SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended April 1, 1998, or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___________ to
___________
Commission file number 333-07601
FRD ACQUISITION CO.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 57-1040952
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3355 Michelson Dr., Suite 350
Irvine, California 92612
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(864) 597-8000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of May 15, 1998, 1000 shares of the registrant's Common Stock, $0.10 par
value per share, were outstanding, all of which were owned by the registrant's
parent, Advantica Restaurant Group, Inc.
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRD Acquisition Co.
Condensed Statements of Consolidated Operations
(Unaudited)
<TABLE>
<CAPTION>
Successor Company Predecessor Company
Twelve Weeks Ended One Week Ended Quarter Ended
April 1, 1998 January 7, 1998 April 2, 1997
------------------- ----------------- --------------
(In thousands)
<S> <C> <C> <C>
Net company sales $ 102,127 $ 8,266 $ 126,399
Franchise and foreign licensing revenue 1,038 115 636
--------- --------- ---------
Operating revenue 103,165 8,381 127,035
--------- --------- ---------
Operating expenses:
Product cost 26,565 2,255 34,113
Payroll and benefits 38,292 3,139 46,365
Amortization of reorganization value in excess of
amounts allocable to identifiable assets, net 9,377 -- --
Depreciation and amortization of property 5,660 469 6,052
Amortization of other intangibles 437 122 1,527
Management fees to Advantica 1,032 84 1,270
Allocated costs from Advantica 577 48 625
Other 25,870 2,218 31,289
--------- --------- ---------
107,810 8,335 121,241
--------- --------- ---------
Operating (loss) income (4,645) 46 5,794
--------- --------- ---------
Other charges (credits):
Interest and debt expense, net 6,517 585 7,503
Other, net (3) -- (134)
--------- --------- ---------
6,514 585 7,369
--------- --------- ---------
Loss before reorganization items and taxes (11,159) (539) (1,575)
Reorganization items -- (44,993) --
--------- --------- ---------
(Loss) income before taxes (11,159) 44,454 (1,575)
Provision for income taxes 113 11,367 53
--------- --------- ---------
Net (loss) income $ (11,272) $ 33,087 $ (1,628)
========= ========= =========
</TABLE>
See accompanying notes
2
<PAGE>
FRD Acquisition Co.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
April 1, 1998 December 31, 1997
--------------- ------------------
<S> <C> <C>
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 5,892 $ 9,051
Receivables 2,216 4,661
Receivable from Advantica -- 1,870
Inventories 3,421 3,758
Other 4,481 9,132
--------- ---------
16,010 28,472
--------- ---------
Property and equipment 146,318 151,675
Accumulated depreciation (5,565) (34,346)
--------- ---------
140,753 117,329
--------- ---------
Other Assets:
Goodwill, net -- 186,613
Other intangibles, net 43,902 7,275
Deferred taxes 15,037 25,487
Other 4,721 6,352
Reorganization value in excess of amounts allocable to
identifiable assets, net 193,784 --
--------- ---------
257,444 225,727
--------- ---------
Total Assets $ 414,207 $ 371,528
========= =========
</TABLE>
See accompanying notes
3
<PAGE>
FRD Acquisition Co.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
April 1, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
In thousands)
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Current maturities of long-term debt $ 22,822 $ 23,457
Accounts payable 21,453 21,645
Accrued salaries and vacation 9,858 12,820
Accrued insurance 5,672 4,560
Accrued interest 4,461 9,282
Payable to Advantica 12,807 10,182
Other 19,717 15,184
------------ --------------
96,790 97,130
------------ --------------
Long-term Liabilities:
Debt, less current maturities 201,743 195,652
Liability for self-insured claims 10,334 9,397
Other noncurrent liabilities 16,893 2,716
------------ --------------
228,970 207,765
------------ ---------------
325,760 304,895
------------ --------------
Shareholder's Equity:
Common stock: par value $0.10; 1000 shares
authorized, issued and outstanding --- ---
Paid-in capital 99,719 75,000
Deficit (11,272) (8,367)
------------ --------------
Total Shareholder's Equity 88,447 66,633
------------ --------------
Total Liabilities and Shareholder's Equity $ 414,207 $ 371,528
============ ==============
</TABLE>
See accompanying notes
4
<PAGE>
FRD Acquisition Co.
