UNITED STATES
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 29,
1999, 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 12 , 1999, 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>
Quarter Quarter
Ended Ended
September 29, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
(In thousands)
Revenue:
Company restaurant sales $ 95,735 $ 110,831
Franchise and licensing revenue 2,251 1,482
------------- ------------
Total operating revenue 97,986 112,313
------------- ------------
Cost of company restaurant sales:
Product costs 25,164 31,308
Payroll and benefits 37,696 41,267
Occupancy 5,892 6,537
Other operating expenses 12,177 16,520
------------- ------------
Total costs of company restaurant sales 80,929 95,632
Franchise restaurant costs 851 702
General and administrative expenses 3,801 3,618
Management fees to Advantica 974 1,120
Allocated costs from Advantica 650 625
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 9,734 9,784
Depreciation and other amortization 6,418 9,075
Gains on refranchising and other, net (222) (3,433)
------------- ------------
Total operating costs and expenses 103,135 117,123
------------- ------------
Operating loss (5,149) (4,810)
------------- ------------
Other expenses:
Interest expense, net 6,401 6,945
Other nonoperating (income) expenses, net (7) 41
------------- ------------
Total other expenses, net 6,394 6,986
------------- ------------
Loss before taxes (11,543) (11,796)
Benefit from income taxes (3,461) (521)
------------- ------------
Net loss $ (8,082) $ (11,275)
============= ============
</TABLE>
See accompanying notes
2
<PAGE>
FRD Acquisition Co.
Condensed Statements of Consolidated Operations
(Unaudited)
<TABLE>
<CAPTION>
Successor Company Predecessor Company
----------------------------------------------- -------------------
Three Quarters Thirty-Eight One Week
Ended Weeks Ended Ended
September 29, 1999 September 30, 1998 January 7, 1998
------------------ ------------------ ---------------
<S> <C> <C> <C>
(In thousands)
Revenue:
Company restaurant sales $ 285,836 $ 325,600 $ 8,266
Franchise and licensing revenue 6,358 4,203 141
---------- ---------- ----------
Total operating revenue 292,194 329,803 8,407
---------- ---------- ----------
Cost of company restaurant sales:
Product costs 74,706 87,883 2,255
Payroll and benefits 112,158 122,397 3,193
Occupancy 17,714 19,279 521
Other operating expenses 39,198 46,371 1,331
---------- ---------- ----------
Total costs of company restaurant sales 243,776 275,930 7,300
Franchise restaurant costs 3,014 1,910 47
General and administrative expenses 11,595 10,214 291
Management fees to Advantica 2,903 3,289 84
Allocated costs from Advantica 1,950 1,827 48
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 29,168 29,144 ---
Depreciation and other amortization 23,032 25,694 591
Gains on refranchising and other, net (553) (3,644) ---
---------- ---------- ----------
Total operating costs and expenses 314,885 344,364 8,361
---------- ---------- ----------
Operating (loss) income (22,691) (14,561) 46
---------- ---------- ----------
Other expenses:
Interest expense, net 19,165 20,466 585
Other nonoperating expenses (income), net 149 (44) ---
---------- ---------- ----------
Total other expenses, net 19,314 20,422 585
---------- ---------- ----------
Loss before reorganization items and taxes (42,005) (34,983) (539)
Reorganization items --- --- (44,993)
---------- ---------- ----------
(Loss) income before taxes (42,005) (34,983) 44,454
(Benefit from) provision for income taxes (6,001) (1,737) 11,367
---------- ---------- ----------
Net (loss) income $ (36,004) $ (33,246) $ 33,087
========== ========== ==========
</TABLE>
See accompanying notes
3
<PAGE>
FRD Acquisition Co.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 29, 1999 December 30, 1998
------------------ ------------------
<S> <C> <C>
(In thousands)
Assets
Current Assets:
Cash and cash equivalents $ 4,253 $ 5,841
Receivables 4,513 6,343
Inventories 2,632 3,070
Other 3,383 3,952
------------- ------------
14,781 19,206
------------- ------------
Property and equipment 160,637 149,336
Accumulated depreciation (50,084) (30,184)
------------- ------------
110,553 119,152
------------- ------------
Other Assets:
Reorganization value in excess of amounts allocable to
identifiable assets, net 126,528 155,852
Other intangibles, net 40,045 41,896
Deferred taxes 24,991 18,744
Other 5,308 3,903
------------- ------------
196,872 220,395
------------- ------------
$ 322,206 $ 358,753
============= ============
Liabilities and Shareholder's Equity
Current Liabilities:
Current maturities of long-term debt $ 2,881 $ 13,530
Accounts payable 13,326 20,361
Accrued salaries and vacation 8,692 10,199
Accrued insurance 3,486 4,408
Accrued interest 4,683 9,320
Payable to Advantica 21,606 16,740
Other 14,793 18,532
------------- ------------
69,467 93,090
------------- ------------
Long-Term Liabilities:
Debt, less current maturities 208,952 182,743
Liability for self-insured claims 7,317 10,014
Other noncurrent liabilities 14,563 14,995
------------- ------------
230,832 207,752
------------- ------------
300,299 300,842
------------- ------------
Shareholder's Equity:
Common stock: par value $0.10; 1,000 shares authorized,
issued and outstanding --- ---
Paid-in capital 99,719 99,719
Deficit (77,812) (41,808)
------------- -----------
Total Shareholder's Equity 21,907 57,911
------------- -----------
$ 322,206 $ 358,753
============= ===========
</TABLE>
See accompanying notes
4
<PAGE>
FRD Acquisition Co.
