UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1999, or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___________
to ___________
Commission file number 333-07601
FRD ACQUISITION CO.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 57-1040952
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3355 Michelson Dr., Suite 350
Irvine, California 92612
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(864) 597-8000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
As of May 14, 1999, 1,000 shares of the registrant's Common Stock, $0.10 par
value per share, were outstanding, all of which were owned by the registrant's
parent, Advantica Restaurant Group, Inc.
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRD Acquisition Co.
Condensed Statements of Consolidated Operations
(Unaudited)
<TABLE>
<CAPTION>
SUCCESSOR COMPANY PREDECESSOR COMPANY
Quarter Twelve Weeks One Week
Ended Ended Ended
March 31, 1999 April 1, 1998 January 7, 1998
-------------- ------------- ---------------
<S> <C> <C> <C>
(In thousands)
Revenue:
Company restaurant sales $ 92,989 $ 102,127 $ 8,266
Franchise and licensing revenue 1,989 1,299 141
--------- --------- ---------
Total operating revenue 94,978 103,426 8,407
--------- --------- ---------
Cost of company restaurant sales:
Product costs 24,681 26,565 2,255
Payroll and benefits 37,155 38,938 3,193
Occupancy 5,846 6,321 521
Other operating expenses 13,642 14,957 1,331
--------- --------- ---------
Total costs of company restaurant sales 81,324 86,781 7,300
Franchise restaurant costs 1,104 611 47
General and administrative expenses 3,931 3,596 291
Management fees to Advantica 944 1,032 84
Allocated costs from Advantica 650 577 48
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 9,726 9,377 --
Depreciation and other amortization 8,178 6,097 591
--------- --------- ---------
Total operating costs and expenses 105,857 108,071 8,361
--------- --------- ---------
Operating (loss) income (10,879) (4,645) 46
--------- --------- ---------
Other expenses:
Interest expense, net 6,479 6,517 585
Other nonoperating expenses (income), net 133 (3) --
--------- --------- ---------
Total other expenses, net 6,612 6,514 585
--------- --------- ---------
Loss before reorganization items and taxes (17,491) (11,159) (539)
Reorganization items -- -- (44,993)
--------- --------- ---------
(Loss) income before taxes (17,491) (11,159) 44,454
(Benefit from) provision for income taxes (1,640) 113 11,367
--------- --------- ---------
Net (loss) income $ (15,851) $ (11,272) $ 33,087
========= ========= =========
</TABLE>
See accompanying notes
2
<PAGE>
FRD Acquisition Co.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
March 31, 1999 December 30, 1998
-------------- -----------------
<S> <C> <C>
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 1,941 $ 5,841
Receivables 2,787 6,343
Inventories 2,788 3,070
Other 3,861 3,952
--------- ---------
11,377 19,206
--------- ---------
Property and equipment 152,740 149,336
Accumulated depreciation (37,512) (30,184)
--------- ---------
115,228 119,152
--------- ---------
Other Assets:
Reorganization value in excess of amounts allocable
to identifiable assets, net 146,126 155,852
Other intangibles, net 41,220 41,896
Deferred taxes 20,532 18,744
Other 3,157 3,903
--------- ---------
211,035 220,395
--------- ---------
$ 337,640 $ 358,753
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Current maturities of long-term debt $ 20,161 $ 13,530
Accounts payable 19,860 20,361
Accrued salaries and vacation 7,896 10,199
Accrued insurance 4,566 4,408
Accrued interest 4,456 9,320
Payable to Advantica 18,318 16,740
Other 14,348 18,532
--------- ---------
89,605 93,090
--------- ---------
Long-term Liabilities:
Debt, less current maturities 181,268 182,743
Liability for self-insured claims 9,920 10,014
Other noncurrent liabilities 14,787 14,995
--------- ---------
205,975 207,752
--------- ---------
295,580 300,842
--------- ---------
Shareholder's Equity:
Common stock: par value $0.10; 1,000 shares authorized,
issued and outstanding -- --
Paid-in capital 99,719 99,719
Deficit (57,659) (41,808)
--------- ---------
Total Shareholder's Equity 42,060 57,911
--------- ---------
$ 337,640 $ 358,753
========= =========
</TABLE>
See accompanying notes
3
<PAGE>
FRD Acquisition Co.
