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 29, 2000, or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___________
to ___________
Commission file number 333-07601
FRD ACQUISITION CO.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 57-1040952
- ------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3355 Michelson Dr., Suite 350
Irvine, California 92612
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(864) 597-8000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of May 12, 2000, 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)
Quarter Quarter
Ended Ended
March 29, 2000 March 31, 1999
-------------- --------------
(In thousands)
Revenue:
Company restaurant sales $ 92,653 $ 92,989
Franchise and licensing revenue 2,061 1,989
--------- ---------
Total operating revenue 94,714 94,978
--------- ---------
Cost of company restaurant sales:
Product costs 24,293 24,681
Payroll and benefits 37,081 37,155
Occupancy 6,234 5,846
Other operating expenses 12,578 13,642
--------- ---------
Total costs of company restaurant sales 80,186 81,324
Franchise restaurant costs 875 1,104
General and administrative expenses 4,124 3,931
Management fees to Advantica 942 944
Allocated costs from Advantica 660 650
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 4,760 9,726
Depreciation and other amortization 6,867 8,178
--------- ---------
Total operating costs and expenses 98,414 105,857
--------- ---------
Operating loss (3,700) (10,879)
--------- ---------
Other expenses:
Interest expense, net 6,338 6,479
Other nonoperating expenses, net -- 133
--------- ---------
Total other expenses, net 6,338 6,612
--------- ---------
Loss before income taxes (10,038) (17,491)
Provision for (benefit from) income taxes 83 (1,640)
--------- ---------
Net loss $ (10,121) $ (15,851)
========= =========
See accompanying notes
2
<PAGE>
FRD Acquisition Co.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
March 29, 2000 December 29, 1999
(In thousands) -------------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,216 $ 8,392
Receivables 2,400 4,852
Inventories 2,568 2,700
Other 4,945 3,941
--------- ---------
14,129 19,885
--------- ---------
Property and equipment 167,109 164,644
Accumulated depreciation (59,027) (52,975)
--------- ---------
108,082 111,669
--------- ---------
Other Assets:
Reorganization value in excess of amounts allocable
to identifiable assets, net 51,058 55,812
Other intangibles, net 38,679 39,406
Other 4,899 5,102
--------- ---------
94,636 100,320
--------- ---------
Total Assets $ 216,847 $ 231,874
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt $ 7,703 $ 2,770
Accounts payable 17,048 19,293
Accrued salaries and vacation 9,286 7,858
Accrued insurance 3,141 3,627
Accrued interest 4,632 9,491
Payable to Advantica 25,123 23,809
Other 11,590 14,025
--------- ---------
78,523 80,873
--------- ---------
Long-term Liabilities:
Debt, less current maturities 206,064 207,164
Liability for insurance claims 6,930 7,817
Other noncurrent liabilities 13,197 13,766
--------- ---------
226,191 228,747
--------- ---------
Total Liabilities 304,714 309,620
--------- ---------
Shareholder's Equity (Deficit):
Common stock: par value $0.10; 1,000 shares
authorized, issued and outstanding -- --
Paid-in capital 99,719 99,719
Deficit (187,586) (177,465)
--------- ---------
Total Shareholder's Equity (Deficit) (87,867) (77,746)
--------- ---------
Total Liabilities and Shareholder's Equity (Deficit) $ 216,847 $ 231,874
========= =========
</TABLE>
See accompanying notes
3
<PAGE>
FRD Acquisition Co.