Statements of Consolidated Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Successor Company Predecessor Company
----------------------------------------------- -------------------
Three Quarters Thirty-Eight One Week
Ended Weeks Ended Ended
September 29, 1999 September 30, 1998 January 7, 1998
------------------ ------------------ ---------------
<S> <C> <C> <C>
(In thousands)
Cash Flows From Operating Activities:
Net (loss) income $ (36,004) $ (33,246) $ 33,087
Adjustments to reconcile (loss) income to
cash flows from operating activities:
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 29,168 29,144 ---
Depreciation and other amortization 23,032 25,694 591
Amortization of deferred financing costs 1,124 989 28
Amortization of debt premium (1,255) (1,123) ---
Gains on refranchising and other, net (553) (3,644) ---
Deferred tax (benefit) provision (6,247) (2,863) 11,340
Noncash reorganization items --- --- (44,993)
Decrease (increase) in assets:
Receivables 1,830 524 252
Inventories 438 447 ---
Other current assets (1,001) 1,758 3,918
Other assets (2,687) 1,104 ---
Increase (decrease) in liabilities:
Accounts payable (7,035) 8,075 (3,085)
Accrued salaries and vacation (1,507) (2,844) (1,451)
Payable to Advantica 4,867 5,017 132
Other accrued liabilities (7,780) (11,067) 1,388
Liability for self-insurance claims (2,048) (864) (253)
Other noncurrent liabilities (606) 25 3
---------- ------------ ----------
Net cash flows (used in) provided by
operating activities (6,264) 17,126 957
---------- ------------ ----------
Cash flows From Investing Activities:
Purchase of property (13,008) (6,243) ---
Proceeds from lease buy-outs --- 3,650 ---
Proceeds from disposition of property 613 162 ---
---------- ------------ ----------
Net cash flows used in investing activities (12,395) (2,431) ---
---------- ------------ ----------
Cash Flows From Financing Activities:
Principal debt payments (12,929) (11,217) (6,515)
Borrowing on credit facilities 30,000 --- ---
---------- ------------ ----------
Net cash flows provided by (used in)
financing activities 17,071 (11,217) (6,515)
---------- ------------ ----------
Increase (decrease) in cash and cash equivalents (1,588) 3,478 (5,558)
Cash and Cash Equivalents at:
Beginning of period 5,841 3,493 9,051
---------- ------------ ---------
End of period $ 4,253 $ 6,971 $ 3,493
========== ============ =========
</TABLE>
See accompanying notes
5
<PAGE>
FRD ACQUISITION CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 29, 1999
(UNAUDITED)
Note 1. GENERAL
FRD Acquisition Co. ("FRD" or, together with its subsidiaries, the "Company"), a
wholly owned subsidiary of Advantica Restaurant Group, Inc. ("Advantica"), owns
and operates the Coco's and Carrows restaurant brands.
