FRD ACQUISITION CO, 10-K405, 1999-03-30

FRD ACQUISITION CO
10-K405, 1999-03-30
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the fiscal year ended December 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)

<TABLE>
<S> <C>
DELAWARE 57-1040952
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
3355 MICHELSON DRIVE, SUITE 350
IRVINE, CA 92612
(Address of principal executive offices) (Zip code)
</TABLE>

Registrant's telephone number, including area code: (864) 597-8000
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Securities registered pursuant to Section 12(b) of the Act:

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<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
<S> <C>
None None
</TABLE>

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Securities registered pursuant to Section 12(g) of the Act: None

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 _

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

As of March 15, 1999, 1,000 shares of 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.

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS
(I)(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE
REDUCED DISCLOSURE FORMAT.
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TABLE OF CONTENTS

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PAGE
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<S> <C> <C>
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 5
Item 3. Legal Proceedings........................................... 5
Item 4. Submission of Matters to a Vote of Security Holders......... 5

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 6
Item 6. Selected Financial Data..................................... 6
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 15
Item 8. Financial Statements and Supplementary Data................. 16
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 16

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 16
Item 11. Executive Compensation...................................... 16
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 16
Item 13. Certain Relationships and Related Transactions.............. 16

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 17

INDEX TO FINANCIAL STATEMENTS.......................................... F-1

SIGNATURES.............................................................
</TABLE>

FORWARD-LOOKING STATEMENTS

The forward-looking statements included in the "Business," "Legal
Proceedings," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Quantitative and Qualitative Disclosures About
Market Risk" sections, which reflect management's best judgment based on factors
currently known, involve risks and uncertainties. Words such as "expects,"
"anticipates," "believes," "intends," "plans," and "hopes," variations of such
words and similar expressions are intended to identify such forward-looking
statements. Actual results could differ materially from those anticipated in
these forward-looking statements as a result of a number of factors including,
but not limited to, the factors discussed in such sections and those set forth
in the cautionary statements contained in Exhibit 99 to this Form 10-K. (See
Exhibit 99 -- Safe Harbor Under the Private Securities Litigation Reform Act of
1995.) Forward-looking information provided by the Company in such sections
pursuant to the safe harbor established under the Private Securities Litigation
Reform Act of 1995 should be evaluated in the context of these factors.
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PART I

ITEM 1. BUSINESS

INTRODUCTION

FRD Acquisition Co. ("FRD" or, together with its subsidiaries and including
its predecessor, as applicable, the "Company") was incorporated in February 1996
as a wholly-owned subsidiary of Flagstar Corporation ("Flagstar"), 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
consideration for all of the outstanding stock of FRI-M Corporation ("FRI-M"),
the former subsidiary of Family Restaurants, Inc. ("FRI"), which owns the Coco's
and Carrows chains.

The Company is one of the nation's leading operators of family-style
restaurants. As of year end, the Company operated 273 restaurants owned or
leased by the Company and franchised 57 restaurants, principally under the
Coco's and Carrows names. Approximately 88% of the Company-owned restaurants are
located in California, which management believes makes the Company one of the
largest family-style restaurant operators in California, both in terms of sales
volume and number of restaurants. Coco's and Carrows restaurants have been in
existence for 50 and 30 years, respectively, and have developed excellent name
recognition and a loyal customer base. In addition to its domestic operations,
as of year end the Company was the licensor of 300 Coco's restaurants, primarily
in Japan and South Korea.

In the financial statements and selected financial data included herein,
reference to the "FRD Predecessor Company" refers to the period of ownership of
FRI-M by FRI, giving effect to information about events occurring upon FRI's
emergence from a Bankruptcy Code (as defined below) reorganization (the "FRI
Reorganization") through May 23, 1996. "FRD Successor" refers to the period of
ownership of FRI-M by FRD subsequent to May 23, 1996. "FRD Emerged Successor"
refers to the period subsequent to the implementation of fresh start reporting
as of January 7, 1998. Further discussion of the adoption of fresh start
reporting is included in "Selected Financial Data" and Note 2 to the
Consolidated and Combined Financial Statements included in this Form 10-K.

The FRD Predecessor combined financial statements for the periods indicated
represent the financial position and operations of FRI-M, as a wholly-owned
subsidiary of FRI (or its predecessor), and certain subsidiaries of FRI-M
including those restaurants that made up the Family Restaurant Division and the
FRD Commissary, both of which were divisions of FRI. The Family Restaurant
Division primarily consisted of the Coco's and Carrows restaurant concepts. The
FRI-M combined financial statements exclude the financial position and
operations of FRI-MRD Corporation, a wholly-owned subsidiary of the FRI-M
Corporation which was not acquired by FRD.

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's and Flagstar's plan of reorganization dated
as of November 7, 1997 (the "Plan of Reorganization") (as further described in
Note 1 to the Consolidated and Combined Financial Statements included herein).
On the Effective Date, Flagstar 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.

RESTAURANTS

The Company's restaurants offer an extensive menu of moderately-priced
breakfast, lunch and dinner items and are typically open either 18 or 24 hours a
day. Both Coco's and Carrows restaurants provide casual sit-down dining
experiences and emphasize consistently high quality food with an excellent
price-to-value relationship and friendly, efficient service.

While the Coco's and Carrows concepts appeal to many of the same broad-based
customers, they are positioned, as described below, to target distinct groups
within the mid-scale family-style category. Through this positioning, the
Company optimizes its ability to appeal to a larger customer base with two
distinctly different brands focusing on different customer needs while achieving
economies of scale for the two restaurants chains.

COCO'S

Coco's is a bakery restaurant chain operating primarily in California and
Arizona, as well as Japan and South Korea. Coco's ranks among the top 15 chains
in the family-style category based on U.S. systemwide sales and international
sales. Coco's offers a variety of fresh-baked goods such as pies, muffins and
cookies and value-priced and innovative menu items.

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The chain has positioned itself at the upper end of the family-style category,
and answers the needs of quality-conscious family diners by offering
consistently high quality food, great service, fair prices and a pleasant,
comfortable atmosphere. The Coco's chain currently consists of 150
Company-owned, 31 domestic franchised and 300 international licensed
restaurants. The initial fee for a single Coco's franchise in the United States
is $35,000, and the current royalty payment rate is 4% of net sales. Initial
fees and royalties for licensed restaurants are negotiated under separate
licensing agreements which generally carry lower royalty rates than franchised
restaurants.

The restaurants are generally open 18 hours a day. Coco's restaurants have
uniform menus within the United States and serve breakfast, lunch and dinner.
Lunch and dinner day parts are Coco's strongest, each comprising approximately
38% of 1998 sales. In 1998, the average guest check was $6.96, with average
Company-owned unit sales of approximately $1.6 million. Coco's currently employs
approximately 7,600 people.

CARROWS

Carrows is a regional mid-scale family-style restaurant chain operating
primarily in six western states. Carrows currently consists of 123 Company-owned
units and 26 domestic franchises, and employs approximately 5,500 people.
Carrows specializes in traditional Santa Barbara-style American food, with an
emphasis on quality, homestyle fare at an excellent value. The concept appeals
strongly to families with children as well as to mature adults -- two groups
expected to grow rapidly into the next century. The menu is always current, but
not trendy, and is revised regularly to reflect the most appealing foods that
guests demand. The restaurants are generally open 24 hours a day. Carrows
restaurants have uniform menus and serve breakfast, lunch and dinner.

Lunch and dinner day parts (including "late night") are Carrows' strongest,
comprising approximately 31% and 43% of 1998 sales, respectively. In 1998, the
average guest check was $6.60, with average Company-owned unit sales of
approximately $1.4 million.

SITE SELECTION

The Company's franchise development group is responsible for identifying and
securing new franchise locations. The franchise development group works closely
with real estate brokers in the Company's existing markets who are familiar with
the Company's needs and selection criteria. In general, the Company's
restaurants are located in high-traffic commercial areas with a substantial
surrounding residential base within a three-mile radius. The commercial traffic
typically provides the Company's weekday breakfast and lunch clientele while the
residential traffic accounts for a majority of the Company's dinner and weekend
business. The location and concentration of its restaurants allow it to realize
certain economies of scale in advertising, distribution and field supervision.
Sites are evaluated on the basis of a variety of factors, including demographic
data, land use and environmental restrictions, competition in the area, ease of
access, visibility, availability of parking and proximity to a major traffic
generator such as a shopping mall, office complex, stadium or university.

OPERATIONS AND MANAGEMENT

RESTAURANT MANAGEMENT AND EMPLOYEE STRUCTURE. The Company's restaurant
management field structure is currently comprised of two vice presidents of
operations (one for each concept), who each oversee approximately 15 to 17
district managers. Each district manager, in turn, oversees seven to ten
restaurants. A general manager, associate manager and assistant manager are
employed at each restaurant to manage day-to-day operations, including customer
relations, food service, cost control, restaurant maintenance, hiring and
training of restaurant employees, and the implementation of all Company
policies. Coco's and Carrows restaurants typically operate with a staff of 40
employees for low volume restaurants to 70 employees for high volume
restaurants. The average restaurant employs approximately 45 to 55 employees,
and a majority of the restaurant level employees work part-time.

The Company recognizes the importance of its personnel in providing
customers with a quality dining experience. As a result, the Company offers its
employees extensive training and opportunities for promotion, as well as
incentive-based compensation. The success of these endeavors allows the Company
to enjoy employee turnover rates that management believes are below industry
averages and to benefit from a staff of highly experienced employees. The
Company's restaurant general managers average approximately ten years of
experience with the Company.

TRAINING. Both Coco's and Carrows provide formal training programs for new
managers and hourly employees of the Company's restaurants. Exceptional general
managers are identified as "Executive Training Managers" and are responsible for
management trainees in their geographic regions. Management training includes
nine weeks with Executive Training Managers for Coco's (because of the bakery
concept) and eight weeks for Carrows. Hourly employees are trained by the

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respective restaurant managers and each shift employs hourly employees who have
been certified to assist in the training of other employees.

QUALITY CONTROL. Coco's and Carrows have developed programs and systems
that ensure the safety, quality and consistency of key ingredients, menu items
and operations. The major components of these programs include a supplier/
distributor quality assurance program that audits ingredients and suppliers to
ensure compliance with specifications, and a restaurant food safety program
which is responsible for maintaining communications with regulatory agencies and
proactively managing risk situations.

MENUS

COCO'S MENU STRATEGY. The Company's menu strategy for Coco's is to (1)
serve a variety of high quality American cuisine with special attention given to
plate presentation in order to communicate a price-to-value relationship; (2)
utilize high quality food products, including fresh fish, fresh baked muffins,
dinner breads, etc., to communicate the increasing strength of those product
lines in the marketplace; and (3) improve sales and profits by strategic menu
offerings which appeal to a target market of families. The Company redesigned
the Coco's menu in January 1999. This change, which increases and contemporizes
the taste profile of the menu, will assist Coco's in appealing to a broader base
of customers. Continued enhancement and increased visibility of Coco's bakery
products should also assist Coco's appeal to a broader customer base.

CARROWS MENU STRATEGY. The Company's menu strategy for Carrows is to (1)
serve a consistent quality and variety of traditional Santa Barbara-style
American cuisine, with an emphasis on signature items and product execution; (2)
provide an excellent price-to-value relationship through the amount of food
offered for the money; (3) leverage the high quality of its food products to
achieve increased margins from its menu items; and (4) generate sales and
profits in the breakfast and dinner day parts through the strong marketing of
breakfast specials and high quality dinner items, such as prime rib and seafood,
which are not generally available in family restaurants.

RESEARCH AND DEVELOPMENT. Each of the Company's restaurant chains regularly
evaluates its menu. New products are developed in a Company test kitchen by a
classically trained corporate chef and then tested in selected restaurants to
determine customer response and to ensure that consistency, quality standards
and profitability are maintained. While research and development activities are
important to the Company's business, amounts expended for these activities are
not material.

MARKETING

Media advertising is a large part of the integrated process that the Company
uses to market its concepts. The Company also uses its menu strategy,
interior/exterior building design, employee uniforms, style of service, and
specialized promotions to help differentiate itself from its competition. Media
advertising for both Coco's and Carrows is primarily product oriented, featuring
special entrees presented and priced to convey high value. Both concepts
reinforce the idea that they are the restaurant of choice for all dining
occasions (i.e., breakfast, lunch, dinner, families, seniors).

RAW MATERIAL SOURCES AND AVAILABILITY

The Company uses Advantica's purchasing department to obtain high quality
ingredients at the most favorable prices and to make centralized purchasing
arrangements for the main ingredients, supplies and equipment needs of all
Coco's and Carrows restaurants. Advantica's size provides the Company with
significant purchasing power which often enables it to obtain products at
favorable prices from several nationally recognized distributors.

On January 19, 1998, the Company became subject to a distribution agreement
with Proficient Food Company ("PFC") (a former subsidiary of Advantica which was
sold in 1995 to Meadowbrook Meat Company, Inc. ("MBM"), and with which
Advantica's other restaurant concepts also have distribution agreements).
Pursuant to the agreement, PFC/MBM will distribute and supply certain products
to the Company for the next seven years. Although there are no volume
requirements, the agreement requires that named products be purchased through
PFC/MBM unless they are unable to make delivery within a reasonable period.

The Company believes that satisfactory sources of supply are generally
available for all items regularly used by its restaurants and has not
experienced any material shortages of food, equipment, or other products which
are necessary to its restaurant operations.

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SEASONALITY

The Company's business is moderately seasonal. Restaurant sales are
generally greater in the second and third calendar quarters (April through
September) than in the first and fourth calendar quarters (October through
March). Additionally, severe weather, storms and similar conditions may impact
sales volumes seasonally in some operating regions. Occupancy and other
operating costs, which remain relatively constant, have a disproportionately
greater effect on operating results during quarters with lower restaurant sales.

TRADEMARKS AND SERVICE MARKS

The Company, either directly or through its wholly-owned subsidiaries, has
registered certain trademarks and service marks with the United States Patent
and Trademark office and in international jurisdictions. The Company regards its
trademarks and service marks as important to the identification of its
restaurants and believes they are of material importance to the conduct of its
business. Domestic trademark and service mark registrations are renewable at
various intervals from 10 to 20 years, while international trademark and service
mark registrations have various durations from 5 to 20 years. The Company
generally intends to renew trademarks and service marks which come up for
renewal. The Company owns or has rights to all trademarks it believes are
material to its restaurant operations.

COMPETITION

The restaurant industry is highly competitive and affected by many factors.
Restaurants compete on the basis of name recognition and advertising, the price,
quality and perceived value of their food offerings, the quality and speed of
their service, convenience and the attractiveness of their facilities. In
addition, recent economic trends have increased competition for qualified
managerial operations personnel as well as hourly employees.

Management believes the Company's principal competitive strengths include
its restaurants' brand name recognition; restaurant locations; the value,
variety and quality of food products served; the quality and training of its
employees; and the Company's market penetration, which has resulted in economies
of scale in a variety of areas, including advertising, distribution and field
supervision. See Exhibit 99 to this Form 10-K for certain additional factors
relative to the Company's competition in the restaurant industry.

ECONOMIC, MARKET AND OTHER CONDITIONS

The restaurant industry is affected by many factors, including changes in
national, regional and local economic conditions affecting consumer spending,
changes in socio-demographic characteristics of areas in which restaurants are
located, changes in consumer tastes and preferences, increases in the number of
restaurants generally and in particular areas and unfavorable trends in regional
weather conditions.

GOVERNMENT REGULATIONS

The Company and its franchisees are subject to various local, state and
Federal laws and regulations governing various aspects of the restaurant
business, including, but not limited to, health, sanitation, environmental
matters, safety, disabled persons' access to its restaurant facilities, the sale
of alcoholic beverages and hiring and employment practices. The operation of the
Company's franchise system is also subject to regulations enacted by a number of
states and to rules promulgated by the Federal Trade Commission. The Company
believes that it is in material compliance with applicable laws and regulations,
but it cannot predict the effect on operations of the enactment of additional
requirements in the future. The cost of compliance with government regulations
has not had a material impact on the operations of the Company.

