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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION 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 29, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from___________ to___________
Commission file number 333-07601
FRD ACQUISITION CO.
(Exact name of registrant as specified in its charter)
DELAWARE 57-1040952
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
3355 MICHELSON DRIVE, SUITE 350
IRVINE, CA 92612
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (864) 597-8000
---------------
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
None None
---------------
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, 2000, 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.
<PAGE>
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business 1
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters 7
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 17
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 18
PART III
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial Owners
and Management 18
Item 13. Certain Relationships and Related Transactions 18
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 19
INDEX TO FINANCIAL STATEMENTS F-1
SIGNATURES
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 and in Exhibit 99.2 -- Excerpt from Advantica's February 17, 2000 press
release announcing its new strategic direction, 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
99.1 to this Form 10-K (see Exhibit 99.1 -- 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.
<PAGE>
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 the predecessor of Advantica Restaurant Group, Inc.
("Advantica"). On May 23, 1996, FRD consummated the acquisition of 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 265 restaurants owned or
leased by the Company and franchised 62 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 303 Coco's restaurants, primarily
in Japan and South Korea.
On January 7, 1998 (the "Effective Date"), Advantica's predecessor, Flagstar
Companies, Inc. ("FCI"), and its wholly owned subsidiary, Flagstar Corporation
("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
Amended Joint Plan of Reorganization dated as of November 7, 1997 (the "Plan").
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. As of the Effective Date,
Advantica adopted fresh start reporting pursuant to the guidance provided by the
American Institute of Certified Public Accountants'("AICPA") Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("SOP 90-7"). Advantica "pushed down" the impact of fresh start
reporting to its operating subsidiaries, including the Company. Further
discussion of the adoption of fresh start reporting is included in "Selected
Financial Data" and Note 2 to the Consolidated Financial Statements included in
this Form 10-K.
On February 17, 2000, in connection with its announcement of a new strategic
direction, Advantica also announced that it had retained the firm of Donaldson,
Lufkin & Jenrette Securities Corporation to begin immediately exploring
strategic alternatives for the Company, including its possible sale or
recapitalization. See Exhibit 99.2 to this Form 10-K for an excerpt from
Advantica's February 17, 2000 press release announcing its new strategic
direction.
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. For a breakdown of the
revenues contributed by each concept (and other related segment disclosures) for
the last three years, see its corresponding section of Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 16 to
the accompanying Consolidated Financial Statements.
1
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COCO'S
Coco's is a bakery restaurant chain operating primarily in California as well
as Japan, South Korea and the United Arab Emirates. 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 in addition to value-priced and innovative menu items. 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. At December 29, 1999, the Coco's chain consisted of 148
Company-owned, 34 domestic franchised and 303 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 dayparts are Coco's strongest, comprising approximately 37.6%
and 40.4% of 1999 sales, respectively. In 1999, the average guest check was
$7.41, with average Company-owned unit sales of approximately $1.5 million.
Coco's currently employed approximately 6,800 people at December 29, 1999.
During 1999, the Company began a reimage test and completed 14 Coco's
restaurants in Southern California by the end of the year. Throughout 2000,
Coco's plans to evaluate the post-reimage performance of these restaurants as
well as to continue testing a lower-cost reimage prototype before beginning a
full roll out of the program in 2001.
CARROWS
Carrows is a regional family-style restaurant chain operating primarily in
California. Carrows consisted of 117 Company-owned units and 28 domestic
franchises, and employed approximately 4,700 people at December 29, 1999.
Carrows specializes in traditional 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, a group expected to grow rapidly in
the new century. Carrows restaurants have uniform menus and serve breakfast,
lunch and dinner. 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 18 hours a day.
Lunch and dinner dayparts (including "late night") are Carrows' strongest,
comprising approximately 32.7% and 42.3% of 1999 sales, respectively. In 1999,
the average guest check was $6.81, 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.
2
<PAGE>
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. In the Coco's concept, the district managers report to two
directors of operations who report to the vice president of operations. A
general manager, associate manager and assistant manager are employed at each
Coco's and Carrows 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 lower volume restaurants to 70 employees for higher 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
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 serve a wide
variety of high quality traditional American fare combined with more
contemporary selections designed to deliver distinctive visual and taste appeal.
To improve sales and profits, Coco's will emphasize its high quality products
such as fresh fish, freshly baked muffins and pies and other bakery products,
and product promotions will provide price point options that offer guests an
excellent value while maintaining margins and profitability. Based on customer
research conducted in 1999, Coco's plans to roll out a new menu during the last
half of 2000 which is designed to strengthen its customer base and increase
guest frequency.
CARROWS' MENU STRATEGY. The Company's menu strategy for Carrows is to offer a
consistent quality and variety of traditional American favorites which emphasize
the brand's signature products, value pricing and portions. To continue
satisfying the needs of the family-style segment customers, Carrows will
supplement its current popular menu with ongoing product development. Carrows
plans to focus on refining the menu items for all day parts and conducting
effective product promotions designed to build guest satisfaction and frequency
of visits while maintaining profitable margins.
3
<PAGE>
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 significant.
ADVERTISING
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 all of
Advantica's restaurant concepts have distribution agreements). Pursuant to the
agreement, PFC/MBM will continue to distribute and supply certain products to
the Company for the next six 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.
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.
4
<PAGE>
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. Recent
economic trends have also 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 99.1 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 both 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
regulations 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 29, 1999, 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 for the Company's operations
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 to $5.15 per
hour on September 1, 1997, and Congress is currently considering another
increase to $6.15 per hour over a multiple-year time frame. 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.
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.
5
<PAGE>
EMPLOYEES
At December 29, 1999, the Company had approximately 11,500 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 5,900
square feet allowing them to accommodate 120 to 180 guests. The number and
location of the Company's restaurants as of December 29, 1999 are presented
below:
<TABLE>
<CAPTION>
COCO'S CARROWS
------------------------ ----------------------
FRANCHISED/ FRANCHISED/
STATE/COUNTRY OWNED LICENSED OWNED LICENSED
- ------------- ----- ---------- ----- -----------
<S> <C> <C> <C> <C>
Arizona 20 2 5
California 124 24 110 7
Colorado 2
Indiana 2(a)
Missouri 2
Nevada 5(b) 1
New Mexico 4
Oregon 8
Texas 2 2
Washington 6 1
Japan 270
South Korea 31
Other International 2
----- ----- ---- ----
Total 148 337 117 28
===== ===== ==== ====
</TABLE>
(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 265 restaurants operated by the Company as of December 29, 1999, 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 213
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 New FRD Credit Facility (as defined below). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 9 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 significant adverse effect on its
liquidity, financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
6
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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, 2000, 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 1997, 1998 or 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 9 to the accompanying
Consolidated 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 year ended 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 fifty-one weeks ended December 30, 1998 and the fiscal year
ended December 29, 1999. 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 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.
<TABLE>
<CAPTION>
FRD PREDECESSOR (a) FRD SUCCESSOR (b) FRD EMERGED SUCCESSOR (c)
------------------------- -------------------------------------- ---------------------------
FIVE SEVEN ONE FIFTY-ONE
FISCAL YEAR MONTHS MONTHS YEAR WEEK WEEKS FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, MAY 23, DECEMBER 26, DECEMBER 31, JANUARY 7, DECEMBER 30, DECEMBER 29,
(IN MILLIONS, EXCEPT RATIOS) 1995 (d) 1996 1996 (e) 1997 (d) 1998 1998 1999
------------- -------- ------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Statement Data:
Operating revenues (f) $ 505.6 $195.9 $ 295.0 $ 492.5 $ 8.4 $ 439.4 $ 389.8
Operating income 32.0 2.5 11.9 27.1 - (19.1) (91.6)(g)
Net income (loss) 4.7 1.1 (6.2) (2.2) 33.1 (41.8) (135.7)
Ratio of earnings to fixed
charges (h) 1.7x 1.7x - - 61.5x - -
Deficiency in the coverage of
fixed charges by earnings before
fixed charges (h) - - 5.7 6.0 - 45.5 116.5
Balance Sheet Data (at end of
period):
Current assets $ 31.7 $ 34.9 $ 28.5 $ 19.2 $ 19.9
Working capital deficit (i) (111.0) (55.7) (68.7) (73.9) (61.0)
Net property and equipment 146.0 135.0 117.3 119.1 111.7
Total assets 332.8 388.0 371.5 358.8 231.9
Long-term debt, excluding current
portion 27.5 218.5 195.7 182.7 207.2
Other Data:
EBITDA as defined (j) $ 33.4 $ 61.6 $ 0.7 $ 60.6 $ 43.4
Net cash flows provided by operating
activities $ 45.9 $ 5.3 21.2 17.1 1.0 23.0 8.8
Net cash flows (used in) provided
by investing activities (15.9) 17.9 (130.8) (2.9) - 5.9 (22.0)
Net cash flows (used in) provided
by financing activities (28.7) (27.7) 122.9 (19.4) (6.5) (26.6) 15.7
</TABLE>
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7
<PAGE>
(a) The FRD Predecessor selected financial data 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 selected financial data 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.
(b) The FRD Successor selected financial data for the periods indicated
represent the financial position and operations of FRD from the date of
acquisition of FRI-M (May 23, 1996) to the Effective Date, when fresh
start reporting was adopted (see (c) below).
(c) 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 "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 financial statements, 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.
(d) Fiscal years 1995 and 1997 represent 53-week periods.