On January 7, 1998 (the "Effective Date"), Flagstar Companies, Inc. ("FCI") and
Flagstar Corporation ("Flagstar") emerged from proceedings under Chapter 11 of
Title 11 of the United States Code pursuant to FCI's and Flagstar's Amended
Joint Plan of Reorganization dated as of November 7, 1997 (the "Plan"). On the
Effective Date, Flagstar, a wholly owned subsidiary of FCI, merged with and into
FCI, the surviving corporation, and FCI changed its name to Advantica Restaurant
Group, Inc. 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 included herein 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 30,
1998 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. 1998 Annual Report on Form 10-K. The results of operations for the three
quarters ended September 29, 1999 are not necessarily indicative of the results
for the entire fiscal year ending December 29, 1999.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Note 2. FRESH START REPORTING
As of the Effective Date, Advantica adopted fresh start reporting pursuant to
the guidance provided by the American Institute of Certified Public Accountants'
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." In conjunction with the revaluation of assets and liabilities, a
reorganization value for Advantica was determined which generally approximated
its fair value before considering debt and approximated the amount a buyer would
pay for the assets of Advantica after reorganization. Under fresh start
reporting, the reorganization value of Advantica was allocated to its assets. In
accordance with fresh start reporting, the portion of the reorganization value
which was not attributable to specific tangible or identified intangible assets
of Advantica has been reported as "reorganization value in excess of amounts
allocable to identifiable assets, net of accumulated amortization" in the
accompanying Consolidated Balance Sheets. 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.
The results of operations in the accompanying Statement of Consolidated
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
6
<PAGE>
adjustments. In this regard, the Statement of Consolidated Operations reflects
reorganization items consisting primarily of gains and losses related to the
adjustments of assets and liabilities to fair value.
Subsequent to the first 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.
Note 3. NEW FRD CREDIT FACILITY
On May 14, 1999, FRD and certain of its operating subsidiaries entered into a
new credit agreement with The Chase Manhattan Bank ("Chase") and Credit Lyonnais
New York Branch ("Credit Lyonnais") and other lenders named therein and thereby
established a $70 million Senior Secured Credit Facility (the "New FRD Credit
Facility") to replace the bank facility previously in effect for the Company's
Coco's and Carrows operations (the "Old FRD Credit Facility") which was
scheduled to mature in August 1999. The New FRD Credit Facility, which is
guaranteed by Advantica, consists of a $30 million term loan and a $40 million
revolving credit facility and matures in May 2003.
Note 4. 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 the management fees equaling one
percent of revenues that are payable to Advantica under the management service
agreement, are included in operating expenses and totaled $0.7 million and $2.0
million for the quarter and three quarters ended September 29, 1999,
respectively. 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 New FRD Credit Facility. Advantica's method of allocating these
expenses is not the only reasonable method and other reasonable methods of
allocation might produce different results.
Note 5. 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.
7
<PAGE>
Note 6. SEGMENT INFORMATION
The Company operates two restaurant concepts -- Coco's and Carrows -- and each
concept is considered a reportable segment. Administrative costs of the
corporate headquarters have been allocated to the reportable segments primarily
on the basis of percentage of sales.
The Company evaluates performance based on several factors, of which the primary
financial measure is business segment operating income before interest, taxes,
depreciation, amortization, management fees payable to Advantica and
restructuring and impairment charges ("EBITDA as defined"). EBITDA as defined is
a key internal measure used to evaluate the amount of cash flow available for
debt repayment and funding of additional investments. EBITDA as defined is not a
measure defined by generally accepted accounting principles and should not be
considered as an alternative to net income or cash flow data prepared in
accordance with generally accepted accounting principles, or as a measure of a
company's profitability or liquidity. The Company's measure of EBITDA as defined
may not be comparable to similarly titled measures reported by other companies.