The Company is subject to Federal and state laws governing matters such as
minimum wages, overtime and other working conditions. At December 30, 1998, the
majority of the Company's employees were paid at minimum wage. Accordingly,
increases in the minimum wage or decreases in the allowable tip credit (which
reduces the minimum wage paid to tipped employees in certain states) increase
the Company's labor costs. This is especially true in California, where there is
no tip credit. The California minimum wage increased from $4.25 to $5.00 per
hour on March 1, 1997 and increased to $5.75 per hour on March 1, 1998. Also,
the Federal minimum wage increased from $4.25 per hour to $4.75 per hour on
October 1, 1996 and increased again to $5.15 per hour on September 1, 1997.
Employers must pay the higher of the Federal or state minimum wage. The Company
has attempted to offset increases in the minimum wage through pricing and
various cost control efforts; however, there can be no assurance that the
Company or its franchisees can continue to pass on such cost increases to its
customers in the future.

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ENVIRONMENTAL MATTERS

Federal, state and local environmental laws and regulations have not
historically had a material impact on the operations of the Company; however,
the Company cannot predict the effect on its operations of possible future
environmental legislation or regulations.

EMPLOYEES

At December 30, 1998, the Company had approximately 13,000 employees, none
of whom were covered by union contracts. Many of the Company's restaurant
employees work part-time and many are paid at or slightly above minimum wage
levels. The Company has experienced no significant work stoppages and believes
that its relationship with its employees is satisfactory.

ITEM 2. PROPERTIES

The Company's restaurants are free standing units ranging from 4,900 to
5,600 square feet allowing them to accommodate 120 to 180 guests. The number and
location of the Company's restaurants as of December 30, 1998 are presented
below:

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COCO'S CARROWS
-------------------- --------------------
FRANCHISED/ FRANCHISED/
STATE/COUNTRY OWNED LICENSED OWNED LICENSED
- ------------- ----- ----------- ----- -----------
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Arizona..................................................... 21 2 1 4
California.................................................. 125 21 115 6
Colorado.................................................... -- 2 -- --
Indiana..................................................... 2(a) -- -- --
Missouri.................................................... 2 -- -- --
Nevada...................................................... -- -- 4(b) 1
New Mexico.................................................. -- -- -- 4
Oregon...................................................... -- -- -- 8
Texas....................................................... -- -- 3 2
Washington.................................................. -- 6 -- 1
Japan....................................................... -- 267 -- --
South Korea................................................. -- 32 -- --
Other International......................................... -- 1 -- --
--- --- --- --
Total..................................................... 150 331 123 26
=== === === ==
</TABLE>

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(a) These units are jojos restaurants, which are similar in format to Coco's.

(b) Includes one Jeremiah's restaurant, a midscale family-steak restaurant.

Of the 273 restaurants operated by the Company as of December 30, 1998, the
Company owned the land and building for 5, owned the building and leased the
land for 47, and leased both land and building for the remaining 221
restaurants. Most of the leases provide for the payment of a base rent or
approximately 5% to 6% of gross sales, whichever is greater. In addition to the
restaurants, the Company leases 18,500 square feet of office space in Irvine,
California for its corporate headquarters.

Substantially all of the Company's properties and assets are pledged to
secure indebtedness under the FRI-M Credit Facility (as defined below). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 8 to the Consolidated
and Combined Financial Statements included herein.

ITEM 3. LEGAL PROCEEDINGS

The Company is from time to time involved in routine litigation incidental
to the conduct of its business. The Company believes that no currently pending
litigation to which it is a party will have a material adverse effect on its
liquidity, financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company is a wholly-owned subsidiary of Advantica. As a result, there is
no established public trading market for the Company's common stock and all per
share data is omitted. As of March 15, 1999, 1,000 shares of the Company's
common stock were outstanding, all of which are owned by Advantica.

Dividends were not paid by the Company during 1996, 1997 nor 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 8 to the accompanying
Consolidated and Combined Financial Statements of the Company regarding certain
restrictions on the payment of dividends.

ITEM 6. SELECTED FINANCIAL DATA

Set forth below are certain selected financial data of FRD Predecessor for
the fiscal years ended 1994 and 1995 and the five-month period ended May 23,
1996, FRD Successor for the seven-month period ended December 26, 1996, the
fiscal year ended December 31, 1997 and the one week ended January 7, 1998 and
FRD Emerged Successor for the 51 weeks ended December 30, 1998. Such data have
generally been derived from the Consolidated and Combined Financial Statements
of FRD which have been audited. The following should be read in conjunction with
the Consolidated and Combined Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" presented elsewhere herein. Because FRD is a wholly-owned subsidiary
of Advantica, per share data is not meaningful and has been omitted.

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FRD
FRD FRD EMERGED
PREDECESSOR SUCCESSOR SUCCESSOR
------------------------------------- ---------------------------------------- ------------
FIVE SEVEN ONE FIFTY-ONE
YEAR YEAR MONTHS MONTHS YEAR WEEK WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 25, DECEMBER 31, MAY 23, DECEMBER 26, DECEMBER 31, JANUARY 7, DECEMBER 30,
1994(a) 1995(b) 1996 1996(c) 1997(b) 1998 1998(d)
(In millions, except ratios) ------------ ------------ ------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA:
Operating revenues........... $510.1 $505.6 $195.9 $295.0 $492.5 $ 8.4 $438.1
Operating income............. 31.2 32.0 2.5 11.9 27.1 -- (19.1)
Net income (loss)............ 10.1 4.7 1.1 (6.2) (2.2) 33.1 (41.8)
Ratio of earnings to fixed
charges(e)................. 3.9x 1.7x 1.7x -- -- 61.5x --
Deficiency in the coverage of
fixed charges to earnings
before fixed
charges(e)................. -- -- -- 5.7 6.0 -- 45.5
BALANCE SHEET DATA (AT END OF
PERIOD):
Current assets............... $ 19.9 $ 31.7 $ 34.9 $ 28.5 $ 19.2
Working capital
deficiency(f).............. (106.2) (111.0) (55.7) (68.7) (73.9)
Net property and equipment... 165.3 146.0 135.0 117.3 119.1
Total assets................. 351.0 332.8 388.0 371.5 358.8
Long-term debt, excluding
current portion............ 32.5 27.5 218.5 195.7 182.7
OTHER DATA:
EBITDA as defined(g)......... $ 33.4 $ 61.6 $ 0.7 $ 60.6
Net cash flows provided by
operating activities....... $ 33.5 $ 45.9 $ 5.3 21.2 17.1 1.0 23.0
Net cash flows (used in)
provided by investing
activities................. (23.8) (15.9) 17.9 (130.8) (2.9) -- 5.9
Net cash flows (used in)
provided by financing
activities................. (8.2) (28.7) (27.7) 122.9 (19.4) (6.5) (26.6)
</TABLE>

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(a) Data presented for 1994 include one month of financial information for a
predecessor of FRD Predecessor prior to the FRI Reorganization and eleven
months of financial information for FRD Predecessor following the FRI
Reorganization. In January 1994, FRI's predecessor corporation completed the
FRI Reorganization and applied the provisions of American Institute of
Certified Public Accountants' (the "AICPA") Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code" ("SOP 90-7"). Pursuant to SOP 90-7, FRI's predecessor corporation
qualified for fresh start reporting as of January 27, 1994 and, accordingly,
all assets and liabilities of FRI were adjusted to fair value at the date of
reorganization. FRI obtained an appraisal of the assets and liabilities of
FRI and FRD Predecessor establishing the reorganization value (i.e.,
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fair value) of the assets and liabilities. FRI utilized the results of this
appraisal to implement fresh start reporting, which resulted in a
reorganization value in excess of amounts allocable to identifiable assets
of $155.5 million to FRD Predecessor at January 27, 1994. For the eleven
months ended December 25, 1994, FRD Predecessor's operating statement and
selected operating data consisted of operating revenues of $466.0 million,
operating income of $29.5 million, interest and debt expenses of $6.5
million, net income of $9.4 million and ratio of earnings to fixed charges
of 3.9x. For the one month ended January 26, 1994, the predecessor of FRD
Predecessor's operating statement and selected operating data consisted of
operating revenues of $44.1 million, operating income of $1.6 million,
interest and debt expenses of $0.5 million, net income of $0.7 million and
ratio of earnings to fixed charges of 3.7x.

(b) Fiscal 1995 and 1997 represent 53-week periods.

(c) The December 26, 1996 data reflects the impact of the acquisition of FRI-M
by FRD, including, but not limited to, the issuance of $156.9 million of
Senior Notes (as defined below), a $56.0 million term loan (under the FRI-M
Credit Facility) and the impact of the application of purchase accounting.

(d) As discussed in more detail in Note 1 to the Consolidated Financial
Statements, FCI and Flagstar emerged from bankruptcy on January 7, 1998. As
described in Note 2 to the Consolidated Financial Statements, the change in
ownership of Advantica effected by the resulting financial restructuring
required that Advantica apply fresh start reporting effective January 7,
1998 in accordance with SOP 90-7. Advantica has "pushed down" the impact of
fresh start reporting to the Company. Accordingly, all financial statements
subsequent to January 7, 1998 are referred to as FRD Emerged Successor, as
they reflect periods subsequent to the implementation of fresh start
reporting and are not comparable to the financial statements for periods
prior to January 7, 1998.

(e) For purposes of computing the ratio of earnings to fixed charges or
deficiency in the coverage of fixed charges to earnings before fixed
charges, fixed charges consist of interest on debt, amortization of deferred
financing costs and the interest element in rental payments under operating
and capital leases (estimated to be one third). Earnings consist of income
from operations before income taxes, plus fixed charges.

(f) FRD historically operates with a working capital deficiency because (1)
restaurant operations are conducted primarily 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) cash from sales
is usually received before related accounts payable for food, beverage and
supplies become due.

(g) "EBITDA as defined" is defined by FRD as operating income before
depreciation, amortization, management fees payable to Advantica and
restructuring and impairment charges and 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. FRD's measure of EBITDA as defined
may not be comparable to similarly titled measures reported by other
companies; accordingly, EBITDA as defined of FRD Predecessor is not
presented.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

The following discussion should be read in conjunction with "Selected
Financial Data" and the Consolidated Financial Statements and other more
detailed financial information appearing elsewhere herein. For purposes of
providing a meaningful comparison of FRD's 1998 operating performance, the
following discussion and presentation of the results of operations for the 51
weeks ended December 30, 1998 (FRD Emerged Successor) and the one week ended
January 7, 1998 (FRD Successor) will be combined and referred to as the year
ended December 30, 1998. In addition, operating results for the year ended
December 31, 1997 reflect the operations of FRD Successor, and operating results
for the year ended December 26, 1996 reflect the sum of the seven months ended
December 26, 1996 (FRD Successor) and the five months ended May 23, 1996 (FRD
Predecessor).

7
<PAGE> 10

RESULTS OF OPERATIONS

1998 RESTAURANT UNIT ACTIVITY

<TABLE>
<CAPTION>
ENDING ENDING
UNITS UNITS UNITS SOLD/ UNITS UNITS
12/31/97 OPENED CLOSED REFRANCHISED 12/30/98
-------- ------ ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
Coco's
Company-owned...................................... 178 -- (17) (11) 150
Franchised units................................... 17 4 (1) 11 31
Licensed units..................................... 298 12 (10) -- 300
--- -- --- --- ---
493 16 (28) -- 481
--- -- --- --- ---
Carrows
Company-owned...................................... 140 -- (5) (12) 123
Franchised units................................... 14 2 (2) 12 26
--- -- --- --- ---
154 2 (7) -- 149
--- -- --- --- ---
647 18 (35) -- 630
=== == === === ===
</TABLE>

RESTAURANT OPERATIONS

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 30,
1996 1997(a) 1998
COCO'S ------------ ------------ ------------
<S> <C> <C> <C>
($ in millions, except average unit and same-store data)
U. S. systemwide sales...................................... $278.5 $288.1 $280.3
====== ====== ======
Net company sales........................................... $269.9 $275.8 $255.7
Franchise and foreign licensing revenue..................... 3.8 4.3 4.1
------ ------ ------
Total revenue..................................... 273.7 280.1 259.8
------ ------ ------
Operating expenses:
Amortization of reorganization value in excess of amounts
allocable to identifiable assets....................... -- -- 22.1
Other..................................................... 265.3 264.4 244.5
------ ------ ------
Total operating expenses.......................... 265.3 264.4 266.6
------ ------ ------
Operating income (loss)..................................... $ 8.4 $ 15.7 $ (6.8)
====== ====== ======
EBITDA as defined........................................... $ 18.5(b) $ 35.0 $ 37.9
Average annual unit sales (in thousands):
Company-owned............................................. 1,462 1,492 1,569
Franchised................................................ 1,719 1,728 1,356
Same-store data (Company-owned) (c):
Same-store sales decrease................................. (1.6)% 0.0% (0.7)%
Average guest check....................................... $ 6.80 $ 6.77 $ 6.96
Operated units:
Company-owned............................................. 183(d) 178(d) 150(d)
Franchised................................................ 5 17 31
Licensed.................................................. 278 298 300
------ ------ ------
Total............................................. 466 493 481
====== ====== ======
</TABLE>

- ---------------

(a) Fiscal 1997 represents a 53-week period.

(b) EBITDA as defined relates only to the period subsequent to the Company's
acquisition of Coco's and Carrows, as the Company's measure of EBITDA as
defined may not be comparable to similarly titled measures reported by other
companies.

(d) Includes the Company's jojos restaurants (17, 16 and 2 as of year end 1996,
1997 and 1998, respectively).

8
<PAGE> 11

1998 VS. 1997

Coco's NET COMPANY SALES for the year ended December 30, 1998 decreased
$20.1 million (7.3%) compared to the prior year. The decrease includes a $4.8
million impact due to six fewer reporting days compared to the prior year
comparable period. The remaining decrease reflects a 28-unit decrease in the
number of Company-owned restaurants and a small decrease in same-store sales.
The decrease in same-store sales resulted primarily from a decline in customer
traffic, partially offset by a higher average guest check in the first half of
the year. The increase in average guest check reflects menu price increases
instituted in August 1997 and February 1998 in response to minimum wage
increases. In the third and fourth quarters, the Company was able to reverse the
negative trend in customer traffic through the implementation of successful
value-priced promotions. Due to the effect of such value pricing on average
guest check, same-store sales remained slightly negative on a year-to-date
basis. FRANCHISE AND FOREIGN LICENSING REVENUE was essentially flat compared to
the prior year, reflecting an increase in franchise revenue offset by a decrease
in foreign licensing revenue. The increase in franchise revenue resulted from
the net increase of 14 franchised units in 1998. The decline in foreign
licensing revenue resulted primarily from a stronger dollar versus the yen. The
stronger dollar versus the yen and the increase in the number of franchised
units also explain the large variance in franchise average unit sales.

The comparability of 1998 and 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 $22.1 million for the year ended December 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 $3.2
million. Excluding the estimated impact of fresh start reporting, operating
expenses decreased $23.1 million (8.7%). This decrease reflects the effect of
six fewer reporting days than in the prior year, the 28-unit decrease in
Company-owned restaurants and gains of $4.0 million related to lease buyouts
recorded as a reduction of operating expenses in the current year.

EBITDA AS DEFINED, which is defined by the Company as operating income
before depreciation, amortization, management fees payable to Advantica and
charges for restructuring and impairment, increased $2.9 million for 1998
compared to 1997. This increase results from the factors noted in the preceding
paragraphs, excluding the estimated $25.3 million increase in depreciation and
amortization.

Excluding the estimated impact of the adoption of fresh start reporting,
Coco's OPERATING INCOME for the year ended December 30, 1998 increased $2.8
million compared to the prior year comparable period as a result of the factors
noted above.

