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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 26, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 33-14051
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(TM)
[LOGO OF PRANDIUM(TM) INC. APPEARS HERE]
(Exact name of registrant as specified in its charter)
Delaware 33-0197361
(Incorporated in) (I.R.S. Employer
Identification No.)
18831 Von Karman Avenue, Irvine, CA 92612
(Address of principal executive offices)
Telephone: (949) 757-7900
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value.
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Indicate by a 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 and (2) has been subject to the filing
requirements for at least 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. [_]
The aggregate market value of the registrant's common stock held by non-
affiliates of the registrant as of March 17, 2000 was approximately $19.2
million. All directors, officers and more than 10% stockholders of registrant
are deemed affiliates of registrant for the purpose of calculating such
aggregate market value. The registrant, however, does not represent that such
persons, or any of them, would be deemed "affiliates" of the registrant for
any other purpose under the Securities Exchange Act of 1934 or the Securities
Act of 1933.
As of March 17, 2000, the registrant had issued and outstanding 180,380,513
shares of common stock, $.01 par value per share.
Documents Incorporated by Reference:
Notice of 2000 Annual Meeting and Proxy Statement (Part III of Form 10-K)
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PRANDIUM, INC.
FORM 10-K
For the Fiscal Year Ended December 26, 1999
INDEX
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market for the Registrant's Common Equity and Related 13
Stockholder Matters........................................
Item 6. Selected Financial Data..................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition 15
and Results of Operations..................................
Item 8. Financial Statements and Supplementary Data................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting 27
and Financial Disclosure...................................
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 28
Item 11. Executive Compensation...................................... 28
Item 12. Security Ownership of Certain Beneficial Owners and 28
Management.................................................
Item 13. Certain Relationships and Related Transactions.............. 28
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on From 29
8-K........................................................
Signatures............................................................ 33
2
PRANDIUM, INC.
PART I
Item 1. BUSINESS
Background
Prandium, Inc., formerly known as Koo Koo Roo Enterprises, Inc. and as
Family Restaurants, Inc. (together with its subsidiaries, the "Company"), was
incorporated in Delaware in 1986. The Company is primarily engaged in the
operation of restaurants in the full-service and fast-casual segments.
Information relating to periods ending prior to October 30, 1998 included in
this report relates to the historical operations of Family Restaurants, Inc.
and, except as otherwise indicated, does not reflect the operations of Koo Koo
Roo, Inc., a Delaware corporation ("KKR") and KKR's previously wholly owned
subsidiary The Hamlet Group, Inc., a California corporation ("Hamlet"), both
of which the Company acquired on October 30, 1998. At December 26, 1999, the
Company operated 308 restaurants in 27 states, approximately 68% of which are
located in California, Ohio, Pennsylvania, Indiana and Michigan, and
franchised and licensed 24 restaurants outside the United States.
Subsequent Event
On March 27, 2000, the Company entered into a definitive agreement to sell
substantially all of its El Torito Division to Acapulco Acquisition Corp.
("Acapulco") in a transaction with an enterprise value of approximately $130.0
million, subject to certain post-closing adjustments based on a closing
balance sheet, with consideration consisting of cash and the assumption of
certain capitalized lease obligations and other debt (the "El Torito Sale").
Consummation of the El Torito Sale is subject to customary terms and
conditions. There can be no assurance that the Company will successfully
complete the El Torito Sale. See "--Sale of El Torito Division."
1998 Merger
On October 30, 1998, the Company, FRI-Sub, Inc. ("Merger Sub"), an indirect
wholly-owned subsidiary of the Company, and KKR consummated a merger (the
"Merger"), pursuant to which Merger Sub was merged with and into KKR, with KKR
as the surviving corporation. As a result of the Merger, each outstanding
share of common stock of KKR was converted into the right to receive one share
of common stock of the Company (the "Company Common Stock"). Immediately prior
to the Merger, a stock dividend was declared pursuant to which approximately
121.96 shares of Company Common Stock were distributed for each share of
Company Common Stock outstanding. Prior to the Merger, the Company provided a
$3 million loan (the "Bridge Loan") to a subsidiary of KKR, which was repaid
after completion of the Merger. Additionally, in connection with the Merger,
FRI-MRD Corporation, a wholly owned subsidiary of the Company ("FRI-MRD"),
issued $24 million aggregate face amount of senior secured discount notes (the
"MRD Merger Notes") for net proceeds of $21.7 million, and the Company
expanded the Foothill Credit Facility (as defined below) by an additional
$20 million. The proceeds from the sale of the MRD Merger Notes were used to
acquire all of the outstanding capital stock of Hamlet from KKR immediately
prior to the consummation of the Merger (the "Hamlet Acquisition"). The Merger
and the Hamlet Acquisition were accounted for as a purchase. Accordingly, the
results of operations and financial position of KKR (including Hamlet) were
combined with the results of operations and financial position of the
Company's operations from October 30, 1998 forward.
After completion of the Merger, confusion between the Company's prior name,
Koo Koo Roo Enterprises, Inc., and the Koo Koo Roo restaurant concept led to
numerous misunderstandings within the restaurant industry and among the
Company's shareholders, vendors and other audiences. As a result, the Company
adopted its new name in April 1999.
Other Historical Events
On January 10, 1997, the Company entered into a five-year, $35 million
credit facility (the "Foothill Credit Facility") with Foothill Capital
Corporation ("Foothill") to provide for the ongoing working capital needs of
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the Company. The Foothill Credit Facility replaced the Company's old credit
facility (the "Old Credit Facility"). In connection with the Merger, the
Company increased the Foothill Credit Facility to $55 million. The Foothill
Credit Facility now provides for up to $35 million in revolving cash
borrowings and up to $55 million in letters of credit (less the outstanding
amount of revolving cash borrowings). The Foothill Credit Facility is secured
by substantially all of the real and personal property of the Company and
contains restrictive covenants.
On August 12, 1997, FRI-MRD issued senior discount notes (the "Senior
Discount Notes") in an aggregate face amount of $61 million at a price of
approximately 75% of par. The Senior Discount Notes are due on January 24,
2002. No cash interest was payable on the Senior Discount Notes until July 31,
1999, at which time interest became payable in cash semi-annually at the rate
of 15% per annum, with the first cash interest payment made on January 31,
2000. The Senior Discount Notes were issued to certain existing holders of the
Company's 9 3/4% Senior Notes due 2002 (the "Senior Notes") in exchange for
$15.6 million of Senior Notes plus approximately $34 million of cash. On
January 14 and 15, 1998, FRI-MRD issued an additional $14 million aggregate
face amount of the Senior Discount Notes to the same purchasers at a price of
83% of par. FRI-MRD received approximately $11.6 million in cash as a result
of this subsequent sale. Proceeds from the sales of the Senior Discount Notes
were used to fund the Company's capital expenditure programs and for general
corporate purposes.
On June 9, 1998, FRI-MRD entered into a Note Agreement pursuant to which on
October 30, 1998 FRI-MRD issued $24 million aggregate face amount of MRD
Merger Notes at a price of approximately 90% of par resulting in net proceeds
of $21.7 million. The MRD Merger Notes are due on January 24, 2002. No cash
interest was payable on the MRD Merger Notes until July 31, 1999, at which
time interest became payable in cash semi-annually at the rate of 14% per
annum with the first cash interest payment made on January 31, 2000. Proceeds
from the sale of the MRD Merger Notes were used exclusively to purchase all of
the outstanding shares of Hamlet, and the MRD Merger Notes are secured by all
of the outstanding shares of Hamlet.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Liquidity and Capital Resources--Liquidity."
Restaurant Operations
The Company operated 308 restaurants primarily under the Chi-Chi's, El
Torito, Casa Gallardo, Koo Koo Roo and Hamburger Hamlet concepts at December
26, 1999. The Chi-Chi's, El Torito and Casa Gallardo restaurants serve
moderately priced, high-quality Mexican food and a wide selection of alcoholic
and non-alcoholic beverages. Koo Koo Roo restaurants are in the emerging food
category of fresh, convenient meals--meals with the convenience and value
associated with quick service, but the quality, freshness and variety
associated with upscale, casual full-service restaurants. The Hamburger Hamlet
restaurants are full-service casual dining restaurants known for their quality
service and their extensive variety of distinctive products.
The average food check per person (excluding alcoholic beverage sales) for
1999 is as follows (the average food check per person for El Torito represents
all restaurants in the El Torito Division including Casa Gallardo):
Chi-Chi's.............................................................. $9.23
El Torito.............................................................. 10.61
Koo Koo Roo............................................................ 9.13
Hamburger Hamlet....................................................... 11.03
Chi-Chi's restaurants generally contain from 5,000 to 10,600 square feet of
floor space and accommodate approximately 200 to 400 guests in the restaurant
and lounge. El Torito restaurants generally contain from 7,500 to 11,000
square feet of floor space and accommodate approximately 300 to 400 guests in
the restaurant and lounge. The Company's Mexican restaurants are generally
located in freestanding buildings in densely populated suburban areas, and the
Company believes their festive atmosphere and moderate prices are especially
appealing to family clientele. Koo Koo Roo restaurants generally contain from
2,700 to 3,100 square feet of floor space and accommodate approximately 75 to
85 guests.
4
Site Selection
The selection of sites for new restaurants is the responsibility of the
senior management of El Torito Restaurants, Inc. ("El Torito"), Chi-Chi's,
Inc. ("Chi-Chi's") and KKR. Typically, potential sites are brought to the
attention of the Company by real estate brokers and developers familiar with
the Company's needs. 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.
Employees
At December 26, 1999, the Company had a total of 17,813 employees, of whom
16,306 were restaurant employees, 1,169 were field management and 338 were
corporate personnel. Upon the completion of the El Torito Sale, the Company
estimates it will have approximately 11,600 employees. Employees are paid on
an hourly basis, except restaurant managers, corporate and field management
and administrative personnel. Restaurant employees include a mix of full-time
and part-time, mostly hourly personnel, enabling the Company to provide
services necessary during hours of restaurant operations. The Company has not
experienced any significant work stoppages and believes its labor relations
are good.
Competition
The restaurant business is highly competitive and is affected by changes in
the public's eating habits and preferences, population trends and traffic
patterns and local and national economic conditions affecting consumer
spending habits. Key competitive factors in the industry are the quality and
value of the food products offered, quality and speed of service,
attractiveness of facilities, advertising, name identification and restaurant
location. Each of the Company's restaurants competes directly or indirectly
with locally-owned restaurants, as well as with restaurants with national or
regional images, many of which have greater financial, marketing, personnel
and other resources than the Company. The Company is required to respond to
various factors affecting the restaurant industry, including changes in
consumer preferences, tastes and eating habits, demographic trends and traffic
patterns, increases in food and labor costs, competitive pricing and national,
regional and local economic conditions. The failure to compete successfully
could have a material adverse effect on the Company's financial condition and
results of operations.
The Company's Mexican restaurants have encountered increased competition in
recent years, both from new Mexican full-service restaurants and from
restaurants offering Mexican food products as part of an overall casual dining
concept.
Koo Koo Roo restaurants participate in the quick-service segment which is
highly competitive with respect to price, service and location. In addition,
the quick-service segment is characterized by the frequent introduction of new
products, accompanied by substantial promotional campaigns. In recent years
numerous competitors, including those in the casual dining and quick-service
segment have introduced products, including products featuring chicken, that
were developed to capitalize on growing consumer preference for food products
that are, or are perceived to be, more healthful, nutritious, lower in
calories and lower in fat content. Management believes that Koo Koo Roo will
be subject to increased competition from companies whose products or marketing
strategies address these consumer preferences. There can be no assurance that
consumers will regard the Koo Koo Roo products as sufficiently distinguishable
from competitive products (such as, for example, those offered by El Pollo
Loco and Boston Market) or that substantially equivalent products will not be
introduced by existing or new competitors.
Government Regulation
Each of the Company's restaurants is subject to Federal, state and local
laws and regulations governing health, sanitation, environmental matters,
safety, the sale of alcoholic beverages and regulations regarding hiring
5
and employment practices. The Company believes it has all licenses and
approvals material to the operation of its business, and that its operations
are in material compliance with applicable laws and regulations.
The Company is subject to Federal and state laws governing matters such as
minimum wages, overtime and other working conditions. Approximately half of
the Company's employees are paid at rates related to the minimum wage.
Therefore, increases in the minimum wage or decreases in the allowable tip
credit (tip credits reduce the minimum wage that must be paid to tipped
employees in certain states) increase the Company's labor costs. This is
especially true in California, where there is no tip credit. Effective
September 1, 1997, the Federal minimum wage was increased from $4.75 to $5.15.
However, a provision of this law effectively froze the minimum wage for tipped
employees at then current levels by increasing the allowable tip credit in
those states that allow for a tip credit. Furthermore, in California, the
state's minimum wage was increased to $5.00 on March 1, 1997 and most recently
increased to $5.75 on March 1, 1998. In response to the minimum wage increases
on March 1, 1997 and March 1, 1998, the Company raised menu prices at its El
Torito restaurants in an effort to recover the higher payroll costs. Chi-Chi's
also raised menu prices in October and December 1997 as a result of the
cumulative impact of these minimum wage increases. Similarly, in March 1998,
KKR also raised menu prices for its Koo Koo Roo restaurants. No minimum wage
increases are currently scheduled for 2000 at this time, but it is anticipated
that the Federal legislature will pass a minimum wage increase later this
year.
The Company is also subject to both Federal and state regulations governing
disabled persons' access to its restaurant facilities, including the Americans
with Disabilities Act ("ADA"), which became effective in January 1992. If the
ADA were interpreted to require a higher degree of accessibility for disabled
persons than presently established, it could have a significant economic
impact on the Company, inasmuch as such interpretation could require the
Company, and the restaurant industry as a whole, to make substantial
modifications to its restaurant facilities.
Currently, the Company franchises and licenses 24 restaurants
internationally. See "--Franchised and Licensed Restaurants." The Company
believes its franchises are operating in substantial compliance with
applicable laws and regulations governing such operations.
Trademarks and Service Marks
The Company regards its trademarks and service marks as important to the
identification of its restaurants and believes that they have significant
value in the conduct of its business. The Company has registered various
trademarks and service marks with the United States Patent and Trademark
Office. In addition to its Federal registrations, certain trademarks and
service marks have been registered in various states and selected
international markets in which the Company operates restaurants. Also, many of
the Company's menus, training manuals and other printed manuals utilized in
conjunction with its business are copyrighted.
Franchised and Licensed Restaurants
In May 1994, El Torito and Coco's Restaurants, Inc. ("Coco's"), a former
indirect subsidiary of the Company, entered into a license agreement, which,
among other things, granted to Coco's an exclusive right and license that
permits Coco's to grant other parties a sublicense to develop the Company's El
Torito Mexican restaurant concept in Japan. As a result, in April 1995, Coco's
entered into a Technical Assistance and License Agreement, which, among other
things, granted to Coco's Japan Co., Ltd. ("CJCL") the right to develop the
Company's El Torito Mexican restaurant concept in Japan. At December 26, 1999,
CJCL operated six El Torito restaurants in Japan.
On October 15, 1997, Chi-Chi's entered into a binding term sheet agreement
with its licensee, Chi-Chi's International Operations, Inc. ("CCIO"), whereby
the parties agreed to resolve various ongoing disputes. Under the general
provisions of the term sheet, (i) the rights to develop Chi-Chi's restaurants
throughout the world, except in areas of currently existing Chi-Chi's
franchises, have been transferred back to Chi-Chi's; (ii) for a period of five
years, CCIO shall operate the existing 15 international Chi-Chi's restaurants
for Chi-Chi's in
6
exchange for a fee equal to all royalties and fees payable from the
international franchisees and licensees; (iii) CCIO has the right to convert
the existing 15 international Chi-Chi's restaurants to other concepts; and
(iv) under certain conditions, Chi-Chi's has the right to terminate the
management arrangement with CCIO within five years. As a result of the term
sheet, Chi-Chi's will not receive any royalties or license fees from CCIO or
the currently existing international Chi-Chi's restaurant operations until
Chi-Chi's terminates the management agreement with CCIO.
In March 1999, KKR's original Canadian licensee ("KKR Canada") filed a
bankruptcy proceeding in Ontario, Canada. As a result thereof, KKR Canada lost
its license rights to own and develop Koo Koo Roo restaurants in Canada. In
April 1999, KKR entered into a Master License and Development Agreement with
1337855 Ontario, Inc., a Canadian company ("Ontario") which, among other
things, granted to Ontario an exclusive right and license to develop Koo Koo
Roo restaurants throughout Canada and requires Ontario to pay KKR quarterly
royalties beginning in 2000. Ontario currently has one Koo Koo Roo restaurant
in the Toronto area, which restaurant is not in material compliance with the
terms of the Master License and Development Agreement. In addition, KKR has
entered into license agreements covering England and Israel. No restaurants
have been developed to date under these agreements.
In 1996, the Company established El Torito Franchising Company ("ETFC") to
market domestically and internationally the El Torito Mexican restaurant
concept. There is currently no domestic franchise activity. On January 16,
1997, ETFC entered into a Master Franchise and Development Agreement with
Evliyaoglu Ltd. ("EL"), pursuant to which EL was granted the rights to develop
a minimum of 20 El Torito restaurants over 15 years in Turkey. At December 26,
1999, EL operated one El Torito restaurant and one El Torito Express
restaurant in Turkey. In addition, on February 13, 1998, ETFC entered into a
Master Franchise and Development Agreement with UVECO Holding, Inc. ("UVECO"),
pursuant to which UVECO was granted the rights to develop 21 El Torito
restaurants over 20 years in seven countries in the Middle East.
As described above, under existing license and other franchise agreements,
six El Torito restaurants are operated in Japan, two El Torito restaurants are
operated in Turkey, 15 Chi-Chi's restaurants are operated in international
markets and one Koo Koo Roo restaurant is operated in Toronto, Canada.
Franchise and license fees were $190,000 for the year ended December 26, 1999.
This compares to $235,000 for the year ended December 27, 1998 and $219,000
for the year ended December 28, 1997.
Sale of El Torito Division
On March 27, 2000, the Company entered into a definitive agreement (the
"Sale Agreement") to sell substantially all of the El Torito Division to
Acapulco in a transaction with an enterprise value of approximately $130.0
million. Consummation of the El Torito Sale is subject to customary terms and
conditions. There can be no assurance that the Company will successfully
complete the El Torito Sale.
