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 June 28, 2000, or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___________
to ___________
Commission file number 333-07601
FRD ACQUISITION CO.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 57-1040952
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3355 Michelson Dr., Suite 350
Irvine, California 92612
--------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(864) 597-8000
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of August 11, 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
June 28, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
(In thousands)
Revenue:
Company restaurant sales $ 91,754 $ 97,112
Franchise and licensing revenue 2,033 2,118
--------- ---------
Total operating revenue 93,787 99,230
--------- ---------
Cost of company restaurant sales:
Product costs 24,039 24,861
Payroll and benefits 35,319 37,307
Occupancy 3,511 5,976
Other operating expenses 13,201 13,379
--------- ---------
Total costs of company restaurant sales 76,070 81,523
Franchise restaurant costs 829 1,059
General and administrative expenses 5,533 3,863
Management fees to Advantica 932 985
Allocated costs from Advantica 626 650
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 4,660 9,708
Depreciation and other amortization 7,690 8,436
Gains on refranchising and other, net (40) (331)
--------- ---------
Total operating costs and expenses 96,300 105,893
--------- ---------
Operating loss (2,513) (6,663)
--------- ---------
Other expenses:
Interest expense, net 6,504 6,285
Other nonoperating (income) expenses, net (41) 23
--------- ---------
Total other expenses, net 6,463 6,308
--------- ---------
Loss before taxes (8,976) (12,971)
Provision for (benefit from) income taxes 106 (900)
--------- ---------
Net loss $ (9,082) $ (12,071)
========= =========
</TABLE>
See accompanying notes
2
<PAGE>
FRD Acquisition Co.
Statements of Consolidated Operations
(Unaudited)
<TABLE>
<CAPTION>
Two Quarters Two Quarters
Ended Ended
June 28, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
(In thousands)
Revenue:
Company restaurant sales $ 184,407 $ 190,101
Franchise and licensing revenue 4,094 4,107
--------- ---------
Total operating revenue 188,501 194,208
--------- ---------
Cost of company restaurant sales:
Product costs 48,332 49,542
Payroll and benefits 72,400 74,462
Occupancy 9,745 11,822
Other operating expenses 25,779 27,021
--------- ---------
Total costs of company restaurant sales 156,256 162,847
Franchise restaurant costs 1,704 2,163
General and administrative expenses 9,657 7,794
Management fees to Advantica 1,874 1,929
Allocated costs from Advantica 1,286 1,300
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 9,420 19,434
Depreciation and other amortization 14,557 16,614
Gains on refranchising and other, net (40) (331)
--------- ---------
Total operating costs and expenses 194,714 211,750
--------- ---------
Operating loss (6,213) (17,542)
--------- ---------
Other expenses:
Interest expense, net 12,842 12,764
Other nonoperating (income) expenses, net (41) 156
--------- ---------
Total other expenses, net 12,801 12,920
--------- ---------
Loss before taxes (19,014) (30,462)
Provision for (benefit from) income taxes 189 (2,540)
--------- ---------
Net loss $ (19,203) $ (27,922)
========= =========
</TABLE>
See accompanying notes
3
<PAGE>
FRD Acquisition Co.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 28, 2000 December 29, 1999
------------- -----------------
<S> <C> <C>
(In thousands)
Assets
Current Assets:
Cash and cash equivalents $ 3,574 $ 8,392
Receivables 3,555 4,852
Inventories 2,486 2,700
Other 4,186 3,941
--------- ---------
13,801 19,885
--------- ---------
Property and equipment 168,270 164,644
Accumulated depreciation (64,099) (52,975)
--------- ---------
104,171 111,669
--------- ---------
Other Assets:
Reorganization value in excess of amounts allocable to
identifiable assets, net 46,402 55,812
Other intangibles, net 38,054 39,406
Other 5,176 5,102
--------- ---------
89,632 100,320
--------- ---------
Total Assets $ 207,604 $ 231,874
========= =========
Liabilities and Shareholder's Equity (Deficit)
Current Liabilities:
Current maturities of long-term debt $ 2,663 $ 2,770
Accounts payable 17,953 19,293
Accrued salaries and vacation 7,921 7,858
Accrued insurance 2,876 3,627
Accrued interest 9,698 9,491
Payable to Advantica 26,931 23,809
Other 13,388 14,025
--------- ---------
81,430 80,873
--------- ---------
Long-Term Liabilities:
Debt, less current maturities 205,036 207,164
Liability for insurance claims 5,806 7,817
Other noncurrent liabilities 12,281 13,766
--------- ---------
223,123 228,747
--------- ---------
Total Liabilities 304,553 309,620
--------- ---------
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 (196,668) (177,465)
--------- ---------
Total Shareholder's Equity (Deficit) (96,949) (77,746)
--------- ---------
Total Liabilities and Shareholder's Equity (Deficit) $ 207,604 $ 231,874
========= =========
</TABLE>
See accompanying notes
4
<PAGE>
FRD Acquisition Co.
