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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 30, 2001 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] PRANDIUM INC.
Incorporated in Delaware I.R.S. Employer Identification No. 33-0197361
2701 Alton Parkway, Irvine, CA 92606
Telephone: (949) 863-8500
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.
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 22, 2002 was approximately
$667,000. 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 22, 2002, the registrant had issued and outstanding 180,380,513
shares of common stock, $.01 par value per share.
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PRANDIUM, INC.
FORM 10-K
For the Fiscal Year Ended December 30, 2001
INDEX
Page
umbers
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PART I
Item 1. Business........................................................ 3
Item 2. Properties...................................................... 15
Item 3. Legal Proceedings............................................... 18
Item 4. Submission of Matters to a Vote of Security Holders............. 19
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters................................. 20
Item 6. Selected Financial Data......................................... 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 24
Item 8. Financial Statements and Supplementary Data..................... 43
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 43
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 44
Item 11. Executive Compensation.......................................... 46
Item 12. Security Ownership of Certain Beneficial Owners
and Management.............................................. 50
Item 13. Certain Relationships and Related Transactions.................. 51
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K......................................... 53
Signatures .................................................................. 59
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PRANDIUM, INC.
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PART I
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Item 1. BUSINESS
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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 30, 2001, the
Company operated 190 restaurants in 21 states, approximately 65% of which are
located in California, Ohio, Pennsylvania, Indiana and Michigan, and franchised
and licensed 7 restaurants outside the United States.
Defaults on Indebtedness, Effect on Liquidity and Operations and Going Concern
During 1999 and the first half of fiscal 2000, the Company explored several
financing transactions and other strategic alternatives in an effort to meet its
debt service requirements. This process culminated in the sale to Acapulco
Acquisition Corp. ("Acapulco") of the El Torito restaurant division on June 28,
2000 (the "El Torito Sale"). A portion of the net cash proceeds from that
transaction was used to pay indebtedness of $25.9 million outstanding under the
Company's credit facility (the "Foothill Credit Facility") with Foothill Capital
Corporation ("Foothill"). In addition, Acapulco assumed $9.8 million of
long-term debt, consisting primarily of capitalized lease obligations, as part
of the El Torito Sale. However, even after completion of the El Torito Sale, the
Company has continued to be highly leveraged and has 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 deliberation among the Company and its legal and financial
advisors during January 2001 , the Company's subsidiary FRI-MRD Corporation
("FRI-MRD") elected not to pay the semi-annual interest payments due January 31,
2001 and July 31, 2001 and the principal and interest due January 24, 2002 on
its outstanding long-term debt (the "FRI-MRD Notes"). The Company also elected
not to pay the semi-annual interest payments due February 1, 2001 and August 1,
2001 and the principal and interest due on February 1, 2002 on its outstanding
long-term debt composed of 9 3/4% notes and 10 7/8% subordinated notes
(collectively, the "Prandium Notes"). Under the terms of the note agreements
governing the FRI-MRD Notes 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. As a
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result of these "Events of Default," the Company has classified all debt
outstanding under the FRI-MRD Notes and the Prandium Notes (approximately $233.4
million at December 30, 2001) as current in its 2001 consolidated balance sheet.
The Company is currently negotiating with certain of its creditors,
including Foothill and the holders of the FRI-MRD Notes and some of the holders
of the Prandium Notes, to reach agreement on a capital restructuring of the
Company and its subsidiaries and to that end has negotiated and executed a term
sheet (the "Note Term Sheet") on November 7, 2001 and subsequent letter
agreement (the "Note Letter Agreement") on March 26, 2002 with an authorized
representative of holders of a majority of the FRI-MRD Notes. As currently
contemplated, the restructuring would involve a prepackaged plan of
reorganization to be implemented through the commencement of cases by the
Company and FRI-MRD under chapter 11 of the United States Bankruptcy Code (such
cases, a "Reorganization Case") and, either concurrent with or subsequent to the
Reorganization Case, the sale of the Hamburger Hamlet restaurant chain. In light
of the amount that the Company owes to creditors and the size of the Company's
operations, the Company anticipates that, under such a prepackaged plan, there
will not be value available for distribution to its current stockholders or the
holders of the 10 7/8% subordinated Prandium Notes. The Company does not
currently contemplate that the Reorganization Case would involve any of the
Company's operating subsidiaries.
The Company cannot provide any assurance it will be able to reach an
acceptable agreement with its creditors on a capital restructuring, on the terms
of such an agreement, or on such an agreement's effect on the Company's
operations. If the Company cannot reach such an agreement, it will need to
consider other alternatives, including, but not limited to, a chapter 11
bankruptcy filing without a prearranged or prepackaged reorganization plan.
There can be no assurance that the Company would be able to reorganize
successfully in such a proceeding. Under any such circumstances, the Company
anticipates that there will not be value available for distribution to its
current stockholders or the holders of the 10 7/8% subordinated Prandium Notes.
These factors raise substantial doubt about the Company's ability to continue as
a going concern for a reasonable period of time. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and
Capital Resources--Liquidity."
Hamburger Hamlet Division
A sale of the Hamburger Hamlet restaurant chain is contemplated by the Note
Letter Agreement and the Company's capital restructuring strategy. On October
23, 2001, FRI-MRD entered into an agreement to sell its chain of 14 Hamburger
Hamlet restaurants. The agreement was terminated on February 6, 2002 in
accordance with its terms. The Company continues to explore and develop
opportunities to sell the Hamburger Hamlet restaurant chain and on March 14,
2002 entered into a letter agreement with a prospective purchaser entitling such
purchaser to a 30-day exclusive negotiation period.
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
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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 the FRI-MRD
Notes. 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. Court
approval of a settlement of this matter is currently being sought. It is
expected that the cost of settlement will be covered by insurance. 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.
Through May 2001, the number of directorships was increased to six and Messrs.
William E. Rulon, Daniel E. Maltby, Donald C. Blough, Khanh T. Tran and Michael
E. Malanga were appointed to fill the vacancies on the Board of Directors.
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. As a result
of the El Torito Sale, the Company received, after a $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 Division on June 28, 2000."
1998 Merger
On October 30, 1998, the Company, FRI-Sub, Inc. ("Merger Sub"), an indirect
wholly-owned subsidiary of the Company, and KKR consummated a merger (the
"Merger"), pursuant to which Merger Sub was merged with and into KKR, with KKR
as the surviving corporation. As a result of the Merger, each outstanding share
of common stock of KKR was converted into the right to receive one share of
common stock of the Company (the "Company Common Stock"). Immediately prior to
the Merger, a stock dividend was declared pursuant to which approximately 121.96
shares of Company Common Stock were distributed for each share of Company Common
Stock outstanding. Prior to the Merger, the Company provided a $3 million loan
(the "Bridge Loan") to a subsidiary of KKR, which was repaid after completion of
the Merger. Additionally, in connection with the Merger, FRI-MRD 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.
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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 stockholders, 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 the five-year, $35 million
Foothill Credit Facility with 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 personal property of the Company (other than
Hamlet's capital stock) along with $10.2 million of cash collateral and contains
covenants that 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. The Company was not in compliance with certain financial ratios
at December 30, 2001, September 30, 2001, July 1, 2001, April 1, 2001 and
December 31, 2000. In addition, the vesting of the FRI-MRD noteholders' right to
accelerate the debt caused an Event of Default to occur under the provisions of
the Foothill Credit Facility. The Company has notified Foothill of all such
Events of Default and has entered into forbearance agreements with Foothill
through June 30, 2002. The Company and Foothill are also negotiating the terms
of a new $15 million credit facility to provide for letters of credit, a line of
credit for the ongoing working capital needs of the Company and that would allow
the release of the cash collateral held by Foothill. While a term sheet between
the parties expired on March 31, 2002, negotiations are continuing with
Foothill.
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 were 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 and principal payment provisions of the
Senior Discount Notes, and the Company has negotiated and executed the Note Term
Sheet and Note Letter Agreement regarding a 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 were
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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 and principal
payment provisions of the MRD Merger Notes, and the Company has negotiated and
executed the Note Term Sheet and Note Letter Agreement regarding a 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."
Restaurant Operations
The Company operated 190 restaurants primarily under the Chi-Chi's, Koo Koo
Roo and Hamburger Hamlet concepts at December 30, 2001. 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 for Chi-Chi's and Hamburger Hamlet
(excluding alcoholic beverage sales) for 2001 on an unweighted basis is as
follows:
Chi-Chi's $10.98
Hamburger Hamlet 10.18
The average transaction charge for Koo Koo Roo for 2001 on an unweighted basis
was $9.82.
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.
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Employees
At December 30, 2001, the Company had a total of 9,945 employees, of whom
9,148 were restaurant employees, 634 were field management and 163 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.
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
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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 43% 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 50(cent) on January 1, 2001 with another 50(cent)
increase on January 1, 2002 to the current rate of $6.75 per hour. No Federal
minimum wage increases are currently scheduled for 2002. In response to previous
minimum wage increases, the Company has implemented various menu price
increases.
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 7 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 international markets in which
the Company operates restaurants. Also, many of the Company's menus, training
manuals, web sites 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,
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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 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. KKR terminated, effective April 2001, the Master
License and Development Agreement due to Ontario's failure to comply with the
development schedule set forth therein.
In April 1999, KKR entered into an Amended and Restated License Agreement
with KKR Management Company LLC ("Management Company") which, among other
things, granted to Management Company an exclusive right and license to develop
Koo Koo Roo restaurants throughout England. KKR terminated, effective December
2001, the Amended and Restated License Agreement due to Management Company's
failure to comply with the development schedule set forth therein.
In May 2000, KKR entered into a Second Amendment to License Agreement with
Koo Koo Roo Israel Ltd., LLC ("Israel Ltd.") which further amended a License
Agreement, originally entered into between the parties in May 1998, and amended
in July 1998. Among other things, the License Agreement and the two amendments
granted to Israel Ltd. an exclusive right and license to develop Koo Koo Roo
restaurants throughout Israel. KKR terminated, effective December 2001, the
License Agreement, as amended, due to Israel Ltd.'s failure to comply with the
development schedule set forth therein.
As described above, under existing license and other franchise agreements,
7 Chi-Chi's restaurants are operated in international markets. There were no
franchise and license fees paid to the Company for the year ended December 30,
2001. This compares to $101,000 for the year ended December 31, 2000 and
$190,000 for the year ended December 26, 1999, which were entirely related to
franchisees of the El Torito Division prior to its sale.
Sale of El Torito Division on June 28, 2000
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, after a $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
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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
$6,458,000, respectively. Such operating income included 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.