Statements of Consolidated Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Successor Company Predecessor Company
Twelve Weeks Ended One Week Ended Quarter Ended
April 1, 1998 January 7, 1998 April 2, 1997
------------------ --------------- --------------
<S> <C> <C> <C>
(In thousands)
Cash Flows From Operating Activities:
Net income (loss) $(11,272) $ 33,087 $ (1,628)
Adjustments to reconcile income (loss) to
cash flows from operating activities:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 9,377 -- --
Depreciation and amortization of property 5,660 469 6,052
Amortization of other intangibles 437 122 1,527
Amortization of deferred financing costs 311 28 339
Amortization of debt premium (357) -- --
Deferred tax (benefit) provision (890) 11,340 --
Noncash reorganization items -- (44,993) --
Decrease (increase) in assets:
Receivables 2,057 252 3,446
Inventories 187 -- 1,577
Other current assets 2,423 3,918 (1,682)
Other assets 926 -- (61)
Increase (decrease) in liabilities:
Accounts payable 2,893 (3,085) (845)
Accrued salaries and vacation (1,511) (1,451) 1,289
Payable to Advantica 2,493 132 1,895
Other accrued liabilities (7,318) 1,388 (9,476)
Liability for self-insurance claims (397) (253) 102
Other noncurrent liabilities (616) 3 249
-------- -------- --------
Net cash flows provided by operating activities 4,403 957 2,784
-------- -------- --------
Cash flows From Investing Activities:
Purchase of property (1,111) -- (1,430)
Proceeds from disposition of property 115 -- 5,309
-------- -------- --------
Net cash flows provided by (used in)
investing activities (996) -- 3,879
-------- -------- --------
Cash Flows From Financing Activities:
Principal debt payments, net (1,008) (6,515) (10,603)
-------- -------- --------
Net cash flows (used in) financing activities (1,008) (6,515) (10,603)
Increase (decrease) in cash and cash equivalents 2,399 (5,558) (3,940)
Cash and Cash Equivalents at:
Beginning of period 3,493 9,051 14,300
-------- -------- --------
End of period $ 5,892 $ 3,493 $ 10,360
======== ======== ========
</TABLE>
See accompanying notes
5
<PAGE>
FRD Acquisition Co.
Notes to Consolidated Financial Statements
April 1, 1998
(Unaudited)
Note 1. Basis of Presentation
FRD Acquisition Co. ("FRD" or, together with its subsidiaries, "the Company")
was incorporated in February 1996 as a wholly-owned subsidiary of Flagstar
Corporation ("Flagstar"), which is a wholly-owned subsidiary of Flagstar
Companies, Inc. ("FCI") (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 exchange for all of the
outstanding stock of FRI-M Corporation ("FRI-M"), the subsidiary of Family
Restaurants, Inc., which owns the Coco's and Carrows chains.
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 7). 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.
The consolidated financial statements of the Company are unaudited and include
all adjustments management believes are necessary for a fair presentation of the
results of operations for such interim periods. All such adjustments are of a
normal and recurring nature. The interim consolidated financial statements
should be read in conjunction with the Consolidated and Combined Financial
Statements and notes thereto for the year ended December 31, 1997 and the
related Management's Discussion and Analysis of Financial Condition and Results
of Operations, both of which are contained in the FRD Acquisition Co. 1997
Annual Report on Form 10-K (the "FRD 10-K"). The results of operations for the
twelve weeks ended April 1, 1998 and the one week ended January 7, 1998 are not
necessarily indicative of the results for the entire fiscal year ending December
30, 1998.
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
Note 2. Fresh Start Reporting
As of the Effective Date, Advantica adopted fresh start reporting pursuant to
the guidance provided by the AICPA's Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7").