Statements of Consolidated Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Two Quarters Two Quarters
Ended Ended
June 28, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
(In thousands)
Cash Flows From Operating Activities:
Net loss $(19,203) $(27,922)
Adjustments to reconcile loss to
cash flows from operating activities:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 9,420 19,434
Depreciation and other amortization 14,557 16,614
Amortization of deferred financing costs 381 749
Amortization of debt premium (925) (810)
Gains on refranchising and other, net (40) (331)
Deferred tax provision (benefit) -- (2,805)
Decrease (increase) in assets:
Receivables 1,297 2,981
Inventories 214 399
Other current assets (245) (1,178)
Other assets (399) (2,044)
Increase (decrease) in liabilities:
Accounts payable (1,340) (7,740)
Accrued salaries and vacation 63 (1,062)
Payable to Advantica 3,122 3,195
Other accrued liabilities (220) (2,924)
Liability for insurance claims (2,762) 217
Other noncurrent liabilities (1,693) (488)
-------- --------
Net cash flows provided by (used in)
operating activities 2,227 (3,715)
-------- --------
Cash flows From Investing Activities:
Purchase of property (5,541) (7,420)
Proceeds from disposition of property 5 150
-------- --------
Net cash flows used in investing activities (5,536) (7,270)
-------- --------
Cash Flows From Financing Activities:
Principal debt payments (1,509) (12,127)
Borrowing on credit facilities -- 30,000
-------- --------
Net cash flows (used in) provided by financing activities (1,509) 17,873
-------- --------
(Decrease) increase in cash and cash equivalents (4,818) 6,888
Cash and Cash Equivalents at:
Beginning of period 8,392 5,841
-------- --------
End of period $ 3,574 $ 12,729
======== ========
</TABLE>
See accompanying notes
5
<PAGE>
Frd Acquisition Co.
Notes to Consolidated Financial Statements
June 28, 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 two quarters
ended June 28, 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 $1.3 million for the
quarter and two quarters ended June 29, 2000 and $0.6 million and $1.3 million
for the quarter and two quarters ended June 30, 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 New FRD Credit
Facility (as defined below). Advantica's method of allocating these expenses is
not the only reasonable method and other reasonable methods of allocation might
produce different results.
Note 3. Earnings (Loss) Per Common Share
As described in Note 1, FRD is a wholly owned subsidiary of Advantica.
Accordingly, per share data is not meaningful and has been omitted for all
periods.
Note 4. Segment Information
The Company operates two restaurant concepts -- Coco's and Carrows -- and each
concept is considered a reportable segment. Administrative costs of the
corporate headquarters have been allocated to the reportable segments primarily
on the basis of percentage of sales.
The Company evaluates performance based on several factors, of which the primary
financial measure is business segment operating income before interest, taxes,
depreciation, amortization, management fees payable to Advantica and
restructuring and impairment charges ("EBITDA as defined"). EBITDA as defined is
a key internal measure used to evaluate the amount of cash flow available for
debt repayment and funding of additional investments. EBITDA as defined is not a
measure defined by generally accepted accounting principles and should not be
considered as an alternative to net income or cash flow data prepared in
accordance with generally accepted accounting principles. The Company's measure
of EBITDA as defined may not be comparable to similarly titled measures reported
by other companies.
6
<PAGE>
<TABLE>
<CAPTION>
Quarter Quarter Two Quarters Two Quarters
Ended Ended Ended Ended
June 28, 2000 June 30, 1999 June 28, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(In thousands)
Revenue
Coco's $ 53,894 $ 57,250 $ 109,501 $ 112,058
Carrows 39,893 41,980 79,000 82,150
--------- --------- --------- ---------
Total consolidated revenue $ 93,787 $ 99,230 $ 188,501 $ 194,208
========= ========= ========= =========
EBITDA as defined
Coco's $ 6,291 $ 7,360 $ 11,779 $ 12,813
Carrows 4,478 5,106 7,859 7,622
--------- --------- --------- ---------
Total consolidated EBITDA as defined 10,769 12,466 19,638 20,435
Depreciation and amortization expense (12,350) (18,144) (23,977) (36,048)
Management fees to Advantica (932) (985) (1,874) (1,929)
Other charges:
Interest expense, net (6,504) (6,285) (12,842) (12,764)
Other, net 41 (23) 41 (156)
--------- --------- --------- ---------
Consolidated loss before income taxes $ (8,976) $ (12,971) $ (19,014) $ (30,462)
========= ========= ========= =========
</TABLE>
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 June 28, 2000 and the results of operations for the
quarter and two quarters ended June 28, 2000 as compared to the quarter and two
quarters ended June 30, 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.