Certain Risk Factors
Defaults on Indebtedness, Effect on Liquidity and Operations and Going Concern
During 1999 and the first half of fiscal 2000, the Company explored several
financing transactions and other strategic alternatives in an effort to meet its
debt service requirements. This process culminated in the El Torito Sale on June
28, 2000. A portion of the net cash proceeds from that transaction was used to
pay indebtedness of $25.9 million outstanding under the Foothill Credit
Facility. In addition, Acapulco assumed $9.8 million of long-term debt,
consisting primarily of capitalized lease obligations, as part of the El Torito
Sale. However, even after completion of the El Torito Sale, the Company has
continued to be highly leveraged and has 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 deliberation among the Company and its legal and financial
advisors during January 2001, FRI-MRD elected not to pay the semi-annual
interest payments due January 31, 2001 and July 31, 2001 and the principal and
interest due January 24, 2002 on the FRI-MRD Notes. The Company also elected not
to pay the semi-annual interest payments due February 1, 2001 and August 1, 2001
and the principal and interest due on February 1, 2002 on the Prandium Notes.
Under the terms of the note agreements governing the FRI-MRD Notes 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. As a result of these
"Events of Default," the Company has classified all debt outstanding under the
FRI-MRD Notes and the Prandium Notes (approximately $233.4 million at December
30, 2001) as current in its 2001 consolidated balance sheet.
-11-
The Company is currently negotiating with certain of its creditors,
including Foothill and the holders of the FRI-MRD Notes and some of the holders
of the Prandium Notes, to reach agreement on a capital restructuring of the
Company and its subsidiaries and to that end has negotiated and executed the
Note Term Sheet and Note Letter Agreement with an authorized representative of
holders of a majority of the FRI-MRD Notes. As currently contemplated, the
restructuring would involve the Reorganization Case and, either concurrent with
or subsequent to the Reorganization Case, the sale of the Hamburger Hamlet
restaurant chain. In light of the amount that the Company owes to creditors and
the size of the Company's operations, the Company anticipates that, under such a
prepackaged plan, there will not be value available for distribution to its
current stockholders or the holders of the 10 7/8% subordinated Prandium Notes.
The Company does not currently contemplate that the Reorganization Case would
involve any of the Company's operating subsidiaries.
The Company cannot provide any assurance it will be able to reach an
acceptable agreement with its creditors on a capital restructuring, on the terms
of such an agreement, or on such an agreement's effect on the Company's
operations. If the Company cannot reach such an agreement, it will need to
consider other alternatives, including, but not limited to, a chapter 11
bankruptcy filing without a prearranged or prepackaged reorganization plan.
There can be no assurance that the Company would be able to reorganize
successfully in such a proceeding. Under any such circumstances, the Company
anticipates that there will not be value available for distribution to its
current stockholders or the holders of the 10 7/8% subordinated Prandium Notes.
These factors raise substantial doubt about the Company's ability to continue as
a going concern for a reasonable period of time. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and
Capital Resources--Liquidity."
Ability to Sell Hamburger Hamlet
The Note Term Sheet contemplated that the sale of the Hamburger Hamlet
restaurant chain would occur prior to the closing of the Reorganization Case.
The Note Letter Agreement that modified the Note Term Sheet removed this
requirement though added certain restrictions on the operation of the Hamburger
Hamlet restaurant chain. However, the sale of the Hamburger Hamlet restaurants
still remains part of the Company's capital restructuring strategy, and,
therefore, the Company must find an acceptable purchaser. While the Company has
entered into a letter agreement with a prospective purchaser entitling such
purchaser to a 30-day exclusive negotiation period, there can be no guarantee
that the Company will be able to sell the Hamburger Hamlet restaurant chain on
acceptable terms.
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:
-12-
For the Years Ended
---------------------------
December 30, December 31,
2001 2000
------------ ------------
($ in thousands)
Total debt $ 235,238 $ 237,756
Stockholders' deficit (162,654) (99,377)
Deficiency of losses to cover fixed charges (62,942) (101,801)
This substantial indebtedness, if not restructured, 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 30, 2001, December 31, 2000 and December 26,
1999, the Company recorded net losses of $63.3 million, $41.8 million and $36.5
million, respectively. For the same periods, the Company recorded operating
losses of $ 34.7 million, $71.0 million and $4.6 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.
-13-
Future Growth and Financing
If the Company successfully restructures its debt, the Company anticipates
that its future business strategy will include remodeling existing Chi-Chi's and
Koo Koo Roo 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,
restrictions under the Company's debt instruments, 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.
Control by Principal Stockholder
Mr. Kevin S. Relyea, the Company's Chief Executive Officer, President 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,
including plans for reorganization. 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
-14-
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 190 restaurants operated by the Company as of December 30, 2001, the
Company owned the land and buildings for 19, owned the buildings and leased the
land for 42 and leased both land and buildings for the remaining 129
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
- ---------------- -----------
2002-2006 13
2007-2011 26
2012-2016 41
2017-2021 21
2022 and later 70
---
Total 171
===
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 the Company's test kitchen and a
quality assurance testing facility. The Company also leases (i) 11,000 square
feet of space in a building in Louisville, Kentucky which houses certain
Chi-Chi's support functions, (ii) 34,200 square feet of vacant space in Irvine,
California for which the lease expires on April 30, 2002 and (iii) various other
smaller offices and warehouses.
Substantially all of the Company's assets have been pledged under the
Foothill Credit Facility (other than owned restaurants and Hamlet's capital
stock). However, of the 61 owned restaurants at December 30, 2001 (buildings or
land and buildings), one was subject to a security interest in favor of a third
party.
Approximately 25% 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
-15-
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 30, 2001:
-16-
Total
Hamburger Number of
Chi-Chi's Koo Koo Roo Hamlet Other Restaurants
--------- ----------- --------- ----- -----------
California 0 36 10 1 47
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 4 0 0 1 5
Kentucky 4 0 0 0 4
Illinois 3 0 0 0 3
Massachusetts 3 0 0 0 3
West Virginia 3 0 0 0 3
Connecticut 1 0 0 0 1
Delaware 1 0 0 0 1
Kansas 1 0 0 0 1
Nevada 0 0 0 1 1
New York 1 0 0 0 1
South Dakota 1 0 0 0 1
--- -- -- - ---
Total 137 36 14 3 190
=== == == = ===
-17-
Not including restaurants sold as part of an operating division, during the
past five years the Company has divested more than 90 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 30, 2001, the Company was attempting
to lease four closed properties with an annual carrying cost of $0.4 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 arose 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 alleged that
Mr. Relyea improperly usurped the stock purchase opportunity from the Company
and also alleged constructive fraud.
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
arose out of the same set of facts as the suit filed on January 26, 2001 and
sought similar damages and fees. On April 25, 2001, the court ruled that the two
cases were related and would proceed before the same judge. However, on June 28,
2001, the court in the case filed on February 13, 2001 granted the plaintiff's
request to dismiss his complaint without prejudice. While the Company and Mr.
Relyea believe that there exist valid defenses to each of the claims asserted,
it was determined that a potentially successful defense of the suit would likely
be more expensive than settlement.
The Company, Mr. Relyea, and the plaintiff in the suit filed on January 26,
2001 have executed a Stipulated Settlement of Derivative Claims, under which Mr.
Relyea agreed to certain restrictions on the sale of the block of the Company's
stock purchased on December 29, 2000. Without admitting liability, the Company
and Mr. Relyea agreed not to oppose an application for attorney's fees by
plaintiff's counsel of $99,000 as part of the settlement. On March 14, 2002, the
Board of Directors voted to approve the Stipulated Settlement of Derivative
Claims, with Mr. Relyea abstaining from voting. The plaintiff recently filed a
Motion to Approve Settlement of Action and for an Award of Attorney's Fees. The
Superior Court is currently scheduled to hold a hearing on this motion on April
9, 2002. It is expected that the cost of the settlement will be covered by
insurance.
-18-
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.
-19-
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 2000
First Quarter.............. $0.5400 $0.1450
Second Quarter............. $0.4000 $0.2100
Third Quarter.............. $0.2400 $0.1150
Fourth Quarter............. $0.1450 $0.0550
Year Ended December 2001
First Quarter ............. $0.1450 $0.0220
Second Quarter ............ $0.0600 $0.0290
Third Quarter ............. $0.0350 $0.0160
Fourth Quarter ............ $0.0250 $0.0062
At March 22, 2002, there were 1,175 stockholders of record of Company
Common Stock.
The Securities and Exchange Commission ("SEC") has amended certain rules
under the Securities Exchange Act of 1934 regarding the use of a company's
discretionary proxy voting authority with respect to stockholder proposals
submitted to a company for consideration at such company's next annual meeting.
The Company believes the Reorganization Case and the solicitation of consents in
connection therewith will serve the purpose of an annual meeting in 2002, and,
therefore, a separate annual meeting would be an unnecessary expense.
Stockholder proposals submitted to the Company outside the processes of Rule
14a-8 (i.e., the procedures for placing a stockholders' proposal in the
Company's proxy materials) will be considered untimely with respect to all
subsequent annual meetings of stockholders if received by the Company more than
120 days or less than 90 days prior to the anniversary date of the immediately
preceding annual meeting of stockholders.
The Company has not paid cash dividends to holders of Company Common Stock
since its incorporation. The Company has retained, and expects to continue to
retain, all available earnings, if any, generated by its operations for the
maintenance, development and growth of its business, and does not anticipate
paying dividends on Company Common Stock in the foreseeable future. In
-20-
addition, each of the indentures, as amended, governing the Prandium Notes, the
note agreements governing the FRI-MRD Notes and the Foothill Credit Facility
restrict or prohibit the Company's ability to pay dividends.