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 is amortizing such amount over a five-year
amortization period. Advantica has "pushed down" the impact of fresh start
reporting to its operating subsidiaries,
6
<PAGE>
including the Company. Accordingly, all financial statements for any period
subsequent to the Effective Date are referred to as "Successor Company" as they
reflect the periods subsequent to the implementation of fresh start reporting
and are not comparable to the financial statements for periods prior to the
Effective Date.
The total reorganization value assigned to the Company's assets was estimated
based on a review of the operating performance of companies in the restaurant
industry that offer products and services that are comparable to or competitive
with the Company. The following multiples were established for these companies:
(i) enterprise value (defined as market value of outstanding equity, plus debt,
minus cash and cash equivalents)/revenues for the four most recent fiscal
quarters; (ii) enterprise value/earnings before interest, taxes, depreciation
and amortization for the four most recent fiscal quarters; and (iii) enterprise
value/earnings before interest and taxes for the four most recent fiscal
quarters. The Company did not independently verify the information for the
comparative companies considered in its valuations, which information was
obtained from publicly available reports. The foregoing multiples were then
applied to the Company's financial forecast. Valuations achieved in selected
merger and acquisition transactions involving comparable businesses were used as
further validation of the valuation range. The total reorganization value of the
Company of $326 million is the midpoint of a range of values determined based on
the above methodology.
The results of operations in the accompanying Statement of Operations for the
week ended January 7, 1998 reflect the results of operations prior to
Advantica's emergence from bankruptcy and the effects of fresh start reporting
adjustments. In this regard, the Statement of Operations reflects reorganization
items consisting primarily of gains and losses related to the adjustments of
assets and liabilities to fair value. The fair value of assets and liabilities
has been determined based on certain valuations and other studies which are not
yet complete. Because the current valuation is preliminary in nature, further
adjustments may be required but are not expected to be material.
7
<PAGE>
The effect of the Plan and the adoption of fresh start reporting on the
Company's January 7, 1998 balance sheet are as follows:
<TABLE>
<CAPTION>
Predecessor Adjustments Successor
Company for Fresh Company
(In thousands) January 7, 1998 Start Reporting (a) January 7, 1998
--------------- ------------------- ---------------
<S> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 3,493 $ 3,493
Receivables 4,220 $ (140) 4,080
Receivable from Advantica 1,870 --- 1,870
Inventories 3,758 (150) 3,608
Other 5,397 (175) 5,222
Property and equipment, net 116,860 28,459 145,319
Other Assets:
Goodwill, net 186,515 (186,515) ---
Other intangible assets, net 7,263 37,529 44,792
Deferred taxes 25,487 (11,340) 14,147
Other 6,317 (709) 5,608
Reorganization value in excess of amounts
allocable to identifiable assets --- 203,160 203,160
--------- ----------- ------------
$ 361,180 $ 70,119 $ 431,299
========= =========== ============
Liabilities and Shareholder's Equity
Current liabilities:
Current maturities of long-term debt 16,942 16,942
Accounts payable 18,561 18,561
Accrued salaries and vacation 11,369 11,369
Accrued insurance 4,306 4,306
Accrued interest 9,836 9,836
Payable to Advantica 10,314 10,314
Other 16,019 5,639 21,658
Long-Term Liabilities:
Debt, less current maturities 195,652 13,336 208,988
Liability for self-insured claims 9,397 2,700 12,097
Other noncurrent liabilities 2,718 14,791 17,509
Shareholder's Equity:
Common Stock: par value $0.10, 1000 shares
authorized, issued and outstanding --- ---
Paid-in capital 75,000 24,719 99,719
Deficit (8,934) 8,934 ---
---------- ------------ ------------
$ 361,180 $ 70,119 $ 431,299
========= =========== ============
</TABLE>
(a) In accordance with the principles of SOP 90-7, the reorganization resulted
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
8
<PAGE>
exit costs, and the adjustments to self-insured claims and contingent
liabilities reflecting a change in methodology, and (vi) the adjustments 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.
