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 July 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 August 14, 1998, 1,000 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
Quarter Ended Quarter Ended
July 1, 1998 July 2, 1997
----------------- -------------------
(In thousands)
<S> <C> <C>
Net company sales $ 112,642 $ 120,977
Franchise and foreign licensing revenue 1,108 1,442
--------- ---------
Operating revenue 113,750 122,419
--------- ---------
Operating expenses:
Product cost 30,010 33,251
Payroll and benefits 41,597 43,366
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 9,983 --
Depreciation and amortization of property 10,035 6,360
Amortization of other intangibles 487 1,126
Management fees to Advantica 1,137 1,224
Allocated costs from Advantica 625 625
Other 24,982 29,165
--------- ---------
118,856 115,117
--------- ---------
Operating (loss) income (5,106) 7,302
--------- ---------
Other charges (credits):
Interest and debt expense, net 7,004 7,495
Other, net (81) 519
--------- ---------
6,923 8,014
--------- ---------
Loss before taxes (12,029) (712)
(Benefit) provision for income taxes (1,329) 106
--------- ---------
Net loss $ (10,700) $ (818)
========= =========
</TABLE>
See accompanying notes
2
<PAGE>
FRD Acquisition Co.
Condensed Statements of Consolidated Operations
(Unaudited)
<TABLE>
<CAPTION>
Successor Company Predecessor Company
Twenty-five Weeks One Week Two Quarters
Ended Ended Ended
July 1, 1998 January 7, 1998 July 2, 1997
------------- --------------- ------------
(In thousands)
<S> <C> <C> <C>
Net company sales $ 214,769 $ 8,266 $ 247,376
Franchise and foreign licensing revenue 2,146 115 2,078
--------- --------- ---------
Operating revenue 216,915 8,381 249,454
--------- --------- ---------
Operating expenses:
Product cost 56,575 2,255 67,365
Payroll and benefits 79,890 3,139 89,731
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 19,346 -- --
Depreciation and amortization of property 15,709 469 12,412
Amortization of other intangibles 924 122 2,653
Management fees to Advantica 2,169 84 2,494
Allocated costs from Advantica 1,202 48 1,250
Other 50,851 2,218 60,455
--------- --------- ---------
226,666 8,335 236,360
--------- --------- ---------
Operating (loss) income (9,751) 46 13,094
--------- --------- ---------
Other charges (credits):
Interest and debt expense, net 13,521 585 14,998
Other, net (85) -- 385
--------- --------- ---------
13,436 585 15,383
--------- --------- ---------
Loss before reorganization items and taxes (23,187) (539) (2,289)
Reorganization items -- (44,993) --
--------- --------- ---------
(Loss) income before taxes (23,187) 44,454 (2,289)
(Benefit) provision for income taxes (1,216) 11,367 159
--------- --------- ---------
Net (loss) income $ (21,971) $ 33,087 $ (2,448)
========= ========= =========
</TABLE>
See accompanying notes
3
<PAGE>
FRD Acquisition Co.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
July 1, 1998 December 31, 1997
------------ ------------------
(In thousands)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 5,046 $ 9,051
Receivables 2,832 4,661
Receivable from Advantica -- 1,870
Inventories 3,265 3,758
Other 4,464 9,132
--------- ---------
15,607 28,472
--------- ---------
Property and equipment 149,215 151,675
Accumulated depreciation (15,531) (34,346)
--------- ---------
133,684 117,329
--------- ---------
Other Assets:
Reorganization value in excess of amounts allocable to
identifiable assets, net 181,333 --
Goodwill, net -- 186,613
Other intangibles, net 43,458 7,275
Deferred taxes 17,238 25,487
Other 4,681 6,352
--------- ---------
246,710 225,727
--------- ---------
Total Assets $ 396,001 $ 371,528
========= =========
</TABLE>
See accompanying notes
4
<PAGE>
FRD Acquisition Co.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
July 1, 1998 December 31, 1997
------------ ------------------
(In thousands)
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Current maturities of long-term debt $ 23,456 $ 23,457
Accounts payable 15,331 21,645
Accrued salaries and vacation 10,007 12,820
Accrued insurance 5,268 4,560
Accrued interest 9,316 9,282
Payable to Advantica 13,611 10,182
Other 19,383 15,184
--------- ---------
96,372 97,130
--------- ---------
Long-term Liabilities:
Debt, less current maturities 193,734 195,652
Liability for self-insured claims 10,011 9,397
Other noncurrent liabilities 18,136 2,716
--------- ---------
221,881 207,765
--------- ---------
318,253 304,895
--------- ---------
Shareholder's Equity:
Common stock: par value $0.10; 1,000 shares
authorized, issued and outstanding -- --
Paid-in capital 99,719 75,000
Deficit (21,971) (8,367)
--------- ---------
Total Shareholder's Equity 77,748 66,633
--------- ---------
Total Liabilities and Shareholder's Equity $ 396,001 $ 371,528
========= =========
</TABLE>
See accompanying notes
5
<PAGE>
FRD Acquisition Co.
