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 June 30, 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 August 13, 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
June 30, 1999 July 1, 1998
------------- ------------
<S> <C> <C>
(In thousands)
Revenue:
Company restaurant sales $ 97,112 $ 112,642
Franchise and licensing revenue 2,118 1,422
--------- ---------
Total operating revenue 99,230 114,064
--------- ---------
Cost of company restaurant sales:
Product costs 24,861 30,010
Payroll and benefits 37,307 42,192
Occupancy 5,976 6,421
Other operating expenses 13,379 14,895
--------- ---------
Total costs of company restaurant sales 81,523 93,518
Franchise restaurant costs 1,059 597
General and administrative expenses 3,863 2,999
Management fees to Advantica 985 1,137
Allocated costs from Advantica 650 625
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 9,708 9,983
Depreciation and other amortization 8,436 10,522
Gains on refranchising and other, net (331) (211)
--------- ---------
Total operating costs and expenses 105,893 119,170
--------- ---------
Operating loss (6,663) (5,106)
--------- ---------
Other expenses:
Interest expense, net 6,285 7,004
Other nonoperating expenses (income), net 23 (81)
--------- ---------
Total other expenses, net 6,308 6,923
--------- ---------
Loss before taxes (12,971) (12,029)
Benefit from income taxes (900) (1,329)
--------- ---------
Net loss $ (12,071) $ (10,700)
========= =========
</TABLE>
See accompanying notes
2
<PAGE>
FRD Acquisition Co.
Condensed Statements of Consolidated Operations
(Unaudited)
<TABLE>
<CAPTION>
Successor Company Predecessor Company
------------------------------------ -------------------
Two Quarters Twenty-Five One Week
Ended Weeks Ended Ended
June 30, 1999 July 1, 1998 January 7, 1998
------------- -------------- ---------------
<S> <C> <C> <C>
(In thousands)
Revenue:
Company restaurant sales $ 190,101 $ 214,769 $ 8,266
Franchise and licensing revenue 4,107 2,721 141
--------- --------- ----------
Total operating revenue 194,208 217,490 8,407
--------- --------- ----------
Cost of company restaurant sales:
Product costs 49,542 56,575 2,255
Payroll and benefits 74,462 81,130 3,193
Occupancy 11,822 12,742 521
Other operating expenses 27,021 29,852 1,331
--------- --------- ----------
Total costs of company restaurant sales 162,847 180,299 7,300
Franchise restaurant costs 2,163 1,208 47
General and administrative expenses 7,794 6,595 291
Management fees to Advantica 1,929 2,169 84
Allocated costs from Advantica 1,300 1,202 48
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 19,434 19,346 ---
Depreciation and other amortization 16,614 16,633 591
Gains on refranchising and other, net (331) (211) ---
--------- --------- ----------
Total operating costs and expenses 211,750 227,241 8,361
--------- --------- ----------
Operating (loss) income (17,542) (9,751) 46
--------- --------- ----------
Other expenses:
Interest expense, net 12,764 13,521 585
Other nonoperating expenses (income), net 156 (85) ---
--------- --------- ----------
Total other expenses, net 12,920 13,436 585
--------- --------- ----------
Loss before reorganization items and taxes (30,462) (23,187) (539)
Reorganization items --- --- (44,993)
--------- --------- ----------
(Loss) income before taxes (30,462) (23,187) 44,454
(Benefit from) provision for income taxes (2,540) (1,216) 11,367
--------- --------- ----------
Net (loss) income $ (27,922) $ (21,971) $ 33,087
========= ========= ==========
</TABLE>
See accompanying notes
3
<PAGE>
FRD Acquisition Co.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1999 December 30, 1998
------------- -----------------
<S> <C> <C>
(In thousands)
Assets
Current Assets:
Cash and cash equivalents $ 12,729 $ 5,841
Receivables 3,702 6,343
Inventories 2,672 3,070
Other 3,559 3,952
----------- ------------
22,662 19,206
----------- ------------
Property and equipment 154,976 149,336