1997 VS. 1996

Coco's NET COMPANY SALES for 1997 increased $5.9 million (2.2%) as compared
to 1996. This increase reflects an estimated $4.8 million impact from the
additional six days in the 1997 reporting period compared to the prior year
comparable period due to the change in the fiscal year. In addition, four
Carrows units were converted to Coco's restaurants during 1997, contributing
$3.3 million in sales. Offsetting these increases is the impact of a decrease of
nine Company-owned stores in 1997. Coco's same-store sales were flat in 1997 as
compared to 1996. FRANCHISE AND FOREIGN LICENSING REVENUE increased by $0.5
million (12.9%) for 1997 as compared to 1996. This increase is a result of the
net increase of 20 foreign licensed units as well as 12 additional domestic
franchise units in the current year.

Coco's OPERATING EXPENSES for 1997 decreased by $0.9 million (0.3%) as
compared to the prior year. This decrease is primarily a result of savings in
product and labor costs due to an increased operations focus on cost controls,
waste reduction and labor initiatives and $1.9 million of gains on sales of
restaurants, compared to no gains recorded in 1996. In addition, the prior year
included nonrecurring adjustments of approximately $1.6 million, which increased
legal and workers' compensation expenses. No comparable charges are included in
the current year period. These decreases were largely offset by the impact of an
additional six days in the 1997 reporting period as compared to the prior year
comparable period due to the change in the fiscal year, the increase in Federal
and state minimum wage rates and the impact of Advantica's management fees of
$2.8 million in 1997 compared to $1.6 million in 1996.

EBITDA AS DEFINED, which is defined by the Company as operating income
before depreciation, amortization, management fees payable to Advantica and
charges for (recoveries of) restructuring and impairment, increased by $16.5
million in 1997 as compared to 1996. This increase is primarily a result of
calculating EBITDA using the twelve months' operating results for 1997 versus
using the operating results for only the seven months after acquisition for
1996, as well as the other factors noted in the preceding paragraphs.

9
<PAGE> 12

OPERATING INCOME for Coco's increased to $15.7 million in 1997 as a result
of the factors noted above.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 30,
1996 1997 (a) 1998
CARROWS ------------ ------------ ------------
<S> <C> <C> <C>
($ in millions, except average unit and same-store data)
U.S. systemwide sales....................................... $217.3 $215.2 $203.8
====== ====== ======
Net company sales........................................... $217.3 $211.8 $185.5
Franchise and foreign licensing revenue..................... -- 0.6 1.2
------ ------ ------
Total revenue..................................... 217.3 212.4 186.7
------ ------ ------
Operating expenses:
Amortization of reorganization value in excess of amounts
allocable to identifiable assets....................... -- -- 17.9
Other..................................................... 211.2 201.0 181.0
------ ------ ------
Total operating expenses.......................... 211.2 201.0 198.9
------ ------ ------
Operating income (loss)..................................... $ 6.1 $ 11.4 $(12.2)
====== ====== ======
EBITDA as defined........................................... $ 14.9(b) $ 26.6 $ 23.4
Average annual unit sales (in thousands):
Company-owned............................................. 1,343 1,362 1,377
Franchised................................................ NM NM 1,131
Same-store data (Company-owned)(c):
Same-store sales increase (decrease)...................... 0.1% (1.7)% (2.0)%
Average guest check....................................... $ 6.25 $ 6.49 $ 6.60
Operated units:
Company-owned............................................. 160 140 123
Franchised................................................ -- 14 26
------ ------ ------
Total............................................. 160 154 149
====== ====== ======
</TABLE>

- ---------------

(a)Fiscal 1997 represents a 53-week period.

(b)EBITDA as defined relates only to the period subsequent to the Company's
acquisition of Coco's and Carrows, as the Company's measure of EBITDA as
defined may not be comparable to similarly titled measures reported by other
companies.

(c)Prior year amounts have not been restated for 1998 comparable units.

NM = Not Meaningful

1998 VS. 1997

Carrows' NET COMPANY SALES decreased $26.3 million (12.4%) for the year
ended December 30, 1998 compared to the prior year. The decrease reflects a $3.8
million impact due to six fewer reporting days compared to the prior year. The
remaining decrease reflects a 17-unit decrease in the number of Company-owned
restaurants, 12 of which were converted to franchise units, and a decrease in
same-store sales. The decrease in same-store sales resulted primarily from a
decrease in customer traffic partially offset by a higher average guest check in
the first half of the year. The increase in average guest check reflects menu
price increases instituted in August 1997 and February 1998 in response to
minimum wage increases. In the third and fourth quarters, the Company was able
to reverse the negative trend in customer traffic through the implementation of
successful value-priced promotions. Due to the effect of such value pricing on
average guest check, same-store sales remained negative on a year-to-date basis.
FRANCHISE AND FOREIGN LICENSING REVENUE increased $0.6 million for the year
ended December 30, 1998 compared to the prior year. This increase resulted from
the addition of 12 franchised units over the prior year.

10
<PAGE> 13

amortization and depreciation of $2.2 million. Excluding the estimated impact of
fresh start reporting, operating expenses decreased $22.2 million (11.0%),
reflecting the effect of six fewer reporting days than in the prior year
comparable period, the 17-unit decrease in Company-owned restaurants and gains
of $1.2 million related to lease buyouts recorded as a reduction of operating
expenses in the current year.

EBITDA AS DEFINED, which is defined by the Company as operating income
before depreciation, amortization, management fees payable to Advantica and
charges for restructuring and impairment, decreased by $3.2 million in 1998 as
compared to 1997. This decrease is a result of the factors noted in the
preceding paragraphs, excluding the estimated $20.1 million increase in
depreciation and amortization.

Excluding the estimated impact of the adoption of fresh start reporting,
Carrows' OPERATING INCOME for the year ended December 30, 1998 decreased $3.5
million from the prior year as a result of the factors noted above.

1997 VS. 1996

Carrows' NET COMPANY SALES decreased $5.5 million (2.5%) for 1997 as
compared to 1996 in spite of an estimated $3.8 million impact from the
additional six days in the 1997 reporting period in comparison to the prior year
comparable period due to the change in the fiscal year. The sales decrease is
primarily the result of a 20-unit decrease in Company-owned restaurants, 12 of
which were converted to franchise units. It also reflects a decrease in
same-store sales reflecting a decrease in traffic, partially offset by an
increase in average guest check. FRANCHISE AND FOREIGN LICENSING REVENUE for
1997 is $0.6 million, reflecting the opening of 14 domestic franchise units.

Carrows' OPERATING EXPENSES decreased $10.2 million (4.8%) for 1997 as
compared to 1996, despite the impact of an additional six days in the 1997
reporting period as compared to the prior year comparable period due to the
change in the fiscal year, increases in the Federal and state minimum wage rates
and the impact of Advantica's management fees of $2.1 million in the current
year compared to $1.3 million in 1996. The decrease in expenses as compared with
the prior year reflects the impact of approximately $1.5 million of nonrecurring
adjustments which increased legal and workers' compensation expenses in 1996, as
well as savings in product and labor costs in 1997 due to increased focus by
operations on cost control, waste reduction and labor initiatives. In addition,
operating expenses in 1997 include $3.3 million of gains on sales of
restaurants, compared to no gains recorded in 1996.

EBITDA AS DEFINED, which is defined by the Company as operating income
before depreciation, amortization, management fees payable to Advantica and
charges for restructuring and impairment, increased by $11.7 million in 1997 as
compared to 1996. This increase is primarily a result of calculating EBITDA
using the twelve months' operating results for 1997 versus using the operating
results for only the seven months after acquisition for 1996, as well as the
other factors noted in the preceding paragraphs.

OPERATING INCOME for Carrows increased to $11.4 million in 1997 as a result
of the factors noted above.

FRD CONSOLIDATED

1998 VS. 1997

INTEREST EXPENSE, NET, decreased $2.1 million (7.2%) for the year ended
December 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 January 7, 1998 in accordance
with fresh start reporting and to the lower level of outstanding debt in the
1998 period.

REORGANIZATION ITEMS include professional fees and other expenditures
incurred by the Company as a result of the Advantica bankruptcy and the "push
down" of fresh start reporting from Advantica.

The (BENEFIT FROM) PROVISION FOR INCOME TAXES from continuing operations for
the 51 weeks ended December 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 (8%) for the 51 weeks ended December 30, 1998 compared to
a benefit reflecting an approximate rate of (64%) for the year ended December
31, 1997. 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

11
<PAGE> 14

opening balance sheet. 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.

EBITDA AS DEFINED, which is defined by the Company as operating income
before depreciation, amortization, management fees payable to Advantica and
charges for restructuring and impairment, decreased by $0.3 million in 1998 as
compared to 1997. This increase is a result of the factors noted in the
preceding paragraphs, excluding the estimated $45.5 million increase in
depreciation and amortization.

The increase in CONSOLIDATED NET LOSS of $6.5 million for the year ended
December 30, 1998 as compared to the prior year comparable period is a result of
the items previously discussed.

ACCOUNTING CHANGES

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 external and internal
direct costs of developing or obtaining internal-use software to be capitalized
as a long-lived asset and also requires training costs included in the purchase
price of computer software and costs associated with research and development to
be expensed as incurred. In April 1998, the AICPA issued Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), which
provides additional guidance on the financial reporting of start-up costs,
requiring costs of start-up activities to be expensed as incurred.

In accordance with the adoption of fresh start reporting upon emergence from
bankruptcy (see Note 2 to the Consolidated and Combined Financial Statements
herein), 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 preopening
costs totaling $0.1 million. Subsequent to the Effective Date, preopening costs
are being expensed as incurred.

In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS 131 does not impact
the Company's consolidated results of operations, financial position or cash
flows.

Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Financial Instruments and Hedging Activities" ("SFAS 133"), was
issued in June 1998. This statement establishes accounting and reporting
standards for derivative financial instruments and for hedging activities. It
requires that entities recognize all derivatives as either assets or liabilities
in the balance sheet and measure those instruments at fair value. The accounting
for changes in fair value of the derivative (i.e., gains and losses) depends on
the intended use of the derivative and the resulting designation. SFAS No. 133
is effective for the Company's fiscal year-end 2000 financial statements. The
Company is in the process of evaluating the effect of SFAS 133 on its
consolidated results of operations, financial position and cash flows and
therefore is unable to evaluate the effect of adoption.

1997 VS. 1996

CONSOLIDATED INTEREST EXPENSE increased $7.3 million for the 12 months ended
December 31, 1997 as compared to the 12 months ended December 26, 1996. This
increase is attributed to the change in the Company's debt structure related to
its acquisition of FRI-M in May 1996. As a result of the acquisition, the
Company obtained a $56.0 million bank term loan (under the FRI-M Credit
Facility) and issued $156.9 million in Senior Notes.

The (BENEFIT) PROVISION FOR INCOME TAXES resulting from the loss from
continuing operations for the year ended December 31, 1997 reflects an estimated
annual effective income tax rate of approximately (64%) for 1997 compared to a
provision for 1996 which reflects an approximate rate of 8%. The change in the
effective income tax rate from the prior year can be attributed to the deferred
income tax benefits related to the reduction in the 1996 valuation allowance and
income tax credits related to employer-paid social security taxes.

12
<PAGE> 15

REORGANIZATION ITEMS incurred by the Company in 1997 include professional
fees and other expenditures related to the Advantica bankruptcy and the planned
"push down" of fresh start reporting from Advantica.

EBITDA AS DEFINED, which is defined by the Company as operating income
before depreciation, amortization, management fees payable to Advantica and
charges for restructuring and impairment, increased by $28.2 million in 1997 as
compared to 1996. This increase is primarily a result of calculating EBITDA
using the twelve months' operating results for 1997 versus using the operating
results for only the seven months after acquisition for 1996, as well as the
other factors noted in the preceding paragraphs.

The decrease in CONSOLIDATED NET LOSS of $2.9 million in comparison to the
prior year is due to a combination of the above described items.

EXPOSURE TO CURRENCY FLUCTUATIONS

The Company is the licensor of Coco's restaurants primarily in Japan and
South Korea. Royalties due to the Company are paid in foreign currency based on
sales attributable to such Coco's. The receivable balance at December 30, 1998
primarily represents ten months of Coco's Japan royalties expected to be
received in March 1999. Because this royalty is paid annually, the Company has
potential exposure that exchange rates may fluctuate causing an unfavorable
impact on the receivable balance. At December 31, 1997 and December 30, 1998,
the net royalty receivable amounted to $2.3 million and $2.4 million,
respectively.

CHANGE IN FISCAL YEAR

Effective December 27, 1996, the Company changed its fiscal year end from
the last Thursday of the calendar year to the last Wednesday of the calendar
year. Due to the timing of this change, the Company's 1997 fiscal year includes
an extra six days in comparison to the prior fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

In connection with the acquisition of FRI-M, the Company obtained a credit
facility (the "FRI-M Credit Facility") on May 23, 1996, which provides for a $56
million term loan (the "Term Loan") and a $35 million working capital and letter
of credit facility (the "Revolving Credit Facility"). At December 30, 1998, the
amount of the Term Loan outstanding was $10.4 million and FRI-M had no
outstanding working capital borrowings; however, letters of credit outstanding
were $13.2 million. Such facility is unavailable to Advantica and its other
subsidiaries.

Also in connection with the acquisition, FRD issued $156.9 million aggregate
principal amount of 12 1/2% Senior Notes due 2004 (the "Senior Notes"). The
Senior Notes mature on July 15, 2004.

The FRI-M Credit Facility and the indenture under which the Senior Notes
have been issued contain a number of restrictive covenants which, among other
things (subject to certain exceptions), limit FRD and its subsidiaries with
respect to incurrence of debt, existence of liens, investments and joint
ventures, the declaration or payment of dividends, the making of guarantees and
other contingent obligations, mergers, the sale of assets, capital expenditures
and material changes in their business. In addition, the FRI-M Credit Facility
contains certain financial covenants including provisions for the maintenance of
a minimum level of interest coverage (as defined), limitations on ratios of
indebtedness (as defined) to earnings before interest, taxes, depreciation and
amortization (EBITDA), maintenance of a minimum level of EBITDA and limitations
on annual capital expenditures.

The Company was in compliance with the terms of the FRI-M Credit Facility at
December 30, 1998. Under the most restrictive provision of the FRI-M Credit
Facility (the minimum interest coverage ratio), for the four quarters ended
December 30, 1998, the Company's EBITDA could be approximately $0.3 million less
and the Company would still be in compliance.

13
<PAGE> 16

As of December 30, 1998, scheduled maturities of long-term debt relative to
FRD for the years 1999 and thereafter are as follows (in millions):

<TABLE>
<CAPTION>
YEAR:
- -----
<S> <C>
1999........................................................ $13.6
2000........................................................ 2.9
2001........................................................ 2.8
2002........................................................ 2.4
2003........................................................ 1.8
Thereafter.................................................. 161.0
</TABLE>

Because of covenant limitations under Advantica's senior notes indenture and
Advantica's bank credit facility, and under the FRI-M Credit Facility and the
indenture under which the Senior Notes have been issued, Advantica's ability to
make further investments in FRD to upgrade the Coco's and Carrows concepts has
been severely limited. In an effort to address this issue, during the latter
half of 1998 Advantica began exploring various alternatives to restructure FRD's
capital structure in order to increase capital availability and otherwise
improve FRD's financial flexibility. Most recently, Advantica has (1) designated
FRD and its subsidiaries as restricted subsidiaries in accordance with the terms
of Advantica's senior notes indenture, generally increasing Advantica's
investment flexibility thereunder in its relationship with FRD and its
subsidiaries, (2) obtained certain amendments to its credit facility to increase
Advantica's investment flexibility under that facility with respect to the
Coco's and Carrows operations, and (3) held discussions with certain financial
institutions regarding refinancing the FRI-M Credit Facility prior to its
scheduled maturity date in August 1999. As a result of those discussions, Coco's
and Carrows have entered into a written commitment letter, pursuant to which
they have received commitments from The Chase Manhattan Bank ("Chase") and
Credit Lyonnais New York Branch ("Credit Lyonnais") for a $70 million Senior
Secured Credit Facility (the "New FRI-M Facility"). Such facility, which is
expected to be guaranteed by Advantica, will consist of a combined term loan and
revolving credit facility and will mature four years from the date of closing.
The closing of such facility, expected to occur in the second quarter of 1999,
is subject to, among other conditions, the negotiation of definitive agreements
with Chase and Credit Lyonnais on mutually acceptable terms.