Statements of Consolidated Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Successor Company Predecessor Company
Twenty-five Weeks One Week Two Quarters
Ended Ended Ended
July 1, 1998 January 7, 1998 July 2, 1997
----------------- --------------- ------------
(In thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $(21,971) $ 33,087 $ (2,448)
Adjustments to reconcile income (loss) to
cash flows from operating activities:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 19,346 -- --
Depreciation and amortization of property 15,709 469 12,412
Amortization of other intangibles 924 122 2,653
Amortization of deferred financing costs 649 28 678
Amortization of debt premium (723) -- --
Gain on disposition of assets (19) -- (3)
Deferred tax (benefit) provision (3,091) 11,340 (3,741)
Noncash reorganization items -- (44,993) --
Decrease (increase) in assets:
Receivables 1,436 252 2,742
Inventories 343 -- 1,605
Other current assets 1,026 3,918 (211)
Other assets 808 -- (1,706)
Increase (decrease) in liabilities:
Accounts payable (1,753) (3,085) (2,447)
Accrued salaries and vacation (1,362) (1,451) (85)
Payable to Advantica 3,298 132 3,846
Other accrued liabilities (3,249) 1,388 (2,020)
Liability for self-insurance claims (91) (253) (259)
Other noncurrent liabilities 1,467 3 549
-------- -------- --------
Net cash flows from operating activities 12,747 957 11,565
-------- -------- --------
Cash flows From Investing Activities:
Purchase of property (3,065) -- (4,121)
Proceeds from disposition of property 293 -- 5,354
-------- -------- --------
Net cash flows provided by (used in)
investing activities (2,772) -- 1,233
-------- -------- --------
Cash Flows From Financing Activities:
Principal debt payments, net (8,422) (6,515) (11,354)
Deferred financing costs -- -- (2)
-------- -------- --------
Net cash flows (used in) financing activities (8,422) (6,515) (11,356)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 1,553 (5,558) 1,442
Cash and Cash Equivalents at:
Beginning of period 3,493 9,051 14,300
-------- -------- --------
End of period $ 5,046 $ 3,493 $ 15,742
======== ======== ========
</TABLE>
See accompanying notes
6
<PAGE>
FRD Acquisition Co.
Notes to Consolidated Financial Statements
July 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
25 weeks ended July 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 that 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, 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.
7
<PAGE>
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.
During the second quarter of 1998 the Company substantially completed valuation
studies performed in connection with the revaluation of its assets and
liabilities in accordance with fresh start reporting. Depreciation expense for
the quarter ended July 1, 1998 includes an estimated $2.0 million representing
the difference between the actual impact of the revaluation on depreciation for
the 12 weeks ended April 1, 1998 and the estimated impact previously reported.
8
<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>
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, 1,000 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 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.
9
<PAGE>
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 April 1998, the AICPA issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"), which provides additional guidance on the financial reporting of
start-up costs, requiring costs of start-up activities to be expensed as
incurred.
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 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. The adoption
of SOP 98-5 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.
