UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 27, 2000, or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ___________ to ___________
Commission file number 333-07601
FRD ACQUISITION CO.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 57-1040952
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3355 Michelson Dr., Suite 350
Irvine, California 92612
--------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(864) 597-8000
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of November 10, 2000, 1,000 shares of the registrant's Common Stock, $0.10
par value per share, were outstanding, all of which were owned by the
registrant's parent, Advantica Restaurant Group, Inc.
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRD Acquisition Co.
Statements of Consolidated Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarter Quarter
Ended Ended
September 27, 2000 September 29, 1999
------------------ ------------------
<S> <C> <C>
(In thousands)
Revenue:
Company restaurant sales $ 88,676 $ 95,735
Franchise and licensing revenue 2,256 2,251
--------- ---------
Total operating revenue 90,932 97,986
--------- ---------
Cost of company restaurant sales:
Product costs 23,016 25,164
Payroll and benefits 36,399 37,696
Occupancy 4,971 5,892
Other operating expenses 14,563 12,177
--------- ---------
Total costs of company restaurant sales 78,949 80,929
Franchise restaurant costs 896 851
General and administrative expenses 3,369 3,801
Management fees to Advantica 904 974
Allocated costs from Advantica 631 650
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 4,660 9,734
Depreciation and other amortization 6,785 6,418
Gains on refranchising and other, net (24) (222)
--------- ---------
Total operating costs and expenses 96,170 103,135
--------- ---------
Operating loss (5,238) (5,149)
--------- ---------
Other expenses:
Interest expense, net 6,002 6,401
Other nonoperating expenses (income), net 1 (7)
--------- ---------
Total other expenses, net 6003 6,394
--------- ---------
Loss before taxes (11,241) (11,543)
Provision for (benefit from) income taxes 108 (3,461)
--------- ---------
Net loss $ (11,349) $ (8,082)
========= =========
</TABLE>
See accompanying notes
2
<PAGE>
FRD Acquisition Co.
Statements of Consolidated Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Quarters Three Quarters
Ended Ended
September 27, 2000 September 29, 1999
------------------ ------------------
<S> <C> <C>
(In thousands)
Revenue:
Company restaurant sales $ 273,083 $ 285,836
Franchise and licensing revenue 6,350 6,358
--------- ---------
Total operating revenue 279,433 292,194
--------- ---------
Cost of company restaurant sales:
Product costs 71,348 74,706
Payroll and benefits 108,799 112,158
Occupancy 14,716 17,714
Other operating expenses 40,342 39,198
--------- ---------
Total costs of company restaurant sales 235,205 243,776
Franchise restaurant costs 2,600 3,014
General and administrative expenses 13,026 11,595
Management fees to Advantica 2,778 2,903
Allocated costs from Advantica 1,917 1,950
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 14,080 29,168
Depreciation and other amortization 21,342 23,032
Gains on refranchising and other, net (64) (553)
--------- ---------
Total operating costs and expenses 290,884 314,885
--------- ---------
Operating loss (11,451) (22,691)
--------- ---------
Other expenses:
Interest expense, net 18,844 19,165
Other nonoperating (income) expenses, net (40) 149
--------- ---------
Total other expenses, net 18,804 19,314
--------- ---------
Loss before taxes (30,255) (42,005)
Provision for (benefit from) income taxes 297 (6,001)
--------- ---------
Net loss $ (30,552) $ (36,004)
========= =========
</TABLE>
See accompanying notes
3
<PAGE>
FRD Acquisition Co.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 27, 2000 September 29, 1999
------------------ ------------------
<S> <C> <C>
(In thousands)
Assets
Current Assets:
Cash and cash equivalents $ 1,318 $ 8,392
Receivables 4,562 4,852
Inventories 2,538 2,700
Other 3,796 3,941
--------- ---------
12,214 19,885
--------- ---------
Property and equipment 172,341 164,644
Accumulated depreciation (70,173) (52,975)
--------- ---------
102,168 111,669
--------- ---------
Other Assets:
Reorganization value in excess of amounts allocable
to identifiable assets, net 41,741 55,812
Other intangibles, net 37,428 39,406
Other 5,439 5,102
--------- ---------
84,608 100,320
--------- ---------
Total Assets $ 198,990 $ 231,874
========= =========
Liabilities and Shareholder's Equity (Deficit)
Current Liabilities:
Current maturities of long-term debt $ 44,559 $ 2,770
Accounts payable 12,833 19,293
Accrued salaries and vacation 8,770 7,858
Accrued insurance 4,529 3,627
Accrued interest 4,556 9,491
Payable to Advantica 28,468 23,809
Other 14,083 14,025
--------- ---------
117,798 80,873
--------- ---------
Long-Term Liabilities:
Debt, less current maturities 173,727 207,164
Liability for insurance claims 4,582 7,817
Other noncurrent liabilities 11,181 13,766
--------- ---------
189,490 228,747
--------- ---------
Total Liabilities 307,288 309,620
--------- ---------
Shareholder's Equity (Deficit):
Common stock: par value $0.10; 1,000 shares authorized,
issued and outstanding -- --
Paid-in capital 99,719 99,719
Deficit (208,017) (177,465)
--------- ---------
Total Shareholder's Equity (Deficit) (108,298) (77,746)
--------- ---------
Total Liabilities and Shareholder's Equity (Deficit) $ 198,990 $ 231,874
========= =========
</TABLE>
See accompanying notes
4
<PAGE>
FRD Acquisition Co.