Management believes the New FRI-M Facility, together with cash generated
from operations, various cash management measures and other sources, will
provide FRD with adequate liquidity to meet its working capital, debt service
and capital expenditure requirements for at least the next twelve months.
However, a significant downturn in the restaurant industry, the California
economy or other developments adversely affecting FRD's cash flow could
materially impair its ability to service its indebtedness.

FRD's principal capital requirements are those associated with opening new
restaurants and remodeling and maintaining its existing restaurants and
facilities. During 1998, total capital expenditures were approximately $10.9
million. Of the total capital expenditures, approximately $0.6 million were
financed through capital leases. Capital expenditures during 1999 are expected
to total approximately $30 million to $35 million; however, the Company is not
committed to spending this amount and could spend less if circumstances warrant.

At December 30, 1998 and December 31, 1997, the Company had working capital
deficits of $73.9 million and $68.7 million, respectively. The increase in the
deficit is attributable primarily to a use of cash related to $29.6 million in
term loan payments. FRD 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.

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) that will 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

14
<PAGE> 17

compliance. To oversee 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 Advantica Board of Directors
and 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
$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 December 30, 1998 were approximately $16.1 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. 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
adequately address the Year 2000 issue 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 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 phone interviews are being 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's operations.

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 its
facilities at the Company's corporate office and is beginning 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. As the Year 2000 project progresses, Advantica will
establish contingency plans addressing business critical processes for
operations and other critical corporate functions. 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

The Company has exposure to interest rate risk related to certain
instruments entered into for other than trading purposes. Specifically, the
Company has in place the FRI-M Credit Facility, which consists of the Term Loan,
with a balance outstanding of $10.4 million at December 30, 1998, and the $35
million Revolving Credit Facility. The Revolving Credit Facility bears interest
at variable rates; however, there were no amounts outstanding under this
facility at December 30, 1998. Borrowings under the FRI-M Credit Facility bear
interest based on the prime rate or an adjusted Eurodollar rate (approximately
8.4% at December 30, 1998). The Company's other outstanding long-term debt bear
fixed rates of interest. While changes in the prime rate and Eurodollar rate
could affect the cost of funds borrowed in the future, existing amounts
outstanding are at fixed rates; therefore, the Company believes the effect, if
any, of reasonably possible near-term changes in interest rates on the Company's
consolidated financial position, results of operations and cash flows would not
be material.

15
<PAGE> 18

The Company may from time to time use interest rate swaps to manage overall
borrowing costs and reduce exposure to adverse fluctuations in interest rates.
The Company does not use derivative instruments for trading purposes. No
financial derivatives were in place at December 30, 1998.

COMMODITY PRICE RISK

The Company purchases certain products such as beef, poultry, pork and
coffee which are affected by commodity pricing and are, therefore, subject to
price volatility caused by weather, production problems, delivery difficulties
and other factors that are outside the Company's control and which are generally
unpredictable. Changes in commodity prices affect the Company and its
competitors generally and often simultaneously. In general, the food products
purchased by the Company are purchased based upon market prices established with
vendors. Although many of the items purchased are subject to changes in
commodity prices, certain purchasing arrangements are structured to contain
features that minimize price volatility by establishing price ceilings and/or
floors. The Company uses these types of purchase arrangements to control costs
as an alternative to using financial instruments to hedge commodity prices. In
many cases, the Company believes it will be able to address commodity cost
increases which are significant and appear to be long-term in nature by
adjusting its menu pricing or changing its product delivery strategy. However,
competitive circumstances could limit such actions and in those circumstances
increases in commodity prices could result in lower margins for the Company.
Because of the often short-term nature of commodity pricing aberrations and the
ability of the Company to change menu pricing or product delivery strategies in
response to commodity price increases, the Company believes that the impact of
commodity price risk is immaterial.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Index to Financial Statements and Financial Statement Schedule which
appears on page F-1 herein.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is omitted pursuant to General
Instruction (I)(2)(c) of Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is omitted pursuant to General
Instruction (I)(2)(c) of Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is omitted pursuant to General
Instruction (I)(2)(c) of Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is omitted pursuant to General
Instruction (I)(2)(c) of Form 10-K.

INFORMATION REGARDING CERTAIN INDEBTEDNESS

The following information regarding certain indebtedness of the Company does
not purport to be complete and is qualified in its entirety by reference to the
documents governing such indebtedness, including the definitions of certain
terms therein, which have been filed as exhibits to the Company's filings with
the Commission. Whenever particular provisions of such documents are referred to
herein, such provisions are incorporated herein by reference and the statements
are qualified in their entirety by such reference. See Note 8 to the
Consolidated and Combined Financial Statements for additional information
regarding the Company's indebtedness and the terms thereof (including
indebtedness under the FRI-M Credit Facility).

16
<PAGE> 19

THE SENIOR NOTES

In connection with the May 23, 1996 acquisition of FRI-M, FRD issued $156.9
million principal amount of 12 1/2% Senior Notes due 2004. The Senior Notes are
senior unsecured, general obligations of FRD and rank senior in right of payment
to all existing and future subordinated indebtedness of FRD and rank pari passu
in right of payment with all existing and future unsubordinated indebtedness of
FRD. The Senior Notes are effectively subordinated to secured indebtedness of
FRD, including FRD's guaranty of borrowings under the FRI-M Credit Facility to
the extent of the value of FRD's assets securing such guaranty. Borrowings under
the FRI-M Credit Facility are secured by substantially all of FRD's assets. The
Senior Notes are structurally subordinated to all indebtedness of FRI-M,
including its indebtedness under the FRI-M Credit Facility. Interest on the
Senior Notes accrues at the rate of 12 1/2% per annum and is payable
semi-annually in arrears on January 15 and July 15, commencing on July 15, 1996.
They will mature on July 15, 2004.

The Senior Notes will be redeemable, in whole or in part, at the option of
FRD at any time on or after May 23, 2001, initially at a redemption price equal
to 105.0% of the principal amount thereof to and including May 22, 2002, at
102.5% of the principal amount thereof to and including May 22, 2003, and
thereafter at 100% of the principal amount thereof, together in each case with
accrued interest.

Notwithstanding the foregoing, at any time prior to May 23, 1999, FRD may
redeem up to $50 million aggregate principal amount of the Senior Notes at a
redemption price equal to 107.5% of the principal amount thereof, together with
accrued interest, from the net cash proceeds of an initial public equity
offering of FRD, subject to certain further terms and conditions.

PART IV

ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) (1) Financial Statements: See the Index to Financial Statements and
Financial Statement Schedule which appears on page F-1 hereof.

(2) Financial Statement Schedules: See the Index to Financial Statements and
Financial Statement Schedule which appears on page F-1 hereof.

(3) Exhibits
Certain of the exhibits to this report, indicated by an asterisk, are
hereby incorporated by reference to other documents on file with the
Commission with which they are physically filed, to be a part hereof as
of their respective dates.

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
*3.1 Certificate of Incorporation of FRD (incorporated by
reference to Exhibit 3.1 to Registration Statements on Forms
S-1 and S-4 dated as of September 6, 1996 (No. 333-07601) of
FRD (the "FRD Form S-4")).
*3.2 Bylaws of FRD (incorporated by reference to Exhibit 3.2 to
the FRD Form S-4).
*3.2.1 Amendment to the Bylaws of FRD, dated May 24, 1996
(incorporated by reference to Exhibit 3.2.1. to FRD's annual
report on Form 10-K for the period ended December 26, 1996).
*4.1 Indenture dated as of May 23, 1996 between FRD and the Bank
of New York, as Trustee (the "Indenture") (incorporated by
reference to Exhibit 4.1 to the FRD Form S-4).
*4.2 Stock Purchase Agreement dated as of March 1, 1996 by and
among Flagstar, FRI, FRD, and Family Restaurants, Inc.
(incorporated by reference to Exhibit 4.2 to the FRD Form
S-4).
*4.3 Registration Rights Agreement dated as of May 23, 1996
between FRD and Family Restaurants, Inc. (the "Registration
Rights Agreement") (incorporated by reference to Exhibit 4.3
to the FRD Form S-4).
*4.3.1 First Amendment to Registration Rights Agreement, dated as
of August 23, 1996 (incorporated by reference to Exhibit
4.3.1 to the FRD Form S-4).
*10.1 Credit Agreement dated as of May 23, 1996 by and among FRD,
as Guarantor, FRI-M as Borrower, the Financial Institutions
listed therein, as lenders, Bankers Trust Company, Chemical
Bank and Citicorp USA, Inc., as co-syndication agents, and
Credit Lyonnais New York Branch, as administrative agent
(the "Credit Agreement") (incorporated by reference to
Exhibit 10.1 to the FRD Form S-4).
</TABLE>

17
<PAGE> 20

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
*10.1.1 First Amendment to the Credit Agreement, dated as of July 1,
1996 (incorporated by reference to Exhibit 10.1.1 to FRD's
quarterly report on Form 10-Q for the period ending
September 26, 1996 (the "1996 Form 10-Q")).
*10.1.2 Second Amendment to the Credit Agreement, dated November 19,
1996 (incorporated by reference to Exhibit 4.24 to FCI's
annual report on Form 10-K for the period ended December 31,
1996).
*10.1.3 Third Amendment to the Credit Agreement, dated March 7, 1997
(incorporated by reference to Exhibit 4.2 to FCI's quarterly
report on Form 10-Q for the period ending April 2, 1997).
*10.1.4 Fourth Amendment to the Credit Agreement, dated July 9, 1997
(incorporated by reference to Exhibit 4.1 to FCI's quarterly
report on Form 10-Q for the period ended October 1, 1997).
*10.2 Tax Sharing and Allocation Agreement dated as of May 23,
1996 among FRI and the Company (incorporated by reference to
Exhibit 10.2 to the FRD Form S-4).
*10.3 Management Services Agreement dated as of May 24, 1996
between FRD and Flagstar (incorporated by reference to
Exhibit 10.3 to the FRD Form S-4).
*10.4 Technical Assistance and License Agreement, dated as of
April 14, 1995, between Coco's Restaurant, Inc. and Coco's
Japan Co., Ltd (incorporated by reference to Exhibit 10.5 to
the FRD Form S-4).
*10.5 Advantica Restaurant Group Stock Option Plan, as adopted
January 28, 1998 and amended through September 28, 1998
(incorporated by reference to Exhibit 10.2 to Advantica's
quarterly report on Form 10-Q for the period ended September
30, 1998 (the "Advantica 1998 Third Quarter 10-Q")).
*10.6 Advantica Restaurant Group Officer Stock Option Plan, as
adopted January 28, 1998 and amended through September 28,
1998 (incorporated by reference to Exhibit 10.3 to
Advantica's 1998 Third Quarter 10-Q).
*10.7 Fifth Amendment, dated December 9, 1997, to the Credit
Agreement (incorporated by reference to Exhibit 4.21 to
Amendment No. 1 to the Registration Statement on Form S-1
(No. 333-45811) of Advantica).
*10.8 Sixth Amendment, dated December 23, 1998, to the Credit
Agreement (incorporated by reference to Exhibit 10.36 to
Advantica's annual report on Form 10-K for the year ended
December 30, 1998).
27 Financial Data Schedule (for SEC use only).
99 Safe Harbor Under the Private Securities Litigation Reform
Act of 1995.
</TABLE>

- ---------------

(b) No reports on Form 8-K were filed during the quarter ended December 30,
1998.

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.

No annual report or proxy material has been provided to the security holders
of FRD.

18
<PAGE> 21

FRD ACQUISITION CO.

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report -- Deloitte & Touche LLP....... F-2
Independent Auditors' Report -- KPMG LLP.................... F-3
Statements of Combined Operations for the Five Months Ended
May 23, 1996 and Statements of Consolidated Operations for
the Seven Months Ended December 26, 1996, the Year Ended
December 31, 1997, the One Week Ended January 7, 1998 and
the Fifty-One Weeks Ended December 30, 1998............... F-4
Consolidated Balance Sheets as of December 31, 1997 and
December 30, 1998......................................... F-5
Statements of Combined Cash Flows for the Five Months Ended
May 23, 1996 and Statements of Consolidated Cash Flows for
the Seven Months Ended December 26, 1996, the Year Ended
December 31, 1997, the One Week Ended January 7, 1998 and
the Fifty-One Weeks Ended December 30, 1998............... F-6
Notes to Consolidated and Combined Financial Statements..... F-8
Financial Statement Schedule: Condensed Financial
Information of Registrant................................. S-1
</TABLE>

F-1
<PAGE> 22

INDEPENDENT AUDITORS' REPORT

Board of Directors
FRD Acquisition Co.:

We have audited the accompanying consolidated balance sheets of FRD
Acquisition Co. and subsidiaries (the "Company") as of December 30, 1998
(Emerged Successor balance sheet) and December 31, 1997 (Successor balance
sheet), and the related statements of consolidated operations and consolidated
cash flows for the fifty-one-week period ended December 30, 1998 (Emerged
Successor operations), the one-week period ended January 7, 1998 and the year
ended December 31, 1997 and the seven months ended December 26, 1996 (Successor
operations). Our audits also included the financial statement schedule listed in
the Index. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements and financial statement
schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the financial statements, on November 12, 1997,
the Bankruptcy Court entered an order confirming the plan of reorganization of
the Company's parent, Advantica Restaurant Group, Inc. (formerly Flagstar
Companies, Inc.), which became effective after the close of business on January
7, 1998. Accordingly, the accompanying financial statements have been prepared
in conformity with AICPA Statement of Position 90-7, "Financial Reporting for
Entities in Reorganization Under the Bankruptcy Code," for the FRD Emerged
Successor as a new entity with assets, liabilities, and a capital structure
having carrying values not comparable with prior periods as described in Note 2.

In our opinion, the Emerged Successor consolidated financial statements
present fairly, in all material respects, the financial position of the Company
as of December 30, 1998 and the results of its operations and cash flows for the
fifty-one-week period ended December 30, 1998. Further, in our opinion, the
Successor consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1997 and
December 26, 1996 and the results of its operations and its cash flows for
one-week period ended January 7, 1998, the year ended December 31, 1997 and the
seven months ended December 26, 1996 in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.

DELOITTE & TOUCHE LLP
Greenville, South Carolina
February 16, 1999

F-2
<PAGE> 23

INDEPENDENT AUDITORS' REPORT

Board of Directors
FRD Acquisition Co.:

We have audited the accompanying combined statements of operations and cash
flows of FRD Acquisition Co. (FRD Predecessor) for the five months ended May 23,
1996. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
combined financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
FRD Acquisition Co. (FRD Predecessor) for the five months ended May 23, 1996 in
conformity with generally accepted accounting principles.

KPMG LLP
Orange County, California
July 25, 1996

F-3
<PAGE> 24

FRD ACQUISITION CO.