Accumulated depreciation (44,238) (30,184)
----------- -----------
110,738 119,152
----------- -----------
Other Assets:
Reorganization value in excess of amounts allocable to
identifiable assets, net 136,261 155,852
Other intangibles, net 40,665 41,896
Deferred taxes 21,549 18,744
Other 4,985 3,903
----------- -----------
203,460 220,395
----------- -----------
$ 336,860 $ 358,753
=========== ===========
Liabilities and Shareholder's Equity
Current Liabilities:
Current maturities of long-term debt $ 2,975 $ 13,530
Accounts payable 12,621 20,361
Accrued salaries and vacation 9,136 10,199
Accrued insurance 3,981 4,408
Accrued interest 9,306 9,320
Payable to Advantica 19,935 16,740
Other 15,386 18,532
---------- ----------
73,340 93,090
---------- ----------
Long-Term Liabilities:
Debt, less current maturities 210,037 182,743
Liability for self-insured claims 9,088 10,014
Other noncurrent liabilities 14,406 14,995
---------- ----------
233,531 207,752
---------- ----------
306,871 300,842
---------- ----------
Shareholder's Equity:
Common stock: par value $0.10; 1,000 shares authorized,
issued and outstanding --- ---
Paid-in capital 99,719 99,719
Deficit (69,730) (41,808)
---------- ----------
Total Shareholder's Equity 29,989 57,911
---------- ----------
$ 336,860 $ 358,753
========== ==========
</TABLE>
See accompanying notes
4
<PAGE>
FRD Acquisition Co.
Statements of Consolidated Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Successor Company Predecessor Company
--------------------------------------- -------------------
Two Quarters Twenty-Five One Week
Ended Weeks Ended Ended
June 30, 1999 July 1, 1998 January 7, 1998
------------- ------------ ---------------
<S> <C> <C> <C>
(In thousands)
Cash Flows From Operating Activities:
Net (loss) income $ (27,922) $ (21,971) $ 33,087
Adjustments to reconcile income (loss) to
cash flows from operating activities:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 19,434 19,346 ---
Depreciation and other amortization 16,614 16,633 591
Amortization of deferred financing costs 749 649 28
Amortization of debt premium (810) (723) ---
Gains on refranchising and other, net (331) (211) ---
Deferred tax (benefit) provision (2,805) (3,091) 11,340
Noncash reorganization items --- --- (44,993)
Decrease (increase) in assets:
Receivables 2,981 1,436 252
Inventories 399 343 ---
Other current assets (1,178) 1,026 3,918
Other assets (2,044) 1,000 ---
Increase (decrease) in liabilities:
Accounts payable (7,740) (1,753) (3,085)
Accrued salaries and vacation (1,062) (1,362) (1,451)
Payable to Advantica 3,195 3,298 132
Other accrued liabilities (2,924) (3,249) 1,388
Liability for self-insurance claims 217 (91) (253)
Other noncurrent liabilities (488) 1,467 3
----------- ----------- -----------
Net cash flows (used in) provided by
operating activities (3,715) 12,747 957
----------- ----------- -----------
Cash flows From Investing Activities:
Purchase of property (7,420) (3,065) ---
Proceeds from disposition of property 150 293 ---
----------- ----------- -----------
Net cash flows used in investing activities (7,270) (2,772) ---
----------- ----------- -----------
Cash Flows From Financing Activities:
Principal debt payments (12,127) (8,422) (6,515)
Borrowing on credit facilities 30,000 --- ---
----------- ----------- -----------
Net cash flows provided by (used in) financing
activities 17,873 (8,422) (6,515)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 6,888 1,553 (5,558)
Cash and Cash Equivalents at:
Beginning of period 5,841 3,493 9,051
----------- ----------- -----------
End of period $ 12,729 $ 5,046 $ 3,493
=========== =========== ===========
</TABLE>
See accompanying notes
5
<PAGE>
FRD ACQUISITION CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 two
quarters ended June 30, 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 1999
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 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.