Statements of Consolidated Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Quarters Three Quarters
Ended Ended
September 27, 2000 September 29, 1999
------------------ ------------------
<S> <C> <C>
(In thousands)
Cash Flows From Operating Activities:
Net loss $(30,552) $(36,004)
Adjustments to reconcile loss to
cash flows used in operating activities:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 14,080 29,168
Depreciation and other amortization 21,342 23,032
Amortization of deferred financing costs 572 1,124
Amortization of debt premium (1,387) (1,255)
Gains on refranchising and other, net (64) (553)
Deferred tax benefit -- (6,247)
Decrease (increase) in assets:
Receivables 291 1,830
Inventories 163 438
Other current assets 144 (1,001)
Other assets (850) (2,687)
Increase (decrease) in liabilities:
Accounts payable (6,460) (7,035)
Accrued salaries and vacation 912 (1,507)
Payable to Advantica 4,660 4,867
Other accrued liabilities (5,142) (7,780)
Liability for insurance claims (2,333) (2,048)
Other noncurrent liabilities (2,321) (606)
-------- --------
Net cash flows used in operating activities (6,945) (6,264)
-------- --------
Cash flows From Investing Activities:
Purchase of property (9,779) (13,008)
Proceeds from disposition of property 16 613
-------- --------
Net cash flows used in investing activities (9,763) (12,395)
-------- --------
Cash Flows From Financing Activities:
Principal debt payments (2,166) (12,929)
Borrowing on credit facilities 11,800 30,000
-------- --------
Net cash flows provided by financing activities 9,634 17,071
-------- --------
Decrease in cash and cash equivalents (7,074) (1,588)
Cash and Cash Equivalents at:
Beginning of period 8,392 5,841
-------- --------
End of period $ 1,318 $ 4,253
======== ========
</TABLE>
See accompanying notes
5
<PAGE>
FRD ACQUISITION CO.
Notes to Consolidated Financial Statements
September 27, 2000
(Unaudited)
Note 1. General
FRD Acquisition Co. ("FRD" or, together with its subsidiaries, the "Company"), a
wholly owned subsidiary of Advantica Restaurant Group, Inc. ("Advantica"), owns
and operates the Coco's and Carrows restaurant brands. During the first quarter
of 2000, Advantica announced a plan to explore the possible sale of FRD.
The consolidated financial statements of the Company included herein are
unaudited and include all adjustments management believes are necessary for a
fair presentation of the results of operations for such interim periods. All
such adjustments are of a normal and recurring nature. The interim consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 29, 1999 and
the related Management's Discussion and Analysis of Financial Condition and
Results of Operations, both of which are contained in the FRD Acquisition Co.
1999 Annual Report on Form 10-K. The results of operations for the three
quarters ended September 27, 2000 are not necessarily indicative of the results
for the entire fiscal year ending December 27, 2000.
Note 2. Related Party Transactions
Certain administrative functions are provided for the Company by Advantica. The
Company is allocated a portion of these expenses based upon services received.