-21-
Item 6. SELECTED FINANCIAL DATA (1)
-----------------------
($ in thousands, except per share amounts)
As of and for the Years Ended
--------------------------------------------------------------------------------------
Dec. 30, Dec. 31, Dec. 26, Dec. 27, Dec. 28,
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
Statement of Operations Data:
Sales $ 289,870 $ 424,632 $ 536,579 $ 472,653 $ 463,724
Cost of Sales:
Product cost 76,631 113,278 141,881 126,788 123,803
Payroll and related costs 103,781 152,670 190,772 165,207 162,807
Occupancy and other operating expenses 83,932 116,065 139,153 125,177 129,428
Depreciation and amortization 15,691 22,852 28,031 22,916 22,395
General and administrative expenses 22,099 27,834 32,742 27,417(2) 30,186
Opening costs 354 762 2,879 3,345 188
Loss on disposition of properties, net 1,449 4,104 5,265 7,993 3,885
Gain on sale of division 0 60,729 0 0 0
Provision for divestitures and write-down
of long-lived assets 17,043 58,027 484 27,661 2,640
VCU termination expense (3) 0 0 0 4,223 0
Restructuring costs 3,610 0 0 0 0
Interest expense, net 28,222 30,841 31,371 24,659 19,476
Income tax provision 335 700 492 400 509
------------ ------------ ------------ ------------ ------------
Net loss $ (63,277) $ (41,772) $ (36,491) $ (63,133) $ (31,593)
============ ============ ============ ============ ============
Net loss per share-basic and diluted $ (0.35) $ (0.23) $ (0.20) $ (0.48) $ (0.26)
============ ============ ============ ============ ============
Weighted average shares outstanding -
basic and diluted 180,380,513 180,380,513 180,380,513 131,309,797 121,515,391
============ ============ ============ ============ ============
Balance Sheet Data:
Working capital deficiency (4) $ (261,219)(5)(6) $ (12,265) $ (28,415)(7) $ (74,116) $ (66,412)
Current assets 65,738 (6) 63,040 67,613 35,790 45,117
Total assets 173,882 220,512 286,633 348,186 289,768
Current liabilities (4) 326,957 (5) 75,305 96,028 109,906 111,529
Non-current portion of long-term debt,
including capitalized lease obligations 967 235,696 237,871(8) 237,151 199,955
Common stockholders' deficit (162,654) (99,377) (57,605) (21,137) (26,194)
Selected Consolidated Financial Ratios
and Other Data:
EBITDA (9) $ 3,427 $ 14,785 $ 32,031 $ 28,604 $ 17,500
Net loss (63,277) (41,772) (36,491) (63,133) (31,593)
Net cash used in operating activities (8,725) (17,760) (1,202) (2,495) (13,105)
Capital expenditures 5,483 15,622 30,335 27,691 13,588
Net cash provided by (used in) investing
activities (14,737) 89,632 (32,081) (41,760) (16,631)
Net cash provided by (used in) financing
activities (2,061) (21,967) 19,176 29,444 28,434
Deficiency of losses to cover fixed
charges (10) (62,942) (101,801) (35,999) (62,733) (31,084)
Restaurants open at end of period 190 203 308 314 275
Ratio of EBITDA to interest expense, net 0.12x 0.48x 1.02x 1.14x 0.90x
-22-
(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 was not required to pay.
(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.
(5) The Company elected not to pay the semi-annual interest payments due
January 31, 2001 and July 31, 2001 and the principal and interest due
January 24, 2002 on the FRI-MRD Notes. The Company also elected not to pay
the semi-annual interest payments due February 1, 2001 and August 1, 2001
and the principal and interest due February 1, 2002 on the Prandium Notes.
Under the terms of the note agreements governing the FRI-MRD Notes 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. As a result of these
Events of Default, the Company has classified all debt outstanding
(approximately $233.4 million) under the FRI-MRD Notes and the Prandium
Notes as current in the consolidated balance sheet at December 30, 2001.
(6) Includes the impact of the classification of $15,844,000 in property held
for sale related to the Hamburger Hamlet restaurant chain as a current
asset in the 2001 consolidated financial statements.
(7) Includes the impact of working capital borrowings classified as a current
liability in the 1999 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 1999 consolidated financial
statements.
(8) Excludes $7,077,000 related to the El Torito Division which is included as
a reduction of property held for sale.
(9) 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
-23-
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.
(10) For the periods presented, the Company's losses prevented coverage of the
fixed charges by the amounts disclosed. For the purposes of calculating the
deficiency of earnings (losses) to fixed charges (i) earnings (losses)
represent income (loss) before income taxes, fixed charges, gain on sale of
division and extraordinary gain on extinguishment of debt and (ii) fixed
charges consist of interest on all indebtedness, interest related to
capital lease obligations and amortization of debt issuance costs and
discounts relating to indebtedness.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
Certain information and statements included in this Management's Discussion
and Analysis of Financial Condition and Results of Operations, including,
without limitation, statements containing the words "believes," "anticipates,"
"expects," "intends," "plans," "estimates" and words of similar import,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and involve known and unknown risks and
uncertainties that could cause actual results of the Company or the restaurant
industry to differ materially from expected results expressed or implied by such
forward-looking statements. Although it is not possible to itemize all of the
factors and specific events that could affect the outlook of a restaurant
company operating in a competitive environment, factors that could significantly
impact expected results include:
. the ability of the Company to reach agreement with its creditors on an
acceptable capital structure;
. determination of any judicial court involved in the restructuring of
the Company;
. the ability of the Company to sell the Hamburger Hamlet restaurant
chain on acceptable terms;
. 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;
-24-
. changes in legislation;
. demographic changes;
. the ability to attract and retain qualified personnel;
. changes in business strategy or development or divestment 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.
Critical Accounting Policies
The Company's financial condition and results of operations are necessarily
impacted by the methods, assumptions and estimates used in the application of
critical accounting policies. The following accounting policies are particularly
important to the financial condition or results of operations of the Company,
and require estimates or other judgments of matters inherently uncertain.
Changes in the estimates or other judgments included within these accounting
policies could result in a significant change to the information presented in
the consolidated financial statements. (These accounting policies are also
discussed in the notes to the consolidated financial statements.)
1. Impairment of Long-Lived Assets. The Company reviews long-lived assets
-------------------------------
for impairment when events or circumstances indicate that the carrying amounts
may not be recoverable. Assets subject to this review, and for which impairments
have been recorded in 2001 or prior years, include property, plant and equipment
and costs in excess of net assets of business acquired.
In determining asset impairments, management must make significant
judgments and estimates to calculate the fair value of an asset. Fair value is
developed through consideration of several valuation methods including
comparison of similar recent sales transactions and discounted cash flow.
Discounted cash flow is calculated by estimating future cash flow streams,
applying appropriate discount rates to determine the present values of the cash
flow streams, and then assessing the probability of the various cash flow
scenarios. The impairment is then recorded based on the excess of the carrying
value of the asset over fair value.
Changes in assumptions and estimates included within the impairment reviews
could result in significantly different results than those discussed below in
Results of Operations and recorded in the consolidated financial statements.
-25-
2. Insurance Reserves. Insurance liabilities and reserves are accounted for
------------------
based on actuarial estimates of the amount of loss inherent in that period's
claims, including losses for which claims that have not yet been reported. These
estimates rely on actuarial calculations of ultimate loss experience for similar
historical events and an estimate of incurred but not reported claims. The
Company's insurance reserves totaled $7,976,000 at December 30, 2001. Management
continually evaluates the potential for changes in loss estimates, both positive
and negative, and uses the results of these evaluations to adjust recorded
provisions and reserves.
3. Divestment Reserves. The Company makes decisions to close restaurants
-------------------
based on their cash flows and anticipated future profitability. 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. These divestment charges represent a
liability for the net present value of any remaining lease obligations,
including executory costs, after the expected closure dates, net of estimated
sublease income, if any. These estimates of future costs often require
significant judgments and estimates by management and could be materially
affected by factors such as the Company's ability to secure subleases and the
Company's success at negotiating early termination agreements with lessors.
While management believes the current estimates of future liabilities are
adequate, it is possible that future events could require the Company to make
significant adjustments for revisions to these estimates.
Liquidity and Capital Resources
Liquidity
The Company reported net cash used in operating activities of $8.7 million
for the year ended December 30, 2001 and net cash used in operating activities
of $17.8 million for the year ended December 31, 2000. Cash needs are being
funded by available cash balances which resulted primarily from the El Torito
Sale. The Company's viability is dependent upon its ability to restructure its
debt and/or capital structure. As described below, the Company is currently
negotiating with certain of its creditors to reach agreement on an acceptable
capital restructuring of the Company and its subsidiaries which, as currently
contemplated, would involve a Reorganization Case. 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. In light of the amount
owed to creditors and the size of the Company's operations, the Company
anticipates that, in such a restructuring, there will not be value available for
recovery by the current stockholders or the holders of the 10 7/8% subordinated
Prandium Notes. If the Company cannot reach agreement with its creditors, the
Company will need to consider other alternatives, including but not limited to,
a chapter 11 bankruptcy filing without a prearranged or prepackaged
reorganization plan. 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 30, 2001, net cash
used in operating activities was $8.7 million compared to $17.8 million for the
year ended December 31, 2000. Interest paid decreased by $30.3 million from 2000
to 2001 due to the failure to make the interest payments
-26-
on the Prandium Notes and the FRI-MRD Notes. This change was partially offset by
a $18.1 million decrease in cash received from customers, franchisees and
licensees as compared to cash paid to suppliers and employees from 2000 to 2001
and $3.7 million in restructuring costs. For 2001, net cash used in investing
activities was $14.7 million as compared to net cash provided by investing
activities of $89.6 million in 2000. This change was primarily due to net
proceeds received from the El Torito Sale of $111.7 million in 2000 along with
an increase in restricted cash of $7.9 million, partially offset by a reduction
in capital expenditures of $10.1 million. For 2001, net cash used in financing
activities was $2.1 million compared to $22.0 million used in financing
activities in 2000, including $21.9 million in repaid working capital
borrowings.
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.
EBITDA. For the year ended December 30, 2001, 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, restructuring costs, interest, taxes, depreciation and
amortization and extraordinary items) of $3.4 million, compared to $14.8 million
for 2000. The decrease in EBITDA of $11.4 million was primarily the result of:
(i) the sale of the El Torito Division on June 28, 2000 that resulted in $13.0
million less EBITDA in 2001 versus 2000; (ii) $2.4 million of incremental
general and administrative expenses that were previously allocated to the El
Torito Division that were not eliminated after the sale and (iii) a $0.2 million
decrease in EBITDA in the Koo Koo Roo Division, partially offset by a $4.2
million increase in EBITDA in the Chi-Chi's Division.
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;
-27-
. 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 $261.2 million on December
30, 2001. This amount includes property held for sale of approximately $15.8
million and the classification of approximately $233.4 million in debt
outstanding under the FRI-MRD Notes and Prandiuim Notes as current. See "-- Debt
and Negotiations with Creditors" for a description of the Company's planned
course of action with respect to this material deficiency.
The following represents a comprehensive list of the Company's contractual
obligations and commitments, giving effect to the Events of Default discussed
above and excluding any new debt resulting from the reorganization ($ in
thousands):
Payments Due by Period
-----------------------------------------------------------------------
Total 2002 2003 2004 2005 2006 Thereafter
-------- ------- ------- ------- ------- ------- ----------
Long-term debt,
including capitalized
lease obligations $ 1,808 $ 841 $ 381 $ 194 $ 157 $ 113 $ 122
Operating leases 144,632 27,813 25,375 21,763 18,932 13,202 37,547
-------- ------- ------- ------- ------- ------- -------
Total contractual
cash obligations $146,440 $28,654 $25,756 $21,957 $19,089 $13,315 $37,669
======== ======= ======= ======= ======= ======= =======
Debt and Negotiations with Creditors.
1. Credit Facility. On January 10, 1997, the Company entered into the
---------------
Foothill Credit Facility which provided for a five-year, $35 million credit
facility for the ongoing working capital needs of the Company. As a result of
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:
. is secured by substantially all of the personal property of the
Company (other than the capital stock of Hamlet) along with the cash
collateral discussed below; and
. 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.
The Company was not in compliance with certain financial ratios at December
30, 2001, September 30, 2001, July l, 2001, April 1, 2001 and December 31, 2000.