Under the terms of the Sale Agreement, the Company will receive, subject to
certain post-closing adjustments based on a closing balance sheet, cash of
$130.0 million ($5.0 million of which will be placed in escrow for a
designated period following the consummation of the El Torito Sale) less the
amount of the El Torito Division's long-term debt, primarily capitalized lease
obligations, assumed by Acapulco at the closing ($10.7 million of such long-
term debt was outstanding as of February 20, 2000). Six restaurants currently
operated by the El Torito Division will not be sold and will continue to be
operated by the Company. The Company expects the sale to be finalized in the
second quarter of fiscal 2000 and to record a pretax gain in fiscal 2000 as a
result of this transaction. In connection with the El Torito Sale, the Company
and FRI-MRD have agreed, subject to certain limitations, to indemnify Acapulco
against certain losses if they occur, primarily related to events prior to the
closing. Acapulco has agreed to indemnify the Company, with certain
exceptions, for certain events occurring after the closing. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--
Liquidity and Capital Resources."
7
Certain Risk Factors
Substantial Leverage
The Company currently has (and following completion of the El Torito Sale
will continue to have) a significant amount of indebtedness. The following
chart shows certain important credit statistics as of the dates specified
below:
For the Years Ended
-------------------------
December 26, December 27,
1999 1998
------------ ------------
($ in thousands)
Total Debt......................................... $260,721 $239,649
Stockholders' deficit.............................. (57,605) (21,137)
Deficiency of losses to cover fixed charges........ (35,999) (62,733)
This substantial indebtedness could have important consequences. For
example, it could:
. increase the Company's vulnerability to adverse general economic and
industry conditions;
. limit the Company's ability to obtain additional financing to fund
future working capital, capital expenditures, acquisitions and other
general corporate requirements;
. require the Company to dedicate a substantial portion of its cash flow
from operations to payments on indebtedness, thereby reducing the
availability of cash flow to fund working capital, capital expenditures,
acquisitions and other general corporate purposes;
. limit the Company's flexibility in planning for, or reacting to, changes
in its business and the industry in which it operates;
. place the Company at a competitive disadvantage compared to its
competitors that have less debt; and
. subject the Company to covenants that will restrict, among other things,
its ability to borrow money, conduct affiliate transactions, lend or
otherwise advance money to non-subsidiaries, pay dividends or advances
and make certain other payments and, under its credit facility, require
it to maintain specified financial ratios and earnings.
Failure to comply with certain covenants in the Company's debt instruments
could result in an event of default which, if not cured or waived, could have
a material adverse effect on the Company.
Ability to Service Debt
The Company's ability to make payments on and to refinance its indebtedness
and to fund planned capital expenditures will depend on its ability to
generate cash in the future. This, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors
that are beyond the Company's control.
The Company can give no assurance that its business will generate
sufficient cash flow from operations, that currently anticipated cost savings
and operating improvements will be realized on schedule or that future
borrowings will be available in an amount sufficient to enable the Company to
pay its indebtedness or to fund other liquidity needs. If the Company is
unable to generate sufficient cash flow from operations in the future to
service its debt, it may be required, among other things, to seek additional
financing in the debt or equity markets, to refinance or restructure all or a
portion of its indebtedness, to sell selected assets or to reduce or delay
planned capital expenditures. Such measures may not be sufficient for the
Company to service its debt. In addition, there can be no assurance that any
such financing, refinancing or sale of assets will be available on
commercially reasonable terms or at all. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and
Capital Resources--Liquidity."
8
History of Losses
For the years ended December 26, 1999, December 27, 1998 and December 28,
1997, the Company recorded net losses of $36.5 million, $63.1 million and
$31.6 million, respectively. For the same periods, the Company recorded
operating losses of $4.6 million, $38.1 million and $11.6 million,
respectively. Although the Company believes that the use of proceeds from the
El Torito Sale, if consummated, the ongoing impact of the Merger and other
initiatives will result in improvements to operations, there can be no
assurance that the Company will achieve profitable operations in the future.
Future Growth and Financing
The Company's business strategy includes remodeling existing restaurants
and developing new restaurants, which may include future development,
construction and renovation projects. The extent and timing of any such
projects will depend upon various factors, including available cash flow, the
ability to obtain additional financing (including landlord contributions) and
the availability of suitable locations, many of which are beyond the Company's
control. In addition, the Company is subject to the risks inherent in any
development activity, including, but not limited to, disruption of existing
operations, delays in receipt of permits, licenses or other regulatory
approvals, shortages of materials or skilled labor, work stoppages, and
weather interferences, any of which could delay development or result in
substantial cost increases.
Sale of El Torito Division
On March 27, 2000, the Company entered into a definitive agreement to
complete the El Torito Sale. Planning and implementing the separation of the
El Torito Division from the Company has and will require the dedication of
management resources, and the Company expects to incur certain incremental
expenses in future periods related to the separation. Efforts required to
separate the operations of the El Torito Division may disrupt the Company's
ongoing business activities. These factors could have an adverse affect on the
Company's results of operations or financial condition. In addition, a
significant portion of the Company's administrative infrastructure represents
costs that are fixed. Accordingly, these costs may represent a greater
percentage of sales after the separation and thus could adversely affect the
Company's results of operations.
It is anticipated that the Company will provide transitional services to
support the ongoing El Torito Division operations for some period of time.
These transitional services relate to certain of the Company's administrative
functions. After expiration of the transitional service arrangement, the
Company may not be able to effectively re-deploy the employees performing
these services in a timely manner, and the Company's financial results could
be adversely affected.
Control by Principal Stockholder
The former partners of Apollo FRI Partners, L.P. ("Apollo") own
approximately 55% of the Company's outstanding common stock and have the
ability to control the election of directors and the results of virtually all
other matters submitted to a vote of the stockholders. Such concentration of
ownership, together with the anti-takeover effects of certain provisions in
the Delaware General Corporate Law and the Company's charter documents may
have the effect of delaying or preventing a change of control of the Company.
Key Personnel
The Company's success depends to a significant extent on retaining the
services of its executive officers and directors, particularly Mr. Kevin
Relyea, the Company's Chief Executive Officer and Chairman of the Board. The
Company does not maintain key man insurance. The loss of the services of key
employees or directors (whether such loss is through resignation or other
causes) or the inability to attract additional qualified personnel could have
an adverse effect on the Company's financial condition and results of
operations. The Company has entered into an employment agreement with Mr.
Relyea that expires on December 31, 2001.
9
Forward Looking Statements
This document includes "forward looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act
including, in particular, the statements about the Company's plans,
strategies, and prospects. When used in this document and the documents
incorporated herein by reference, the words "believes," "expects,"
"anticipates," "intends," "plans," "estimates" or similar expressions are
intended to identify in certain circumstances, forward looking statements.
Although the Company believes that its plans, intentions and expectations
reflected in or suggested by such forward looking statements are reasonable,
it can give no assurance that such plans, intentions or expectations will be
achieved. Important factors that could cause actual results to differ
materially from the forward looking statements made in this document are set
forth above and elsewhere in this document and in the documents incorporated
herein by reference. Given these uncertainties, the Company cautions against
undue reliance on such statements or projections. The Company does not
undertake any obligation to update these forward looking statements or
projections. All forward looking statements attributable to the Company or
persons acting on the Company's behalf are expressly qualified in their
entirety by the preceding cautionary statements. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Item 2. PROPERTIES
Of the 308 restaurants operated by the Company as of December 26, 1999, the
Company owned the land and buildings for 28, owned the buildings and leased
the land for 55 and leased both land and buildings for the remaining 225
restaurants. The full-service restaurants are primarily free-standing units
ranging from approximately 5,000-11,000 square feet. KKR restaurants generally
approximate 2,700 to 3,100 square feet. Most of the leases provide for the
payment of a base rental or approximately 5% to 6% of gross sales, whichever
is greater, plus real estate taxes, insurance and other expenses.
The leases (assuming exercise of all options) have terms expiring as
follows:
Number of
Lease Expiration Restaurants
---------------- -----------
2000-2004........................................................ 13
2005-2009........................................................ 32
2010-2014........................................................ 72
2015-2019........................................................ 56
2020 and later................................................... 107
---
Total.......................................................... 280
===
In addition, the Company owns a 43,120 square-foot building in Irvine,
California which houses support personnel for the Company. Adjacent to this
building the Company has started construction of a new 4,000 square-foot
research and development facility, which will house quality assurance and the
Company's test kitchen. Construction is expected to be completed in the second
quarter of 2000. The Company leases 34,200 square feet of space in an office
building in Irvine, California which houses El Torito and KKR operations
staff, the Company's headquarters personnel and certain support functions of
the Company. The Company also leases 26,270 square feet of space in a building
in Louisville, Kentucky which houses the Chi-Chi's operations and support
functions and various other smaller offices and warehouses. In connection with
the El Torito Sale, the Company will review its office and warehouse
requirements and reduce available square footage as necessary and allowable
under its various lease agreements.
Substantially all of the Company's assets have been pledged under the
Foothill Credit Facility. However, of the 83 owned restaurants at December 26,
1999 (buildings or land and buildings), two were subject to security interests
in favor of other third parties.
10
Approximately 42% of the Company's restaurants are located in California.
Revenues are dependent on discretionary spending by consumers, particularly by
consumers living in the communities in which the restaurants are located. A
significant weakening in any of the local economies in which the restaurants
operate (particularly California) may cause the residents of such communities
to curtail discretionary spending which, in turn, could have a material effect
on the results of operations and financial position of the entire Company. In
addition, the results achieved to date by the Koo Koo Roo restaurants in the
core Southern California market may not be indicative of the prospects or
market acceptance of a larger number of restaurants, particularly in wider and
more geographically dispersed areas with varied demographic characteristics.
The Company's geographic concentration of restaurants could have a material
adverse effect on its financial condition and results of operations. The
following table details the Company-operated restaurants by state of operation
as of December 26, 1999:
Total
Hamburger Number of
Chi-Chi's El Torito* Koo Koo Roo Hamlet Restaurants
--------- ---------- ----------- --------- -----------
California.............. 0 83 37 10 130
Ohio.................... 28 0 0 0 28
Pennsylvania............ 23 0 0 0 23
Indiana................. 13 2 0 0 15
Michigan................ 14 0 0 0 14
Virginia................ 9 0 0 2 11
Maryland................ 8 0 0 2 10
Wisconsin............... 10 0 0 0 10
Missouri................ 0 8 0 0 8
Minnesota............... 7 0 0 0 7
New Jersey.............. 7 0 0 0 7
Kentucky................ 6 0 0 0 6
Illinois................ 5 1 0 0 6
Iowa.................... 5 0 0 0 5
Florida................. 0 0 4 0 4
New York................ 4 0 0 0 4
Massachusetts........... 3 0 0 0 3
Nevada.................. 0 1 2 0 3
Oregon.................. 0 3 0 0 3
West Virginia........... 3 0 0 0 3
Arizona................. 0 2 0 0 2
Connecticut............. 1 0 0 0 1
Delaware................ 1 0 0 0 1
Kansas.................. 1 0 0 0 1
North Dakota............ 1 0 0 0 1
South Dakota............ 1 0 0 0 1
Washington.............. 0 1 0 0 1
--- --- --- --- ---
Total................. 150 101 43 14 308
=== === === === ===
- --------
* All but six restaurants (five in California and one in Nevada) to be sold
to Acapulco if the El Torito Sale is consummated--See "BUSINESS--Sale of El
Torito Division."
In the past five years, the Company has divested more than 115 restaurants,
and the Company currently has a substantial portfolio of closed, subleased and
assigned properties. Because the ability of any particular acquiror to satisfy
its obligations under any subleased or assigned lease depends on its ability
to generate sufficient revenues in the acquired restaurant, there can be no
assurance that the Company will not incur significant and unplanned costs in
connection with such leases. It is expected that ongoing divestment activities
will add to this
11
portfolio of closed, subleased and assigned properties. From time to time, the
Company has been required to reassume leases associated with these properties,
but it has generally been able to relet them within a reasonable period of
time. As of December 26, 1999, the Company was attempting to lease nine closed
properties with an annual carrying cost of $1.5 million. The failure to relet
such leases on favorable economic terms, or at all, or increases in the
carrying costs associated with such leases, could have a material adverse
effect on the Company's financial condition and results of operations.
Item 3. LEGAL PROCEEDINGS
The Company is involved in various litigation matters incidental to its
business. The Company does not believe that any of the claims or actions filed
against it will have a material adverse effect upon the consolidated financial
position or results of operations of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
From September 15, 1986 (date of incorporation) through October 30, 1998,
there was no established public trading market for the Company's Common Stock.
Commencing November 2, 1998 with the consummation of the Merger, and
continuing until February 1, 1999, the Company's Common Stock traded in and
was listed for quotation through the National Association of Securities
Dealers Automated Quotation System ("Nasdaq") National Market. Beginning
February 2, 1999, the Company's Common Stock has traded in the NASD Over-the-
Counter Bulletin Board Market.
The following table sets forth for the periods identified the high and low
closing price of the Company's Common Stock, as reported by the applicable
market.
High Low
----- -----
Year Ended December 1997
First Quarter................................................. N/A N/A
Second Quarter................................................ N/A N/A
Third Quarter................................................. N/A N/A
Fourth Quarter................................................ N/A N/A
Year Ended December 1998
First Quarter................................................. N/A N/A
Second Quarter................................................ N/A N/A
Third Quarter................................................. N/A N/A
Fourth Quarter (beginning November 2, 1998)................... $1.25 $0.53
Year Ended December 1999
First Quarter................................................. $1.00 $0.47
Second Quarter................................................ $1.09 $0.52
Third Quarter................................................. $0.55 $0.31
Fourth Quarter................................................ $0.36 $0.13
At March 17, 2000, there were 1,032 stockholders of record of Company
Common Stock.
The Securities and Exchange Commission ("SEC") has amended certain rules
under the Securities Exchange Act of 1934 regarding the use of a company's
discretionary proxy voting authority with respect to stockholder proposals
submitted to a company for consideration at such company's next annual
meeting. Stockholder proposals submitted to the Company outside the processes
of Rule 14a-8 (i.e., the procedures for placing a stockholders' proposal in
the Company's proxy materials) will be considered untimely with respect to the
2000 annual meeting of stockholders and all subsequent annual meetings of
stockholders if received by the Company more than 120 days or less than 90
days prior to the anniversary date of the immediately preceding annual meeting
of stockholders.
The Company has not paid cash dividends to holders of Company Common Stock
since its incorporation. The Company has retained, and expects to continue to
retain, all available earnings, if any, generated by its operations for the
maintenance, development and growth of its business, and does not anticipate
paying dividends on Company Common Stock in the foreseeable future. In
addition, each of the indentures, as amended, (collectively, the "Indentures")
governing the Company's outstanding Senior Notes and Senior Subordinated
Discount Notes, the note agreements governing the FRI-MRD Senior Discount
Notes and the MRD Merger Notes and the Foothill Credit Facility restricts or
prohibits the Company's ability to pay dividends.
13
Item 6. SELECTED FINANCIAL DATA(1)
As of and for the Years Ended
-----------------------------------------------------------------
Dec. 26, Dec. 27, Dec. 28, Dec. 29, Dec. 31,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
($ in thousands, except per share amounts)
Statement of Operations
Data:
Sales................... $ 536,579 $ 472,653 $ 463,724 $ 724,229 $ 1,134,359
Cost of Sales:
Product cost........... 141,881 126,788 123,803 200,379 322,194
Payroll and related
costs................. 190,772 165,207 162,807 273,536 419,185
Occupancy and other
operating expenses.... 139,153 125,177 129,428 181,730 275,164
Depreciation and
amortization........... 28,031 22,916 22,395 33,802 52,561
General and
administrative
expenses............... 32,742 27,417(2) 30,186 41,742 56,245
Opening expense......... 2,879 3,345 188 673 5,275
Loss on disposition of
properties............. 5,265 7,993 3,885 8,600 12,067
Gain on sale of
division............... 0 0 0 62,601 0
Provision for
divestitures and write-
down of long-lived
assets................. 484 27,661 2,640 0 44,500
VCU termination expense
(3).................... 0 4,223 0 0 0
Restructuring costs..... 0 0 0 6,546 4,392
Interest expense, net... 31,371 24,659 19,476 36,725 65,277
Income tax provision.... 492 400 509 890 1,208
----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary item..... (36,491) (63,133) (31,593) 2,207 (123,709)
Extraordinary gain on
extinguishment of
debt................... 0 0 0 134,833 0
----------- ----------- ----------- ----------- -----------
Net income (loss)....... $ (36,491) $ (63,133) $ (31,593) $ 137,040 $ (123,709)
=========== =========== =========== =========== ===========
Net income (loss) per
share--basic and
diluted:
Income (loss) before
extraordinary item.... $ (0.20) $ (0.48) $ (0.26) $ 0.02 $ (1.02)
Extraordinary item..... -- -- -- 1.11 --
----------- ----------- ----------- ----------- -----------
Net income (loss)...... $ (0.20) $ (0.48) $ (0.26) $ 1.13 $ (1.02)
=========== =========== =========== =========== ===========
Weighted average shares
outstanding--basic and
diluted................ 180,380,513 131,309,797 121,515,391 121,515,391 121,515,391
=========== =========== =========== =========== ===========
Balance Sheet Data:
Working capital
(deficiency) (4)(5).... $ (28,415) $ (74,116) $ (66,412) $ (85,524) $ 45,114
Current assets.......... 67,613 35,790 45,117 46,612 267,077
Total assets............ 286,633 348,186 289,768 307,606 551,270
Current liabilities
(5).................... 96,028 109,906 111,529 132,136 221,963
Non-current portion of
long-term debt,
including capitalized
lease obligations (6).. 237,871 237,151 199,955 165,325 455,203
Common stockholders'
equity (deficit)....... (57,605) (21,137) (26,194) 5,399 (131,576)
Selected Consolidated
Financial Ratios and
Other Data:
EBITDA (7).............. $ 32,031 $ 28,064(2) $ 17,500 $ 26,842 $ 61,571
Net income (loss)....... (36,491) (63,133) (31,593) 137,040 (123,709)
Net cash provided by
(used in) operating
activities............. (1,202) (2,495) (13,105) (21,857) 6,083
Capital expenditures.... 30,335 27,691 13,588 9,848 38,022
Net cash provided by
(used in) investing
activities............. (32,081) (41,760) (16,631) 165,024 (19,615)
Net cash provided by
(used in) financing
activities............. 19,176 29,444 28,434 (117,717) 13,663
Deficiency of earnings
(losses) to cover fixed
charges (8)............ (35,999) (62,733) (31,084) (59,504) (122,501)
Restaurants open at end
of period.............. 308 314 275 281 670
Ratio of EBITDA to
interest expense, net 1.02x 1.14x 0.90x 0.73x 0.94x
- --------
(1) The results of operations and financial position of KKR (including Hamlet)
have been combined with the results of operations and financial position
of the Company from October 30, 1998 forward.