These allocations, which are in addition to management fees equal to one percent
of revenues payable to Advantica under the management services agreement, are
included in operating expenses and totaled $0.6 million and $1.9 million for the
quarter and three quarters ended September 27, 2000 and $0.7 million and $2.0
million for the quarter and three quarters ended September 29, 1999,
respectively. Payment of the fees to Advantica cannot occur unless certain
financial targets are met as described in the Company's senior notes indenture
and in the FRD Credit Facility (as defined below). Advantica's method of
allocating these expenses is not the only reasonable method and other reasonable
methods of allocation might produce different results.
Note 3. Earnings (Loss) Per Common Share
As described in Note 1, FRD is a wholly owned subsidiary of Advantica.
Accordingly, per share data is not meaningful and has been omitted for all
periods.
Note 4. Debt
On May 14, 1999, FRD and certain of its operating subsidiaries entered into a
new $70 million credit facility (the "FRD Credit Facility"). The FRD Credit
Facility, which is guaranteed by Advantica, consists of a $30.0 million term
loan and a $40 million revolving credit facility and matures in May 2003. Such
facility is unavailable to Advantica and its other subsidiaries. FRD has entered
into an amendment with the lenders under the FRD Credit Facility which, among
other things, provides a waiver of compliance with certain third quarter
financial covenants until January 8, 2001. If Advantica's process of selling FRD
is not completed by January 8, 2001, the Company may be required to seek an
additional waiver or negotiate other arrangements with its lenders. No assurance
can be given that the Company will be able to obtain such additional waiver or
to negotiate such other arrangements on commercially reasonable terms or
otherwise, if needed. As a result, the outstanding term loan borrowings of $30.0
million have been reclassified as current debt. The Company believes, however,
that it will be able to successfully complete the FRD sales process or negotiate
other arrangements with its lenders.
6
<PAGE>
Note 5. Segment Information
The Company operates two restaurant concepts -- Coco's and Carrows -- and each
concept is considered a reportable segment. Administrative costs of the
corporate headquarters have been allocated to the reportable segments primarily
on the basis of percentage of sales.
The Company evaluates performance based on several factors, of which the primary
financial measure is business segment operating income before interest, taxes,
depreciation, amortization, management fees payable to Advantica and
restructuring and impairment charges ("EBITDA as defined"). EBITDA as defined is
a key internal measure used to evaluate the amount of cash flow available for
debt repayment and funding of additional investments. EBITDA as defined is not a
measure defined by generally accepted accounting principles and should not be
considered as an alternative to net income or cash flow data prepared in
accordance with generally accepted accounting principles. The Company's measure
of EBITDA as defined may not be comparable to similarly titled measures reported
by other companies.
<TABLE>
<CAPTION>
Quarter Quarter Three Quarters Three Quarters
Ended Ended Ended Ended
September 27, 2000 September 29, 1999 September 27, 2000 September 29, 1999
------------------ ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
(In thousands)
REVENUE
Coco's $ 51,832 $ 56,096 $ 161,333 $ 168,154
Carrows 39,100 41,890 118,100 124,040
--------- --------- --------- ---------
Total consolidated revenue $ 90,932 $ 97,986 $ 279,433 $ 292,194
========= ========= ========= =========
EBITDA AS DEFINED
Coco's $ 3,760 $ 6,353 $ 15,539 $ 19,166
Carrows 3,351 5,624 11,210 13,246
--------- --------- --------- ---------
Total consolidated EBITDA as defined 7,111 11,977 26,749 32,412
Depreciation and amortization expense (11,445) (16,152) (35,422) (52,200)
Management fees to Advantica (904) (974) (2,778) (2,903)
Other charges:
Interest expense, net (6,002) (6,401) (18,844) (19,165)
Other, net (1) 7 40 (149)
--------- --------- --------- ---------
Consolidated loss before income taxes $ (11,241) $ (11,543) $ (30,255) $ (42,005)
========= ========= ========= =========
</TABLE>
Note 6. SFAS 133 and SFAS 138 Implementation
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). In June 2000, the FASB issued
Statement of Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities -- an amendment of FASB
Statement No. 133" ("SFAS 138"), which amends certain provisions of SFAS 133 to
clarify areas causing difficulties in implementation, including expanding the
