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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 31, 2000
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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[LOGO OF PRANDIUM INC.]
(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 23, 2001 was approximately $3.6
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 23, 2001, the registrant had issued and outstanding 180,380,513
shares of common stock, $.01 par value per share.
Documents Incorporated by Reference:
Notice of 2001 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 31, 2000
INDEX
Page
Numbers
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PART I
Item 1. Business................................................ 3
Item 2. Properties.............................................. 11
Item 3. Legal Proceedings....................................... 13
Item 4. Submission of Matters to a Vote of Security Holders..... 13
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters..................................... 14
Item 6. Selected Financial Data................................. 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 17
Item 8. Financial Statements and Supplementary Data............. 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 29
PART III
Item 10. Directors and Executive Officers of the Registrant...... 30
Item 11. Executive Compensation.................................. 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management.............................................. 30
Item 13. Certain Relationships and Related Transactions.......... 30
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................ 31
Signatures........................................................ 34
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 31, 2000, the
Company operated 203 restaurants in 22 states, approximately 64% of which are
located in California, Ohio, Pennsylvania, Indiana and Michigan, and
franchised and licensed 13 restaurants outside the United States.
Defaults on Indebtedness, Effect on Liquidity and Operations and Going
Concern
As of the filing date of this report, the Company has failed to pay the
interest that came due February 1, 2001 with respect to its 9 3/4% Senior
Notes maturing February 1, 2002 (the "Senior Notes") and its 10 7/8% Senior
Subordinated Discount Notes maturing February 1, 2004 (the "Discount Notes"
and, together with the Senior Notes, the "Prandium Notes"). Under the terms of
the Prandium Notes, the grace period for the failure to pay interest has
expired. In addition, as of the filing date of this report, the Company's
subsidiary FRI-MRD Corporation ("FRI-MRD") has failed to pay the interest due
January 31, 2001 with respect to its Senior Discount Notes (as defined below)
and the MRD Merger Notes (as defined below). Under the terms of the Senior
Discount Notes and the MRD Merger Notes, the grace period for the failure to
pay interest has expired. Under the terms of the note agreements governing the
FRI-MRD debt and the indentures governing the Prandium Notes, these non-
payments became "Events of Default" and the holders of all such debt have
become entitled to certain rights, including the right to accelerate the debt.
In addition, the vesting of the right (whether or not exercised) of the
noteholders to accelerate the debt caused an "Event of Default" to occur under
the Foothill Credit Facility (as defined below) and Foothill (as defined
below) became entitled to certain additional rights, including the right to
cash collateralize letters of credit issued under the Foothill Credit
Facility. No working capital borrowings are currently outstanding under the
Foothill Credit Facility. As of March 23, 2001, the Company had $11.5 million
in letters of credit issued under the Foothill Credit Facility, in large part
to provide security for future amounts payable by the Company under its
workers' compensation insurance program. Although none of the holders of the
Prandium Notes, the Senior Discount Notes or the MRD Merger Notes nor Foothill
have exercised their rights, there can be no assurance that they will not do
so in the future.
At the filing date of this report, all outstanding principal under the note
agreements and the indentures was considered to be a current obligation
because of the defaults under the note agreements and the indentures. The
Company does not have sufficient current assets nor does it presently have any
other available sources of capital to satisfy this current liability. In
addition, the Foothill Credit Facility permits Foothill to liquidate
collateral under the security agreement thereto to satisfy amounts outstanding
under the Foothill Capital Facility or upon the failure to cash collateralize
outstanding letters of credit upon Foothill's request. The Foothill Credit
Facility is secured by a first priority lien and security interests in
substantially all tangible and intangible assets of the Company and its
subsidiaries other than Hamlet's capital stock. Foothill and FRI-MRD entered
into a letter agreement as of March 29, 2001 whereby FRI-MRD acknowledged
certain specified events of default and acknowledged that as a result of such
events of default, Foothill has no further obligation to make advances to FRI-
MRD under the Foothill Credit Facility. In addition, pursuant to such letter
agreement Foothill agreed that it would forbear from exercising its remedies
relative to the events of default specified in the letter agreement until the
earliest to occur of: (i) May 15, 2001 (or such later date as Foothill may
designate in writing in its sole discretion); and (ii) the occurrence of any
Event of Default under the Foothill Credit Facility (other than those defaults
set forth in the letter agreement).
3
In addition to the Events of Default on certain of its debt instruments,
the Company has incurred recurring losses from operations and has a
significant stockholders' deficit and for these reasons, the Company's
independent auditors have included an explanatory paragraph in their report on
the Company's financial statements for the year ended December 31, 2000
expressing substantial doubt about the Company's ability to continue as a
going concern.
The Company is currently negotiating with its creditors to reach agreement
on an acceptable capital restructuring of the Company and its subsidiaries.
The Company cannot provide any assurance that an agreement can be reached or
what such agreement may consist of and what effects may ensue on the
operations and interests of the Company. If the Company is not able to
successfully reach an agreement with its creditors or successfully resolve its
capital structure, its ability to continue to operate in the ordinary course
may be materially adversely affected and the Company will need to consider
other alternatives, including but not limited to, a federal bankruptcy filing.
Even if the Company does reach an agreement with its creditors, the filing of
a Chapter 11 case may become necessary to implement the terms of the
agreement. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Liquidity and Capital Resources--Liquidity."
Change of Control
On December 29, 2000, Mr. Kevin S. Relyea, the Company's Chairman, Chief
Executive Officer and President, acquired approximately 53.1% of the Company's
outstanding capital stock pursuant to the terms of a Share Purchase and Sale
Agreement by and between Mr. Relyea and AIF II, L.P., dated December 29, 2000.
Mr. Relyea purchased 95,831,997 outstanding shares of common stock held by AIF
II, L.P. for an aggregate consideration of $15,000 in cash. After giving
effect to the acquisition, Mr. Relyea owns approximately 53.7% of the
outstanding capital stock of the Company. Prior to effecting the acquisition,
Foothill granted a waiver under the change of control provisions of the
Foothill Credit Facility. Mr. Relyea's purchase did not trigger the change of
control provisions of the Prandium Notes or FRI-MRD debt. On January 26, 2001,
a stockholder of the Company initiated a stockholder derivative suit arising
out of Mr. Relyea's purchase of the common stock. See "LEGAL PROCEEDINGS."
On January 4, 2001, each of David J. Ament, Peter P. Copses, Antony P.
Ressler, A. William Allen, III and George G. Golleher resigned from the
Company's Board of Directors and the number of directorships was reduced to
two. On March 2, 2001, the number of directorships was increased to three and
Messrs. William E. Rulon and Daniel E. Maltby were appointed to fill the
vacancies on the Board of Directors.
Sale of El Torito Division
On June 28, 2000, the Company completed the sale of substantially all of
the El Torito Division to Acapulco Acquisition Corp. ("Acapulco") in a
transaction with an adjusted enterprise value of approximately $129.5 million
(the "El Torito Sale"). As a result of the El Torito Sale, the Company
received, subject to a preliminary $0.7 million post-closing adjustment based
on a closing balance sheet, $128.8 million, consisting of $114.0 million in
cash, the assumption of $9.8 million of long-term debt, consisting primarily
of capitalized lease obligations, and $5.0 million deposited in escrow. The
Company recorded a pretax gain of $60.7 million in fiscal 2000 as a result of
this transaction. A portion of the net cash proceeds was used to pay
indebtedness outstanding under the Foothill Credit Facility of $25.9 million.
See "--Sale of El Torito Divison."
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
4
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 issued $24
million aggregate face amount of senior secured discount notes (the "MRD
Merger Notes") for net proceeds of $21.7 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 current 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
the Company. The Foothill Credit Facility replaced the Company's old credit
facility (the "Old Credit Facility"). In connection with the Merger, the
Foothill Credit Facility was increased to $55 million. As a result of the
El Torito Sale, the Foothill Credit Facility was amended and restated to,
among other things, reduce the credit facility to a maximum of $20 million
(subject to certain limitations). The Foothill Credit Facility is secured by
substantially all of the real and personal property of the Company (other than
Hamlet's capital stock) and contains restrictive covenants. The Company has
notified Foothill of several currently existing defaults under the provisions
of the Foothill Credit Facility and has requested a waiver.
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 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. At
the filing date of this report, FRI-MRD is in default of the interest payment
provisions of the Senior Discount Notes, and the Company is currently
negotiating with the noteholders to determine an acceptable capital
restructuring of the Company and its subsidiaries.
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. At the filing date of this report, FRI-
MRD is in default of the interest payment provisions of the MRD Merger Notes,
and the Company is currently negotiating with the noteholders to determine an
acceptable capital restructuring of the Company and its subsidiaries.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Liquidity and Capital Resources--Liquidity."
5
Restaurant Operations
The Company operated 203 restaurants primarily under the Chi-Chi's, Koo Koo
Roo and Hamburger Hamlet concepts at December 31, 2000. The Chi-Chi's
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 restaurant category of fast-casual--restaurants that serve
meals with the convenience and value associated with quick service, but the
quality, freshness and variety associated with casual, full-service dining
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
2000 on an unweighted basis is as follows:
Chi-Chi's............................................................. $10.78
Koo Koo Roo........................................................... 10.26
Hamburger Hamlet...................................................... 9.83
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. The Chi-Chi's 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.
Site Selection
The selection of sites for new restaurants is the responsibility of the
senior management of 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 31, 2000, the Company had a total of 11,217 employees, of whom
10,384 were restaurant employees, 620 were field management and 213 were
corporate personnel. 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.
6
The Company's Chi-Chi's 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 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 further
increased to $5.75 on March 1, 1998. In October 2000, the California
Industrial Welfare Commission voted to increase the state's minimum wage by
50c on January 1, 2001 with another 50c increase to occur on January 1, 2002.
No Federal minimum wage increases are currently scheduled for 2001. In
response to previous minimum wage increases, the Company has implemented
various menu price increases, and each of the Company's concepts raised prices
in early 2001.
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 13 restaurants
internationally. See "--Franchised and Licensed Restaurants." The Company
believes the franchised restaurants 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
7
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
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 must operate the existing international Chi-Chi's restaurants for
Chi-Chi's in exchange for a fee equal to all royalties and fees payable from
the international franchisees and licensees; (iii) CCIO has the right to
convert existing 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 required Ontario to pay KKR quarterly
royalties beginning in 2000. Ontario currently has no Koo Koo Roo restaurants
in Canada and 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.
As described above, under existing license and other franchise agreements,
13 Chi-Chi's restaurants are operated in international markets. Franchise and
license fees were $101,000 for the year ended December 31, 2000 and were
entirely related to the El Torito Division prior to its sale. This compares to
$190,000 for the year ended December 26, 1999 and $235,000 for the year ended
December 27, 1998.
Sale of El Torito Division
On June 28, 2000, the Company completed the El Torito Sale in a transaction
with an adjusted enterprise value of approximately $129.5 million. At June 28,
2000, the El Torito Division operated 97 full-service restaurants and four
fast-casual restaurants in eleven states and franchised and licensed eleven
restaurants outside the United States. All but two full-service restaurants
and none of the four fast-casual restaurants were included in the El Torito
Sale. As a result of the El Torito Sale, the Company received, subject to a
preliminary $0.7 million post-closing adjustment based on a closing balance
sheet, $128.8 million, consisting of $114.0 million in cash, the assumption of
$9.8 million of long-term debt, consisting primarily of capitalized lease
obligations, and $5.0 million deposited in escrow. The Company recorded a
pretax gain of $60.7 million in fiscal 2000 as a result of this transaction. A
portion of the net cash proceeds was used to pay indebtedness outstanding
under the Foothill Credit Facility of $25.9 million. 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.
The 95 full-service El Torito Division restaurants that were sold generated
sales of $112,409,000 and $214,681,000 for the six months and two days ended
June 27, 2000 (through the date of sale) and the year ended December 26, 1999,
respectively, and produced El Torito Division operating income of $5,411,000
and $9,954,000, respectively. Such operating income includes charges for
allocated corporate general and administrative expenses of $2,889,000 and
$5,515,000 for the six months and two days ended June 27, 2000 and the year
ended December 26, 1999, respectively. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and
Capital Resources."
8
Certain Risk Factors
Defaults on Indebtedness, Effect on Liquidity and Operations and Going
Concern
As of the filing date of this report, the Company has failed to pay the
interest that came due February 1, 2001 with respect to the Prandium Notes.
Under the terms of the Prandium Notes, the grace period for the failure to pay
interest has expired. In addition, as of the filing date of this report, FRI-
MRD has failed to pay the interest due January 31, 2001 with respect to its
Senior Discount Notes and the MRD Merger Notes. Under the terms of the Senior
Discount Notes and MRD Merger Notes, the grace period for the failure to pay
interest has expired. Under the terms of the note agreements governing the
FRI-MRD debt and the indentures governing the Prandium Notes, these non-
payments became "Events of Default" and the holders of all such debt have
become entitled to certain rights, including the right to accelerate the debt.