Note 3. New Accounting Standards
In March 1998, the AICPA 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 capitalization of
external and internal direct costs of developing or obtaining internal-use
software 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.
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 2), the Company adopted 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 resulted in the write-off of
previously capitalized pre-opening costs totaling $0.1 million. Subsequent to
the Effective Date, pre-opening costs are being expensed as incurred. The
adoption of SOP 98-1 at January 7, 1998 resulted 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 are being expensed as incurred.
Effective January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting of Comprehensive Income"
("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components in the financial statements.
Comprehensive income is comprised of net income and other comprehensive income
items, such as revenues, expenses, gains and losses that under generally
accepted accounting principles are excluded from net income and reflected as a
component of equity. For the twelve weeks ended April 1, 1998, the one week
ended January 7, 1998 and the quarter ended April 2, 1997, there were no
differences between net income and comprehensive income.
Note 4. Reorganization Items
Reorganization items included in the accompanying Statements of Consolidated
Operations reflect the impact of the adjustment of assets and liabilities to
fair value in accordance with SOP 90-7 as discussed in Note 2.
Note 5. 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 13-week period ended April 1, 1998 has six
fewer days in comparison to the prior year quarter. For the purposes of
management's discussion and analysis, the results of operations for the twelve
weeks ended April 1, 1998 and the one week ended January 7, 1998 will be
combined and referred to as the quarter ended April 1, 1998.
Note 6. Related Party Transactions
Certain administrative functions are provided for the Company by Advantica. 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 $0.6 million for the quarter ended
April 1, 1998. Payment of the fees to Advantica cannot occur unless certain
financial targets are met
9
<PAGE>
as described in the Company's senior note indenture and in the FRI-M Credit
Agreement. Advantica's method of allocating these expenses is not the only
reasonable method and other reasonable methods of allocation might produce
different results.
Note 7. Advantica Financial Restructuring
On the Effective Date, FCI and Flagstar emerged from proceedings under the
Bankruptcy Code pursuant to FCI and Flagstar's Plan dated as of November 7,
1997. Material features of the Plan 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 (the "10 7/8% Senior Notes") and 10 3/4% Senior
Notes due 2001 (the "10 3/4% Senior Notes" and, collectively with the 10
7/8% Senior Notes due 2002, the "Old Senior Notes"), (ii) Flagstar's
11.25% Senior Subordinated Debentures due 2004 (the "11.25% Debentures")
and 11 3/8% Senior Subordinated Debentures due 2003 (the "11 3/8%
Debentures" and, 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;
(c) Advantica had 100 million authorized shares of Common Stock (of
which 40 million were issued and outstanding on the Effective Date)
and 25 million authorized shares of preferred stock (none of which
are currently outstanding). Pursuant to the Plan, 10% 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 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 2008 (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 agreement providing Advantica (excluding the Company) with a
$200 million senior secured revolving credit facility.
Note 8. Earnings (Loss) Per Common Share
As described in Note 1, FRD is a wholly-owned subsidiary of Advantica.
Accordingly, per share data is not meaningful and has been omitted for all
periods.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to highlight significant changes in
financial position as of April 1, 1998 and the results of operations for the
twelve weeks ended April 1, 1998 and one week ended January 7, 1998 as compared
to the quarter ended April 2, 1997. For purposes of providing a meaningful
comparison of the Company's quarterly operating performance, the following
discussion and presentation of the results of operations for the twelve weeks
ended April 1, 1998 and the one week ended January 7, 1998 will be combined and
referred to as the quarter ended April 1, 1998. Where appropriate, the impact of
the adoption of fresh start reporting on the results of operations during this
period will be separately disclosed.