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 25 weeks ended July 1, 1998, the one week ended
January 7, 1998 and the two quarters ended July 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 25 weeks
ended July 1, 1998 and the one week ended January 7, 1998 will be combined and
referred to as the two quarters ended July 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
July 1, 1998 and $1.2 million for the two quarters ended July 1, 1998. 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. Advantica's method of allocating these expenses is not the only
reasonable method and other reasonable methods of allocation might produce
different results.
10
<PAGE>
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to highlight significant changes in
financial position as of July 1, 1998 and the results of operation for the 25
weeks ended July 1, 1998 and one week ended January 7, 1998 as compared to the
corresponding 1997 periods. 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 two quarters ended July 1,
1998 reflect the sum of the 25 weeks ended July 1, 1998 (Successor Company) and
the one week ended January 7, 1998 (Predecessor Company). Where appropriate, the
impact of the adoption of fresh start reporting on the results of operations
during this period will be separately disclosed.
11
<PAGE>
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; the ability
of the Company to mitigate the impact of the Year 2000 issue successfully;
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 July 1, 1998 Compared to Quarter Ended July 2, 1997
The table below summarizes restaurant activity for the quarter ended July 1,
1998.
<TABLE>
<CAPTION>
Ending Units Units Units Units Ending Units Ending Units
4/1/98 Opened Closed/Sold Refranchised 7/1/98 7/2/97
<S> <C> <C> <C> <C> <C> <C>
Coco's
Company-owned units 176 -- (1) -- 175 185
Franchised units 18 -- (1) -- 17 7
Licensed units 295 4 (3) -- 296 286
----- ----- ----- ----- ----- -----
489 4 (5) -- 488 478
----- ----- ----- ----- ----- -----
Carrows
Company-owned units 139 -- (1) (1) 137 156
Franchised units 16 1 -- 1 18 1
----- ----- ----- ----- ----- -----
155 1 (1) -- 155 157
----- ----- ----- ----- ----- -----
644 5 (6) -- 643 635
===== ===== ===== ====== ===== =====
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
COCO'S
Quarter Quarter %
($ in millions, except average unit and Ended Ended Increase/
comparable store data) July 1, 1998 July 2, 1997 (Decrease)
<S> <C> <C> <C>
U.S. systemwide sales $ 70.6 $ 70.3 0.4
========== ===========
Net company sales $ 64.9 $ 67.6 (4.0)
Franchise and foreign licensing revenue 0.8 1.4 (42.9)
---------- -----------
Total revenue 65.7 69.0 (4.8)
---------- -----------
Operating expenses:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 5.6 --- NM
Other 62.1 64.3 (3.4)
---------- -----------
Total operating expenses 67.7 64.3 5.3
---------- -----------
Operating (loss) income $ (2.0) $ 4.7 NM
========== ===========
Average unit sales
Company-owned $370,100 $367,400 0.7
Franchised $336,800 $434,000 (22.4)
Comparable store data (Company-owned)
Comparable store sales decrease (0.8%) (1.5%)
Average guest check $7.15 $6.73 6.2
NM = Not Meaningful
</TABLE>
Coco's NET COMPANY SALES for the second quarter ended July 1, 1998 decreased
$2.7 million (4.0%) as compared to the prior year comparable quarter. This
decrease reflects a 10-unit decrease in the number of Company-owned restaurants
and a slight decrease in comparable store sales. The decrease in comparable
store sales is largely due to 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 August 1997 and February 1998 in
response to minimum wage increases. FRANCHISE AND FOREIGN LICENSING REVENUE
decreased $0.6 million (42.9%) for the second quarter of 1998 as compared to the
second quarter of 1997, reflecting a stronger dollar versus the yen. This
decline was partially offset by the addition of 10 domestic franchised units and
a net increase of 10 foreign licensed units over the prior year quarter. The
increase in the number of franchised units also explains the large variance in
franchise average unit sales as the calculation for the prior year reflected
only a small number of franchised units (seven units).