<TABLE>
<CAPTION>
Predecessor
Successor Company Company
----------------------------------------------------------------------------- ---------------
Quarter Quarter Three Quarters Thirty-Eight One Week
Ended Ended Ended Weeks Ended Ended
September 29,1999 September 30, 1998 September 29, 1999 September 30, 1998 January 7, 1998
----------------- ------------------ ------------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C>
(In thousands)
REVENUE
Coco's $ 56,096 $ 65,054 $ 168,154 $ 191,389 $ 4,892
Carrows 41,890 47,259 124,040 138,414 3,515
----------- ----------- ----------- ----------- ---------
Total consolidated revenue $ 97,986 $ 112,313 $ 292,194 $ 329,803 $ 8,407
=========== =========== =========== =========== =========
EBITDA AS DEFINED
Coco's $ 6,353 $ 10,194 $ 19,166 $ 27,841 $ 737
Carrows 5,624 4,975 13,246 15,725 (16)
----------- ----------- ----------- ----------- ---------
Total consolidated EBITDA as defined 11,977 15,169 32,412 43,566 721
Depreciation and amortization expense (16,152) (18,859) (52,200) (54,838) (591)
Management fees to Advantica (974) (1,120) (2,903) (3,289) (84)
Other charges:
Interest expense, net (6,401) (6,945) (19,165) (20,466) (585)
Other, net 7 (41) (149) 44 ---
Reorganization items --- --- --- --- 44,993
----------- ----------- ----------- ----------- ---------
Consolidated (loss) income before $ (11,543) $ (11,796) $ (42,005) $ (34,983) $ 44,454
income taxes =========== =========== =========== =========== =========
</TABLE>
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 29, 1999 and the results of operations for
the quarter and three quarters ended September 29, 1999 as compared to the
quarter ended September 30, 1998 and the thirty-eight weeks ended September 30,
1998 and one week ended January 7, 1998. For purposes of providing a meaningful
comparison of the Company's year-to-date operating performance, the following
discussion and presentation of the results of operations for the thirty-eight
weeks ended September 30, 1998 and the one week ended January 7, 1998 will be
combined and referred to as the three quarters ended September 30, 1998. Where
appropriate, the impact of the adoption of fresh start reporting on the results
of operations during this period will be separately disclosed.
8
<PAGE>
The forward-looking statements included in Management's Discussion and Analysis
of Financial Condition and Results of Operations, including its "Strategic
Focus" and "Impact of the Year 2000" sections, 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 and its subsidiaries
and underlying concepts to be materially different from the performance
indicated or implied by such statements. Words such as "expects," "anticipates,"
"believes," "projects," "intends," "plans" and "hopes," variations of such words
and similar expressions are intended to identify such forward-looking
statements. Factors that could cause actual performance to differ materially
from the performance indicated by such statements 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 of
Financial Condition and Results of Operations in, and Exhibit 99 to, the
Company's Annual Report on Form 10-K for the period ended December 30, 1998.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 29, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998
The table below summarizes restaurant activity for the quarter ended September
29, 1999.
<TABLE>
<CAPTION>
Ending Units Units Net Ending Ending
Units Opened/ Sold/ Units Units Units
June 30,1999 Acquired Closed Refranchised September 29, 1999 September 30, 1998
------------ -------- ------ ------------ ------------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Coco's
Company-owned units 150 -- -- -- 150 160
Franchised units 34 -- -- -- 34 19
Licensed units 301 5 (1) -- 305 299
---- ---- ---- ---- ---- ----
485 5 (1) -- 489 478
---- ---- ---- ---- ---- ----
Carrows
Company-owned units 120 -- -- -- 120 136
Franchised units 27 1 -- -- 28 16
---- ---- ---- ---- ---- ----
147 1 -- -- 148 152
---- ---- ---- ---- ---- ----
632 6 (1) -- 637 630
==== ==== ==== ==== ==== ====
</TABLE>
9
<PAGE>
COCO'S
<TABLE>
<CAPTION>
Quarter Ended %
September 29, 1999 September 30, 1998 Increase/(Decrease)
------------------ ------------------- -------------------
<S> <C> <C> <C>
($ in millions, except average unit data)
U.S. systemwide sales $ 66.0 $ 70.0 (5.7)
========== ===========
Net company sales $ 54.5 $ 64.0 (14.8)
Franchise and licensing revenue 1.6 1.1 45.5
---------- -----------
Total revenue 56.1 65.1 (13.8)
---------- -----------
Operating expenses:
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 5.2 5.4 (3.7)
Other 54.0 60.7 (11.0)
---------- -----------
Total operating expenses 59.2 66.1 (10.4)
---------- -----------
Operating loss $ (3.1) $ (1.0) NM
========== ===========
EBITDA as defined $ 6.4 $ 10.2 (37.3)
Average unit sales:
Company-owned 364,800 369,900 (1.4)
Franchised 336,200 340,500 (1.3)
Same-store sales decrease (Company-owned) (5.6%) (1.6%)
NM = Not Meaningful
</TABLE>
Coco's NET COMPANY SALES for the third quarter of 1999 decreased $9.5 million
(14.8%) compared to the third quarter of 1998. This decline reflects a decrease
in same-store sales and the lower revenue due to 23 fewer Company-owned
restaurants than last year (including 13 Company-owned restaurants sold on the
last day of the prior year quarter). FRANCHISE AND LICENSING REVENUE increased
$0.5 million (45.5%), primarily attributable to a net increase of 15 franchised
units and six licensed units over the prior year quarter.