The forward-looking statements included in Management's Discussion and Analysis
of Financial Condition and Results of Operations, which reflect management's
best judgment based on factors currently known, involve risks, uncertainties,
and other factors which may cause the actual performance of FRD, its subsidiary,
and underlying concepts to be materially different from the performance
indicated or implied by such statements. Such factors include, among others:
competitive pressures from within the restaurant industry; the level of success
of the Company's operating initiatives and advertising and promotional efforts,
including the initiatives and efforts specifically mentioned herein; adverse
publicity; changes in business strategy or development plans; terms and
availability of capital; regional weather conditions; overall changes in the
general economy, particularly at the retail level; and other factors included in
the discussion below, or in the Management's Discussion and Analysis and in
Exhibit 99 to the Company's Annual Report on Form 10-K for the period ended
December 31, 1997.
Results of Operations
Quarter Ended April 1, 1998 Compared to Quarter Ended April 2, 1997
The table below summarizes restaurant activity for the quarter ended April 1,
1998.
<TABLE>
<CAPTION>
Ending Units Units Units Unit Ending Units Ending Units
12/31/97 Opened Closed/Sold Conversions 4/1/98 4/2/97
------------ ------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Coco's
Company-owned units 178 -- (1) (1) 176 184
Franchised units 17 -- -- 1 18 5
Licensed units 298 1 (4) -- 295 281
---- ----- ----- ----- ---- ----
493 1 (5) -- 489 470
---- ----- ----- ----- ---- ----
Carrows
Company-owned units 140 -- -- (1) 139 158
Franchised units 14 1 -- 1 16 1
---- ----- ------ ----- ----- ----
154 1 -- -- 155 159
---- ----- ------ ----- ---- ----
647 2 (5) -- 644 629
==== ===== ===== ===== ==== ====
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
COCO'S
Quarter Quarter %
($ in millions, except average unit and Ended Ended Increase/
comparable store data) April 1, 1998 April 2, 1997 (Decrease)
----------------- ------------- ----------
<S> <C> <C> <C>
U.S. systemwide sales $ 69.9 $ 73.1 (4.4)
=========== ===========
Net company sales $ 64.3 $ 70.8 (9.2)
Franchise and foreign licensing revenue 1.0 0.7 42.9
----------- -----------
Total revenue 65.3 71.5 (8.7)
----------- -----------
Operating expenses:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 5.2 --- NM
Other 61.6 67.9 (9.3)
----------- -----------
Total operating expenses 66.8 67.9 (1.6)
----------- -----------
Operating income $ (1.5) $ 3.6 NM
=========== ===========
Average unit sales
Company-owned $364,900 $385,600 (5.4)
Franchised $327,100 $441,700 (25.9)
Comparable store data (Company-owned)
Comparable store sales decrease (0.2%) (0.8%)
Average guest check $6.99 $6.60 5.9
NM = Not Meaningful
</TABLE>
Coco's NET COMPANY SALES for the first quarter ended April 1, 1998 decreased
$6.5 million (9.2%) as compared to the prior year comparable quarter. This
decrease reflects a $4.8 million impact due to six fewer reporting days in the
first quarter of 1998 compared to the prior year quarter. The remaining decrease
of $1.7 million reflects an eight-unit decrease in the number of Company-owned
restaurants as well as a slight decrease in comparable store sales. The decrease
in comparable store sales reflects a decrease in customer traffic, largely
offset by an increase in average guest check. The increase in average guest
check resulted from menu price increases instituted in August 1997 and February
1998 in response to minimum wage increases. FRANCHISE AND FOREIGN LICENSING
REVENUE increased by $0.3 million (42.9%) for the first quarter of 1998 as
compared to the first quarter of 1997, reflecting the addition of 13 domestic
franchised units and the net increase of 14 foreign licensed units over the
prior year quarter. The increase in number of franchised units also explains the
large variance in franchise average unit sales, as the calculation for the prior
year quarter reflected only a small number of franchised units (five units).