Coco's OPERATING EXPENSES for the second quarter of 1998 increased $3.4 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 $5.6 million for the quarter ended
July 1, 1998. In addition, the adjustment of property and equipment and other
intangible assets to fair value resulted in an increase in amortization and
depreciation of $1.9 million. Excluding the effect of the impact of fresh start
reporting, operating expenses decreased $4.1 million (6.4%), reflecting the
effect of the 10-unit decrease in Company-owned restaurants and the impact of
cost reduction programs implemented to increase operating margins.
Excluding the impact of the adoption of fresh start reporting, OPERATING INCOME
for the second quarter of 1998
13
<PAGE>
increased $0.8 million from the prior year comparable quarter as a result of the
factors noted above.
<TABLE>
<CAPTION>
CARROWS
Quarter Quarter %
($ in millions, except average unit and Ended Ended Increase/
comparable store data) July 1, 1998 July 2, 1997 (Decrease)
<S> <C> <C> <C>
U.S. systemwide sales $ 52.7 $ 53.9 (2.2)
============ ============
Net company sales $ 47.8 $ 53.3 (10.3)
Franchise revenue 0.3 0.1 NM
------------ ------------
Total revenue 48.1 53.4 (9.9)
------------ ------------
Operating expenses:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 4.4 --- NM
Other 46.8 50.8 (7.9)
------------ ------------
Total operating expenses 51.2 50.8 0.8
------------ ------------
Operating (loss) income $ (3.1) $ 2.6 NM
============ ============
Average unit sales
Company-owned $343,600 $339,600 1.2
Franchised $292,200 NM
Comparable store data (Company-owned)
Comparable store sales decrease (1.3%) (3.2%)
Average guest check $6.91 $6.50 6.3
NM = Not Meaningful
</TABLE>
Carrows' NET COMPANY SALES for the second quarter ended July 1, 1998 decreased
$5.5 million (10.3%) as compared to the prior year comparable quarter. This
decrease reflects a 19-unit decrease in the number of Company-owned restaurants,
13 of which were converted to franchise units, and a decrease in comparable
store sales. The decrease in comparable store sales is largely due to a decrease
in customer traffic, 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
increased $0.2 million for the second quarter of 1998 as compared to the second
quarter of 1997, reflecting the addition of 17 franchised units over the prior
year quarter.
Carrows' OPERATING EXPENSES for the second quarter of 1998 increased $0.4
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 $4.4 million for the quarter ended
July 1, 1998. In addition, the adjustment of property and equipment and other
intangible assets to fair value resulted in an increase in amortization and
depreciation of $1.4 million. Excluding the effect of the impact of fresh start
reporting, operating expenses decreased $5.4 million (10.6%), reflecting the
effect of the 19-unit decrease in Company-owned restaurants and the impact of
cost reduction programs implemented to increase operating margins.
14
<PAGE>
Excluding the impact of the adoption of fresh start reporting, OPERATING INCOME
for the second quarter of 1998 increased $0.1 million as compared to the prior
year comparable quarter as a result of the factors noted above.
FRD CONSOLIDATED
During the second quarter of 1998 the Company substantially completed valuation
studies performed in connection with the revaluation of its assets and
liabilities in accordance with fresh start reporting. Depreciation expense for
the quarter ended July 1, 1998 includes an estimated $2.0 million representing
the difference between the actual impact of the revaluation on depreciation for
the 12 weeks ended April 1, 1998 and the estimated impact previously reported.
CONSOLIDATED INTEREST AND DEBT EXPENSE decreased $0.5 million (6.6%) for the
quarter ended July 1, 1998 as compared to the prior year quarter. This decrease
is attributed to the lower effective yield on Company debt resulting from the
revaluation of such debt to fair value in accordance with fresh start reporting
and to the lower level of outstanding debt in the 1998 period.
The PROVISION FOR INCOME TAXES from continuing operations for the quarter has
been computed based on management's estimate of the annual effective income tax
rate applied to loss before taxes. The Company recorded an income tax benefit
reflecting an effective income tax rate of approximately (11%) for the quarter
ended July 1, 1998 compared to a provision reflecting an approximate rate of 15%
for the quarter ended July 2, 1997. The change in the effective income tax rate
from the prior year can be attributed to the recognition of certain FICA income
tax credits.