6
<PAGE>
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 $1.3
million for the quarter and two quarters ended June 30, 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. 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 Two Quarters Twenty-Five One Week
Ended Ended Ended Weeks Ended Ended
June 30,1999 July 1,1998 June 30, 1999 July 1, 1998 January 7, 1998
------------ ----------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
(In thousands)
REVENUE
Coco's $ 57,250 $ 65,827 $ 112,058 $ 126,335 $ 4,892
Carrows 41,980 48,237 82,150 91,155 3,515
---------- ---------- ----------- ----------- ---------
Total consolidated revenue $ 99,230 $ 114,064 $ 194,208 $ 217,490 $ 8,407
========== ========== =========== =========== =========
EBITDA AS DEFINED
Coco's $ 7,360 $ 10,190 $ 12,813 $ 17,648 $ 737
Carrows 5,106 6,346 7,622 10,749 (16)
---------- ---------- ----------- ----------- ---------
Total consolidated EBITDA as defined 12,466 16,536 20,435 28,397 721
Depreciation and amortization expense (18,144) (20,505) (36,048) (35,979) (591)
Management fees to Advantica (985) (1,137) (1,929) (2,169) (84)
Other charges:
Interest expense, net (6,285) (7,004) (12,764) (13,521) (585)
Other, net (23) 81 (156) 85 ---
Reorganization items --- --- --- --- 44,993
---------- ---------- ----------- ----------- ---------
Consolidated (loss) income before $ (12,971) $ (12,029) $ (30,462) $ (23,187) $ 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 June 30, 1999 and the results of operations for the
quarter and two quarters ended June 30, 1999 as compared to the quarter ended
July 1, 1998 and the twenty-five weeks ended July 1, 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 twenty-five weeks ended July
1, 1998 and the one week ended January 7, 1998 will be combined and referred to
as the two quarters ended July 1, 1998. 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, including its "Strategic
Focus" and "Impact of the Year 2000" sections, which reflect management's best
judgment
8
<PAGE>
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 JUNE 30, 1999 COMPARED TO QUARTER ENDED JULY 1, 1998
The table below summarizes restaurant activity for the quarter ended June 30,
1999.
<TABLE>
<CAPTION>
Ending Units Units Net Ending Ending
Units Opened/ Sold/ Units Units Units
March 31,1999 Acquired Closed Refranchised June 30, 1999 July 1, 1998
------------- -------- ------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Coco's
Company-owned units 150 -- -- -- 150 175
Franchised units 33 2 (1) -- 34 17
Licensed units 298 3 -- -- 301 296
---- ---- ---- ---- ---- ----
481 5 (1) -- 485 488
---- ---- ---- ---- ---- ----
Carrows
Company-owned units 122 -- (1) (1) 120 137
Franchised units 26 -- -- 1 27 18
---- ---- ---- ---- ---- ----
148 -- (1) -- 147 155
---- ---- ---- ---- ---- ----
629 5 (2) -- 632 643
==== ==== ==== ==== ==== ====
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
COCO'S
Quarter Ended %
June 30, 1999 July 1, 1998 Increase/(Decrease)
------------- ------------ -------------------
<S> <C> <C> <C>
($ in millions, except average unit data)
U.S. systemwide sales $ 66.6 $ 70.6 (5.7)
=========== ===========
Net company sales $ 55.8 $ 64.8 (13.9)
Franchise and licensing revenue 1.4 1.0 40.0
----------- -----------
Total revenue 57.2 65.8 (13.1)
----------- -----------
Operating expenses:
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 5.2 5.6 (7.1)
Other 55.2 62.2 (11.3)
----------- -----------
Total operating expenses 60.4 67.8 (10.9)
----------- -----------
Operating loss $ (3.2) $ (2.0) NM
=========== ===========
EBITDA as defined $ 7.4 $ 10.2 (27.5)
Average unit sales:
Company-owned 370,600 370,100 0.1
Franchised 320,900 336,800 (4.7)
Same-store sales decrease (Company-owned) (4.8%) (0.8%)
NM = Not Meaningful
</TABLE>
Coco's NET COMPANY SALES for the second quarter of 1999 decreased $9.0 million
(13.9%) compared to the second quarter of 1998. The decrease reflects a 25-unit
decrease in Company-owned restaurants and a decrease in same-store sales.
FRANCHISE AND LICENSING REVENUE increased $0.4 million (40.0%), primarily
attributable to a net increase of 17 franchised units and five licensed units
over the prior year quarter.