7
<PAGE>
Results of Operations
Quarter Ended June 28, 2000 Compared to Quarter Ended June 30, 1999
-------------------------------------------------------------------
The table below summarizes restaurant activity for the quarter ended June 28,
2000:
<TABLE>
<CAPTION>
Ending Units Net Units Ending Ending
Units Opened/ Units Sold/ Units Units
3/29/00 Acquired Refranchised Closed 6/28/00 6/30/99
------- -------- ------------ ------ ------- -------
<S> <C> <C> <C> <C>
Coco's
Company-owned units 146 -- -- (2) 144 150
Franchised units 34 -- -- -- 34 34
Licensed units 302 -- -- (1) 301 301
---- ---- ---- ---- ---- ----
482 -- -- (3) 479 485
---- ---- ---- ---- ---- ----
Carrows
Company-owned units 117 -- -- (1) 116 120
Franchised units 28 -- -- -- 28 27
---- ---- ---- ---- ---- ----
145 -- -- (1) 144 147
---- ---- ---- ---- ---- ----
627 -- -- (4) 623 632
==== ==== ==== ==== ==== ====
</TABLE>
Coco's
------
<TABLE>
<CAPTION>
Quarter Ended
---------------------------- %
June 28, 2000 June 30, 1999 Increase/(Decrease)
------------- ------------- -------------------
<S> <C> <C> <C>
($ in millions, except average unit data)
Total systemwide sales $ 149.7 $ 145.2 3.1
======== ========
Net company sales $ 52.5 $ 55.8 (5.9)
Franchise and licensing revenue 1.4 1.4 --
-------- --------
Total revenue 53.9 57.2 (5.8)
-------- --------
Operating expenses:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 2.5 5.2 (51.9)
Other 52.2 55.2 (5.4)
-------- --------
Total operating expenses 54.7 60.4 (9.4)
-------- --------
Operating loss $ (0.8) $ (3.2) (75.0)
======== ========
EBITDA as defined $ 6.3 $ 7.4 (14.9)
Average unit sales:
Company-owned 363,800 370,600 (1.8)
Franchised 335,500 320,900 4.5
Same-store sales decrease (company-owned) (3.0)% (4.8)%
</TABLE>
Coco's NET COMPANY SALES for the second quarter of 2000 decreased $3.3 million
(5.9%) compared to the prior year quarter. The decrease is the result of a 3.0%
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 $5.7 million (9.4%) compared to the prior
year quarter. Excluding the impact of a $2.7 million decrease in amortization of
excess reorganization value and a $0.6 million decrease in depreciation and
other amortization, operating expenses decreased $2.4 million over the prior
year quarter. This decrease resulted primarily from the decrease in same-store
sales and company-owned restaurants. The current quarter also benefited from
$1.5
8
<PAGE>
million of reductions in workers' compensation and general liability accruals
resulting from improved actuarial trends. 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.
Additionally, the decrease in depreciation and other amortization in the current
quarter relates to a significant group of assets that became fully depreciated
at the end of the second quarter of 1999.
EBITDA AS DEFINED decreased $1.1 million (14.9%) compared to the prior year
quarter as a result of the factors noted in the preceding paragraphs, excluding
the decrease in depreciation and amortization expense.
Coco's OPERATING LOSS decreased $2.4 million compared to the prior year quarter
as a result of the factors noted above.