In addition, the vesting of the FRI-MRD noteholders' right to accelerate the
debt caused an Event of Default to occur under the
-28-
provisions of the Foothill Credit Facility. The Company has notified Foothill of
all such Events of Default. 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 ($9.5 million of
letters of credit were outstanding as of March 22, 2002, all of which were cash
collateralized as described below). No working capital borrowings were
outstanding as of December 30, 2001 or March 22, 2002.
On March 29, 2001, May 15, 2001 and June 18, 2001, Foothill, FRI-MRD and
Chi-Chi's entered into a series of letter agreements whereby FRI-MRD and
Chi-Chi's acknowledged certain specified events of default and that as a result
of such events of default, Foothill has no further obligation to make advances
under the Foothill Credit Facility, and Foothill agreed that, subject to certain
conditions, it would forbear from exercising its remedies relative to such
events of default. Pursuant to the May 15, 2001 letter agreement, FRI-MRD paid a
forbearance fee in the amount of $100,000 and transferred $4,000,000 in cash to
Foothill to be held as cash collateral and as additional security for the
outstanding letters of credit. Pursuant to the June 18, 2001 letter agreement,
in which FRI-MRD and Chi-Chi's agreed to cash collateralize all letters of
credit outstanding under the Foothill Credit Facility in an amount equal to 105%
of face value, FRI-MRD transferred approximately $8,068,000 to Foothill,
bringing the total amount held by Foothill for that purpose to approximately
$12,068,000 at that time (cash collateral held by Foothill is included as part
of the restricted cash balance on the Company's 2001 consolidated balance
sheet). After receiving this amount, Foothill released its liens on the real
property of the Company and its subsidiaries.
On October 18, 2001, January 10, 2002 and March 13, 2002, the Company,
FRI-MRD, Chi-Chi's and certain other subsidiaries of the Company entered into
subsequent letter agreements with Foothill whereby the Company acknowledged that
certain specified events of default had occurred and reacknowledged that
Foothill has no further obligation to make advances or otherwise extend credit
under the Foothill Credit Facility. Foothill agreed that, subject to certain
conditions including the reaffirmation and consent by the Company, FRI-MRD and
certain other subsidiaries of the Company of their obligations under the
Foothill Credit Facility and the payment of forbearance fees in the amount of
$50,000 on October 18, 2001 and $60,000 on March 13, 2002, 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) June 30, 2002 (or such
later date as Foothill may designate in writing in its sole discretion); (ii)
the occurrence of any Event of Default under the Foothill Credit Facility (other
than those defaults set forth in, and certain future defaults contemplated by,
the letter agreement); and (iii) the failure of the Company to comply with
certain covenants set forth in the letter agreements. The Company also (A)
released Foothill from any claims they may have arising under the Foothill
Credit Facility, (B) agreed not to seek authority from any bankruptcy court to
obtain the use of any cash Foothill holds as cash collateral and additional
security for letters of credit outstanding under the Foothill Credit Facility
and (C) agreed that the Company and FRI-MRD would each commence a pre-negotiated
or prepackaged proceeding under chapter 11 of the United States Bankruptcy Code
on or before May 15, 2002. The Foothill Credit Facility was amended to extend
its maturity date to June 30, 2002, and to increase the amount of a substitute
letter of credit, which the Company must deliver to Foothill upon the Foothill
Credit Facility's termination, from 105% to 107% of the outstanding letters of
credit if Foothill is not released from all such letters of credit. The fee on
undrawn letters of credit was also increased from 3% to 5% per annum. As of
March 22, 2002, Foothill currently continues to hold approximately $10.2 million
as cash collateral for the outstanding letters of credit.
-29-
The Company is currently negotiating with Foothill to replace the existing
Foothill Credit Facility with a new $15 million credit facility. The new credit
facility would provide for letters of credit, a line of credit for the ongoing
working capital needs of the Company and the release of the cash collateral held
by Foothill. While a term sheet between the parties expired on March 31, 2002,
negotiations are continuing. There can be no assurance that an agreement can be
reached with Foothill or on the terms of such an agreement.
2. FRI-MRD and Prandium Notes. After completion of the El Torito Sale, the
--------------------------
Company continued to be highly leveraged and has significant annual debt service
requirements. During the second half of fiscal 2000, the Company began
considering various alternatives to address its debt service requirements. As a
result of discussions and deliberations among the Company and its legal and
financial advisors during January 2001, the Company's subsidiary FRI-MRD elected
not to pay the semi-annual interest payments due January 31, 2001 and July 31,
2001 and the principal and interest due January 24, 2002 on the FRI-MRD Notes.
The Company also elected not to pay the semi-annual interest payments due
February 1, 2001 and August 1, 2001 and the principal and interest due February
1, 2002 on the Prandium Notes. Under the terms of the note agreements governing
the FRI-MRD Notes 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.
The Company has executed each of the Note Term Sheet and the Note Letter
Agreement with an authorized representative of the holders of the FRI-MRD Notes.
The Note Term Sheet and the Note Letter Agreement contemplate restructuring the
terms of the FRI-MRD Notes in a Reorganization Case, which restructuring would
be effective on the effective date of a reorganization plan confirmed in the
Reorganization Case (the "Closing"). Under the Note Term Sheet and the Note
Letter Agreement, at the Closing, all accrued interest on the FRI-MRD Notes
would be waived and such notes would be replaced with notes having substantially
similar terms as the MRD Merger Notes except that the replacement notes (i)
would have their maturity date extended to January 31, 2005, (ii) would have an
interest rate of 12%, (iii) would include capital expenditure restrictions on
the Hamburger Hamlet restaurant chain, (iv) would require that free cash flow
generated by the Hamburger Hamlet restaurant chain prior to a sale of the
restaurants, and the proceeds of any Hamburger Hamlet sale, be applied to prepay
the replacement notes and (v) would contain additional limitations on
indebtedness and capital expenditures. In addition, while no cash interest
payments would be required, prepayments would be encouraged by an extra
reduction in principal of up to 33.33% of the prepaid amount, depending on how
quickly the prepayment is made. The restructuring contemplated by the Note Term
Sheet and the Note Letter Agreement is conditioned on, among other things, the
Company entering into a replacement for the Foothill Credit Facility and the
confirmation of a reorganization plan in the Reorganization Case on terms
consistent with the Note Term Sheet and the Note Letter Agreement. The Note
Letter Agreement also provides that until the FRI-MRD Notes are paid in full,
the holders of the replacement notes will have the right to appoint a member to
a five member board of directors of the restructured company.
-30-
The Company has been negotiating with some of the holders of its 9 3/4%
Prandium Notes and 10 7/8% Prandium Notes with respect to the restructuring of
the Company. While no definitive agreement has been reached, in light of the
amount that the Company owes to creditors, the size of the Company's operations,
and the structural subordination of the Prandium Notes to the FRI-MRD Notes, the
Company anticipates that, under a prepackaged plan of reorganization or
otherwise, there will not be value available for distribution to the holders of
the 10 7/8% subordinated Prandium Notes.
3. Equity Holders. In light of the amount owed to creditors and the size of
--------------
the Company's operations, the Company anticipates that there will not be value
available for recovery by the current stockholders in a restructuring of the
Company.
4. Other. A sale of the Hamburger Hamlet restaurant chain is contemplated
-----
by the Note Letter Agreement and the Company's capital restructuring strategy.
On October 23, 2001, FRI-MRD entered into an agreement to sell its chain of 14
Hamburger Hamlet restaurants. The agreement terminated on February 6, 2002 in
accordance with its terms. The Company continues to explore and develop
opportunities to sell the Hamburger Hamlet restaurant chain and, on March 14,
2002, entered into a letter agreement with a prospective purchaser entitling
such purchaser to a 30-day exclusive negotiation period. There can be no
guarantee that the Company will be able to sell the Hamburger Hamlet restaurants
on acceptable terms.
The Hamburger Hamlet restaurant chain generated sales of $32,371,000 and
$33,006,000 for the fiscal years ended December 30, 2001 and December 31, 2000,
respectively, and related operating income of $1,948,000 and $2,039,000 for the
same periods, respectively. Such operating income includes charges for allocated
general and administrative expenses of $748,000 and $702,000 for the fiscal
years ended December 30, 2001 and December 31, 2000, respectively.
Capital Resources
Net cash used in investing activities was $14.7 million for the year ended
December 30, 2001, including $5.5 million used for capital expenditures, as
compared to net cash provided by investing activities of $89.6 million for
fiscal 2000 and net cash used in investing activities of $32.1 million for
fiscal 1999. The change in net cash provided by (used in) investing activities
for 2001 as compared to 2000 and 1999 was primarily due to (i) net proceeds from
the completion of the El Torito Sale in 2000 and (ii) lower capital expenditures
in 2001 and 2000. The $5.5 million of capital expenditures for fiscal 2001 were
used to repair and replace equipment in the normal course of business and to
construct a new Koo Koo Roo restaurant in Woodland Hills, California.
Capital expenditures of up to approximately $7.8 million have been
identified for fiscal 2002. The Company anticipates the roll-out of new decor
and kitchen equipment packages to additional Koo Koo Roo restaurants in support
of its new menu items and to revitalize guests' perceptions of the quality and
freshness of the food. Other capital plans are currently being formulated.
Actual capital expenditures for fiscal 2002 will be dependent on the successful
resolution of the Company's capital structure, restrictions under the Company's
debt instruments and the availability of the required funds.
-31-
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, under which no
working capital borrowings were outstanding as of December 30, 2001 and March
22, 2002. 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.
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 2001 as compared to fiscal year 2000.
Total sales of $289,870,000 for 2001 decreased by $134,762,000 or 31.7% as
compared to 2000. The decrease was the result of: (i) the sale of the El Torito
Division on June 28, 2000; (ii) sales decreases for restaurants sold or closed,
other than those included in the sale of the El Torito Division; (iii) declines
in comparable restaurant sales for Koo Koo Roo, Chi-Chi's and Hamburger Hamlet;
and (iv) the absence of sales related to having 52 weeks of operations in fiscal
2001 versus 53 weeks of operations in fiscal 2000, partially offset by sales
from new restaurants. The breakdown of the sales decrease for 2001 is detailed
below:
2001 Sales
Decrease
----------
($ in thousands)
Decrease in Sales from the Sale of the El Torito Division $(112,409)
Decrease in Sales from Restaurants Sold or Closed other than
those included in the Sale of the El Torito Division (12,285)
Decrease in Sales of Comparable Restaurants (6,833)
Sales from Extra Week of Operations in 2000 (4,881)
Sales from New Restaurants 1,646
---------
$(134,762)
=========
Overall sales for comparable restaurants in 2001 were $278,972,000, which
were $6,833,000 or 2.4% unfavorable when compared to 2000. Comparable sales in
2001 for Chi-Chi's were $204,594,000, which were $2,495,000 or 1.2% unfavorable
to 2000. Koo Koo Roo's comparable sales were $42,007,000 in 2001, which were
$4,254,000 or 9.2% unfavorable to 2000. Comparable
-32-
Hamburger Hamlet sales of $32,371,000 in 2001 were $84,000 or 0.3% unfavorable
to 2000.