STATEMENTS OF CONSOLIDATED (SUCCESSOR AND EMERGED SUCCESSOR)
AND COMBINED (PREDECESSOR) OPERATIONS

<TABLE>
<CAPTION>
FRD
FRD FRD EMERGED
PREDECESSOR SUCCESSOR SUCCESSOR
----------- ---------------------------------------- ------------
FIVE SEVEN ONE FIFTY-ONE
MONTHS MONTHS YEAR WEEK WEEKS
ENDED ENDED ENDED ENDED ENDED
MAY 23, DECEMBER 26, DECEMBER 31, JANUARY 7, DECEMBER 30,
1996 1996 1997 1998 1998
----------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
(In thousands)
Net company sales....................... $194,464 $292,731 $487,593 $ 8,266 $432,930
Franchise and foreign licensing
revenue............................... 1,479 2,313 4,900 115 5,188
-------- -------- -------- -------- --------
Operating revenue....................... 195,943 295,044 492,493 8,381 438,118
-------- -------- -------- -------- --------
Operating expenses:
Product cost.......................... 54,370 83,519 133,733 2,255 119,467
Payroll and benefits.................. 74,642 104,090 178,721 3,139 160,565
Amortization of reorganization value
in excess amounts allocable to
identifiable assets................ -- -- -- -- 40,051
Depreciation and amortization of
property........................... 9,487 14,621 23,703 469 33,018
Amortization of other intangibles..... 2,884 3,885 5,853 122 2,253
Management fees to Advantica.......... -- 2,950 4,925 84 4,381
Allocated costs from Advantica........ -- 21 2,500 48 2,202
Other................................. 52,078 74,011 115,972 2,218 95,259
-------- -------- -------- -------- --------
193,461 283,097 465,407 8,335 457,196
-------- -------- -------- -------- --------
Operating income (loss)................. 2,482 11,947 27,086 46 (19,078)
-------- -------- -------- -------- --------
Other charges (credits):
Interest expense, net................. 4,658 17,680 29,597 585 26,897
Other, net............................ (5,437) (4) 2,975 -- (515)
-------- -------- -------- -------- --------
(779) 17,676 32,572 585 26,382
-------- -------- -------- -------- --------
Income (loss) before reorganization
items and taxes....................... 3,261 (5,729) (5,486) (539) (45,460)
Reorganization items.................... -- -- 528 (44,993) --
-------- -------- -------- -------- --------
Income (loss) before taxes.............. 3,261 (5,729) (6,014) 44,454 (45,460)
Provision (benefit) for income taxes.... 2,160 460 (3,836) 11,367 (3,652)
-------- -------- -------- -------- --------
Net income (loss)....................... $ 1,101 $ (6,189) $ (2,178) $ 33,087 $(41,808)
======== ======== ======== ======== ========
</TABLE>

See notes to consolidated and combined financial statements.

F-4
<PAGE> 25

FRD ACQUISITION CO.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
FRD FRD
SUCCESSOR EMERGED SUCCESSOR
DECEMBER 31, DECEMBER 30,
1997 1998
(In thousands) ------------ -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 9,051 $ 5,841
Receivables............................................... 4,661 6,343
Receivable from Advantica................................. 1,870 --
Inventories............................................... 3,758 3,070
Other..................................................... 9,132 3,952
-------- --------
28,472 19,206
-------- --------
Property and equipment...................................... 151,675 149,336
Accumulated depreciation.................................... (34,346) (30,184)
-------- --------
117,329 119,152
-------- --------
Other assets:
Reorganization value in excess of amounts allocable to
identifiable assets, net............................... -- 155,852
Goodwill, net............................................. 186,613 --
Other intangibles, net.................................... 7,275 41,896
Deferred taxes............................................ 25,487 18,744
Other..................................................... 6,352 3,903
-------- --------
225,727 220,395
-------- --------
$371,528 $358,753
======== ========

LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Current maturities of long-term debt...................... $ 23,457 $ 13,530
Accounts payable.......................................... 21,645 20,361
Accrued salaries and vacation............................. 12,820 10,199
Accrued insurance......................................... 4,560 4,408
Accrued interest.......................................... 9,282 9,320
Payable to Advantica...................................... 10,182 16,740
Other..................................................... 15,184 18,532
-------- --------
97,130 93,090
-------- --------
Long-term liabilities:
Debt, less current maturities............................. 195,652 182,743
Liability for self-insured claims......................... 9,397 10,014
Other noncurrent liabilities.............................. 2,716 14,995
-------- --------
207,765 207,752
-------- --------
304,895 300,842
-------- --------
Commitments and Contingencies
Stockholder's Equity:
Common stock: par value $0.10; 1,000 shares authorized,
issued and outstanding................................. -- --
Paid-in capital........................................... 75,000 99,719
Deficit................................................... (8,367) (41,808)
-------- --------
66,633 57,911
-------- --------
$371,528 $358,753
======== ========
</TABLE>

See notes to consolidated and combined financial statements.

F-5
<PAGE> 26

FRD ACQUISITION CO.

STATEMENTS OF CONSOLIDATED (SUCCESSOR AND EMERGED SUCCESSOR) AND
COMBINED (PREDECESSOR) CASH FLOWS

<TABLE>
<CAPTION>
FRD
FRD FRD EMERGED
PREDECESSOR SUCCESSOR SUCCESSOR
----------- ---------------------------------------- ------------
FIVE SEVEN ONE FIFTY-ONE
MONTHS MONTHS YEAR WEEK WEEKS
ENDED ENDED ENDED ENDED ENDED
MAY 23, DECEMBER 26, DECEMBER 31, JANUARY 7, DECEMBER 30,
1996 1996 1997 1998 1998
----------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
(In thousands)
Cash Flows from Operating Activities:
Net income (loss)........................... $ 1,101 $ (6,189) $ (2,178) $ 33,087 $(41,808)
Adjustments to reconcile net income (loss)
to cash flows from operating activities:
Amortization of reorganization value in
excess of amounts allocable to
identifiable assets.................... -- -- -- -- 40,051
Depreciation and amortization of
property............................... 9,487 14,621 23,703 469 33,018
Amortization of other intangibles........ 2,884 3,885 5,853 122 2,253
Amortization of deferred financing
costs.................................. -- 816 1,356 28 1,336
Amortization of debt premium............. -- -- -- -- (1,497)
Gain on disposition of assets............ (5,738) -- (5,190) -- (5,979)
Gain on lease buyouts.................... -- -- -- -- (5,178)
Deferred tax (benefit) provision......... -- -- (4,183) 11,340 (3,899)
Noncash reorganization items............. -- -- -- (44,993) --
Decrease (increase) in assets:
Receivables................................. 1,676 (2,226) 1,115 252 (1,189)
Inventories................................. 68 117 1,281 -- 538
Other current assets........................ (485) (4,105) (3,933) 3,918 1,551
Other assets................................ 1,251 (989) (1,952) -- 872
Increase (decrease) in liabilities:
Accounts payable............................ (4,762) 610 2,074 (3,085) 3,278
Accrued salaries and vacation............... -- 98 1,305 (1,451) (1,170)
Payable to Advantica........................ -- 2,950 7,231 132 6,426
Other accrued liabilities................... (2,290) 10,964 (7,015) 1,388 (3,992)
Liability for self-insurance claims......... 2,133 624 (4,887) (253) (1,681)
Other noncurrent liabilities................ -- 29 2,507 3 66
-------- --------- -------- -------- --------
Net cash flows from operating activities...... 5,325 21,205 17,087 957 22,996
-------- --------- -------- -------- --------
Cash Flows from Investing Activities:
Purchase of property........................ (2,216) (2,746) (14,941) -- (10,367)
Proceeds from lease buyouts................. -- -- -- -- 3,806
Proceeds from disposition of property....... 20,087 -- 12,046 -- 12,515
Acquisition of business..................... -- (128,056) -- -- --
-------- --------- -------- -------- --------
Net cash flows provided by (used in )
investing activities........................ 17,871 (130,802) (2,895) -- 5,954
-------- --------- -------- -------- --------
See notes to consolidated and combined financial statements.
</TABLE>

F-6
<PAGE> 27
FRD ACQUISITION CO.

STATEMENTS OF CONSOLIDATED (SUCCESSOR AND EMERGED SUCCESSOR) AND
COMBINED (PREDECESSOR) CASH FLOWS -- (CONTINUED)

See notes to consolidated and combined financial statements.

F-7
<PAGE> 28

FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

NOTE 1: ORGANIZATION AND 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"), 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 family dining segment. The acquisition price of
$313.4 million (which was paid in exchange for all of the outstanding stock of
FRI-M Corporation ("FRI-M"), the subsidiary of Family Restaurants, Inc. ("FRI"),
which owns the Coco's and Carrows chains), was financed with $125.0 million in
cash ($75.0 million of which was provided from Flagstar's cash balances and the
remaining $50.0 million from bank term loans which totaled $56.0 million, with
$6 million being used to pay transaction fees), the issuance of $156.9 million
in senior notes of FRD to FRI (the "Senior Notes"), and the assumption of
certain capital lease obligations of approximately $31.5 million. The
acquisition was accounted for using the purchase method of accounting. In
accordance with the purchase method of accounting, the purchase price was
allocated to the underlying assets and liabilities of FRI-M based on their
estimated respective fair values at the date of acquisition. The purchase price
exceeded the fair value of the net assets acquired by approximately $195
million, as adjusted. Prior to January 7, 1998, the resulting goodwill was being
amortized on a straight line basis over 40 years. Unamortized goodwill was
written off at January 7, 1998 in conjunction with the adoption of fresh start
reporting as described in Note 2.

FRD restaurants primarily offer moderately-priced breakfast, lunch and
dinner items. At December 30, 1998, the Company owned 273 full-service
restaurants located primarily in six states, with approximately 88% of its
restaurants located in California. Additionally, as of December 30, 1998, the
Company was the licensor of 300 restaurants primarily located in Japan and South
Korea and the franchisor of 57 restaurants in the United States.

In the financial statements included herein, reference to "FRD Predecessor"
refers to the period of ownership of FRI-M by FRI, giving effect to information
about events occurring upon FRI's emergence from a Chapter 11 bankruptcy code
reorganization through May 23, 1996. "FRD Successor" refers to the period of
ownership of FRI-M by FRD subsequent to May 23, 1996. "FRD Emerged Successor"
refers to the period subsequent to the emergence of Advantica from proceedings
under the Bankruptcy Code (as defined below) and the application of fresh start
reporting as described in Note 2.

The FRD Predecessor Company's combined financial statements combine the
financial position and operations of FRI-M, a wholly owned subsidiary of FRI,
and certain subsidiaries including those restaurants that made up the Family
Restaurant Division and including the FRD Commissary, a division of FRI. The
Family Restaurant Division primarily represented the Coco's and Carrows
restaurant concepts. The FRI-M combined financial statements exclude the
financial position and operations of FRI-MRD Corporation, a wholly-owned
subsidiary of the FRI-M Corporation which was not acquired by FRD.

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 15). 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 above mentioned Chapter 11
proceedings.

Material features of the Plan as it became effective as of January 7, 1998,
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: (1) Flagstar's 10 7/8%
Senior Notes due 2002 and 10 1/4% Senior Notes due 2001 (collectively with
the 10 7/8% Senior Notes due 2002, the "Old Senior Notes"), (2) Flagstar's
11.25% Senior Subordinated Debentures due 2004 and 11 3/8% Senior

F-8
<PAGE> 29
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION -- Continued
Subordinated Debentures due 2003 (collectively with the 11.25% Senior
Subordinated Debentures due 2004 the "Senior Subordinated Debentures"), (3)
Flagstar's 10% Convertible Junior Subordinated Debentures due 2014 (the "10%
Convertible Debentures"), (4) FCI's $2.25 Series A Cumulative Convertible
Exchangeable Preferred Stock and (5) FCI's $.50 par value common stock (the
"Old Common Stock");

(c) Advantica had 100 million authorized shares of Common Stock (of
which 40 million were deemed issued and outstanding on the Effective Date
pursuant to the Plan subject to completion of the exchange of securities as
contemplated by such plan) and 25 million authorized shares of preferred
stock (none of which are currently outstanding). Pursuant to the Plan of
Reorganization, ten percent of the number of shares of Common Stock issued
and outstanding on the Effective Date, on a fully diluted basis, is reserved
for issuance under a new management stock option program. Additionally, 4
million shares of Common Stock are reserved for issuance upon the exercise
of new warrants expiring January 7, 2005 that were deemed issued and
outstanding on the Effective Date and entitle the holders thereof to
purchase in the aggregate 4 million shares of Common Stock at an exercise
price of $14.60 per share (the "Warrants");

(d) Each holder of the Old Senior Notes received such holder's pro rata
portion of 100% of Advantica's 11 1/4% Senior Notes due 2008 (the "Advantica
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 (1) shares of Common Stock equivalent to 4.5% of the
Common Stock issued on the Effective Date and (2) 100% of the Warrants
issued on the Effective Date; and

(g) Advantica refinanced its prior credit facilities by entering into a
new credit facility with The Chase Manhattan Bank ("Chase") and other
lenders named therein, providing Advantica (excluding FRI-M) with a $200
million senior revolving credit facility (the "Credit Facility").

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 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 upon emergence has been 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 "FRD Emerged Successor," as they reflect the periods
subsequent to the implementation of fresh start reporting and are not comparable
to the financial statements for periods prior to the Effective Date.

The total reorganization value assigned to the Company's assets was
estimated based on a review of the operating performance of companies in the
restaurant industry that offer products and services that are comparable to or
competitive with the Company. The following multiples were established for these
companies: (1) enterprise value (defined as market value of outstanding equity,
plus debt, minus cash and cash equivalents)/revenues for the four most recent
fiscal quarters;

F-9
<PAGE> 30
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2: FRESH START REPORTING -- Continued
(2) enterprise value/earnings before interest, taxes, depreciation and
amortization for the four most recent fiscal quarters and (3) 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
$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 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.

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.

F-10
<PAGE> 31
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2: FRESH START REPORTING -- Continued
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>
FRD EMERGED
FRD SUCCESSOR ADJUSTMENTS FOR SUCCESSOR
COMPANY FRESH START COMPANY
JANUARY 7, 1998 REPORTING(A) JANUARY 7, 1998
(In thousands) --------------- --------------- ---------------
<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 tangible 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 STOCKHOLDER'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
Stockholder's Equity:
Common Stock: par value $0.10, 1000 shares authorized,
issued and outstanding.............................. -- --
Paid-in capital........................................ 75,000 24,719 99,719
Deficit................................................ (8,934) 8,934 --
-------- --------- --------
$361,180 $ 70,119 $431,299
======== ========= ========
</TABLE>

- ---------------

(a) In accordance with the principles of SOP 90-7, the reorganization resulted
in the application of fresh start reporting which results in the revaluation
of assets and liabilities to estimated current fair value. The revaluation
reflects adjustments for fresh start reporting, which include (1) the
adjustment of property, net to estimated fair value, (2) the write-off of
unamortized goodwill and establishment of estimated fair value of other
intangible assets (primarily franchise rights and tradenames), (3) the
establishment of reorganization value in excess of amounts allocable to
identifiable assets, (4) the increase in value of debt to reflect estimated
fair value, (5) the recognition of liabilities associated with severance and
other exit costs, and the adjustments to self-insured claims

F-11
<PAGE> 32
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2: FRESH START REPORTING -- Continued
and contingent liabilities reflecting a change in methodology, and (6) the
adjustments to reflect the new value of common stockholder's equity based on
reorganization value, which was determined by estimating the fair value of
the Company.

The following unaudited pro forma financial information shows the results of
operations of the Company as though the reorganization and adoption of fresh
start reporting discussed above had occurred as of December 27, 1996. These
results reflect the amortization of the increase in intangible assets as a
result of the application of fresh start reporting over the estimated useful
lives of the related asset, including reorganization value in excess of amounts
allocable to identifiable assets over a five-year period; trade names over a
40-year period; and franchise rights over estimated average remaining terms of 9
to 15 years.

<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
(In millions)
Revenue................................................. $492.5
Net loss................................................ (41.0)
</TABLE>

The pro forma financial information presented above does not purport to be
indicative of either (1) the results of operations, had the reorganization and
the adoption of fresh start reporting taken place on December 27, 1996, or (2)
future results of operations. The operations of the Company on a pro forma basis
for the period ended January 7, 1998 would differ from historical results
primarily due to the reorganization items credit of approximately $45 million.

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting policies and methods of their application that significantly
affect the determination of financial position, cash flows and results of
operations are as follows:

Consolidated Financial Statements. Consolidated Financial Statements
include the accounts of the Company and its subsidiaries. Certain prior year
amounts have been reclassified to conform to the current year presentation.