normal purchase and sale exemption for supply contracts. Advantica has appointed
a team to implement SFAS 133 for the entire enterprise, including FRD. This team
has been implementing a SFAS 133 risk management process, educating both
financial and nonfinancial personnel, reviewing contracts to identify
derivatives and embedded derivatives and addressing various other SFAS
133-related issues. FRD will adopt SFAS 133 and the corresponding amendments
under SFAS 138 on January 1, 2001. SFAS 133, as amended by SFAS 138, is not
expected to have a material impact on the Company's consolidated results of
operations, financial position or cash flows.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to highlight significant changes in
financial position as of September 27, 2000 and the results of operations for
the quarter and three quarters ended September 27, 2000 as compared to the
quarter and three quarters ended September 29, 1999. The forward-looking
statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations, which reflect management's best judgment
based on factors currently known, involve risks, uncertainties, and other
factors which may cause the actual performance of FRD and its subsidiaries and
underlying concepts to be materially different from the performance indicated or
implied by such statements. Such factors include, among others: competitive
pressures from within the restaurant industry; the level of success of the
Company's operating initiatives and advertising and promotional efforts,
including the initiatives and efforts specifically mentioned herein; adverse
publicity; changes in business strategy or development plans; terms and
availability of capital; regional weather conditions; overall changes in the
general economy, particularly at the retail level; and other factors included in
the discussion below, in Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-K for the year ended December 29, 1999 and in Exhibit 99.1 thereto.
RESULTS OF OPERATIONS
Quarter Ended September 27, 2000 Compared to Quarter Ended September 29, 1999
-----------------------------------------------------------------------------
The table below summarizes restaurant activity for the quarter ended September
27, 2000:
<TABLE>
<CAPTION>
Ending Units Net Units Ending Ending
Units Opened/ Units Sold/ Units Units
June 28, 2000 Acquired Refranchised Closed September 27, 2000 September 29, 1999
------------- -------- ------------ ------ ------------------- ------------------
<S> <C> <C> <C>
Coco's
Company-owned units 144 -- -- -- 144 150
Franchised units 34 2 -- -- 36 34
Licensed units 301 2 -- (3) 300 305
---- ---- ---- ---- ---- ----
479 4 -- (3) 480 489
---- ---- ---- ---- ---- ----
Carrows
Company-owned units 116 -- -- -- 116 120
Franchised units 28 1 -- (1) 28 28
---- ---- ---- ---- ---- ----
144 1 -- (1) 144 148
---- ---- ---- ---- ---- ----
623 5 -- (4) 624 637
==== ==== ==== ==== ==== ====
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Coco's
Quarter Ended
---------------------------------------- %
September 27, 2000 September 29, 1999 Increase/(Decrease)
------------------ ------------------ -------------------
<S> <C> <C> <C>
($ in millions, except average unit data)
Total systemwide sales $ 161.6 $ 163.3 (1.0)
========= ==========
Net company sales $ 50.2 $ 54.5 (7.9)
Franchise and licensing revenue 1.6 1.6 --
--------- ----------
Total revenue 51.8 56.1 (7.7)
--------- ----------
Operating expenses:
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 2.5 5.2 (51.9)
Other 52.5 54.0 (2.8)
--------- ----------
Total operating expenses 55.0 59.2 (7.1)
--------- ----------
Operating loss $ (3.2) $ (3.1) 3.2
========= ==========
EBITDA as defined $ 3.8 $ 6.4 (40.6)
Average unit sales:
Company-owned 351,300 364,800 (3.7)
Franchised 333,700 336,200 (0.7)
Same-store sales decrease (company-owned) (5.1)% (5.6)%
</TABLE>
Coco's NET COMPANY SALES for the third quarter of 2000 decreased $4.3 million
(7.9%) compared to the prior year quarter. The decrease is the result of a 5.1%
decrease in same-store sales along with a decrease in the number of
company-owned units. FRANCHISE AND LICENSING REVENUE remained flat compared to
the prior year quarter.
Coco's OPERATING EXPENSEs decreased $4.2 million (7.1%) compared to the prior
year quarter. Excluding the impact of a $2.7 million decrease in amortization of
excess reorganization value, operating expenses decreased $1.5 million over the
prior year quarter. The decrease resulted primarily from lower same-store sales
and fewer company-owned restaurants. The decrease in amortization of excess
reorganization value from the prior year quarter resulted from an impairment
charge to reorganization value recorded in the fourth quarter of 1999.