Statements Of Consolidated Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
SUCCESSOR COMPANY PREDECESSOR COMPANY
Quarter Twelve Weeks One Week
Ended Ended Ended
March 31, 1999 April 1, 1998 January 7, 1998
-------------- ------------- ---------------
<S> <C> <C> <C>
(In thousands)
Cash Flows From Operating Activities:
Net (loss) income $(15,851) $(11,272) $ 33,087
Adjustments to reconcile income (loss) to
cash flows from operating activities:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 9,726 9,377 --
Depreciation and other amortization 8,178 6,097 591
Amortization of deferred financing costs 339 311 28
Amortization of debt premium (405) (357) --
Deferred tax (benefit) provision (1,789) (890) 11,340
Noncash reorganization items -- -- (44,993)
Decrease (increase) in assets:
Receivables 3,556 2,057 252
Inventories 283 187 --
Other current assets 91 2,423 3,918
Other assets 198 926 --
Increase (decrease) in liabilities:
Accounts payable (501) 2,893 (3,085)
Accrued salaries and vacation (2,302) (1,511) (1,451)
Payable to Advantica 1,578 2,493 132
Other accrued liabilities (8,642) (7,318) 1,388
Liability for self-insurance claims 64 (397) (253)
Other noncurrent liabilities (135) (616) 3
-------- -------- --------
Net cash flows (used in) from operating activities (5,612) 4,403 957
-------- -------- --------
Cash Flows From Investing Activities:
Purchase of property (4,054) (1,111) --
Proceeds from disposition of property -- 115 --
Net cash flows used in investing activities (4,054) (996) --
-------- -------- --------
Cash Flows From Financing Activities:
Principal debt payments (1,434) (1,008) (6,515)
Borrowing on credit facilities 7,200 -- --
-------- -------- --------
Net cash flows provided by (used in) financing
activities 5,766 (1,008) (6,515)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (3,900) 2,399 (5,558)
Cash And Cash Equivalents at:
Beginning of period 5,841 3,493 9,051
-------- -------- --------
End of period $ 1,941 $ 5,892 $ 3,493
======== ======== ========
</TABLE>
See accompanying notes
4
<PAGE>
FRD ACQUISITION CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
NOTE 1. GENERAL
FRD Acquisition Co. ("FRD" or, together with its subsidiaries, the "Company"), a
wholly-owned subsidiary of Advantica Restaurant Group, Inc. ("Advantica"), owns
and operates the Coco's and Carrows restaurant brands.
On January 7, 1998 (the "Effective Date"), Flagstar Companies, Inc. ("FCI") and
Flagstar Corporation ("Flagstar") emerged from proceedings under Chapter 11 of
Title 11 of the United States Code pursuant to FCI's and Flagstar's Amended
Joint Plan of Reorganization dated as of November 7, 1997 (the "Plan"). On the
Effective Date, Flagstar, a wholly-owned subsidiary of FCI, merged with and into
FCI, the surviving corporation, and FCI changed its name to Advantica Restaurant
Group, Inc. FCI's operating subsidiaries, including the Company, did not file
bankruptcy petitions and were not parties to the Chapter 11 proceedings.
The consolidated financial statements of the Company included herein are
unaudited and include all adjustments management believes are necessary for a
fair presentation of the results of operations for such interim periods. All
such adjustments are of a normal and recurring nature. The interim consolidated
financial statements should be read in conjunction with the Consolidated and
Combined Financial Statements and notes thereto for the year ended December 30,
1998 and the related Management's Discussion and Analysis of Financial Condition
and Results of Operations, both of which are contained in the FRD Acquisition
Co. 1998 Annual Report on Form 10-K. The results of operations for the quarter
ended March 31, 1999 are not necessarily indicative of the results for the
entire fiscal year ending December 29, 1999.