In addition, the vesting of the right (whether or not exercised) of the
noteholders to accelerate the debt caused an "Event of Default" to occur under
the Foothill Credit Facility and Foothill became entitled to certain
additional rights, including the right to cash collateralize letters of credit
issued under the Foothill Credit Facility. No working capital borrowings are
currently outstanding under the Foothill Credit Facility. As of March 23,
2001, the Company had $11.5 million in letters of credit issued under the
Foothill Credit Facility, in large part to provide security for future amounts
payable by the Company under its workers' compensation insurance program.
Although none of the holders of the Prandium Notes, the Senior Discount Notes
or the MRD Merger Notes nor Foothill have exercised their rights, there can be
no assurance that they will not do so in the future. Foothill and FRI-MRD
entered into a letter agreement as of March 29, 2001 whereby FRI-MRD
acknowledged certain specified events of default and acknowledged that as a
result of such events of default, Foothill has no further obligation to make
advances to FRI-MRD under the Foothill Credit Facility. In addition, pursuant
to such letter agreement Foothill agreed that it would forbear from exercising
its remedies relative to the events of default specified in the letter
agreement until the earliest to occur of: (i) May 15, 2001 (or such later date
as Foothill may designate in writing in its sole discretion); and (ii) the
occurrence of any Event of Default under the Foothill Credit Facility (other
than those defaults set forth in the letter agreement).
At the filing date of this report, all outstanding principal under the note
agreements and the indentures was considered to be a current obligation
because of the defaults under the note agreements and the indentures. The
Company does not have sufficient current assets nor does it presently have any
other available sources of capital to satisfy this current liability. In
addition, the Foothill Credit Facility permits Foothill to liquidate
collateral under the security agreement thereto to satisfy amounts outstanding
under the Foothill Capital Facility or upon the failure to cash collateralize
outstanding letters of credit upon Foothill's request. The Foothill Credit
Facility is secured by a first priority lien and security interests in
substantially all tangible and intangible assets of the Company and its
subsidiaries other than Hamlet's capital stock.
In addition to the Events of Default on certain of its debt instruments,
the Company has incurred recurring losses from operations and has a
significant stockholders' deficit and for these reasons, the Company's
independent auditors have included an explanatory paragraph in their report on
the Company's financial statements for the year ended December 31, 2000
expressing substantial doubt about the Company's ability to continue as a
going concern.
The Company is currently negotiating with its creditors to reach agreement
on an acceptable capital restructuring of the Company and its subsidiaries.
The Company cannot provide any assurance that an agreement can be reached or
what such agreement may consist of and what effects may ensue on the
operations and interests of the Company. Any restructuring transaction could
materially adversely affect the interests of existing equity holders. Also,
the Company is uncertain as to what actions will be taken by Foothill, the
holders of the FRI-MRD notes and the holders of the Prandium Notes if the
defaults are not cured. In the event the Company does not succeed in its
restructuring efforts, the Company's management believes that the Company will
not be able to access capital for new restaurant development and other capital
expenditures. The Company's management also believes that, absent the
restructuring, the Company will be unable to offer meaningful equity
incentives to attract and retain key management and that the Company will be
exposed to a significant risk of loss of key employees. If the Company is not
able to successfully reach an agreement with its creditors or successfully
resolve its capital structure, its ability to continue to operate in the
ordinary course may be materially adversely affected and the
9
Company will need to consider other alternatives, including but not limited
to, a federal bankruptcy filing. Even if the Company does reach an agreement
with its creditors, the filing of a Chapter 11 case may become necessary to
implement the terms of the agreement.
Substantial Leverage and Ability to Service Debt
The Company currently has a significant amount of indebtedness under which
it is currently in default. See "--Defaults on Indebtedness, Effect on
Liquidity and Operations and Going Concern." The following chart shows certain
important credit statistics as of the dates specified below:
For the Years Ended
-------------------------
December 31, December 26,
2000 1999
------------ ------------
($ in thousands)
Total Debt.................................... $ 237,756 $260,721
Stockholders' deficit......................... (99,377) (57,605)
Deficiency of losses to cover fixed charges... (101,801) (35,999)
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 requirements;
. 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.
History of Losses
For the years ended December 31, 2000, December 26, 1999 and December 27,
1998, the Company recorded net losses of $41.8 million, $36.5 million and
$63.1 million, respectively. For the same periods, the Company recorded
operating losses of $71.0 million, $4.6 million and $38.1 million,
respectively. Although the Company believes that the completion of a
successful capital restructuring would eliminate significant interest costs in
the future and that other strategic initiatives could result in improvements
to operations, there can be no assurance that the Company will achieve
profitable operations in the future.
Future Growth and Financing
If the Company successfully restructures its debt, the Company anticipates
that its future business strategy will include 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.
10
Control by Principal Stockholder
Mr. Kevin S. Relyea, the Company's Chief Executive Officer and Chairman of
the Board of Directors owns approximately 53.7% of the Company's outstanding
common stock and has 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, particularly Mr. Relyea. The Company does
not maintain key man insurance. The loss of the services of key employees
(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 automatically
extends from day to day so that the employment agreement always has a term of
at least two years.
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, 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 203 restaurants operated by the Company as of December 31, 2000, the
Company owned the land and buildings for 20, owned the buildings and leased
the land for 42 and leased both land and buildings for the remaining 141
restaurants. The full-service restaurants are primarily free-standing units
ranging from approximately 5,000 to 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
---------------- -----------
2001-2005........................................................ 10
2006-2010........................................................ 29
2011-2015........................................................ 39
2016-2020........................................................ 28
2021 and later................................................... 77
---
Total.......................................................... 183
===
11
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 completed construction in 2000 of a 4,000 square-foot
research and development facility, which houses one of the Company's test
kitchens and a quality assurance testing facility. The Company leases 34,200
square feet of space in an office building in Irvine, California which houses
KKR operations staff, the Company's headquarters' personnel and certain
support functions of the Company. Currently, there is excess capacity in this
location as a result of the El Torito Sale. The Company may choose to vacate
these offices in April 2002 when the current lease expires and consolidate
personnel in its owned facility. The Company also leases (i) 26,270 square
feet of space in a building in Louisville, Kentucky which houses the Chi-Chi's
operations and support functions and (ii) various other smaller offices and
warehouses.
Substantially all of the Company's assets have been pledged under the
Foothill Credit Facility (other than Hamlet's capital stock). However, of the
62 owned restaurants at December 31, 2000 (buildings or land and buildings),
one was subject to a security interest in favor of a third party.
Approximately 26% 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 31, 2000:
Total
Hamburger Number of
Chi-Chi's Koo Koo Roo Hamlet Other Restaurants
--------- ----------- --------- ----- -----------
California.................... 0 37 10 5 52
Ohio.......................... 28 0 0 0 28
Pennsylvania.................. 23 0 0 0 23
Indiana....................... 13 0 0 0 13
Michigan...................... 13 0 0 0 13
Maryland...................... 8 0 2 0 10
Wisconsin..................... 10 0 0 0 10
Virginia...................... 6 0 2 0 8
Minnesota..................... 7 0 0 0 7
New Jersey.................... 7 0 0 0 7
Iowa.......................... 5 0 0 0 5
Florida....................... 0 4 0 0 4
Illinois...................... 4 0 0 0 4
Kentucky...................... 4 0 0 0 4
Massachusetts................. 3 0 0 0 3
Nevada........................ 0 2 0 1 3
West Virginia................. 3 0 0 0 3
New York...................... 2 0 0 0 2
Connecticut................... 1 0 0 0 1
Delaware...................... 1 0 0 0 1
Kansas........................ 1 0 0 0 1
South Dakota.................. 1 0 0 0 1
--- --- --- --- ---
Total....................... 140 43 14 6 203
=== === === === ===
12
Not including restaurants sold as part of an operating division, during the
past five years the Company has divested more than 120 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 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 31, 2000, the Company was attempting
to lease six closed properties with an annual carrying cost of $0.7 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
On January 26, 2001, a purported stockholder of the Company initiated a
stockholder derivative suit against the Company and Mr. Relyea, in the
Superior Court of the State of California for the County of Orange, seeking,
among other things, compensatory damages, a constructive trust, punitive
damages and attorneys' fees. The suit arises out of the sale by AIF II, L.P.
on December 29, 2000, of 95,831,997 shares of the Company's common stock to
Mr. Relyea for a cash purchase price of $15,000. Mr. Relyea is the Company's
Chief Executive Officer, President and Chairman of the Board of Directors. The
suit alleges that Mr. Relyea improperly usurped the stock purchase opportunity
from the Company and also alleges constructive fraud. The Company and Mr.
Relyea deny any wrongdoing or impropriety and intend to defend the suit
vigorously on among other grounds that the purchase of stock was not a
corporate opportunity.
On February 13, 2001, a similar stockholder derivative suit was filed in
the Superior Court of the State of California for the County of Orange by
another purported stockholder against the Company and Mr. Relyea. This suit
arises out of the same set of facts as the suit filed on January 26, 2001 and
seeks similar damages and fees. The Company and Mr. Relyea are seeking to have
this case consolidated with the case filed on January 26, 2001.
The Company is involved in various other 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.
13
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 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
Year Ended December 2000
First Quarter................................................. $0.55 $0.14
Second Quarter................................................ $0.41 $0.20
Third Quarter................................................. $0.23 $0.11
Fourth Quarter................................................ $0.14 $0.06
At March 23, 2001, there were 1,088 stockholders of record of Company
Common Stock.
The Securities and Exchange Commission ("SEC") has amended certain rules
under the Securities Exchange Act of 1934 regarding the use of a company's
discretionary proxy voting authority with respect to stockholder proposals
submitted to a company for consideration at such company's next annual
meeting. Stockholder proposals submitted to the Company outside the processes
of Rule 14a-8 (i.e., the procedures for placing a stockholder's proposal in
the Company's proxy materials) will be considered untimely with respect to the
2001 annual meeting of stockholders and all subsequent annual meetings of
stockholders if received by the Company more than 120 days or less than 90
days prior to the anniversary date of the immediately preceding annual meeting
of stockholders.
The Company has not paid cash dividends to holders of Company Common Stock
since its incorporation. The Company has retained, and expects to continue to
retain, all available earnings, if any, generated by its operations for the
maintenance, development and growth of its business, and does not anticipate
paying dividends on Company Common Stock in the foreseeable future. In
addition, each of the indentures, as amended, (collectively, the "Indentures")
governing the Company's outstanding Senior Notes and Senior Subordinated
Discount Notes, the note agreements governing the FRI-MRD Senior Discount
Notes and the MRD Merger Notes and the Foothill Credit Facility restricts or
prohibits the Company's ability to pay dividends.
