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 September 30, 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 November 2, 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
September 30, 1998 October 1, 1997
------------------ ----------------
<S> <C> <C>
(In thousands)
Net company sales $ 110,831 $ 120,514
Franchise and foreign licensing revenue 1,152 1,252
----------- -----------
Operating revenue 111,983 121,766
----------- -----------
Operating expenses:
Product cost 31,308 33,631
Payroll and benefits 40,693 42,942
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 9,784 ---
Depreciation and amortization of property 8,225 5,792
Amortization of other intangibles 850 1,502
Management fees to Advantica 1,120 1,218
Allocated costs from Advantica 625 625
Other 24,188 30,575
----------- ------------
116,793 116,285
----------- ------------
Operating (loss) income (4,810) 5,481
----------- ------------
Other charges:
Interest and debt expense, net 6,945 7,203
Other, net 41 23
----------- ------------
6,986 7,226
----------- ------------
Loss before taxes (11,796) (1,745)
Benefit from income taxes (521) (2,299)
---------- ------------
Net (loss) income $ (11,275) $ 554
========== ============
</TABLE>
See accompanying notes
2
<PAGE>
FRD Acquisition Co.
Condensed Statements of Consolidated Operations
(Unaudited)
<TABLE>
<CAPTION>
Successor Company Predecessor Company
Thirty-eight Weeks One Week Three Quarters
Ended Ended Ended
September 30, 1998 January 7, 1998 October 1, 1997
------------------ --------------- ---------------
<S> <C> <C> <C>
(In thousands)
Net company sales $ 325,600 $ 8,266 $ 367,890
Franchise and foreign licensing revenue 3,298 115 3,330
--------- --------- ---------
Operating revenue 328,898 8,381 371,220
--------- --------- ---------
Operating expenses:
Product cost 87,883 2,255 100,996
Payroll and benefits 120,583 3,139 132,673
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 29,130 -- --
Depreciation and amortization of property 23,934 469 18,010
Amortization of other intangibles 1,774 122 4,349
Management fees to Advantica 3,289 84 3,712
Allocated costs from Advantica 1,827 48 1,875
Other 75,039 2,218 91,030
--------- --------- ---------
343,459 8,335 352,645
--------- --------- ---------
Operating (loss) income (14,561) 46 18,575
--------- --------- ---------
Other charges (credits):
Interest and debt expense, net 20,466 585 22,201
Other, net (44) -- 408
--------- --------- ---------
20,422 585 22,609
--------- --------- ---------
Loss before reorganization items and taxes (34,983) (539) (4,034)
Reorganization items -- (44,993) --
--------- --------- ---------
(Loss) income before taxes (34,983) 44,454 (4,034)
(Benefit from) provision for income taxes (1,737) 11,367 (2,140)
--------- --------- ---------
Net (loss) income $ (33,246) $ 33,087 $ (1,894)
========= ========= =========
</TABLE>
See accompanying notes
3
<PAGE>
FRD Acquisition Co.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
Successor Company Predecessor Company
September 30, 1998 December 31, 1997
------------------ -------------------
<S> <C> <C>
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 6,971 $ 9,051
Receivables 3,745 4,661
Receivable from Advantica -- 1,870
Inventories 3,161 3,758
Other 5,814 9,132
--------- ---------
19,691 28,472
--------- ---------
Property and equipment 152,841 151,675
Accumulated depreciation (23,463) (34,346)
--------- ---------
129,378 117,329
--------- ---------
Other Assets:
Reorganization value in excess of amounts allocable to
identifiable assets, net 170,426 --
Goodwill, net -- 186,613
Other intangibles, net 42,417 7,275
Deferred taxes 17,010 25,487
Other 4,249 6,352
--------- ---------
234,102 225,727
--------- ---------
Total Assets $ 383,171 $ 371,528
========= =========
</TABLE>
See accompanying notes
4
<PAGE>
FRD Acquisition Co.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
Successor Company Predecessor Company
September 30, 1998 December 31, 1997
------------------ ------------------
<S> <C> <C>
(In thousands)
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Current maturities of long-term debt $ 28,194 $ 23,457
Accounts payable 25,158 21,645
Accrued salaries and vacations 8,525 12,820
Accrued insurance 5,129 4,560
Accrued interest 4,436 9,282
Payable to Advantica 15,331 10,182
Other 19,692 15,184
--------- ---------
106,465 97,130
--------- ---------
Long-term Liabilities:
Debt, less current maturities 183,852 195,652
Liability for self-insured claims 9,541 9,397
Other noncurrent liabilities 16,840 2,716
--------- ---------
210,233 207,765
--------- ---------
316,698 304,895
--------- ---------
Shareholder's Equity:
Common stock: par value $0.10; 1,000 shares
authorized , issued and outstanding -- --
Paid-in capital 99,719 75,000
Deficit (33,246) (8,367)
--------- ---------
Total Shareholder's Equity 66,473 66,633
--------- ---------
Total Liabilities and Shareholder's Equity $ 383,171 $ 371,528
========= =========
</TABLE>
See accompanying notes
5
<PAGE>
FRD Acquisition Co.