Coco's OPERATING EXPENSES decreased $6.9 million (10.4%) compared to the prior
year quarter, primarily resulting from sales declines and a decrease in
Company-owned restaurants. Additionally, operating expenses decreased in the
current year quarter due to a $0.8 million nonrecurring reduction of an
environmental accrual, which is reflected as a credit to operating expenses.
Depreciation and other amortization decreased primarily as a result of a
significant group of assets becoming fully depreciated in the second quarter of
the current year. The decrease in operating expenses is partially offset by
increased labor costs due to higher wage rates driven by market conditions. In
addition, operating expenses for the prior year quarter benefitted from $3.4
million of gains related to lease buy-outs which were recorded as a reduction of
operating expenses.
EBITDA AS DEFINED decreased $3.8 million (37.3%) compared to the prior year
quarter as a result of the factors noted in the preceding paragraphs, excluding
the decrease in depreciation and other amortization.
Coco's OPERATING INCOME decreased $2.1 million compared to the prior year
quarter as a result of the factors noted above.
10
<PAGE>
CARROWS
<TABLE>
<CAPTION>
Quarter Ended %
September 29, 1999 September 30, 1998 Increase/(Decrease)
------------------ ------------------- -------------------
<S> <C> <C> <C>
($ in millions, except average unit data)
U.S. systemwide sales $ 48.3 $ 51.7 (6.6)
========== ==========
Net company sales $ 41.2 $ 46.9 (12.2)
Franchise revenue 0.7 0.4 75.0
---------- ----------
Total revenue 41.9 47.3 (11.4)
---------- ----------
Operating expenses:
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 4.5 4.4 2.3
Other 39.4 46.7 (15.6)
---------- ----------
Total operating expenses 43.9 51.1 (14.1)
---------- ----------
Operating loss $ (2.0) $ (3.8) 47.4
========== ==========
EBITDA as defined $ 5.6 $ 4.9 14.3
Average unit sales:
Company-owned 343,900 343,000 0.3
Franchised 259,500 274,400 (5.4)
Same-store sales decrease (Company-owned) (3.7%) (2.1%)
</TABLE>
Carrows' NET COMPANY SALES for the third quarter of 1999 decreased $5.7 million
(12.2%) compared to the third quarter of 1998. The decrease reflects a 16-unit
decrease in Company-owned restaurants and a decrease in same-store sales.
FRANCHISE AND LICENSING REVENUE increased $0.3 million primarily attributable to
a net increase of 12 franchised units over the prior year quarter.
Carrows' OPERATING EXPENSES decreased $7.2 million (14.1%) compared to the prior
year quarter, primarily resulting from sales declines, fewer Company-owned
restaurants and management's continued focus on cost controls. Additionally,
operating expenses decreased in the current year quarter due to a $0.7 million
nonrecurring reduction of an environmental accrual, which is reflected as a
credit to operating expenses. Depreciation and other amortization decreased
primarily as a result of a significant group of assets becoming fully
depreciated in the second quarter of the current year. The decrease in operating
expenses is partially offset by increased labor costs due to higher wage rates
driven by market conditions.
EBITDA AS DEFINED increased $0.7 million (14.3%) compared to the prior year
quarter as a result of the factors noted in the preceding paragraphs, excluding
the decrease in depreciation and other amortization.
Carrows' OPERATING INCOME increased $1.8 million compared to the prior year
quarter as a result of the factors noted above.
11
<PAGE>
FRD CONSOLIDATED
The Company's consolidated EBITDA AS DEFINED decreased $3.2 million (21.0%) for
the third quarter of 1999 compared to the third quarter of 1998. This decrease
has been explained in the preceding paragraphs.
CONSOLIDATED INTEREST EXPENSE, NET decreased $0.5 million (7.8%) compared to the
prior year quarter. This decrease is attributable to the timing of the Company's
term loan borrowings.