14
Item 6. SELECTED FINANCIAL DATA(1)
As of and for the Years Ended
-----------------------------------------------------------------------
Dec. 31, Dec. 26, Dec. 27, Dec. 28, Dec. 29,
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
($ in thousands, except per share amounts)
Statement of Operations
Data:
Sales................... $ 424,632 $ 536,579 $ 472,653 $ 463,724 $ 724,229
Cost of Sales:
Product cost........... 113,278 141,881 126,788 123,803 200,379
Payroll and related
costs................. 152,670 190,772 165,207 162,807 273,536
Occupancy and other
operating expenses.... 116,065 139,153 125,177 129,428 181,730
Depreciation and
amortization........... 22,852 28,031 22,916 22,395 33,802
General and
administrative
expenses............... 27,834 32,742 27,417(2) 30,186 41,742
Opening costs........... 762 2,879 3,345 188 673
Loss on disposition of
properties, net........ 4,104 5,265 7,993 3,885 8,600
Gain on sale of
division............... 60,729 0 0 0 62,601
Provision for
divestitures and write-
down of long-lived
assets................. 58,027 484 27,661 2,640 0
VCU termination expense
(3).................... 0 0 4,223 0 0
Restructuring costs..... 0 0 0 0 6,546
Interest expense, net... 30,841 31,371 24,659 19,476 36,725
Income tax provision.... 700 492 400 509 890
----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary item..... (41,772) (36,491) (63,133) (31,593) 2,207
Extraordinary gain on
extinguishment of
debt................... 0 0 0 0 134,833
----------- ----------- ----------- ----------- -----------
Net income (loss)....... $ (41,772) $ (36,491) $ (63,133) $ (31,593) $ 137,040
=========== =========== =========== =========== ===========
Net income (loss) per
share--basic and
diluted:
Income (loss) before
extraordinary item.... $ (0.23) $ (0.20) $ (0.48) $ (0.26) $ 0.02
Extraordinary item..... -- -- -- -- 1.11
----------- ----------- ----------- ----------- -----------
Net income (loss)...... $ (0.23) $ (0.20) $ (0.48) $ (0.26) $ 1.13
=========== =========== =========== =========== ===========
Weighted average shares
outstanding--basic and
diluted................ 180,380,513 180,380,513 131,309,797 121,515,391 121,515,391
=========== =========== =========== =========== ===========
Balance Sheet Data:
Working capital
(deficiency) (4)....... $ (12,265)(5) $ (28,415)(6) $ (74,116) $ (66,412) $ (85,524)
Current assets.......... 63,040 67,613 35,790 45,117 46,612
Total assets............ 220,512 286,633 348,186 289,768 307,606
Current liabilities
(4).................... 75,305(5) 96,028 109,906 111,529 132,136
Non-current portion of
long-term debt,
including capitalized
lease obligations...... 235,696 237,871(7) 237,151 199,955 165,325
Common stockholders'
equity (deficit)....... (99,377) (57,605) (21,137) (26,194) 5,399
Selected Consolidated
Financial Ratios and
Other Data:
EBITDA (8).............. $ 14,785 $ 32,031 $ 28,064(2) $ 17,500 $ 26,842
Net income (loss)....... (41,772) (36,491) (63,133) (31,593) 137,040
Net cash used in
operating activities... (17,760) (1,202) (2,495) (13,105) (21,857)
Capital expenditures.... 15,622 30,335 27,691 13,588 9,848
Net cash provided by
(used in) investing
activities............. 89,632 (32,081) (41,760) (16,631) 165,024
Net cash provided by
(used in) financing
activities............. (21,967) 19,176 29,444 28,434 (117,717)
Deficiency of earnings
(losses) to cover fixed
charges (9)............ (101,801) (35,999) (62,733) (31,084) (59,504)
Restaurants open at end
of period.............. 203 308 314 275 281
Ratio of EBITDA to
interest expense, net 0.48x 1.02x 1.14x 0.90x 0.73x
- --------
(1) Reflects the sale of the El Torito Division on June 28, 2000. In addition,
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.
15
(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) 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 and 1996.
(5) The Company did not pay the interest due on certain notes on January 31
and February 1, 2001. The failure to make such required interest payments
constitutes an Event of Default under the applicable note agreements and
indentures. Accordingly, as of the filing date of this report, all unpaid
principal could be declared immediately due and payable, the impact of
which would be to increase current liabilities and working capital
deficiency by approximately $233.4 million as of such date.
(6) Includes the impact of working capital borrowings classified as a current
liability in the Consolidated Financial Statements and the classification
of $55,835,000 in property held for sale related to the El Torito Division
as a current asset in the Consolidated Financial Statements.
(7) Excludes $7,077,000 related to the El Torito Division which is included as
a reduction of property held for sale.
(8) 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.
(9) 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.
16
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 ability of the Company to satisfy its debt obligations;
. the continuing development of successful marketing strategies for each
of the Company's concepts;
. the effect of national and regional economic conditions;
. the availability of adequate working capital;
. competitive products and pricing;
. 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;
. increases in food and labor costs; and
. increases in utility costs and the impact of potential utility
interruptions.
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. 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.
17
Liquidity and Capital Resources
Liquidity
The Company reported net cash used in operating activities for the years
ended December 31, 2000 and December 26, 1999 of $17.8 million and $1.2
million, respectively. Cash needs are being funded by available cash balances
which resulted from the El Torito Sale. The Company's viability is dependent
upon its ability to restructure its capital structure. The Company is
currently negotiating with its creditors to reach agreement on an acceptable
capital restructuring of the Company and its subsidiaries. The Company cannot
provide any assurance that an agreement can be reached or on the terms of an
agreement or its effects on the Company's operations and interests. If the
Company cannot reach agreement with Foothill, the holders of the FRI-MRD notes
and the holders of the Prandium Notes, the Company will need to consider other
alternatives, including but not limited to, a federal bankruptcy filing. Even
if the Company does reach an agreement with its creditors, the filing of a
Chapter 11 case may become necessary to implement the terms of the agreement.
Assuming the Company is able to work out an acceptable capital structure, its
continuing viability will 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 any new financing agreements or
to be able to renegotiate such obligations and terms.
Statement of Cash Flows. For the year ended December 31, 2000, net cash
used in operating activities was $17.8 million compared to $1.2 million for
the year ended December 26, 1999. Interest paid increased by $15.5 million
from 1999 to 2000 and the difference in cash received from customers,
franchisees and licensees as compared to cash paid to suppliers and employees
decreased by $4.8 million from 1999 to 2000. These changes were partially
offset by an increase in interest received of $1.8 million and a decrease in
opening costs of $2.1 million when comparing 2000 to 1999. For 2000, net cash
provided by investing activities was $89.6 million as compared to net cash
used in investing activities of $32.1 million in 1999. This change was
primarily due to net proceeds received from the El Torito Sale of $111.7
million, along with a reduction in capital expenditures of $14.7 million. For
2000, net cash used in financing activities was $22.0 million compared to
$19.2 million provided by financing activities in 1999. In 2000, the $21.9
million in working capital borrowings from 1999 were repaid.
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 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.
EBITDA. For the year ended December 31, 2000, 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
$14.8 million, compared to $32.0 million for 1999. The decrease of $17.2
million was primarily the result of (i) the sale of the El Torito Division on
June 28, 2000 that resulted in $9.1 million less EBITDA in 2000 versus 1999;
(ii) the introduction of Chi-Chi's Menu 2000 which negatively impacted EBITDA
in the second quarter of 2000 by $2.4 million and had a continuing negative
impact on food and labor margins throughout the remainder of the year; (iii)
decreases in comparable sales in the Chi-Chi's and Koo Koo Roo concepts for
2000; (iv) added advertising expense to test the effectiveness of radio for
18
Koo Koo Roo in Southern California and to support the introduction of Chi-
Chi's Menu 2000; (v) certain general and administrative expenses that were
previously allocated to the El Torito Division which have not been eliminated;
and (vi) severance costs of $0.6 million related to a change in Chi-Chi's
management effected in December 2000. As a result of the sale of the El Torito
Division, the Company will be operating at lower EBITDA levels for the
foreseeable future.
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 normally 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;
. rapid turnover allows a limited investment in inventories; and
. cash from sales is applied to the payment of related accounts payable
for food, beverages and supplies which are generally purchased on trade
credit terms.
The Company had a working capital deficiency of $12.3 million on December
31, 2000. As a result of the Events of Default discussed above, at the filing
date of this report the Company's working capital deficiency would be
increased by approximately $233.4 million as a result of classifying the
unpaid principal balance in default as current. See "--Other" for a
description of the Company's planned course of action with respect to this
material deficiency.
Credit Facility. On January 10, 1997, the Company entered into the Foothill
Credit Facility to provide for the ongoing working capital needs of the
Company. As a result of the acquisition of KKR on October 30, 1998, the
Company increased the Foothill Credit Facility to $55 million. In connection
with the El Torito Sale, (i) the Company used a portion of the cash proceeds
from the sale to repay $25.9 million outstanding under the Foothill Credit
Facility and (ii) the Foothill Credit Facility was amended and restated to
adjust all restrictive covenants to reflect the El Torito Sale and reduce the
credit facility to a maximum of $20 million (subject to certain limitations)
of letters of credit and revolving cash borrowings. The Foothill Credit
Facility:
. is secured by substantially all of the real and personal property of the
Company (other than Hamlet's capital stock);
. 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, however, if by October 2, 2001 the
Company's senior and subordinated debt maturities for those issues that
currently mature in 2002 are not extended by at least one year, then (i)
any revolving borrowings must be repaid and (ii) letters of credit must
be cash collateralized on October 2, 2001.
The Company was not in compliance with certain of its financial ratios at
December 31, 2000. In addition, the non-payment of interest on the FRI-MRD
notes is considered a default under the provisions of the Foothill Credit
Facility. The Company has notified Foothill of all such defaults and has
requested a waiver. There can be no assurances that the waiver will be
granted. Letters of credit are issued under the Foothill Credit Facility in
large part to provide security for future amounts payable under the Company's
workers' compensation insurance program ($11.5 million of such letters of
credit were outstanding as of March 23, 2001). No working capital borrowings
were outstanding as of March 23, 2001.
19
Prandium Notes. On January 27, 1994, the Company sold $300 million
principal amount of the Senior Notes and $150 million principal amount ($109
million in proceeds) of the Discount Notes. The Senior Notes require
semiannual interest payments on February 1 and August 1 of each year and
mature on February 1, 2002. The Senior Notes are redeemable at the option of
the Company at 100%. Cash interest payments on the Discount Notes began on
August 1, 1997 and the terms of such debt require that interest continue to be
paid on February 1 and August 1 of each year, and such notes 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 101.359%,
declining to 100% at February 1, 2002. At the filing date of this report, the
Company is in default of the interest payment provisions of the Prandium
Notes.
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, 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. At the filing date of this report, FRI-MRD
is in default of the interest payment provisions of these notes and is
currently negotiating with the noteholders to determine an acceptable capital
restructuring of the Company and its subsidiaries.
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, 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.
At the filing date of this report, FRI-MRD is in default of the interest
payment provisions of these notes and is currently negotiating with the
noteholders to determine an acceptable capital restructuring of the Company
and its subsidiaries.
Other. During 1999, the Company explored several financing transactions and
other strategic alternatives in an effort to meet its debt service
requirements. This process culminated in the completion of the El Torito Sale
on June 28, 2000. A portion of the net cash proceeds from that transaction was
used to pay indebtedness outstanding under the Foothill Credit Facility of
$25.9 million. In addition, Acapulco assumed $9.8 million of long-term debt,
consisting primarily of capitalized lease obligations, as part of the El
Torito Sale.
After completion of the El Torito Sale, the Company continued to be highly
leveraged and have significant annual debt service requirements. During the
second half of fiscal 2000, the Company began considering other alternatives
to address its debt service requirements.
As a result of discussions and deliberations among the Company, its legal
advisors and its financial advisors, the Company's subsidiary FRI-MRD elected
not to pay the semi-annual interest payments due January 31, 2001
20
on its outstanding long-term debt. The Company also elected not to pay the
semi-annual interest payments due February 1, 2001 on its outstanding long-
term debt. Under the terms of the note agreements governing the FRI-MRD debt
and the indentures governing the Company debt, these non-payments became
"Events of Default" and the holders of all such debt have become entitled to
certain rights, including the right to accelerate the debt. In addition, the
vesting of the right (whether or not exercised) of the noteholders to
accelerate the debt caused an "Event of Default" to occur under the Foothill
Credit Facility and Foothill became entitled to certain additional rights.
Foothill and FRI-MRD entered into a letter agreement as of March 29, 2001
whereby FRI-MRD acknowledged certain specified events of default and
acknowledged that as a result of such events of default, Foothill has no
further obligation to make advances to FRI-MRD under the Foothill Credit
Facility. In addition, pursuant to such letter agreement Foothill agreed that
it would forbear from exercising its remedies relative to the events of
default specified in the letter agreement until the earliest to occur of: (i)
May 15, 2001 (or such later date as Foothill may designate in writing in its
sole discretion); and (ii) the occurrence of any Event of Default under the
Foothill Credit Facility (other than those defaults set forth in the letter
agreement). The Company is currently negotiating with its creditors to reach
agreement on an acceptable capital restructuring of the Company and its
subsidiaries. There can be no assurances that the Company will be able to
successfully reach an agreement with its creditors or successfully resolve its
capital structure. In such an event, the Company's ability to continue to
operate in the ordinary course may be materially adversely affected.
Capital Resources
Net cash provided by investing activities was $89.6 million for the year
ended December 31, 2000, net of $15.6 million used for capital expenditures,
as compared to net cash used in investing activities of $32.1 million for
fiscal 1999 and $41.8 million for fiscal 1998. The change in net cash provided
by (used in) investing activities for 2000 as compared to 1999 and 1998 was
primarily due to (i) net proceeds from the completion of the El Torito Sale
and (ii) lower capital expenditures in 2000.
Capital expenditures for fiscal 2000 were $15.6 million, including $0.9
million expended on El Torito in the normal course of business during the six
months prior to the sale of that division. Three new Koo Koo Roo restaurants
were opened in fiscal 2000. Fifteen additional Chi-Chi's were remodeled,
bringing the total Chi-Chi's that have been remodeled between January 1, 1997
and December 31, 2000 to 98.
Capital expenditures of up to approximately $12.0 million have been
identified for fiscal 2001. The Company anticipates opening up to three new
Koo Koo Roo restaurants and expanding a new Koo Koo Roo menu test to seven
restaurants. Actual capital expenditures for fiscal 2001 will be dependent on
successful resolution of the Company's capital structure and on the
availability of required funds.
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.