EBITDA AS DEFINED decreased $2.6 million (40.6%) compared to the prior year
quarter as a result of the factors noted in the preceding paragraphs, excluding
the decrease in amortization expense.
Coco's OPERATING LOSS increased $0.1 million compared to the prior year quarter
as a result of the factors noted above.
9
<PAGE>
<TABLE>
<CAPTION>
Carrows
Quarter Ended
---------------------------------------- %
September 27, 2000 September 29, 1999 Increase/(Decrease)
------------------ ------------------ -------------------
<S> <C> <C> <C>
($ in millions, except average unit data)
Total systemwide sales $ 45.2 $ 48.4 (6.6)
======== ========
Net company sales $ 38.5 $ 41.2 (6.6)
Franchise revenue 0.6 0.7 (14.3)
-------- --------
Total revenue 39.1 41.9 (6.7)
-------- --------
Operating expenses:
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 2.2 4.5 (51.1)
Other 38.9 39.4 (1.3)
-------- --------
Total operating expenses 41.1 43.9 (6.4)
-------- --------
Operating loss $ (2.0) $ (2.0) --
======== ========
EBITDA as defined $ 3.3 $ 5.6 (41.1)
Average unit sales (in thousands):
Company-owned 329,800 343,900 (4.1)
Franchised 245,400 259,500 (5.4)
Same-store sales decrease (company-owned) (4.7)% (3.7)%
</TABLE>
Carrows' NET COMPANY SALES for the third quarter of 2000 decreased $2.7 million
(6.6%) compared to the prior year quarter. The decrease primarily reflects the
impact of fewer company-owned units along with a 4.7% decrease in same-store
sales over the prior year quarter. FRANCHISE REVENUE remained relatively flat
compared to the prior year quarter.
Carrows' OPERATING EXPENSES decreased $2.8 million (6.4%) compared to the prior
year quarter. Excluding the impact of a $2.3 million decrease in amortization of
excess reorganization value, operating expenses decreased $0.5 million over the
prior year quarter. The decrease primarily reflects the impact of lower
same-store sales and fewer company-owned units. The decrease in amortization of
excess reorganization value from the prior year quarter resulted from an
impairment charge to reorganization value recorded in the fourth quarter of
1999.
EBITDA AS DEFINED decreased $2.3 million (41.1%) compared to the prior year
quarter as a result of the factors noted in the proceeding paragraphs, excluding
the decrease in amortization expense.
Carrows' OPERATING LOSS remained flat compared to the prior year quarter.
FRD CONSOLIDATED
The Company's CONSOLIDATED EBITDA AS DEFINED decreased $4.9 million (40.6%) for
the third quarter of 2000 compared to the third quarter of 1999. This decrease
is a result of the factors discussed in the preceding paragraphs.
CONSOLIDATED INTEREST EXPENSE, NET, decreased $0.4 million (6.2%) compared to
the prior year quarter.
The PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations for the
quarter ended September 27, 2000 has been computed based on management's
estimate of the annual effective income tax rate applied to loss before taxes.
The Company recorded an income tax provision reflecting an approximate rate of
1.0% for the quarter ended September 27, 2000 compared to an income tax benefit
reflecting an approximate rate of (30.0)% for the quarter ended September 29,
1999. The increase in the income tax rate over the prior year quarter is
principally due to the establishment of a valuation allowance on the loss
generated in the current quarter.
10
<PAGE>
The increase in CONSOLIDATED NET LOSS of $3.3 million in comparison to the prior
year quarter is a result of the items previously discussed.