(2) Includes the reversal of accrued management fees of $2,500,000 payable to
Apollo that the Company will not be required to pay.
14
(3) Compensation expense of $4.2 million was recorded in the fourth quarter of
1998 in connection with the termination of the Company's Value Creation
Units Plan. Such expense consisted of a $4 million cash payment and
approximately $0.2 million for the intrinsic value of stock options
granted on December 9, 1998 in connection with the termination of awards
under the Value Creation Units Plan. The stock options are fully vested
options to purchase up to, in the aggregate, 3% of the fully diluted
Company Common Stock immediately following the Merger (including shares to
be reserved for issuance under the Company's 1998 Stock Incentive Plan).
Such options have a per share strike price of $.50 and were not
exercisable for a period of 90 days after issuance.
(4) Includes the impact of working capital borrowings classification discussed
in Note 7 of the Consolidated Financial Statements and the classification
of $55,835,000 in property held for sale discussed in Note 17 of the
Consolidated Financial Statements.
(5) As of December 27, 1998, the Company has separated its self-insurance
reserves into current and long-term portions. Accordingly, working capital
(deficiency) and current liabilities are not comparable with the amounts
listed for 1997, 1996 and 1995.
(6) Excludes $7,077,000 related to the El Torito Division which is included as
a reduction of property held for sale.
(7) EBITDA is defined as earnings (loss) before opening costs, loss on
disposition of properties, gain on sale of division, provision for
divestitures and write-down of long-lived assets, VCU termination expense,
restructuring costs, interest, taxes, depreciation and amortization and
extraordinary items. The Company has included information concerning
EBITDA herein because it understands that such information is used by
certain investors as one measure of an issuer's historical ability to
service debt. EBITDA should not be considered as an alternative to, or
more meaningful than, operating income (loss) as an indicator of operating
performance or to cash flows from operating activities as a measure of
liquidity. Furthermore, other companies may compute EBITDA differently,
and therefore, EBITDA amounts among companies may not be comparable.
(8) For the periods presented, the Company's earnings (losses) are inadequate
to cover fixed charges by the amounts disclosed. For the purposes of
calculating the deficiency of earnings (losses) to fixed charges
(i) earnings (losses) represent income (loss) before income taxes, fixed
charges, gain on sale of division and extraordinary gain on extinguishment
of debt and (ii) fixed charges consist of interest on all indebtedness,
interest related to capital lease obligations and amortization of debt
issuance costs and discounts relating to indebtedness.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain information and statements included in this Management's Discussion
and Analysis of Financial Condition and Results of Operations, including,
without limitation, statements containing the words "believes," "anticipates,"
"expects," "intends," "plans," "estimates" and words of similar import,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and involve known and unknown risks
and uncertainties that could cause actual results of the Company or the
restaurant industry to differ materially from expected results expressed or
implied by such forward-looking statements. Although it is not possible to
itemize all of the factors and specific events that could affect the outlook
of a restaurant company operating in a competitive environment, factors that
could significantly impact expected results include:
. the continuing development of successful marketing strategies for each
of the Company's concepts;
. the effect of national and regional economic conditions;
. the ability of the Company to satisfy its debt obligations;
. the availability of adequate working capital;
. competitive products and pricing;
15
. changes in legislation;
. demographic changes;
. the ability to attract and retain qualified personnel;
. changes in business strategy or development plans;
. business disruptions;
. changes in consumer preferences, tastes and eating habits; and
. increases in food and labor costs.
The Company disclaims any obligation to update any such factors or to
publicly announce the result of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
On October 30, 1998, the Company, Merger Sub and KKR consummated the
Merger, pursuant to which Merger Sub was merged with and into KKR, with KKR as
the surviving corporation. As a result of the Merger, each outstanding share
of common stock of KKR was converted into the right to receive one share of
Company Common Stock. Immediately prior to the Merger, a stock dividend was
declared pursuant to which approximately 121.96 shares of Company Common Stock
were distributed for each share of Company Common Stock outstanding
immediately prior to the Merger. Prior to the Merger, the Company provided the
Bridge Loan to a subsidiary of KKR. Additionally, in connection with the
Merger, FRI-MRD issued the MRD Merger Notes pursuant to the Senior Secured
Discount Note Agreement dated June 9, 1998 for which it received net proceeds
of $21.7 million, and the Company expanded the Foothill Credit Facility by an
additional $20 million. The proceeds from the sale of the MRD Merger Notes
were used to complete the Hamlet Acquisition immediately prior to the
consummation of the Merger.
Information relating to periods ending prior to October 30, 1998 included
herein relates to the historical operations of Prandium, Inc. (formerly known
as Koo Koo Roo Enterprises, Inc. and as Family Restaurants, Inc.) and does not
reflect the operations of KKR and Hamlet which the Company acquired on October
30, 1998.
Liquidity and Capital Resources
Liquidity
The Company reported net cash used in operating activities for the years
ended December 26, 1999 and December 27, 1998 of $1.2 million and $2.5
million, respectively. Cash needs are being funded by available cash balances,
supplemented, as necessary, by working capital advances available under the
Foothill Credit Facility. In addition, in 1997 and 1998 FRI-MRD raised
approximately $67.3 million in cash from the issuance of the Senior Discount
Notes and the MRD Merger Notes to supplement its cash needs. The Company's
viability has been and will continue to be dependent upon its ability to
generate sufficient operating cash flow or cash flow from other sources to
meet its obligations on a timely basis, and to comply with the terms of its
financing agreements.
Statement of Cash Flows. For the year ended December 26, 1999, net cash
used in operating activities was $1.2 million compared to $2.5 million for the
year ended December 27, 1998. The difference in cash received from customers,
franchisees and licensees as compared to cash paid to suppliers and employees
decreased by $1.2 million from 1998 to 1999. This decrease combined with $1.6
million in lower interest received were more than offset by the lack of VCU
termination expense in 1999. For 1999, net cash used in investing activities
was $32.1 million compared to $41.8 million for the same period in 1998. The
decrease in net cash used in investing activities of $9.7 million was due to
the decrease of Merger-related expenditures of $14.7 million, an increase in
proceeds from payment on notes receivable of $2.2 million, and an increase in
proceeds from sale of notes receivable of $3.2 million, offset in part by an
increase in capital expenditures of $2.6 million, an increase in lease
termination payments of $2.2 million, other divestment expenditures of $2.3
million and a decrease in proceeds from disposal of property and equipment of
$2.4 million. For 1999, net cash provided by financing
16
activities was $19.2 million compared to $29.4 million for the same period in
1998. During 1998, $33.3 million in net proceeds from the issuance of notes
was received, as compared to $21.9 million in proceeds from working capital
borrowings in 1999.
For the year ended December 27, 1998, net cash used in operating activities
was $2.5 million compared to $13.1 million for the year ended December 28,
1997. The difference in cash received from customers, franchisees and
licensees as compared to cash paid to suppliers and employees improved by
$17.9 million from 1997 to 1998 which more than offset cash paid for opening
costs of $3.0 million and for VCU termination expense of $4.0 million in 1998.
For 1998, net cash used in investing activities was $41.8 million compared to
$16.6 million in 1997. The increase in net cash used in investing activities
of $25.2 million was due to Merger-related expenditures of $17.0 million and
an increase in capital expenditures of $14.1 million which more than offset
decreases in mandatory lease buybacks of $2.7 million, lease termination
payments of $1.5 million and an increase in proceeds from disposal of property
and equipment of $3.4 million. For 1998, net cash provided by financing
activities was $29.4 million compared to net cash used in financing activities
of $28.4 million in 1997. During 1998 and 1997, $33.3 million and $33.9
million in net proceeds from the issuance of notes was received, respectively,
while reductions of long-term debt decreased by $0.4 million and payment of
debt issuance costs decreased by $1.3 million from 1997.
EBITDA. For the year ended December 26, 1999, the Company reported EBITDA
(defined as earnings (loss) before opening costs, loss on disposition of
properties, gain on sale of division, provision for divestitures and write-
down of long-lived assets, VCU termination expense, restructuring costs,
interest, taxes, depreciation and amortization and extraordinary items) of
$32.0 million, compared to $28.1 million for 1998. The $3.9 million
improvement was due to the continuing impact of cost reduction and
reengineering strategies which have improved operating margins, continuing
positive comparable restaurant sales trends at El Torito and $4.4 million
contributed by KKR and Hamlet in 1999 compared to $0.4 million for November
and December 1998, partially offset by the $2.5 million reversal in 1998 of
certain management fee accruals that the Company was not required to pay. This
improved EBITDA is the continuation of the trend that began in 1996 when new
management was installed at both El Torito and Chi-Chi's. Since 1995, the
divisional EBITDA of the Company's ongoing operations is set forth in the
following table.
Divisional EBITDA
--------------------------------
El Chi-
Fiscal Year Ended Torito Chi's Koo Koo Roo(b)
----------------- ------- -------- --------------
($ in thousands)
December 31, 1995(a)........................ $13,508 $(10,455) $ --
December 29, 1996........................... 11,956 (4,278) --
December 28, 1997........................... 17,627 36 --
December 27, 1998........................... 22,869 1,426 364
December 26, 1999........................... 22,000 5,942 4,384
- --------
(a) Includes 53 weeks of operations and, in accordance with Company policy at
that time, excludes certain unallocated corporate overhead.
(b) The Merger and Hamlet Acquisition were completed on October 30, 1998.
The Company has included information concerning EBITDA herein because it
understands that such information is used by certain investors as one measure
of an issuer's historical ability to service debt. EBITDA should not be
considered as an alternative to, or more meaningful than, operating income
(loss) as an indicator of operating performance or to cash flows from
operating activities as a measure of liquidity. Furthermore, other companies
may compute EBITDA differently, and therefore, EBITDA amounts among companies
may not be comparable.
Working Capital Deficiency. The Company operates with a substantial working
capital deficiency because:
. restaurant operations are conducted primarily on a cash (and cash
equivalent) basis with a low level of accounts receivable;
17
. rapid turnover allows a limited investment in inventories; and
. cash from sales is usually received before related accounts payable for
food, beverages and supplies become due.
The Company had a working capital deficiency of $62.4 million on December
26, 1999 (excluding the impact of $55.8 million in property held for sale
discussed in Note 17 of the Financial Statements and the impact of $21.9
million in working capital borrowings classified as a current liability).
Credit Facility. The Foothill Credit Facility:
. provides for up to $35 million in revolving cash borrowings and up to
$55 million in letters of credit (less the outstanding amount of
revolving cash borrowings);
. is secured by substantially all of the real and personal property of the
Company;
. contains covenants which restrict, among other things, the Company's
ability to incur debt, pay dividends on or redeem capital stock, make
certain types of investments, make dispositions of assets and engage in
mergers and consolidations; and
. expires on January 10, 2002.
The Company was in compliance with all financial ratios at December 26,
1999. Letters of credit are issued under the Foothill Credit Facility
primarily to provide security for future amounts payable under the Company's
workers' compensation insurance program ($18.3 million of such letters of
credit were outstanding as of March 17, 2000). $27.5 million of working
capital borrowings were outstanding as of March 17, 2000.
Senior Discount Notes. On August 12, 1997, FRI-MRD issued an aggregate
principal amount of $61 million of its Senior Discount Notes to certain
holders of the Company's Senior Notes in exchange for $15.6 million of Senior
Notes plus approximately $34 million of cash. On January 14 and 15, 1998, FRI-
MRD issued an additional $14 million aggregate principal amount of its Senior
Discount Notes to the same purchasers for approximately $11.6 million in cash.
The Senior Discount Notes are due on January 24, 2002. No cash interest was
payable on the Senior Discount Notes until July 31, 1999, at which time
interest became payable in cash semi-annually at the rate of 15% per annum,
with the first cash interest payment made on January 31, 2000. The Senior
Discount Notes are redeemable by FRI-MRD, in whole or in part, on or before
January 23, 2001, at a price of 107.5% of the accreted value thereof, or after
January 23, 2001, at a price of 103.75% of the accreted value thereof. The
Senior Discount Notes contain covenants that restrict FRI-MRD, including
limitations on (i) the incurrence of certain indebtedness and liens, (ii) the
ability to make certain restricted payments, (iii) certain mergers,
consolidations and asset sales and (iv) certain transactions with affiliates.
Proceeds from the sales of the Senior Discount Notes were used to fund the
Company's capital expenditure programs and for general corporate purposes.
Senior Secured Discount Notes. On June 9, 1998, FRI-MRD entered into a Note
Agreement pursuant to which on October 30, 1998 FRI-MRD issued $24 million
aggregate face amount of MRD Merger Notes at a price of approximately 90% of
par resulting in net proceeds of $21.7 million. The MRD Merger Notes are due
on January 24, 2002. No cash interest was payable on the MRD Merger Notes
until July 31, 1999, at which time interest became payable in cash semi-
annually at the rate of 14% per annum, with the first cash interest payment
made on January 31, 2000. The MRD Merger Notes are redeemable by FRI-MRD, in
whole or in part, on or before January 23, 2001, at a price of 105% of the
accreted value thereof, or after January 23, 2001, at a price of 102.5% of the
accreted value thereof. The MRD Merger Notes contain covenants that restrict
FRI-MRD, including limitations on (i) the incurrence of certain indebtedness
and liens, (ii) the ability to make certain restricted payments, (iii) certain
mergers, consolidations and asset sales, (iv) certain transactions with
affiliates and (v) the issuance of any equity securities of Hamlet. Proceeds
from the sale of the MRD Merger Notes were used exclusively to purchase all of
the outstanding shares of Hamlet, and the MRD Merger Notes are secured by all
of such outstanding shares of Hamlet.
18
Other. During 1999, the Company explored several financing transactions and
other strategic alternatives in an effort to meet its debt service
requirements and retained Donaldson, Lufkin & Jenrette Securities Corporation
and U.S. Bancorp Libra as financial advisors to assist in these efforts. This
process culminated in the execution of the Sale Agreement on March 27, 2000 to
sell substantially all of the El Torito Division to Acapulco in a transaction
with an enterprise value of $130.0 million, subject to certain adjustments
based on a closing balance sheet. Cash proceeds from the sale will be used to
repay certain indebtedness and for general corporate purposes. Consummation of
the El Torito Sale is subject to customary terms and conditions, and there can
be no assurances that this transaction will be consummated.
Upon completion of the El Torito Sale, the Company will continue to be
highly leveraged and have significant debt service requirements, excluding
requirements under the Foothill Credit Facility, as follows:
Cash
Interest Principal
-------- ---------
($ in millions)
2000...................................................... $28.4 $ 1.1
2001...................................................... 28.3 0.9
2002...................................................... 15.6 203.2
2003...................................................... 3.4 0.5
2004...................................................... 1.7 31.1
Although management believes that the proceeds available to the Company as
a result of the El Torito Sale should be sufficient to meet its operating and
debt service requirements for the next two years, there can be no assurance
that the Company will be able to repay or refinance its Senior Notes and
Senior Subordinated Discount Notes, or that FRI-MRD will be able to repay or
refinance the Senior Discount Notes or the MRD Merger Notes, at their
respective maturities. The Company will continue to explore various
alternatives to further reduce its debt.
Capital Resources
Net cash used in investing activities was $32.1 million for the year ended
December 26, 1999, including $30.3 million for capital expenditures, as
compared to net cash used in investing activities of $41.8 million for fiscal
1998 and $16.6 million for fiscal 1997.
Capital expenditures of up to approximately $37.3 million (including
approximately $16.3 million for the El Torito Division) have been identified
for fiscal 2000, including approximately $9.2 million (including approximately
$2.6 million for the El Torito Division) devoted to normal improvements of the
Company's restaurants. The Company is considering continuing its remodeling of
both El Torito and Chi-Chi's restaurants and is allocating approximately $9.5
million (including approximately $3.8 million for the El Torito Division) for
this purpose in fiscal 2000. The Company anticipates that up to three new El
Torito restaurants and up to seven new Koo Koo Roo restaurants could open in
2000 and beginning to accelerate the Koo Koo Roo growth plan in 2001. Actual
capital expenditures for fiscal 2000 will be dependent on the availability of
required funds and the timing of the consummation of the El Torito Sale.
By December 26, 1999, the Company had completed the remodeling of 42 El
Torito restaurants in various markets, and 83 Chi-Chi's restaurants, in
various markets.
Year 2000
The Company believes it has successfully addressed the potential business
risks associated with the Year 2000. The Year 2000 issue involved the use of a
two-digit year field instead of a four-digit year field in computer systems.
If computer systems could not distinguish between the year 1900 and the year
2000, system failures or other computer errors could have resulted. To date,
the Company is not aware of the occurrence of any significant Year 2000
problems being reported in connection with its business. Some business risks
associated with the Year 2000 issue may remain throughout 2000. However, it is
not anticipated that future Year 2000 issues, if any, will have a material
adverse effect on the Company.
19
The total cost to the Company of addressing Year 2000 issues was
approximately $9.0 million, a significant portion of which was lease financed.
This amount was incurred for new software and related hardware and
installation costs during 1998 and 1999 in the Company's corporate offices and
operating restaurants.
Interest Rate Risk
The Company's primary exposure to financial market risks is the impact that
interest rate changes could have on the Foothill Credit Facility, of which
$21,850,000 was outstanding as of December 26, 1999. Borrowings under the
Foothill Credit Facility bear interest at the prime rate as announced by Wells
Fargo & Company plus 1.875% for borrowings less than $23,333,333 and at the
prime rate plus 2.875% for borrowings equal to or greater than $22,333,333
(averaging 10.14% in fiscal 1999). A hypothetical increase of 100 basis points
in short-term interest rates would result in an increase of approximately
$219,000 in annual pretax losses. The estimated increase is based upon the
outstanding balance of the Foothill Credit Facility, and assumes no change in
the volume, index or composition of debt at December 26, 1999.
Results of Operations
As used herein, "comparable restaurants" are restaurants operated by the
Company for at least eighteen months and that continued operating through the
last day of the later year being compared. The Company has adjusted its
comparable restaurant sales calculation to conform to the general industry
standard of an 18-month base versus the prior 12-month base. This change has
not had a material impact on reported comparable restaurant sales results due
to the Company's relatively low levels of new restaurant growth in the past
three years.