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 no
working capital borrowings were outstanding as of December 31, 2000.
Borrowings under the Foothill Credit Facility bear interest at the prime rate
as announced by Wells Fargo Bank plus 1.875% for borrowings less than or equal
to $10 million and at the prime rate plus 2.875% for borrowings greater than
$10 million.
21
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. In 1999, the Company 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 did
not have a material impact on reported comparable restaurant sales results due
to the Company's relatively low levels of new restaurant growth.
Fiscal year 2000 as compared to fiscal year 1999
Total sales of $424,632,000 for 2000 decreased by $111,947,000 or 20.9% as
compared to 1999. The decrease was the result of (i) the sale of the El Torito
Division on June 28, 2000; (ii) declines in comparable restaurant sales for
Koo Koo Roo and Chi-Chi's, slightly offset by an increase in comparable
restaurant sales for Hamburger Hamlet; and (iii) sales decreases for
restaurants sold or closed, other than those included in the sale of the El
Torito Division, partially offset by sales from new restaurants and sales
related to having 53 weeks of operations in fiscal 2000 versus 52 weeks of
operations in fiscal 1999. The breakdown of the sales decrease for 2000 is
detailed below:
2000 Sales
Decrease
----------------
($ in thousands)
Decrease in Sales from the Sale of the El Torito Division.. $(102,272)
Decrease in Sales from Restaurants Sold or Closed other
than Those included in the Sale of the El Torito
Division.................................................. (11,776)
Net Decrease in Sales of Comparable Restaurants............ (5,637)
Sales from New Restaurants................................. 2,511
Sales from Extra Week of Operations........................ 5,227
---------
$(111,947)
=========
Overall sales for comparable restaurants in 2000 were $293,132,000, which
were $5,637,000 or 1.9% unfavorable when compared to 1999. Comparable sales in
2000 for Chi-Chi's were $210,018,000, which were $2,439,000 or 1.1%
unfavorable to 1999. Koo Koo Roo's comparable sales were $50,742,000, which
were $3,617,000 or 6.7% unfavorable to 1999. Offsetting these unfavorable
variances were comparable Hamburger Hamlet sales of $32,372,000, which were
$419,000 or 1.3% favorable to 1999.
2000 Comparable
Sales Increase
(Decrease)
-------------------
Amount Percent
--------- --------
($ in thousands)
Comparable Chi-Chi's................................... $ (2,439) (1.1)%
Comparable Koo Koo Roo................................. (3,617) (6.7)
Comparable Hamburger Hamlet............................ 419 1.3
--------- ------
$(5,637) (1.9)%
========= ======
The primary focus in Chi-Chi's for 2000 was the introduction of a new menu
in the second quarter. All broadcast media flights for 2000 were scheduled to
support the introduction, which media was broadcast almost exclusively in the
second and third quarters. Consequently, no media was scheduled for the fourth
quarter contributing to comparable sales declines of 6.3% for the fourth
quarter of 2000 when compared to the same period in 1999. Additionally,
certain major competitors of Chi-Chi's targeted the fourth quarter of 2000
with significant broadcast media campaigns.
Costs related to the introduction of Chi-Chi's Menu 2000 negatively
impacted EBITDA in 2000. During the second quarter of 2000, gross margin was
negatively impacted by introductory food and labor costs, including
22
training, totaling approximately $1.8 million. Expenses for menus, uniforms
and small equipment were approximately $600,000 during the second quarter of
2000.
Koo Koo Roo increased its marketing focus in 2000 with six campaigns
compared to four in 1999, supporting three new product introductions, Stuffed
Potatoes, BBQ Chicken and Apple Crumb Dessert, as well as campaigns for its
Original Chicken and Thanksgiving. In addition to print media, Koo Koo Roo
tested radio and billboard advertising in the Los Angeles/Orange County
California market during the fourth quarter of 2000.
Hamburger Hamlet introduced three new Hamlet At Night menus in 2000
supported by print advertising and in-store merchandising. This strategy of
seasonal menus, begun in 1999, has shown to be successful in revitalizing
Hamburger Hamlet's dinner business. Hamburger Hamlet reported comparable sales
increases of 2.1% in the fourth quarter of 2000 when compared to the same
period in 1999.
In the following discussion of the Company's operating results, one of the
major components of the variance of 2000 versus 1999 was the El Torito Sale.
Reported results for 2000 included only six months of operations for El Torito
while results for 1999 included a full year of operations for El Torito.
Therefore, when the discussion references the impact of the El Torito Sale,
the impact to which it refers is this six month absence of operating results
for 2000.
Product costs of $113,278,000 for 2000 decreased by $28,603,000 or 20.2% as
compared to 1999. Product cost as a percentage of sales increased from 26.4%
in 1999 to 26.7% in 2000. The El Torito Sale accounted for $24,867,000 (86.9%)
of the product costs decrease and more than 100% of the percentage of sales
increase, primarily because of El Torito's volume of margarita sales and the
associated increase in tequila prices related to the Mexican agave shortage.
If all of El Torito's results were excluded from both 2000 and 1999, product
costs as a percentage of sales decreased from 27.7% in 1999 to 27.4% in 2000,
primarily because of favorable cheese prices in the first half of 2000,
partially offset by the Chi-Chi's Menu 2000 introduction.
Payroll and related costs of $152,670,000 for 2000 were $38,102,000 or
20.0% favorable to 1999. As a percentage of sales, payroll and related costs
increased from 35.6% in 1999 to 36.0% in 2000. The El Torito Sale accounted
for $36,486,000 (95.8%) of the total variance. The remaining variance was
composed of higher management expenses as a result of 53 weeks of salaries in
2000 versus 52 weeks in 1999 and increases related to the Chi-Chi's Menu 2000
introduction, partially offset by the savings in variable labor associated
with the decrease in sales.
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 further
increased to $5.75 on March 1, 1998. In October 2000, the California
Industrial Welfare Commission voted to increase the state's minimum wage by
50c on January 1, 2001 with another 50c increase to occur on January 1, 2002.
No Federal minimum wage increases are currently scheduled for 2001. In
response to previous minimum wage increases, the Company has implemented
various menu price increases, and each of the Company's concepts raised prices
in early 2001.
Occupancy and other operating expenses of $116,065,000 in 2000 were
$23,088,000 or 16.6% favorable to 1999. The El Torito Sale accounted for
$25,998,000 (112.6%) of the variance, offset by the impact of the Chi-Chi's
Menu 2000 introduction and increased advertising expense for both Koo Koo Roo
and Chi-Chi's. These inefficiencies were reflected in the increase from 25.9%
in 1999 to 27.3% in 2000 for occupancy and other operating expenses as a
percentage of sales.
23
Depreciation and amortization of $22,852,000 for 2000 decreased by
$5,179,000 or 18.5% as compared to 1999 due to the El Torito Sale which
accounted for $4,788,000 or 92.5% of the decrease, the impact of the
29 restaurants sold or closed since the beginning of 1999 and the reduced
depreciable basis from the write-down of certain long-lived assets in the
fourth quarter of 1999.
General and administrative expenses of $27,834,000 in 2000 were $4,908,000
or 15.0% favorable to 1999. As a percentage of sales, general and
administrative expense increased from 6.1% in 1999 to 6.6% in 2000. The
decrease in expenses was due to the El Torito Sale, which was partially offset
by the impact of 53 weeks of salaries in 2000 versus 52 weeks in 1999 and
severance expenses related to the reorganization of Chi-Chi's executive staff.
The increase as a percentage of sales for 2000 primarily reflects general and
administrative expenses being spread over fewer restaurants due to the El
Torito Sale. This is in spite of the elimination of over 100 positions in the
Company's support center since the end of 1999. Management continues to
closely evaluate the Company's general and administrative cost structure for
additional savings opportunities.
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 $762,000 in 2000 decreased $2,117,000 or
73.5% from 1999 as the Company reduced the rate of new openings and remodels.
The Company reported a loss on disposition of properties of $4.1 million
for 2000 compared to a loss of $5.3 million in 1999. These amounts reflect
losses associated with restaurant divestments and closures and remodeled
restaurant asset retirements in such periods. In addition, the Company's
reserve for carrying costs of closed properties increased $0.2 million in 2000
and $1.7 million in 1999.
In the fourth quarter of 2000, ten non-strategic Koo Koo Roo restaurants
were designated for divestment, and the Company recorded a provision for
divestitures of $4.5 million. Also during the fourth quarter of 2000, the
Company substantially completed its divestment program for Chi-Chi's
restaurants, divesting a total of 28 restaurants since inception of the
program. As a result, $0.8 million was recorded as an additional provision for
divestitures. Finally, the Company identified eight other restaurants with
impaired values in 2000 and recorded a write-down of long-lived assets of $1.7
million during the third quarter and $3.1 million during the fourth quarter.
As previously reported by the Company, the Koo Koo Roo restaurant concept
realized comparable restaurant sales declines since the acquisition of the Koo
Koo Roo and Hamburger Hamlet restaurant operations on October 30, 1998, which
declines continued through the fourth quarter of 2000. These sales declines
have resulted in operating performance for the Koo Koo Roo restaurants which
is lower than anticipated at the time of the Merger. These operating results
have caused the Company to reevaluate its business strategy for Koo Koo Roo.
Consistent with this reevaluation, the Company has revised its forecasts for
the future operations of Koo Koo Roo which has resulted in a reduction in
projected future cash flows and a lower valuation of the business.
Accordingly, in the fourth quarter of 2000, the Company completed an
evaluation of the carrying value of the Koo Koo Roo costs in excess of net
assets of business acquired which determined that the entire unamortized
balance of $47,771,000 at December 31, 2000 should be written off. For a
further discussion of the methodology and assumptions employed to assess the
recoverability of the Koo Koo Roo costs in excess of net assets of business
acquired, refer to Note 5 of the Company's audited consolidated financial
statements.
Interest expense, net of $30,841,000 for 2000 decreased by $530,000 or 1.7%
as compared to 1999 primarily resulting from increased interest income on
invested cash balances partially offset by increased interest expense on
working capital borrowings.
The Company recorded a pretax gain of $60,729,000 in fiscal 2000 as a
result of the sale of the El Torito Division.
Fiscal year 1999 as compared to fiscal year 1998
Total sales of $536,579,000 for 1999 increased by $63,926,000 or 13.5% as
compared to 1998. The increase was due to (i) additional sales from the Koo
Koo Roo and Hamburger Hamlet restaurants which were acquired
24
in the Merger and the Hamlet Acquisition on October 30, 1998 and (ii) sales
from new restaurants, partially offset by sales decreases for restaurants sold
or closed. The breakdown of the sales increase for 1999 is detailed below:
1999 Sales
Increase
----------------
($ 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%
========= ======
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,
25
both sales and customer counts in the test market have shown significant
increases over prior year. Menu 2000 was introduced to the rest of the Chi-
Chi's system in the second quarter of 2000 and was 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, 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 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.
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.
26
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.
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
or13.9% 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 $6,712,000 or
27.2% as compared to 1998 primarily resulting from (i) the issuance of Senior
Discount Notes in January 1998 and the additional accretion and accrual of
interest thereon, (ii) the issuance of the MRD Merger Notes on October 30,
1998 and the accretion and accrual of interest thereon, (iii) interest on
working capital borrowings in 1999 and (iv) reduced interest income on
invested cash balances.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and hedging activities. SFAS 133, as
amended by SFAS 137 and SFAS 138, is effective for all fiscal quarters of
fiscal years beginning after December 15, 2000. The Company does not believe
it has any instruments or transactions subject to SFAS 133.
27
Selected Operating Data
The following table sets forth certain information regarding (i) the
Company; (ii) its ongoing Chi-Chi's restaurant division, KKR restaurant
division (acquired on October 30, 1998) and other operating restaurants; and
(iii) the El Torito restaurant division which was divested on June 28, 2000.
At December 31, 2000, the Company's Chi-Chi's restaurant division operated 140
full-service restaurants and the Company's KKR restaurant division operated 57
fast-casual and full-service restaurants.
For the Years Ended
--------------------------------------
December 31, December 26, December 27,
2000 1999 1998
------------ ------------ ------------
($ in thousands, except average check
amount)
Chi-Chi's Restaurant Division
Restaurant Open at End of Period:
Owned/operated...................... 140 150 165
Franchised and Licensed............. 13 15 12
Sales................................. $217,469 $227,716 $243,666
Restaurant Level Cashflow (a)......... 14,347 20,569 18,285
Divisional EBITDA (b)................. 557 5,942 1,426
Percentage increase (decrease) in
comparable restaurant sales.......... (1.1)% (0.5)% 1.8%
Average check......................... $ 10.78 $ 9.23 $ 8.50
KKR Restaurant Division (c)
Restaurant Open at End of Period:
Owned/operated...................... 57 57 54
Franchised and Licensed............. 0 1 3
Sales................................. $ 87,947 $ 88,252 $ 14,617
Restaurant Level Cashflow (a)......... 9,445 10,335 1,376
Divisional EBITDA (b)................. 3,122 4,384 364
Percentage increase (decrease) in
comparable restaurant sales.......... (3.7)% N.A. N.A.