Carrows
-------
<TABLE>
<CAPTION>
Quarter Ended
---------------------------- %
June 28, 2000 June 30, 1999 Increase/(Decrease)
------------- ------------- -------------------
<S> <C> <C> <C>
($ in millions, except average unit data)
Total systemwide sales $ 46.4 $ 48.4 (4.1)
======== ========
Net company sales $ 39.3 $ 41.4 (5.1)
Franchise revenue 0.6 0.6 ---
-------- --------
Total revenue 39.9 42.0 (5.0)
-------- --------
Operating expenses:
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 2.2 4.5 (51.1)
Other 39.4 41.0 (3.9)
-------- --------
Total operating expenses 41.6 45.5 (8.6)
-------- --------
Operating loss $ (1.7) $ (3.5) (51.4)
======== ========
EBITDA as defined $ 4.5 $ 5.1 (11.8)
Average unit sales (in thousands):
Company-owned 334,800 345,300 (3.0)
Franchised 254,500 262,600 (3.1)
Same-store sales decrease (company-owned) (2.9)% (4.3)%
</TABLE>
Carrows' NET COMPANY SALES for the second quarter of 2000 decreased $2.1 million
(5.1%) compared to the prior year quarter. The decrease primarily reflects the
impact of fewer company-owned units along with a 2.9% decrease in same-store
sales over the prior year quarter. FRANCHISE REVENUE remained flat compared to
the prior year quarter.
Carrows' OPERATING EXPENSES decreased $3.9 million (8.6%) compared to the prior
year quarter. Excluding the impact of a $2.3 million decrease in amortization of
excess reorganization value and a $0.1 million decrease in depreciation and
other amortization, operating expenses decreased $1.5 million over the prior
year quarter. This decrease results primarily from the decrease in same-store
sales and in company-owned restaurants. The current quarter benefited from $1.3
million of reductions in workers' compensation and general liability accruals
resulting from improved actuarial trends. Additionally, higher legal 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 quarter resulted
from an impairment charge to reorganization value recorded in the fourth quarter
of 1999.
EBITDA AS DEFINED decreased $0.6 million (11.8%) compared to the prior year
quarter as a result of the factors noted in the proceeding paragraphs, excluding
the decrease in depreciation and amortization expense.
Carrows' OPERATING LOSS decreased $1.8 million compared to the prior year
quarter as a result of the factors noted above.
9
<PAGE>
FRD Consolidated
----------------
The Company's CONSOLIDATED EBITDA AS DEFINED decreased $1.7 million (13.6%) for
the second quarter of 2000 compared to the second quarter of 1999. This decrease
is a result of the factors discussed in the preceding paragraphs.
CONSOLIDATED INTEREST EXPENSE, NET, increased $0.2 million (3.5%) compared to
the prior year quarter.
The PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations for the
quarter ended June 28, 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 1.2% for the
quarter ended June 28, 2000 compared to an income tax benefit reflecting an
approximate rate of (6.9)% for the quarter ended June 30, 1999. The increase in
the income tax rate over the prior year quarter is principally due to the
establishment of a valuation allowance on the loss generated in the current
quarter.
The decrease in CONSOLIDATED NET LOSS of $3.0 million in comparison to the prior
year quarter is a result of the items previously discussed.
Two Quarters Ended June 28, 2000 Compared to Two Quarters Ended June 30, 1999
-----------------------------------------------------------------------------
Coco's
------
<TABLE>
<CAPTION>
Two Quarters Ended
---------------------------- %
June 28, 2000 June 30, 1999 Increase/(Decrease)
------------- ------------- -------------------
<S> <C> <C> <C>
($ in millions, except average unit data)
Total systemwide sales $ 302.2 $ 287.1 5.3
========= =========
Net company sales $ 106.6 $ 109.2 (2.4)
Franchise and licensing revenue 2.9 2.9 ---
--------- ---------
Total revenue 109.5 112.1 (2.3)
--------- ---------
Operating expenses:
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 5.0 10.5 (52.4)
Other 107.0 109.8 (2.6)
--------- ---------
Total operating expenses 112.0 120.3 (6.9)
--------- ---------
Operating loss $ (2.5) $ (8.2) (69.5)
========= =========
EBITDA as defined $ 11.8 $ 12.8 (7.8)
Average unit sales:
Company-owned 737,900 728,600 1.3
Franchised 674,100 632,400 6.6
Same-store sales increase (decrease) (company-owned) 0.1% (6.3)%
</TABLE>
Coco's NET COMPANY SALES for the two quarters ended June 28, 2000 decreased $2.6
million (2.4%) compared to the prior year. The decrease reflects fewer
company-owned units versus the prior year period, partially offset by a 0.1%
increase in same-store sales. FRANCHISE AND LICENSING REVENUE remained
relatively flat compared to the prior year period.