Statements of Consolidated Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Quarter Quarter
Ended Ended
March 29, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
(In thousands)
Cash Flows From Operating Activities:
Net loss $(10,121) $(15,851)
Adjustments to reconcile loss to cash flows from operating
activities:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 4,760 9,726
Depreciation and other amortization 6,867 8,178
Amortization of deferred financing costs 191 339
Amortization of debt premium (462) (405)
Deferred tax benefit -- (1,789)
Decrease (increase) in assets:
Receivables 2,452 3,556
Inventories 132 283
Other current assets (1,006) 91
Other assets 17 198
Increase (decrease) in liabilities:
Accounts payable (2,245) (501)
Accrued salaries and vacation 1,428 (2,302)
Payable to Advantica 1,314 1,578
Other accrued liabilities (7,290) (8,642)
Liability for self-insurance claims (1,373) 64
Other noncurrent liabilities (570) (135)
-------- --------
Net cash flows used in operating activities (5,906) (5,612)
-------- --------
Cash flows From Investing Activities:
Purchase of property (2,514) (4,054)
Proceeds from disposition of property -- --
-------- --------
Net cash flows used in investing activities (2,514) (4,054)
-------- --------
Cash Flows From Financing Activities:
Principal debt payments (756) (1,434)
Borrowing on credit facilities 5,000 7,200
-------- --------
Net cash flows provided by financing activities 4,244 5,766
-------- --------
Decrease in cash and cash equivalents (4,176) (3,900)
Cash and Cash Equivalents at:
Beginning of period 8,392 5,841
-------- --------
End of period $ 4,216 $ 1,941
======== ========
</TABLE>
See accompanying notes
4
<PAGE>
FRD ACQUISITION CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 29, 2000
(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.
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
Financial Statements and notes thereto for the year ended December 29, 1999 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.
1999 Annual Report on Form 10-K. The results of operations for the quarter ended
March 29, 2000 are not necessarily indicative of the results for the entire
fiscal year ending December 27, 2000.
Note 2. 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 both the quarter
ended March 29, 2000 and 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 New FRD Credit Facility (as
defined below). Advantica's method of allocating these expenses is not the only
reasonable method and other reasonable methods of allocation might produce
different results.
Note 3. 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 4. 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.
5
<PAGE>
Quarter Quarter
Ended Ended
March 29, 2000 March 31, 1999
-------------- --------------
(In thousands)
REVENUE
Coco's $ 55,607 $ 54,808
Carrows 39,107 40,170
-------- --------
Total consolidated revenue $ 94,714 $ 94,978
======== ========
EBITDA AS DEFINED
Coco's $ 5,488 $ 5,453
Carrows 3,381 2,516
-------- --------
Total consolidated EBITDA as defined 8,869 7,969
Depreciation and amortization expense (11,627) (17,904)
Management fees to Advantica (942) (944)
Other charges:
Interest expense, net (6,338) (6,479)
Other, net -- (133)
-------- --------
Consolidated loss before income taxes $(10,038) $(17,491)
======== ========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to highlight significant changes in
financial position as of March 29, 2000 and the results of operations for the
quarter ended March 29, 2000 as compared to the quarter ended March 31, 1999.
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;
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 Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-K for the year ended December 29, 1999 and in Exhibit 99.1 thereto.
6
<PAGE>
RESULTS OF OPERATIONS
Quarter Ended March 29, 2000 Compared to Quarter Ended March 31, 1999
- ---------------------------------------------------------------------
The table below summarizes restaurant activity for the quarter ended March 29,
2000.