Fiscal year 1999 as compared to fiscal year 1998
Total sales of $536,579,000 for 1999 increased by $63,926,000 or 13.5% as
compared to 1998. The increase was due to (i) additional sales from the Koo
Koo Roo and Hamburger Hamlet restaurants which were acquired in the Merger and
the Hamlet Acquisition on October 30, 1998 and (ii) sales from new
restaurants, partially offset by sales decreases for restaurants sold or
closed. The breakdown of the sales increase for 1999 is detailed below:
1999 Sales
Increase
----------
($ in
thousands)
----------
Increased Sales from the KKR Restaurant Division.................. $ 73,635
Sales from New Restaurants........................................ 6,398
Decrease in Sales of Comparable Restaurants....................... (42)
Decrease in Sales from Restaurants Sold or Closed................. (16,065)
--------
$ 63,926
========
Overall sales for comparable restaurants were relatively flat in 1999.
Sales for comparable restaurants of $433,604,000 for 1999 decreased by $42,000
compared to 1998. The decrease is comprised of a $1,177,000 or 0.5% decrease
in Chi-Chi's sales and a $1,135,000 or 0.5% increase in El Torito sales.
1999 Comparable
Sales Decrease
----------------
Amount Percent
------- -------
($ in
thousands)
Comparable Chi-Chi's....................................... $(1,177) (0.5)%
Comparable El Torito....................................... 1,135 0.5
-------
Total.................................................... $ (42) 0.0 %
======= ====
20
El Torito comparable sales for 1999 were up 0.5% as compared to the same
period in 1998. Throughout 1999, the primary marketing tool was a print
campaign featuring various coupon offers. The focus throughout the year was El
Torito's 45th Anniversary Celebration combined with a quarterly introduction
of an innovative product or line of products. El Torito comparable sales were
up 3.0% in the first quarter compared to the same period in 1998. These
results were in part associated with the introduction of El Torito's 45th
Anniversary Celebration and in part associated with the rollover of the El
Nino weather system which negatively impacted sales in the first quarter of
1998. The first quarter marketing effort consisted of a print campaign
focusing on the Fiesta Favorites Chef's Specials. Second quarter comparable
sales results were also positive, up 1.0% versus prior year. The second
quarter advertising continued the focus on the 45th Anniversary with a print
campaign introducing El Torito's signature product for the quarter
"Enchi"WOW"das." In the third quarter, comparable sales results were 1.0%
unfavorable versus prior year. The signature product during the quarter, the
"45 RPM Revolutionary Platter from Mexico" was designed and priced as a meal
to be shared by two guests. To offset softening sales in the fourth quarter
(comparable sales were unfavorable 2.0% in the fourth quarter), the XXL 45th
Anniversary Fajitas and Holiday Combinations were introduced. The print
campaign in the quarter included a Buy One Get One Free Coupon designed to
create incremental guest traffic.
Chi-Chi's comparable sales for 1999 were 0.5% lower than 1998 compared to a
1.8% increase for 1998 over 1997. Comparable sales through the third quarter
were up 0.5% over prior year. However, in the fourth quarter of 1999, Chi-
Chi's switched from broadcast media advertising to freestanding inserts in
print media ("FSIs"). When compared to the fourth quarter of 1998 when Chi-
Chi's was running broadcast media advertising, comparable sales in the fourth
quarter of 1999 were 3.6% lower. Concurrently, advertising expense was lowered
approximately $1.1 million as a result of the net media savings. The FSIs
featured a variety of Chi-Chi's signature items like the Outrageous Burrito,
Sizzling Enchiladas and Grilled Steak & Chicken Fajitas. In the Cantina, a
special Countdown Margarita, served in a commemorative take-home glass for
$7.25, helped guests celebrate the Millennium. In October 1999, Chi-Chi's
began testing an extensive new food offering, Menu 2000, in a three-unit,
midwestern market. Menu 2000 is the result of intensive testing for consumer
tastes and interests, food research and operational planning. During all 10
weeks of the advertising-supported test in 1999, both sales and customer
counts in the test market have shown significant increases over prior year.
Menu 2000 will be introduced to the rest of the Chi-Chi's system in the second
quarter of 2000 and will be the primary focus of broadcast media advertising
in 2000.
During 1999, Koo Koo Roo initiated four marketing events including the
introduction of a line of Chicken Chop bowls, $5.99 combo meals and a focus on
take home meals. Each promotion was supported with print advertising and in-
store merchandising materials. During the first quarter, Koo Koo Roo
introduced the Chargrilled Chicken Chop, now one of its top-selling products.
With the success of this product, Koo Koo Roo introduced two additional
Chicken Chop bowls in the third quarter. During the second quarter, Koo Koo
Roo offered a selection of four combo meals for $5.99, featuring Koo Koo Roo
Original Skinless Flame Broiled Chicken(R), Country Herb and Garlic Rotisserie
Chicken and Fresh-Roasted Turkey. Each combo meal included an entree, any two
hot or cold side dishes and a beverage. In the fourth quarter, the marketing
focused on one of its signature products, Country Herb and Garlic Rotisserie
Chicken. The print advertising focused on building the take home business with
a coupon incentive for a $5.99 Rotisserie Chicken. Along with the focus on
Rotisserie Chicken, Koo Koo Roo teamed up with Dreamworks to promote their
video release of The Prince of Egypt. This promotion centered on building
awareness of the Koo Koo Roo Kid's Meals. During this promotion, each Kid's
Meal (while supplies were available) came with a souvenir The Prince of Egypt
cup and a small stuffed camel from The Prince of Egypt. Following these two
promotions, Koo Koo Roo focused on Thanksgiving Day which resulted in an
increase of 10% in turkey sales on Thanksgiving Day.
Hamburger Hamlet introduced two new Hamlet At Night menus in 1999. These
new menus included products such as Halibut Macadamia, Santa Fe Chicken,
Grilled Pork Chop, Shepherd's Pie and Mediterranean Shrimp Penne Pasta.
Hamburger Hamlet also teamed up with Oreo(R) in 1999 and introduced a new
dessert--Oreo(R) Cookie Mudd Pie. These menus were supported with in-store
merchandising and direct mail distributed around the West and East Coast
Hamburger Hamlet locations. During the summer of 1999, Hamburger Hamlet
21
also introduced five "New Gourmet Burgers From Around The World." The French
Onion Burger became a core menu item following its introduction during this
promotion.
Product costs of $141,881,000 for 1999 increased by $15,093,000 or 11.9% as
compared to 1998 due to the acquisition of the Koo Koo Roo and Hamburger
Hamlet restaurants in the Merger which accounted for $22,795,000 or 151.0% of
the increase, partially offset by the impact of the 32 restaurants sold or
closed since the beginning of 1998. As a percentage of sales, product costs
decreased to 26.4% in 1999 from 26.8% in 1998.
Payroll and related costs of $190,772,000 for 1999 increased by $25,565,000
or 15.5% as compared to 1998 due to (i) the acquisition of the Koo Koo Roo and
Hamburger Hamlet restaurants in the Merger which accounted for $24,393,000 or
95.4% of the increase, (ii) the impact of the minimum wage increase in
California on March 1, 1998 and (iii) the impact of improved management
staffing in many of the Company's restaurants, partially offset by the impact
of the 32 restaurants sold or closed since the beginning of 1998. As a
percentage of sales, payroll and related costs increased from 35.0% in 1998 to
35.6% in 1999. The increase in payroll and related costs as a percentage of
sales was offset in part by a continuing focus on improving labor scheduling
and efficiencies.
The Company is subject to Federal and state laws governing matters such as
minimum wages, overtime and other working conditions. Approximately half of
the Company's employees are paid at rates related to the minimum wage.
Therefore, increases in the minimum wage or decreases in the allowable tip
credit (tip credits reduce the minimum wage that must be paid to tipped
employees in certain states) increase the Company's labor costs. This is
especially true in California, where there is no tip credit. Effective
September 1, 1997, the Federal minimum wage was increased from $4.75 to $5.15.
However, a provision of this law effectively froze the minimum wage for tipped
employees at then current levels by increasing the allowable tip credit in
those states that allow for a tip credit. Furthermore, in California, the
state's minimum wage was increased to $5.00 on March 1, 1997 and most recently
increased to $5.75 on March 1, 1998. In response to the minimum wage increases
on March 1, 1997 and March 1, 1998, the Company raised menu prices at its El
Torito restaurants in an effort to recover the higher payroll costs. Chi-Chi's
also raised menu prices in October and December 1997 as a result of the
cumulative impact of these minimum wage increases. Similarly, in March 1998,
KKR also raised menu prices for its Koo Koo Roo restaurants. No minimum wage
increases are currently scheduled for 2000 at this time, but it is anticipated
that the Federal legislature will pass a minimum wage increase later this
year.
Occupancy and other operating expenses of $139,153,000 for 1999 increased
by $13,976,000 or 11.2% as compared to 1998. The increase was due to the
acquisition of the Koo Koo Roo and Hamburger Hamlet restaurants in the Merger
which added $17,488,000 in additional costs, partially offset by (i) the
impact of the 32 restaurants sold or closed since the beginning of 1998 and
(ii) the impact of the Company's cost reduction strategies. As a percentage of
sales, occupancy and other expenses decreased from 26.5% in 1998 to 25.9% in
1999.
Depreciation and amortization of $28,031,000 for 1999 increased by
$5,115,000 or 22.3% as compared to 1998 due to the acquisition of the Koo Koo
Roo and Hamburger Hamlet restaurants in the Merger which accounted for
$4,126,000 or 80.7% of the increase and additional depreciation related to the
Company's ongoing capital expenditure program, partially offset by the impact
of the 32 restaurants sold or closed since the beginning of 1998 and the
reduced depreciable basis from the write-down of certain long-lived assets in
the fourth quarter of 1998.
General and administrative expenses of $32,742,000 for 1999 increased by
$5,325,000 or 19.4% as compared to 1998. General and administrative expenses
of $4,844,000 were incurred by and allocated to the Koo Koo Roo and Hamburger
Hamlet restaurant operations in 1999. As a percentage of sales, general and
administrative expenses increased from 5.8% in 1998 to 6.1% in 1999. General
and administrative expenses in 1998 would have been 6.3% of sales if the
impact of $2,500,000 in prior year management fee accrual reversals were added
back. Management continues to closely evaluate the Company's general and
administrative cost structure for savings opportunities.
22
Opening costs are incurred in connection with the opening or remodeling of
a restaurant and are principally related to stocking the restaurant and
training its staff. Opening costs of $2,879,000 for 1999 decreased by $466,000
or 13.9% as compared to 1998, primarily due to expensing $344,000 of December
28, 1997 unamortized opening costs in the quarter ended March 29, 1998 as a
result of adopting Statement of Position 98-5 ("SOP 98-5"), "Reporting on the
Costs of Start-up Activities," in the first quarter of 1998.
The Company reported a loss on disposition of properties of $5.3 million
for 1999 compared to a loss of $8.0 million in 1998. These amounts reflect
losses associated with restaurant divestments and closures and remodeled
restaurant asset retirements in such periods. In addition, also included in
1998 is a $3.0 million increase in the Company's reserve for carrying costs of
closed properties and the write-off of $2.2 million in notes receivable
related to prior restaurant divestments.
In the fourth quarter of 1999, three non-strategic Koo Koo Roo restaurants
were designated for divestment, and the Company recorded a provision for
divestitures of $0.9 million. Also during the fourth quarter of 1999, the
Company reevaluated its divestment program for Chi-Chi's restaurants and
removed 20 operating restaurants from the divestment list. As a result, $1.0
million previously recorded in conjunction with a 1998 provision for
divestitures has been reversed. Finally, the Company identified two other
restaurants with impaired values and recorded a write-down of long-lived
assets of $0.6 million.
Interest expense, net of $31,371,000 for 1999 increased by $6,712,000 or
27.2% as compared to 1998 primarily resulting from (i) the issuance of Senior
Discount Notes in January 1998 and the additional accretion and accrual of
interest thereon, (ii) the issuance of the MRD Merger Notes on October 30,
1998 and the accretion and accrual of interest thereon, (iii) interest on
working capital borrowings in 1999 and (iv) reduced interest income on
invested cash balances.
Fiscal year 1998 as compared to fiscal year 1997
Total sales of $472,653,000 for 1998 increased by $8,929,000 or 1.9% as
compared to 1997. The increase was due to (i) the addition of sales from the
Koo Koo Roo and Hamburger Hamlet restaurants which were acquired in the Merger
and the Hamlet Acquisition on October 30, 1998 and (ii) sales increases in the
comparable El Torito and Chi-Chi's, partially offset by sales decreases for
restaurants sold or closed. The breakdown of the sales increase for 1998 is
detailed below:
1998 Sales
Increase
----------------
($ in thousands)
Sales from the KKR Restaurant Division...................... $ 14,617
Increase in Sales of Comparable Restaurants................. 4,814
Decrease in Sales from Restaurants Sold or Closed........... (10,502)
--------
$ 8,929
========
Sales for comparable restaurants of $451,928,000 for 1998 increased by
$4,814,000 or 1.1% compared to 1997. The increase was comprised of a
$4,223,000 or 1.8% increase in Chi-Chi's and a $591,000 or 0.3% increase in El
Torito, achieved in the face of a continuing competitive operating environment
for restaurants.
1998
Comparable
Sales Increase
--------------
Amount Percent
------ -------
($ in
thousands)
Comparable Chi-Chi's.......................................... $4,223 1.8%
Comparable El Torito.......................................... 591 0.3
------
Total....................................................... $4,814 1.1%
====== ===
23
El Torito comparable sales for 1998 were up 0.3% as compared to the same
period in 1997. After the negative impact of the El Nino weather system in the
first quarter of 1998, comparable sales for the second, third and fourth
quarters were up 0.3%, 0.1% and 2.6%, respectively, as compared to the same
periods in 1997. During the third and fourth quarters, El Torito suspended the
use of electronic media for advertising, opting to reach targeted customers
utilizing alternative print media strategies. July began with the introduction
of El Torito's "All New Fajitas" campaign featuring a series of bounce-back
programs. In the fourth quarter, El Torito introduced the "XXL Fajitas
Skillets" promotion which featured seven new Fajitas entrees served on
oversize cast iron skillets. The in-restaurant marketing for the promotion
included brightly colored in-store material featuring an "actual size" Fajitas
skillet. The campaign was advertised utilizing print media and included
special discount offers designed to both generate new guest trial and increase
frequency of existing guests. In addition, El Torito introduced a Traditional
Holiday Combinations menu insert in December in an effort to trade guests into
higher margin entrees. Also contributing to El Torito's improving sales trends
were the positive results of the remodel program which started in 1997. As of
the end of fiscal 1998, El Torito had completed 32 remodels.
Comparable sales for Chi-Chi's were up 1.8% for 1998 as compared to the
same period in 1997. During the third and fourth quarters of 1998, Chi-Chi's
comparable sales were up 3.1% and 4.7%, respectively, as compared to the same
periods in 1997. July began with the media-supported introduction of Chi-Chi's
"Sizzling Sensation" campaign featuring the new Grilled Steak & Chicken Tower
and other items such as the Sizzling Enchiladas and the new Sizzling Burrito
and Sizzling Chimichanga. A free-standing insert extended the campaign through
mid-September and included special discount offers for all times of the day to
boost sales during the historic back-to-school sales lull. Chi-Chi's continued
with its marketing direction through the end of 1998 portraying the concept as
a value-oriented, fun Mexican restaurant where you can "put a little salsa in
your life." Also contributing to Chi-Chi's improving comparable sales trends
were the favorable results of the remodel program begun in 1997. Through the
end of fiscal 1998, Chi-Chi's remodeled 45 restaurants, five of which
incorporated an enhanced, more extensive version of the original remodel
concept.
Product costs of $126,788,000 for 1998 increased by $2,985,000 or 2.4% as
compared to 1997 due to the acquisition of the Koo Koo Roo and Hamburger
Hamlet restaurants in the Merger which accounted for $4,699,000 or 157.4% of
the increase, partially offset by the impact of the 22 restaurants sold or
closed since the beginning of 1997. As a percentage of sales, product costs
remained relatively flat, increasing slightly to 26.8% in 1998 from 26.7% in
1997.
Payroll and related costs of $165,207,000 for 1998 increased by $2,400,000
or 1.5% as compared to 1997 due to the acquisition of the Koo Koo Roo and
Hamburger Hamlet restaurants in the Merger which accounted for $5,308,000 or
221.2% of the increase, partially offset by the impact of the 22 restaurants
sold or closed since the beginning of 1997. As a percentage of sales, payroll
and related costs decreased slightly from 35.1% in 1997 to 35.0% in 1998 due
in part to a continuing focus on improving labor scheduling and efficiencies.
The improvement in payroll and related costs as a percentage of sales was
offset, in part, by the impact of the minimum wage increases nationally on
September 1, 1997, and on March 1, 1997 and March 1, 1998 in California.
Occupancy and other operating expenses of $125,177,000 for 1998 decreased
by $4,251,000 or 3.3% as compared to 1997. The decrease was due to (i) the
impact of the 22 restaurants sold or closed since the beginning of 1997, (ii)
the impact of El Torito and Chi-Chi's cost reduction strategies and (iii) a
decrease in media advertising expense in El Torito, partially offset by the
acquisition of the Koo Koo Roo and Hamburger Hamlet restaurants in the Merger
which added $3,234,000 in additional costs. As a percentage of sales,
occupancy and other expenses decreased from 27.9% in 1997 to 26.5% in 1998.
Depreciation and amortization of $22,916,000 for 1998 increased by $521,000
or 2.3% as compared to 1997 due to the acquisition of the Koo Koo Roo and
Hamburger Hamlet restaurants in the Merger which accounted for $1,087,000 or
208.6% of the increase and additional depreciation related to the Company's
ongoing capital expenditure program, partially offset by the impact of the 22
restaurants sold or closed since the beginning of 1997 and the write-down of
certain long-lived assets in 1997 and 1998.
24
General and administrative expenses of $27,417,000 for 1998 decreased by
$2,769,000 or 9.2% as compared to 1997. As a percentage of sales, general and
administrative expenses decreased from 6.5% in 1997 to 5.8% in 1998. General
and administrative expenses were relatively flat for the year after taking
into account the impact of $2,500,000 in prior year management fee accrual
reversals and no similar fees accrued in 1998, partially offset by $1,012,000
in incremental expenses related to completing the Merger and the Hamlet
Acquisition and absorbing the KKR divisional operations.