The BENEFIT FROM INCOME TAXES from continuing operations for the third quarter
of 1999 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 30.0% for the
quarter ended September 29, 1999 compared to an income tax benefit reflecting an
approximate rate of 4.4% for the quarter ended September 30, 1998.
The decrease in CONSOLIDATED NET LOSS of $3.2 million compared to the prior year
quarter is a result of the items previously discussed.
12
<PAGE>
THREE QUARTERS ENDED SEPTEMBER 29, 1999 COMPARED TO THREE QUARTERS ENDED
SEPTEMBER 30, 1998
COCO'S
<TABLE>
<CAPTION>
Three Quarters Ended %
September 29, 1999 September 30, 1998 Increase/(Decrease)
------------------ ------------------- -------------------
<S> <C> <C> <C>
($ in millions, except average unit data)
U.S. systemwide sales $ 196.1 $ 210.4 (6.8)
=========== ===========
Net company sales $ 163.7 $ 193.2 (15.3)
Franchise and licensing revenue 4.5 3.1 45.2
----------- -----------
Total revenue 168.2 196.3 (14.3)
----------- -----------
Operating expenses:
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 15.7 16.2 (3.1)
Other 163.8 184.6 (11.3)
----------- -----------
Total operating expenses 179.5 200.8 (10.6)
----------- -----------
Operating loss $ (11.3) $ (4.5) NM
=========== ===========
EBITDA as defined $ 19.2 $ 28.6 (32.9)
Average unit sales:
Company-owned 1,093,400 1,115,600 (2.0)
Franchised 968,400 1,005,000 (3.6)
Same-store sales decrease (Company-owned) (6.1%) (0.8%)
NM = Not Meaningful
</TABLE>
Coco's NET COMPANY SALES for the three quarters ended September 29, 1999
decreased $29.5 million (15.3%) compared to the 1998 comparable period. The
decrease reflects lower same-store sales and fewer Company-owned restaurants.
FRANCHISE AND LICENSING REVENUE increased $1.4 million (45.2%), primarily
attributable to a net increase of 15 domestic franchised units and six licensed
restaurants over the prior year comparable period.
Coco's OPERATING EXPENSES decreased $21.3 million (10.6%) compared to the prior
year comparable period, primarily reflecting the decrease in Company-owned
restaurants. Additionally, depreciation and other amortization decreased
primarily as a result of a significant group of assets becoming fully
depreciated in the second quarter of the current year.
EBITDA AS DEFINED decreased $9.4 million (32.9%) compared to the prior year
comparable period as a result of the factors noted in the preceding paragraphs,
excluding the decrease in depreciation and other amortization.
Coco's OPERATING INCOME decreased $6.8 million compared to the prior year
comparable period as a result of the factors noted above.
13
<PAGE>
CARROWS
<TABLE>
<CAPTION>
Three Quarters Ended %
September 29, 1999 September 30, 1998 Increase/(Decrease)
------------------ ------------------- -------------------
<S> <C> <C> <C>
($ in millions, except average unit data)
U.S. systemwide sales $ 143.1 $ 154.5 (7.4)
========== ==========
Net company sales $ 122.1 $ 140.7 (13.2)
Franchise revenue 1.9 1.2 58.3
---------- ----------
Total revenue 124.0 141.9 (12.6)
---------- ----------
Operating expenses:
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 13.4 12.9 3.9
Other 122.0 139.0 (12.2)
---------- ----------
Total operating expenses 135.4 151.9 (10.9)
---------- ----------
Operating loss $ (11.4) $ (10.0) NM
========== ==========
EBITDA as defined $ 13.2 $ 15.7 (15.9)
Average unit sales:
Company-owned 1,017,800 1,024,000 (0.6)
Franchised 785,500 850,200 (7.6)
Same-store sales decrease (Company-owned) (3.9%) (1.6%)
NM = Not Meaningful
</TABLE>
Carrows' NET COMPANY SALES for the three quarters ended September 29, 1999
decreased $18.6 million (13.2%) compared to the 1998 comparable period. This
decrease reflects lower same-store sales and fewer Company-owned restaurants.
FRANCHISE REVENUE increased $0.7 million for the three quarters ended September
29, 1999 compared to the 1998 comparable period. This increase resulted from a
net increase of 12 domestic franchise units over the prior year.