Coco's OPERATING EXPENSES decreased $7.4 million (10.9%) compared to the prior
year quarter, primarily resulting from the 25-unit decrease in Company-owned
restaurants. The decrease in operating expenses related to fewer units is
partially offset by higher labor costs due to an increase in training costs
related to the installation of a new POS system and increased payroll costs
driven by market conditions.
EBITDA AS DEFINED decreased $2.8 million (27.5%) compared to the prior year
quarter as a result of the factors noted in the preceding paragraphs.
Coco's OPERATING INCOME decreased $1.2 million compared to the prior year
quarter as a result of the factors noted above.
10
<PAGE>
<TABLE>
<CAPTION>
CARROWS
Quarter Ended %
June 30, 1999 July 1, 1998 Increase/(Decrease)
------------- ------------ -------------------
<S> <C> <C> <C>
($ in millions, except average unit data)
U.S. systemwide sales $ 48.4 $ 52.7 (8.2)
=========== ===========
Net company sales $ 41.4 $ 47.8 (13.4)
Franchise revenue 0.6 0.4 50.0
----------- -----------
Total revenue 42.0 48.2 (12.9)
----------- -----------
Operating expenses:
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 4.5 4.4 2.3
Other 41.0 46.9 (12.6)
----------- -----------
Total operating expenses 45.5 51.3 (11.3)
----------- -----------
Operating loss $ (3.5) $ (3.1) (12.9)
=========== ===========
EBITDA as defined $ 5.1 $ 6.4 (20.3)
Average unit sales:
Company-owned 345,300 343,600 0.5
Franchised 262,600 292,200 (10.1)
Same-store sales decrease (Company-owned) (4.3%) (1.3%)
</TABLE>
Carrows' NET COMPANY SALES for the second quarter of 1999 decreased $6.4 million
(13.4%) compared to the second quarter of 1998. The decrease reflects a 17-unit
decrease in Company-owned restaurants and a decrease in same-store sales.
FRANCHISE AND LICENSING REVENUE increased $0.2 million primarily attributable to
a net increase of nine franchised units over the prior year quarter.
Carrows' OPERATING EXPENSES decreased $5.8 million (11.3%) compared to the prior
year quarter, primarily reflecting a 17-unit decrease in Company-owned
restaurants. The decrease in operating expenses related to fewer units is
partially offset by higher labor costs due to an increase in training costs
related to the installation of a new POS system and increased payroll costs
driven by market conditions.
EBITDA AS DEFINED decreased $1.3 million (20.3%) compared to the prior year
quarter as a result of the factors noted in the preceding paragraphs.
Carrows' OPERATING INCOME decreased $0.4 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 $4.1 million (24.6%) for
the second quarter of 1999 compared to the second quarter of 1998. This decrease
is a result of the factors discussed in the preceding paragraphs.
CONSOLIDATED INTEREST EXPENSE, NET decreased $0.7 million (10.3%) 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 second 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 6.9% for the
quarter ended June 30, 1999 compared to an income tax benefit reflecting an
approximate rate of 11.0% for the quarter ended July 1, 1998. The change in the
effective tax rate in the second quarter of 1999 from the second quarter of 1998
is a result of the adjustment to the estimated effective rate made during fiscal
year 1998 due to the recognition of certain FICA income tax credits.
The decrease in CONSOLIDATED NET INCOME of $1.4 million compared to the prior
year quarter is a result of the items previously discussed.