Average check (Koo Koo Roo restaurants
only)................................ $ 10.26 $ 9.13 $ 8.70
Other Operating Restaurants
Restaurants Open at End of Period:
Owned/operated...................... 6 6 3
Franchised and Licensed............. 0 0 0
Sales................................. $ 6,807 $ 5,930 $ 4,625
Restaurant Level Cashflow (a)......... 159 280 445
Divisional EBITDA (b)................. (1,709) (112) 332
Ongoing Operations
Restaurants Open at End of Period:
Owned/operated...................... 203 213 222
Franchised and Licensed............. 13 16 15
Sales................................. $312,223 $321,898 $262,908
Restaurant Level Cashflow (a)......... 23,951 31,184 20,106
Divisional EBITDA (b)................. 1,970 10,214 2,122
Divested Operations (d)
Restaurant Open at End of Period:
Owned/operated...................... 0 95 92
Franchised and Licensed............. 0 8 8
Sales................................. $112,409 $214,681 $209,745
Restaurant Level Cashflow (a)......... 18,668 33,589 34,362
Divisonal EBITDA (b).................. 12,984 22,112 22,537
Total Company
Restaurants Open at End of Period:
Owned/operated...................... 203 308 314
Franchised and Licensed............. 13 24 23
Sales................................. $424,632 $536,579 $472,653
EBITDA (e)............................ 14,785 32,031 28,064(f)
28
- --------
(a) 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.
(b) 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. Corporate
general and administrative expenses which have not been eliminated and
that would have been allocated to the El Torito Division prior to the
sale of that division are being charged to Other Operating Restaurants
in 2000 so as not to distort the year-over-year comparisons of the Chi-
Chi's and KKR Restaurant Divisions.
(c) Reflects operations since the Merger and Hamlet Acquisition on October
30, 1998.
(d) Divested Operations represents the results of the El Torito Division
until it was divested on June 28, 2000.
(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 2000, 1999 and 1998, the effects of general inflation did not have a
significant impact on the Company's results of operations. However, beginning
in late 2000, utility rate increases began to adversely impact the Company.
The continuing impact of these increases and the impact of potential
electricity interruptions in California cannot be predicted at this time.
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.
29
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.
30
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
(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. (Filed as Exhibit 2(b) to the Company's
Form 10-K filed with the SEC on March 29, 2000.)
2 (c) Amendment No. 1 to Stock Purchase Agreement dated June 28,
2000, by and among the Company, FRI-MRD Corporation and
Acapulco Acquisition Corp. (Filed as Exhibit 2.2 to the
Company's Form 8-K filed with the SEC on July 5, 2000.)
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.)
31
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.)
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. (Filed as Exhibit 10(h) to the Company's Form 10-K
filed with the SEC on March 29, 2000.)
*10 (i) The Company's 2000 Management Incentive Compensation Plan
Description.
10 (j) Amended and Restated Loan and Security Agreement by and among
the Company, FRI-MRD Corporation, Chi-Chi's, Inc., each of
their subsidiaries and Foothill Capital Corporation, dated as
of July 19, 2000. (Filed as Exhibit 10.1 to the Company's
Form 8-K filed with the SEC on July 24, 2000.)
10 (k) Amended, Restated and Consolidated General Continuing Guaranty,
dated as of July 19, 2000, by and among the Company, FRI-MRD
Corporation, FRI-Admin Corporation, Koo Koo Roo, Inc., The
Hamlet Group, Inc. and Foothill Capital Corporation. (Filed as
Exhibit 10.2 to the Company's Form 8-K filed with the SEC on
July 24, 2000.)
10 (l) Amended and Restated Subordination Agreement, dated as of July
19, 2000, by and among Foothill Capital Corporation, FRI-MRD
Corporation and the Company. (Filed as Exhibit 10.3 to the
Company's Form 8-K filed with the SEC on July 24, 2000.)
32
10 (m) Amended, Restated and Consolidated Security Agreement, dated
as of July 19, 2000, by and among Foothill Capital
Corporation, the Company, FRI-MRD Corporation,
FRI-Admin Corporation, Koo Koo Roo, Inc., The Hamlet Group,
Inc. and each of the subsidiaries of Chi-Chi's, Inc. (Filed as
Exhibit 10.4 to the Company's Form 8-K filed with the SEC on
July 24, 2000.)
10 (n) Amended, Restated and Consolidated Stock Pledge Agreement,
dated as of July 19, 2000, by and among the Company, FRI-MRD
Corporation, Chi-Chi's, Inc. and Foothill Capital Corporation.
(Filed as Exhibit 10.5 to the Company's Form 8-K filed with
the SEC on July 24, 2000.)
10 (o) Amended and Restated Trademark Security Agreement, dated as of
July 19, 2000, by and among Chi-Chi's, Inc. and Foothill
Capital Corporation. (Filed as Exhibit 10.6 to the Company's
Form 8-K filed with the SEC on July 24, 2000.)
10 (p) 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 (q) 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 (r) 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 (s) 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 (t) Second Amended and Restated Employment Agreement dated as of
July 13, 2000 by and between Kevin S. Relyea, the Company and
certain subsidiaries.
10 (u) 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 (v) Severence Agreement and General Release dated as of December
21, 2000 by and between Roger K. Chamness, the Company and
certain subsidiaries.
10 (w) Prandium, Inc. Divestiture Bonus Plan for Key Management for
1999-2000. (Filed as Exhibit 10(nn) to the Company's Form 10-K
filed with the SEC on March 29, 2000.)
*10 (x) Letter Agreement as of March 29, 2001 by and among Foothill
Capital Corporation, FRI-MRD Corporation and Chi-Chi's, Inc.
*21 (a) List of Subsidiaries.
*21 (b) Names Under Which Subsidiaries Do Business.
*23 Consent of KPMG LLP.
(b) Reports on Form 8-K
None.
- --------
* Filed herewith.
33
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: April 2, 2001
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 April 2, 2001
____________________________________ Executive Officer (Principal
Kevin S. Relyea Executive Officer)
/s/ Daniel E. Maltby, Ph.D. Director April 2, 2001
____________________________________
Daniel E. Maltby, Ph.D.
/s/ William E. Rulon Director April 2, 2001
____________________________________
William E. Rulon
/s/ Robert T. Trebing, Jr. Executive Vice President and April 2, 2001
____________________________________ Chief Financial Officer
Robert T. Trebing, Jr. (Principal Financial and
Accounting Officer)
34
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
PRANDIUM, INC.
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of December 31, 2000 and December 26,
1999..................................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31,
2000, December 26, 1999 and December 27, 1998............................ F-4
Consolidated Statements of Common Stockholders' Deficit for the Years
Ended December 31, 2000, December 26, 1999 and December 27, 1998......... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, December 26, 1999 and December 27, 1998............................ F-6
Notes to Consolidated Financial Statements................................ F-8
Schedule II--Valuation and Qualifying Accounts for the Years Ended
December 31, 2000, December 26, 1999 and December 27, 1998............... S-1
F-1
INDEPENDENT AUDITORS' REPORT
The 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 31, 2000 and December
26, 1999, and the related consolidated statements of operations, common
stockholders' deficit and cash flows for the years ended December 31, 2000,
December 26, 1999 and December 27, 1998. 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 auditing standards generally
accepted in the United States of America. 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 31, 2000 and December 26, 1999, and
the results of their operations and their cash flows for the years ended
December 31, 2000, December 26, 1999 and December 27, 1998 in conformity with
accounting principles generally accepted in the United States of America.
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.
The accompanying consolidated financial statements have been prepared
assuming that Prandium, Inc. will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements, the Company has incurred
recurring losses from operations, has a significant stockholders' deficit and
has experienced events of default on certain of its debt instruments. These
circumstances raise substantial doubt about the entity's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 2. The consolidated financial statements and related
financial statement schedule do not include any adjustments that might result
from the outcome of this uncertainty.
KPMG LLP
Orange County, California
March 2, 2001
F-2
PRANDIUM, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 26,
2000 1999
------------ ------------
($ in thousands)
ASSETS
------
Current assets:
Cash and cash equivalents.......................... $ 53,505 $ 3,600
Restricted cash.................................... 2,500 0
Receivables........................................ 2,075 2,408
Inventories........................................ 2,386 2,672
Other current assets............................... 2,574 3,098
Property held for sale............................. 0 55,835
--------- ---------
Total current assets............................. 63,040 67,613
Property and equipment, net.......................... 124,922 137,460
Costs in excess of net assets of business acquired,
net................................................. 16,814 66,293
Other assets......................................... 15,736 15,267
--------- ---------
$ 220,512 $ 286,633
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Working capital borrowings......................... $ 0 $ 21,850
Current portion of long-term debt, including
capitalized lease obligations..................... 2,060 1,000
Accounts payable................................... 8,150 9,228
Current portion of self-insurance reserves......... 2,812 2,601
Other accrued liabilities.......................... 58,760 57,711
Income taxes payable............................... 3,523 3,638
--------- ---------
Total current liabilities........................ 75,305 96,028
Self-insurance reserves.............................. 5,298 6,560
Other long-term liabilities.......................... 3,590 3,779
Long-term debt, including capitalized lease
obligations, less current portion................... 235,696 237,871
Commitments and contingencies
Stockholders' deficit:
Common stock--authorized 300,000,000 shares, par
value $.01, 180,380,513 shares issued and
outstanding in 2000 and 1999...................... 1,804 1,804
Additional paid-in capital......................... 222,353 222,353
Accumulated deficit................................ (323,534) (281,762)
--------- ---------
Total stockholders' deficit...................... (99,377) (57,605)
--------- ---------
$ 220,512 $ 286,633
========= =========
See accompanying notes to consolidated financial statements
F-3
PRANDIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
----------------------------------------
December 31, December 26, December 27,
2000 1999 1998
------------ ------------ ------------
($ in thousands, except per share
amounts)
Sales............................... $ 424,632 $ 536,579 $ 472,653
------------ ------------ ------------
Product costs....................... 113,278 141,881 126,788
Payroll and related costs........... 152,670 190,772 165,207
Occupancy and other operating
expenses........................... 116,065 139,153 125,177
Depreciation and amortization....... 22,852 28,031 22,916
General and administrative
expenses........................... 27,834 32,742 27,417
Opening costs....................... 762 2,879 3,345
Loss on disposition of properties,
net................................ 4,104 5,265 7,993
Provision for divestitures and
write-down of long-lived assets.... 58,027 484 27,661
VCU termination expense............. 0 0 4,223
------------ ------------ ------------
Total costs and expenses.......... 495,592 541,207 510,727
------------ ------------ ------------
Operating loss...................... (70,960) (4,628) (38,074)
Gain on sale of division............ 60,729 0 0
Interest expense, net............... (30,841) (31,371) (24,659)
------------ ------------ ------------
Loss before income tax provision.... (41,072) (35,999) (62,733)
Income tax provision................ 700 492 400
------------ ------------ ------------
Net loss............................ $ (41,772) $ (36,491) $ (63,133)
============ ============ ============
Net loss per share--basic and
diluted............................ $ (0.23) $ (0.20) $ (0.48)
============ ============ ============
Weighted average shares
outstanding--basic and diluted..... 180,380,513 180,380,513 131,309,797
============ ============ ============
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 31, 2000
Common Stock Additional
------------------ Paid-in Accumulated
Shares Amount Capital Deficit Total
----------- ------ ---------- ----------- --------
($ in thousands)
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)
Net loss.................. 0 0 0 (41,772) (41,772)
----------- ------ -------- --------- --------
Balance at December 31,
2000..................... 180,380,513 $1,804 $222,353 $(323,534) $(99,377)
=========== ====== ======== ========= ========
See accompanying notes to consolidated financial statements
F-5
PRANDIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
--------------------------------------
December 31, December 26, December 27,
2000 1999 1998
------------ ------------ ------------
($ in thousands)
Increase (Decrease) in Cash and Cash Equivalents
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers.......... $ 425,546 $ 537,619 $ 471,716
Cash received from franchisees and
licensees............................ 1,581 1,726 2,018
Cash paid to suppliers and employees.. (413,351) (520,792) (454,024)
Cash paid for VCU termination
expense.............................. 0 0 (4,036)
Interest received..................... 2,142 365 1,931
Interest paid......................... (32,101) (16,645) (16,653)
Opening costs......................... (762) (2,879) (3,001)
Income taxes paid..................... (815) (596) (446)
--------- --------- ---------
Net cash used in operating
activities......................... (17,760) (1,202) (2,495)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of property and
equipment............................ 1,075 2,510 4,862
Proceeds from payments on notes
receivable........................... 711 2,238 0
Proceeds from sale of notes
receivable, net...................... 0 3,246 0
Cash required for Merger and Hamlet
Acquisition.......................... 0 (2,356) (17,016)
Capital expenditures.................. (15,622) (30,335) (27,691)
Lease termination payments............ (974) (3,557) (1,349)
Other divestment expenditures......... (1,976) (2,307) 0
Proceeds from the El Torito sale,
net.................................. 111,660 0 0
Increase in restricted cash........... (2,500) 0 0
Other................................. (2,742) (1,520) (566)
--------- --------- ---------
Net cash provided by (used in)
investing activities............... 89,632 (32,081) (41,760)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of notes... 0 0 33,304
Proceeds from (repayments of) working
capital borrowings, net.............. (21,850) 21,850 0
Proceeds from equipment financing..... 2,672 0 0
Payment of debt issuance costs........ 0 (347) (1,141)
Reductions of long-term debt,
including capitalized lease
obligations.......................... (2,789) (2,327) (2,719)
--------- --------- ---------
Net cash provided by (used in)
financing activities............... (21,967) 19,176 29,444
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents............................ 49,905 (14,107) (14,811)
Cash and cash equivalents at beginning
of period.............................. 3,600 17,707 32,518
--------- --------- ---------
Cash and cash equivalents at end of
period................................. $ 53,505 $ 3,600 $ 17,707
========= ========= =========
F-6
PRANDIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
For the Years Ended
--------------------------------------
December 31, December 26, December 27,
2000 1999 1998
------------ ------------ ------------
($ in thousands)
Reconciliation of Net Loss to Net Cash Used in Operating Activities
Net loss............................... $(41,772) $(36,491) $(63,133)
-------- -------- --------
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization........ 22,852 28,031 22,916
Amortization of debt issuance costs
and deferred gain................... 1,102 1,550 1,250
Expense of unamortized opening
costs............................... 0 0 344
Loss on disposition of properties.... 4,104 5,265 7,993
Provision for divestitures and write-
down of long-lived assets........... 58,027 484 27,661
Gain on sale of division............. (60,729) 0 0
VCU termination expense related to
stock options....................... 0 0 187
Accretion of interest on notes....... 0 6,954 8,757
(Increase) decrease in receivables... 967 1,285 (819)
Decrease in inventories.............. 195 17 93
Decrease in other current assets..... 1,005 70 30
Increase (decrease) in accounts
payable............................. (2,555) (5,086) 4,767
Decrease in self-insurance reserves.. (229) (3,457) (7,475)
Increase (decrease) in other accrued
liabilities......................... (612) 280 (5,020)
Decrease in income taxes payable..... (115) (104) (46)
-------- -------- --------
Total adjustments.................. 24,012 35,289 60,638
-------- -------- --------
Net cash used in operating activities.. $(17,760) $ (1,202) $ (2,495)
======== ======== ========
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.
