,407
<OTHER-EXPENSES> 2,975
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,597
<INCOME-PRETAX> (6,014)
<INCOME-TAX> (3,836)
<INCOME-CONTINUING> (2,178)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,178)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>

<PAGE> 1
EXHIBIT 99

SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. The Company desires to
take advantage of the "safe harbor" provisions of the Act. Certain information,
particularly information regarding future economic performance, finances and
management's plans and objectives, contained or incorporated by reference in the
Company's 1997 Annual Report on Form 10-K is forward-looking. In some cases
information regarding certain important factors that could cause actual results
to differ materially from any such forward-looking statement appear together
with such statement. Also, the following factors, in addition to other possible
factors not listed, could affect the Company's actual results and cause such
results to differ materially from those expressed in forward-looking statements:

Competition. The Company's future performance will be subject to a number
of factors that affect the restaurant industry generally, including competition.
The restaurant business is highly competitive and the competition can be
expected to increase. Price, restaurant location, food quality, quality and
speed of service and attractiveness of facilities are important aspects of
competition as are the effectiveness of marketing and advertising programs. The
competitive environment is also often affected by factors beyond the Company's
or a particular restaurant's control. The Company's restaurants compete with a
wide variety of restaurants ranging from national and regional restaurant chains
(some of which have substantially greater financial resources than the Company)
to locally-owned restaurants. There is also active competition for advantageous
commercial real estate sites suitable for restaurants.

Economic, Market and Other Conditions. Food service businesses are often
affected by changes in consumer tastes, national, regional and local economic
conditions and demographic trends. The performance of individual restaurants may
be adversely affected by factors such as traffic patterns, demographic
considerations and the type, number and location of competing restaurants.
Multi-unit food service chains such as the Company's can also be materially and
adversely affected by publicity resulting from food quality, illness, injury or
other health concerns or operating issues stemming from one restaurant or a
limited number of restaurants. Dependence on frequent deliveries of fresh
produce and groceries subjects food service businesses to the risk that
shortages or interruptions in supply, caused by adverse weather or other
conditions could adversely affect the availability, quality and cost of
ingredients. In addition, unfavorable trends or developments concerning factors
such as inflation, increased food, labor and employee benefit costs (including
increases in hourly wage and minimum unemployment tax rates), regional weather
conditions and the availability of experienced management and hourly employees
may also adversely affect the food service industry in general and the Company's
results of operations and financial condition in particular.

Importance of Locations. The success of Company and franchised restaurants
is significantly influenced by location. There can be no assurance that current
locations will continue to be attractive, as demographic patterns change. It is
possible the neighborhood or economic conditions where restaurants are located
could decline in the future, resulting in potentially reduced sales in those
locations.

Government Regulations. The Company and its franchisees are subject to
Federal, state and local laws and regulations governing health, sanitation,
environmental matters, safety, the sale of alcoholic beverages and hiring and
employment practices. Restaurant operations are also subject to Federal and
state laws that prohibit discrimination and laws regulating the design and
operation of facilities, such as the American With Disabilities Act of 1990. The
operation of the Company's franchisee system is also subject to regulations
enacted by a number of states and to rules promulgated by the Federal Trade
Commission. The Company cannot predict the effect on its operations,
particularly on its relationship with franchisees, caused by the future
enactment of additional legislation regulating the franchise relationship.