2001 Comparable Sales
Increase (Decrease)
---------------------
Amount Percent
------- -------
($ in thousands)
Comparable Chi-Chi's $(2,495) (1.2)%
Comparable Koo Koo Roo (4,254) (9.2)
Comparable Hamburger Hamlet (84) (0.3)
-------
$(6,833) (2.4)%
======= ====
Marketing efforts for Chi-Chi's during 2001 centered around product
offerings such as Create-a-Combo, Fantastic Fajitas and Grilled Tacos Baja
Style. These campaigns were supported by both broadcast advertising and
freestanding inserts in newspapers. Sales in the third quarter of 2001 were
negatively impacted by the events of September 11, particularly in the Baltimore
and Washington, D.C. markets where restaurants were closed for one or more days.
Additionally, in 2000, Chi-Chi's concentrated its advertising in the second and
third quarters in support of a new menu introduction, which resulted in higher
sales for the second and third quarters of 2000 as compared to the same periods
in 2001. However, comparable sales for Chi-Chi's were 4.5% favorable in the
fourth quarter of 2001 compared to the same period in 2000.
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 training,
totaling approximately $1.8 million and expenses for menus, uniforms and small
equipment totaling approximately $600,000.
Koo Koo Roo continued to see comparable sales declines in 2001 when
compared to 2000. Testing of new menu categories to broaden the appeal of the
brand continued throughout 2001 and continue in 2002. Sales for those
restaurants that have been testing the new items have lower comparable sales
declines than the comparable sales declines at the non-test restaurants. Koo Koo
Roo is continuing to divest restaurants in its non-core markets and new
executive management has been installed for the concept.
Hamburger Hamlet continued with its strategy of introducing new seasonal
menus three times during the year. The events of September 11 negatively
affected Hamburger Hamlet in both the third and fourth quarters of 2001,
particularly its Crystal City location across from Washington's Reagan National
Airport.
In the following discussion of the Company's operating results, one of the
major components of the variance of 2001 versus 2000 was the El Torito Sale.
Reported results for 2000 included six months of operations for El Torito prior
to the El Torito Sale on June 28, 2000. When the discussion references the
impact of the El Torito Sale, the impact to which it refers is this six-month
inclusion of El Torito's operating results for 2000.
-33-
Product costs of $76,631,000 for 2001 decreased by $36,647,000 or 32.4% as
compared to 2000. Product costs as a percentage of sales decreased from 26.7% in
2000 to 26.4% in 2001. The El Torito Sale accounted for $27,851,000 (76.0%) of
the product costs decrease and, without El Torito, product costs as a percentage
of sales decreased from 27.4% to 26.4%, as produce prices were favorable for Koo
Koo Roo and Chi-Chi's and chicken pricing was favorable for Chi-Chi's.
Additionally, as Chi-Chi's became more familiar with the new menu it introduced
in 2000, it regained efficiencies that it lost when the new menu was introduced.
Payroll and related costs of $103,781,000 for 2001 were $48,889,000 or
32.0% favorable to 2000. As a percentage of sales, payroll and related costs
decreased from 36.0% in 2000 to 35.8% in 2001. The El Torito Sale accounted for
$39,278,000 (80.3%) of the total variance. The remaining variance was composed
of lower management expenses as a result of 52 weeks of salaries in 2001 versus
53 weeks in 2000 and decreases in variable labor as Chi-Chi's became more
familiar with the new menu it introduced in 2000 and regained efficiencies that
it lost when the new menu was introduced. Payroll and related costs as a
percentage of sales, excluding El Torito, decreased from 36.3% in 2000 to 35.8%
in 2001. Chi-Chi's, the primary driver of the improvement, decreased from 37.5%
to 36.5%.
The Company is subject to Federal and state laws governing matters such as
minimum wages, overtime and other working conditions. Approximately 43% 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 50(CENTS)on January 1, 2001 with another 50(CENTS)
increase on January 1, 2002 to the current rate of $6.75 per hour. No Federal
minimum wage increases are currently scheduled for 2002. In response to previous
minimum wage increases, the Company has implemented various menu price
increases.
Occupancy and other operating expenses of $83,932,000 in 2001 were
$32,133,000 or 27.7% favorable to 2000. As a percentage of sales, occupancy and
other operating expenses increased from 27.3% in 2000 to 29.0% in 2001. The El
Torito Sale accounted for $26,612,000 (82.8%) of the variance. The closure of 13
additional restaurants during 2001 improved rent expense by $930,000. The
remainder of the variance was the result of reduced variable expenses related to
lower sales.
Depreciation and amortization of $15,691,000 for 2001 decreased by
$7,161,000 or 31.3% as compared to 2000 due to the El Torito Sale which
accounted for $5,367,000 or 75% of the decrease, the impact of the 27
restaurants sold or closed since the beginning of 2000 and the reduced
depreciable basis from the impairment write-down of certain long-lived assets.
General and administrative expenses of $22,099,000 in 2001 were $5,735,000
or 20.6% lower than 2000. The decrease in expenses was primarily due to the El
Torito Sale ($5,684,000 or 99.1%
-34-
of the total variance). As a percentage of sales, general and administrative
expenses increased from 6.6% in 2000 to 7.6% in 2001. The increase as a
percentage of sales for 2001 primarily reflects general and administrative
expenses being spread over fewer restaurants due to the El Torito Sale. This
increase resulted 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 $354,000 in 2001 decreased $408,000 or 53.5% from
2000 as the Company reduced the rate of new openings and remodels.
The Company reported a loss on disposition of properties of $1.4 million
for 2001 compared to a loss of $4.1 million in 2000. 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 $1.2 million in 2001 and $0.2
million in 2000.
In the fourth quarter of 2001, four Koo Koo Roo restaurants were designated
for divestment, and the Company recorded a provision for divestitures of $0.8
million. Also during the fourth quarter of 2001, sixteen Chi-Chi's were
designated for divestment, and the Company recorded a provision for divestitures
of $2.7 million. In December 2001, the Company recorded an additional provision
for divestitures of $2.0 million for costs associated with Chi-Chi's lease
terminations and other divestment costs. The Company also identified three
Chi-Chi's restaurants with impaired values in 2001 and recorded write-downs of
long-lived assets of $1.6 million in the fourth quarter. Finally, the Company
analyzed the carrying value of certain restaurants impaired prior to 2001 and
recorded additional write-downs of long-lived assets of $0.4 million during
2001.
At December 30, 2001, the assets and liabilities of the Hamburger Hamlet
restaurants have been written down to their estimated net realizable value of
$15.8 million and classified as property held for sale in the accompanying 2001
consolidated balance sheet. The related write-down of $8.2 million was reported
in provision for divestitures and write-down of long-lived assets in the third
quarter of 2001. During the third quarter of 2001, the Company also recorded a
write-down of $1.1 million related to the sale of another restaurant property.
The Company reported restructuring costs of $3,610,000 for 2001. These
costs are primarily related to amounts paid to legal and financial advisors in
connection with the Company's proposed debt and capital restructuring and
accrued severance and related costs due to the second quarter organizational
restructuring designed to centralize certain divisional functions, reduce
corporate support center costs and gain efficiencies for the Company going
forward.
Interest expense, net of $28,222,000 for 2001 decreased by $2,619,000 or
8.5% as compared to 2000 primarily resulting from reduced interest expense on
working capital borrowings.
-35-
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 Divison $(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 $419,000 or 1.3%
favorable to 1999.
2001 Comparable Sales
Increase (Decrease)
---------------------
Amount Percent
------- -------
($ 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.
-36-
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 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.
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.
-37-
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.
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.
-38-
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.
Accounting Pronouncements
In July 2001, the FASB issued Statement No. 141, "Business Combinations"
("SFAS 141"), and Statement No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). SFAS 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. SFAS 141 also
specifies criteria for intangible assets acquired in a purchase method business
combination to meet in order to be recognized and reported apart from goodwill.
SFAS 142 will require that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS 142. SFAS 142 will also
require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values and
reviewed for impairment in accordance with SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144").
The Company was required to adopt the provisions of SFAS 141 effective July
1, 2001 and the provisions of SFAS 142 effective January 1, 2002. Goodwill and
intangible assets acquired in business combinations completed before July 1,
2001 will continue to be amortized prior to the adoption of SFAS 142. As a
result of the anticipated sale of the Company's Hamburger Hamlet restaurant
chain and the classification of the net realizable value of Hamburger Hamlet's
assets and liabilities as property held for sale, the Company no longer has
goodwill or intangible assets to analyze in connection with the adoption of SFAS
142. Excess reorganization value, if any, resulting from the Company's proposed
reorganization would fall under the scope of SFAS 142. The Company is unable to
determine the impact on the consolidated financial statements of any such excess
reorganization value.
The FASB issued Statement No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"), in September 2001. SFAS 143 is effective for fiscal
years beginning after June 15, 2002 and addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Management does not believe
that the adoption of this standard will have any impact on the Company's
financial position, results of operations or liquidity.
The FASB issued SFAS 144 in October 2001. SFAS 144 is effective for fiscal
years beginning after December 15, 2001, addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and effectively
supercedes SFAS 121. Management does not believe that the adoption of this
standard will cause a material variation from the Company's current accounting
policies.
-39-
Selected Operating Data
The following table sets forth certain information regarding (i) the
Company; (ii) its ongoing Chi-Chi's restaurants, Koo Koo Roo and Hamburger
Hamlet restaurants (both 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 30, 2001, the Company operated 137 full-service
Chi-Chi's restaurants, 36 fast-casual Koo Koo Roo restuarants and 14
full-service Hamburger Hamlet restaurants.
-40-
For the Years Ended
--------------------------------------------
December 30, December 31, December 26,
2001 2000 1999
------------ ------------ ------------
($ in thousands, except average check amount)
Chi-Chi's Restaurants
- ---------------------
Restaurants Open at End of Period:
Owned/operated 137 140 150
Franchised and Licensed 7 13 15
Sales $205,851 $217,469 $227,716
Restaurant Level Cashflow (a) 17,027 14,347 20,569
Divisional EBITDA (b) 4,775 557 5,942
Percentage decrease in comparable
restaurant sales (1.2)% (1.1)% (0.5)%
Average check $ 10.98 $ 10.78 $ 9.23
Koo Koo Roo Restaurants (c)
- ---------------------------
Restaurants Open at End of Period:
Owned/operated 36 43 43
Franchised and Licensed 0 0 1
Sales $ 46,781 $ 54,941 $ 56,299
Restaurant Level Cashflow (a) 3,468 4,373 5,547
Divisional EBITDA (b) (676) (675) 790
Percentage decrease in comparable
restaurant sales (9.2)% (6.7)% N.A.