Statements of Consolidated Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Successor Company Predecessor Company
Thirty-eight Weeks One Week Three Quarters
Ended Ended Ended
September 30, 1998 January 7, 1998 October 1, 1997
------------------ --------------- ---------------
<S> <C> <C> <C>
(In thousands)
Cash Flows From Operating Activities:
Net income (loss) $(33,246) $ 33,087 $ (1,894)
Adjustments to reconcile income (loss) to
cash flows from operating activities:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 29,130 -- --
Depreciation and amortization of property 23,934 469 18,010
Amortization of other intangibles 1,774 122 4,349
Amortization of deferred financing costs 989 28 1,017
Amortization of debt premium (1,123) -- --
Gain on disposition of assets (16) -- (97)
Gain on lease buyouts (3,628) -- --
Deferred tax (benefit) provision (2,863) 11,340 (3,611)
Noncash reorganization items -- (44,993) --
Decrease (increase) in assets:
Receivables 524 252 1,926
Inventories 447 -- 1,576
Other current assets 1,758 3,918 591
Other assets 1,104 -- (1,764)
Increase (decrease) in liabilities:
Accounts payable 8,075 (3,085) (3,413)
Accrued salaries and vacation (2,844) (1,451) (315)
Payable to Advantica 5,017 132 5,584
Other accrued liabilities (11,067) 1,388 (11,694)
Liability for self-insurance claims (864) (253) (4,572)
Other noncurrent liabilities 25 3 597
-------- -------- --------
Net cash flows from operating activities 17,126 957 6,290
-------- -------- --------
Cash flows From Investing Activities:
Purchase of property (6,243) -- (7,542)
Proceeds from lease buyouts 3,650 -- --
Proceeds from disposition of property 162 -- 5,681
-------- -------- --------
Net cash flows used in investing activities (2,431) -- (1,861)
-------- -------- --------
Cash Flows From Financing Activities:
Principal debt payments, net (11,217) (6,515) (14,585)
Deferred financing costs -- -- (2)
-------- -------- --------
Net cash flows used in financing activities (11,217) (6,515) (14,587)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 3,478 (5,558) (10,158)
Cash and Cash Equivalents at:
Beginning of period 3,493 9,051 14,300
-------- -------- --------
End of period $ 6,971 $ 3,493 $ 4,142
======== ======== ========
</TABLE>
See accompanying notes
6
<PAGE>
FRD Acquisition Co.
Notes to Consolidated Financial Statements
September 30, 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
38 weeks ended September 30, 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" statements, 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. Multiples were established for these companies with respect to
the following: (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.
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> <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 conjunction 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 displaying
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 38 weeks ended September 30, 1998, the one week
ended January 7, 1998 and the three quarters ended October 1, 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.
As a result of the timing of this change, the first three quarters of 1997
include more than 39 weeks of operations. The 1998 comparable period consisted
of 39 weeks.