The increase in CONSOLIDATED NET LOSS of $9.9 million in comparison to the prior
year quarter is a result of the above items.
15
<PAGE>
Two quarters Ended July 1, 1998 Compared to Two Quarters Ended July 2, 1997
<TABLE>
<CAPTION>
COCO'S
Two Quarters Two Quarters %
($ in millions, except average unit and Ended Ended Increase/
comparable store data) July 1, 1998 July 2, 1997 (Decrease)
<S> <C> <C> <C>
U.S. systemwide sales $ 140.5 $ 143.3 (2.0)
========== ============
Net company sales $ 129.2 $ 138.5 (6.7)
Franchise and foreign licensing revenue 1.8 2.0 (10.0)
---------- ------------
Total revenue 131.0 140.5 (6.8)
---------- ------------
Operating expenses:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 10.8 --- NM
Other 123.7 132.2 (6.4)
---------- ------------
Total operating expenses 134.5 132.2 1.7
---------- ------------
Operating (loss) income $ (3.5) $ 8.3 NM
=========== ============
Average unit sales
Company-owned $735,000 $753,000 (2.4)
Franchised $663,900 $874,900 (24.1)
Comparable store data (Company-owned)
Comparable store sales decrease (0.4%) (1.1%)
Average guest check $7.07 $6.66 6.2
NM = Not Meaningful
</TABLE>
Coco's NET COMPANY SALES for the two quarters ended July 1, 1998 decreased $9.3
million (6.7%) as compared to the prior year comparable period. This decrease
reflects a 10-unit decrease in the number of Company-owned restaurants, a $4.8
million impact due to six fewer reporting days in the 1998 period compared to
the prior year period and a slight decrease in comparable store sales. The
decrease in comparable store sales is due to a decrease in customer traffic
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 decreased $0.2 million (10.0%) for the two quarters ended July 1, 1998
as compared to the prior year comparable period, resulting primarily from a
stronger dollar versus the yen. This decline was partially offset by the
addition of 10 domestic franchised units and a net increase of 10 foreign
licensed units over the prior year. The increase in the number of franchised
units also explains the large variance in franchise average unit sales as the
calculation for the prior year reflected only a small number of franchised units
(seven units).
Coco's OPERATING EXPENSES for the two quarters ended July 1, 1998 increased $2.3
million as compared to the prior year comparable period. 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 $10.8 million for
the two quarters ended July 1, 1998. In addition, the adjustment of property and
equipment and other intangible assets to fair value resulted in an increase in
amortization and depreciation of $1.6 million. Excluding the effect of the
16
<PAGE>
impact of fresh start reporting, operating expenses decreased $10.1 million
(7.6%), reflecting the effect of six fewer reporting days than in the prior year
comparable period, the 10-unit decrease in Company-owned restaurants and
management's continued focus on cost controls.
Excluding the impact of the adoption of fresh start reporting, OPERATING INCOME
for the two quarters ended July 1, 1998 increased $0.6 million from the prior
year comparable period as a result of the factors noted above.
<TABLE>
<CAPTION>
CARROWS
Two Quarters Two Quarters %
($ in millions, except average unit and Ended Ended Increase/
comparable store data) July 1, 1998 July 2, 1997 (Decrease)
<S> <C> <C> <C>
U.S. systemwide sales $ 102.9 $ 109.7 (6.2)
========== ==========
Net company sales $ 93.8 $ 108.8 (13.8)
Franchise revenue 0.5 0.1 NM
---------- ----------
Total revenue 94.3 108.9 (13.4)
---------- ------------
Operating expenses:
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 8.5 --- NM
Other 92.0 104.1 (11.6)
---------- -----------
Total operating expenses 100.5 104.1 (3.5)
---------- -----------
Operating (loss) income $ (6.2) $ 4.8 NM
========== ===========
Average unit sales
Company-owned $671,500 $ 688,900 (2.5)
Franchised $577,000 NM
Comparable store data (Company-owned)
Comparable store sales decrease (1.3%) (2.0%)
Average guest check $6.85 $6.44 6.4
NM = Not Meaningful
</TABLE>
Carrows' NET COMPANY SALES decreased $15.0 million (13.8%) for the two quarters
ended July 1, 1998 as compared to the prior year comparable period. This
decrease reflects a 19-unit decrease in the number of Company-owned restaurants,
13 of which were converted to franchise units, a $3.8 million impact due to six
fewer reporting days in the 1998 period compared to the prior year period and a
decrease in comparable store sales. The decrease in comparable store sales is
largely due to a decrease in customer traffic, 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 increased $0.4 million for the two quarters ended
July 1, 1998 as compared to the prior year comparable period. This increase
resulted from the addition of 17 franchised units over the prior year quarter.