(e) 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 a prior credit facility as discussed below) and the impact of
the application of purchase accounting.
(f) Operating revenues have been reclassified to conform to the 1999
presentation.
(g) Operating income for the year ended December 29, 1999 reflects an
impairment charge of $60.5 million. For a discussion of the 1999
impairment charge, see the consolidated operating results discussion in
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 7 in the accompanying Consolidated
Financial Statements.
(h) For purposes of computing the ratio of earnings to fixed charges or
deficiency in the coverage of fixed charges by 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.
(i) FRD historically operates with a working capital deficit 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. For a discussion of the decrease in
the working capital deficit from December 30, 1998 to December 29,
1999, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
(j) "EBITDA as defined" is defined by FRD as operating income before
depreciation, amortization, management fees payable to Advantica and
restructuring and impairment charges. For the fiscal year 1999, an
impairment charge of $60.5 million has been excluded from EBITDA as
defined. For a discussion of the 1999 impairment charge, see the
consolidated operating results discussion "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations" and Note 7 in the accompanying Consolidated Financial
Statements. 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. It 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 for FRD
Predecessor is not presented.
8
<PAGE>
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 the Company's 1998 operating performance, the following
discussion and presentation of the results of operations for the fifty-one 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 fiscal year
ended December 30, 1998, unless otherwise noted. Where appropriate, the impact
of the adoption of fresh start reporting on the results of operations during
this period will be separately disclosed.
RESULTS OF OPERATIONS
1999 RESTAURANT UNIT ACTIVITY
<TABLE>
<CAPTION>
ENDING UNITS ENDING
UNITS UNITS UNITS SOLD/ UNITS
12/30/98 OPENED REFRANCHISED CLOSED 12/29/99
-------- ------ ------------ ------ --------
<S> <C> <C> <C> <C> <C>
Coco's
Company-owned 150 -- -- (2) 148
Franchised units 31 4 -- (1) 34
Licensed units 300 11 -- (8) 303
---- ---- ---- ---- ----
481 15 -- (11) 485
---- ---- ---- ---- ----
Carrows
Company-owned 123 (1) (5) 117
Franchised units 26 1 1 -- 28
---- ---- ---- ---- ----
149 1 -- (5) 145
---- ---- ---- ---- ----
630 16 -- (16) 630
==== ==== ==== ==== ====
</TABLE>
9
<PAGE>
RESTAURANT OPERATIONS
COCO'S
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 29,
1997(a) 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
($ in millions, except average
unit and same-store data)
U. S. systemwide sales $ 288.1 $ 280.3 $ 263.5
======== ======== ========
Net company sales $ 275.8 $ 255.7 $ 219.5
Franchise and foreign
licensing revenue 4.3 4.6 5.8
-------- -------- --------
Total revenue 280.1 260.3 225.3
-------- -------- --------
Operating expenses:
Amortization of
reorganization value
in excess of amounts
allocable to
identifiable assets -- 22.1 20.8
Impairment charge -- -- 35.3
Other 264.4 245.0 220.7
-------- -------- --------
Total operating expenses 264.4 267.1 276.8
-------- -------- --------
Operating income (loss) $ 15.7 $ (6.8) $ (51.5)
======== ======== ========
EBITDA as defined $ 35.0 $ 37.9 $ 25.3
Average annual unit
sales (in thousands):
Company-owned 1,492 1,569 1,472
Franchised 1,728 1,356 1,310
Same-store sales
decrease (Company-owned) (b): 0.0% (0.7)% (6.2)%
Operated units:
Company-owned 178(c) 150(c) 148(c)
Franchised 17 31 34
Licensed 298 300 303
-------- -------- --------
Total 493 481 485
======== ======== ========
</TABLE>
- ------------------
(a) Fiscal 1997 represents a 53-week period.
(b) Prior year amounts have not been restated for 1999 comparable units.
(c) Includes the Company's jojos restaurants (16 as of year end 1997 and 2 as of
year ends 1998 and 1999).
1999 VS. 1998
Coco's NET COMPANY SALES for the year ended December 29, 1999 decreased $36.2
million (14.2%) compared to the prior year. The decrease reflects lower sales
from a decrease in the number of Company-owned equivalent units from the prior
year. In addition, lower same-store sales resulted from a decline in customer
traffic partially offset by a higher guest check average. FRANCHISE AND
LICENSING REVENUE increased $1.2 million (26.1%), primarily attributable to a
net increase in franchised units over the prior year.
Coco's OPERATING EXPENSES increased $9.7 million (3.6%) compared to the prior
year. Excluding the impact of a $35.3 million impairment charge, operating
expenses decreased $25.6 million, primarily reflecting the decrease in
Company-owned equivalent units and lower same-store sales.
10
<PAGE>
EBITDA AS DEFINED decreased $12.6 million (33.2%) for 1999 compared to 1998.
This decrease is the result of factors noted in the preceding paragraphs,
excluding the impairment charge.
Coco's OPERATING INCOME for the year ended for the year ended December 29, 1999
decreased $44.7 million compared to the prior year as a result of the factors
noted above.
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 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 1998.
FRANCHISE AND LICENSING REVENUE was flat in 1998 compared to the prior year,
reflecting an increase in franchise revenue offset by a decrease in 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 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 $22.6 million (8.5%). This decrease reflects the effect of six fewer
reporting days in 1998 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 1998.
EBITDA AS DEFINED increased $2.9 million (8.3%) for 1998 compared to 1997. This
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 $2.8 million
compared to the prior year as a result of the factors noted above.
11
<PAGE>
CARROWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 29,
1997 (a) 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
($ in millions, except average
unit and same-store data)
U.S. systemwide sales $ 215.2 $ 203.8 $ 190.5
======== ======== ========
Net company sales $ 211.8 $ 185.5 $ 162.0
Franchise revenue 0.7 2.0 2.5
-------- -------- --------
Total revenue 212.5 187.5 164.5
-------- -------- --------
Operating expenses:
Amortization of
reorganization value
in excess of amounts
allocable to
identifiable assets -- 17.9 17.8
Impairment charge -- -- 25.2
Other 201.1 181.8 161.6
-------- -------- --------
Total operating expenses 201.1 199.7 204.6
-------- -------- --------
Operating income (loss) $ 11.4 $ (12.2) $ (40.1)
======== ======== ========
EBITDA as defined $ 26.6 $ 23.4 $ 18.1
Average annual unit
sales (in thousands):
Company-owned 1,362 1,377 1,365
Franchised NM 1,131 1,052
Same-store sales
decrease (Company-owned)(b): (1.7)% (2.0)% (3.7)%
Operated units:
Company-owned 140 123 117
Franchised 14 26 28
-------- -------- --------
Total 154 149 145
======== ======== ========
</TABLE>
- -----------------
NM = Not meaningful
(a) Fiscal 1997 represents a 53-week period.
(b) Prior year amounts have not been restated for 1999 comparable units.
1999 VS. 1998
Carrows' NET COMPANY SALES for the year ended December 29, 1999 decreased $23.5
million (12.7%) compared to the prior year. The decrease reflects lower sales
from a decrease in the number of Company-owned equivalent units from the prior
year. In addition, lower same-store sales resulted from a decline in customer
traffic partially offset by a higher guest check average. FRANCHISE REVENUE
increased $0.5 million (25.0%), primarily attributable to a net increase in
franchised units over the prior year.
Carrows' OPERATING EXPENSES increased $4.9 million (2.5%) compared to the prior
year. Excluding the impact of a $25.2 million impairment charge, operating
expenses decreased $20.3 million, primarily reflecting the decrease in
Company-owned equivalent units and lower same-store sales.
EBITDA AS DEFINED decreased $5.3 million (22.6%) for 1999 compared to 1998. This
decrease is the result of factors noted in the preceding paragraphs, excluding
the impairment charge.
12
<PAGE>
Carrows' OPERATING INCOME for the year ended December 29, 1999 decreased $27.9
million compared to the prior year as a result of the factors noted above.
1998 VS. 1997
Carrows' NET COMPANY SALES for the year ended December 30, 1998 decreased $26.3
million (12.4%) compared to the prior year comparable period. The decrease
reflects a $3.8 million impact due to six fewer reporting days in 1998 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 1998. FRANCHISE REVENUE
increased $1.3 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.
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
$17.9 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 $2.2 million.
Excluding the estimated impact of fresh start reporting, operating expenses
decreased $21.5 million (10.7%), reflecting the effect of six fewer reporting
days in 1998 than in the prior year, 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 1998.
EBITDA AS DEFINED decreased by $3.2 million (12.0%) for 1998 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.
FRD CONSOLIDATED
1999 VS. 1998
The Company's consolidated EBITDA AS DEFINED decreased $17.9 million (29.2%)
compared to the prior year. This decrease is a result of the factors discussed
in the preceding paragraphs.
CONSOLIDATED INTEREST EXPENSE, NET, decreased $2.7 million (9.9%) for the year
ended December 29, 1999 as compared to the prior year comparable period. This
decrease is primarily due to the timing of the Company's borrowings on credit
facilities.