Opening costs are incurred in connection with the opening or remodeling of
a restaurant and are principally related to stocking the restaurant and
training its staff. Through the year ended December 28, 1997, the Company's
policy had been to capitalize such opening costs and amortize them over one
year. In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5 which specifies that all costs of start-up activities,
including restaurant opening costs, should be expensed as incurred. Although
SOP 98-5 was effective for fiscal years beginning after December 15, 1998,
early adoption was allowed, and the Company elected to adopt the provisions of
SOP 98-5 in the quarter ended March 29, 1998. Accordingly, $344,000 of
unamortized opening costs at December 28, 1997 (classified as other current
assets) was expensed in the condensed consolidated statement of operations for
the quarter ended March 29, 1998. Opening costs incurred during the year ended
December 27, 1998 were $3,001,000. Amortization of opening costs of $188,000
in the comparable period of 1997 was reclassified.
The Company reported a loss on disposition of properties of $8.0 million
for 1998 compared to a loss of $3.9 million in 1997. These amounts reflect
losses associated with restaurant divestments and closures in such periods. In
addition, also included in 1998 is a $3.0 million increase in the Company's
reserve for carrying costs of closed properties and the write-off of $2.2
million in notes receivable related to prior restaurant divestments.
As a result of a continued review of operating results and as part of its
strategic planning process for 1999, the Company identified 48 non-strategic
Chi-Chi's restaurants which are not part of the Chi-Chi's long-term core
market focus. In connection with this analysis, the Company analyzed the
carrying value of the long-lived assets of these restaurants, determined the
anticipated costs of divestment and recorded a provision for divestitures of
$22.9 million, which included reducing the assets' carrying value to their
estimated fair market value. In addition, the Company identified 12 other
restaurants with impaired values and recorded a write-down of long-lived
assets of $4.8 million.
Compensation expense of $4.2 million was recorded in the fourth quarter of
1998 in connection with the termination of the Company's Value Creation Units
Plan. Such expense consisted of a $4 million cash payment and approximately
$0.2 million for the intrinsic value of stock options granted on December 9,
1998 in connection with the termination of awards under the Value Creation
Units Plan. The stock options are fully vested options to purchase up to, in
the aggregate, 3% of the fully diluted Company Common Stock immediately
following the Merger (including shares to be reserved for issuance under the
Company's 1998 Stock Incentive Plan). Such options have a per share strike
price of $.50 and were not exercisable for a period of 90 days after issuance.
Interest expense, net of $24,659,000 for 1998 increased by $5,183,000 or
26.6% as compared to 1997 primarily resulting from (i) the issuance of the
Senior Discount Notes in August 1997 and January 1998 and the accretion of
interest thereon and (ii) the issuance of the MRD Merger Notes on October 30,
1998 and the accretion of interest thereon, partially offset by the
elimination of cash interest expense associated with the $15.6 million of
Senior Notes received as part of the exchange on August 12, 1997.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and hedging activities. SFAS 133 is
effective for all fiscal quarters of fiscal years beginning after June 15,
2000. The FASB has proposed extending the effective date of SFAS 133 for one
year. The Company has no instruments or transactions subject to SFAS 133.
25
Selected Operating Data
Until the Merger on October 30, 1998, the Company primarily operated full-
service Mexican restaurants in two divisions under the El Torito, Chi-Chi's,
Casa Gallardo and other names. In connection with the Merger and the Hamlet
Acquisition, the Company acquired the Koo Koo Roo and Hamburger Hamlet
restaurant operations. At December 26, 1999 the Company's El Torito restaurant
division operated 101 full-service and fast-casual restaurants, the Company's
Chi-Chi's restaurant division operated 150 full-service restaurants and the
Company's KKR restaurant division operated 57 fast-casual and full-service
restaurants.
The following table sets forth certain information regarding the Company
and its El Torito, Chi-Chi's and KKR restaurant divisions.
For the Years Ended
---------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
($ in thousands, except average check
amount)
El Torito Restaurant Division (a)
Restaurants Open at End of Period:
Owned/operated...................... 101 95 96
Franchised and Licensed............. 8 8 9
Sales................................. $220,611 $214,370 $217,949
Restaurant Level Cashflow (b)......... 33,869 34,807 30,051
Divisional EBITDA (c)................. 22,000 22,869 17,627
Percentage increase (decrease) in
comparable restaurant sales.......... 0.5 % 0.3% (0.6)%
Average check......................... $ 10.61 $ 10.15 $ 9.87
Chi-Chi's Restaurant Division
Restaurants Open at End of Period:
Owned/operated...................... 150 165 179
Franchised and Licensed............. 15 12 16
Sales................................. $227,716 $243,666 $245,775
Restaurant Level Cashflow (b)......... 20,569 18,285 16,515
Divisional EBITDA (c)................. 5,942 1,426 36
Percentage increase (decrease) in
comparable restaurant sales.......... (0.5)% 1.8% (8.2)%
Average check......................... $ 9.23 $ 8.50 $ 7.82
KKR Restaurant Division (d)
Restaurants Open at End of Period:
Owned/operated...................... 57 54 0
Franchised and Licensed............. 1 3 0
Sales................................. $ 88,252 $ 14,617 $ 0
Restaurant Level Cashflow (b)......... 10,335 1,376 0
Divisional EBITDA (c)................. 4,384 364 0
Percentage increase (decrease) in
comparable restaurant sales.......... N.A. N.A. N.A.
Average check (Koo Koo Roo restaurants
only)................................ $ 9.13 $ 8.70 $ N.A.
Total Company
Restaurants Open at End of Period:
Owned/operated...................... 308 314 275
Franchised and Licensed............. 24 23 25
Sales................................. $536,579 $472,653 $463,724
EBITDA (e)............................ 32,031 28,064(f) 17,500
- --------
(a) The El Torito Division (minus six restaurants) is to be sold to
Acapulco if the El Torito Sale is consummated--See "BUSINESS--Sale of
El Torito Division."
26
(b) Restaurant Level Cashflow with respect to any operating division
represents Divisional EBITDA (as defined below) before general and
administrative expenses and any net franchise profit or miscellaneous
income (expense) reported by the respective division.
(c) Divisional EBITDA with respect to any operating division is defined as
earnings (loss) before opening costs, gain (loss) on disposition of
properties, interest, taxes, depreciation and amortization.
(d) Reflects operations since the Merger and Hamlet Acquisition on October
30, 1998.
(e) EBITDA is defined as earnings (loss) before opening costs, loss on
disposition of properties, gain on sale of division, provision for
divestitures and write-down of long-lived assets, VCU termination
expense, restructuring costs, interest, taxes, depreciation and
amortization and extraordinary items. The Company has included
information concerning EBITDA herein because it understands that such
information is used by certain investors as one measure of an issuer's
historical ability to service debt. EBITDA should not be considered as
an alternative to, or more meaningful than, operating income (loss) as
an indicator of operating performance or to cash flows from operating
activities as a measure of liquidity. Furthermore, other companies may
compute EBITDA differently, and therefore, EBITDA amounts among
companies may not be comparable.
(f) Includes the reversal of accrued management fees of $2,500,000 in 1998
payable to Apollo that will not be paid.
Inflation
The inflationary factors which have historically affected the Company's
results of operations include increases in the cost of food, alcoholic
beverages, labor and other operating expenses. In addition, most of the
Company's real estate leases require the Company to pay taxes, maintenance,
insurance, repairs and utility costs, all of which are subject to the effects
of inflation. To date, the Company has offset the effects of inflation, at
least in part, through periodic menu price increases and various cost-cutting
programs, but no assurance can be given that the Company will continue to be
able to offset such increases in the future.
During 1999 and 1998, the effects of inflation did not have a significant
impact on the Company's results of operations.
Seasonality
The Company, as a whole, does not experience significant seasonal
fluctuations in sales. However, the Company's sales tend to be slightly
greater during the spring and summer months.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements on page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers of the Registrant
is incorporated herein by reference to the Company's definitive proxy
statement which will be filed with the Commission within 120 days of the
Company's fiscal year end.
Item 11. EXECUTIVE COMPENSATION
Information concerning executive compensation of the Registrant is
incorporated herein by reference to the Company's definitive proxy statement
which will be filed with the Commission within 120 days of the Company's
fiscal year end.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management of the Registrant is incorporated herein by reference to the
Company's definitive proxy statement which will be filed with the Commission
within 120 days of the Company's fiscal year end.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions with
the Registrant is incorporated herein by reference to the Company's definitive
proxy statement which will be filed with the Commission within 120 days of the
Company's fiscal year end.
28
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
----
(a) (1) Financial Statements. See the Index to Financial Statements on page
F-1.
(2) Financial Statement Schedule
Schedule II--Valuation and qualifying accounts S-1 S-1
(3) Exhibits
2 (a) Agreement and Plan of Merger, dated as of June 9, 1998 by
and among the Company, Fri-Sub, Inc. and Koo Koo Roo, Inc.
("KKR"). (Filed as Exhibit 2.1 to the Company's Form S-4
filed with the SEC on July 1, 1998.)
*2 (b) Stock Purchase Agreement, dated as of March 27, 2000, by
and among the Company, FRI-MRD Corporation and Acapulco
Acquisition Corp.
3 (a) Sixth Restated Certificate of Incorporation of the
Company. (Filed as Exhibit 3(a) to the Company's Form 10-Q
filed with the SEC on May 12, 1999.)
3 (b) Second Amended and Restated Bylaws of the Company. (Filed
as Exhibit 3(c) to the Company's Form 10-K filed with the
SEC on March 29, 1999.)
4 (a) Indenture Dated as of January 27, 1994
Re: $300,000,000 9-3/4% Senior Notes Due 2002. (Filed as
Exhibit 4(a) to the Company's Form 10-K filed with the SEC
on March 28, 1994.)
4 (b) Indenture Dated as of January 27, 1994
Re: $150,000,000 10-7/8% Senior Subordinated Discount
Notes Due 2004. (Filed as Exhibit 4(b) to the Company's
Form 10-K filed with the SEC on March 28, 1994.)
4 (c) First Supplemental Indenture, dated as of July 3, 1996,
between the Registrant and IBJ Schroder Bank & Trust
Company, a New York Banking corporation, as Trustee.
(Filed as Exhibit 10.1 to the Company's Form 8-K filed
with the SEC on July 9, 1996.)
4 (d) First Supplemental Indenture, dated as of July 3, 1996,
between the Registrant and Fleet National Bank, as
successor by merger to Fleet National Bank of
Massachusetts, formerly known as Shawmut Bank, N.A., as
Trustee. (Filed as Exhibit 10.2 to the Company's Form 8-K
filed with the SEC on July 9, 1996.)
4 (e) Note Agreement Dated as of August 12, 1997
Re: Up to $75,000,000 FRI-MRD Corporation Senior Discount
Notes Due January 24, 2002. (Filed as Exhibit 4(e) to the
Company's Form 10-Q filed with the SEC on November 12,
1997.)
4 (f) Joinder Agreement Dated as of January 14, 1998
Re: FRI-MRD Corporation Senior Discount Notes due January
24, 2002. (Filed as Exhibit 4(f) to the Company's Form 10-
K filed with the SEC on March 30, 1998.)
4 (g) First Amendment dated as of June 9, 1998 to the Note
Agreement dated August 12, 1997. (Filed as Exhibit 4.7 to
the Company's Form S-4 filed with the SEC on July 1,
1998.)
29
4 (h) Note Agreement dated as of June 9, 1998 Re: $24,000,000
FRI-MRD Corporation Senior Secured Discount Notes due
January 24, 2002. (Filed as Exhibit 4.8 to the
Company's Form S-4 filed with the SEC on July 1, 1998.)
4 (i) First Amendment dated as of October 30, 1998 to the
Note Agreement dated as of June 9, 1998. (Filed as
Exhibit 4(i) to the Company's Form 10-Q filed with the
SEC on November 12, 1998.)
4 (j) Waiver dated as of January 29, 1999 to the Note
Agreements dated as of August 12, 1997 and June 9,
1998. (Filed as Exhibit 4(j) to the Company's Form 10-K
filed with the SEC on March 29, 1999.)
10 (a) The Company's 1994 Incentive Stock Option Plan. (Filed
as Exhibit 10(g) to the Company's Form 10-K filed with
the SEC on March 28, 1994.)
10 (b) The Company's Deferred Compensation Plan. (Filed as
Exhibit 10(k) to the Company's Form 10-K filed with the
SEC on March 27, 1995.)
10 (c) The Company's Severance Plan. (Filed as Exhibit 10(m)
to the Company's Form 10-K filed with the SEC on March
27, 1995.)
10 (d) Lease Indemnification Agreement, dated as of January
27, 1994, by and between the Company and W. R. Grace &
Co.-Conn. (Filed as Exhibit 10(ii) to the Company's
Form 10-K filed with the SEC on March 28, 1994.)
10 (e) Tax Sharing Agreement, dated as of January 27, 1994, by
and among the Company, Foodmaker, Inc. and Chi-Chi's,
Inc. (Filed as Exhibit 10(ll) to the Company's Form 10-
K filed with the SEC on March 28, 1994.)
10 (f) Registration Rights Agreement, dated as of January 27,
1994, by and among the Company and certain of its
shareholders. (Filed as Exhibit 10(mm) to the Company's
Form 10-K filed with the SEC on March 28, 1994.)
10 (g) The Company's 1998 Management Incentive Compensation
Plan Description. (Filed as Exhibit 10(h) to the
Company's Form 10-K filed with the SEC on March 29,
1999.)
*10 (h) The Company's 1999 Management Incentive Compensation
Plan Description.
10 (i) Loan and Security Agreement, dated as of January 10,
1997, between Foothill Capital Corporation and the
Company and its subsidiaries named therein. (Filed as
Exhibit 10(w) to the Company's Form 10-K filed with the
SEC on March 31, 1997.)
10 (j) General Continuing Guarantee, dated as of January 10,
1997, by the Company in favor of Foothill Capital
Corporation. (Filed as Exhibit 10(x) to the Company's
Form 10-K filed with the SEC on March 31, 1997.)
10 (k) Form of subsidiary General Continuing Guarantee, dated
as of January 10, 1997. (Filed as Exhibit 10(y) to the
Company's Form 10-K filed with the SEC on March 31,
1997.)
10 (l) Security Agreement, dated as of January 10, 1997,
between Foothill Capital Corporation and the Company.
(Filed as Exhibit 10(z) to the Company's Form 10-K
filed with the SEC on March 31, 1997.)
10 (m) Form of subsidiary Security Agreement, dated as of
January 10, 1997, between Foothill Capital Corporation
and the subsidiary named therein. (Filed as Exhibit
10(aa) to the Company's Form 10-K filed with the SEC on
March 31, 1997.)
10 (n) Stock Pledge Agreement, dated as of January 10, 1997,
between the Company and Foothill Capital Corporation.
(Filed as Exhibit 10(bb) to the Company's Form 10-K
filed with the SEC on March 31, 1997.)
30
10 (o) Form of subsidiary Stock Pledge Agreement, dated as of
January 10, 1997, between the subsidiary named therein
and Foothill Capital Corporation. (Filed as
Exhibit 10(cc) to the Company's Form 10-K filed with
the SEC on March 31, 1997.)
10 (p) Trademark Security Agreement, dated as of January 10,
1997, by Chi-Chi's, Inc. in favor of Foothill Capital
Corporation. (Filed as Exhibit 10(dd) to the Company's
Form 10-K filed with the SEC on March 31, 1997.)
10 (q) Trademark Security Agreement, dated as of January 10,
1997, by El Torito Restaurants, Inc. in favor of
Foothill Capital Corporation. (Filed as Exhibit 10(ee)
to the Company's Form 10-K filed with the SEC on March
31, 1997.)
10 (r) First Amendment to the Loan and Security Agreement
dated as of May 23, 1997 by and among the parties
thereto. (Filed as Exhibit 10(gg) to the Company's Form
10-Q filed with the SEC on August 13, 1997.)
10 (s) Amendment Number Two to Loan and Security Agreement
dated as of August 12, 1997 by and among the parties
thereto. (Filed as Exhibit 10(hh) to the Company's Form
10-Q filed with the SEC on November 12, 1997.)
10 (t) Distribution Service Agreement, dated as of November 1,
1997, between El Torito Restaurants, Inc. and The SYGMA
Network, Inc. (Portions of this document have been
omitted pursuant to a request for confidential
treatment.) (Filed as Exhibit 10(bb) to the Company's
Form 10-K filed with the SEC on March 30, 1998.)
10 (u) Distribution Service Agreement, dated as of April 30,
1997, between Chi-Chi's, Inc. and Sysco Corporation.
(Portions of this document have been omitted pursuant
to a request for confidential treatment.) (Filed as
Exhibit 10(cc) to the Company's Form 10-K filed with
the SEC on March 30, 1998.)
10 (v) Stock Purchase Agreement dated as of June 9, 1998 by
and between FRI-MRD Corporation and KKR. (Filed as
Exhibit 10.1 to the Company's Form S-4 filed with the
SEC on July 1, 1998.)
10 (w) Bridge Loan Agreement dated as of June 9, 1998 among
the Hamlet Group, Inc., as borrower, KKR, H.H.K. of
Virginia, and H.H. of Maryland, Inc., as guarantors,
and FRI-MRD Corporation, as lender. (Filed as Exhibit
10.2 to the Company's Form S-4 filed with the SEC on
July 1, 1998.)
10 (x) Amendment Number Three to Loan and Security Agreement
dated as of April 9, 1998 by and among the parties
thereto. (Filed as Exhibit 10.29 to Amendment No. 1 to
the Company's Form S-4 filed with the SEC on August 18,
1998.)
10 (y) Amendment Number Four to Loan and Security Agreement
dated as of June 9, 1998 by and among the parties
thereto. (Filed as Exhibit 10.30 to Amendment No. 1 to
the Company's Form S-4 filed with the SEC on August 18,
1998.)
10 (z) Amendment Number Five to Loan and Security Agreement
dated as of October 30, 1998 by and among the parties
thereto. (Filed as Exhibit 10(hh) to the Company's Form
10-Q filed with the SEC on November 12, 1998.)
10 (aa) Koo Koo Roo Enterprises, Inc. 1998 Stock Incentive
Plan. (Filed as Exhibit 10(ii) to the Company's Form
10-Q filed with the SEC on November 12, 1998.)
10 (bb) General Continuing Guarantee dated October 30, 1998 by
The Hamlet Group, Inc. (Filed as Exhibit 10(cc) to the
Company's Form 10-K filed with the SEC on March 29,
1999.)
31
10 (cc) Amendment Number One to General Continuing Guarantee
and Security Agreement, dated as of October 30, 1998
between Foothill and the Company. (Filed as Exhibit
10(dd) to the Company's Form 10-K filed with the SEC
on March 29, 1999.)