Three Quarters Ended September 27, 2000 Compared to Three Quarters Ended
September 29, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Coco's
Three Quarters Ended
---------------------------------------- %
September 27, 2000 September 29, 1999 Increase/(Decrease)
------------------ ------------------ -------------------
<S> <C> <C> <C>
($ in millions, except average unit data)
Total systemwide sales $ 463.8 $ 450.5 3.0
========== ==========
Net company sales $ 156.8 $ 163.7 (4.2)
Franchise and licensing revenue 4.5 4.5 --
---------- ----------
Total revenue 161.3 168.2 (4.1)
---------- ----------
Operating expenses:
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 7.5 15.7 (52.2)
Other 159.6 163.8 (2.6)
---------- ----------
Total operating expenses 167.1 179.5 (6.9)
---------- ----------
Operating loss $ (5.8) $ (11.3) (48.7)
========== ==========
EBITDA as defined $ 15.5 $ 19.2 (19.3)
Average unit sales:
Company-owned 1,089,100 1,093,400 (0.4)
Franchised 1,007,800 968,400 4.1
Same-store sales increase (decrease) (company-owned) (1.7)% (6.1)%
</TABLE>
Coco's NET COMPANY SALES for the three quarters ended September 27, 2000
decreased $6.9 million (4.2%) compared to the prior period. The decrease is the
result of a 1.7% decrease in same-store sales along with a decrease in the
number of company-owned units. FRANCHISE AND LICENSING REVENUE remained flat
over the prior year period.
Coco's OPERATING EXPENSEs decreased $12.4 million (6.9%) compared to the prior
year comparable period. Excluding the impact of a $8.2 million decrease in
amortization of excess reorganization value and a $0.9 million decrease in
depreciation and other amortization, operating expenses decreased $3.3 million
over the prior year comparable period. The decrease resulted primarily from
lower same-store sales and fewer company-owned restaurants. The current period
also benefited from $1.5 million of reductions in workers' compensation and
general liability accruals resulting from improved actuarial trends. The
decrease in amortization of excess reorganization value resulted from an
impairment charge to reorganization value recorded in the fourth quarter of
1999. Additionally, the decrease in depreciation and other amortization in the
current period relates to a significant group of assets that became fully
depreciated at the end of the second quarter of 1999.
EBITDA as defined decreased $3.7 million (19.3%) compared to the prior year same
period as a result of the factors noted in the preceding paragraphs, excluding
the decrease in depreciation and amortization expense.
Coco's OPERATING LOSS decreased $5.5 million compared to the prior year period
as a result of the factors noted above.
11
<PAGE>
<TABLE>
<CAPTION>
Carrows
Three Quarters Ended
---------------------------------------- %
September 27, 2000 September 29, 1999 Increase/(Decrease)
------------------ ------------------ -------------------
<S> <C> <C> <C>
($ in millions, except average unit data)
Total systemwide sales $ 137.5 $ 143.1 (3.9)
======== ==========
Net company sales $ 116.2 $ 122.1 (4.8)
Franchise revenue 1.9 1.9 --
-------- ----------
Total revenue 118.1 124.0 (4.8)
-------- ----------
Operating expenses:
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 6.6 13.4 (50.7)
Other 117.2 122.0 (3.9)
-------- ----------
Total operating expenses 123.8 135.4 (8.6)
-------- ----------
Operating loss $ (5.7) $ (11.4) (50.0)
======== ==========
EBITDA as defined $ 11.2 $ 13.2 (15.2)
Average unit sales (in thousands):
Company-owned 991,900 1,017,800 (2.5)
Franchised 763,200 785,500 (2.8)
Same-store sales decrease (company-owned) (2.5)% (3.9)%
</TABLE>
Carrows' NET COMPANY SALES for the three quarters ended September 27, 2000
decreased $5.9 million (4.8%) compared to the 1999 comparable period. The
decrease primarily reflects the impact of fewer company-owned units along with a
decrease in same-store sales over the prior year period. FRANCHISE REVENUE
remained flat compared to the prior year period.
Carrows' OPERATING EXPENSES decreased $11.6 million (8.6%) compared to the prior
year comparable period. Excluding the impact of a $6.8 million decrease in
amortization of excess reorganization value and a $0.8 million decrease in
depreciation and other amortization, operating expenses decreased $4.0 million
over the prior year comparable period. The decrease primarily reflects the
impact of lower same-store sales and fewer company-owned units. The current
period also benefited from $1.3 million of reductions in workers' compensation
and general liability accruals resulting from improved actuarial trends.
Additionally, higher accruals related to pending litigation were offset by the
reduction of lease liabilities resulting from the renegotiation of a closed
store lease. The decrease in amortization of excess reorganization value from
the prior year resulted from an impairment charge to reorganization value
recorded in the fourth quarter of 1999.