Carrows' OPERATING EXPENSES decreased $16.5 million (10.9%) compared to the
prior year comparable period, reflecting a decrease in Company-owned restaurants
and management's continued focus on cost controls. Additionally, depreciation
and other amortization decreased primarily as a result of a significant group of
assets becoming fully depreciated in the second quarter of the current year.
EBITDA AS DEFINED decreased $2.5 million (15.9%) compared to the prior year
comparable period as a result of the factors noted in the preceding paragraphs,
excluding the decrease in depreciation and other amortization.
Carrows' OPERATING INCOME decreased $1.4 million compared to the prior year
comparable period as a result of the factors noted above.
14
<PAGE>
FRD CONSOLIDATED
The Company's consolidated EBITDA AS DEFINED decreased $11.9 million (26.8%)
compared to the prior year comparable period. This decrease has been explained
in the preceding paragraphs.
CONSOLIDATED INTEREST AND DEBT EXPENSE decreased $1.9 million (9.0%) for the
three quarters ended September 29, 1999 as compared to the prior year comparable
period. The decrease is primarily attributable to the timing of the Company's
term loan borrowings.
REORGANIZATION ITEMS recorded in the one week ended January 7, 1998 include the
impact of the adjustment of assets and liabilities to fair value in accordance
with SOP 90-7 as discussed in Note 2 to the consolidated financial statements
included herein.
The PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations for the
three quarters ended September 29, 1999 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 14.3% for the three quarters of 1999 compared to an income
tax benefit reflecting an approximate rate of 5.0% for the thirty-eight weeks
ended September 30, 1998. The provision for the one week period ended January 7,
1998 of $11.4 million primarily relates to the tax effect of the revaluation of
the Company's assets and liabilities in accordance with fresh start accounting.
The decrease in CONSOLIDATED NET INCOME of $35.8 million 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 Coco's and Carrows, the Company entered
into the Old FRD Credit Facility on May 23, 1996. Because of covenant
limitations under the indenture under Advantica's and FRD's various financing
documents, Advantica's ability to make further investments in FRD to upgrade the
Coco's and Carrows concepts was severely limited. In an effort to address this
issue, during the first half of 1999, Advantica (1) designated FRD and its
subsidiaries as restricted subsidiaries in accordance with the terms of
Advantica Senior Notes Indenture, generally increasing Advantica's investment
flexibility thereunder in its relationship with FRD and its subsidiaries, (2)
obtained certain amendments to Advantica's bank credit facility to increase
Advantica's investment flexibility under that facility with respect to the
Coco's and Carrows operations, and (3) effective May 14, 1999, entered into the
New FRD Credit Facility which consists of a $30 million term loan and a $40
million revolving credit facility and matures in May 2003 (see Note 3 to the
consolidated financial statements). The New FRD Credit Facility, which is
guaranteed by Advantica, refinanced the Old FRD Credit Facility and is available
to fund Coco's and Carrows' capital expenditures and for general corporate
purposes. Such facility is not available to Advantica and its other
subsidiaries. At September 29, 1999, the Company had $30 million outstanding
term loan borrowings, no outstanding working capital borrowings and letters of
credit outstanding of $12.7 million.
At September 29, 1999 and December 30, 1998, the Company had working capital
deficits of $54.7 million and $73.9 million, respectively. The decrease in the
working capital deficit resulted from obtaining the New FRD Credit Facility on
May 14, 1999 which refinanced the Old FRD Credit Facility. The $30 million term
loan balance under the New Credit Facility is considered long term at September
29, 1999. The Company is able to operate with a substantial working capital
deficit because: (1) restaurant operations are conducted on a cash (and cash
equivalent) basis with a low level of accounts receivable, (2) rapid turnover
allows a limited investment in inventories and (3) 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
deficits.
15
<PAGE>
As of September 29, 1999, the Company had cash balances of $4.3 million. The
Company believes that these cash balances, the availability of funds under the
New FRD Credit Facility and future operating cash flows will be sufficient to
fund its major remodeling effort at Coco's (see STRATEGIC FOCUS below).