10 (dd) Amendment Number One to Security Agreement dated
October 30, 1998 between Foothill and FRI-MRD
Corporation. (Filed as Exhibit 10(ee) to the Company's
Form 10-K filed with the SEC on March 29, 1999.)
10 (ee) Amendment Number One to Stock Pledge Agreement dated
October 30, 1998 between Foothill Capital Corporation
and FRI-MRD Corporation. (Filed as Exhibit 10(ff) to
the Company's Form 10-K filed with the SEC on March
29, 1999.)
10 (ff) General Continuing Guarantee dated October 30, 1998 by
KKR. (Filed as Exhibit 10(gg) to the Company's Form
10-K filed with the SEC on March 29, 1999.)
10 (gg) Security Agreement dated October 30, 1998 between
Foothill Capital Corporation and KKR. (Filed as
Exhibit 10(hh) to the Company's Form 10-K filed with
the SEC on March 29, 1999.)
10 (hh) Amended and Restated Employment Agreement dated as of
November 9, 1998 by and between Kevin S. Relyea, the
Company and certain subsidiaries. (Filed as Exhibit
10(ii) to the Company's Form 10-K filed with the SEC
on March 29, 1999.)
10 (ii) Amended and Restated Employment Agreement dated as of
November 9, 1998 by and between Roger K. Chamness, the
Company and certain subsidiaries. (Filed as Exhibit
10(jj) to the Company's Form 10-K filed with the SEC
on March 29, 1999.)
10 (jj) Amended and Restated Employment Agreement dated as of
November 9, 1998 by and between William D. Burt, the
Company and certain subsidiaries. (Filed as Exhibit
10(kk) to the Company's Form 10-K filed with the SEC
on March 29, 1999.)
10 (kk) Employment Agreement dated as of November 1, 1998 by
and between Gayle A. DeBrosse, the Company and certain
subsidiaries. (Filed as Exhibit 10(ll) to the
Company's Form 10-K filed with the SEC on March 29,
1999.)
10 (ll) Nominating Agreement dated as of December 1, 1998
between the Company and AIF II, L.P. (Filed as Exhibit
10(mm) to the Company's Form 10-K filed with the SEC
on March 29, 1999.)
10 (mm) Amendment Number Six to Loan and Security Agreement
dated as of February 26, 1999 by and among the parties
thereto. (Filed as Exhibit 10(nn) to the Company's
Form 10-K filed with the SEC on March 29, 1999.)
*10 (nn) Prandium, Inc. Divestiture Bonus Plan for Key
Management for 1999-2000.
*21 (a) List of Subsidiaries.
*21 (b) Names Under Which Subsidiaries Do Business.
*23 Consent of KPMG LLP.
*27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
- --------
* Filed herewith.
32
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.
PRANDIUM, INC.
/s/ Robert T. Trebing, Jr.
By: _________________________________
Robert T. Trebing, Jr.
Executive Vice President and
Chief Financial Officer
Date: March 27, 2000
Pursuant to the requirements of the Securities 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/ Kevin S. Relyea Chairman, President and Chief March 27, 2000
____________________________________ Executive Officer (Principal
Kevin S. Relyea Executive Officer)
/s/ A. William Allen, III Director March 27, 2000
____________________________________
A. William Allen, III
/s/ Peter P. Copses Director March 27, 2000
____________________________________
Peter P. Copses
/s/ George G. Golleher Director March 27, 2000
____________________________________
George G. Golleher
/s/ David B. Kaplan Director March 27, 2000
____________________________________
David B. Kaplan
/s/ Antony P. Ressler Director March 27, 2000
____________________________________
Antony P. Ressler
/s/ Robert T. Trebing, Jr. Executive Vice President and March 27, 2000
____________________________________ Chief Financial Officer
Robert T. Trebing, Jr. (Principal Financial and
Accounting Officer)
33
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
PRANDIUM, INC.
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of December 26, 1999 and December 27,
1998..................................................................... F-3
Consolidated Statements of Operations for the Years Ended December 26,
1999, December 27, 1998 and December 28, 1997............................ F-4
Consolidated Statements of Common Stockholders' Deficit for the three
Years Ended December 26, 1999, December 27, 1998 and December 28, 1997... F-5
Consolidated Statements of Cash Flows for the Years Ended December 26,
1999, December 27, 1998 and December 28, 1997............................ F-6
Notes to Consolidated Financial Statements................................ F-8
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
Prandium, Inc.:
We have audited the accompanying consolidated balance sheets of Prandium,
Inc. (formerly known as Koo Koo Roo Enterprises, Inc. and as Family
Restaurants, Inc.) and its subsidiaries as of December 26, 1999 and December
27, 1998, and the related consolidated statements of operations, common
stockholders' deficit and cash flows for the years ended December 26, 1999,
December 27, 1998 and December 28, 1997. In connection with our audits of the
consolidated financial statements, we also audited the financial statement
schedule as listed in the accompanying index. These consolidated 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit 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.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Prandium,
Inc. and its subsidiaries as of December 26, 1999 and December 27, 1998, and
the results of their operations and their cash flows for the years ended
December 26, 1999, December 27, 1998 and December 28, 1997 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
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 shown therein.
KPMG LLP
Orange County, California
February 19, 2000, except for
note 17 which is as of
March 27, 2000
F-2
PRANDIUM, INC.
CONSOLIDATED BALANCE SHEETS
December 26, December 27,
1999 1998
------------ ------------
($ in thousands)
ASSETS
------
Current assets:
Cash and cash equivalents........................... $ 3,600 $ 17,707
Receivables......................................... 2,408 9,106
Inventories......................................... 2,672 5,020
Other current assets................................ 3,098 3,957
Property held for sale.............................. 55,835 0
--------- ---------
Total current assets.............................. 67,613 35,790
Property and equipment, net........................... 137,460 201,314
Reorganization value in excess of amount allocable to
identifiable assets, net............................. 0 35,129
Costs in excess of net assets of business acquired,
net.................................................. 66,293 56,455
Other assets.......................................... 15,267 19,498
--------- ---------
$ 286,633 $ 348,186
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Working capital borrowings.......................... $ 21,850 $ 0
Current portion of long-term debt, including
capitalized lease obligations...................... 1,000 2,498
Accounts payable.................................... 9,228 22,447
Current portion of self-insurance reserves.......... 2,601 7,225
Other accrued liabilities........................... 57,711 73,994
Income taxes payable................................ 3,638 3,742
--------- ---------
Total current liabilities......................... 96,028 109,906
Self-insurance reserves............................... 6,560 17,815
Other long-term liabilities........................... 3,779 4,451
Long-term debt, including capitalized lease
obligations, less current portion.................... 237,871 237,151
Commitments and contingencies
Stockholders' deficit:
Common stock--authorized 300,000,000 shares, par
value $.01, 180,380,513 shares issued and
outstanding in 1999 and 178,105,294 shares issued
and outstanding in 1998............................ 1,804 1,781
Additional paid-in capital.......................... 222,353 222,353
Accumulated deficit................................. (281,762) (245,271)
--------- ---------
Total stockholders' deficit....................... (57,605) (21,137)
--------- ---------
$ 286,633 $ 348,186
========= =========
See accompanying notes to consolidated financial statements
F-3
PRANDIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
----------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
($ in thousands, except per share
amounts)
Sales............................... $ 536,579 $ 472,653 $ 463,724
------------ ------------ ------------
Product costs....................... 141,881 126,788 123,803
Payroll and related costs........... 190,772 165,207 162,807
Occupancy and other operating
expenses........................... 139,153 125,177 129,428
Depreciation and amortization....... 28,031 22,916 22,395
General and administrative
expenses........................... 32,742 27,417 30,186
Opening costs....................... 2,879 3,345 188
Loss on disposition of properties,
net................................ 5,265 7,993 3,885
Provision for divestitures and
write-down of
long-lived assets.................. 484 27,661 2,640
VCU termination expense............. 0 4,223 0
------------ ------------ ------------
Total costs and expenses.......... 541,207 510,727 475,332
------------ ------------ ------------
Operating loss...................... (4,628) (38,074) (11,608)
Interest expense, net............... 31,371 24,659 19,476
------------ ------------ ------------
Loss before income tax provision.... (35,999) (62,733) (31,084)
Income tax provision................ 492 400 509
------------ ------------ ------------
Net loss............................ $ (36,491) $ (63,133) $ (31,593)
============ ============ ============
Net loss per share--basic and
diluted............................ $ (0.20) $ (0.48) $ (0.26)
============ ============ ============
Weighted average shares
outstanding--basic and diluted..... 180,380,513 131,309,797 121,515,391
============ ============ ============
See accompanying notes to consolidated financial statements
F-4
PRANDIUM, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' DEFICIT
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 26, 1999
Common Stock Additional
------------------ Paid-in Accumulated
Shares Amount Capital Deficit Total
----------- ------ ---------- ----------- --------
($ in thousands)
Balance at December 29,
1996..................... 121,515,391 $1,215 $154,729 $(150,545) $ 5,399
Net loss.................. 0 0 0 (31,593) (31,593)
----------- ------ -------- --------- --------
Balance at December 28,
1997..................... 121,515,391 1,215 154,729 (182,138) (26,194)
Net loss.................. 0 0 0 (63,133) (63,133)
Issuance of common stock
to acquire KKR........... 56,589,903 566 67,437 0 68,003
VCU termination expense... 0 0 187 0 187
----------- ------ -------- --------- --------
Balance at December 27,
1998..................... 178,105,294 1,781 222,353 (245,271) (21,137)
Net loss.................. 0 0 0 (36,491) (36,491)
Issuance of common stock.. 2,275,219 23 0 0 23
----------- ------ -------- --------- --------
Balance at December 26,
1999..................... 180,380,513 $1,804 $222,353 $(281,762) $(57,605)
=========== ====== ======== ========= ========
See accompanying notes to consolidated financial statements.
F-5
PRANDIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
($ in thousands)
Decrease in Cash and Cash Equivalents
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers.......... $ 537,619 $ 471,716 $ 464,780
Cash received from franchisees and
licensees............................ 1,726 2,018 2,074
Cash paid to suppliers and employees.. (520,792) (454,024) (465,069)
Cash paid for VCU termination
expense.............................. 0 (4,036) 0
Interest received..................... 365 1,931 2,119
Interest paid......................... (16,645) (16,653) (16,747)
Opening costs......................... (2,879) (3,001) 0
Income taxes paid..................... (596) (446) (262)
--------- --------- ---------
Net cash used in operating
activities......................... (1,202) (2,495) (13,105)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of property and
equipment............................ 2,510 4,862 1,492
Proceeds from payments on notes
receivable........................... 2,238 0 0
Proceeds from sale of notes
receivable, net...................... 3,246 0 3,514
Cash required for Merger and Hamlet
Acquisition.......................... (2,356) (17,016) 0
Capital expenditures.................. (30,335) (27,691) (13,588)
Mandatory lease buyback, net.......... 0 0 (2,690)
Lease termination payments............ (3,557) (1,349) (2,891)
Capitalized opening costs............. 0 0 (532)
Other divestment expenditures......... (2,307) 0 0
Other................................. (1,520) (566) (1,936)
--------- --------- ---------
Net cash used in investing
activities......................... (32,081) (41,760) (16,631)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of notes... 0 33,304 33,947
Proceeds from working capital
borrowings, net...................... 21,850 0 0
Payment of debt issuance costs........ (347) (1,141) (2,418)
Reductions of long-term debt,
including capitalized lease
obligations.......................... (2,327) (2,719) (3,095)
--------- --------- ---------
Net cash provided by financing
activities......................... 19,176 29,444 28,434
--------- --------- ---------
Net decrease in cash and cash
equivalents............................ (14,107) (14,811) (1,302)
Cash and cash equivalents at beginning
of period.............................. 17,707 32,518 33,820
--------- --------- ---------
Cash and cash equivalents at end of
period................................. $ 3,600 $ 17,707 $ 32,518
========= ========= =========
F-6
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
($ in thousands)
Reconciliation of Net Loss to Net Cash Used in Operating Activities
Net loss............................... $(36,491) $(63,133) $(31,593)
-------- -------- --------
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization........ 28,031 22,916 22,395
Amortization of debt issuance costs.. 1,550 1,250 1,084
Expense of unamortized opening
costs............................... 0 344 0
Loss on disposition of properties.... 5,265 7,993 3,885
Provision for divestitures and write-
down of long-lived assets........... 484 27,661 2,640
VCU termination expense related to
stock options....................... 0 187 0
Accretion of interest on notes....... 6,954 8,757 2,845
(Increase) decrease in receivables... 1,285 (819) 304
(Increase) decrease in inventories... 17 93 (32)
(Increase) decrease in other current
assets.............................. 70 30 (342)
Increase (decrease) in accounts
payable............................. (5,086) 4,767 (5,041)
Decrease in self-insurance reserves.. (3,457) (7,475) (2,457)
Increase (decrease) in other accrued
liabilities......................... 280 (5,020) (7,040)
Increase (decrease) in income taxes
payable............................. (104) (46) 247
-------- -------- --------
Total adjustments.................. 35,289 60,638 18,488
-------- -------- --------
Net cash used in operating activities.. $ (1,202) $ (2,495) $(13,105)
======== ======== ========
Supplemental schedule of noncash investing and financing activities:
Capital expenditures and cash flows from financing activities exclude
capitalized leases of $5,123 in 1999 and $977 in 1998.
See Note 2 for discussion of the Merger.
Disclosure of accounting policy:
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
See accompanying notes to consolidated financial statements
F-7
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 26, 1999
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Prandium, Inc., formerly known as Koo Koo Roo Enterprises, Inc. and as
Family Restaurants, Inc. (together with its subsidiaries, the "Company"), was
incorporated in Delaware in 1986. The Company is primarily engaged in the
operation of restaurants in the full-service and fast-casual segments, through
its subsidiaries. Information relating to periods ending prior to October 30,
1998 included herein relates to the historical operations of Family
Restaurants, Inc. and, except as otherwise indicated, does not reflect the
operations of Koo Koo Roo, Inc., a Delaware corporation, or The Hamlet Group,
Inc., a California corporation (collectively "KKR"), which the Company
acquired on October 30, 1998. At December 26, 1999, the Company operated 308
restaurants in 27 states, approximately 68% of which are located in
California, Ohio, Pennsylvania, Indiana and Michigan, and franchised and
licensed 24 restaurants outside the United States.
Fiscal year
The Company reports results of operations based on 52 or 53 week periods
ending on the last Sunday in December. The fiscal years ended December 26,
1999, December 27, 1998 and December 28, 1997 included 52 weeks.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated.
Estimations
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Inventories
Inventories consist primarily of food and liquor and are stated at the
lower of cost or market. Costs are determined using the first-in, first-out
(FIFO) method.
Property and equipment
Property and equipment are stated at cost and are depreciated on a
straight-line basis over their estimated useful lives (buildings principally
over 25 to 35 years and furniture, fixtures and equipment over 3 to 10 years).
Leasehold improvements are amortized on a straight-line basis over the shorter
of their estimated useful lives or the terms of the related leases. Property
under capitalized leases is amortized over the terms of the leases using the
straight-line method.
Losses on disposition of properties are recognized when a commitment to
divest a restaurant property is made by the Company and include estimated
carrying costs through the expected disposal date.
F-8
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Advertising
Production costs of commercials and programming are charged to operations
when aired. Costs of other advertising, promotion and marketing programs are
charged to operations in the year incurred.
Franchise and license fees
Initial franchise and license fees are recognized when all material
services have been performed and conditions have been satisfied. No initial
fees were recognized in 1999. Initial fees for 1998 and 1997 totaled $350,000
and $100,000, respectively. Monthly fees for all franchise and license
arrangements are accrued as earned based on the respective monthly sales. Such
fees totaled $1,542,000 for 1999, $1,331,000 for 1998 and $2,115,000 for 1997
and offset general and administrative expenses.
Reorganization value
Reorganization value in excess of amounts allocable to identifiable assets
is amortized using the straight-line method over 30 years. Accumulated
amortization of reorganization value amounted to $8,298,000 at December 26,
1999 and $6,896,000 at December 27, 1998.
Costs in excess of net assets of business acquired
Costs in excess of net assets of business acquired is amortized using the
straight-line method over 40 years. Accumulated amortization amounted to
$2,002,000 at December 26, 1999 and $244,000 at December 27, 1998.
Impairment of long-lived assets
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be
Disposed Of," which generally requires the assessment of certain long-lived
assets for possible impairment when events or circumstances indicate the
carrying value of these assets may not be recoverable.
The Company evaluates property and equipment for impairment by comparison
of the carrying value of the assets to estimated undiscounted cash flows
(before interest charges) expected to be generated by the asset over its
estimated remaining useful life. In addition, the Company's evaluation
considers data such as continuity of personnel, changes in the operating
environment, name identification, competitive information and market trends.
Finally, the evaluation considers changes in management's strategic direction
or market emphasis. When the foregoing considerations suggest that a
deterioration of the financial condition of the Company or any of its assets
has occurred, the Company measures the amount of an impairment, if any, based
on the estimated fair value of each of its assets.
As a result of a continued review of operating results, the Company
identified one unprofitable Chi-Chi's and one unprofitable El Torito
restaurant which may either take too long to recover profitability or may not
recover at all, despite current marketing and cost control programs. In
connection with this analysis, the Company analyzed the carrying value of the
long-lived assets of these restaurants and recorded a write-down of long-lived
assets of $628,000 during the fourth quarter of 1999 to reduce the assets'
carrying value to their estimated fair market value.
During 1998, the Company identified nine unprofitable Chi-Chi's and three
unprofitable El Torito restaurants with impaired values. In connection with
this analysis, the Company analyzed the carrying value of the long-lived
assets of these restaurants and recorded a write-down of long-lived assets of
$4.8 million during the fourth quarter of 1998 to reduce the assets' carrying
value to their estimated fair market value.
F-9
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Also, during 1997, the Company identified 18 unprofitable Chi-Chi's
restaurants with impaired values. In connection with this analysis, the
Company analyzed the carrying value of the long-lived assets of these
restaurants and recorded a write-down of long-lived assets of $2.6 million
during the second quarter of 1997 to reduce the assets' carrying value to
their estimated fair market value.
Opening costs
Opening costs are incurred in connection with the opening or remodeling of
a restaurant and are principally related to stocking the restaurant and
training its staff. Through the year ended December 28, 1997, the Company's
policy had been to capitalize such opening costs and amortize them over one
year. In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities," which specifies that all costs of start-up activities,
including restaurant opening costs, should be expensed as incurred. Although
SOP 98-5 was effective for fiscal years beginning after December 15, 1998,
early adoption was allowed, and the Company adopted the provisions of SOP 98-5
in the quarter ended March 29, 1998.