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 31, 2000
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 31, 2000, the Company operated 203
restaurants in 22 states, approximately 64% of which are located in
California, Ohio, Pennsylvania, Indiana and Michigan, and franchised and
licensed 13 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 year ended December 31, 2000
included 53 weeks and the fiscal years ended December 26, 1999 and December
27, 1998 included 52 weeks.
Principles of consolidation
The consolidated financial statements include the accounts of Prandium,
Inc. and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Estimations
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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, paper 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.
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.
F-8
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Franchise and license fees
Initial franchise and license fees are recognized when all material
services have been performed and conditions have been satisfied. Initial fees
for 2000 and 1998 totaled $49,000 and $350,000, respectively. No initial fees
were recognized in 1999. Monthly fees for all franchise and license
arrangements are accrued as earned based on the respective monthly sales. Such
fees totaled $1,530,000 for 2000, $1,542,000 for 1999 and $1,331,000 for 1998
and offset general and administrative expenses.
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. Costs in excess of net assets of business
acquired related to Koo Koo Roo restaurants was amortized through the fourth
quarter of 2000 when the Company wrote off its remaining balance as further
discussed in Note 5. Accumulated amortization amounted to $966,000 at December
31, 2000 and $2,002,000 at December 26, 1999. The Company evaluates the
carrying value of its costs in excess of net assets of business acquired on an
ongoing basis relying on a number of factors, including operating results,
business plans, budgets and economic projections. In addition, the Company's
evaluation considers non-financial 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 divisions has occurred, the Company measures the amount
of an impairment, if any, based on the estimated fair value of the restaurant
operations over the remaining amortization period.
Impairment of long-lived assets
The Company evaluates long-lived assets 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 three unprofitable Chi-Chi's, three unprofitable El Torito Express
restaurants and two unprofitable Koo Koo Roo restaurants 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 write-downs of long-lived assets of $1,730,000 and
$3,106,000 during the third and fourth quarters of 2000, respectively, to
reduce the assets' carrying value to their estimated fair value.
During 1999, the Company identified one unprofitable Chi-Chi's and one
unprofitable El Torito restaurant as being impaired. 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 value.
During 1998, the Company identified nine unprofitable Chi-Chi's and three
unprofitable El Torito restaurants as being impaired. 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 value.
F-9
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 2000, 1999 and 1998 were $762,000, $2,879,000
and $3,001,000, respectively.
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 anti-dilutive 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
(as defined below). 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 17. 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. For the years ended
December 31, 2000, December 26, 1999 and December 27, 1998, 20,933,000 shares,
25,801,000 shares and 26,300,000 shares, respectively, relating to the
possible exercise of outstanding stock options were not included in the
computation of net loss per share as their effect would have been anti-
dilutive.
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.
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
F-10
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 2000 presentation.
NOTE 2--GOING CONCERN MATTERS AND RECAPITALIZATION PLAN:
The Company's consolidated financial statements have been presented on a
going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. As shown in the
2000 consolidated financial statements, the Company incurred losses of
$41,772,000, $36,491,000 and $63,133,000 for the fiscal years ended December
31, 2000, December 26, 1999 and December 27, 1998, respectively, and had a
stockholders' deficit of $99,377,000 on December 31, 2000.
During 1999, the Company explored several financing transactions and other
strategic alternatives in an effort to meet its debt service requirements.
This process culminated in the completion of the El Torito Sale (as defined
below) on June 28, 2000. A portion of the net cash proceeds from that
transaction was used to pay indebtedness outstanding under the Foothill Credit
Facility (as defined below) of $25.9 million. In addition, Acapulco (as
defined below) assumed $9.8 million of long-term debt, consisting primarily of
capitalized lease obligations, as part of the El Torito Sale. After completion
of the El Torito Sale, however, the Company has continued to be highly
leveraged and have significant annual debt service requirements.
During the second half of fiscal 2000, the Company began considering other
alternatives to address its debt service requirements. As a result of
discussions and deliberations among the Company, its legal advisors and its
financial advisors, the Company's subsidiary FRI-MRD Corporation ("FRI-MRD")
elected not to pay the semi-annual interest payments due January 31, 2001 on
its outstanding long-term debt. The Company also elected not to pay the semi-
annual interest payments due February 1, 2001 on its outstanding long-term
debt. Under the terms of the note agreements governing the FRI-MRD debt and
the indentures governing the Company debt, these non-payments became "Events
of Default" and the holders of all such debt have become entitled to certain
rights, including the right to accelerate the debt. In addition, the vesting
of the right (whether or not exercised) of the noteholders to accelerate the
debt caused an "Event of Default" to occur under the Foothill Credit Facility
and Foothill (as defined below) became entitled to certain additional rights.
The Company is currently negotiating with its creditors to reach agreement on
an acceptable capital restructuring of the Company and its subsidiaries. These
factors raise substantial doubt about the Company's ability to continue as a
going concern for a reasonable period of time.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent on its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain modifications in its financial and capital structure and ultimately to
attain profitable operations.
F-11
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Management is continuing its efforts to restructure its existing debt so that
the Company can meet its obligations and sustain operations. There can be no
assurances, however, that the Company will be able to successfully negotiate
with its creditors.
NOTE 3--SALE OF EL TORITO DIVISION:
On June 28, 2000, the Company completed the sale of substantially all of
the El Torito Division to Acapulco Acquisition Corp. ("Acapulco") in a
transaction with an adjusted enterprise value of approximately $129.5 million
(the "El Torito Sale"). At June 28, 2000, the El Torito Division operated 97
full-service restaurants and four fast-casual restaurants in eleven states and
franchised and licensed eleven restaurants outside the United States. All but
two full-service restaurants and none of the four fast-casual restaurants were
included in the El Torito Sale. As a result of the El Torito Sale, the Company
received, subject to a preliminary $0.7 million post-closing adjustment based
on a closing balance sheet, $128.8 million, consisting of $114.0 million in
cash, the assumption of $9.8 million of long-term debt, consisting primarily
of capitalized lease obligations, and $5.0 million deposited in escrow. The
Company recorded a pretax gain of $60.7 million in fiscal 2000 as a result of
this transaction. A portion of the net cash proceeds was used to pay
indebtedness outstanding under the Foothill Credit Facility of $25.9 million
and another portion was set aside in an interest bearing escrow account
totaling $5.0 million. Of this escrow account balance, $2.5 million was
recorded as restricted cash and $2.5 million was recorded in other assets.
The 95 full-service El Torito Division restaurants that were sold generated
sales of $112,409,000 and $214,681,000 for the six months and two days ended
June 27, 2000 (through date of sale) and the fiscal year ended December 26,
1999, respectively, and produced El Torito Division operating income of
$5,411,000 and $9,954,000, respectively. Such operating income includes
charges for allocated corporate general and administrative expenses of
$2,889,000 and $5,515,000 for the six months and two days ended June 27, 2000
and the fiscal year ended December 26, 1999, respectively.
NOTE 4--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
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 $21.7
million. The proceeds from the sale of the MRD Merger Notes were used to
acquire all of the outstanding capital stock of The Hamlet Group, Inc.
("Hamlet") from KKR immediately prior to the consummation of the Merger (the
"Hamlet Acquisition"). The Merger and the Hamlet Acquisition were accounted
for as a purchase. Accordingly, the results of operations and financial
position of KKR (including Hamlet) are combined with the results of operations
and financial position of the Company subsequent to the purchase.
F-12
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The assets acquired, including the costs in excess of net assets of
business acquired, and liabilities assumed in the Merger and the Hamlet
Acquisition are as follows ($ 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 was completed, resulting in a $10.8 million reduction in
such assets.
The following table summarizes unaudited pro forma combined financial
information for the Company, assuming the Merger and the Hamlet Acquisition
occurred as of the beginning of fiscal 1998. The unaudited pro forma combined
financial information is not indicative of the results of operations of the
combined companies that would have occurred had the Merger and the Hamlet
Acquisition occurred at the beginning of the period presented, nor is it
indicative of future operating results. The unaudited pro forma adjustments
are based upon currently available information and certain assumptions that
management believes are reasonable under the circumstances.
Fiscal Year Ended
December 27, 1998
-----------------------
(Pro Forma)
($ 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 5--WRITE-OFF OF COSTS IN EXCESS OF NET ASSETS OF BUSINESS ACQUIRED:
Since the Merger, Koo Koo Roo has realized comparable restaurant sales
declines that continued through the fourth quarter of 2000. These sales
declines have resulted in operating performance for Koo Koo Roo which is lower
than anticipated at the time of the Merger. These operating results have
caused the Company to reevaluate its business strategy for Koo Koo Roo.
Consistent with this strategic reevaluation, the Company has revised its
forecasts for the future operations of Koo Koo Roo resulting in a reduction in
projected future cash flows and a lower valuation of the business. The Company
has determined that its projected results for Koo Koo Roo would not support
the future recoverability of the remaining Koo Koo Roo costs in excess of net
assets of business acquired balance of $47,771,000 at December 31, 2000.
The Company evaluated the recoverability of the Koo Koo Roo costs in excess
of net assets of business required on the basis of a forecast of future
operations. Based on such forecast, the cumulative undiscounted future cash
flow was insufficient to recover the Koo Koo Roo costs in excess of net
asssets of business required balance. Accordingly, the Company wrote off the
remaining unamortized balance of $47,771,000 in the fourth quarter of 2000.