Certain prior year amounts have been reclassified to conform to the 1999
presentation.
Note 2. FRESH START REPORTING
As of the Effective Date, Advantica adopted fresh start reporting pursuant to
the guidance provided by the American Institute of Certified Public Accountants'
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" ("SOP 90-7"). Fresh start reporting assumes that a
new reporting entity has been created and requires that assets and liabilities
be adjusted to their fair values as of the Effective Date in conformity with the
procedures specified by Accounting Principles Board Opinion No. 16, "Business
Combinations." In conjunction with the revaluation of assets and liabilities, a
reorganization value for Advantica was determined which generally approximated
its fair value before considering debt and approximated the amount a buyer would
pay for the assets of Advantica after reorganization. Under fresh start
reporting, the reorganization value of Advantica was allocated to its assets. In
accordance with fresh start reporting, the portion of the reorganization value
which was not attributable to specific tangible or identified intangible assets
of Advantica has been reported as "reorganization value in excess of amounts
allocable to identifiable assets, net of accumulated amortization" in the
accompanying Consolidated Balance Sheets. Advantica is amortizing such amount
over a five-year amortization period. Advantica has "pushed down" the impact of
fresh start reporting to its operating subsidiaries, including the Company.
Accordingly, all financial statements for any period subsequent to the Effective
Date are referred to as "Successor Company" as they reflect the periods
subsequent to the implementation of fresh start reporting and are not comparable
to the financial statements for periods prior to the Effective Date.
The results of operations in the accompanying Statement of Consolidated
Operations for the week ended January 7, 1998 reflect the results of operations
prior to Advantica's emergence from bankruptcy and the effects of fresh start
reporting adjustments. In this regard, the Statement of Consolidated Operations
reflects reorganization items consisting primarily of gains and losses related
to the adjustments of assets and liabilities to fair value.
5
<PAGE>
Subsequent to the first quarter of 1998, the Company substantially completed
valuation studies performed in connection with the revaluation of its assets and
liabilities in accordance with fresh start reporting.
Note 3. RELATED PARTY TRANSACTIONS
Certain administrative functions are provided for the Company by Advantica. The
Company is allocated a portion of these expenses based upon services received.
These allocations, which are in addition to management fees equal to one percent
of revenues payable to Advantica under the management service agreement, are
included in operating expenses and totaled $0.7 million for the quarter ended
March 31, 1999. 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 Facility. Advantica's method of allocating these
expenses is not the only reasonable method and other reasonable methods of
allocation might produce different results.
Note 4. NEW FRI-M CREDIT FACILITY
On May 14, 1999, FRI-M Corporation ("FRI-M"), a wholly-owned subsidiary of FRD,
and certain of its operating subsidiaries entered into a new credit agreement
with The Chase Manhattan Bank ("Chase") and Credit Lyonnais New York Branch
("Credit Lyonnais") and other lenders named therein and thereby established a
$70 million Senior Secured Credit Facility (the "New FRI-M Credit Facility) to
replace the bank facility previously in effect for the Company's Coco's and
Carrows operations (the "FRI-M Credit Facility") which was scheduled to mature
in August 1999. The New FRI-M Credit Facility, which is guaranteed by Advantica,
consists of a $30 million term loan and a $40 million revolving credit facility
and matures in May 2003.
Note 5. EARNINGS (LOSS) PER COMMON SHARE
As described in Note 1, FRD is a wholly-owned subsidiary of Advantica.
Accordingly, per share data is not meaningful and has been omitted for all
periods.
Note 6. SEGMENT INFORMATION
The Company operates two restaurant concepts -- Coco's and Carrows -- and each
concept is considered a reportable segment. Administrative costs of the
corporate headquarters have been allocated to the reportable segments primarily
on the basis of percentage of sales.