EBITDA AS DEFINED decreased $2.0 million (15.2%) compared to the prior year
period as a result of the factors noted in the proceeding paragraphs, excluding
the decrease in depreciation and amortization expense.
Carrows' OPERATING LOSS decreased $5.7 million compared to the prior year period
as a result of the factors noted above.
12
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FRD Consolidated
The Company's CONSOLIDATED EBITDA AS DEFINED decreased $5.7 million (17.5%) for
the three quarters ended September 27, 2000 compared to the prior year period.
This decrease is a result of the factors discussed in the preceding paragraphs.
CONSOLIDATED INTEREST EXPENSE, NET, decreased $0.3 million (1.7%) compared to
the prior year period.
The PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations for the
three quarters ended September 27, 2000 has been computed based on management's
estimate of the annual effective income tax rate applied to loss before taxes.
The Company recorded an income tax provision reflecting an approximate rate of
1.0% for the three quarters ended September 27, 2000 compared to an income tax
benefit reflecting an approximate rate of (14.3)% for the three quarters ended
September 29, 1999. The increase in the income tax rate over the prior year
period is principally due to the establishment of a valuation allowance on the
loss generated in the current period.
The decrease in CONSOLIDATED NET LOSS of $5.4 million in comparison to the prior
year period is a result of the items previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
At September 27, 2000, the Company had $30.0 million outstanding term loan
borrowings, working capital borrowings of $11.8 million and letters of credit
outstanding of $16.3 million under the FRD Credit Facility, leaving a net
availability of $11.9 million. FRD has entered into an amendment with the
lenders under the FRD Credit Facility which, among other things, provides a
waiver of compliance with certain third quarter financial covenants until
January 8, 2001. If Advantica's process of selling FRD is not completed by
January 8, 2001, the Company may be required to seek an additional waiver or
negotiate other arrangements with its lenders. No assurance can be given that
the Company will be able to obtain such additional waiver or to negotiate such
other arrangements on commercially reasonable terms or otherwise, if needed. The
Company believes, however, that it will be able to successfully complete the FRD
sales process or negotiate other arrangements with its lenders.
At September 27, 2000 and December 29, 1999, the Company had working capital
deficits of $105.6 million and $61.0 million, respectively. The increase in the
deficit is due primarily to the reclassification of the outstanding term loan
borrowings as current debt. The Company is able to operate with a substantial
working capital deficit because: (1) restaurant operations are conducted on a
cash (and cash equivalent) basis with a low level of accounts receivable, (2)
rapid turnover allows a limited investment in inventories; and (3) accounts
payable for food, beverages, and supplies usually become due after the receipt
of cash from related sales. The Company intends to continue to operate with
working capital deficits.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposure at September 27, 2000 is consistent with the
types of market risk and amount of exposure presented in its Annual Report on
Form 10-K for the year ended December 29, 1999.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In an action originally filed on November 8, 1999, two current and three former
managers of Carrows restaurant units initiated, in the Superior Court of Los
Angeles County, California, a class action lawsuit seeking, among other things,
overtime compensation. The suit alleges that Carrows requires its managers to
work more than 50% of their time performing nonmanagement related tasks, thus
entitling them to overtime compensation. Carrows contends that it properly
classifies its managers as salaried employees, thereby exempting them from the
payment of overtime compensation. During the third quarter of 2000, the parties
reached a tentative agreement to resolve the claims of individuals who were
employed as managers of Carrows in California between November 8, 1995 and July
21, 2000. While continuing to deny liability, the Company elected to resolve the
case to avoid the expense of continued litigation and the risk of loss. The
total settlement of $1.0 million is conditioned upon the Court's final approval.
The Court has scheduled a final approval hearing for late November 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. The following are included as exhibits to this report:
EXHIBIT
NO. DESCRIPTION
------- -----------
27 Financial Data Schedule
------------------------------------------
b. No reports on Form 8-K were filed during the quarter ended
September 27, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRD ACQUISITION CO.
Date: November 13, 2000 By: /s/Ronald B. Hutchison
----------------------------------------
Ronald B. Hutchison
Executive Vice President
(Duly authorized officer of
registrant/principal financial officer)
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