Note 6. Related Party Transactions
In September 1998, the Company entered into a lease buyout agreement with
Denny's, Inc., a wholly-owned subsidiary of Advantica. Under the terms of the
agreement, Denny's paid $2.3 million in cash proceeds in exchange for the right
to assume the leases associated with 13 restaurant units. The negotiated
purchase price was deemed to approximate market value as substantiated by a
purchase offer from an unrelated party for the same 13 units. As a result of the
transaction, the Company recognized a $2.6 million gain which is recorded as a
reduction to other operating expenses in the accompanying statement of
consolidated operations. Due to the intercompany nature of the transaction, the
entire gain is eliminated in the statement of consolidated operations of
Advantica.
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
September 30, 1998 and $1.9 million for the three quarters ended September 30,
1998. Payment of the fees to Advantica cannot occur unless certain financial
targets are met as described in the Company's senior note
10
<PAGE>
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, was reserved for issuance under a new management
stock option program. Additionally, 4 million shares of Common Stock were
reserved for issuance upon the exercise of new warrants expiring Janu-
ary 7, 2005 that were issued and outstanding on the Effective Date and
that 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 September 30, 1998 and the results of operations for
the quarter ended September 30, 1998, the 38 weeks ended September 30, 1998 and
the one week ended January 7, 1998 as compared to the quarter and three quarters
ended October 1, 1997. For purposes of providing a meaningful
11
<PAGE>
comparison of the Company's year-to-date operating performance, the following
discussion and presentation of the results of operations for the three quarters
ended September 30, 1998 reflect the sum of the 38 weeks ended September 30,
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.
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 September 30, 1998 Compared to Quarter Ended October 1, 1997
The table below summarizes restaurant activity for the quarter ended September
30, 1998.
<TABLE>
<CAPTION>
Units
Ending Units Units Sold/ Units Ending Units Ending Units
7/1/98 Opened Closed Refranchised 9/30/98 10/1/97
Coco's
<S> <C> <C> <C> <C> <C> <C>
Company-owned units 175 -- (15) -- 160 186
Franchised units 17 2 -- -- 19 8
Licensed units 296 3 -- -- 299 292
--- --- --- --- --- ---
488 5 (15) -- 478 486
Carrows
Company-owned units 137 -- (1) -- 136 153
Franchised units 18 -- (2) -- 16 3
--- --- --- --- --- ---
155 -- (3) -- 152 156
--- --- --- --- --- ---
643 5 (18) -- 630 642
=== === === === === ===
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
COCO'S
($ in millions, except average unit and same-store data) Quarter Quarter %
Ended Ended Increase/
September 30, 1998 October 1, 1997 (Decrease)
------------------ ---------------- -----------
<S> <C> <C> <C>
U.S. systemwide sales $ 70.0 $ 71.5 (2.1)
============ =============
Net company sales $ 63.9 $ 68.2 (6.3)
Franchise and licensing revenue 1.0 1.1 (9.1)
------------ -------------
Total revenue 64.9 69.3 (6.3)
------------ -------------
Operating expenses:
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 5.5 --- NM
Other 60.3 66.3 (9.0)
------------ -------------
Total operating expenses 65.8 66.3 (0.8)
------------ -------------
Operating (loss) income $ (0.9) $ 3.0 NM
============ =============
Average unit sales
Company-owned $ 369,900 $ 366,500 0.9
Franchised $ 340,500 $ 441,700 (22.9)
Same-store data (Company-owned)
Same-store sales (decrease) increase (1.6%) 2.7%
Average guest check $6.73 $6.79 (0.9)
NM = Not Meaningful
</TABLE>
Coco's NET COMPANY SALES for the quarter decreased $4.3 million (6.3%) compared
to the prior year comparable quarter. This decrease reflects a 13-unit decrease
in the number of Company-owned restaurants, (excluding the 13 units disposed of
on September 30, 1998) and a 1.6% decrease in same-store sales. The decrease in
same-store sales is primarily due to a decrease in average guest check,
reflecting the impact of promotions of certain popular menu items at value
prices during the period, somewhat offset by menu price increases instituted in
February 1998 in response to minimum wage increases. FRANCHISE AND FOREIGN
LICENSING REVENUE decreased $0.1 million for the third quarter of 1998 as
compared to the third quarter of 1997, reflecting a stronger dollar versus the
yen. This decline was partially offset by the net increase of eleven domestic
franchised units and seven foreign licensed units over the prior year quarter.