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 fiscal year
ended December 29, 1999 reflects an annual effective income tax rate applied to
loss before taxes of approximately 16% for the fiscal year ended December 29,
1999 compared to an income tax benefit reflecting an approximate rate of (8%)
for the fifty-one weeks ended December 30, 1998. The change in the effective
rate relates to the establishment of a valuation allowance on certain assets
which, based on projected future taxable income, it is more likely than not that
a tax benefit will not be realized. Accordingly, the tax provision for 1999
primarily relates to the recording of this valuation. The provision for the one
week period ended
13
<PAGE>
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 $126.9 million compared to the prior
year is a result of the items previously discussed.
IMPAIRMENT OF REORGANIZATION VALUE
Due to the presence of certain conditions at December 29, 1999, including the
market discount on certain of the Company's debt instruments and certain
operating trends, the Company concluded it should perform an impairment
assessment of the carrying amount of the intangible asset "Reorganization value
in excess of amounts allocated to identifiable assets, net of accumulated
amortization." In performing this analysis, management utilized a discounted
future cash flow model and recorded an impairment charge of $60.5 million,
representing the difference between estimated value of the Company resulting
from the cash flow model and the value of the Company's net assets recorded at
December 29, 1999 prior to recognition of impairment. The discount rate used in
the cash model was an estimate of Advantica's current cost of capital. The
adjusted carrying value of the intangible asset, $55.8 million, will continue to
be amortized over its three-year remaining useful life.
ACCOUNTING CHANGES
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. In June 1999,
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133" ("SFAS 137"), was issued. In accordance with SFAS 133 and
SFAS 137, SFAS 133 will be effective for the Company's first quarter of its 2001
fiscal year. The Company is in the process of evaluating the effect of adopting
SFAS 133.
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 29, 1999
represents primarily ten months of Coco's Japan royalties expected to be
received in March 2000. 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 29, 1999, the net royalty
receivable amounted to $2.1 million.
1998 VS. 1997
CONSOLIDATED 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 INCOME TAXES from continuing operations for the fifty-one weeks
ended December 30, 1998 reflects an
14
<PAGE>
annual effective income tax benefit rate applied to loss before taxes of
approximately (8%) for the fifty-one 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 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, decreased by $0.3 million (0.5%) in 1998 as compared to 1997.
This decrease is a result of the factors previously discussed, excluding the
estimated $45.4 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 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
On May 14, 1999, FRD and certain of its operating subsidiaries entered into a
new credit agreement with The Chase
15
<PAGE>
Manhattan Bank and Credit Lyonnais New York Branch and other lenders named
therein and thereby established a $70 million senior secured credit facility
(the "New FRD Credit Facility") to replace a prior facility which was scheduled
to mature in August 1999. The New FRD Credit Facility, which is guaranteed by
Advantica, consists of a $30 million term loan and a $40 million revolving
credit facility, and matures in May 2003. Borrowings under the New FRD Credit
Facility are to be used for working capital requirements and other general
corporate purposes. Certain letters of credit may be issued under the revolving
credit facility. All borrowings under the New FRD Credit Facility accrue
interest at a variable rate based on the prime rate or an adjusted Eurodollar
rate (approximately 9.6% at December 29, 1999) 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. Principal installments of the term loan
will be payable as follows: $2.0 million per quarter for three consecutive
quarters beginning June 30, 2001; $3.0 million per quarter for four consecutive
quarters beginning March 31, 2002; and $6.0 million for two consecutive quarters
beginning March 31, 2003. At December 29, 1999, FRD and its subsidiaries had
$30.0 million outstanding term loan borrowings, no outstanding working capital
borrowings and letters of credit outstanding of $11.1 million.
The New FRD Credit Facility and the indenture under which the 12.5% Senior Notes
due 2004 (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 the 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 change in their business. In addition,
the New FRD 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) and limitations on
annual capital expenditures. The cash flows from FRD are required to be used to
service the Company's indebtedness under the New FRD Credit Facility and the
Senior Notes and, therefore, other than for the payment of certain management
fees and tax reimbursements payable to Advantica under certain conditions, are
currently unavailable to service the debt of Advantica and its other
subsidiaries.
As of December 29, 1999, scheduled maturities of long-term debt relative to FRD
for the years 2000 and thereafter are as follows (in millions):
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR:
-----
2000 $ 2.9
2001 8.8
2002 14.5
2003 13.9
2004 157.6
Thereafter 2.1
</TABLE>
Management believes the New FRD Credit 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 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 1999, total capital expenditures were approximately $22.8
million. Of the total capital expenditures, approximately $0.2 million were
financed through capital leases. Capital expenditures during 2000 are expected
to total approximately $12.0 million to $16.0 million; however, the Company is
not committed to spending this amount and could spend less if circumstances
warrant.
At December 29, 1999 and December 30, 1998, the Company had working capital
deficits of $61.0 million and $73.9 million, respectively. The decrease in the
deficit resulted primarily from obtaining the New FRD Credit Facility,
16
<PAGE>
which refinanced a prior facility scheduled to mature in August 1999. The $30
million term loan is considered long-term debt at December 29, 1999.
IMPACT OF THE YEAR 2000 ISSUE
The Company's systems infrastructure and critical applications successfully
handled the transition into the Year 2000. All restaurants were fully functional
and opened for business without incident on January 1, 2000. No supply chain
interruptions were identified. Although no Year 2000-related problems are
anticipated, the Company is monitoring all systems throughout the first quarter
of 2000.
The amounts capitalized or expensed by the Company related to Year 2000
remediation efforts during 1999 were not significant. The Company does not
expect to incur additional costs related to this issue during 2000.
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 New FRD Credit Facility, which consists of a $30 million term loan and
a $40 million revolving credit facility. The revolving credit facility bears
interest at variable rates; however, there were no amounts outstanding under
this facility at December 29, 1999. Borrowings under the New FRD Credit Facility
bear interest based on the prime rate or an adjusted Eurodollar rate
(approximately 9.6% at December 29, 1999). 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 significant.
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
interest rate derivatives were in place at December 29, 1999.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company has exposure to foreign exchange rate risk related to certain
foreign currency transactions. In order to mitigate this risk, the Company from
time to time has entered into foreign exchange forward contracts. The Company
does not speculate on the future direction of foreign currency exchange rates
nor does the Company use these derivative financial instruments for trading
purposes. While changes in the foreign currency exchange rates could affect the
amount of gains or losses on forward contracts, forward contracts outstanding as
of December 29, 1999 are not significant; therefore, the Company believes the
effect, if any, of reasonably possible near-term changes in foreign currency
exchange rates on the Company's consolidated financial position, results of
operations and cash flows would not be significant.
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
17
<PAGE>
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 not significant.
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 9 to the
Consolidated Financial Statements for additional information regarding the
Company's indebtedness and the terms thereof (including indebtedness under the
New FRD Credit Facility).
THE SENIOR NOTES
In connection with the May 23, 1996 acquisition of FRI-M, FRD issued $156.9
million principal amount of 12.5% Senior
18
<PAGE>
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 New FRD Credit Facility to the extent of the value of FRD's
assets securing such guaranty. Borrowings under the New FRD Credit Facility are
secured by substantially all of the Company's assets. The Senior Notes are
structurally subordinated to all indebtedness of FRI-M, including its
indebtedness under the New FRD 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.
The Senior Notes will mature on July 15, 2004. They 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.
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.
EXHIBIT
NO. DESCRIPTION
- ------- -----------
*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 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).
*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).
*10.1 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).
*10.2 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).
*10.3 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).
*10.4 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")).
19
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
*10.5 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).
*10.6 Merger Amendment, dated March 15, 1999, to the Advantica Restaurant
Group Stock Option Plan and the Advantica Restaurant Group Officer
Stock Option Plan (incorporated by reference to Exhibit 10.5 to
Advantica's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999 ("Advantica's 1999 First Quarter Form 10-Q")).
*10.7 Advantica Stock Option Plan as amended through March 15, 1999
(incorporated by reference to Exhibit 10.5 to Advantica's 1999 First
Quarter Form 10-Q).
*10.8 Credit Agreement, dated May 14, 1999, among Coco's Restaurants, Inc.,
Carrows Restaurants, Inc., and jojo's Restaurants, Inc., as borrowers,
FRD Acquisition Co. and FRD Corporation, as guarantors, the lenders
named therein, Credit Lyonnias New York Branch as administrative agent,
and The Chase Manhattan Bank, as documentation agent and syndication
agent (incorporated by reference to Exhibit 10.1 to Advantica's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).
27 Financial Data Schedule (for SEC use only).
99.1 Safe Harbor Under the Private Securities Litigation Reform Act of 1995.
99.2 Excerpt from Advantica's February 17, 2000 press release announcing its
new strategic direction.
- ---------------
(b) No reports on Form 8-K were filed during the quarter ended December 29,
1999.
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.