Coco's OPERATING EXPENSES for the first quarter of 1998 decreased by $1.1
million compared to the prior year quarter. The comparability of 1998 to 1997
operating results is significantly affected by the impact of the adoption of
fresh start reporting as of January 7, 1998. Specifically, the amortization of
reorganization value in excess of amounts allocable to identifiable assets,
which is over a five-year period, totaled $5.2 million for the twelve weeks
ended April 1, 1998. The increase in amortization related to the reorganization
value is offset by the effect of the adjustment of property and equipment and
other intangible assets to fair value, which resulted in an estimated decrease
in amortization and depreciation of approximately $0.3 million. Excluding the
effect of the estimated impact of fresh start reporting, operating expenses
decreased $6.0 million (8.8%), reflecting the effect of six fewer reporting days
than the prior year comparable quarter, an eight-unit decrease in Company-owned
restaurants and management's continued focus on product cost controls.
12
<PAGE>
Excluding the impact of the adoption of fresh start reporting, OPERATING INCOME
for the first quarter of 1998 decreased $0.2 million from the prior year
comparable quarter as a result of the factors noted above.
<TABLE>
<CAPTION>
CARROWS
Quarter Quarter %
($ in millions, except average unit and Ended Ended Increase/
comparable store data) April 1, 1998 April 2, 1997 (Decrease)
------------- ------------- -----------
<S> <C> <C> <C>
U.S. systemwide sales $ 50.2 $ 55.6 (9.7)
========== ===========
Net company sales $ 46.0 $ 55.6 (17.3)
Franchise revenue 0.3 --- NM
---------- ----------
Total revenue 46.3 55.6 (16.7)
---------- ----------
Operating expenses:
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 4.1 --- NM
Other 45.2 53.4 (15.4)
---------- ----------
Total operating expenses 49.3 53.4 (7.7)
---------- ----------
Operating income $ (3.0) $ 2.2 NM
========== ==========
Average unit sales
Company-owned $ 327,900 $ 349,300 (6.1)
Franchised $ 284,200 NM ---
Comparable store data (Company-owned)
Comparable store sales decrease (1.4%) (0.8%)
Average guest check $6.79 $6.37 6.6
NM = Not Meaningful
</TABLE>
Carrows' NET COMPANY SALES for the quarter ended April 1, 1998 decreased $9.6
million (17.3%) as compared to the prior year comparable quarter. This decrease
reflects a $3.8 million impact due to six fewer reporting days in the first
quarter of 1998 compared to the prior year quarter. The additional decrease of
$5.8 million reflects a 19-unit decrease in the number of Company-owned
restaurants, 12 of which were converted to franchise units, and a decrease in
comparable store sales. The decrease in comparable sales reflects a decrease in
customer traffic, partially offset by an increase in average guest check. The
increase in average guest check resulted from menu price increases instituted in
July 1997 and February 1998 in response to minimum wage increases. FRANCHISE
REVENUE was $0.3 million for the first quarter of 1998, reflecting the addition
of 15 franchised units over the prior year quarter.
Carrows' OPERATING EXPENSES for the first quarter of 1998 decreased by $4.1
million compared to the prior year quarter. The comparability of 1998 and 1997
operating results is significantly affected by the impact of the adoption of
fresh start reporting as of January 7, 1998. Specifically, the amortization of
reorganization value in excess of amounts allocable to identifiable assets,
which is over a five-year period, totaled $4.1 million for the twelve weeks
ended April 1, 1998. The increase in amortization related to the reorganization
value is offset by the effect of the adjustment of property and equipment and
other intangible assets to fair value, which resulted in an estimated decrease
in amortization and depreciation of approximately $0.3 million. Excluding the
effect of the estimated impact of fresh start reporting, operating expenses
decreased $7.9 million (14.8%), reflecting the effect of six fewer reporting
days than in the prior year comparable quarter, the 19-unit decrease in
Company-owned restaurants and management's continued focus on product cost
controls.
13
<PAGE>
Excluding the impact of the adoption of fresh start reporting, OPERATING INCOME
for the first quarter of 1998 decreased $1.4 million from the prior year
comparable quarter as a result of the factors noted above.