Average transaction $ 9.82 $ 10.26 $ 9.13
Hamburger Hamlet Restaurants (c)
- --------------------------------
Restaurants Open at End of Period:
Owned/operated 14 14 14
Franchised and Licensed 0 0 0
Sales $ 32,371 $ 33,006 $ 31,953
Restaurant Level Cashflow (a) 4,869 5,072 4,788
Divisional EBITDA (b) 3,642 3,797 3,594
Percentage increase(decrease) in
comparable restaurant sales (0.3)% 1.3% N.A.
Average check $ 10.18 $ 9.83 $ 11.03
Other Operating Restaurants
- ---------------------------
Restaurants Open at End of Period:
Owned/operated 3 6 6
Franchised and Licensed 0 0 0
Sales $ 4,867 $ 6,807 $ 5,930
Restaurant Level Cashflow (a) 162 159 280
Divisional EBITDA (b) (4,089) (1,709) (112)
Ongoing Operations
- ------------------
Restaurants Open at End of Period:
Owned/operated 190 203 213
Franchised and Licensed 7 13 16
Sales $289,870 $312,223 $321,898
Restaurant Level Cashflow (a) 25,526 23,951 31,184
Divisional EBITDA (b) 3,652 1,970 10,214
Divested Operations (d)
- ------------------------
Restaurants Open at End of Period:
Owned/operated 0 0 95
Franchised and Licensed 0 0 8
Sales $ 0 $112,409 $214,681
Restaurant Level Cashflow (a) 0 18,668 33,589
Divisonal EBITDA (b) 0 12,984 22,112
Total Company
- -------------
Restaurants Open at End of Period:
Owned/operated 190 203 308
Franchised and Licensed 7 13 24
Sales $289,870 $424,632 $536,579
EBITDA (e) 3,427 14,785 32,031
-41-
(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 2001 and
2000 so as not to distort the year-over-year comparisons of the Chi-Chi's
and KKR Restaurant Divisions.
(c) During fiscal 2000 and 1999 and a significant portion of 2001, Koo Koo Roo
and Hamburger Hamlet shared certain divisional support functions, the cost
of which was absorbed by Koo Koo Roo.
(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.
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
-42-
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 2001, 2000 and 1999, 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, if any, 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 Consolidated Financial Statements on page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
-43-
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The following table sets forth certain information with respect to the
Directors, executive officers and senior management of the Company as of March
22, 2002:
Name Age Position With Company
---- --- ---------------------
Kevin S. Relyea......................... 47 President, Chief Executive Officer, Chairman of the Board, President of
Chi-Chi's, Inc. and President of Koo Koo Roo, Inc.
Donald C. Blough........................ 54 Director
Michael E. Malanga...................... 48 Director, Executive Vice President, Corporate Development
Daniel E. Maltby, Ph.D.................. 55 Director
William E. Rulon........................ 69 Director
Khanh T. Tran........................... 46 Director
Robert T. Trebing, Jr................... 52 Executive Vice President and Chief Financial Officer
Laurie A. Katapski...................... 45 Executive Vice President, Marketing
Lisa C. Manuel.......................... 46 Senior Vice President, Finance and Information Technology
Michael A. Rule......................... 36 Vice President, General Counsel and Secretary
Kevin S. Relyea became a director in December 1995. In June 1998, Mr.
Relyea became Chairman of the Board. Mr. Relyea has served as Chief Executive
Officer since December 1995 and as President since August 1995. Mr. Relyea
became President of Chi-Chi's, Inc. in December 2000 and President of Koo Koo
Roo, Inc. in June 2001. Mr. Relyea joined the Company in January 1994 as
Executive Vice President and President of the Family Restaurant Division. From
1988 to January 1994, Mr. Relyea had been Regional Vice President of the Jack in
the Box operations for Foodmaker, Inc. (now Jack in the Box, Inc.) Mr. Relyea
received an M.B.A. from Pepperdine University in 1988.
Donald C. Blough became a director in April 2001. Mr. Blough has been
President and Chief Executive Officer of DB Financial Management, Inc. since
November 2000. From 1993 to 2000, Mr. Blough held the position of Corporate Vice
President, Chief Information Officer for Jack in the Box, Inc. From 1978 to
1993, Mr. Blough held various positions for Jack in the Box, Inc., including
Division Vice President of Systems Development. Mr. Blough received an M.B.A.
from National University in 1986.
Michael E. Malanga became a director in May 2001. Mr. Malanga also serves
as Executive Vice President, Corporate Development. He joined the Company at its
inception as Director of Mergers and Acquisitions and has held the positions of
Vice President and Senior Vice President. He was promoted to his current
position in March 1998. Mr. Malanga received a B.S. in Business Administration
from the University of Southern California in 1976.
Daniel E. Maltby, Ph.D. became a director in March 2001. Dr. Maltby is an
Associate Professor of Leadership and Management in the School of Professional
Studies at Biola University and Director of the Master of Arts Degree in
Organizational Leadership and the Biola Leadership
-44-
Project, a think tank and resource development group. Prior to joining the
faculty at Biola University in 1997, Dr. Maltby spent ten years as a management
consultant in strategic and organizational development for Wilson Consulting
Group. Dr. Maltby is also a director of the Evangelical Christian Credit Union
and the National Network of Youth Ministries.
William E. Rulon became a director in March 2001. From 1985 to 1997, Mr.
Rulon served as Senior Vice President, Secretary and Counsel for Foodmaker, Inc.
(now named Jack in the Box, Inc.). From 1966 to 1985, Mr. Rulon held various
positions in the legal department of Ralston-Purina Company and its
subsidiaries, including counsel for Continental Restaurants, Inc. Since 1997,
Mr. Rulon has been engaged in private investing. Mr. Rulon is also a director of
the Board of Trustees of the Neuberger Berman income funds, equity funds, and
advisors management trust, and The Pro Kids Golf and Learning Academy.
Khanh T. Tran became a director in April 2001. Mr. Tran is Executive Vice
President and Chief Financial Officer of Pacific Life Insurance Company, Newport
Beach, California. Mr. Tran joined Pacific Life in 1990 as treasurer and assumed
responsibility for strategic planning in 1995. In June 1996, Mr. Tran was named
Senior Vice President and Chief Financial Officer. Mr. Tran began his career
with United California Bank in 1977, then joined The Flying Tiger Line, Inc. in
1980. From 1988 to 1990, he served as assistant treasurer of The Vons Companies,
Inc. Mr. Tran received his M.B.A. in Finance and Marketing from the University
of California, Los Angeles. He received his bachelor's degree in Economics and
Political Science from Whittier College, California. Mr. Tran also serves as a
director of Pacific Life Insurance Company, Pacific Financial Products, Inc.,
Pacific Legacy Investment Company, PM Realty Advisors, Inc., World-Wide Holdings
Limited, and Aviation Capital Group.
Robert T. Trebing, Jr. serves as Executive Vice President and Chief
Financial Officer and has so served since April 1997. He joined the Company at
its inception and has held the positions of Senior Vice President and Chief
Financial Officer, Senior Vice President of Finance, Vice President of Finance,
Vice President and Controller and Manager of Financial Reporting. Mr. Trebing is
a Certified Public Accountant. Mr. Trebing received a B.A. from California State
University at Fullerton in 1972 and an M.B.A. from the University of Southern
California in 1973.
Laurie A. Katapski serves as Executive Vice President, Marketing and has so
served since January 2001. She served as Senior Vice President of Marketing,
Chi-Chi's from 1996 to 2000. She began her career in 1975 as a food server and
trainer for Reuben's and Coco's restaurants, both of which concepts were then
owned by the Company. Ms. Katapski has also held the positions of Vice President
of Marketing, Coco's, and Director of Marketing, Coco's and jojos. Ms. Katapski
earned her bachelor's degree from California State University, Long Beach, and
has studied competition and strategy at Harvard Business School.
Lisa C. Manuel serves as Senior Vice President, Finance and Information
Technology and has so served since September 2001. She joined the Company in
1996 as Vice President, Finance for the Chi-Chi's division and added
responsibility for Finance for the other divisions of the
-45-
Company in 2000. Ms. Manuel received her B.A. from Texas Christian University
and her M.B.A. from UCLA.
Michael A. Rule serves as Vice President, General Counsel and Secretary of
the Company and has so served since February 2002. He joined the Company in
February 1997 as Senior Legal Counsel and has also held the position Vice
President, Associate General Counsel. Prior to joining the Company, Mr. Rule
spent six years in private practice as a business transactional attorney and
business litigator with the law firms Morgan Lewis & Bockius and Thomson &
Nelson. Mr. Rule earned his Juris Doctorate degree from Columbia University.
The Company's By-laws provide that its Board of Directors shall consist of
not less than two nor more than seven members, the exact number to be fixed from
time to time by the Board. The Company's Board of Directors is currently fixed
at six directors.
Compliance with Section 16(a) of the Securities Exchange Act
------------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, and persons who own more than 10
percent of a registered class of the Company's equity securities to file with
the Commission initial reports of ownership and changes of reports in ownership
of Common Stock and other equity securities of the Company. Officers, directors
and greater-than-10-percent stockholders are required by Commission regulations
to furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the 2001 Fiscal Year, all Section 16(a) filing
requirements applicable to its officers, directors and greater-than-ten-percent
beneficial owners were timely met.
Item 11. EXECUTIVE COMPENSATION
----------------------
The following table sets forth, in summary form, information about the
compensation the Company paid to its Chief Executive Officer and the four other
most highly compensated executives (the "Named Executive Officers"), for
services performed in the 2001, 2000 and 1999 fiscal years.
-46-
Summary Compensation Table
Long-Term
Annual Compensation Compensation
------------------- ------------
Other Annual Securities
Compensation(1) Underlying All Other
Name and Principal Position Year Salary($) Bonus($) ($) Options(#) Compensation ($)
--------------------------- ---- --------- -------- --- ---------- ----------------
Kevin S. Relyea, 2001 522,728 418,950 (2) -- -- 810 (3)
Chairman of the Board, 2000 497,837 959,600 (4) -- -- 810
President, Chief Executive Officer, 1999 475,000 142,500 -- -- 729
President of Chi-Chi's, Inc. and
President of Koo Koo Roo, Inc.
Robert T. Trebing, Jr., 2001 211,542 105,772 (2) -- -- 1,032 (3)
Executive Vice 2000 204,174 116,942 (5) -- -- 988
President and Chief 1999 197,752 29,682 -- -- 1,478
Financial Officer
Michael E. Malanga, 2001 173,040 82,194 (2) -- -- 535 (3)
Executive Vice 2000 169,938 69,732 (6) -- -- 521
President, Corporate 1999 159,692 20,750 -- -- 746
Development
Laurie A. Katapski, 2001 161,200 83,700 (2) 44,537 (7) -- 327 (3)
Executive Vice President, 2000 143,269 12,902 -- -- 284
Marketing 1999 138,923 11,471 -- -- 370
Lisa C. Manuel, 2001 143,539 72,000 (2) -- -- 483 (3)
Senior Vice President, Finance and 2000 130,615 23,460 -- -- 377
Information Technology 1999 120,923 19,360 -- -- 312
(1) As permitted by rules established by the SEC, no amounts are shown with
respect to certain "perquisites" where such amounts do not exceed in the
aggregate the lesser of 10% of bonus plus salary or $50,000.