20
<PAGE>
FRD ACQUISITION CO.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE
----
Independent Auditors' Report F-2
Statements of Consolidated Operations for the Fiscal Year Ended
December 31, 1997, the One Week Ended January 7, 1998, the
Fifty-One Weeks Ended December 30, 1998 and the Fiscal Year
Ended December 29, 1999 F-3
Consolidated Balance Sheets as of December 30, 1998 and
December 29, 1999 F-4
Statements of Consolidated Cash Flows for the Fiscal Year Ended
December 31, 1997, the One Week Ended January 7, 1998, the Fifty-One
Weeks Ended December 30, 1998 and the Fiscal Year Ended
December 29, 1999 F-5
Notes to Consolidated Financial Statements F-7
Financial Statement Schedule: Condensed Financial Information
of Registrant S-1
F-1
<PAGE>
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 29, 1999 and December 30,
1998 and the related statements of consolidated operations and consolidated cash
flows for the fiscal year ended December 29, 1999 and the fifty-one-week period
ended December 30, 1998 (Emerged Successor operations), and the one-week period
ended January 7, 1998 and the year ended December 31, 1997 (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 auditing standards generally accepted
in the United States of America. 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., 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 consolidated financial position of the
Company as of December 29, 1999 and December 30, 1998 and the results of its
consolidated operations and consolidated cash flows for the fiscal year ended
December 29, 1999 and the fifty-one-week period ended December 30, 1998 in
conformity with accounting principles generally accepted in the United States of
America. Further, in our opinion, the Successor consolidated financial
statements present fairly, in all material respects, the results of its
consolidated operations and its consolidated cash flows for the one-week period
ended January 7, 1998 and the year ended December 31, 1997 in conformity with
accounting principles generally accepted in the United States of America. 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, 2000
F-2
<PAGE>
FRD ACQUISITION CO.
STATEMENTS OF CONSOLIDATION OPERATIONS
<TABLE>
<CAPTION>
FRD SUCCESSOR FRD EMERGED SUCCESSOR
----------------------- -------------------------
FISCAL YEAR ONE WEEK FIFTY-ONE FISCAL YEAR
ENDED ENDED WEEKS ENDED ENDED
DECEMBER 31, JANUARY 7, DECEMBER 30, DECEMBER 29,
1997 1998 1998 1999
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
(In thousands)
Revenue:
Company restaurant sales $ 487,593 $ 8,266 $ 432,930 $ 381,474
Franchise and foreign licensing revenue 4,947 141 6,462 8,316
--------- -------- --------- ---------
Total operating revenue 492,540 8,407 439,392 389,790
--------- -------- --------- ---------
Cost of company restaurant sales:
Product cost 133,732 2,255 119,467 99,917
Payroll and benefits 181,780 3,193 162,916 148,709
Occupancy 29,177 521 25,541 22,211
Other operating expenses 70,344 1,331 62,030 54,187
--------- -------- --------- ---------
Total cost of company restaurant sales 415,033 7,300 369,954 325,024
Franchise restaurant costs 1,452 47 2,731 3,895
General and administrative expenses 17,185 291 15,037 15,427
Management fees to Advantica 4,925 84 4,381 3,873
Allocated costs from Advantica 2,500 48 2,202 2,600
Amortization of reorganization value in
excess amounts allocable to identifiable
assets -- -- 40,051 38,586
Depreciation and other amortization 29,556 591 35,271 32,034
Impairment charge -- -- -- 60,500
Gains on refranchising and other, net (5,197) -- (11,157) (528)
--------- -------- --------- ---------
Total operating costs and expenses 465,454 8,361 458,470 481,411
--------- -------- --------- ---------
Operating income (loss) 27,086 46 (19,078) (91,621)
--------- -------- --------- ---------
Other expenses:
Interest expense, net 29,597 585 26,897 24,769
Other nonoperating expenses (income), net 2,975 -- (515) 116
--------- -------- --------- ---------
Total other expenses, net 32,572 585 26,382 24,885
--------- -------- --------- ---------
Loss before reorganization items and taxes (5,486) (539) (45,460) (116,506)
Reorganization items 528 (44,993) -- --
--------- -------- --------- ---------
(Loss) income before taxes (6,014) 44,454 (45,460) (116,506)
(Benefit from) provision for income taxes (3,836) 11,367 (3,652) 19,151
--------- -------- --------- ---------
Net (loss) income $ (2,178) $ 33,087 $ (41,808) $(135,657)
========= ======== ========= =========
</TABLE>
See notes to consolidated and combined financial statements.
F-3
<PAGE>
FRD ACQUISITION CO.
STATEMENTS OF CONSOLIDATION OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29,
1998 1999
------------ ------------
<S> <C> <C>
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 5,841 $ 8,392
Receivables 6,343 4,852
Inventories 3,070 2,700
Other 3,952 3,941
--------- ---------
19,206 19,885
--------- ---------
Property and equipment 149,336 164,644
Accumulated depreciation (30,184) (52,975)
--------- ---------
119,152 111,669
--------- ---------
Other Assets:
Reorganization value in excess of
amounts allocable to identifiable
assets, net 155,852 55,812
Other intangibles, net 41,896 39,406
Deferred taxes 18,744 --
Other 3,903 5,102
--------- ---------
220,395 100,320
--------- ---------
$ 358,753 $ 231,874
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt $ 13,530 $ 2,770
Accounts payable 20,361 19,293
Accrued salaries and vacation 10,199 7,858
Accrued insurance 4,408 3,627
Accrued interest 9,320 9,491
Payable to Advantica 16,740 23,809
Other 18,532 14,025
--------- ---------
93,090 80,873
--------- ---------
Long-term Liabilities:
Debt, less current maturities 182,743 207,164
Liability for insurance claims 10,014 7,817
Other noncurrent liabilities 14,995 13,766
--------- ---------
207,752 228,747
--------- ---------
Total liabilities 300,842 309,620
--------- ---------
Commitments and Contingencies
Stockholder's Equity (Deficit):
Common stock: par value $0.10;
1,000 shares authorized, issued
and outstanding -- --
Paid-in capital 99,719 99,719
Equity (Deficit) (41,808) (177,465)
--------- ---------
57,911 (77,746)
--------- ---------
$ 358,753 $ 231,874
========= =========
</TABLE>
See notes to consolidated and combined financial statements.
F-4
<PAGE>
FRD ACQUISITION CO.
STATEMENTS OF CONSOLIDATION OPERATIONS
<TABLE>
<CAPTION>
FRD SUCCESSOR FRD EMERGED SUCCESSOR
------------------------------------------------------------
FISCAL YEAR ONE WEEK FIFTY-ONE FISCAL YEAR
ENDED ENDED WEEKS ENDED ENDED
DECEMBER 31, JANUARY 7, DECEMBER 30, DECEMBER 29,
1997 1998 1998 1999
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
(In thousands)
Cash Flows from Operating
Activities:
Net (loss) income $ (2,178) $ 33,087 $ (41,808) $(135,657)
Adjustments to
reconcile net (loss)
income to cash flows from
operating activities:
Amortization of
reorganization value in
excess of amounts
allocable to
identifiable assets -- -- 40,051 38,586
Depreciation and other
amortization 29,556 591 35,271 32,034
Impairment charge -- -- -- 60,500
Amortization of deferred
financing costs 1,356 28 1,336 1,315
Amortization of debt
premium -- -- (1,497) (1,667)
Gain on refranchising and
other, net (5,197) -- (5,979) (528)
Gain on lease buyouts -- -- (5,178) --
Deferred tax (benefit)
provision (4,183) 11,340 (3,899) 18,744
Noncash reorganization
items -- (44,993) -- --
Decrease (increase) in assets:
Receivables 1,115 252 (1,189) 1,491
Inventories 1,281 -- 538 370
Other current assets (3,933) 3,918 1,551 (59)
Other assets (1,952) -- 872 (2,608)
Increase (decrease) in
liabilities:
Accounts payable 2,074 (3,085) 3,278 (1,069)
Accrued salaries and
vacation 1,305 (1,451) (1,170) (2,340)
Payable to Advantica 7,231 132 6,426 7,069
Other accrued liabilities (7,015) 1,388 (3,992) (3,131)
Liability for self-insurance
claims (4,887) (253) (1,681) (2,908)
Other noncurrent liabilities 2,514 3 66 (1,321)
------- ------ ------ ------
Net cash flows provided by
operating activities 17,087 957 22,996 8,821
------- ------ ------ ------
Cash Flows from Investing
Activities:
Purchase of property (14,941) -- (10,367) (22,570)
Proceeds from lease buyouts -- -- 3,806 --
Proceeds from disposition
of property 12,046 -- 12,515 590
------- ------ ------ ------
Net cash flows (used in)
provided by investing
activities (2,895) -- 5,954 (21,980)
------- ------ ------ ------
</TABLE>
F-5
<PAGE>
FRD ACQUISITION CO.
STATEMENTS OF CONSOLIDATION OPERATIONS (Continued)
<TABLE>
<CAPTION>
FRD SUCCESSOR FRD EMERGED SUCCESSOR
------------------------------ -------------------------------
FISCAL YEAR ONE WEEK FIFTY-ONE FISCAL YEAR
ENDED ENDED WEEKS ENDED ENDED
DECEMBER 31, JANUARY 7, DECEMBER 30, DECEMBER 29,
1997 1998 1998 1999
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
(In thousands)
Cash Flows from Financing Activities:
Principal debt payments, net $ (19,441) $ (6,515) $ (26,602) $ (14,290)
Term loan proceeds - - - 30,000
--------- --------- --------- ---------
Net cash flows (used in) provided by
financing activities (19,441) (6,515) (26,602) 15,710
--------- --------- --------- ---------
(Decrease) increase in cash and cash
equivalents (5,249) (5,558) 2,348 2,551
Cash and cash equivalents at:
Beginning of period 14,300 9,051 3,493 5,841
--------- --------- --------- ---------
End of period $ 9,051 $ 3,493 $ 5,841 $ 8,392
========= ========= ========= =========
Supplemental Cash Flow Information:
Income taxes paid (refunded) $ 1,977 $ - $ (1,402) $ 236
========= ========= ========= =========
Interest paid $ 27,606 $ - $ 23,957 $ 23,580
========= ========= ========= =========
Non cash financing activities:
Capital lease obligations $ 694 $ - $ 569 $ 226
========= ========= ========= =========
</TABLE>
F-6
<PAGE>
FRD ACQUISITION CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 REORGANIZATION AND BASIS OF REPORTING
FRD Acquisition Co. ("FRD" or, together with its subsidiaries, the "Company")
was incorporated in February 1996 as a wholly owned subsidiary of a predecessor
of Advantica Restaurant Group, Inc. ("Advantica"). On May 23, 1996, FRD
consummated the acquisition of 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. At December 29, 1999, the Company owned 265
full-service restaurants located primarily in six states, with approximately 88%
of its restaurants located in California. Additionally, as of December 29, 1999,
the Company was the licensor of 303 restaurants primarily located in Japan and
South Korea and the franchisor of 62 restaurants in the United States.