The stronger dollar versus the yen and the increase in the number of franchised
units (the calculation for the prior year reflected only eight franchised units)
also explain the large variance in franchise average unit sales.
The comparability of 1998 to 1997 OPERATING EXPENSES 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 $5.5
million for the quarter. In addition, the adjustment of property and equipment
and other intangible assets to fair value resulted in an estimated increase in
amortization and depreciation of $0.8 million. Excluding the estimated impact of
fresh start reporting, operating expenses decreased $6.8 million (10.3%),
reflecting a 13-unit decrease in Company-owned restaurants and gains of $3.4
million related to lease buyouts recorded as a reduction of operating expenses
in the current year quarter.
Excluding the estimated impact of the adoption of fresh start reporting, Coco's
OPERATING INCOME for the quarter increased $2.4 million from the prior year
comparable quarter as a result of the factors noted above.
13
<PAGE>
<TABLE>
<CAPTION>
CARROWS
Quarter Quarter %
($ in millions, except average unit and same-store data) Ended Ended Increase/
September 30, 1998 October 1, 1997 (Decrease)
------------------ ---------------- -----------
<S> <C> <C> <C>
U.S. systemwide sales $ 51.7 $ 53.7 (3.7)
=========== ==============
Net company sales $ 46.9 $ 52.4 (10.5)
Franchise revenue 0 .2 0.1 NM
------------ --------------
Total revenue 47.1 52.5 (10.3)
------------ --------------
Operating expenses:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 4.3 --- NM
Other 46.7 49.9 (6.4)
------------ --------------
Total operating expenses 51.0 49.9 2.2
------------ --------------
Operating (loss) income $ (3.9) $ 2.6 NM
============ ==============
Average unit sales
Company-owned $ 343,000 $ 339,500 1.0
Franchised $ 274,400 NM
Same-store data (Company-owned)
Same-store sales decrease (2.1%) (0.3%)
Average guest check $6.38 $6.52 (2.1)
NM = Not Meaningful
</TABLE>
Carrows' NET COMPANY SALES for the quarter decreased $5.5 million (10.5%) as
compared to the prior year comparable quarter. This decrease reflects a 17-unit
decrease in the number of Company-owned restaurants, 13 of which were converted
to franchise units, and a decrease in same-store sales. The decrease in
same-store sales is largely due to a decrease in average guest check offset by
an increase in customer traffic. The increase in customer traffic reflects the
positive impact of promotions of certain popular menu items at value prices
during the period. Such promotions also resulted in a lower average guest check,
which was somewhat offset by the effect of menu price increases instituted in
February 1998 in response to minimum wage increases. FRANCHISE REVENUE increased
$0.1 million for the third quarter of 1998 as compared to the third quarter of
1997, reflecting the addition of 13 franchised units over the prior year
quarter.
The comparability of 1998 to 1997 OPERATING EXPENSES 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 $4.3
million for the quarter. In addition, the adjustment of property and equipment
and other intangible assets to fair value resulted in an estimated increase in
amortization and depreciation of $0.5 million. Excluding the estimated impact of
fresh start reporting, operating expenses decreased $3.7 million (7.4%),
reflecting a 17-unit decrease in Company-owned restaurants.
Excluding the estimated impact of the adoption of fresh start reporting,
Carrows' OPERATING INCOME for the quarter decreased $1.7 million as compared to
the prior year comparable quarter as a result of the factors noted above.
14
<PAGE>
FRD CONSOLIDATED
CONSOLIDATED INTEREST AND DEBT EXPENSE, NET, decreased $0.3 million (3.6%) for
the quarter 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 at the Effective Date in accordance with fresh start
reporting and to the lower level of outstanding debt in the 1998 period.