<TABLE>
<CAPTION>
Ending Units Net Units Ending Ending
Units Opened/ Units Sold/ Units Units
12/29/99 Acquired Refranchised Closed 3/29/00 3/31/99
-------- -------- ------------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Coco's
Company-owned units 148 -- -- (2) 146 150
Franchised units 34 1 -- (1) 34 33
Licensed units 303 -- -- (1) 302 298
---- ---- ---- ---- ---- ----
485 1 -- (4) 482 481
---- ---- ---- ---- ---- ----
Carrows
Company-owned units 117 -- -- -- 117 122
Franchised units 28 -- -- -- 28 26
---- ---- ---- ---- ---- ----
145 -- -- -- 145 148
---- ---- ---- ---- ---- ----
630 1 -- (4) 627 629
==== ==== ==== ==== ==== ====
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Coco's
- ------
Quarter Quarter %
Ended Ended Increase/
March 29, 2000 March 31,1999 (Decrease)
-------------- ------------- ----------
<S> <C> <C> <C>
($ in millions, except average unit data)
U.S. systemwide sales $ 65.8 $ 63.5 3.6
========= ========
Net company sales $ 54.2 $ 53.4 1.5
Franchise and licensing revenue 1.4 1.4 --
--------- --------
Total revenue 55.6 54.8 1.5
--------- --------
Operating expenses:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 2.5 5.3 (52.8)
Other 54.8 54.6 0.4
--------- --------
Total operating expenses 57.3 59.9 (4.3)
--------- --------
Operating loss $ (1.7) $ (5.1) (66.7)
========= ========
EBITDA as defined $ 5.5 $ 5.5 --
Average unit sales:
Company-owned 374,100 358,000 4.5
Franchised 338,700 311,400 8.8
Same-store sales increase (decrease) (Company-owned) 3.3% (7.8)%
</TABLE>
Coco's NET COMPANY SALES for the first quarter of 2000 increased $0.8 million
(1.5%) compared to the prior year quarter. The increase is the result of a 3.3%
increase in same-store sales partially offset by a decrease in the number of
Company-owned units. FRANCHISE AND LICENSING REVENUE remained flat compared to
the prior year quarter.
Coco's OPERATING EXPENSES decreased $2.6 million (4.3%) compared to the prior
year quarter. Excluding the impact of a $2.8 million decrease in amortization of
excess reorganization value and a $0.6 million decrease in depreciation and
other amortization, operating expenses increased $0.8 million over the prior
year quarter. This increase primarily reflects an increase in occupancy and
general and administrative costs. The decrease in amortization of excess
reorganization value from the prior year quarter resulted from an impairment
charge to reorganization value recorded in the fourth quarter of 1999.
EBITDA AS DEFINED was unchanged from the prior year quarter as a result of the
factors noted in the preceding paragraphs, excluding the decrease in
depreciation and amortization expense.
Coco's OPERATING LOSS decreased $3.4 million compared to the prior year quarter
as a result of the factors noted above.
8
<PAGE>
<TABLE>
<CAPTION>
Carrows
- -------
Quarter Quarter %
Ended Ended Increase/
March 29, 2000 March 31, 1999 (Decrease)
-------------- -------------- ----------
<S> <C> <C> <C>
($ in millions, except average unit data)
U.S. systemwide sales $ 45.9 $ 46.4 (1.1)
========= ========
Net company sales $ 38.5 $ 39.6 (2.8)
Franchise revenue 0.6 0.6 ---
--------- --------
Total revenue 39.1 40.2 (2.7)
--------- --------
Operating expenses:
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 2.2 4.5 (51.1)
Other 38.9 41.5 (6.3)
--------- --------
Total operating expenses 41.1 46.0 (10.7)
--------- --------
Operating loss $ (2.0) $ (5.8) (65.5)
========= ========
EBITDA as defined $ 3.4 $ 2.5 36.0
Average unit sales (in thousands):
Company-owned 327,300 327,200 ---
Franchised 263,300 263,400 ---
Same-store sales increase (decrease) (Company-owned) 0.2% (3.6)%
</TABLE>
Carrows' NET COMPANY SALES for the first quarter of 2000 decreased $1.1 million
(2.8%) compared to the prior year quarter. The decrease reflects the impact of
fewer Company-owned units over the prior year quarter, partially offset by a
0.2% increase in same-store sales over the prior year quarter. FRANCHISE REVENUE
remained flat over the prior year quarter.
Carrows' OPERATING EXPENSES decreased $4.9 million (10.7%) compared to the prior
year quarter. Excluding the impact of a $2.3 million decrease in amortization of
excess reorganization value and a $0.7 million decrease in depreciation and
other amortization, operating expenses decreased $1.9 million over the prior
year quarter. This decrease primarily reflects the impact of fewer Company-owned
units and effective cost management. The decrease in amortization of excess
reorganization value from the prior year quarter resulted from an impairment
charge to reorganization value recorded in the fourth quarter of 1999.