On January 7, 1998 (the "Effective Date"), Advantica's predecessor, Flagstar
Companies, Inc. ("FCI"), and its wholly owned subsidiary, Flagstar Corporation
("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").
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 above mentioned Chapter 11 proceedings.
In the financial statements included herein, "FRD Successor" refers to the
period of ownership of FRI-M by FRD subsequent to its acquisition on May 23,
1996. "FRD Emerged Successor" refers to the period subsequent to the emergence
of Advantica from proceedings under the Bankruptcy Code and the application of
fresh start reporting as described in Note 2.
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." 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" (see Note 7 regarding the 1999 impairment of
the reorganization value). Advantica is amortizing such amount over a five-year
amortization period. Advantica "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" financial statements, as they reflect the periods
subsequent to the implementation of fresh start reporting and are not comparable
to the financial statements for periods prior to the Effective Date.
The results of operations in the accompanying Statement of Consolidated
Operations for the week ended January 7, 1998 reflect the results of operations
prior to Advantica's emergence from bankruptcy and the effects of fresh start
reporting adjustments. In this regard, the Statement of Consolidated Operations
reflects reorganization items consisting primarily of gains and losses related
to the adjustments of assets and liabilities to fair value.
F-7
<PAGE>
During 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 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.
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.
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.
PROPERTY AND DEPRECIATION. Property was adjusted to 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 years and furniture, fixtures and equipment over 3 to 8
years).
GOODWILL AND OTHER INTANGIBLE ASSETS. 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,
trade names, franchise and other operating agreements. Other intangible assets
were adjusted 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 trade names. At December 30, 1998 and December 29, 1999,
accumulated amortization of franchise operating rights totaled approximately
$1.9 million and $3.8 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 identified intangible assets of the Company is being
amortized using the straight-line method over a five-year period. At December
30, 1998 and December 29, 1999, accumulated amortization totaled approximately
$39.7 million and $78.2 million, respectively.
ASSET IMPAIRMENT. The Company follows the provisions of Accounting Principles
Board Opinion No. 17, "Intangible Assets" ("APB 17"), and Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). In accordance
with APB 17 and SFAS 121, as applicable, the Company assesses impairment of
long-lived assets such as reorganization value in excess of amounts
F-8
<PAGE>
allocable to identifiable assets, goodwill and property, plant and equipment
whenever changes or events indicate that the carrying value may not be
recoverable. In accordance with APB 17, the Company assesses impairment of the
intangible assets reorganization value in excess of amounts allocable to
identifiable assets and goodwill whenever the Company's market indicators (e.g.,
market discount on certain debt instruments) and/or operating trends have had
other than a temporary adverse change. The Company applies a discounted cash
flow approach to measure impairment. The discount rate used is Advantica's
estimated current cost of capital. In accordance with SFAS 121, other long-lived
assets are written down to fair value if, based on an analysis, the sum of the
expected future undiscounted cash flows is less than the carrying amount of the
assets.
DEFERRED FINANCING COSTS. Costs related to the issuance of debt are deferred and
amortized as a component of interest expense using the straight-line method over
the terms of the respective debt issues.
INCOME TAXES. The Company is included in the consolidated federal and certain
state income tax returns of Advantica. 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. The Company
reports its income tax expense, deferred tax assets and liabilities following
this separate-return method. See Note 10 for a further description of the
accounting for income taxes.
INSURANCE RESERVES. Through June 29, 1997, the Company was subject to insurance
retentions/deductibles for workers' compensation, general liability, property
and automobile risks which are supplemented by stop-loss type insurance
policies. As of June 30, 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 insurance liabilities recorded at December 30,
1998 and December 29, 1999 were $14.1 million and $11.0 million, respectively,
reflecting a 5% discount rate for 1998 and 1999. The related undiscounted amount
at such dates were $15.9 million and $12.4 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.
Cash proceeds received from sales of Company-owned restaurants totaled $7.4
million for the fiscal year ended December 31, 1997, $16.3 million for the
fifty-one weeks ended December 30, 1998 and $0.6 million for the fiscal year
ended December 29, 1999. Cash proceeds for the one week ended January 7, 1998
were not significant. 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
in the year in which the commercials are initially aired. Advertising expense
totaled $16.3 million for the fiscal year ended December 31, 1997, $0.3 million
for the one week ended January 7, 1998, $16.0 million for the fifty-one weeks
ended December 30, 1998 and $13.5 million for the fiscal year ended December 29,
1999. Prepaid advertising included in the Consolidated Balance Sheets totaled
$0.1 million and $0.3 million at December 30, 1998 and December 29, 1999,
respectively.
F-9
<PAGE>
CASH OVERDRAFTS. The Company has included in accounts payable on the
accompanying balance sheets cash overdrafts totaling $7.7 million at December
30, 1998 and $9.8 million at December 29, 1999.
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 29, 1999 primarily represents ten months of Coco's Japan
royalties expected to be received in March 2000. 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 30, 1998
and December 29, 1999, the net royalty receivable amounted to $2.4 million and
$2.1 million, respectively.
NEW ACCOUNTING STANDARDS. 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. In June 1999, Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133" ("SFAS 137"), was issued. In
accordance with SFAS 133 and SFAS 137, SFAS 133 will be effective for the
Company's first fiscal quarter of its 2001 fiscal year. The Company is in the
process of evaluating the effect of adopting SFAS 133.
NOTE 4 RECEIVABLES
A summary of receivables follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29,
1998 1999
------------ ------------
<S> <C> <C>
License and franchise fees and
related receivables $2,316 $2,781
Trade, principally credit cards 570 749
Notes receivable 1,075 451
Other 2,522 1,011
Allowance for doubtful accounts (140) (140)
------ ------
$6,343 $4,852
====== ======
</TABLE>
NOTE 5 OTHER CURRENT ASSETS
A summary of other current assets follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29,
1998 1999
------------ ------------
<S> <C> <C>
Prepaid rent $1,821 $1,874
Prepaid other 2,131 2,067
------ ------
$3,952 $3,941
====== ======
</TABLE>
F-10
<PAGE>
NOTE 6 PROPERTY AND EQUIPMENT
A summary of property and equipment follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29,
1998 1999
------------ ------------
<S> <C> <C>
Land $ 2,383 $ 2,383
Buildings and improvements 103,763 113,234
Furniture, fixtures and equipment 41,461 45,613
Projects under construction 1,729 3,414
--------- ---------
149,336 164,644
Less accumulated depreciation
and amortization (30,184) (52,975)
--------- ---------
$ 119,152 $ 111,669
========= =========
</TABLE>
Property under capitalized leases in the amount of $26.6 million and $26.3
million at December 30, 1998 and December 29, 1999, respectively, is included in
buildings and improvements. Accumulated amortization of property under capital
leases amounted to $6.8 million and $11.6 million at December 30, 1998 and
December 29, 1999, respectively. Capital leases primarily relate to buildings on
certain restaurants properties. The land portions of these leases are accounted
for as operating leases.
Substantially all of the capitalized and operating leases initially had original
terms of 20-25 years, and a majority of these leases expire by the year 2005.
Many 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>
FISCAL YEAR ONE WEEK FIFTY-ONE FISCAL YEAR
ENDED ENDED WEEKS ENDED ENDED
DECEMBER 31, JANUARY 7, DECEMBER 30, DECEMBER 29,
1997 1998 1998 1999
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Minimum rent $23,536 $ 450 $22,686 $19,996
Contingent rent 3,975 71 3,600 2,915
Sublease rent (93) -- (1,046) (700)
------- ----- -------- -------
$27,418 $ 521 $ 25,240 $22,211
======= ===== ======== =======
</TABLE>
At December 29, 1999, 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 MINIMUM MINIMUM MINIMUM
LEASE SUBLEASE LEASE SUBLEASE
DUE IN: PAYMENTS RECEIPTS PAYMENTS RECEIPTS
- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
2000 $ 4,346 $ 1,551 $ 17,574 $ 1,332
2001 3,869 1,378 16,416 1,199
2002 3,282 1,066 14,767 1,108
2003 2,425 769 13,340 925
2004 1,114 597 11,313 694
Subsequent years 3,169 1,958 62,682 2,457
-------- -------- -------- --------
Total 18,205 $ 7,319 $136,092 $ 7,715
Less imputed interest 5,340 ======== ======== ========
Present value of capital
lease obligation --------
$ 12,865
========
</TABLE>
F-11
<PAGE>
Payments for certain FRD operating leases are being made by FRI in accordance
with the provisions of the stock purchase agreement signed at the date of
acquisition. As such, these payments have been excluded from the amount of
minimum lease payments and minimum sublease receipts reported above.