The BENEFIT FROM INCOME TAXES from continuing operations for the quarter has
been computed based on management's estimate of the annual effective income tax
rate applied to loss before taxes. The Company recorded an income tax benefit
reflecting an effective income tax rate of approximately (4.4%) for the quarter
ended September 30, 1998 compared to an income tax benefit reflecting an
approximate rate of (131.7%) for the prior year quarter. The change in the
effective income tax rate relates to the completion of FRD Predecessor's 1996
calendar year income tax returns in the prior year quarter, at which time the
deferred income tax benefits related to certain income tax loss carryforwards
that had been allocated to the Company were recognized. In addition, during the
1997 quarter the Company recognized certain income tax credits related to
employer-paid social security taxes and certain deferred income tax benefits
related to the reduction in the valuation allowance originally established in
the Company's opening balance sheet.
The increase in CONSOLIDATED NET LOSS of $11.8 million in comparison to the
prior year quarter is a result of the items previously discussed.
15
<PAGE>
Three Quarters Ended September 30, 1998 Compared to Three Quarters Ended
October 1, 1997
<TABLE>
<CAPTION>
COCO'S
($ in millions, except average unit and same-store data) Three Quarters Three Quarters %
Ended Ended Increase/
September 30, 1998 October 1, 1997 (Decrease)
------------------ --------------- ----------
<S> <C> <C> <C>
U.S. systemwide sales $ 210.4 $ 214.8 (2.0)
============ ==============
Net company sales $ 193.2 $ 206.7 (6.5)
Franchise and licensing revenue 2.7 3.1 (12.9)
------------ --------------
Total revenue 195.9 209.8 (6.6)
------------ --------------
Operating expenses:
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 16.2 --- NM
Other 184.1 198.5 (7.3)
------------ --------------
Total operating expenses 200.3 198.5 0.9
------------ --------------
Operating (loss) income $ (4.4) $ 11.3 NM
============ ==============
Average unit sales
Company-owned $ 1,115,600 $ 1,119,400 (0.3)
Franchised $ 1,005,000 $ 1,323,900 (24.1)
Same-store data (Company-owned)
Same-store sales (decrease) increase (0.8%) 0.1%
Average guest check $6.96 $6.70 3.9
NM = Not Meaningful
</TABLE>
Coco's NET COMPANY SALES for the three quarters ended September 30, 1998
decreased $13.5 million (6.5%) as compared to the prior year comparable period.
This decrease reflects a 13-unit decrease in the number of Company-owned
restaurants (excluding the 13 units disposed of on September 30, 1998), 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 same-store sales. The decrease in
same-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 $0.4
million (12.9%) for the three quarters ended September 30, 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 net increase of eleven
domestic franchise units and seven foreign licensed units over the prior year.
The stronger dollar versus the yen and the increase in the number of franchised
units (the calculation for the prior year reflected only eight franchise units)
also explain the large variance in franchise average unit sales.
The comparability of 1998 to 1997 OPERATING EXPENSES 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
$16.2 million for the three quarters. In addition, the adjustment of property
and equipment and other intangible assets to fair value resulted in an estimated
increase in amortization and depreciation of $2.4 million. Excluding the
estimated impact of fresh start reporting, operating expenses decreased $16.8
million (8.5%), reflecting the effect of six fewer reporting days than in the
prior year comparable period, the 13-unit decrease in Company-owned restaurants,
and the impact of cost reduction programs implemented to increase operating
margins. Also reflected in the decrease in operating expenses are gains of $3.6
million related to lease buyouts recorded in 1998.
16
<PAGE>
Excluding the estimated impact of the adoption of fresh start reporting, Coco's
OPERATING INCOME for the three quarters ended September 30, 1998 increased $2.9
million from the prior year comparable period as a result of the factors noted
above.