Accordingly, $344,000 of unamortized opening costs at December 28, 1997
(classified as other current assets) was expensed in the condensed
consolidated statement of operations for the quarter ended March 29, 1998.
Opening costs incurred during 1999 and 1998 were $2,879,000 and $3,001,000,
respectively. Amortization of opening costs of $188,000 in 1997 has been
reclassified in the accompanying consolidated statements of operations.
Net loss per common share
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share" specifies the computation, presentation and disclosure requirements for
earnings (loss) per share for entities with publicly held common stock. The
impact of common stock equivalents has not been included since the impact
would be antidilutive for all periods presented.
Share and per share restatement
On October 30, 1998, the Company declared a stock dividend pursuant to
which approximately 121.96 shares of Company Common Stock were distributed for
each share of Company Common Stock outstanding immediately prior to the
Merger. All data with respect to loss per share and share information in the
consolidated financial statements has been retroactively adjusted to reflect
the stock dividend.
Stock-based employee compensation
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company measures stock-based employee compensation cost for financial
statement purposes in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and its related
interpretations and includes pro forma information in Note 15. Accordingly,
compensation cost for the stock option grants to employees is measured as the
excess of the quoted market price of the Company's common stock at the grant
date over the amount the employee must pay for the stock.
Segment disclosures
In 1998, the Company adopted SFAS No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information." SFAS 131 establishes
standards for reporting information about operating segments. The Company's
reportable segments are based on restaurant operating divisions.
F-10
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income taxes
The Company recognizes income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred tax assets are reduced by a valuation allowance when
it is more likely than not that they will not be realized.
Reclassifications
Certain amounts as previously reported have been reclassified to conform to
the 1999 presentation.
NOTE 2--KKR MERGER:
On October 30, 1998, the Company, FRI-Sub, Inc. ("Merger Sub"), an indirect
wholly owned subsidiary of the Company, and KKR consummated a merger (the
"Merger"), pursuant to which Merger Sub was merged with and into KKR, with KKR
as the surviving corporation. The Merger was effected after KKR received
stockholder approval for the Merger at a special meeting of KKR stockholders
held on October 30, 1998.
As a result of the Merger, each outstanding share of common stock, $.01 par
value, of KKR was converted into the right to receive one share of common
stock, par value $.01 per share, of the Company (the "Company Common Stock").
Accordingly, the aggregate number of shares of Company Common Stock issued in
the Merger was approximately 56.6 million. Immediately prior to the Merger, a
stock dividend was declared pursuant to which approximately 121.96 shares of
Company Common Stock were distributed for each share of Company Common Stock
outstanding immediately prior to the Merger. Prior to the Merger, the Company
provided a $3 million loan to a subsidiary of KKR which was repaid after
completion of the Merger. Additionally, in connection with the Merger, FRI-MRD
Corporation, a wholly owned subsidiary of the Company ("FRI-MRD"), issued $24
million aggregate face amount of new senior secured discount notes (the "MRD
Merger Notes") pursuant to the Senior Secured Discount Note Agreement dated
June 9, 1998 for which it received net proceeds of $21.7 million and the
Company expanded the Foothill Credit Facility by an additional $20 million.
The proceeds from the sale of the MRD Merger Notes were used to acquire all of
the outstanding capital stock of The Hamlet Group, Inc. ("Hamlet") from KKR
immediately prior to the consummation of the Merger (the "Hamlet
Acquisition"). The Merger and the Hamlet Acquisition were accounted for as a
purchase. Accordingly, the results of operations and financial position of KKR
(including Hamlet) are combined with the results of operations and financial
position of the Company subsequent to the purchase.
The assets acquired, including the costs in excess of net assets of
business acquired, and liabilities assumed in the Merger and the Hamlet
Acquisition are as follows ($ in thousands):
Tangible assets acquired at fair value........................... $ 33,866
Costs in excess of net assets of business acquired............... 68,295
Liabilities assumed at fair value................................ (17,142)
--------
Total purchase price............................................. $ 85,019
========
An appraisal of the acquired real estate, restaurant equipment, furniture,
fixtures and leasehold interests was concluded in 1999, and the final
allocation of purchase price to the fair value of tangible assets acquired and
liabilities assumed has been completed, resulting in a $10.8 million reduction
in such assets.
F-11
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes unaudited pro forma combined financial
information for the Company, assuming the Merger and the Hamlet Acquisition
occurred as of the beginning of fiscal 1998. The unaudited pro forma combined
financial information is not indicative of the results of operations of the
combined companies that would have occurred had the Merger and the Hamlet
Acquisition occurred at the beginning of the periods presented, nor is it
indicative of future operating results. The unaudited pro forma adjustments are
based upon currently available information and certain assumptions that
management believes are reasonable under the circumstances.
Fiscal Year Ended
December 27, 1998
-----------------------
(Pro Forma)
($ in thousands, except
per share data)
Consolidated Statements of Operations Information--
Sales............................................. $546,683
Net loss.......................................... $(87,509)
Pro forma basic and diluted loss per common
share............................................ $ (0.49)
Pro forma weighted average number of common shares
outstanding (in thousands)....................... 178,105
NOTE 3--RECEIVABLES:
A summary of receivables follows:
1999 1998
------ ------
($ in
thousands)
Trade, principally credit cards................................ $1,259 $3,113
License and franchise fees and related receivables............. 154 254
FRD Notes...................................................... 0 3,250
Interest on FRD Notes.......................................... 0 186
Notes receivable............................................... 47 153
Other.......................................................... 948 2,150
------ ------
$2,408 $9,106
====== ======
NOTE 4--STRATEGIC DIVESTMENT PROGRAMS:
In the fourth quarter of 1999, three non-strategic Koo Koo Roo restaurants
were designated for divestment (the "KKR Strategic Divestment Program"). In
conjunction with the KKR Strategic Divestment Program, the Company recorded a
provision for divestitures of $904,000. This provision consisted of costs
associated with lease terminations, subsidized subleases, brokerage fees and
other divestment costs. During 1999, these restaurants had sales of $1,852,000
and restaurant level operating losses of $457,000. The restaurants are still in
operation and accordingly, none of the divestiture reserves have been utilized
as of December 26, 1999. The KKR Strategic Divestment Program is scheduled to
be completed within the next 12 months, and the operating
F-12
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
results will be included in the Company's consolidated statement of operations
until the divestments are completed.
In the fourth quarter of 1998, 48 non-strategic Chi-Chi's restaurants were
designated for divestment (the "CC Strategic Divestment Program"). In
conjunction with the CC Strategic Divestment Program, the Company recorded a
provision for divestitures of $22,884,000, including divestment reserves of
$12,256,000. For the fiscal years ended December 26, 1999 and December 27,
1998, the Company paid (i) $287,000 and zero, respectively, for severance
costs associated with certain restaurants and regional managers in connection
with the restaurants divested and (ii) $1,913,000 and $1,645,000,
respectively, for net costs associated with lease terminations, subsidized
subleases, brokerage fees and other divestment costs. The Company does not
believe it will be able to satisfactorily negotiate lease terminations or
subleases for 20 operating restaurants of the 48 Chi-Chi's restaurants
designated for divestment. As a result, these 20 restaurants have been removed
from the Strategic Divestment Program, and $1,048,000 previously recorded in
conjunction with the provision for divestitures has been reversed during the
fourth quarter of 1999. Such amount is included as a reduction of provision
for divestitures and write-down of long-lived assets. After this reversal,
eight restaurants with sales of $6,650,000 and restaurant level operating
losses of $860,000 during 1999, remain in the divestment program. The CC
Strategic Divestment Program is scheduled to be completed over the next 12
months, and the operating results will be included in the Company's
consolidated statement of operations until the divestments are completed.
NOTE 5--PROPERTY AND EQUIPMENT:
A summary of property and equipment follows:
1999 1998
-------- --------
($ in thousands)
Land................................................... $ 15,943 $ 23,700
Buildings and improvements............................. 110,397 156,220
Furniture, fixtures and equipment...................... 60,009 92,887
Projects under construction............................ 8,152 13,592
-------- --------
194,501 286,399
Accumulated depreciation and amortization.............. (57,041) (85,085)
-------- --------
$137,460 $201,314
======== ========
Property under capitalized leases in the amount of $2,829,000 at December
26, 1999 and $12,104,000 at December 27, 1998 is included in buildings and
improvements. Accumulated amortization of property under capitalized leases
amounted to $2,755,000 at December 26, 1999 and $6,287,000 at December 27,
1998. These capitalized leases primarily relate to the buildings on certain
restaurant properties; the land portions of these leases are accounted for as
operating leases.
In addition, property under capitalized leases in the amount of $1,802,000
at December 26, 1999 and $977,000 at December 27, 1998 is included in
furniture, fixtures and equipment. Accumulated amortization of this property
under capitalized leases amounted to $35,000 at December 26, 1999 and $184,000
at December 27, 1998.
Depreciation and amortization relating to property and equipment was
$24,871,000 for 1999, $21,271,000 for 1998 and $20,994,000 for 1997, of which
$2,176,000, $2,169,000 and $2,236,000, respectively, was related to
amortization of property under capitalized leases.
F-13
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A majority of the capitalized and operating leases have original terms of
25 years, and substantially all of these leases expire in the year 2010 or
later. Most 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. The total amount of contingent rent under capitalized
leases for the years ended December 26, 1999, December 27, 1998 and December
28, 1997 was $890,000, $938,000 and $934,000, respectively. Total rental
expense for all operating leases comprised the following:
1999 1998 1997
------- ------- -------
($ in thousands)
Minimum rent......................................... $44,220 $35,476 $35,521
Contingent rent...................................... 1,798 1,417 1,235
Less: Sublease rent.................................. (6,163) (5,903) (6,434)
------- ------- -------
$39,855 $30,990 $30,322
======= ======= =======
At December 26, 1999, the present value of capitalized lease payments and
the future minimum lease payments on noncancellable operating leases were:
Capitalized Operating
Due in Leases Leases
------ ----------- ---------
($ in thousands)
2000................................................. $ 931 $ 29,927
2001................................................. 600 29,167
2002................................................. 408 27,016
2003................................................. 197 24,561
2004................................................. 107 20,820
Later years.......................................... 57 61,820
------- --------
Total minimum lease payments......................... 2,300 $193,311
========
Interest............................................. (343)
-------
Present value of minimum lease payments.............. $ 1,957
=======
The future lease payments summarized above include commitments for leased
properties included in the Company's divestiture programs and exclude
commitments for leased properties included in the El Torito Division which is
reported as property held for sale (see note 17).
NOTE 6--OTHER ASSETS:
A summary of other assets follows:
1999 1998
------- -------
($ in
thousands)
Liquor licenses........................................... $ 5,235 $ 6,014
Debt issuance costs....................................... 3,653 4,857
Notes receivable.......................................... 5,440 7,655
Deferred compensation plan................................ 222 0
Other..................................................... 717 972
------- -------
$15,267 $19,498
======= =======
Debt issuance costs are amortized over the terms of the respective loan
agreements.
F-14
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7--LONG-TERM DEBT, INCLUDING CAPITALIZED LEASE OBLIGATIONS:
Long-term debt, including capitalized lease obligations, is comprised of
the following:
1999 1998
-------- --------
($ in thousands)
9 3/4% Senior Notes..................................... $103,456 $103,456
10 7/8% Senior Subordinated Discount Notes.............. 30,900 30,900
15% Senior Discount Notes............................... 75,000 69,111
14% Senior Secured Discount Notes....................... 24,000 22,179
Capitalized lease obligations........................... 1,957 8,310
Other................................................... 1,766 3,145
-------- --------
237,079 237,101
Deferred gain on debt exchange.......................... 1,792 2,548
-------- --------
238,871 239,649
Amounts due within one year............................. 1,000 2,498
-------- --------
$237,871 $237,151
======== ========
On January 27, 1994, the Company sold $300 million principal amount of 9
3/4% Senior Notes due in full in 2002 (the "Senior Notes") and $150 million
principal amount ($109 million in proceeds) of 10 7/8% Senior Subordinated
Discount Notes due in full in 2004 (the "Discount Notes" and, together with
the Senior Notes, the "Notes"), and the Company and certain of its
subsidiaries entered into a $150 million senior secured revolving credit
facility with a $100 million sub-limit for standby letters of credit, which
was to be used for general corporate purposes including working capital, debt
service and capital expenditure requirements (the "Old Credit Facility").
The Senior Notes require semiannual interest payments on February 1 and
August 1 of each year and will mature on February 1, 2002. The Senior Notes
are redeemable at the option of the Company after February 1, 1999. Such notes
may now be redeemed at 101.393%, declining to 100% at February 1, 2001. Cash
interest payments on the Discount Notes began on August 1, 1997 and will
continue to be paid on February 1 and August 1 of each year, and such notes
will mature on February 1, 2004. The Discount Notes are redeemable at the
option of the Company after February 1, 1999. Such notes may now be redeemed
at 102.719%, declining to 100% at February 1, 2002.
On August 12, 1997, FRI-MRD issued senior discount notes (the "Senior
Discount Notes") in the face amount of $61 million at a price of approximately
75% of par. The Senior Discount Notes are due on January 24, 2002. No cash
interest was payable on the Senior Discount Notes until July 31, 1999, at
which time interest became payable in cash semi-annually at the rate of 15%
per annum, with the first cash interest payment made on January 31, 2000. The
Senior Discount Notes were issued to certain existing holders of the Company's
Senior Notes in exchange for $15.6 million of Senior Notes plus approximately
$34 million of cash. The gain of $3,548,000 realized on the exchange of Senior
Notes has been deferred and classified as an element of long-term debt in
accordance with the guidelines of Emerging Issues Task Force Issue No. 96-19
because the present value of the cash flows of the Senior Discount Notes was
not at least 10% different from the present value of the cash flows of the
Senior Notes exchanged. The deferred gain is being amortized as a reduction of
interest expense over the life of the Senior Discount Notes. On January 14 and
15, 1998, FRI-MRD issued an additional $14 million aggregate face amount of
the Senior Discount Notes to the same purchasers at a price of 83% of par.
FRI-MRD received approximately $11.6 million in cash as a result of this
subsequent sale. Proceeds from the sales of the Senior Discount Notes were
used to fund the Company's capital expenditure programs and for general
corporate purposes.
F-15
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On June 9, 1998, FRI-MRD entered into a Note Agreement pursuant to which
FRI-MRD issued $24 million aggregate face amount of MRD Merger Notes on
October 30, 1998 at a price of approximately 90% of par resulting in net
proceeds of $21.7 million. The MRD Merger Notes are due on January 24, 2002.
No cash interest was payable on the MRD Merger Notes until July 31, 1999, at
which time interest became payable in cash semi-annually at the rate of 14%
per annum with the first cash interest payment made on January 31, 2000. The
MRD Merger Notes are redeemable by FRI-MRD, in whole or in part, on or before
January 23, 2001, at a price of 105% of the accreted value thereof, or after
January 23, 2001, at a price of 102.5% of the accreted value thereof. Proceeds
from the sale of the MRD Merger Notes were used exclusively to purchase all of
the outstanding shares of Hamlet, and the MRD Merger Notes are secured by all
of such outstanding shares of Hamlet.
On January 10, 1997, the Company entered into a five-year, $35 million
credit facility with Foothill Capital Corporation (the "Foothill Credit
Facility"), which replaced the Old Credit Facility, to provide for the ongoing
working capital needs of the Company. In connection with the Merger, the
Company increased the Foothill Credit Facility to $55 million. The Foothill
Credit Facility now provides for up to $35 million in revolving cash
borrowings and up to $55 million in letters of credit (less the outstanding
amount of revolving cash borrowings). The Foothill Credit Facility is secured
by substantially all of the real and personal property of the Company and
contains restrictive covenants. The Company is in compliance with all
financial ratios at December 26, 1999. Standby letters of credit are issued
under the Foothill Credit Facility primarily to provide security for future
amounts payable by the Company under its workers' compensation insurance
program ($16,057,000 of such letters of credit were outstanding as of December
26, 1999). $21,850,000 in working capital borrowings were outstanding as of
December 26, 1999 with an interest rate of 10.375%. These working capital
borrowings are classified as a current liability in the accompanying
Consolidated Balance Sheet due to the potential impact of the El Torito Sale
discussed in note 17.
The Company's viability has been and will continue to be dependent upon its
ability to generate sufficient operating cash flow or cash flow from other
sources to meet its obligations on a timely basis, and to comply with the
terms of its financing agreements. There can be no assurance that the Company
will be able to repay or refinance its Senior Notes and its 10 7/8% Senior
Subordinated Discount Notes due 2004, or that FRI-MRD will be able to repay or
refinance the Senior Discount Notes or the MRD Merger Notes, at their
respective maturities.
Maturities of long-term debt, including capitalized lease obligations,
during the four years subsequent to December 31, 2000 are as follows:
$1,693,000 in 2001, $203,331,000 in 2002, $480,000 in 2003 and $31,094,000 in
2004.
NOTE 8--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The recorded amounts of the Company's cash and cash equivalents,
receivables, accounts payable, self-insurance reserves, other accrued
liabilities and certain financial instruments included in other assets at
December 26, 1999 and December 27, 1998 approximate fair value. The fair value
of the Company's long-term debt, excluding capitalized lease obligations, is
estimated as follows:
1999 1998
---------------- ----------------
Recorded Fair Recorded Fair
Amount Value Amount Value
-------- ------- -------- -------
($ in thousands)
Senior Notes............................ $103,456 $46,555 $103,456 $65,177
Discount Notes.......................... 30,900 13,905 30,900 18,540
Senior Discount Notes................... 75,000 75,000 69,111 67,781
Senior Secured Discount Notes........... 24,000 24,000 22,179 22,179
Working capital borrowings.............. 21,850 21,850 0 0
Other................................... 2,266 2,024 3,145 2,903
F-16
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair values of the Senior Notes and Discount Notes are based on an
average market price of these instruments as of the end of fiscal 1999 and
1998. The fair values of the Senior Discount Notes and Senior Secured Discount
Notes as of the end of fiscal 1999 and 1998 are based on an assessment of the
value of the notes by an investment banking firm which takes into account the
accreted values of the Senior Discount Notes and Senior Secured Discount Notes
on such date, historical sale price information and other relevant pricing
information. The fair value of working capital borrowings equals the recorded
amount as a result of the variable interest rate of such debt. The fair value
of the other debt is estimated using discount rates which the Company believes
would be available to it for debt with similar terms and average maturities.