F-13
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6--RECEIVABLES:
A summary of receivables follows:
2000 1999
------ ------
($ in
thousands)
Trade, principally credit cards............................... $1,557 $1,259
License and franchise fees and related receivables............ 126 154
Notes receivable.............................................. 53 47
Other......................................................... 339 948
------ ------
$2,075 $2,408
====== ======
NOTE 7--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 in 1999. During 2000, two of the
restaurants were subleased and the third restaurant's lease was terminated. In
the fourth quarter of 2000, ten additional non-strategic Koo Koo Roo
restaurants were designated for divestment. In conjunction with the KKR
Strategic Divestment program, the Company recorded a provision for
divestitures of $4,510,000 in 2000. This provision consisted of (i) $2,765,000
for the write-down to net realizable value of the property and equipment
associated with such restaurants and (ii) $1,745,000 for costs associated with
lease terminations, subsidized subleases, brokerage fees and other divestment
costs. During 2000, these ten restaurants had sales of $8,797,000 and
restaurant level operating losses of $1,529,000. For the fiscal years ended
December 31, 2000 and December 26, 1999, the Company paid $135,000 and zero,
respectively, for divestment costs. Eight of the restaurants are still in
operation. The KKR Strategic Divestment Program is scheduled to be completed
within the next 12 months, and the operating 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 in 1998 of $22,884,000, including divestment
reserves of $12,256,000. Twenty operating restaurants of the original 48 non-
strategic restaurants were removed from the Strategic Divestment Program at
December 26, 1999 since the Company determined it would not be able to
satisfactorily negotiate lease terminations or subleases for these
restaurants, and $1,048,000 previously recorded in conjunction with the
provision for divestitures was reversed in the fourth quarter of 1999. Such
amount was included as a reduction of provision for divestitures and write-
down of long-lived assets. In the fourth quarter of 2000, the Company recorded
an additional provision for divestitures of $835,000 for costs associated with
lease terminations, subsidized subleases, brokerage fees and other divestment
costs. For the fiscal years ended December 31, 2000, December 26, 1999 and
December 27, 1998, the Company paid (i) $225,000, $287,000 and zero,
respectively, for severance costs associated with certain restaurant and
regional managers in connection with the restaurants divested and (ii)
$2,124,000, $1,913,000 and $2,114,000, respectively, for net costs associated
with lease terminations, subsidized subleases, brokerage fees and other
divestment costs. During 2000 until their divestment, the eight remaining
restaurants had sales of $2,831,000 and restaurant level operating losses of
$741,000. During 2000, the Company substantially completed the divestment of
the eight remaining restaurants for a program total of 28 non-strategic Chi-
Chi's restaurants.
Three other non-strategic restaurants were identified for divestment during
2000. The Company recorded a provision for divestitures of $1,805,000 in 2000.
This provision consisted of (i) $1,730,000 for the write-down
F-14
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to fair value of the property and equipment associated with such restaurants
and (ii) $75,000 for costs associated with broker commissions and other
divestment costs.
NOTE 8--PROPERTY AND EQUIPMENT:
A summary of property and equipment follows:
2000 1999
-------- --------
($ in thousands)
Land................................................... $ 15,490 $ 15,943
Buildings and improvements............................. 110,023 110,397
Projects under construction............................ 62,850 60,009
Furniture, fixtures and equipment...................... 4,279 8,152
-------- --------
192,642 194,501
Accumulated depreciation and amortization.............. (67,720) (57,041)
-------- --------
$124,922 $137,460
======== ========
Property under capitalized leases in the amount of $2,829,000 at December
31, 2000 and December 26, 1999 is included in buildings and improvements.
Accumulated amortization of this property under capitalized leases amounted to
$2,254,000 at December 31, 2000 and $2,113,000 at December 26, 1999. 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 $2,092,000
at December 31, 2000 and $1,802,000 at December 26, 1999 is included in
furniture, fixtures and equipment. Accumulated amortization of this property
under capitalized leases amounted to $1,127,000 at December 31, 2000 and
$678,000 at December 26, 1999.
Depreciation and amortization relating to property and equipment was
$20,436,000 for 2000, $24,871,000 for 1999 and $21,271,000 for 1998, of which
$1,787,000, $2,176,000 and $2,169,000, respectively, was related to
amortization of property under capitalized leases.
A majority of the capitalized building leases have original terms of 25
years and all of the capitalized equipment leases have original terms of three
years. All of these leases expire by the end of the year 2005. A majority of
the operating leases have original terms of 25 years, and substantially all of
these leases expire in the year 2011 or later. Most operating 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 31, 2000, December 26, 1999 and December 27, 1998 was
$16,000, $890,000 and $938,000, respectively. Total rental expense for all
operating leases comprised the following:
2000 1999 1998
------- ------- -------
($ in thousands)
Minimum rent................................... $36,373 $44,220 $35,476
Contingent rent................................ 1,719 1,798 1,417
Less: Sublease rent............................ (5,179) (6,163) (5,903)
------- ------- -------
$32,319 $39,855 $30,990
======= ======= =======
F-15
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2000, the present value of capitalized lease payments and
the future minimum lease payments on non-cancellable operating leases were:
Capitalized Operating
Due in Leases Leases
------ ----------- ---------
($ in thousands)
2001................................................. $ 890 $ 29,195
2002................................................. 671 27,368
2003................................................. 202 24,938
2004................................................. 107 21,298
2005................................................. 57 18,056
Later years.......................................... 0 46,266
------ --------
Total minimum lease payments......................... 1,927 $167,121
========
Interest............................................. (230)
------
Present value of minimum lease payments.............. $1,697
======
The future lease payments summarized above include commitments for leased
properties included in the Company's divestiture programs.
NOTE 9--OTHER ASSETS:
A summary of other assets follows:
2000 1999
------- -------
($ in
thousands)
Liquor licenses.......................................... $ 5,203 $ 5,235
Debt issuances costs..................................... 1,467 3,653
Notes receivable......................................... 4,677 5,440
Cash in escrow........................................... 2,500 0
Deferred compensation plan............................... 477 222
Other.................................................... 1,412 717
------- -------
$15,736 $15,267
======= =======
Debt issuance costs are amortized over the terms of the respective loan
agreements on a method approximating the effective interest method.
F-16
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10--LONG-TERM DEBT, INCLUDING CAPITALIZED LEASE OBLIGATIONS:
Long-term debt, including capitalized lease obligations, is comprised of
the following:
2000 1999
-------- --------
($ 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 75,000
14% Senior Secured Discount Notes...................... 24,000 24,000
Capitalized lease obligations.......................... 1,697 1,957
Other.................................................. 1,711 1,766
-------- --------
236,764 237,079
Deferred gain on debt exchange......................... 992 1,792
-------- --------
237,756 238,871
Amounts due within one year............................ 2,060 1,000
-------- --------
$235,696 $237,871
======== ========
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 mature on February 1, 2002. The Senior Notes are
redeemable at the option of the Company at 100%. Cash interest payments on the
Discount Notes began on August 1, 1997, and such notes 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 101.359%, 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-17
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, 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.
The Company did not pay the interest due on the Senior Notes, the Discount
Notes, the Senior Discount Notes and the MRD Merger Notes on January 31 and
February 1, 2001. The failure to make such required interest payments
constitutes an Event of Default under each of the applicable note agreements
and indentures. As a result, all unpaid principal could be declared
immediately due and payable. Accordingly, as of the dates of the defaults, the
unpaid principal balance (approximately $233.4 million at December 31, 2000)
would be classified as a current liability.
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. In connection
with the El Torito Sale, (i) the Company used a portion of the cash proceeds
from the sale to repay $25.9 million outstanding under the Foothill Credit
Facility and (ii) the Foothill Credit Facility was amended and restated to
adjust all restrictive covenants to reflect the El Torito Sale and reduce the
credit facility to a maximum of $20 million (subject to certain limitations)
of letters of credit and revolving cash borrowings. The Foothill Credit
Facility (i) is secured by substantially all of the real and personal property
of the Company (other than Hamlet's capital stock); (ii) 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 (iii)
expires on January 10, 2002, however, if by October 2, 2001 the Company's
senior and subordinated debt maturities for those issues that currently mature
in 2002 are not extended by at least one year, then (a) any revolving
borrowings must be repaid and (b) letters of credit must be cash
collateralized on October 2, 2001.
The Company was not in compliance with certain of its financial ratios
under the Foothill Credit Facility at December 31, 2000. In addition, the FRI-
MRD noteholders' right to accelerate the FRI-MRD notes (regardless of whether
it is exercised) is an Event of Default under the provisions of the Foothill
Credit Facility. The Company has notified Foothill of all such defaults and
Events of Default and has requested a waiver.
Standby letters of credit are issued under the Foothill Credit Facility in
large part to provide security for future amounts payable by the Company under
its workers' compensation insurance program and $12.5 million of such letters
of credit were outstanding as of December 31, 2000. There were no working
capital borrowings outstanding as of December 31, 2000. As of December 26,
1999, $21,850,000 in working capital borrowings were outstanding with an
interest rate of 10.375%.
Giving effect to the Events of Default discussed above, maturities of long-
term debt, including capitalized lease obligations, during the four years
subsequent to December 30, 2001 are as follows: $1,094,000 in 2002, $519,000
in 2003, $195,000 in 2004 and $158,000 in 2005.
NOTE 11--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The recorded amounts of the Company's cash and cash equivalents, restricted
cash, receivables, accounts payable, self-insurance reserves, other accrued
liabilities and certain financial instruments included in other assets
F-18
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
at December 31, 2000 and December 26, 1999 approximate fair value. The fair
value of the Company's long-term debt, excluding capitalized lease
obligations, is estimated as follows:
2000 1999
---------------- ----------------
Recorded Fair Recorded Fair
Amount Value Amount Value
-------- ------- -------- -------
($ in thousands)
Senior Notes........................... $103,456 $20,691 $103,456 $46,555
Discount Notes......................... 30,900 6,180 30,900 13,905
Senior Discount Notes.................. 75,000 71,250 75,000 75,000
Senior Secured Discount Notes.......... 24,000 22,800 24,000 24,000
Working capital borrowings............. 0 0 21,850 21,850
Other.................................. 1,711 1,569 2,266 2,024
The fair values of the Senior Notes and Discount Notes are based on an
average market price of these instruments as of the end of fiscal 2000 and
1999. The fair values of the Senior Discount Notes and Senior Secured Discount
Notes as of the end of fiscal 2000 and 1999 are based on an assessment of the
value of the notes by an investment banking firm which takes into account the
accreted values of the Senior Discount Notes and Senior Secured Discount Notes
on such date, historical sales price information and other relevant pricing
information. The fair value of working capital borrowings equals the recorded
amount as a result of the variable interest rate of such debt. The fair value
of the other debt is estimated using discount rates which the Company believes
would be available to it for debt with similar terms and average maturities.
The Company does not believe it has any instruments or transactions subject
to the provisions of SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities."
NOTE 12--OTHER ACCRUED LIABILITIES:
A summary of other accrued liabilities follows:
2000 1999
------- -------
($ in
thousands)
Wages, salaries and bonuses.............................. $13,077 $11,943
Carrying costs of closed properties...................... 5,943 7,405
Reserve for divestitures................................. 7,969 7,798
Interest................................................. 11,870 12,090
Property taxes........................................... 1,976 2,138
Sales tax................................................ 2,068 1,839
Utilities................................................ 1,413 1,507
Gift certificates........................................ 1,667 1,616
Deferred license fees.................................... 413 1,050
Other.................................................... 12,364 10,325
------- -------
$58,760 $57,711
======= =======
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 13--INCOME TAXES:
The Company had taxable income before application of net operating losses
in 2000. The Company incurred losses for tax purposes in 1999 and 1998. Net
operating losses were used in 2000 to offset 100% of regular
F-19
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
taxable income and 90% of alternative minimum taxable income. The 2000 income
tax provision reflects Federal alternative minimum tax and state and local
income taxes. The income tax provisions for 1999 and 1998 primarily reflect
certain state and local taxes. On a tax return basis, the remaining Federal
regular operating loss carryforwards amounted to approximately $270.9 million
($288.6 million of alternative minimum tax operating loss carryforwards) and
expire in 2009 through 2021. The Company has approximately $711,000 of tax
credit carryforwards which expire in 2003 and 2004.
At December 31, 2000, the Company and its subsidiaries had tax credit
carryforwards of approximately $1.8 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.
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 carryforwards 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.
Based on information that became available during 2000, the Company now
believes that it underwent an ownership change as defined in the Internal
Revenue Code which caused a limitation on the use of tax attributes as a
result of the Merger and the Hamlet Acquisition. These limitations only
applied to tax attributes which originated on or before October 30, 1998.
The Company experienced another ownership change as defined in the Internal
Revenue Code on December 29, 2000 due to Mr. Kevin S. Relyea's purchase of
Company stock. The Company's post December 29, 2000 use of its remaining net
operating loss carryforwards for regular and alternative minimum federal
income tax purposes is subject to an annual limitation of approximately
$608,000.