<TABLE>
<CAPTION>
CARROWS
($ in millions, except average unit and same-store data) Three Quarters Three Quarters %
Ended Ended Increase/
September 30, 1998 October 1, 1997 (Decrease)
------------------ --------------- ----------
<S> <C> <C> <C>
U.S. systemwide sales $ 154.5 $ 163.4 (5.4)
============= ==============
Net company sales $ 140.7 $ 161.2 (12.7)
Franchise and licensing revenue 0.7 0.2 NM
------------- --------------
Total revenue 141.4 161.4 (12.4)
-------------- ---------------
Operating expenses:
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 12.9 --- NM
Other 138.6 154.1 (10.1)
------------- --------------
Total operating expenses 151.5 154.1 (1.7)
------------- --------------
Operating (loss) income $ (10.1) $ 7.3 NM
============== ==============
Average unit sales
Company-owned $ 1,024,000 $ 1,028,400 (0.4)
Franchised 850,200 NM
Same-store data (Company-owned)
Same-store sales decrease (1.6%) (1.5%)
Average guest check $ 6.69 $6.46 3.6
NM = Not Meaningful
</TABLE>
Carrows' NET COMPANY SALES decreased $20.5 million (12.7%) for the three
quarters ended September 30, 1998 as compared to the prior year comparable
period. This decrease reflects a 17-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 same-store sales. The decrease in same-store sales
is largely due to an 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 $0.5 million for the three quarters
ended September 30, 1998 as compared to the prior year comparable period. This
increase resulted from the addition of 13 franchised units over the prior year
quarter.
The comparability of 1998 to 1997 OPERATING EXPENSES 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
$12.9 million for the three quarters ended September 30, 1998. In addition, the
adjustment of property and equipment and other intangible assets to fair value
resulted in an estimated increase in amortization and depreciation of $1.7
million. Excluding the estimated impact of fresh start reporting, operating
expenses decreased $17.2 million (11.2%), reflecting the effect of six fewer
reporting days than in the prior year comparable period and the 17-unit decrease
in Company-owned restaurants.
Excluding the estimated impact of the adoption of fresh start reporting,
Carrows' OPERATING INCOME for the three quarters ended September 30, 1998
decreased $2.8 million from the prior year comparable period as a result of the
factors noted above.
17
<PAGE>
FRD CONSOLIDATED
CONSOLIDATED INTEREST AND DEBT EXPENSE, NET, decreased $1.2 million (5.2%) for
the three quarters ended September 30, 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 market value at
the Effective Date in accordance with fresh start reporting and to the lower
level of outstanding debt in the 1998 period.
The (BENEFIT FROM) PROVISION FOR INCOME TAXES from continuing operations for the
38 weeks ended September 30, 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 (5.0%) for the 38 weeks ended September 30, 1998 compared
to a benefit reflecting an approximate rate of (53.0%) for the 39 weeks ended
October 1, 1997. The provision for the one week period ended January 7, 1998 of
$11.4 million primarily relates to the 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 relates to the completion of FRD
Predecessor's 1996 calendar year income tax returns in the third quarter of
1997, at which time the deferred income tax benefits related to certain income
tax loss carryforwards that had been allocated to the Company were recognized.
In addition, during the third quarter of 1997 the Company recognized certain
income tax credits related to employer-paid social security taxes and certain
deferred income tax benefits related to the reduction in the valuation allowance
originally established in the Company's opening balance sheet.
The decrease in CONSOLIDATED NET LOSS of $1.7 million for the three quarters
ended September 30, 1998 as compared to the prior year comparable period is a
result of the items previously discussed.
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 September 30, 1998, the Company had no outstanding working capital
borrowings; however, letters of credit outstanding were $18.0 million.
At September 30, 1998 and December 31, 1997 the Company had working capital
deficits of $86.8 million and $68.7 million, respectively. The increase in the
working capital deficit is attributable primarily to a use of cash resulting
from $15.0 million in term loan payments, and an increase in the current portion
of the short term debt liability. 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.
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs which were written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or operating equipment that have date-sensitive software using
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 a comprehensive enterprise-wide program in place to address the
impact and issues associated with processing dates up to, through and beyond the
Year 2000. This program consists of three main areas: (a) information systems,
(b) supply chain and critical third party readiness and (c) business equipment.