Fiscal Year. Effective December 27, 1996, the Company changed its fiscal
year end from the last Thursday of the calendar year to the last Wednesday of
the calendar year. Due to the timing of this change, the Company's 1997 fiscal
year includes an extra six days in comparison to the prior fiscal year. The 1995
and 1997 fiscal years include 53 weeks of operations. The 1996 fiscal year
includes 52 weeks. The five months ended May 23, 1996 include 21 weeks, while
the seven months ended December 26, 1996 include 31 weeks.

Financial Statement Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the amounts of revenues and expenses during the
period reported. Actual results could differ from those estimates.

Cash and Cash Equivalents. The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.

Inventories. Inventories consist primarily of food and liquor and are
stated at the lower of cost (first-in, first-out) or market.

Preopening Costs. Prior to January 7, 1998 the Company capitalized certain
direct incremental costs incurred in conjunction with the opening of restaurants
and amortized such costs over a 12-month period from the date of opening.
Subsequent to January 7, 1998, preopening costs are being expensed as incurred
(see New Accounting Standards below).

Property and Depreciation. Prior to January 7, 1998 owned property is
stated at appraised value at acquisition date or cost. Property was restated at
estimated fair value as of January 7, 1998 in conjunction with the adoption of
fresh start reporting. Property additions subsequent to January 7, 1998 are
stated at cost. Property is depreciated on a straight-line basis over estimated
useful lives (buildings principally over 20 to 30 years and furniture, fixtures
and equipment over three to eight years). Prior to the acquisition date, owned
property and equipment of FRD Predecessor was depreciated on a straight-line

F-12
<PAGE> 33
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
basis over estimated lives ranging from 25 to 35 years for buildings and 3 to 10
years for furniture, fixtures and equipment. Leasehold improvements are
amortized on a straight-line basis over the shorter of estimated useful lives or
the terms of related leases. Property under capitalized leases is amortized over
the terms of the leases using the straight-line method.

Goodwill and Other Intangible Assets. Prior to January 7, 1998 the excess
of cost over the fair value of net assets acquired of FRI-M was being amortized
over a 40-year period on the straight-line method. Accumulated amortization on
goodwill amounted to approximately $8.1 million at December 31, 1997.
Unamortized goodwill was written off at January 7, 1998 in conjunction with the
adoption of fresh start reporting as discussed in Note 2. Other intangible
assets consist primarily of trademarks, tradenames, franchise and other
operating agreements. Prior to January 7, 1998, such assets are stated at cost.
Other intangible assets were restated to fair value at January 7, 1998 and are
being amortized on a straight-line basis over the useful lives of the franchise
and other agreements and over 40 years for tradenames. At December 31, 1997 and
December 30, 1998, accumulated amortization of franchise operating rights
totaled approximately $1.0 million and $1.9 million, respectively.

Reorganization Value in Excess of Amounts Allocable to Identifiable
Assets. The portion of the reorganization value of the Company which was not
attributable to specific tangible or identifiable intangible assets of the
Company is being amortized using the straight-line method over a five-year
period. At December 30, 1998 accumulated amortization totaled approximately
$40.0 million.

Deferred Financing Costs. Costs related to the issuance of debt are
deferred and amortized as a component of interest expense using the interest
method over the terms of the respective debt issues.

Income Taxes. The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). The Company is included in the consolidated Federal and
certain state income tax returns of Advantica. As a result of the tax sharing
agreement with Advantica, the Advantica current Federal and the applicable state
consolidated income tax liabilities are allocated to the Company based on their
current Federal and state income tax liability as if they were filing separate
Federal and state income tax returns.

The accompanying predecessor combined financial statements for the periods
prior to May 23, 1996 combine the accounts of certain subsidiaries and divisions
and exclude some operations of the combined entities. Some combined entities
have not been taxable entities, but all have been included in the consolidated
income tax returns of the predecessor parent.

See Note 9 for a further description of the accounting for income taxes.

Self-Insurance Reserves. Through June 30, 1997, the Company was primarily
self-insured, as was the FRD Predecessor, for workers' compensation and general
liability risks which are supplemented by stop-loss type insurance policies. The
FRD Predecessor reflected workers' compensation and general liability reserves
at their estimated undiscounted amounts. In conjunction with the May 23, 1996
acquisition, the Company recorded its self-insurance liabilities for estimated
incurred losses at their estimated present value as of May 23, 1996 based on
expected loss payment patterns determined by independent actuaries. As of July
1, 1997, the Company changed to a guaranteed cost program to cover workers'
compensation insurance. The liabilities for prior and current estimated incurred
losses are discounted to their present value based on expected loss payment
patterns determined by independent actuaries or experience. The total discounted
self-insurance liabilities recorded at December 31, 1997 and December 30, 1998
were $13.6 million and $14.1 million, respectively, reflecting a 5% discount
rate for 1997 and 1998. The related undiscounted amount at such dates were $15.3
million and $15.9 million, respectively.

Franchise and License Fees. Initial franchise and license fees are
recognized when all of the material obligations have been performed and
conditions have been satisfied, typically when operations have commenced.
Continuing fees, based upon a percentage of net sales, are recorded as income on
a monthly basis.

Gains on Sales of Company-Owned Restaurants. Gains on sales of
Company-owned restaurants that include real estate owned by the Company are
recognized in accordance with Statement of Financial Accounting Standards No.
66, "Accounting for Sales of Real Estate." In this regard, gains on such sales
are recognized when the cash proceeds from the sale exceed 20 percent of the
sales price. For restaurant sale transactions that do not include real estate
owned by the Company, gains are recognized at the time of sale, if the
collection of the sale price is reasonably assured.

F-13
<PAGE> 34
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
During the year ended December 31, 1997 and the 51 weeks ended December 30,
1998, the Company recognized gains related to sales of Company-owned restaurants
of approximately $5.2 million and $6.0 million, respectively. Such gains are
included as a reduction of other operating expenses in the accompanying
Statement of Consolidated Operations. No gains on sales of Company-owned
restaurants were included as a reduction of operating expenses for the seven
months ended December 31, 1996 or for the one week ended January 1, 1998. Cash
proceeds received from sales of Company-owned restaurants totaled $7.4 million
for the year ended December 31, 1997 and $16.3 million for the 51 weeks ended
December 30, 1998. Cash proceeds for the one week ended January 7, 1998 were
immaterial. Deferred gains and the noncash portion of proceeds related to such
transactions are not significant.

Advertising. Production costs for radio and television advertising are
expensed as of the date the commercials are initially aired. Advertising expense
totaled $6.7 million for the five months ended May 23, 1996, $9.9 million for
the seven months ended December 26, 1996, $16.3 million for the year ended
December 31, 1997, $0.3 million for the one week ended January 7, 1998 and $16.6
million for the 51 weeks ended December 30, 1998. Prepaid advertising included
in the Consolidated Balance Sheets totaled $0.5 million and $0.1 million at
December 31, 1997 and December 30, 1998, respectively.

Cash Overdrafts. The Company has included in accounts payable on the
accompanying balance sheets cash overdrafts totaling $7.6 million at December
31, 1997 and $7.7 million at December 30, 1998.

Foreign Currency Exposure. The Company is the licensor of Coco's
restaurants primarily in Japan and South Korea. Royalties due to the Company are
paid in foreign currency based on sales attributable to such Coco's. The
receivable balance at December 30, 1998 primarily represents ten months of
Coco's Japan royalties expected to be received in March 1999. Because this
royalty is paid annually, the Company has potential exposure that exchange rates
may fluctuate causing an unfavorable impact on the receivable balance. At
December 31, 1997 and December 30, 1998, the net royalty receivable amounted to
$2.3 million and $2.4 million, respectively.

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 external and internal direct costs of developing or obtaining
internal-use software to be capitalized as a long-lived asset and also requires
training costs included in the purchase price of computer software and costs
associated with research and development to be expensed as incurred. In April
1998, the AICPA issued Statement of Position 98-5, "Reporting on the Costs of
Start-Up Activities" ("SOP 98-5"), which provides additional guidance on the
financial reporting of start-up costs, requiring costs of start-up activities to
be expensed as incurred.

In accordance with the adoption of fresh start reporting upon emergence from
bankruptcy (see Note 2), the Company adopted both statements of position as of
January 7, 1998. The adoption of SOP 98-1 at January 7, 1998 resulted in the
write-off of previously capitalized direct costs of obtaining computer software
associated with research and development totaling $0.4 million. Subsequent to
the Effective Date, similar costs are being expensed as incurred. The adoption
of SOP 98-5 at January 7, 1998 resulted in the write-off of previously
capitalized preopening costs totaling $0.1 million. Subsequent to the Effective
Date, preopening costs are being expensed as incurred.

F-14
<PAGE> 35
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
is effective for the Company's fiscal year 2000 financial statements. The
Company is in the process of evaluating the effect of SFAS 133 on its
consolidated results of operations, financial position and cash flows and
therefore is unable to evaluate the effect of adoption.

NOTE 4: RECEIVABLES

A summary of receivables follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1997 1998
------------ ------------
<S> <C> <C>
License and franchise fees and related
receivables, net........................... $2,351 $2,176
Trade, principally credit cards.............. 801 570
Note receivable.............................. 188 1,075
Other........................................ 1,321 2,522
------ ------
$4,661 $6,343
====== ======
</TABLE>

NOTE 5: OTHER CURRENT ASSETS

A summary of other current assets follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1997 1998
------------ ------------
<S> <C> <C>
Prepaid rent................................. $1,889 $1,821
Prepaid other................................ 3,207 2,131
Amount in escrow from sale of units.......... 4,036 --
------ ------
$9,132 $3,952
====== ======
</TABLE>

NOTE 6: PROPERTY AND EQUIPMENT

A summary of property and equipment follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1997 1998
------------ ------------
<S> <C> <C>
Land......................................... $ 2,383 $ 2,383
Buildings and improvements................... 96,731 103,763
Furniture, fixtures and equipment............ 48,041 41,461
Projects under construction.................. 4,520 1,729
-------- --------
151,675 149,336
Less accumulated depreciation and
amortization............................... (34,346) (30,184)
-------- --------
$117,329 $119,152
======== ========
</TABLE>

Property under capitalized leases in the amount of $31.9 million and $26.6
million at December 31, 1997 and December 30, 1998, respectively, is included in
buildings and improvements. Accumulated amortization of property under capital
leases amounted to $9.0 million and $6.8 million at December 31, 1997 and
December 30, 1998, respectively. Capital leases primarily relate to buildings on
certain restaurants properties. The land portions of these leases are accounted
for as operating leases.

F-15
<PAGE> 36
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6: PROPERTY AND EQUIPMENT -- Continued
A majority of the capitalized and operating leases have original terms of 25
years, and substantially all of these leases expire in the year 2005 or later.
Most leases have renewal options. The leases generally provide for payment of
minimum annual rent, real estate taxes, insurance and maintenance and, in most
cases, contingent rent, calculated as a percentage of sales, in excess of
minimum rent. Total rental expense included in the determination of net income,
including contingent rents for operating and capitalized leases, is as follows
(in thousands):

<TABLE>
<CAPTION>
FIVE SEVEN ONE FIFTY-ONE
MONTHS MONTHS YEAR WEEK WEEKS
ENDED ENDED ENDED ENDED ENDED
MAY 23, DECEMBER 26, DECEMBER 31, JANUARY 7, DECEMBER 30,
1996 1996 1997 1998 1998
------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Minimum rent............................... $6,530 $ 9,801 $23,536 $450 $22,686
Contingent rent............................ 1,386 2,800 3,975 71 3,600
Sublease rent.............................. (29) (150) (93) -- (1,046)
------ ------- ------- ---- -------
$7,887 $12,451 $27,418 $521 $25,240
====== ======= ======= ==== =======
</TABLE>

At December 30, 1998, the present value of capitalized lease obligations and
the future minimum lease payments on noncancelable operating leases were (in
thousands):

<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------------------------- --------------------------------
MINIMUM LEASE MINIMUM SUBLEASE MINIMUM LEASE MINIMUM SUBLEASE
DUE IN: PAYMENTS RECEIPTS PAYMENTS RECEIPTS
- ------- ------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
1999.................................. $ 5,196 $1,586 $ 19,474 $1,178
2000.................................. 4,512 1,473 18,681 1,121
2001.................................. 4,047 1,316 17,200 1,013
2002.................................. 3,372 1,082 15,483 938
2003.................................. 2,521 833 13,516 785
Thereafter............................ 4,506 3,362 78,637 3,880
------- ------ -------- ------
Total minimum lease
payments.................. 24,154 $9,652 $162,991 $8,915
====== ======== ======
Less imputed interest................. 7,028
-------
Present value of capital
lease payments............ $17,126
=======
</TABLE>

Payments for certain FRD operating leases are being made by FRI in
accordance with the provisions of the Stock Purchase Agreement. As such, these
payments have been excluded from the amount of minimum lease payments and
minimum sublease receipts reported above.

NOTE 7: OTHER ASSETS

A summary of other assets follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1997 1998
------------ ------------
<S> <C> <C>
Debt issuance costs, net...................... $3,014 $1,658
Other......................................... 3,338 2,245
------ ------
$6,352 $3,903
====== ======
</TABLE>

F-16
<PAGE> 37
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8: DEBT

Long-term debt, including capitalized lease obligations, is comprised of the
following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1997 1998
------------ ------------
<S> <C> <C>
12 1/2% Senior Notes due July 15, 2004,
interest payable semi-annually.............. $156,897 $156,897
Term loan, principal payable quarterly........ 40,000 10,411
Capitalized lease obligations................. 22,212 17,126
-------- --------
219,109 184,434
Premium, net (see Note 2):
12 1/2% Senior notes, effective rate
10.95%................................... -- 11,839
-------- --------
Total......................................... 219,109 196,273
Less current maturities....................... (23,457) (13,530)
-------- --------
$195,652 $182,743
======== ========
</TABLE>

In connection with the acquisition of FRI-M, the Company obtained a credit
facility (as amended to date, the "FRI-M Credit Facility") on May 23, 1996,
which provides for a $56.0 million term loan (the "Term Loan") and a $35.0
million revolving credit facility (the "Revolving Credit Facility"), which is
also available for letters of credit. At December 30, 1998, the amount of the
Term Loan outstanding was $10.4 million and the Company had no outstanding
working capital borrowings; however, letters of credit outstanding were $13.2
million. Principal installments of the Term Loan are payable quarterly as
follows: $4 million per quarter for four consecutive quarters beginning February
28, 1997; $5 million for four consecutive quarters beginning February 28, 1998;
$6 million on February 28, 1999; and $7 million for two consecutive quarters
beginning May 31, 1999. All borrowings under the FRI-M Credit Facility accrue
interest at a variable rate based on the prime rate or an adjusted Eurodollar
rate (approximately 8.4% at December 30, 1998) and are secured by substantially
all of the assets of FRD and its subsidiaries and by the issued and outstanding
stock of FRI-M and its subsidiaries. The FRI-M Credit Facility expires, and all
amounts outstanding under the facility must be repaid, on August 31, 1999.
Advantica is exploring various alternatives to restructure FRD's capital
structure in order to increase capital availability and otherwise improve FRD's
financial flexibility. Such efforts include pursuing a new credit facility to
refinance the FRI-M Credit Facility before its expiration, as well as other
alternatives to increase Advantica's investment flexibility with respect to
FRD's operations.

The FRI-M Credit Facility and the indenture under which the Senior Notes
have been issued contain a number of restrictive covenants which, among other
things, limit (subject to certain exceptions) FRD and its subsidiaries with
respect to incurrence of debt, existence of liens, investments and joint
ventures, the declaration or payment of dividends, the making of guarantees and
other contingent obligations, mergers, the sale of assets, capital expenditures
and material changes in their business. In addition, the FRI-M Credit Facility
contains certain financial covenants including provisions for the maintenance of
a minimum level of interest coverage (as defined), limitations on ratios of
indebtedness (as defined) to earnings before interest, taxes, depreciation and
amortization (EBITDA), maintenance of a minimum level of EBITDA and limitations
on annual capital expenditures.