12
<PAGE>
TWO QUARTERS ENDED JUNE 30, 1999 COMPARED TO TWO QUARTERS ENDED JULY 1, 1998
<TABLE>
<CAPTION>
COCO'S
Two Quarters Ended %
June 30, 1999 July 1, 1998 Increase/(Decrease)
------------- ------------ -------------------
<S> <C> <C> <C>
($ in millions, except average unit data)
U.S. systemwide sales $ 130.1 $ 140.5 (7.4)
=========== ==========
Net company sales $ 109.2 $ 129.2 (15.5)
Franchise and licensing revenue 2.9 2.0 45.0
----------- ----------
Total revenue 112.1 131.2 (14.6)
----------- ----------
Operating expenses:
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 10.5 10.8 (2.8)
Other 109.8 123.9 (11.4)
----------- ----------
Total operating expenses 120.3 134.7 (10.7)
----------- ----------
Operating loss $ (8.2) $ (3.5) NM
=========== ==========
EBITDA as defined $ 12.8 $ 18.4 (30.4)
Average unit sales:
Company-owned 728,600 735,000 (0.9)
Franchised 632,400 663,900 (4.7)
Same-store sales decrease (Company-owned) (6.3%) (0.4%)
NM = Not Meaningful
</TABLE>
Coco's NET COMPANY SALES for the two quarters ended June 30, 1999 decreased
$20.0 million (15.5%) compared to the 1998 comparable period. The decrease
reflects 25 fewer Company-owned restaurants and lower same-store sales.
FRANCHISE AND LICENSING REVENUE increased $0.9 million (45.0%), primarily
attributable to a net increase of 17 domestic franchised units and five licensed
restaurants over the prior year comparable period.
Coco's OPERATING EXPENSES decreased $14.4 million (10.7%) compared to the prior
year comparable period, primarily reflecting the 25-unit decrease in
Company-owned restaurants.
EBITDA AS DEFINED decreased $5.6 million (30.4%) compared to the prior year
comparable period as a result of the factors noted in the preceding paragraphs.
Coco's OPERATING INCOME decreased $4.7 million compared to the prior year
comparable period as a result of the factors noted above.
13
<PAGE>
<TABLE>
<CAPTION>
CARROWS
Two Quarters Ended %
June 30, 1999 July 1, 1998 Increase/(Decrease)
------------- ------------ -------------------
<S> <C> <C> <C>
($ in millions, except average unit data)
U.S. systemwide sales $ 94.8 $ 102.9 (7.9)
=========== ==========
Net company sales $ 80.9 $ 93.8 (13.8)
Franchise revenue 1.2 0.8 50.0
----------- -----------
Total revenue 82.1 94.6 (13.2)
----------- -----------
Operating expenses:
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 8.9 8.5 4.7
Other 82.5 92.3 (10.6)
----------- -----------
Total operating expenses 91.4 100.8 (9.3)
----------- -----------
Operating loss $ (9.3) $ (6.2) NM
=========== ===========
EBITDA as defined $ 7.6 $ 10.7 (29.0)
Average unit sales:
Company-owned 673,900 671,500 0.4
Franchised 526,000 577,000 (8.8)
Same-store sales decrease (Company-owned) (4.0%) (1.3%)
NM = Not Meaningful
</TABLE>
Carrows' NET COMPANY SALES for the two quarters ended June 30, 1999 decreased
$12.9 million (13.8%) compared to the 1998 comparable period. This decrease
reflects a 17-unit decrease in the number of Company-owned restaurants and a
decrease in same-store sales. FRANCHISE REVENUE increased $0.4 million for the
two quarters ended June 30, 1999 compared to the 1998 comparable period. This
increase resulted from a net increase of nine domestic franchise units over the
prior year.
Carrows' OPERATING EXPENSES decreased $9.4 million (9.3%) compared to the prior
year comparable period, reflecting a 17-unit decrease in Company-owned
restaurants.
EBITDA AS DEFINED decreased $3.1 million (29.0%) compared to the prior year
comparable period as a result of the factors noted in the preceding paragraphs.
Carrows' OPERATING INCOME decreased $3.1 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 $8.7 million (30%)
compared to the prior year comparable period. This decrease is a result of the
factors discussed in the preceding paragraphs.
CONSOLIDATED INTEREST AND DEBT EXPENSE decreased $1.3 million (9.5%) for the two
quarters ended June 30, 1999 as compared to the prior year comparable period.
The decrease is 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
two quarters ended June 30, 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 8.3% for the two quarters of 1999 compared to an income
tax benefit reflecting an approximate rate of 5.2% for the 25 weeks ended July
1, 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 change in
the effective income tax rate from the prior year can be attributed to the
recognition of certain FICA income tax credits.