The Company evaluates performance based on several factors, of which the primary
financial measure is business segment operating income before interest, taxes,
depreciation, amortization, management fees payable to Advantica and
restructuring and impairment charges ("EBITDA as defined"). EBITDA as defined is
a key internal measure used to evaluate the amount of cash flow available for
debt repayment and funding of additional investments. EBITDA as defined is not a
measure defined by generally accepted accounting principles and should not be
considered as an alternative to net income or cash flow data prepared in
accordance with generally accepted accounting principles. The Company's measure
of EBITDA as defined may not be comparable to similarly titled measures reported
by other companies.
<TABLE>
<CAPTION>
Quarter Twelve Weeks One Week
Ended Ended Ended
March 31, 1999 April 1, 1998 January 7, 1998
-------------- ------------- ---------------
<S> <C> <C> <C>
(In thousands)
REVENUE
Coco's $ 54,808 $ 60,508 $ 4,892
Carrows 40,170 42,918 3,515
-------- -------- --------
Total consolidated revenue $ 94,978 $103,426 $ 8,407
======== ======== ========
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Quarter Twelve Weeks One Week
Ended Ended Ended
March 31, 1999 April 1, 1998 January 7, 1998
-------------- ------------- ---------------
<S> <C> <C> <C>
(In thousands)
EBITDA AS DEFINED
Coco's $ 5,453 $ 7,458 $ 737
Carrows 2,516 4,403 (16)
-------- -------- --------
Total consolidated EBITDA as defined 7,969 11,861 721
Depreciation and amortization expense (17,904) (15,474) (591)
Management fees to Advantica (944) (1,032) (84)
Other charges:
Interest expense, net (6,479) (6,517) (585)
Other, net (133) 3 --
Reorganization items -- -- 44,993
-------- -------- --------
Consolidated (loss) income before income taxes $(17,491) $(11,159) $ 44,454
======== ======== ========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT0
OF OPERATIONS
The following discussion is intended to highlight significant changes in
financial position as of March 31, 1999 and the results of operations for the
quarter ended March 31, 1999 as compared to the twelve weeks ended April 1, 1998
and one week ended January 7, 1998. For purposes of providing a meaningful
comparison of the Company's quarterly operating performance, the following
discussion and presentation of the results of operations for the twelve weeks
ended April 1, 1998 and the one week ended January 7, 1998 will be combined and
referred to as the quarter ended April 1, 1998. Where appropriate, the impact of
the adoption of fresh start reporting on the results of operations during this
period will be separately disclosed.
The forward-looking statements included in Management's Discussion and Analysis
of Financial Condition and Results of Operations, which reflect management's
best judgment based on factors currently known, involve risks, uncertainties,
and other factors which may cause the actual performance of FRD, its
subsidiaries, and underlying concepts to be materially different from the
performance indicated or implied by such statements. Such factors include, among
others: competitive pressures from within the restaurant industry; the level of
success of the Company's operating initiatives and advertising and promotional
efforts, including the initiatives and efforts specifically mentioned herein;
the ability of the Company to mitigate the impact of the Year 2000 issue
successfully; adverse publicity; changes in business strategy or development
plans; terms and availability of capital; regional weather conditions; overall
changes in the general economy, particularly at the retail level; and other
factors included in the discussion below, or in the Management's Discussion and
Analysis of Financial Condition and Results of Operations and in Exhibit 99 to
the Company's Annual Report on Form 10-K for the period ended December 30, 1998.
7
<PAGE>
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1999 COMPARED TO QUARTER ENDED APRIL 1, 1998
The table below summarizes restaurant activity for the quarter ended March 31,
1999.