F-17
<PAGE> 38
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8: DEBT -- CONTINUED

Aggregate annual maturities of long-term debt at December 30, 1998 during
the next five years and thereafter are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR:
- -----
<S> <C>
1999........................................................ $ 13,612
2000........................................................ 2,881
2001........................................................ 2,761
2002........................................................ 2,373
2003........................................................ 1,771
Thereafter.................................................. 161,036
--------
$184,434
========
</TABLE>

The estimated fair value of the Company's long-term debt (excluding capital
lease obligations) is $160.8 million at December 30, 1998. Such amount is based
on market quotations.

NOTE 9: INCOME TAXES

A summary of the provision for (benefit from) income taxes is as follows (in
thousands):

<TABLE>
<CAPTION>
SEVEN ONE FIFTY-ONE
MONTHS YEAR WEEK WEEKS
ENDED ENDED ENDED ENDED
DECEMBER 26, DECEMBER 31, JANUARY 7, DECEMBER 30,
1996 1997 1998 1998
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
Current:
Federal.................................. $199 $ (140) $ -- $ 19
State, foreign and other................. 261 487 27 228
---- ------- ------- -------
460 347 27 247
---- ------- ------- -------
Deferred:
Federal.................................. -- (4,144) 9,072 (3,602)
State, foreign and other................. -- (39) 2,268 (297)
---- ------- ------- -------
-- (4,183) 11,340 (3,899)
---- ------- ------- -------
Total provision for (benefit
from) income taxes............. $460 $(3,836) $11,367 $(3,652)
==== ======= ======= =======
</TABLE>

The pro forma provision for income taxes in the combined financial
statements for the five months ended May 23, 1996 is equal to 40% of income
before taxes, excluding the amortization of certain intangible assets.

Subsequent to May 23, 1996, the Company joined with Advantica in the filing
of consolidated federal and certain consolidated state income tax returns. The
Company is a party to a tax-sharing agreement with Advantica that provides for
the Company to pay to Advantica the amount of the current income tax liability
the Company would have had if the Company had filed separate federal and state
income tax returns.

F-18
<PAGE> 39
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 9: INCOME TAXES -- Continued

The following represents the approximate tax effect of each significant type
of temporary difference and carryforward giving rise to deferred income tax
assets or liabilities as of December 31, 1997 and December 30, 1998:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1997 1998
------------ ------------
<S> <C> <C>
(In thousands)
Deferred tax assets:
Self-insurance reserves..................... $ 5,248 $ 5,815
Intangible assets........................... 4,974 --
Debt premium................................ -- 4,666
Lease reserve............................... -- 4,387
Other accruals and reserves................. 4,108 4,931
General business credit carryforwards....... 4,302 6,405
Capital loss carryforwards.................. 10,280 6,826
Net operating loss carryforwards............ 15,010 15,053
Alternative minimum tax credit
carryforwards............................ 56 70
Less: valuation allowance..................... (14,800) (11,353)
-------- --------
Total deferred tax assets..................... 29,178 36,800
-------- --------
Deferred tax liabilities:
Capitalized leases.......................... -- 873
Fixed assets................................ 3,498 9,295
Intangible assets........................... 193 7,888
-------- --------
Total deferred tax liabilities................ 3,691 18,056
-------- --------
Total net deferred tax assets................. $ 25,487 $ 18,744
======== ========
</TABLE>

The Company has provided a valuation allowance for the portion of the
deferred tax assets for which it is more likely than not that a tax benefit will
not be realized.

The difference between the statutory federal income tax rate and the
effective tax rate on loss from continuing operations is as follows:

<TABLE>
<CAPTION>
SEVEN MONTHS YEAR ONE WEEK FIFTY-ONE
ENDED ENDED ENDED WEEKS ENDED
DECEMBER 26, DECEMBER 31, JANUARY 7, DECEMBER 30,
1996 1997 1998 1998
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
Statutory rate...................................... 35% 35% 35% 35%
Difference:
State, foreign and other taxes, net of federal
income tax benefit............................. (3) (7) -- --
Amortization of reorganization value in excess of
amounts allocable to identifiable assets....... -- -- -- (30)
Gain on the recognition of reorganization value,
net of the write-off of goodwill............... -- -- (9) --
Amortization of goodwill.......................... (21) (33) -- --
FICA tip credits.................................. -- 72 -- 5
Non-deductible wages related to the FICA tip
credits........................................ -- (25) -- (2)
Decrease (increase) in the valuation allowance.... (19) 19 -- --
Other............................................. -- 3 -- --
--- --- --- ---
Effective tax rate.................................. (8)% 64% 26% 8%
=== === === ===
</TABLE>

At December 30, 1998 the Company has available, for purposes of its tax
sharing agreement with Advantica, alternative minimum tax ("AMT") credits of
approximately $70,000. Such AMT credits may be carried forward indefinitely. The

F-19
<PAGE> 40
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 9: INCOME TAXES -- Continued
Company also has regular and alternative minimum tax net operating loss
carryovers of approximately $38 million and $7 million, respectively. In
addition, the Company has capital loss carryovers of approximately $17 million
and FICA tip credit carryovers of approximately $6 million. The FICA tip credit
carryovers expire in 2011 through 2013.

In connection with the purchase of FRI-M in 1996, the Company acquired
certain income tax attributes which may be used to offset only the separate
taxable income of FRI-M and its subsidiaries. Approximately $35 million of
regular net operating loss carryforwards and $30 million of regular and AMT
capital loss carryforwards were acquired in the purchase of FRI-M. Due to
FRI-M's ownership changes in January 1994 and again in May 1996, FRI-M's ability
to utilize these loss carryforwards, which arose prior to the ownership changes,
is limited. Approximately $3 million of the acquired regular net operating loss
carryforwards were utilized to offset 1996 post-acquisition taxable income. The
annual limitation for the utilization of approximately $22 million of the
acquired net operating loss carryforwards which were generated after January
1994 is approximately $4 million. The remaining $11 million of the Company's net
operating loss carryforwards which were generated prior to January 1994 can be
utilized only to offset pre-January 1994 built-in gains which are recognized in
certain future periods. These net operating loss carryforwards expire
principally in 2006 through 2010. FRI-M's capital loss carryforward of $17
million can be utilized only to offset capital gains generated by the Company or
its subsidiaries. The Company's capital loss carryforwards are also subject to
the same $4 million annual limitation as the net operating losses generated
after January 1994. The Company recognized approximately $4 million of capital
gains in 1997 and $8 million in 1998 which were utilized to offset some of the
capital loss carryover. The remaining capital loss carryforward of approximately
$17 million will expire in 2000.

NOTE 10: EMPLOYEE BENEFIT PLANS

As of April 1, 1997, certain Company employees became eligible to
participate in Advantica's defined contribution plans, whereby eligible
employees can elect to contribute from 1% to 15% of their compensation to the
plans. The Company makes matching contributions, with certain limitations. The
amount charged to income under these plans was immaterial for the year ended
December 31, 1997, the one week ended January 7, 1998 and the 51 weeks ended
December 30, 1998. FRI maintained several incentive compensation and related
plans for executives and key operating personnel, including restaurant and field
management of its subsidiaries, including FRD Predecessor. Total expenses for
these plans included in the Statement of Combined Operations were $2.5 million
for the five months ended May 23, 1996.

FRD Predecessor participated in savings and investment plans sponsored by
FRI. Substantially all of FRD Predecessor's salaried employees were eligible to
participate in the plans. Total expenses under such plans included in the
Statements of Combined Operations were immaterial for the five months ended May
23, 1996.

Effective with the acquisition, FRI-M employees may no longer participate in
FRI benefit plans.

During 1998, certain employees of FRD were granted stock options under
Advantica's Officer and Non-Officer Stock Option Plans which are described
below. Advantica and FRD have adopted the disclosure-only provisions of
Financial Accounting Standards Board Statement 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), while continuing to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related Interpretations in accounting for their stock-based compensation plans.
Under APB 25, because the exercise price of the Company's employee stock options
equals or exceeds the market price of the underlying stock on the date of grant,
no compensation expense is recognized.

Pursuant to the Plan, and shortly after its effective date, Advantica
adopted The Advantica Restaurant Group Stock Option Plan (the "Non-Officer
Plan") and The Advantica Restaurant Group Officer Stock Option Plan (the
"Officer Plan" and, together with the Non-Officer Plan, the "1998 Stock Option
Plans"). The 1998 Stock Option Plans permit the Compensation and Incentives
Committee of the Advantica Board (the "Committee") to award stock options as
incentives to employees and consultants of Advantica. The Committee has sole
discretion to determine the exercise price, term and vesting schedule of options
awarded under such plans. A total of 4,888,888 shares of Advantica Common Stock
are authorized to be issued under these plans. Under the terms of the plans,
optionees who terminate for any reason other than cause or death will be allowed
60 days after the termination date to exercise vested options. Vested options
are exercisable for one year when termination is by a reason other than
voluntary termination or for cause. If termination is for cause, no option shall
be exercisable after the termination date.

F-20
<PAGE> 41
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10: EMPLOYEE BENEFIT PLANS -- Continued
In addition to the 1998 Stock Option Plans, the Company has adopted The
Advantica Restaurant Group Director Stock Option Plan (the "Director Plan"), the
terms of which are substantially similar to the terms of the 1998 Stock Option
Plans. A total of 200,000 shares of Advantica Common Stock are authorized to be
issued under the Director Plan.

Effective January 28, 1998, options to purchase 1,927,500 shares, 409,000
shares and 54,000 shares of Common Stock at market value at the date of grant
were issued under the Officer Plan, the Non-Officer Plan and the Director Plan,
respectively. Thirty percent of such grants under the Officer and Non-Officer
Plans became exercisable immediately, with an additional 20% vesting the first
and second anniversaries of the date of grant and an additional 15% vesting on
the third and fourth anniversaries. The grants under the Director Plan vest at a
rate of 33.3% per year beginning on the first anniversary of the grant date. On
September 11, 1998, options to purchase an additional 910,000 and 79,100 shares
of Common Stock at market value at the date of grant were issued under the
Officer Plan and the Non-Officer Plan, respectively. Such grants vest at a rate
of 25% per year beginning on the first anniversary of the grant date. All
options issued in 1998 expire ten years from the date of grant.

Prior to its emergence from bankruptcy, Advantica had two stock-based
compensation plans, the 1989 Stock Option Plan (the "1989 Plan") and the 1990
Nonqualified Stock Option Plan (the "1990 Plan"). On the Effective Date,
pursuant to the Plan, FCI's Old Common Stock was canceled, extinguished and
retired. As a result, all stock options outstanding as of that date, including
those under both the 1989 Plan and the 1990 Plan, were effectively canceled. Due
to the fact that all options under the 1989 Plan and the 1990 Plan were
canceled, extinguished and retired on January 7, 1998, the effect on the
accompanying Statement of Consolidated Operations of the compensation expense
calculated under SFAS 123 related to such plans is not included in the pro forma
information presented below.

Pro forma information regarding net income is required by SFAS 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that statement. The fair value of the options
granted in 1998 was estimated at the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions: dividend
yield of 0.0%; expected volatility of .64; risk-free interest rate of 4.6%; and
a weighted average expected life of the options of 8.9 years.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. FRD is a
wholly-owned subsidiary of Advantica, and accordingly, per share data is not
meaningful and has not been provided. The Company's pro forma information
follows:

<TABLE>
<CAPTION>
FIFTY-ONE
WEEKS ENDED
DECEMBER 30,
1998
------------
<S> <C>
(In millions)
Pro forma net loss.......................................... ($42.8)
</TABLE>

A summary of the Plans as they relate to options granted to FRD employees as
of December 30, 1998 and changes during the 51 weeks ended December 30, 1998 is
presented below.

<TABLE>
<CAPTION>
OPTIONS WEIGHTED-AVERAGE
(IN THOUSANDS) EXERCISE PRICE
-------------- ----------------
<S> <C> <C>
Outstanding at January 7, 1998.............. -- $ --
Granted..................................... 451 8.28
Exercised................................... -- --
Forfeited/Expired........................... (56) 8.90
---
Outstanding at December 30, 1998............ 395 8.19
===
Options exercisable at December 30, 1998.... 82 10.00
</TABLE>

F-21
<PAGE> 42
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10: EMPLOYEE BENEFIT PLANS -- Continued
The following table summarizes information about stock options outstanding
at December 30, 1998:

<TABLE>
<CAPTION>
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES 12/30/98 CONTRACTUAL LIFE EXERCISE PRICE 12/30/98 EXERCISE PRICE
- --------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 4.69 134,600 9.70 $ 4.69 -- $ --
10.00 260,250 9.08 10.00 81,750 10.00
</TABLE>

The weighted average fair value per option of options granted during the 51
weeks ended December 30, 1998 was $5.88.

NOTE 11: REORGANIZATION ITEMS

Reorganization items include professional fees and other expenditures
incurred by the Company as a result of the Advantica bankruptcy and the "push
down" of fresh start reporting from Advantica.

NOTE 12: COMMITMENTS AND CONTINGENCIES

The Company is involved in various litigation matters incidental to their
business. The Company does not believe that any of the claims or actions filed
against it will have a material adverse effect upon the consolidated financial
position and results of operations of the Company.

On February 22, 1996, Advantica entered into an agreement with IBM Global
Services ("IBM") (formerly Integrated Systems Solutions Corporation). The
ten-year agreement (as amended) provides for IBM to manage and operate
Advantica's information systems, as well as develop and implement new systems
and applications to enhance information technology for Advantica's corporate
headquarters, restaurants and field management. Under the agreement, IBM has
full oversight responsibility for the data center operations, applications
development and maintenance, voice and data networking, help desk operations and
point-of-sale technology. In connection with the acquisition of FRI-M, an
addendum to the IBM contract, effective January 2, 1997, was signed for the
general purpose of incorporating FRD into the original agreement. In accordance
with the addendum, the Company is required to make annual payments ranging from
$5.7 million to $6.4 million.

NOTE 13: STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>
TOTAL
TOTAL SHAREHOLDER'S
OTHER EQUITY DEFICIT EQUITY (DEFICIT)
------------ -------- ----------------
<S> <C> <C> <C>
(In thousands)
Balance May 24, 1996........................................ $ -- $ -- $ --
Capital Contribution...................................... 75,000 75,000
Net loss.................................................. -- (6,189) (6,189)
------- -------- --------
Balance December 26, 1996................................... 75,000 (6,189) 68,811
Net loss.................................................. -- (2,178) (2,178)
------- -------- --------
Balance December 31, 1997................................... 75,000 (8,367) 66,633
Net income excluding adjustments for fresh start
reporting.............................................. -- (567) (567)
Adjustments for fresh start reporting..................... 24,719 8,934 33,653
------- -------- --------
Balance January 7, 1998..................................... 99,719 -- 99,719
Net loss.................................................. -- (41,808) (41,808)
------- -------- --------
Balance December 30, 1998................................... $99,719 $(41,808) $ 57,911
======= ======== ========
</TABLE>

See Note 14 Related Party Transactions for a summary of the combined equity
activity for the five months ended May 23, 1996.

F-22
<PAGE> 43
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 14: RELATED PARTY TRANSACTIONS

During the third and fourth quarters of 1997, the Company sold two of its
restaurants to Denny's Inc., another wholly-owned subsidiary of Advantica. Gross
proceeds on the sales amounted to $0.8 million with gains of $0.6 million
included in operating income for the year ended December 31, 1997. Additionally,
in 1998, the Company entered into lease buyout agreements with Denny's Inc.
Under the terms of the agreements, Denny's paid $2.8 million in cash proceeds in
exchange for the right to assume the leases associated with 14 restaurants. As a
result of the transactions, the Company recorded $3.3 million in other operating
income in the accompanying Statement of Consolidated Operations. Due to the
intercompany nature of these transactions, the related gains are eliminated in
the Statement of Consolidated Operations of Advantica.