NOTE 7 IMPAIRMENT OF REORGANIZATION VALUE
Due to the presence of certain conditions at December 29, 1999, including the
market discount on certain of the Company's debt instruments and certain
operating trends, the Company concluded it should perform an impairment
assessment of the carrying amount of the intangible asset "Reorganization value
in excess of amounts allocated to identifiable assets, net of accumulated
amortization." In performing this analysis, management utilized a discounted
future cash flow model and recorded an impairment charge of $60.5 million
representing the difference between the estimated value of the Company resulting
from the cash flow model and the value of the Company's net assets recorded at
December 29, 1999 prior to recognition of impairment. The adjusted carrying
value of the intangible asset, $55.8 million, will continue to be amortized over
its three-year remaining useful life.
NOTE 8 OTHER ASSETS
A summary of other assets follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29,
1998 1999
------------ ------------
<S> <C> <C>
Debt issuance costs, net $1,658 $2,782
Other 2,245 2,320
----- -----
$3,903 $5,102
====== ======
</TABLE>
NOTE 9 DEBT
Long-term debt, including capitalized lease obligations, is comprised of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29,
1998 1999
------------ ------------
<S> <C> <C>
12.5% Senior Notes due July 15, 2004,
interest payable semi-annually $ 156,897 $ 156,897
Term loan, principal payable
quarterly 10,411 30,000
Capitalized lease obligations 17,126 12,865
--------- ---------
184,434 199,762
Premium, net (see Note 2):
12.5% Senior notes, effective rate 10.95% 11,839 10,172
--------- ---------
Total 196,273 209,934
Less current maturities (13,530) (2,770)
--------- ---------
Total long-term debt $ 182,743 $ 207,164
========= =========
</TABLE>
In connection with the May 23, 1996 acquisition of FRI-M, FRD issued $156.9
million aggregate principal amount of 12.5% Senior Notes due 2004 (the "Senior
Notes"). The Senior Notes mature on July 15, 2004.
On May 14, 1999, FRD and certain of its operating subsidiaries entered into a
new credit agreement with The Chase Manhattan Bank and Credit Lyonnais New York
Branch and other lenders named therein and thereby established a $70 million
senior secured credit facility (the "New FRD Credit Facility") to replace a
prior facility which was scheduled to mature in August 1999. The New FRD Credit
Facility, which is guaranteed by Advantica, consists of a $30 million term
F-12
<PAGE>
loan and a $40 million revolving credit facility, and matures in May 2003.
Borrowings under the New FRD Credit Facility are to be used for working capital
requirements and other general corporate purposes. Certain letters of credit may
be issued under the revolving credit facility. All borrowings under the New FRD
Credit Facility accrue interest at a variable rate based on the prime rate or an
adjusted Eurodollar rate (approximately 9.6% at December 29, 1999) 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. Principal
installments of the term loan will be payable as follows: $2.0 million per
quarter for three consecutive quarters beginning June 30, 2001; $3.0 million per
quarter for four consecutive quarters beginning March 31, 2002; and $6.0 million
for two consecutive quarters beginning March 31, 2003. At December 29, 1999, FRD
and its subsidiaries had $30.0 million outstanding term loan borrowings, no
outstanding working capital borrowings and letters of credit outstanding of
$11.1 million.
The New FRD 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
the 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 change in their business. In addition, the New FRD 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) and limitations on annual capital expenditures. The cash
flows from FRD are required to be used to service the Company's indebtedness
under the New FRD Credit Facility and the Senior Notes and, therefore, other
than for the payment of certain management fees and tax reimbursements payable
to Advantica under certain conditions, FRD's cash flows are currently
unavailable to service the debt of Advantica and its other subsidiaries.
FRD and its subsidiaries were in compliance with the terms of the New FRD Credit
Facility at December 29, 1999. Under the most restrictive provision of the FRD
Credit Facility (the Total debt/EBITDA ratio), at December 29, 1999, FRD's total
debt could be approximately $3.6 million more and FRD would still be in
compliance.
Aggregate annual maturities of long-term debt at December 29, 1999 during the
next five years and thereafter are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR:
-----
2000 $ 2,894
2001 8,769
2002 14,481
2003 13,862
2004 157,641
Thereafter 2,115
---------
$ 199,762
=========
</TABLE>
The estimated fair value of the Company's long-term debt (excluding capital
lease obligations) is $124.1 million at December 29, 1999. Such amount is based
on market quotations for the same or similar debt issues.
F-13
<PAGE>
NOTE 10 INCOME TAXES
A summary of the provision for (benefit from) income taxes is as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ONE WEEK FIFTY-ONE FISCAL YEAR
ENDED ENDED WEEKS ENDED ENDED
DECEMBER 31, JANUARY 7, DECEMBER 30, DECEMBER 29,
1997 1998 1998 1999
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Current:
Federal $ (140) $ -- $ 19 $ 77
State, foreign and other 487 27 228 330
-------- -------- -------- --------
347 27 247 407
-------- -------- -------- --------
Deferred:
Federal (4,144) 9,072 (3,602) 16,291
State, foreign and other (39) 2,268 (297) 2,453
-------- -------- -------- --------
(4,183) 11,340 (3,899) 18,744
-------- -------- -------- --------
Total provision for
(benefit from)
income taxes $ (3,836) $ 11,367 $ (3,652) $ 19,151
======== ======== ======== ========
</TABLE>
The Company joins 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. The
Company reports its income tax expense, deferred tax assets and liabilities
following this separate-return method. Some of the Company's deferred tax
assets, such as capital loss and net operating loss carryforwards, have been
partially utilized by Advantica in the consolidated income tax return. Under the
tax-sharing agreement, the Company can use the full amount of these deferred tax
assets to offset the Company's future income tax payments to Advantica to the
same extent the Company would have utilized the deferred tax assets on a
separate return.
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 30, 1998 and December 29, 1999:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29,
1998 1999
------------ ------------
<S> <C> <C>
(In thousands)
Deferred tax assets:
Self-insurance reserves $ 5,815 $ 4,394
Debt premium 4,666 4,069
Lease reserve 4,387 3,403
Other accruals and reserves 4,931 4,831
General business credit carryforwards 6,405 8,769
Capital loss carryforwards 6,826 7,044
Net operating loss carryforwards 15,053 18,631
Alternative minimum tax credit carryforwards 70 56
Less: valuation allowance (11,353) (38,569)
-------- --------
Total deferred tax assets 36,800 12,628
-------- --------
Deferred tax liabilities:
Capitalized leases (873) (1,698)
Fixed assets (9,295) (3,028)
Intangible assets (7,888) (7,902)
-------- --------
Total deferred tax liabilities (18,056) (12,628)
-------- --------
Total net deferred tax assets $ 18,744 $ --
======== ========
</TABLE>
F-14
<PAGE>
The Company has provided a valuation allowance for certain deferred tax assets
which, based on projected future taxable income, it is more likely than not that
a tax benefit will not be realized. Accordingly, the tax provision for 1999
primarily relates to the recording of this valuation allowance. Any subsequent
reversal of the valuation allowance of approximately $11.4 million established
in connection with fresh start reporting on January 7, 1998 will be applied
first to reduce reorganization value in excess of amounts allocable to
identifiable assets, then to reduce other identifiable intangible assets
followed by a credit directly to equity.
The difference between the statutory federal income tax rate and the effective
tax rate on loss from continuing operations is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ONE WEEK FIFTY-ONE FISCAL YEAR
ENDED ENDED WEEKS ENDED ENDED
DECEMBER 31, JANUARY 7, DECEMBER 30, DECEMBER 29,
1997 1998 1998 1999
------------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Statutory tax (benefit) rate (35)% 35% (35)% (35)%
Difference:
State, foreign and other
taxes, net of federal
income tax benefit 7 -- -- (1)
Amortization and impairment
of reorganization value
in excess amounts allocable
to identifiable assets -- -- 30 30
Gain on the recognition of
reorganization value,
net of the write-off of
goodwill -- (9) -- --
Amortization of goodwill 33 -- -- --
FICA tip and work opportunity
tax credits (72) -- (5) (2)
Non-deductible wages related
to the FICA tip and work
opportunity tax credits 25 -- 2 1
Decrease (increase) in the
valuation allowance (19) -- -- 23
Other (3) -- -- --
---- ---- ---- ----
Effective tax (benefit) rate (64)% 26% (8)% 16%
==== ==== ==== ====
</TABLE>
At December 29, 1999, the Company has available, for purposes of its tax sharing
agreement with Advantica, alternative minimum tax ("AMT") credits of
approximately $56,000. Such AMT credits may be carried forward indefinitely. The
Company also has regular and AMT net operating loss ("NOL") carryforwards of
approximately $47 million and $18 million, respectively. The regular NOL
carryforwards expire in the years 2008 through 2019 and the AMT NOL
carryforwards expire in the years 2017 through 2019. In addition, the Company
has capital loss carryforwards of approximately $17 million and FICA tip and
work opportunity tax credit carryforwards of approximately $9 million. The FICA
tip and work opportunity tax credit carryforwards expire in 2011 through 2019.