The Company has no instruments or transactions subject to the provisions of
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities."
NOTE 9--OTHER ACCRUED LIABILITIES:
A summary of other accrued liabilities follows:
1999 1998
------- -------
($ in
thousands)
Wages, salaries and bonuses............................... $11,943 $17,618
Carrying costs of closed properties....................... 7,405 12,282
Reserve for divestitures.................................. 8,267 10,611
Interest.................................................. 12,090 5,689
Property taxes............................................ 2,138 2,744
Sales tax................................................. 1,839 3,443
Utilities................................................. 1,507 3,340
Gift certificates......................................... 1,616 2,644
Deferred license fees..................................... 1,050 1,842
Other..................................................... 9,856 13,781
------- -------
$57,711 $73,994
======= =======
Carrying costs of closed properties represent the estimated future costs
associated with the Company's closed and subleased restaurants which consists
primarily of the net present value of lease subsidies which are mainly
comprised of the excess of future lease payments over estimated sublease
revenues.
NOTE 10--INCOME TAXES:
The Company incurred losses for tax purposes in 1999, 1998 and 1997.
Accordingly, the income tax provisions for each year primarily reflect certain
state and local taxes. On a tax return basis, the Federal regular operating
loss carryforwards amounted to approximately $291.6 million ($294.8 million of
alternative minimum tax operating loss carryforwards) and expire in 2003
through 2020. The Company had approximately $711,000 of tax credit
carryforwards which expire in 2003 and 2004.
At December 26, 1999, the Company and its subsidiaries had tax credit
carryforwards of approximately $2.1 million not utilized by W. R. Grace & Co.-
Conn. ("Grace"). In accordance with the 1986 acquisition from Grace, the
Company must reimburse Grace for 75% of the benefit of these tax credits if
they are utilized in future Company tax returns. Further, El Torito
Restaurants, Inc. (a wholly owned subsidiary of the Company) has approximately
$12 million of tax depreciation deductions not claimed in Grace tax returns as
a result of a tax sharing agreement. The Company will also reimburse Grace for
75% of any tax savings generated by these deductions.
F-17
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As a result of the acquisition of Chi-Chi's, the Company has net operating
loss and credit carryforwards not used by Chi-Chi's of $52.5 million and $6.8
million, respectively. The net operating losses expire beginning in 2004
through 2009 and the credit carryovers expire in various years from 2004
through 2009. The acquisition of Chi-Chi's, as well as the 1992 acquisition of
a previous franchisee by Chi-Chi's, triggered ownership changes for Federal
income tax purposes which result in separate annual limitations on the
availability of these losses and credits.
Further, as a result of the Merger and the Hamlet Acquisition, the Company
has net operating losses not used by KKR of $54.4 million. The net operating
losses expire beginning in 2005 through 2018. The Merger triggered an
ownership change for KKR in 1998 for Federal income tax purposes, which, along
with an ownership change for KKR in 1995, results in separate annual
limitations on the availability of these losses.
The Company does not believe that it underwent an ownership change causing
a limitation on the use of tax attributes as a result of the Merger and the
Hamlet Acquisition. Nevertheless, no assurance can be given that there were
not or will not be other transactions that could cause the Company to undergo
such an ownership change.
A reconciliation of income tax expense to the amount of income tax benefit
that would result from applying the Federal statutory rate (35% for 1999, 1998
and 1997) to loss before income taxes is as follows:
Fiscal Year Ended
----------------------------
Dec. 26, Dec. 27, Dec. 28,
1999 1998 1997
-------- -------- --------
($ in thousands)
Benefit for income taxes at statutory rate.. $(12,600) $(21,956) $(10,879)
State taxes, net of Federal income tax
benefit benefit............................ 311 242 219
Nondeductible goodwill...................... 1,071 556 490
Change in deferred tax asset attributable to
continuing operations subject to a full
valuation reserve and other................ 11,710 21,558 10,679
-------- -------- --------
$ 492 $ 400 $ 509
======== ======== ========
At December 26, 1999 and December 27, 1998, the Company's deferred tax
asset was $184,738,000 and $165,686,000, respectively, and deferred tax
liability was $5,438,000 and $5,667,000, respectively. The major components of
the Company's net deferred taxes of $179,300,000 at December 26, 1999 and
$160,019,000 at December 27, 1998 are as follows:
1999 1998
--------- ---------
($ in thousands)
Depreciation........................................ $ (5,438) $ (5,667)
Net operating loss and credit carryforwards......... 155,368 132,257
Capitalized leases.................................. 882 852
Carrying costs and other reserves................... 7,798 8,717
Self-insurance reserves............................. 8,795 9,642
Straight-line rent.................................. 1,530 1,423
Reorganization costs................................ 5,720 6,479
Other............................................... 4,645 6,316
--------- ---------
179,300 160,019
Valuation allowance................................. (179,300) (160,019)
--------- ---------
$ 0 $ 0
========= =========
F-18
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The increase in the valuation allowance for 1999 resulted from the normal
occurrence of temporary differences, including the current year tax loss plus
the effect of acquired deferred assets subject to full valuation allowance.
NOTE 11--OTHER LONG-TERM LIABILITIES:
A summary of other long-term liabilities follows:
1999 1998
------ ------
($ in
thousands)
Straight-line rents.......................................... $3,047 $3,612
Deferred compensation........................................ 732 839
------ ------
$3,779 $4,451
====== ======
NOTE 12--BENEFIT PLANS:
The Company maintains certain incentive compensation and related plans for
executives and key operating personnel, including restaurant and field
management. Expenses for these plans were $4,827,000, $4,261,000 and
$4,062,000 for 1999, 1998 and 1997, respectively.
The Company provides a savings plan pursuant to Section 401(k) of the
Internal Revenue Code, which allows administrative and clerical employees who
have satisfied the service requirements to contribute from 2% to 12% of their
pay on a pre-tax basis. The Company contributes an amount equal to 20% of the
first 4% of compensation that is contributed by the participant. The Company's
contributions under this plan were $186,000, $151,000 and $156,000 in 1999,
1998 and 1997, respectively.
The Company also maintains an unfunded, non-qualified deferred compensation
plan, which was created in 1994 for key executives and other members of
management who were then excluded from participation in the qualified savings
plan. The plan was amended in 1999 to include a split-dollar investment
vehicle. This plan allows participants to defer up to 50% of their salary on a
pre-tax basis. The Company contributes an amount equal to 20% of the first 4%
contributed by the employee. The Company's contributions under the non-
qualified deferred compensation plan were $87,000, $70,000 and $37,000 in
1999, 1998 and 1997, respectively. In each plan, a participant's right to
Company contributions vests at a rate of 25% per year of service.
NOTE 13--RELATED PARTY TRANSACTIONS:
Foodmaker, Inc. ("Foodmaker") provided distribution services through May
1997 to a portion of the Company's restaurants, principally those operated
under the Chi-Chi's name. No distribution services were provided during 1998
and 1999. Distribution sales to those restaurants for the year ended December
28, 1997 aggregated $21,844,000.
Apollo FRI Partners, L.P. ("Apollo") and Green Equity Investors, L.P.
("GEI") charged a combined monthly fee of $100,000 for providing certain
management services to the Company until October 30, 1998. In November 1995,
the management services arrangement with GEI was terminated. In the fourth
quarter of 1998, it was determined that the Company would not be required to
pay $2.5 million of such fees accrued for the benefit of Apollo at December
28, 1997 and any fees charged in 1998. Accordingly, the reversal of such fees
is included as a reduction in 1998 general and administrative expenses. The
Company had total management services fees payable to Apollo and GEI of
$750,000 at December 26, 1999 and December 27, 1998.
F-19
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 14--STOCK OPTIONS:
At December 26, 1999, the Company had three stock option plans. Options to
purchase common stock are generally granted at the fair market value of the
Company's stock on date of grant.
Certain officers and employees of the Company were granted stock options
under the Family Restaurants, Inc. 1994 Incentive Stock Option Plan. As a
result of the Merger, the stock option agreements for these individuals were
amended to convert the number of options and strike prices for the merged
Company's common stock. Additionally, the Company assumed existing stock
option plans of KKR in connection with the Merger, and all options under such
KKR plans are fully vested.
Certain officers, employees and directors of the Company were granted stock
options to purchase 1,202,000 shares during 1999 and 12,703,000 shares during
1998 under the Prandium, Inc. 1998 Stock Incentive Plan, which was approved
November 9, 1998 by the Company's board of directors. The stock options
granted to officers and employees vest ratably over a four year period and
have a ten year term. The stock options granted to directors were immediately
vested and have a ten year term. Under the Company's 1998 Stock Incentive
Plan, approximately 1,865,000 shares of common stock are available for stock
option grants.
The Family Restaurants, Inc. Value Creation Units Plan was terminated in
connection with the Merger. An expense in the fiscal year ended December 27,
1998 of $4,223,000 was incurred in connection with the termination. Such
expense consisted of a $4,036,000 cash payment and $187,000 for the intrinsic
value of stock options granted on December 9, 1998 under the Company's 1998
Stock Incentive Plan to purchase approximately 6,236,000 shares. Such options
have a per share strike price of $.50, were not exercisable for a period of 90
days after issuance and have a five year term.
A summary of the status of the Company's plans as of December 26, 1999,
December 27, 1998 and December 28, 1997 and changes during the years then
ended is presented below:
Dec. 26, 1999 Dec. 27, 1998 Dec. 28, 1997
-------------------------- -------------------------- ------------------------
Weighted- Weighted- Weighted-
Number of Average Number of Average Number of Average
Options Exercice Price Options Exercise Price Options Exercise Price
---------- -------------- ---------- -------------- --------- --------------
Outstanding at beginning
of year................ 26,299,689 $1.21 934,652 $ .89 934,652 $.89
Granted................. 1,202,000 .54 18,939,232 .75 0 0
Impact of Merger-KKR
plans.................. 0 0 6,432,305 2.67 0 0
Cancelled............... (1,700,922) 1.20 (6,500) 1.56 0 0
---------- ---------- -------
Outstanding at end of
year................... 25,800,767 $1.18 26,299,689 $1.21 934,652 $.89
========== ===== ========== ===== ======= ====
Options exercisable at
end of year............ 16,373,231 7,858,517 700,989
========== ========== =======
Options granted during 1999 were approximately 1% of the weighted average
common shares outstanding representing 128 employees. There were no options
exercised during the periods presented.
Options Outstanding Options Exercisable
December 26, 1999 December 26, 1999
-------------------------------------------- ---------------------------
Weighted-Average
Number of Remaining Weighted-Average Number of Weighted-Average
Range of Exercise Prices Options Life (Years) Exercise Price Options Exercise Price
- ------------------------ ---------- ---------------- ---------------- ---------- ----------------
$.18 to $.50............ 6,934,859 4.50 $ .48 6,505,859 $ .49
$.51 to $1.00........... 12,849,005 8.75 .86 3,852,005 .85
$1.01 to $3.00.......... 4,236,486 5.65 1.56 4,234,950 1.56
$3.01 to $8.75.......... 1,780,417 4.37 5.34 1,780,417 5.34
---------- ---- ----- ---------- -----
$.18 to $8.75........... 25,800,767 6.76 $1.18 16,373,231 $1.18
========== ==== ===== ========== =====
F-20
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma net loss and net loss per common share were determined if the
Company had accounted for its employee stock options under the fair value
method of SFAS 123 and are presented in the table below ($ in thousands,
except per share amounts):
Dec. 26, 1999 Dec. 27, 1998
------------- -------------
Net loss--pro forma.......................... $(36,554) $(63,852)
Net loss per common share--pro forma--basic
and diluted................................. $ (.20) $ (.49)
Weighted average fair value of options
granted..................................... $ .19 $ .26
For pro forma disclosures, the options' estimated fair value was amortized
over their expected life of ten years. These pro forma disclosures do not
apply to 1997 nor are they necessarily indicative of anticipated future
disclosures because there were no options granted in 1997, 1996 and 1995, and
SFAS 123 does not apply to grants before 1995. The fair value for these
options was estimated at the date of grant using an options pricing model. The
model was designed to estimate the fair value of exchange traded options
which, unlike employee stock options, can be traded at any time and are fully
transferable. In addition, such models require the input of highly subjective
assumptions, including the expected volatility of the stock price. Therefore,
in management's opinion, the existing models do not provide a reliable single
measure of the value of employee stock options. The following weighted average
assumptions were used to estimate the fair value of these options:
Dec. 26, 1999 Dec. 27, 1998
------------- -------------
Expected dividend yield........................ 0% 0%
Expected stock price volatility................ 10% 10%
Risk free interest rate........................ 6.00% 5.00%
Expected life of options (in years)............ 10 10
NOTE 15--SEGMENT INFORMATION:
The Company operates exclusively in the food-service industry.
Substantially all revenues result from the sale of menu products at
restaurants operated by the Company. The Company's reportable segments are
based on restaurant operating divisions. Operating income (loss) includes the
operating results before interest.
The accounting policies of the segments are the same as those described in
Note 1. The corporate component of operating income (loss) represents
corporate general and administrative expenses. Corporate assets include
corporate cash, investments, receivables, asset portions of financing
instrument and the two full-service and four fast-casual restaurants not
included in the El Torito Sale (see note 17).
F-21
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Dec. 26, 1999 Dec. 27, 1998 Dec. 28, 1997
------------- ------------- -------------
($ in thousands)
Sales
El Torito Division............. $220,611 $214,370 $217,949
Chi-Chi's Division............. 227,716 243,666 245,775
Koo Koo Roo Division........... 88,252 14,617 0
-------- -------- --------
Total Sales.................. $536,579 $472,653 $463,724
======== ======== ========
Depreciation and Amortization
El Torito Division............. $ 10,529 $ 9,688 $ 10,779
Chi-Chi's Division............. 11,189 10,610 9,956
Koo Koo Roo Division........... 5,213 1,087 0
Corporate...................... 1,100 1,531 1,660
-------- -------- --------
Total Depreciation and
Amortization................ $ 28,031 $ 22,916 $ 22,395
======== ======== ========
Operating Income (Loss)
El Torito Division............. $ 5,291 $ 6,605 $ 3,457
Chi-Chi's Division............. (3,161) (39,699) (12,052)
Koo Koo Roo Division........... (2,482) (831) 0
Corporate...................... (4,276) (4,149) (3,013)
-------- -------- --------
Total Operating Loss......... $ (4,628) $(38,074) $(11,608)
======== ======== ========
Interest (Income) Expense, net
El Torito Division............. $ 1,356 $ 856 $ 995
Chi-Chi's Division............. 818 571 635
Koo Koo Roo Division........... 72 (24) 0
Corporate...................... 29,125 23,256 17,846
-------- -------- --------
Total Interest Expense, net.. $ 31,371 $ 24,659 $ 19,476
======== ======== ========
Capital Expenditures
El Torito Division............. $ 11,040 $ 10,980 $ 5,684
Chi-Chi's Division............. 15,379 13,395 6,599
Koo Koo Roo Division........... 3,297 1,450 0
Corporate...................... 619 1,866 1,305
-------- -------- --------
Total Capital Expenditures... $ 30,335 $ 27,691 $ 13,588
======== ======== ========
Total Assets
El Torito Division............. $ 55,835 $100,056 $103,210
Chi-Chi's Division............. 111,077 112,328 134,141
Koo Koo Roo Division........... 100,607 108,410 0
Corporate...................... 19,114 27,392 52,417
-------- -------- --------
Total Assets................. $286,633 $348,186 $289,768
======== ======== ========
NOTE 16--CONTINGENCIES:
The Company is involved in various litigation matters incidental to its
business. The Company does not believe that any of the claims or actions filed
against it will have a material adverse effect upon the consolidated financial
position or results of operations of the Company.
F-22
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 17--SUBSEQUENT EVENT:
On March 27, 2000, the Company entered into a definitive agreement (the
"Sale Agreement") to sell substantially all of the El Torito Division to
Acapulco Acquisition Corp. ("Acapulco") in a transaction with an enterprise
value of approximately $130.0 million. Consummation of the sale is subject to
customary terms and conditions. At December 26, 1999, the El Torito Division
operated 97 full-service restaurants and four fast-casual restaurants in eight
states and franchised and licensed eight restaurants outside the United
States. All but two full-service restaurants and none of the four fast-casual
restaurants are to be included in the sale to Acapulco. Under the terms of the
Sale Agreement, the Company will receive, subject to certain post-closing
adjustments based on a closing balance sheet, cash of $130.0 million less the
El Torito Division's long-term debt, primarily capitalized lease obligations,
which will be assumed by Acapulco at the closing ($9.6 million at December 26,
1999). The Company expects the sale to be finalized in the second quarter of
fiscal 2000 and to record a pretax gain in fiscal 2000 as a result of this
transaction. Cash proceeds from the sale are assumed to be used to repay
certain indebtedness with remaining funds available for general corporate
purposes.
The 95 full-service El Torito Division restaurants to be sold generated
sales of $214,679,000 and $209,745,000 for the years ended December 26, 1999
and December 27, 1998, respectively, and related El Torito Division operating
income of $9,954,000 and $6,176,000, respectively. Such operating income
includes charges for allocated corporate general and administrative expenses
of $5,515,000 and $6,690,000 for the years ended December 26, 1999 and
December 27, 1998, respectively.
As a result of this transaction, the assets and liabilities of the El
Torito Division to be sold have been classified as property held for sale in
the accompanying consolidated balance sheet. The components of property held
for sale are as follows ($ in thousands):
Current assets................................................... $ 5,045
Property and equipment, net...................................... 59,370
Reorganization value, net........................................ 33,727
Other assets..................................................... 1,488
Current liabilities.............................................. (27,410)
Self-insurance reserves.......................................... (7,816)
Other long-term liabilities...................................... (1,492)
Long-term debt, excluding current portion........................ (7,077)
--------
$ 55,835
========
F-23
SCHEDULE II
PRANDIUM, INC.
VALUATION AND QUALIFYING ACCOUNTS
($ in thousands)
Additions
-------------------
Balance at Charged to Charged Balance
beginning costs and to other at end
Description of period expenses accounts Deductions of period
----------- ---------- ---------- -------- ---------- ---------
Allowance for
uncollectible
receivables:
For the year 1999..... $3,462 $ 138 $ 0 $(294)(1) $3,306
For the year 1998..... 1,051 3,060 0 (649)(1) 3,462
For the year 1997..... 879 78 300 (206)(1) 1,051
- --------
(1) Represents write-off of uncollectible receivables against allowance and
includes transfers to other accounts.
S-1