<TABLE>
<CAPTION>
Ending Units Units Net Ending Ending
Units Opened/ Sold/ Units Units Units
12/30/98 Acquired Closed Refranchised 3/31/99 4/1/98
-------- -------- ------ ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Coco's
Company-owned units 150 -- -- -- 150 176
Franchised units 31 2 -- -- 33 18
Licensed units 300 -- (2) -- 298 295
--- --- --- --- --- ---
481 2 (2) -- 481 489
--- --- --- --- --- ---
Carrows
Company-owned units 123 -- (1) -- 122 139
Franchised units 26 -- -- -- 26 16
--- --- --- --- --- ---
149 -- (1) -- 148 155
--- --- --- --- --- ---
630 2 (3) -- 629 644
=== === === === === ===
</TABLE>
8
<PAGE>
COCO'S
<TABLE>
<CAPTION>
Quarter Quarter %
Ended Ended Increase/
March 31, 1999 April 1, 1998 (Decrease)
--------------- --------------- -----------
<S> <C> <C> <C>
($ in millions, except average unit data)
U.S. systemwide sales $ 63.5 $ 69.9 (9.2)
============ ============
Net company sales $ 53.4 $ 64.3 (17.0)
Franchise and licensing revenue 1.4 1.1 27.3
------------ ------------
Total revenue 54.8 65.4 (16.2)
------------ ------------
Operating expenses:
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 5.3 5.2 1.9
Other 54.6 61.7 (11.5)
------------ ------------
Total operating expenses 59.9 66.9 (10.5)
------------ ------------
Operating (loss) income $ (5.1) $ (1.5) NM
============ ============
EBITDA as defined $ 5.5 $ 8.2 (32.9)
Average unit sales:
Company-owned 358,000 364,900 (1.9)
Franchised 311,400 327,100 (4.8)
Same-store sales decrease (Company-owned) (7.8%) (0.2%)
NM = Not Meaningful
</TABLE>
Coco's NET COMPANY SALES for the first quarter of 1999 decreased $10.9 million
(17.0%) compared to the prior year quarter. The decrease reflects a 26-unit
decrease in Company-owned restaurants and a decrease in same-store sales. The
decrease in same-store sales resulted primarily from a decline in customer
traffic. FRANCHISE AND LICENSING REVENUE increased $0.3 million (27.3%),
primarily attributable to a net increase of 15 franchised units over the prior
year quarter.
Coco's OPERATING EXPENSES decreased $7.0 million (10.5%) compared to the prior
year quarter, primarily reflecting a 26-unit decrease in Company-owned
restaurants. The decrease in operating expenses related to fewer units is
partially offset by higher food costs resulting from value-priced promotions and
changes in menu mix and by an increase in depreciation and other amortization
relating to the revaluation of assets and liabilities in accordance with fresh
start reporting. The revaluation was completed subsequent to the first quarter
of 1998 and resulted in increased depreciation and other amortization being
recorded in subsequent quarters.
EBITDA AS DEFINED decreased $2.7 million (32.9%) for the first quarter of 1999
compared to the first quarter of 1998 as a result of the factors noted in the
preceding paragraphs, excluding the increase in depreciation and other
amortization.
Coco's OPERATING INCOME for the 1999 quarter decreased $3.6 million compared to
the prior year quarter as a result of the factors noted above.
9
<PAGE>
CARROWS
<TABLE>
<CAPTION>
Quarter Quarter %
Ended Ended Increase/
March 31, 1999 April 1, 1998 (Decrease)
-------------- ------------- ----------
<S> <C> <C> <C>
($ in millions, except average unit data)
U.S. systemwide sales $ 46.4 $ 50.2 (7.6)
============ ============
Net company sales $ 39.6 $ 46.0 (13.9)
Franchise and licensing revenue 0.6 0.4 50.0
------------ ------------
Total revenue 40.2 46.4 (13.4)
------------ ------------
Operating expenses:
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 4.5 4.1 9.8
Other 41.5 45.4 (8.6)
------------ ------------
Total operating expenses 46.0 49.5 (7.1)
------------ ------------
Operating (loss) $ (5.8) $ (3.1) NM
============ ============
EBITDA as defined $ 2.5 $ 4.4 (43.2)
Average unit sales (in thousands):
Company-owned 327,200 327,900 (0.2)
Franchised 263,400 284,200 (7.3)
Same-store sales decrease (Company-owned) (3.6%) (1.4%)
NM = Not Meaningful
</TABLE>
Carrows' NET COMPANY SALES for the first quarter of 1999 decreased $6.4 million
(13.9%) compared to the prior year quarter. The decrease reflects a 17-unit
decrease in Company-owned restaurants and a decrease in same-store sales. The
decrease in same-store sales is primarily due to a decrease in average guest
check, somewhat offset by increased customer traffic. FRANCHISE AND LICENSING
REVENUE increased $0.2 million, primarily attributable to a net increase of 10
franchised units over the prior year quarter.