In connection with the purchase of FRI-M in 1996, the Company acquired certain
income tax attributes which prior to 1999 could be used to offset only the
separate taxable income of FRI-M and its subsidiaries. Approximately $35 million
of regular NOL 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 NOL carryforwards were utilized
to offset 1996 post-acquisition taxable income. The annual limitation for the
utilization of approximately $20 million of the acquired NOL carryforwards which
were generated after January 1994 is approximately $4 million. The remaining $11
million of the Company's NOL carryforwards which were generated prior to January
1994 can be utilized only to offset pre-January 1994 built-in gains which are
recognized in the five year recognition period subsequent to the ownership
change. Since sufficient built-in gains have been recognized in the five year
recognition period, this $11 million of NOL carryforwards will be available to
offset income, if any, generated in years 2001 through 2008. 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
NOLs generated after January 1994. The Company recognized approximately $4
million of capital gains in 1997 and $8
F-15
<PAGE>
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 11 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 amounts charged to income
under these plans were not significant for the fiscal year ended December 31,
1997, the one week ended January 7, 1998, the fifty-one weeks ended December 30,
1998 and the fiscal year ended December 29, 1999.
During 1998, certain employees of FRD were granted stock options under
Advantica's 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 the 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").
Effective March 15, 1999, the Non-Officer Plan and the Officer Plan were merged
together and the surviving plan's name was changed to the Advantica Stock Option
Plan (the "Company Plan"). All participants in the Non-Officer Plan and Officer
Plan on the effective date of the plan merger continued to be participants in
the Company Plan and retained all options previously issued to participants
under the Officer Plan and the Non-Officer Plan under the same terms and
conditions existing at the time of grant.
The Company Plan permits 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 7,388,888 shares of Advantica common stock are authorized
to be issued under the Company Plan. Under the terms of the Company Plan,
optionees who terminate for any reason other than cause, disability, retirement
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 of disability, retirement or death. If termination is for cause, no
option shall be exercisable after the termination date.
In addition to the Company Plan, Advantica 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 Company Plan. 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 of the date of grant, were
issued under the former Officer Plan, the former Non-Officer Plan and the
Director Plan, respectively. Thirty percent of such grants under the former
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 former Officer Plan and former 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.
During 1999, options to purchase 2,063,500 shares of common stock, at market
value at the date of grant, were issued under the Company Plan. Such options
vest at a rate of 25% per year beginning on the first anniversary of the grant
date and expire ten years from the date of grant. No options were granted under
the Director Plan in 1999.
F-16
<PAGE>
Prior to its emergence from bankruptcy, Advantica had two stock-based
compensation plans, the 1989 Stock Option Plan (the "1989 Plan") and the 1990
Non-qualified Stock Option Plan (the "1990 Plan"). On the Effective Date,
pursuant to the Plan, FCI's existing 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 the Effective Date, 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 these options was
estimated at the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions used for such grants:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Dividend yield 0.0% 0.0%
Expected volatility 0.64 0.72
Risk-free interest rate 4.6% 6.4%
Weighted average expected life 9.0 years 9.0 years
</TABLE>
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 FISCAL YEAR
WEEKS ENDED ENDED
DECEMBER 30, DECEMBER 29,
1998 1999
------------ ------------
<S> <C> <C>
(In Millions)
Pro forma net loss $(42.8) $(136.1)
</TABLE>
A summary of the Plans as they relate to options granted to FRD employees is
presented below:
<TABLE>
<CAPTION>
1998 1999
------------------------- ------------------------
WEIGHTED- WEIGHTED-
OPTIONS AVERAGE OPTIONS AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding, beginning
of year -- $ -- 395 $8.19
Granted 451 8.28 339 3.58
Exercised -- -- -- --
Forfeited/Expired (56) 8.90 (146) 7.24
---- ----
Outstanding, end of year 395 8.19 588 5.77
==== ====
Options exercisable at
year end 82 10.00 115 8.94
</TABLE>
The following table summarizes information about stock options outstanding at
December 29, 1999:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES 12/29/99 CONTRACTUAL LIFE EXERCISE PRICE 12/29/99 EXERCISE PRICE
- --------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 3.50 302,000 9.52 $ 3.50 -- $ --
4.69 91,525 8.70 4.69 22,900 4.69
6.31 10,000 9.02 6.31 -- --
10.00 184,000 8.08 10.00 92,000 10.00
</TABLE>
F-17
<PAGE>
The weighted average fair value per option of options granted during the
fifty-one weeks ended December 30, 1998 and the fiscal year ended December 29,
1999 was $5.88 and $2.69, respectively.
NOTE 12 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 13 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 significant adverse effect upon the consolidated
financial position and results of operations of the Company.
NOTE 14 STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
TOTAL
TOTAL SHAREHOLDER'S
OTHER EQUITY DEFICIT EQUITY (DEFICIT)
(IN THOUSANDS) ------------ --------- ----------------
<S> <C> <C> <C>
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
Net Loss --- (135,657) (135,657)
------- -------- -------
Balance December 29, 1999 $99,719 $(177,465) $(77,746)
======= ========= ========
</TABLE>
NOTE 15 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, Inc. 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 a $3.3
million gain, which is included in gains on refranchising and other, net in the
accompanying Statement of Consolidated Operations.
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, $2.2
million and $2.6 million for the fiscal year ended December 31, 1997, the
fifty-one weeks ended December 30, 1998 and the fiscal year ended December 29,
1999, respectively. Allocated fees included in operating expenses for the week
ended January 7, 1998 were not significant. 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. 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.
F-18
<PAGE>
NOTE 16 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>
FRD SUCCESSOR FRD EMERGED SUCCESSOR
------------------------------- -------------------------------
FISCAL YEAR ONE WEEK FIFTY-ONE FISCAL YEAR
ENDED ENDED WEEKS ENDED ENDED
DECEMBER 31, JANUARY 7, DECEMBER 30, DECEMBER 29,
1997 1998 1998 1999
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
(In thousands)
REVENUE
Coco's $280,083 $ 4,892 $255,442 $ 225,307
Carrows 212,457 3,515 183,950 164,483
-------- -------- -------- ----------
Total consolidated revenue $492,540 $ 8,407 $439,392 $ 389,790
======== ======== ======== ==========
DEPRECIATION AND AMORTIZATION
Coco's $ 16,555 $ 319 $ 41,819 $ 39,153
Carrows 13,001 272 33,503 31,467
-------- -------- -------- ----------
Total consolidated depreciation and amortization $ 29,556 $ 591 $ 75,322 $ 70,620
======== ======== ======== ==========
EBITDA AS DEFINED(a)
Coco's $ 35,015 $ 737 $ 37,215 $ 25,259
Carrows 26,552 (16) 23,410 18,113
-------- -------- -------- ----------
Total consolidated EBITDA as defined 61,567 721 60,625 43,372
Management fees to Advantica (4,925) (84) (4,381) (3,873)
Depreciation and amortization expense (29,556) (591) (75,322) (70,620)
Impairment charge --- --- --- (60,500)
Other charges:
Interest expense, net (29,597) (585) (26,897) (24,769)
Other, net (2,975) --- 515 (116)
Reorganization items (528) 44,993 --- ---
-------- -------- -------- ----------
Consolidated (loss) income before income taxes $ (6,014) $ 44,454 $(45,460) $ (116,506)
======== ======== ======== ==========
CAPITAL EXPENDITURES
Coco's $ 8,427 $ --- $ 5,436 $ 12,997
Carrows 6,514 --- 4,931 9,573
-------- -------- -------- ----------
Total consolidated capital expenditures $ 14,941 $ --- $ 10,367 $ 22,570
======== ======== ======== ==========
</TABLE>
(a) 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. FRD's measure of EBITDA as defined may not be comparable to
similarly titled measures reported by other companies.
F-19
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29,
1998 1999
------------ -----------
<S> <C> <C>
(IN THOUSANDS)
ASSETS
Coco's $205,690 $137,489
Carrows 153,063 94,385
-------- --------
Total consolidated assets $358,753 $231,874
======== ========
</TABLE>
Information as to the Company's operations in different geographical areas is as
follows:
<TABLE>
<CAPTION>
FRD SUCCESSOR FRD EMERGED SUCCESSOR
------------------------ ---------------------------
FISCAL YEAR ONE WEEK FIFTY-ONE FISCAL YEAR
ENDED ENDED WEEKS ENDED ENDED
DECEMBER 31, JANUARY 7, DECEMBER 30, DECEMBER 29,
1997 1998 1998 1999
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
(In thousands)
REVENUE
United States $ 489,121 $ 8,407 $ 436,786 $ 386,897
Other 3,419 --- 2,606 2,893
</TABLE>
Because all of the Company's international restaurants are operated by
licensees, assets located outside the United Stated are not significant.
F-20
<PAGE>
SCHEDULE I
FRD ACQUISITION CO.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29,
1998 1999
------------ ------------
<S> <C> <C>
(In thousands)
ASSETS
Deferred financing costs, net of accumulated
amortization of: 1998 -- $334; 1999 -- $471 $ 835 $ 698
Investment in subsidiary 328,032 210,320
--------- --------
Total assets $ 328,867 $211,018
========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accrued interest $ 8,989 $ 8,989
--------- --------
8,989 8,989
--------- --------
Long-term liabilities:
Payable to subsidiary 93,231 112,706
Senior Notes payable 168,736 167,069
--------- --------
Total long-term liabilities 261,967 279,775
--------- --------
Stockholder's Equity (Deficit):
Common stock: par value $0.10; 1,000 shares
authorized --- ---
Paid-in capital 99,719 99,719
Deficit (41,808) (177,465)
--------- --------
Total Stockholder's Equity (Deficit) 57,911 (77,746)
--------- --------
$ 328,867 $211,018
========= ========
</TABLE>
See accompanying notes to condensed financial statements.