The decrease in CONSOLIDATED NET INCOME of $39.0 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 June 30, 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 June 30, 1999 and December 30, 1998, the Company had working capital deficits
of $50.7 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 June 30, 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.
As of June 30, 1999, the Company had cash balances of $12.7 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).
15
<PAGE>
Strategic Focus
The Company is undertaking a major reimaging effort at its Coco's concept.
Coco's has traditionally been known for its great food, exceptional service and
outstanding bakery products; however, its facilities have had no significant
investment in over a decade. Three reimaged prototype units were completed
during the first half of this year, providing the necessary research to move
forward. The initial phase of the program will result in seven additional
reimages in the San Diego market by mid-September 1999. Assuming the results
from these units meet the Company's return on investment requirements, Coco's
will move forward with the reimaging of an additional 17 units by year end, with
a goal to complete the reimaging program by mid-2001. The Company intends to
fund this reimaging effort from the New FRD Credit Facility and internally
generated funds.
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.
Advantica has a comprehensive enterprise-wide program in place (which includes
the Company) 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 the process, Advantica established a
Steering Committee which is comprised of senior executives from all functional
areas within Advantica and which reports regularly to the Advantica Board of
Directors and Audit Committee.
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 will properly utilize dates beyond
December 31, 1999. For the most part, Advantica replaced existing systems and,
based on current estimates, expects to spend approximately $20 million in 1999
to address its information systems issues. Relative to this amount, Advantica
estimates that approximately $16 million will be used 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. Advantica's total Year 2000 expenditures through June
30, 1999 were approximately $9.1 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. Financial
systems that are critical to the Company's operations became Year 2000 compliant
by the end of June 1999. Restaurant systems are targeted to be compliant by
September 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
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
follow-up phone interviews were performed for critical suppliers and service
providers. For any critical supplier or service provider which did not provide
Advantica with satisfactory evidence of their Year 2000 readiness, contingency
plans were developed which included 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
16
<PAGE>
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 has inventoried and determined the business criticality of all
restaurant equipment. Based on its 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 its facilities at the
Company's corporate office and has 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 is developing a detailed Year 2000 rollover
planning and communication strategy, and will freeze system changes during the
fourth quarter of 1999 to reduce Year 2000 risks. However, the costs of the
project and the ability of Advantica to complete the Year 2000 transition 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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. The following are included as exhibits to this report:
EXHIBIT
NO. DESCRIPTION
- ------- -----------
*10.1 Credit Agreement, dated May 14, 1999, among Coco's Restaurants, Inc.,
Carrows Restaurants, Inc., and jojo's Restaurants, Inc., as
borrowers, FRD Acquisition Co. and FRD Corporation, as guarantors,
the lenders named therein, Credit Lyonnias New York Branch as
administrative agent, and The Chase Manhattan Bank, as documentation
agent and syndication agent (incorporated by reference to Exhibit
10.1 to Advantica's quarterly report on Form 10-Q for the period
ended June 30, 1999).
27 Financial Data Schedule
- ---------------------
*Certain of the exhibits to this Quarterly Report on Form 10-Q, indicated by an
asterisk, are hereby incorporated by reference to other documents on file with
the commission with which they are physically filed, to be a part of hereof as
of their respective dates.
b. No reports on Form 8-K were filed during the quarter ended June 30,
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: August 16, 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 QUARTER ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-29-1999
<PERIOD-START> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 12,729
<SECURITIES> 0
<RECEIVABLES> 3,842
<ALLOWANCES> 140
<INVENTORY> 2,672
<CURRENT-ASSETS> 22,662
<PP&E> 154,976
<DEPRECIATION> 44,238
<TOTAL-ASSETS> 336,860
<CURRENT-LIABILITIES> 73,340
<BONDS> 210,037
0
0
<COMMON> 0
<OTHER-SE> 29,989
<TOTAL-LIABILITY-AND-EQUITY> 336,860
<SALES> 0
<TOTAL-REVENUES> 194,208
<CGS> 0
<TOTAL-COSTS> 211,750
<OTHER-EXPENSES> 156
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,764
<INCOME-PRETAX> (30,462)
<INCOME-TAX> (2,540)
<INCOME-CONTINUING> (27,922)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,922)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