A reconciliation of income tax expense to the amount of income tax benefit
that would result from applying the Federal statutory rate of 35% to loss
before income taxes is as follows:
Fiscal Year Ended
----------------------------
Dec. 31, Dec. 26, Dec. 27,
2000 1999 1998
-------- -------- --------
($ in thousands)
Benefit for income taxes at statutory rate.... $(14,375) $(12,600) $(21,956)
State taxes, net of Federal income tax benefit
benefit...................................... 300 311 242
Nondeductible goodwill........................ 17,531 1,071 556
Change in deferred tax asset attributable to
continuing operations subject to a full
valuation reserve and other.................. (2,756) 11,710 21,558
-------- -------- --------
$ 700 $ 492 $ 400
======== ======== ========
At December 31, 2000 and December 26, 1999, the Company's deferred tax
asset was $168,622,000 and $184,738,000, respectively, and deferred tax
liability was $3,168,000 and $5,438,000, respectively. The major
F-20
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
components of the Company's net deferred taxes of $165,454,000 at December 31,
2000 and $179,300,000 at December 26, 1999 are as follows:
2000 1999
--------- ---------
($ in thousands)
Depreciation....................................... $ (3,168) $ (5,438)
Net operating loss and credit carryforwards........ 146,678 155,368
Capitalized leases................................. 129 882
Carrying costs and other reserves.................. 6,197 7,798
Self-insurance reserves............................ 3,304 8,795
Straight-line rent................................. 1,172 1,530
Reorganization costs............................... 5,720 5,720
Other.............................................. 5,422 4,645
--------- ---------
165,454 179,300
Valuation allowance................................ (165,454) (179,300)
--------- ---------
$ 0 $ 0
========= =========
The decrease in the valuation allowance during the year ended December 31,
2000 resulted from the utilization of net operating losses and from the sale
of El Torito.
NOTE 14--OTHER LONG-TERM LIABILITIES:
A summary of other long-term liabilities follows:
2000 1999
------ ------
($ in
thousands)
Straight-line rents......................................... $3,011 $3,047
Deferred compensation....................................... 512 679
Other....................................................... 67 53
------ ------
$3,590 $3,779
====== ======
NOTE 15--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 $3,787,000, $4,827,000 and
$4,261,000 for 2000, 1999 and 1998, 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 $149,000, $186,000 and $151,000 in 2000,
1999 and 1998, 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 $71,000, $87,000 and $70,000 in
2000, 1999 and 1998, respectively. In each plan, a participants right to
Company contributions vests at a rate of 25% per year of service.
F-21
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 16--RELATED PARTY TRANSACTIONS:
On December 29, 2000, Mr. Kevin S. Relyea, the Company's Chairman, Chief
Executive Officer and President, acquired approximately 53.1% of the Company's
outstanding capital stock pursuant to the terms of a Share Purchase and Sale
Agreement by and between Mr. Relyea and AIF II, L.P., dated December 29, 2000.
Mr. Relyea purchased 95,831,997 outstanding shares of common stock held by AIF
II, L.P. for an aggregate consideration of $15,000 in cash. After giving
effect to the acquisition, Mr. Relyea owns approximately 53.7% of the
outstanding capital stock of the Company. In addition, the Company has entered
into an employment agreement with Mr. Relyea that automatically extends from
day to day so that the employment agreement always has a term of at least two
years.
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 31, 2000 and December 26, 1999.
NOTE 17--STOCK OPTIONS:
At December 31, 2000, 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 805,000 shares during 2000, 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, provided, however,
that one year after a director is no longer a director of the Company, the
options terminate. Under the Company's 1998 Stock Incentive Plan,
approximately 4,535,000 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.
F-22
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status of the Company's plans as of December 31, 2000,
December 26, 1999 and December 27, 1998 and changes during the years then
ended is presented below:
Dec. 31, 2000 Dec. 26, 1999 Dec. 27, 1998
-------------------------- -------------------------- --------------------------
Weighted- Weighted- Weighted-
Number of Average Number of Average Number of Average
Options Exercise Price Options Exercise Price Options Exercise Price
---------- -------------- ---------- -------------- ---------- --------------
Outstanding at beginning
of year................ 25,800,767 $1.18 26,299,689 $1.21 934,652 $ .89
Granted................. 805,000 .21 1,202,000 .54 18,939,232 .75
Impact of Merger-KKR
plans.................. 0 0 0 0 6,432,305 2.67
Cancelled............... (5,673,263) 1.18 (1,700,922) 1.20 (6,500) 1.56
---------- ---------- ----------
Outstanding at end of
year................... 20,932,504 $1.15 25,800,767 $1.18 26,299,689 $1.21
========== ===== ========== ===== ========== =====
Options exercisable at
end of year............ 16,338,102 16,373,231 7,858,517
========== ========== ==========
Options granted during 2000 were approximately 1% of the weighted average
common shares outstanding representing 82 employees. There were no options
exercised during the periods presented.
Options Outstanding Options Exercisable
December 31, 2000 December 31, 2000
-------------------------------------- -------------------------
Weighted-
Average Weighted- Weighted-
Number of Remaining Average Number of Average
Range of Exercise Prices Options Life (Years) Exercise Price Options Exercise Price
- ------------------------ ---------- ------------ -------------- ---------- --------------
$.06 to $.50............ 7,435,836 3.91 $ .46 6,586,586 $ .49
$.51 to $1.00........... 9,514,491 7.68 .86 5,770,491 .85
$1.01 to $3.00.......... 2,383,760 5.50 1.55 2,382,608 1.55
$3.01 to $8.75.......... 1,598,417 3.70 5.43 1,598,417 5.43
---------- ---- ----- ---------- -----
$.06 to $8.75........... 20,932,504 5.79 $1.15 16,338,102 $1.26
========== ==== ===== ========== =====
Pro forma net loss and net loss per common share were determined as if the
Company had accounted for its employee stock options under the fair value
method of SFAS 123 and are presented in the table below ($ in thousands,
except per share amounts):
Dec. 31, 2000 Dec. 26, 1999 Dec. 27, 1998
------------- ------------- -------------
Net loss--pro forma.............. $(41,789) $(36,554) $(63,852)
Net loss per common share--pro
forma--basic and diluted........ $ (.23) $ (.20) $ (.49)
Weighted average fair value of
options granted................. $ .08 $ .19 $ .26
For pro forma disclosures, the options' estimated fair value was amortized
over the vesting period. These pro forma disclosures are not 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 managements 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. 31, 2000 Dec. 26, 1999 Dec. 27, 1998
------------- ------------- -------------
Expected dividend yield.......... 0% 0% 0%
Expected stock price volatility.. 10% 10% 10%
Risk free interest rate.......... 5.00% 6.00% 5.00%
Expected life of options (in
years).......................... 10 10 10
F-23
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 18--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 sales, depreciation and amortization and
operating income (loss) represents operating results of the two full-service
and four fast-casual restaurants not included in the El Torito Sale, as well
as corporate general and administrative expenses. Corporate assets include
corporate cash, restricted cash, investments, receivables, asset portions of
financing instruments and the two full-service and four fast-casual
restaurants not included in the El Torito Sale. Segment information for the El
Torito Division has been restated to exclude the results of the two full-
service and four fast-casual restaurants not included in the El Torito Sale.
Dec. 31, 2000 Dec. 26, 1999 Dec. 27, 1998
------------- ------------- -------------
($ in thousands)
Sales
El Torito Division............ $112,409 $214,681 $209,745
Chi-Chi's Division............ 217,469 227,716 243,666
Koo Koo Roo Division.......... 87,947 88,252 14,617
Corporate..................... 6,807 5,930 4,625
-------- -------- --------
Total Sales.................. $424,632 $536,579 $472,653
======== ======== ========
Depreciation and Amortization
El Torito Division............ $ 5,367 $ 10,155 $ 9,606
Chi-Chi's Division............ 10,521 11,189 10,610
Koo Koo Roo Division.......... 5,512 5,213 1,087
Corporate..................... 1,452 1,474 1,613
-------- -------- --------
Total Depreciation and
Amortization................ $ 22,852 $ 28,031 $ 22,916
======== ======== ========
Operating Income (Loss)
El Torito Division............ $ 5,411 $ 6,458 $ 6,903
Chi-Chi's Division............ (16,380) (3,161) (39,699)
Koo Koo Roo Division.......... (58,810) (2,482) (831)
Corporate..................... (1,181) (5,443) (4,447)
-------- -------- --------
Total Operating Loss......... $(70,960) $ (4,628) $(38,074)
======== ======== ========
Interest (Income) Expense, net
El Torito Division............ $ 1,227 $ 1,356 $ 856
Chi-Chi's Division............ 986 818 571
Koo Koo Roo Division.......... 172 72 (24)
Corporate..................... 28,456 29,125 23,256
-------- -------- --------
Total Interest Expense, net.. $ 30,841 $ 31,371 $ 24,659
======== ======== ========
Capital Expenditures
El Torito Division............ $ 934 $ 8,810 $ 10,249
Chi-Chi's Division............ 8,988 15,379 13,395
Koo Koo Roo Division.......... 3,914 3,297 1,450
Corporate..................... 1,786 2,849 2,597
-------- -------- --------
Total Capital Expenditures... $ 15,622 $ 30,335 $ 27,691
======== ======== ========
Total Assets
El Torito Division............ $ 0 $ 55,835 $100,056
Chi-Chi's Division............ 104,387 111,077 112,328
Koo Koo Roo Division.......... 46,202 100,607 108,410
Corporate..................... 69,923 19,114 27,392
-------- -------- --------
Total Assets................. $220,512 $286,633 $348,186
======== ======== ========
F-24
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 19--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Quarter
--------------------------------------
1st 2nd 3rd 4th
-------- -------- -------- --------
($ in thousands, except per share
amounts)
Fiscal 2000
Total sales...................... $133,114 $137,855 $ 78,040 $ 75,623
Operating income (loss).......... 1,949 1,888 (6,476) (68,321)
Net income (loss)................ $ (6,744) $ (6,822) $ 46,099 $(74,305)
======== ======== ======== ========
Net income (loss) per share--
basic and diluted............... $ (0.04) $ (0.04) $ 0.26 $ (0.41)
======== ======== ======== ========
Fiscal 1999
Total sales...................... $134,258 $140,315 $134,264 $127,742
Operating income (loss).......... (974) 3,249 (1,183) (5,720)
Net loss......................... $ (8,404) $ (4,508) $ (9,500) $(14,079)
======== ======== ======== ========
Net loss per share--basic and
diluted......................... $ (0.05) $ (0.02) $ (0.05) $ (0.08)
======== ======== ======== ========
Quarterly operating results are not necessarily representative of
operations for a full year for various reasons, including unpredictable
adverse weather conditions which may affect sales volume and food costs. All
quarters have 13 weeks except for the fourth quarter of fiscal 2000 which has
14 weeks.
In the third quarter of 2000, the Company (i) recognized a gain of
$60,729,000 as a result of the El Torito Sale and (ii) recorded an asset
impairment charge of $1,730,000 for three El Torito Express restaurants
retained by the Company after the El Torito Sale.
In the fourth quarter of 2000, the Company recorded the following charges:
(i) a $47,771,000 write-off of the Koo Koo Roo costs in excess of net assets
of business acquired, (ii) an $8,526,000 provision for divestitures, and
(iii) a $200,000 increase to the reserve for carrying costs of closed
properties.
In the fourth quarter of 1999, the Company: (i) recorded a write-down of
long-lived assets of $628,000, (ii) recorded a $904,000 provision for
divestitures for three non-strategic Koo Koo Roo restaurants, and
(iii) reversed $1,048,000 previously recorded in conjunction with the
provision for divestitures for the Chi-Chi's strategic divestment program.
NOTE 20--CONTINGENCIES:
On January 26, 2001, a purported stockholder of the Company initiated a
stockholder derivative suit against the Company and Mr. Kevin S. Relyea
seeking, among other things, compensatory damages, a constructive trust,
punitive damages and attorneys fees. The suit arises out of Mr. Relyea's
purchase of 95,831,997 shares of the Company's common stock from its former
majority stockholder and alleges that Mr. Relyea improperly usurped the stock
purchase opportunity from the Company and also alleges constructive fraud. On
February 13, 2001, a similar stockholder derivative suit was filed. The
Company and Mr. Relyea are seeking to have the case filed on February 13, 2001
consolidated with the case filed on January 26, 2001. The Company and Mr.
Relyea deny any wrongdoing or impropriety and intend to defend the suits
vigorously on among other grounds that the purchase of stock was not a
corporate opportunity.
The Company is involved in various other litigation matters incidental to
its business. The Company does not believe that any of the claims or actions
filed against it will have a material adverse effect upon the consolidated
financial position or results of operations of the Company.
F-25
SCHEDULE II
PRANDIUM, INC.
VALUATION AND QUALIFYING ACCOUNTS
($ 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 2000....... $3,306 $ 0 $ 0 $(157)(1) 3,149
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
- --------
(1) Represents write-off of uncollectible receivables against allowance and
transfers to other accounts.
S-1