S-1
<PAGE>
SCHEDULE I
FRD ACQUISITION CO.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FRD SUCCESSOR FRD EMERGED SUCCESSOR
------------- --------------------------
ONE WEEK FIFTY-ONE FISCAL YEAR
ENDED WEEKS ENDED ENDED
JANUARY 7, DECEMBER 30, DECEMBER 29,
1998 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
(In thousands)
Operating income $ --- $ --- $ ---
Other income (expense):
Equity in net income (loss) of
subsidiary 46,834 (23,979) (117,712)
Interest expense (411) (17,829) (17,945)
-------- -------- ----------
Total other income
(expense) 46,423 (41,808) (135,657)
Reorganization items (13,336) --- ---
-------- -------- ----------
Net income (loss) $ 33,087 $(41,808) $ (135,657)
======== ======== ==========
</TABLE>
See accompanying notes to condensed financial statements.
S-2
<PAGE>
SCHEDULE I
FRD ACQUISITION CO.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FRD SUCCESSOR FRD EMERGED SUCCESSOR
------------- ---------------------------
ONE WEEK FIFTY-ONE FISCAL YEAR
ENDED WEEKS ENDED ENDED
JANUARY 7, DECEMBER 30, DECEMBER 29,
1998 1998 1999
---------- ------------ ------------
<S> <C> <C> <C>
(In thousands)
Cash Flows Used In Operating
Activities:
Net Income (Loss) $33,087 $ (41,808) $ (135,657)
Amortization of deferred
financing costs 3 123 137
Non cash reorganization
items 13,336 --- ---
Equity in net (income)
loss from subsidiary (46,834) 23,979 117,712
Increase in accrued
interest payable --- --- ---
Amortization of debt
premium --- (1,497) (1,667)
------- ------- -------
Net cash used in operating
activities (408) (19,203) (19,475)
Net cash flows used in
investing activities --- --- ---
Cash Flows Provided by
Financing Activities:
Increase in payable to
subsidiary 408 19,203 19,475
------- ------- -------
Net cash flows provided by
financing activities 408 19,203 19,475
Net Change in Cash --- --- ---
------- ------- -------
Cash at Beginning and End
of Period $ --- $ --- $ ---
======= ======= =======
Cash Paid for Interest $ 408 $19,203 $19,475
======= ======= =======
</TABLE>
Notes to Condensed Financial Statements
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 12.5% Senior Notes are due July 2004. Interest is payable
semi-annually.
S-3
<PAGE>
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 28, 2000
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID O. DEVOY President and Chief Financial March 28, 2000
- ------------------------------ Officer (Principal Executive,
(David O. Devoy) Financial and Accounting
Officer)
/s/ JAMES B. ADAMSON Director March 28, 2000
- ------------------------------
(James B. Adamson)
/s/ RONALD E. BLAYLOCK Director March 28, 2000
- ------------------------------
(Ronald E. Blaylock)
/s/ VERA KING FARRIS Director March 28, 2000
- ------------------------------
(Vera King Farris)
/s/ JAMES J. GAFFNEY Director March 28, 2000
- ------------------------------
(James J. Gaffney)
/s/ IRWIN N. GOLD Director March 28, 2000
- ------------------------------
(Irwin N. Gold)
/s/ DARRELL JACKSON Director March 28, 2000
- ------------------------------
(Darrell Jackson)
/s/ ROBERT E. MARKS Director March 28, 2000
- ------------------------------
(Robert E. Marks)
/s/ CHARLES F. MORAN Director March 28, 2000
- ------------------------------
(Charles F. Moran)
/s/ ELIZABETH A. SANDERS Director March 28, 2000
- ------------------------------
(Elizabeth A. Sanders)
/s/ DONALD R. SHEPHERD Director March 28, 2000
- ------------------------------
(Donald R. Shepherd)
/s/ RAUL R. TAPIA Director March 28, 2000
- ------------------------------
(Raul R. Tapia)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-29-1999
<PERIOD-START> DEC-31-1998
<PERIOD-END> DEC-29-1999
<CASH> 8,392
<SECURITIES> 0
<RECEIVABLES> 4,992
<ALLOWANCES> 140
<INVENTORY> 2,700
<CURRENT-ASSETS> 19,885
<PP&E> 164,644
<DEPRECIATION> 52,975
<TOTAL-ASSETS> 231,874
<CURRENT-LIABILITIES> 80,873
<BONDS> 207,164
0
0
<COMMON> 0
<OTHER-SE> (77,746)
<TOTAL-LIABILITY-AND-EQUITY> 231,874
<SALES> 0
<TOTAL-REVENUES> 389,790
<CGS> 0
<TOTAL-COSTS> 481,411
<OTHER-EXPENSES> 116
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,769
<INCOME-PRETAX> (116,506)
<INCOME-TAX> 19,151
<INCOME-CONTINUING> (135,657)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (135,657)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 99.1
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (as used in this Exhibit
99.1, 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 1999 Annual Report on Form 10-K (the
"Annual Report") 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. The
following factors, in addition to those set forth in the Annual Report and other
possible factors not listed, could also 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 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 significantly
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-owned 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 Americans 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.
EXHIBIT 99.2
EXCERPT FROM ADVANTICA'S FEBRUARY 17, 2000 PRESS RELEASE ANNOUNCING "ONE
COMPANY, ONE BRAND" STRATEGIC DIRECTION
Investor Contact: Ken Jones FOR IMMEDIATE RELEASE
864-597-8994
Media Contact: Karen Randall
864-597-8440
ADVANTICA RESTAURANT GROUP ANNOUNCES "ONE COMPANY,
ONE BRAND" STRATEGIC DIRECTION WITH FOCUS ON DENNY'S BRAND ONLY; ALSO REPORTS
FOURTH QUARTER EARNINGS
DENNY'S-BRAND-ONLY FOCUS WILL RESULT IN COMPANY'S EXPLORATION OF
STRATEGIC ALTERNATIVES FOR COCO'S AND CARROWS, AN INCREASE IN
FRANCHISE ACTIVITY, AND STAFF REDUCTIONS AND OTHER
MEASURES EXPECTED TO YIELD ANNUALIZED SAVINGS OF APPROXIMATELY $15 MILLION
SPARTANBURG, S.C., February 17, 2000 -- Advantica Restaurant Group, Inc.
(Nasdaq: DINE) today announced that the future direction of the Company will
focus exclusively on its Denny's brand, historically the cornerstone of the
Company and America's largest full service restaurant chain. The
Denny's-brand-only strategy will include efforts to increase significantly the
number of Denny's restaurants owned and operated by franchisees.
The Company has retained the firm of Donaldson, Lufkin & Jenrette Securities
Corporation to commence immediately exploring strategic alternatives, including
a possible sale or recapitalization, for its FRD subsidiary which houses its
Coco's and Carrows brands.
As part of the "One Company, One Brand" strategy, the Company has also taken
initial actions to merge and streamline its corporate overhead structure with
the Denny's organization. Accordingly, James B. Adamson will serve as chairman
and chief executive officer of the Company, and John Romandetti has resigned as
chief executive officer of Denny's. Staff reductions and a new information
systems outsourcing agreement are expected to reduce general and administration
costs by approximately $15 million on an annualized basis.
Adamson said, "Today's announcement is the result of an extensive review of the
Company's operations and structure over the past four months by the Company's
management and Board with the assistance of outside advisors. Denny's continues
to have tremendous brand equity and, as the leading family dining chain,
deserves the full attention of our management and the deployment of our capital
resources. Last year, we began our Denny's Diner 2000 reimage program and
completed 140 units. We are pleased with the overall results to date, and we
plan to continue to reinvest in our restaurants. During 2000, however, we will
develop and test a lower cost alternative in approximately 20 other units. We
expect that the lower cost alternative will have appeal to existing and new
franchisees and will be essential to a successful completion of our reimaging
program system wide.
"We believe that moving to a more franchised-based operation will, over time,
add value for our shareholders. During the next several years, we plan on
refranchising 250 to 300 Company-owned units. Our ultimate goal is for the
Company to retain about 300 units or 40 percent of the current Company-owned
portfolio. The proceeds from the refranchising effort will be used to fund the
reimaging of our remaining Denny's restaurants and to reduce debt.
<PAGE>
"With the strategic direction of the Company focused on Denny's, we have begun
the process of merging corporate administration functions into the Denny's
organization. This process will more closely align operational objectives with
the Advantica management team's corporate objective of enhancing shareholder
value. As a result, certain functions and duplication within functions have been
eliminated. Upon completion of DLJ's engagement with respect to Coco's and
Carrows, and as our Company-owned restaurant units decrease, further general and
administrative expense reductions are expected. Reducing the workforce, while
difficult, is a necessary decision for Advantica at this time. We are committed
to treating our employees fairly. Those employees who are separated from the
Company will be offered severance packages and outplacement services to help
with the transition.
"As we move to our Denny's only focus in the future, we will concentrate our
efforts on improving service levels, enhancing the appearance of facilities and
maintaining and improving food quality, all in an effort to retain our existing
customers, attract new ones and provide customers with an enjoyable dining
occasion on every visit."