Coco's OPERATING EXPENSES decreased $8.3 million (6.9%) compared to the prior
year comparable period. Excluding the impact of a $5.5 million decrease in
amortization of excess reorganization value and a $1.2 million decrease in
depreciation and other amortization, operating expenses decreased $1.6 million
over the prior year comparable period. This decrease resulted primarily from the
decrease in 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.
10
<PAGE>
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 $1.0 million (7.8%) 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 $5.7 million compared to the prior year
comparable period as a result of the factors noted above.
Carrows
-------
<TABLE>
<CAPTION>
Two Quarters Ended
---------------------------- %
June 28, 2000 June 30, 1999 Increase/(Decrease)
------------- ------------- -------------------
<S> <C> <C> <C>
($ in millions, except average unit data)
Total systemwide sales $ 92.3 $ 94.8 (2.6)
========== ========
Net company sales $ 77.8 $ 80.9 (3.8)
Franchise revenue 1.2 1.2 ---
---------- --------
Total revenue 79.0 82.1 (3.8)
---------- --------
Operating expenses:
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 4.4 8.9 (50.6)
Other 78.3 82.5 (5.1)
---------- --------
Total operating expenses 82.7 91.4 (9.5)
---------- --------
Operating loss $ (3.7) $ (9.3) (60.2)
========== ========
EBITDA as defined $ 7.9 $ 7.6 3.9
Average unit sales (in thousands):
Company-owned 662,200 673,900 (1.7)
Franchised 517,800 526,000 (1.6)
Same-store sales decrease (company-owned) (1.4)% (4.0)%
</TABLE>
Carrows' NET COMPANY SALES for the two quarters ended June 28, 2000 decreased
$3.1 million (3.8%) 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 $8.7 million (9.5%) compared to the prior
year comparable period. Excluding the impact of a $4.5 million decrease in
amortization of excess reorganization value and a $0.8 million decrease in
depreciation and other amortization, operating expenses decreased $3.4 million
over the prior year comparable period. The decrease primarily reflects the
impact of 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 increased $0.3 million (3.9%) compared to the prior year same
period as a result of the factors noted in the proceeding paragraphs, excluding
the decrease in depreciation and amortization expense.
Carrows' OPERATING LOSS decreased $5.6 million compared to the prior year same
period as a result of the factors noted above.
11
<PAGE>
FRD Consolidated
----------------
The Company's CONSOLIDATED EBITDA AS DEFINED decreased $0.8 million (3.9%) for
the two quarters ended June 28, 2000 compared to the prior year period. This
decrease is a result of the factors discussed in the preceding paragraphs.
CONSOLIDATED INTEREST EXPENSE, NET, increased $0.1 million (0.6%) compared to
the prior year period.
The PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations for the
two quarters ended June 28, 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 two quarters ended June 28, 2000 compared to an income tax benefit
reflecting an approximate rate of (8.3)% for the two quarters ended June 30,
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 $8.7 million in comparison to the prior
year period is a result of the items previously discussed.
Liquidity and Capital Resources
On May 14, 1999, FRD and certain of its operating subsidiaries entered into a
new $70 million credit facility (the "New FRD Credit Facility"). The New FRD
Credit Facility, which is guaranteed by Advantica, consists of a $30 million
term loan and a $40 million revolving credit facility and matures in May 2003.
Such facility is unavailable to Advantica and its other subsidiaries. At June
28, 2000, the Company had $30.0 million outstanding term loan borrowings, no
outstanding working capital borrowings and letters of credit outstanding of
$11.1 million, leaving a net availability of $28.9 million.
At June 28, 2000 and December 29, 1999, the Company had working capital deficits
of $67.6 million and $61.0 million, respectively. The Company is able to operate
with a substantial working capital deficit because: (1) restaurant operations
are conducted on a cash (and cash equivalent) basis with a low level of accounts
receivable, (2) rapid turnover allows a limited investment in inventories; and
(3) accounts payable for food, beverages, and supplies usually become due after
the receipt of cash from related sales. The Company intends to continue to
operate with working capital deficits.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's market risk exposure at June 28, 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
Two current and three former managers of Carrows restaurant units have
initiated, in the Superior Court of Los Angeles County, California, a class
action lawsuit seeking, among other things, overtime compensation for managers
employed in California. The action, which is currently in its initial stages
pending class certification, was originally filed on November 8, 1999. The suit
alleges that Carrows requires its California 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.
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 June 28,
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: August 14, 2000 By: /s/ Ronald B. Hutchison
--------------------------------
Ronald B. Hutchison
Executive Vice President
(Duly authorized officer of
registrant/principal financial officer)
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