Carrows' OPERATING EXPENSES decreased $3.5 million (7.1%) compared to the prior
year quarter, primarily reflecting a 17-unit decrease in Company-owned
restaurants. The decrease in operating expenses related to fewer units is
partially offset by higher food and labor costs as a result of value-priced
promotions implemented during the quarter. The increase in food costs is
balanced by an improvement in underlying operating expenses resulting from
product re-engineering. The decrease in expenses is also offset by an increase
in depreciation and other amortization relating to the revaluation of assets and
liabilities in accordance with fresh start reporting. The revaluation was
completed subsequent to the first quarter of 1998 and resulted in increased
depreciation and other amortization being recorded in subsequent quarters.
EBITDA AS DEFINED decreased $1.9 million (43.2%) for for the first quarter of
1999 compared to the first quarter of 1998 as a result of the factors noted in
the preceding paragraphs, excluding the increase in depreciation and other
amortization.
Carrows' OPERATING INCOME for the 1999 quarter decreased $2.7 million compared
to the prior year quarter as a result of the factors noted above.
10
<PAGE>
FRD CONSOLIDATED
The Company's consolidated EBITDA AS DEFINED decreased $4.6 million (36.7%) for
for the first quarter of 1999 compared to the first quarter of 1998. This
decrease is a result of the factors discussed in the preceding paragraphs,
excluding the increase in depreciation and other amortization.
CONSOLIDATED INTEREST EXPENSE, NET decreased $0.6 million (8.8%) compared to the
prior year quarter. This decrease is attributable to a decrease in the term loan
debt balance.
REORGANIZATION ITEMS recorded in the one week ended January 7, 1998 include the
impact of the adjustment of assets and liabilities to fair value in accordance
with SOP 90-7 as discussed in Note 2 to the consolidated financial statements
included herein.
The PROVISION FOR INCOME TAXES from continuing operations for the first quarter
of 1999 has been computed based on management's estimate of the annual effective
income tax rate applied to loss before taxes. The Company recorded an income tax
benefit reflecting an effective income tax rate of approximately 9.4% for the
quarter ended March 31, 1999 compared to an income tax provision reflecting an
approximate rate of 1.0% for the twelve weeks ended April 1, 1998. The change in
effective tax rates for the twelve weeks ended April 1, 1998 and the current
quarter ended March 31, 1999 is a result of the adjustment in the estimated
effective income tax rate made during fiscal year 1998, subsequent to the end of
the first quarter. The income tax benefit recorded for the 51 weeks ended
December 30, 1998 reflected an effective tax rate of approximately 8.0%. The
provision for the one week period ended January 7, 1998 of $11.4 million
primarily relates to the tax effect of the revaluation of the Company's assets
and liabilities in accordance with fresh start accounting.
The decrease in CONSOLIDATED NET INCOME of $37.7 million in comparison to the
prior year quarter is a result of the items previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the acquisition of FRI-M, the Company entered into the FRI-M
Credit Facility on May 23, 1996, which provides for a $35.0 million revolving
credit facility that is also available for letters of credit. At March 31, 1999,
the Company had outstanding working capital borrowings and letters of credit of
$7.2 million and $13.2 million, respectively.