(2) Represents amount received pursuant to the Company's 2001 Management
Incentive Compensation Plan bonus program.
(3) Amount shown represents the imputed value of life insurance provided by the
Company.
(4) Mr. Relyea received $159,600 pursuant to the Company's 2000 Management
Incentive Compensation Plan bonus program and $800,000 in connection with
the sale of the El Torito Restaurant division and pursuant to his Second
Amended and Restated Employment Agreement.
(5) Mr. Trebing received $48,592 pursuant to the Company's 2000 Management
Incentive Compensation Plan bonus program and $68,350 pursuant to the
Company's 1999-2000 Divestiture Bonus Plan for Key Management.
(6) Mr. Malanga received $32,747 pursuant to the Company's 2000 Management
Incentive Compensation Plan bonus program and $36,985 pursuant to the
Company's 1999-2000 Divestiture Bonus Plan for Key Management.
(7) Ms. Katapski received $9,000 representing the value of automobile benefits,
$624 in pretax medical benefits, $2,087 in executive medical benefits and
$32,826 in relocation expenses.
-47-
Option Grants
No stock options were granted to any Named Executive Officers during the
2001 Fiscal Year.
Aggregated Option Exercises in Last Fiscal Year and Year-end Option Values
--------------------------------------------------------------------------
No Named Executive Officer exercised any options to purchase shares of
Common Stock during the year ended December 30, 2001. The following table
provides information concerning the number of unexercised options held by each
of the Named Executive Officers as of December 30, 2001.
Number of Securities
Underlying Value of Unexercised In-the-Money
Unexercised Options Held at Options at Fiscal Year-End 2001(1)
Fiscal Year-End 2001
---------------------------------- -----------------------------------
Name Exercisable(#) Unexerciseable(#) Exercisable($) Unexerciseable($)
- ---- -------------- ----------------- -------------- -------------------
Kevin S. Relyea ................... 3,672,585 625,000 0 0
Robert T. Trebing, Jr.............. 510,915 50,000 0 0
Michael E. Malanga................. 430,335 53,250 0 0
Laurie A. Katapski................. 251,130 25,000 0 0
Lisa C. Manuel..................... 183,742 18,750 0 0
(1) The value of unexercised in-the-money options is calculated by multiplying
(A) the number of securities underlying such options by (B) the difference
between (i) the closing price of the Common Stock on the NASDAQ National
Market at December 30, 2001 and (ii) the option exercise price. The closing
value per share was $.0066 on the last trading day of the 2001 Fiscal Year
as reported on the NASDAQ National Market.
Employment Agreements
---------------------
The Company has an employment agreement with Mr. Relyea. Mr. Relyea's
employment agreement, which was amended as of July 13, 2000, provides that he
will serve as the Company's President and Chief Executive Officer with an annual
base salary of $498,750, $523,687 and $549,871 in 2000, 2001 and 2002,
respectively, or such higher amount as may from time to time be determined by
the Company. Mr. Relyea has elected to take no salary increase in 2002. During
the term of the agreement, effective each January 1, beginning January 1, 2003,
Mr. Relyea will receive a five percent increase in his base salary. Mr. Relyea's
employment agreement term extends to December 31, 2002 and automatically extends
from day to day so that the employment agreement always has a remaining term of
at least two years. Mr. Relyea is eligible to receive bonuses based upon certain
performance measures and targets. Mr. Relyea became eligible for a retention
bonus of $1,000,000 on March 1, 2002. In accordance with the terms of the
employment agreement, the retention bonus is due to be paid within 30 days of
March 31, 2002.
-48-
date of termination. Further, for two years Mr. Relyea will receive annual
incentive award amounts equal to the amount of annual incentive earned by Mr.
Relyea in the previous fiscal year. The Company may elect to pay such severance
payments in a lump sum equal to the present value of future monthly payments.
The Company may terminate Mr. Relyea's employment for cause or Mr. Relyea may
voluntarily terminate his employment by giving the Company one month's notice.
In either event, Mr. Relyea will be entitled to salary and benefits, which
accrued through the date of such termination.
The employment agreement with Mr. Relyea also provides for standard
employee benefits, including, without limitation, participation in the Company's
pension, welfare and stock incentive plans, to the extent the Company maintains
any such plans.
In the event that Mr. Relyea is terminated without "cause" or for "good
reason" or in the event of a "change in control" (as defined in the employment
agreement), his stock options will immediately vest.
In the event amounts payable to Mr. Relyea are subject to the excise tax
imposed under Section 4999 of the Internal Revenue Code, as amended, the Company
will provide Mr. Relyea with a tax "gross-up" payment in an amount sufficient to
offset the effects of such excise tax.
The agreement with Mr. Relyea also provides that during the term of his
employment, and for two years thereafter, he will not (i) disclose or use any
"proprietary information" (as defined in the employment agreement); or (ii)
solicit any employee to terminate employment with the Company.
Compensation of Directors
In the 2001 Fiscal Year, each non-employee director of the Company received
a quarterly fee of $12,500 for his services to the Company. Employee directors
do not receive any compensation for their service on the Board of Directors or
any Committee meetings thereof. Each non-employee director is reimbursed for
reasonable expenses incurred to attend Director and Committee meetings.
Effective November 1998, non-employee directors of the Company were
eligible to receive stock option grants under the Company's 1998 Stock Incentive
Plan. No stock option grants were made to non-employee directors in the 2001
Fiscal Year. Options granted to non-employee directors terminate one year after
the non-employee director ceases to be a non-employee director.
Compensation Committee Interlocks and Insider Participation
During the month of January 2001, Messrs. A. William Allen, III, David J.
Ament, Peter P. Copses, George G. Golleher and Antony P. Ressler served on the
Compensation Committee. Mr. Allen served as the Chief Executive Officer and
President of Koo Koo Roo, Inc. prior to the date it became a subsidiary of the
Company. In January 2001, Messrs. Allen, Ament, Copses, Golleher and Ressler
resigned from the Board. Since May 2001, Messrs. Maltby and Rulon have comprised
the
-49-
Company's Compensation Committee. No member of the Compensation Committee has
served as an officer of the Company or any of its subsidiaries.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 22, 2002 by: (i) each of the
Company's current directors; (ii) each of the Named Executive Officers (as such
term is defined under "Executive Compensation"); (iii) all Named Executive
Officers and directors of the Company as a group; and (iv) all those known by
the Company to be beneficial owners of more than five percent of its Common
Stock (the "Principal Stockholders"). This table is based on information
provided to the Company or filed with the Securities and Exchange Commission
(the "Commission") by the Company's directors, Named Executive Officers and
Principal Stockholders. Except as otherwise indicated, the Company believes that
the beneficial owners of the Common Stock listed below, based on information
furnished by such owners, have sole investment and voting power with respect of
such shares, subject to community property laws where applicable. Applicable
percentages are based on 180,380,513 shares outstanding as of March 22, 2002
adjusted as required by rules promulgated by the Commission.
Amount and
Nature of
Beneficial Percent
Name and Address of Beneficial Owner (1) Ownership(2) of Class
---------------------------------------- ------------ --------
Kevin S. Relyea............................................................... 100,543,559 55.7%
Donald C. Blough.............................................................. 0 *
Daniel E. Maltby, Ph.D........................................................ 0 *
William E. Rulon.............................................................. 0 *
Khanh T. Tran................................................................. 0 *
Michael E. Malanga............................................................ 489,907 *
Robert T. Trebing, Jr......................................................... 621,575 *
Laurie A. Katapski............................................................ 263,425 *
Lisa C. Manuel................................................................ 183,742 *
All Named Executive Officers and Directors as a Group (9 persons)............. 102,102,208 56.6%
- ----------
* Less than 1%
(1) The business address of each stockholder listed above is c/o the Company at
2701 Alton Parkway, Irvine, California 92606.
(2) Includes shares issuable upon exercise of options exercisable within 60
days of March 22, 2002, as follows: Mr. Relyea, 3,672,585 shares; Mr.
Malanga, 430,335 shares; Mr. Trebing, 510,915 shares; Ms. Katapski, 251,130
shares; Ms. Manuel, 183,742 shares; and all directors and executive
officers as a group, 5,135,487 shares.
On December 29, 2000, Mr. Relyea acquired 95,831,997 shares of the
Company's Common Stock, representing 53.1% of the outstanding Common Stock, from
AIF II, L.P. for cash purchase price of $15,000.
-50-
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The Company's Bylaws provide that the Company indemnify its directors and
may indemnify its officers, employees and other agents to the fullest extent
permitted by law. The Company believes that indemnification under its Bylaws
covers at least negligence and gross negligence by indemnified parties, and may
require the Company to advance litigation expenses in the case of stockholder
derivative actions or other actions against an undertaking by the indemnified
party to repay such advances if it is ultimately determined that the indemnified
party is not entitled to indemnification. On July 30, 2001, the Company entered
into indemnification agreements with each of its directors that, like the
Bylaws, provide that the Company shall indemnify its directors to the fullest
extent permitted by the law. In addition, the indemnification agreements set
forth the procedures by which indemnification is to be provided.
In addition, the Company's Certificate of Incorporation provides that,
pursuant to Delaware law, its directors shall not be liable for monetary damages
for breach of the directors' fiduciary duty of care to the Company and its
stockholders. This provision in the Certificate of Incorporation does not
eliminate the duty of care, and in appropriate circumstances equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Company for acts
or omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for actions leading to improper personal benefit to the
director, and for payment of dividends or approval of stock repurchases or
redemption's that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.
The Company maintains insurance policies covering officers and directors
under which the insurers agree to pay, subject to certain exclusions, including
certain violations of securities laws, for any claim made against the directors
and officers of the Company for a wrongful act that they may become legally
obligated to pay or for which the Company is required to indemnify the officers
or directors. The Company believes that its Certificate of Incorporation and
provisions of the Bylaws, the aforementioned indemnification agreements and such
insurance policies are necessary to attract and retain qualified persons as
directors and officers.
On July 13, 2000, the Board of Directors approved the issuance of letters
of credit in favor of Kevin Relyea, Roger Chamness and Gayle DeBrosse solely for
the purpose of securing amounts owed or that may be owed to such individuals by
the Company, as discussed below. On November 7, 2000, a letter of credit was
issued in favor of Mr. Relyea in the amount of $2,375,214, which amount
substantially covers the obligations of the Company under Mr. Relyea's Second
Amended and Restated Employment Agreement (for a description of such agreement
see Item 11 - Employment Agreements). Currently, Mr. Relyea's letter of credit
expires on December 2, 2002. On September 27, 2000, a letter of credit was
issued in favor of Mr. Chamness in the amount of $650,000, which amount covered
the obligations of the Company under Mr. Chamness' severance agreement and
general release. Mr. Chamness' letter of credit expired on December 31, 2001. On
September 27, 2000, a letter of credit was issued in favor of Ms. DeBrosse in
the amount of
-51-
$402,250, which amount covered the obligations of the Company under Ms.