Carrows' OPERATING EXPENSES for the two quarters ended July 1, 1998 decreased
$3.6 million compared to the prior year comparable period. 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 $8.5 million for
the two quarters ended July 1, 1998. In addition, the adjustment of property and
equipment and other intangible assets to
17
<PAGE>
fair value resulted in an increase in amortization and depreciation of $1.1
million. Excluding the effect of the impact of fresh start reporting, operating
expenses decreased $13.2 million (12.7%), reflecting the effect of six fewer
reporting days than in the prior year comparable period, the 19-unit decrease in
Company-owned restaurants and management's continued focus on cost controls.
Excluding the impact of the adoption of fresh start reporting, OPERATING INCOME
for the two quarters ended July 1,1998 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 $0.9 million (5.9%) for the two
quarters ended July 1, 1998 as compared to the prior year comparable period.
This decrease is attributed to the lower effective yield on Company debt
resulting from the revaluation of such debt to fair value in accordance with
fresh start reporting and to the lower level of outstanding debt in the 1998
period.
The PROVISION FOR INCOME TAXES from continuing operations for the 25 weeks ended
July 1, 1998 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 benefit reflecting an effective income tax rate of approximately (5%)
for the 25 weeks ended July 1, 1998 compared to a provision reflecting an
approximate rate of 7% for the 26 weeks ended July 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 change in the effective income tax
rate from the prior year can be attributed to the recognition of certain FICA
income tax credits.
The increase in CONSOLIDATED NET INCOME of $13.6 million for the two quarters
ended July 1, 1998 as compared to the prior year comparable period is a result
of the above 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 $35.0
million revolving credit facility, which is also available for letters of
credit. At July 1, 1998, the Company had no outstanding working capital
borrowings; however, letters of credit outstanding were $19.4 million.
At July 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 use of cash resulting from $13.1
million in term loan payments made during the two quarters ended July 1, 1998.
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.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. The following are included as exhibits to this report:
EXHIBIT
NO. DESCRIPTION
27 Financial Data Schedule
- ---------------------
(b) No reports on Form 8-K were filed during the quarter ended July 1,
1998.
19
<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: August 17, 1998 By: /s/ Ronald B. Hutchison
--------------------------------
Ronald B. Hutchison
Executive Vice President
(Duly authorized officer of
registrant/principal financial officer)
20
<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 25 weeks ended July 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> JUL-01-1998
<CASH> 5,046
<SECURITIES> 0
<RECEIVABLES> 2,993
<ALLOWANCES> 161
<INVENTORY> 3,265
<CURRENT-ASSETS> 15,607
<PP&E> 149,215
<DEPRECIATION> 15,531
<TOTAL-ASSETS> 396,001
<CURRENT-LIABILITIES> 96,372
<BONDS> 193,734
0
0
<COMMON> 0
<OTHER-SE> 77,748
<TOTAL-LIABILITY-AND-EQUITY> 396,001
<SALES> 0
<TOTAL-REVENUES> 216,915
<CGS> 0
<TOTAL-COSTS> 226,666
<OTHER-EXPENSES> (85)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,521
<INCOME-PRETAX> (23,187)
<INCOME-TAX> (1,216)
<INCOME-CONTINUING> (21,971)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,971)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