EBITDA AS DEFINED increased $0.9 million (36.0%) compared to the prior year
quarter as a result of the factors noted in the preceding paragraphs, excluding
the decrease in depreciation and amortization expense.
Carrows' OPERATING LOSS decreased $3.8 million compared to the prior year
quarter as a result of the factors noted above.
9
<PAGE>
FRD Consolidated
The Company's consolidated EBITDA AS DEFINED increased $0.9 million (11.3%) for
the first quarter of 2000 compared to the first quarter of 1999. This increase
is a result of the factors discussed in the preceding paragraphs.
CONSOLIDATED INTEREST EXPENSE, NET decreased $0.1 million (2.2%) compared to the
prior year quarter.
The PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations for the
quarter ended March 29, 2000 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 provision reflecting an approximate rate of 0.8% for the
quarter ended March 29, 2000 compared to an income tax benefit reflecting an
approximate rate of (9.4)% for the quarter ended March 31, 1999. The increase in
the income tax rate over the prior year quarter is principally due to the
establishment of a valuation allowance on the loss generated in the current
quarter.
The decrease in CONSOLIDATED NET LOSS of $5.7 million in comparison to the prior
year quarter is a result of the items previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
On May 14, 1999, FRD and certain of its operating subsidiaries entered into a
new $70 million credit facility (the "New FRD Credit Facility") to replace a
prior facility scheduled to mature in August 1999. The New FRD Credit Facility,
which is guaranteed by Advantica, consists of a $30 million term loan and a $40
million revolving credit facility and matures in May 2003. Such facility is
unavailable to Advantica and its other subsidiaries. At March 29, 2000, the
Company had $30.0 million outstanding term loan borrowings, $5.0 million working
capital borrowings and letters of credit outstanding of $11.1 million.
At March 29, 2000 and December 29, 1999, the Company had working capital
deficits of $64.4 million and $61.0 million, respectively. The Company is able
to operate with a substantial working capital deficit because: (1) restaurant
operations are conducted on a cash (and cash equivalent) basis with a low level
of accounts receivable, (2) rapid turnover allows a limited investment in
inventories; and (3) accounts payable for food, beverages, and supplies usually
become due after the receipt of cash from related sales. The Company intends to
continue to operate with working capital deficits.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposure at March 29, 2000 is consistent with the
types of market risk and amount of exposure presented in its Annual Report on
Form 10-K for the year ended December 29, 1999.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. The following are included as exhibits to this report:
EXHIBIT
NO. DESCRIPTION
- ------- -----------
27 Financial Data Schedule
- ---------------------
b. No reports on Form 8-K were filed during the quarter ended March 29,
2000.
11
<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 12, 2000 By: /s/ Ronald B. Hutchison
-----------------------------------
Ronald B. Hutchison
Executive Vice President
(Duly authorized officer of
registrant/principal financial officer)
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-2000
<PERIOD-START> DEC-30-1999
<PERIOD-END> MAR-29-2000
<CASH> 4,216
<SECURITIES> 0
<RECEIVABLES> 2,540
<ALLOWANCES> 140
<INVENTORY> 2,568
<CURRENT-ASSETS> 14,129
<PP&E> 167,109
<DEPRECIATION> 59,027
<TOTAL-ASSETS> 216,847
<CURRENT-LIABILITIES> 78,523
<BONDS> 206,064
0
0
<COMMON> 0
<OTHER-SE> (87,867)
<TOTAL-LIABILITY-AND-EQUITY> 216,847
<SALES> 0
<TOTAL-REVENUES> 94,714
<CGS> 0
<TOTAL-COSTS> 98,414
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,338
<INCOME-PRETAX> (10,038)
<INCOME-TAX> 83
<INCOME-CONTINUING> (10,121)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,121)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