FRD CONSOLIDATED
CONSOLIDATED INTEREST AND DEBT EXPENSE decreased $0.4 million (5.3%) during the
first quarter of 1998 compared to the same quarter last year. This decrease is
attributable to the lower effective yield on Company debt resulting from the
revaluation of such debt to fair market value at the Effective Date in
accordance with fresh start reporting.
REORGANIZATION ITEMS include the impact of the adjustment of assets and
liabilities to fair value in accordance with SOP 90-7 as discussed in Note 2 to
the consolidated financial statements included herein.
The PROVISION FOR INCOME TAXES from continuing operations for the twelve weeks
has been computed based on management's estimate of the annual effective income
tax rate applied to loss before taxes. The Company recorded an income tax
provision reflecting an effective income tax rate of approximately 1% for the
twelve weeks ended April 1, 1998 compared to a provision reflecting an
approximate rate of 3% for the quarter ended April 2, 1997. The provision for
the one week period ended January 7, 1998 of $11.3 million primarily relates to
the tax effect of the revaluation of the Company's assets and liabilities in
accordance with fresh start accounting.
The increase in CONSOLIDATED NET INCOME of $23.4 million in comparison to the
prior year quarter is a result of the above described items.
Liquidity and Capital Resources
At April 1, 1998 and December 31, 1997 the Company had working capital deficits
of $80.8 million and $68.7 million, respectively. The increase in the working
capital deficit is attributable primarily to a decrease in cash and cash
equivalents resulting from $6.6 million in term loan prepayments and $9.8
million in senior debt interest payments made during the quarter. 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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. The following are included as exhibits to this report:
EXHIBIT
NO. DESCRIPTION
*10.1.5 Fifth Amendment, dated December 9, 1997, to the 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
14
<PAGE>
Company, Chemical Bank and Citicorp USA, Inc., as
co-syndication agents, and Credit Lyonnais New York Branch, as
administrative agent (incorporated by reference to Exhibit 4.21 to
Amendment No. 1 to the Registration Statement on Form S-1
(No. 333-45811) of Advantica).
27 Financial Data Schedule
- ---------------------
*Certain of the exhibits to this Quarterly Report on Form 10-Q, 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.
(b) No reports on Form 8-K were filed during the quarter ended April 1,
1998.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRD ACQUISITION CO.
Date: May 18, 1998 By: /s/ Ronald B. Hutchison
---------------------------------
Ronald B. Hutchison
Executive Vice President
(Duly authorized officer of
registrant/principal financial officer)
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Financial Statements of FRD Acquisition Co., as contained
in Form 10-Q for the one week ended January 7, 1998, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JAN-07-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 8,381
<CGS> 0
<TOTAL-COSTS> 8,335
<OTHER-EXPENSES> (44,993)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 585
<INCOME-PRETAX> 44,454
<INCOME-TAX> 11,367
<INCOME-CONTINUING> 33,087
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,087
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Financial Statements of FRD Acquisition Co., as contained
in Form 10-Q for the 12 weeks ended April 1, 1998, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-30-1998
<PERIOD-START> JAN-08-1998
<PERIOD-END> APR-01-1998
<CASH> 5,892
<SECURITIES> 0
<RECEIVABLES> 2,406
<ALLOWANCES> 190
<INVENTORY> 3,421
<CURRENT-ASSETS> 16,010
<PP&E> 146,318
<DEPRECIATION> 5,565
<TOTAL-ASSETS> 414,207
<CURRENT-LIABILITIES> 96,790
<BONDS> 201,743
0
0
<COMMON> 0
<OTHER-SE> 88,447
<TOTAL-LIABILITY-AND-EQUITY> 414,207
<SALES> 0
<TOTAL-REVENUES> 103,165
<CGS> 0
<TOTAL-COSTS> 107,810
<OTHER-EXPENSES> (3)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,517
<INCOME-PRETAX> (11,159)
<INCOME-TAX> 113
<INCOME-CONTINUING> (11,272)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,272)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