Advantica is utilizing both internal and external resources to inventory,
assess, remediate, replace and test its systems for Year 2000 compliance. To
oversee
18
<PAGE>
the process, Advantica has established a Steering Committee which is comprised
of senior executives from all functional areas within Advantica and which
reports regularly to the Board of Directors and the Audit Committee.
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 systems will properly utilize dates beyond
December 31, 1999. For the most part, Advantica intends to replace existing
systems and based on current estimates expects to spend approximately $19
million in both 1998 and 1999 to address its information systems issues.
Relative to these amounts, Advantica estimates approximately $16 million and $14
million will be used in 1998 and 1999, respectively, to develop or purchase new
software and will be capitalized. The remaining amounts will be expensed as
incurred. The related amounts capitalized or expensed by the Company are
expected to be immaterial in all years. Advantica's total Year 2000 expenditures
through September 30, 1998 are approximately $7.2 million. All estimated costs
have been budgeted and are expected to be funded by cash flows from operations.
Currently, all information systems projects are on schedule and are fully
staffed. Systems that are critical to the Company's operations are targeted to
be Year 2000 compliant by June of 1999.
The nature of its business makes the Company very dependent on critical
suppliers and service providers, and the failure of such third parties to
address the Year 2000 issue adequately could have a material impact on the
Company's ability to conduct its business. Accordingly, Advantica has a team in
place to assess the Year 2000 readiness of all third parties on which it
depends. Surveys have been sent to critical suppliers and service providers, and
each survey response is being scored and assessed based on the third party's
Year 2000 project plans in place and progress to date. On-site visits or
follow-up telephone interviews will be performed for critical suppliers and
service providers. For any critical supplier or service provider which does not
provide Advantica with satisfactory evidence of their Year 2000 readiness,
contingency plans will be developed which will include establishing alternative
sources for the product or service provided. Advantica is also communicating
with its franchise business partners regarding Year 2000 business risks.
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 relies
will be timely converted, or that a failure to convert by another company would
not have a material adverse effect on the Company.
Advantica has inventoried and determined the business criticality of all
restaurant equipment. Based on preliminary findings the Company believes that
the date-related issues associated with the proper functioning of such assets
are insignificant and are not expected to represent a material risk to the
Company or its operations. Advantica has conducted an inventory of the
facilities at the Company's corporate office and has begun the correction of
certain date-deficient systems.
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 the
Company to complete it on a timely basis are based on management's best
estimates, which were derived based on numerous assumptions of future events
including the availability of certain resources, third party modification plans
and other factors. Specific factors that could have a material adverse effect on
the cost of the project and its completion date 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, unanticipated failures by
critical vendors and franchisees as well as a failure by Advantica to execute
its own remediation efforts. As a result, there can be no assurance that these
forward looking estimates will be achieved and actual results may differ
materially from those plans, resulting in material financial risk to the
Company. As the Year 2000 project progresses, Advantica will establish
contingency plans if necessary.
19
<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
September 30, 1998.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRD ACQUISITION CO.
Date: November 2, 1998 By: /s/ Ronald B. Hutchison
--------------------------------
Ronald B. Hutchison
Executive Vice President
(Duly authorized officer of
registrant/principal financial officer)
21
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of FRD Acquisition Co., as contained in its Form 10-Q for
the 38 weeks ended September 30, 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> SEP-30-1998
<CASH> 6,971
<SECURITIES> 0
<RECEIVABLES> 3,906
<ALLOWANCES> 161
<INVENTORY> 3,161
<CURRENT-ASSETS> 19,691
<PP&E> 152,841
<DEPRECIATION> 23,463
<TOTAL-ASSETS> 383,171
<CURRENT-LIABILITIES> 106,465
<BONDS> 183,852
0
0
<COMMON> 0
<OTHER-SE> 66,473
<TOTAL-LIABILITY-AND-EQUITY> 383,171
<SALES> 0
<TOTAL-REVENUES> 328,898
<CGS> 0
<TOTAL-COSTS> 343,459
<OTHER-EXPENSES> (44)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,466
<INCOME-PRETAX> (34,983)
<INCOME-TAX> (1,737)
<INCOME-CONTINUING> (33,246)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33,246)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