STRATEGIC FOCUS
During the first three quarters of 1999, the Company completed the reimaging
of 12 Coco's Cafe and Bakery restaurants in Southern California. Nine of these
units were completed late in the third quarter; accordingly, it is too early to
measure the returns. Coco's plans to evaluate the post-reimage performance of
these restaurants through the first quarter of next year before beginning a full
rollout of the program. Additionally, Coco's is developing an alternative
reimage package which will be available for implementation at a lower cost in
certain markets as appropriate. The Company believes that Coco's must invest
capital into its older facilities to attract new customers and retain its
existing customer base against constant competitive pressures.
The Company does not intend to focus on the reimaging or remodeling of its
Carrows restaurants until the Coco's reimaging program is substantially
complete.
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.
Over the past two years, Advantica has had 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 consisted of three
main areas: (a) information systems, (b) supply chain and critical third party
readiness and (c) business equipment. An executive steering committee, comprised
of senior executives from all functional areas, oversaw all Year 2000 efforts
and reported to the Board of Directors regularly. Advantica utilized both
internal and external resources to inventory, assess, remediate, replace and
test its systems for Year 2000 compliance.
Advantica performed an assessment of the impact of the Year 2000 issue and
determined that a significant portion of its software applications needed to be
modified or replaced so that its systems would properly recognize dates beyond
December 31, 1999. For the most part, Advantica replaced existing systems. Based
on current estimates, it is anticipated that total Advantica spending in 1999
related to Year 2000 remediation efforts will be approximately $16 million. Of
that amount, Advantica estimates that by year end a total of approximately $13
million expended to develop or purchase new software will have been capitalized.
The related amounts capitalized or expensed by the Company are immaterial.
All Year 2000 projects addressing critical business issues are complete.
Financial systems that are critical to the Company's operations became Year 2000
compliant by the end of June 1999, and restaurant systems became compliant by
September 1999. Incremental testing of some lower priority systems is in process
to provide further assurance of Year 2000 compliance.
The nature of its business makes Advantica very dependent on critical suppliers
and service providers, and failure of such third parties to address the Year
2000 issues adequately could have a material impact on the Company's ability to
conduct its business. To address these concerns, Advantica has had a dedicated
team in place to assess the Year 2000 readiness of all third parties on which it
depends. Surveys were sent to critical suppliers and service providers and each
survey response was scored and assessed based on the third party's Year 2000
project plans in place and progress to date. On-site visits or
16
<PAGE>
follow-up phone interviews were performed for critical suppliers and service
providers. For any critical supplier or service providers which did not provide
the Company with satisfactory evidence of their Year 2000 readiness, contingency
plans were developed which included establishing alternative sources for the
product or service provided. Advantica also communicated with its franchise
business partners regarding Year 2000 business risks. The Company's costs
associated with the Year 2000 issues exclude 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's operations.
Advantica inventoried and determined the business criticality of all restaurant
equipment. Based on those 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's operations.
Advantica conducted an inventory and assessment of its facilities at the
Company's corporate offices and corrected 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. Advantica has established contingency plans addressing
business-critical processes for operations and other critical corporate
functions. In addition, Advantica has developed a detailed Year 2000 rollover
plan and communications strategy, and has frozen system changes until the first
quarter of 2000. A team is in place to validate that systems are functioning
correctly once year 2000 arrives and to quickly address issues should they
arise.
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 29, 1999.
17
<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 12, 1999 By: /s/ Ronald B. Hutchison
--------------------------------------
Ronald B. Hutchison
Executive Vice President
(Duly authorized officer of
registrant/principal financial officer)
18
<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 nine months ended September 29, 1999, and is qualified in its entirety to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-29-1999
<PERIOD-END> SEP-29-1999
<CASH> 4,253
<SECURITIES> 0
<RECEIVABLES> 4,653
<ALLOWANCES> 140
<INVENTORY> 2,632
<CURRENT-ASSETS> 14,781
<PP&E> 160,637
<DEPRECIATION> 50,084
<TOTAL-ASSETS> 322,206
<CURRENT-LIABILITIES> 69,467
<BONDS> 208,952
0
0
<COMMON> 0
<OTHER-SE> 21,907
<TOTAL-LIABILITY-AND-EQUITY> 322,206
<SALES> 0
<TOTAL-REVENUES> 292,194
<CGS> 0
<TOTAL-COSTS> 314,885
<OTHER-EXPENSES> 149
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,165
<INCOME-PRETAX> (42,005)
<INCOME-TAX> (6,001)
<INCOME-CONTINUING> (36,004)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (36,004)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