Certain administrative functions are provided for the Company by Advantica.
Beginning in 1997, 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 $2.5 million and $2.2
million for the year ended December 31, 1997 and the 51-week period ended
December 30, 1998, respectively. Allocated fees included in operating expenses
for the week ended January 7, 1998 were immaterial. Payment of the fees to
Advantica cannot occur unless certain financial targets are met as described in
the Company's senior note indenture and in the FRI-M Credit Agreement. Because
the Company has not met the financial targets, no payment has been made relative
to these allocations and the related amounts are included in the payable to
Advantica in the Consolidated Balance Sheets. Advantica's method of allocating
these expenses is not the only reasonable method and other reasonable methods of
allocation might produce different results. Prior to acquisition of FRI-M by
FRD, FRI provided certain financial, administrative, legal and staff functions
and services to FRI-M, which were allocated based on the number of open and
operating units. Management considered this method to be reasonable. The
management fee for these services was $1.6 million for the five months ended May
23, 1996.

Interest expense associated with the FRI-M Credit Facility was allocated to
the FRI subsidiaries, including FRI-M, during the five months ended May 23, 1996
based on current liabilities outstanding.

Prior to the acquisition, FRI-M deposited cash in excess of its operating
requirements with FRI, and FRI advanced funds to FRI-M to finance expansion of
its restaurant business. These deposits and advances were made on an
interest-free basis.

Prior to the acquisition, FRI-M was charged premiums by FRI for certain
insurance coverage provided under FRI insurance plans (employee group medical
and life, workers' compensation, general liability and property insurance).
During the five months ended May 23, 1996 such premium charges amounted to $7.1
million.

A summary of the combined equity activity for the the five months ended May
23, 1996 follows. FRI Predecessor information is not presented as it is not
considered relevant.

<TABLE>
<CAPTION>
FIVE MONTHS ENDED
MAY 23, 1996
-----------------
<S> <C>
(In thousands)
Net combined equity, beginning of period.................... $152,601
Allocation of management expenses........................... 1,630
Pro forma income tax provision.............................. 2,160
Repayments on revolving credit facility..................... 79,815
Self-insurance premium charges.............................. 7,089
Change in intercompany...................................... (37,745)
Net income.................................................. 1,101
--------
Net combined equity, end of period.......................... $206,651
========
</TABLE>

F-23
<PAGE> 44
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 15: SEGMENT INFORMATION

The Company operates entirely in the food service industry with
substantially all revenues resulting from the sale of menu products at
restaurants operated by the Company, franchisees or licensees. The Company
operates two restaurant concepts -- Coco's and Carrows -- and each concept is
considered a reportable segment. Administrative costs and assets 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"). The accounting
policies of the business segments are the same as those described in the summary
of significant accounting policies in Note 3.

<TABLE>
<CAPTION>
FIVE MONTHS SEVEN MONTHS YEAR ONE FIFTY-ONE
ENDED ENDED ENDED WEEK ENDED WEEKS ENDED
MAY 23, DECEMBER 26, DECEMBER 31, JANUARY 7, DECEMBER 30,
1996 1996 1997 1998 1998
----------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
(In thousands)
REVENUE
Coco's................................ $110,017 $163,680 $280,057 $ 4,892 $254,863
Carrows............................... 85,926 131,364 212,436 3,489 183,255
-------- -------- -------- ------- --------
Total consolidated revenue............ $195,943 $295,044 $492,493 $ 8,381 $438,118
======== ======== ======== ======= ========
DEPRECIATION AND AMORTIZATION
Coco's................................ $ 7,438 $ 10,282 $ 16,555 $ 319 $ 41,819
Carrows............................... 4,933 8,224 13,001 272 33,503
-------- -------- -------- ------- --------
Total consolidated depreciation and
amortization........................ $ 12,371 $ 18,506 $ 29,556 $ 591 $ 75,322
======== ======== ======== ======= ========
EBITDA AS DEFINED(a)
Coco's................................ $ 18,499 $ 35,015 $ 737 $ 37,215
Carrows............................... 14,904 26,552 (16) 23,410
-------- -------- ------- --------
Total consolidated EBITDA as
defined............................. 33,403 61,567 721 60,625
Depreciation and amortization
expense............................. (18,506) (29,556) (591) (75,322)
Management fees to Advantica.......... (2,950) (4,925) (84) (4,381)
Other charges:
Interest expense, net............... (17,680) (29,597) (585) (26,897)
Other, net.......................... 4 (2,975) -- 515
Reorganization items.................. -- (528) 44,993 --
-------- -------- ------- --------
Consolidated (loss) income before
income taxes........................ $ (5,729) $ (6,014) $44,454 $(45,460)
======== ======== ======= ========
CAPITAL EXPENDITURES
Coco's................................ $ 1,231 $ 1,526 $ 8,427 $ -- $ 5,436
Carrows............................... 985 1,220 6,514 -- 4,931
-------- -------- -------- ------- --------
Total consolidated capital
expenditures........................ $ 2,216 $ 2,746 $ 14,941 $ -- $ 10,367
======== ======== ======== ======= ========
</TABLE>

- ---------------

(a) "EBITDA as defined" is defined by FRD as operating income before
depreciation, amortization, management fees payable to Advantica, and
restructuring and impairment charges and is a key internal measure used to
evaluate the amount of cash flow available for debt repayment and funding of
additional investments. FRD's measure of EBITDA as defined may not be
comparable to similarly titled measures reported by other companies;
accordingly, EBITDA as defined of the Predecessor Company is not presented.

F-24
<PAGE> 45
FRD ACQUISITION CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 15: SEGMENT INFORMATION -- Continued

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1997 1998
------------ ------------
<S> <C> <C>
(In thousands)
ASSETS
Coco's...................................................... $226,513 $205,690
Carrows..................................................... 145,015 153,063
-------- --------
Total consolidated assets................................... $371,528 $358,753
======== ========
</TABLE>

Information as to the Company's operations in different geographical areas
is as follows:

<TABLE>
<CAPTION>
FIVE MONTHS SEVEN MONTHS YEAR ONE FIFTY-ONE
ENDED ENDED ENDED WEEK ENDED WEEKS ENDED
MAY 26, DECEMBER 26, DECEMBER 31, JANUARY 7, DECEMBER 30,
1996 1996 1997 1998 1998
----------- -------------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
(In thousands)
REVENUE
United States....................... $194,584 $292,917 $489,074 $8,381 $435,512
Other............................... 1,359 2,127 3,419 -- 2,606
</TABLE>

Because all of the Company's international revenue is derived from
restaurants operated by franchisees and licensees, assets located outside the
United Stated are not material.

F-25
<PAGE> 46

SCHEDULE I

FRD ACQUISITION CO.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
FRD EMERGED
FRD SUCCESSOR SUCCESSOR
----------------- -----------------
DECEMBER 31, 1997 DECEMBER 30, 1998
(In thousands) ----------------- -----------------
<S> <C> <C>
ASSETS
Deferred financing costs, net of accumulated amortization
of: 1997 -- $208; 1998 -- $334............................ $ 961 $ 835
Investment in subsidiary.................................... 305,177 328,032
-------- --------
Total assets................................................ $306,138 $328,867
======== ========
LIABILITIES AND EQUITY
Current liabilities:
Accrued interest.......................................... $ 8,989 $ 8,989
-------- --------
8,989 8,989
Long-term liabilities:
Payable to subsidiary..................................... 73,619 93,231
Notes payable............................................. 156,897 168,736
-------- --------
Total long-term liabilities................................. 230,516 261,967
Equity
Paid-in capital............................................. 75,000 99,719
Deficit..................................................... (8,367) (41,808)
-------- --------
Total Stockholder's Equity.................................. 66,633 57,911
-------- --------
$306,138 $328,867
======== ========
</TABLE>

S-1
<PAGE> 47

SCHEDULE I

FRD ACQUISITION CO.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED STATEMENT OF OPERATIONS

S-2
<PAGE> 48

SCHEDULE I

FRD ACQUISITION CO.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
FRD EMERGED
FRD SUCCESSOR SUCCESSOR
----------------------------------- -----------------
YEAR ONE WEEK FIFTY-ONE WEEKS
ENDED ENDED ENDED
DECEMBER 31, 1997 JANUARY 7, 1998 DECEMBER 30, 1998
(In thousands) ----------------- --------------- -----------------
<S> <C> <C> <C>
Cash Flows Used In Operating Activities:
Net Loss......................................... $ (2,178) $ 33,087 $(41,808)
Amortization of deferred financing costs......... 127 3 123
Non cash reorganization items.................... -- 13,336 --
Equity in net income from subsidiary............. (17,815) (46,834) 23,979
Increase in accrued interest payable............. 297 -- --
Amortization of debt premium..................... -- -- (1,497)
-------- -------- --------
Net cash used in operating activities.............. (19,569) (408) (19,203)
Cash Flows Used in Investing Activities:
Acquisition of subsidiary........................ -- -- --
-------- -------- --------
Net cash flows used in investing activities........ -- -- --
Cash Flows Provided by Financing Activities:
Increase in payable to subsidiary................ 19,569 408 19,203
Deferred financing costs......................... -- -- --
Capital contribution from Advantica.............. -- -- --
-------- -------- --------
Net cash flows provided by financing activities.... 19,569 408 19,203
Net Change in Cash................................. -- -- --
-------- -------- --------
Cash at Beginning and End of Period................ $ -- $ -- $ --
======== ======== ========
Cash Paid for Interest............................. $ 19,569 $ 408 $ 19,203
======== ======== ========
</TABLE>

Notes to Condensed Financial Information

Note 1: The condensed financial information included in this schedule reflects
FRD Acquisition Co.'s investment in FRI-M, its wholly-owned subsidiary, on the
equity method. FRD Acquisition Co. was formed to acquire the stock of FRI-M.
Such acquisition occurred May 23, 1996 and was effected when FRD paid cash of
$125,000,000 and issued notes payable of $150,000,000 (subsequently increased by
$6,896,902).

Note 2: The 12 1/2% Senior Notes are due July 2004. Interest is payable
semi-annually.

S-3
<PAGE> 49

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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.

By: /s/ RONALD B. HUTCHISON
--------------------------------------
Ronald B. Hutchison
(Executive Vice President)

Date: March 30, 1999

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ CRAIG S. BUSHEY President (Principal Executive Officer) March 30, 1999
- -----------------------------------------------------
(Craig S. Bushey)

/s/ DAVID O. DEVOY Senior Vice President, Finance and Chief March 30, 1999
- ----------------------------------------------------- Financial Officer (Principal Financial
(David O. Devoy) and Accounting Officer)

/s/ JAMES B. ADAMSON Director March 30, 1999
- -----------------------------------------------------
(James B. Adamson)

/s/ ROBERT H. ALLEN Director March 30, 1999
- -----------------------------------------------------
(Robert H. Allen)

/s/ RONALD E. BLAYLOCK Director March 30, 1999
- -----------------------------------------------------
(Ronald E. Blaylock)

/s/ VERA KING FARRIS Director March 30, 1999
- -----------------------------------------------------
(Vera King Farris)

/s/ JAMES J. GAFFNEY Director March 30, 1999
- -----------------------------------------------------
(James J. Gaffney)

/s/ IRWIN N. GOLD Director March 30, 1999
- -----------------------------------------------------
(Irwin N. Gold)

/s/ DARRELL JACKSON Director March 30, 1999
- -----------------------------------------------------
(Darrell Jackson)

/s/ ROBERT E. MARKS Director March 30, 1999
- -----------------------------------------------------
(Robert E. Marks)

/s/ CHARLES F. MORAN Director March 30, 1999
- -----------------------------------------------------
(Charles F. Moran)

/s/ ELIZABETH A. SANDERS Director March 30, 1999
- -----------------------------------------------------
(Elizabeth A. Sanders)

/s/ DONALD R. SHEPHERD Director March 30, 1999
- -----------------------------------------------------
(Donald R. Shepherd)

/s/ RAUL R. TAPIA Director March 30, 1999
- -----------------------------------------------------
(Raul R. Tapia)
</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS OF FRD ACQUISITION CO., AS
CONTAINED IN FORM 10-K FOR THE 51 WEEKS ENDED DECEMBER 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> DEC-30-1998
<CASH> 5,841
<SECURITIES> 0
<RECEIVABLES> 6,343
<ALLOWANCES> 0
<INVENTORY> 3,070
<CURRENT-ASSETS> 19,206
<PP&E> 149,336
<DEPRECIATION> (30,184)
<TOTAL-ASSETS> 358,753
<CURRENT-LIABILITIES> 93,090
<BONDS> 182,743
0
0
<COMMON> 0
<OTHER-SE> 57,911
<TOTAL-LIABILITY-AND-EQUITY> 358,753
<SALES> 0
<TOTAL-REVENUES> 438,118
<CGS> 0
<TOTAL-COSTS> 457,196
<OTHER-EXPENSES> (515)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,897
<INCOME-PRETAX> (45,460)
<INCOME-TAX> (3,652)
<INCOME-CONTINUING> (41,808)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (41,808)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>

<PAGE> 1

EXHIBIT 99

SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. The Company desires to
take advantage of the "safe harbor" provisions of the Act. Certain information,
particularly information regarding future economic performance, finances and
management's plans and objectives, contained or incorporated by reference in the
Company's 1997 Annual Report on Form 10-K is forward-looking. In some cases
information regarding certain important factors that could cause actual results
to differ materially from any such forward-looking statement appear together
with such statement. Also, the following factors, in addition to other possible
factors not listed, could affect the Company's actual results and cause such
results to differ materially from those expressed in forward-looking statements:

Competition. The Company's future performance will be subject to a number
of factors that affect the restaurant industry generally, including competition.
The restaurant business is highly competitive and the competition can be
expected to increase. Price, restaurant location, food quality, quality, quality
and speed of service and attractiveness of facilities are important aspects of
competition as are the effectiveness of marketing and advertising programs. The
competitive environment is also often affected by factors beyond the Company's
or a particular restaurant's control. The Company's restaurants compete with a
wide variety of restaurants ranging from national and regional restaurant chains
(some of which have substantially greater financial resources than the Company)
to locally-owned restaurants. There is also active competition for advantageous
commercial real estate sites suitable for restaurants.

Economic, Market and Other Conditions. Food service businesses are often
affected by changes in consumer tastes, national, regional and local economic
conditions and demographic trends. The performance of individual restaurants may
be adversely affected by factors such as traffic patterns, demographic
consideration and the type, number and location of competing restaurants.
Multi-unit food service chains such as the Company's can also be materially and
adversely affected by publicity resulting from food quality, illness, injury, or
other health concerns or operating issues stemming from one restaurant or a
limited number of restaurants. Dependence on frequent deliveries of fresh
produce and groceries subjects food service businesses to the risk that
shortages or interruptions in supply caused by adverse weather or other
conditions could adversely affect the availability, quality and cost of
ingredients. In addition, unfavorable trends or developments concerning factors
such as inflation, increased food, labor and employee benefit costs (including
increases in hourly wage and minimum unemployment tax rates), regional weather
conditions and the availability of experienced management and hourly employees
may also adversely affect the food service industry in general and the Company's
results of operations and financial condition in particular.

Importance of Locations. The success of Company and franchised restaurants
is significantly influenced by location. There can be no assurance that current
locations will continue to be attractive, as demographic patterns change. It is
possible the neighborhood or economic conditions where restaurants are located
could decline in the future, resulting in potentially reduced sales in those
locations.

Government Regulations. The company and its franchisees are subject to
Federal, state and local laws and regulations governing health, sanitation,
environmental matters, safety, the sale of alcoholic beverages and hiring and
employment practices. Restaurant operations are also subject to Federal and
state laws that prohibit discrimination and laws regulating the design and
operation of facilities, such as the American With Disabilities Act of 1990. The
operation of the Company's franchisee system is also subject to regulations
enacted by a number of states and to rules promulgated by the Federal Trade
Commission. The Company cannot predict the effect on its operations,
particularly on its relationship with franchisees, caused by the future
enactment of additional legislation regulating the franchise relationship.