Because of covenant limitations under the indenture under which the Advantica 11
1/4% Senior Notes due 2008 were issued (the "Advantica Senior Notes Indenture")
and Advantica's bank credit facility, and under the FRI-M Credit Facility and
the indenture under which the FRD 12 1/2% Senior Notes due 2004 were 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 first quarter of 1999, Advantica (1) designated FRD and its
subsidiaries as restricted subsidiaries in accordance with the terms of the
Advantica Senior Notes Indenture, generally increasing Advantica's investment
flexibility thereunder in its relationship with FRD and its subsidiaries, (2)
obtained certain amendments to Advantica's bank credit facility to increase
Advantica's investment flexibility under that facility with respect to the
Coco's and Carrows operations, and (3) obtained written commitments from Chase
and Credit Lyonnais for the New FRI-M Credit Facility. The New FRI-M Credit
Facility, which closed on May 14, 1999, is guaranteed by Advantica and consists
of a $30 million term loan and a $40 million revolving credit facility and
matures in May 2003 (see Note 4 to the consolidated financial statements). The
New FRI-M Credit Facility, which refinanced the existing FRI-M Credit Facility,
is available to fund Coco's and Carrows' capital expenditures and for general
corporate purposes. Such facility is unavailable to Advantica and its other
subsidiaries.
At March 31, 1999 and December 30, 1998, the Company had working capital
deficits of $78.2 million and $73.9 million, respectively. The increase in the
working capital deficit is attributable primarily to a decrease in cash and cash
equivalents resulting from $9.8 million in senior debt interest payments made
during the quarter and to an increase in borrowings against the FRI-M Credit
Facility. The Company is able to operate with a substantial working capital
deficit because: (1) restaurant operations are conducted on a cash (and cash
equivalent) basis with a low level of accounts receivable, (2) rapid turnover
11
<PAGE>
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 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 March 31, 1999 were approximately $3.5 million. All estimated costs have
been budgeted and are expected to be funded by cash flows from operations.
Currently, all information systems projects are on schedule and are fully
staffed. Financial systems that are critical to the Company's operations are
targeted to be Year 2000 compliant by the end of June 1999. Restaurant systems
are targeted to be compliant by August 1999.
The nature of its business makes the Company very dependent on critical
suppliers and service providers, and the failure of such third parties to
address the Year 2000 issue adequately could have a material impact on the
Company's ability to conduct its business. Accordingly, Advantica has a
dedicated team in place to assess the Year 2000 readiness of all third parties
on which it depends. Surveys 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
12
<PAGE>
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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. The following are included as exhibits to this report:
EXHIBIT
NO. DESCRIPTION
- ------- -----------
27 Financial Data Schedule.
- ---------------------
b. No reports on Form 8-K were filed during the quarter ended March 31,
1999.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRD ACQUISITION CO.
Date: May 14, 1999 By: /s/ Ronald B. Hutchison
----------------------------------
Ronald B. Hutchison
Executive Vice President
(Duly authorized officer of
registrant/principal financial officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FRD ACQUISITION CO. AS CONTAINED IN ITS FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-29-1999
<PERIOD-START> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,941
<SECURITIES> 0
<RECEIVABLES> 2,927
<ALLOWANCES> 140
<INVENTORY> 2,788
<CURRENT-ASSETS> 11,377
<PP&E> 152,740
<DEPRECIATION> 37,512
<TOTAL-ASSETS> 337,640
<CURRENT-LIABILITIES> 89,612
<BONDS> 181,268
0
0
<COMMON> 0
<OTHER-SE> 42,060
<TOTAL-LIABILITY-AND-EQUITY> 337,640
<SALES> 0
<TOTAL-REVENUES> 94,978
<CGS> 0
<TOTAL-COSTS> 105,857
<OTHER-EXPENSES> 133
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,479
<INCOME-PRETAX> (17,491)
<INCOME-TAX> (1,640)
<INCOME-CONTINUING> (15,851)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,851)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