DeBrosse's severance agreement and general release. Ms. DeBrosse's letter of
credit was cancelled on January 7, 2002.
-52-
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
Page
----
(a) (1) Financial Statements. See the Index to Consolidated 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
-53-
Re: $150,000,000 10-7/8% Senior Subordinated Discount Notes
Due 2004. (Filed as Exhibit 4(b) to the Company's Form 10-K
filed with the SEC on March 28, 1994.)
4(c) First Supplemental Indenture, dated as of July 3, 1996,
between the Registrant and IBJ Schroder Bank & Trust
Company, a New York Banking corporation, as Trustee. (Filed
as Exhibit 10.1 to the Company's Form 8-K filed with the SEC
on July 9, 1996.)
4(d) First Supplemental Indenture, dated as of July 3, 1996,
between the Registrant and Fleet National Bank, as successor
by merger to Fleet National Bank of Massachusetts, formerly
known as Shawmut Bank, N.A., as Trustee. (Filed as Exhibit
10.2 to the Company's Form 8-K filed with the SEC on July 9,
1996.)
4(e) Note Agreement Dated as of August 12, 1997 Re: Up to
$75,000,000 FRI-MRD Corporation Senior Discount Notes Due
January 24, 2002. (Filed as Exhibit 4(e) to the Company's
Form 10-Q filed with the SEC on November 12, 1997.)
4(f) Joinder Agreement Dated as of January 14, 1998 Re: FRI-MRD
Corporation Senior Discount Notes due January 24, 2002.
(Filed as Exhibit 4(f) to the Company's Form 10-K filed with
the SEC on March 30, 1998.)
4(g) First Amendment dated as of June 9, 1998 to the Note
Agreement dated August 12, 1997. (Filed as Exhibit 4.7 to
the Company's Form S-4 filed with the SEC on July 1, 1998.)
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.)
-54-
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. (Filed as Exhibit 10(i) to the Company's Form
10-K filed with the SEC on April 2, 2001.)
*10(j) The Company's 2001 Management Incentive Compensation Plan
Description.
10(k) 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.)
-55-
10(l) 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(m) 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.)
10(n) 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(o) 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(p) 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(q) 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(r) 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(s) 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.)
-56-
10(t) 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(u) Second Amended and Restated Employment Agreement dated as
of July 13, 2000 by and between Kevin S. Relyea, the
Company and certain subsidiaries. (Filed as Exhibit 10 (t)
to the Company's Form 10-K as filed with the SEC on April
2, 2001.)
*10(v) Severance Agreement and General Release dated as of June
21, 2001 by and between Gayle A. DeBrosse, the Company and
certain subsidiaries.
10(w) Severance Agreement and General Release dated as of
December 21, 2000 by and between Roger K. Chamness, the
Company and certain subsidiaries. (Filed as Exhibit 10 (v)
to the Company's Form 10-K filed with the SEC on April 2,
2001.)
10(x) 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(y) Letter Agreement effective as of March 29, 2001 by and
among Foothill Capital Corporation, FRI-MRD Corporation and
Chi-Chi's, Inc. (Filed as Exhibit 10 (x) to the Company's
Form 10-K filed with the SEC on April 2, 2001.)
10(z) Letter Agreement effective as of May 15, 2001 by and among
Foothill Capital Corporation, FRI-MRD Corporation and
Chi-Chi's, Inc. (Filed as Exhibit 10 (b) to the Company's
Form 10-Q filed with the SEC on May 16, 2001.)
10(aa) Letter Agreement, effective as of June 15, 2001, by and
among Foothill Capital Corporation, FRI-MRD Corporation and
Chi-Chi's, Inc. (Filed as Exhibit 99.1 to the Company's
Form 8-K filed with the SEC on June 20, 2001.)
10(bb) Letter Agreement, effective as of October 18, 2001 by and
among Foothill Capital Corporation, the Company, FRI-MRD
Corporation and certain of its subsidiaries. (Filed as
Exhibit 10 (d) to the Company's Form 10-Q filed with the
SEC on November 14, 2001.)
10(cc) Letter Agreement, dated as of November 7, 2001 by and
among the Company, FRI-MRD Corporation and MacKay Shields
Financial
-57-
to the Company's Form 10-Q filed with the SEC on November
14, 2001.)
10(cc) Letter Agreement, dated as of November 7, 2001 by and
among the Company, FRI-MRD Corporation and MacKay Shields
Financial Corporation. (Filed as Exhibit 10(e) the
Company's Form 10-Q filed with the SEC on November 14,
2001).
10(dd) Letter Agreement, effective as of January 10, 2002 by and
among Foothill Capital Corporation, the Company, FRI-MRD
Corporation and certain of its subsidiaries. (Filed as
Exhibit 99.1 to the Company's Form 8-K filed with the SEC
on January 16, 2002.)
*10(ee) Letter Agreement, effective as of March 13, 2002 by and
among Foothill Capital Corporation, the Company, FRI-MRD
Corporation and certain of its subsidiaries.
*10(ff) Letter Agreement, dated as of March 26, 2002 by and among
the Company, FRI-MRD Corporation and MacKay Shields
Financial Corporation.
*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
-58-
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.
By /S/ Robert T. Trebing, Jr. April 1, 2002
-------------------------- -------------
Robert T. Trebing, Jr Date
Executive Vice President
and Chief Financial Officer
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
--------- ----- ----
Chairman, President and
Chief Executive Officer
(Principal Executive
/S/ Kevin S. Relyea Officer) April 1, 2002
- ---------------------------
Kevin S. Relyea
/S/ Donald C. Blough Director April 1, 2002
- ---------------------------
Donald C. Blough
/S/ Michael E. Malanga Director April 1, 2002
- ---------------------------
Michael E. Malanga
/S/ Daniel E. Maltby, Ph.D. Director April 1, 2002
- ---------------------------
Daniel E. Maltby, Ph.D.
/S/ William E. Rulon Director April 1, 2002
- ---------------------------
William E. Rulon
/S/ Khanh T. Tran Director April 1, 2002
- ---------------------------
Khanh T. Tran
Executive Vice President
and Chief Financial Officer
(Principal Financial and
/S/ Robert T. Trebing, Jr. Accounting Officer) April 1, 2002
- ---------------------------
Robert T. Trebing, Jr.
-59-
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Prandium, Inc.
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 30, 2001 and December 31, 2000 F-3
Consolidated Statements of Operations for the Years Ended December 30, 2001,
December 31, 2000, and December 26, 1999 F-4
Consolidated Statements of Common Stockholders' Deficit for the Years Ended
December 30, 2001, December 31, 2000 and December 26, 1999 F-5
Consolidated Statements of Cash Flows for the Years Ended December 30, 2001,
December 31, 2000 and December 26, 1999 F-6
Notes to Consolidated Financial Statements F-8
Schedule II-Valuation and Qualifying Accounts for the Years Ended
December 30, 2001, December 31, 2000 and December 26, 1999 S-1
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Prandium, Inc.:
We have audited the accompanying consolidated balance sheets of Prandium,
Inc. and its subsidiaries as of December 30, 2001 and December 31, 2000, and the
related consolidated statements of operations, stockholders' deficit and cash
flows for the years ended December 30, 2001, December 31, 2000 and December 26,
1999. 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 30, 2001 and December 31, 2000, and the
results of their operations and their cash flows for the years ended December
30, 2001, December 31, 2000 and December 26, 1999 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
February 15, 2002, except as to the fourth
paragraph of note 2, which is as of March 26, 2002,
the first paragraph of note 4, which is as of March
14, 2002, the eleventh paragraph of note 10, which
is as of March 13, 2002 and the third paragraph
of note 20, which is as of March 14, 2002
F-2
PRANDIUM, INC.
CONSOLIDATED BALANCE SHEETS
($ in thousands)
December 30, December 31,
2001 2000
------------ ------------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 27,982 $ 53,505
Restricted cash 12,992 2,500
Receivables, net 1,894 2,075
Inventories 1,887 2,386
Other current assets 5,139 2,574
Property held for sale 15,844 --
--------- ---------
Total current assets 65,738 63,040
Property and equipment, net 96,926 124,922
Costs in excess of net assets of business acquired, net -- 16,814
Other assets, net 11,218 15,736
--------- ---------
$ 173,882 $ 220,512
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
Current liabilities:
Current portion of long-term debt, including capitalized lease obligations $ 234,271 $ 2,060
Accounts payable 6,178 8,150
Current portion of self-insurance reserves 2,012 2,812
Other accrued liabilities 81,117 58,760
Income taxes payable 3,379 3,523
--------- ---------
Total current liabilities 326,957 75,305
Self-insurance reserves 5,964 5,298
Other long-term liabilities 2,648 3,590
Long-term debt, including capitalized lease obligations, less current portion 967 235,696
--------- ---------
Total liabilities 336,536 319,889
--------- ---------
Commitments and contingencies
Stockholders' deficit:
Common stock - authorized 300,000,000 shares, par value
180,380,513 shares issued and outstanding in 2001 and 2000 1,804 1,804
Additional paid-in capital 222,353 222,353
Accumulated deficit (386,811) (323,534)
--------- ---------
Total stockholders' deficit (162,654) (99,377)
--------- ---------
$ 173,882 $ 220,512
========= =========
See accompanying notes to consolidated financial statements
F-3
PRANDIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per share amounts)
For the Years Ended
--------------------------------------------
December 30, December 31, December 26,
2001 2000 1999
------------ ------------ ------------
Sales $ 289,870 $ 424,632 $ 536,579
------------ ------------ ------------
Product costs 76,631 113,278 141,881
Payroll and related costs 103,781 152,670 190,772
Occupancy and other operating expenses 83,932 116,065 139,153
Depreciation and amortization 15,691 22,852 28,031
General and administrative expenses 22,099 27,834 32,742
Opening costs 354 762 2,879
Loss on disposition of properties, net 1,449 4,104 5,265
Provision for divestitures and write-down of long-
lived assets 17,043 58,027 484
Restructuring costs 3,610 -- --
------------ ------------ ------------
Total costs and expenses 324,590 495,592 541,207
------------ ------------ ------------
Operating loss (34,720) (70,960) (4,628)
Gain on sale of division -- 60,729 --
Interest expense, net (28,222) (30,841) (31,371)
------------ ------------ ------------
Loss before income tax provision (62,942) (41,072) (35,999)
Income tax provision 335 700 492
------------ ------------ ------------
Net loss $ (63,277) $ (41,772) $ (36,491)
============ ============ ============
Net loss per share -- basic and diluted $ (0.35) $ (0.23) $ (0.20)
============ ============ ============
Weighted average shares outstanding -- basic
and diluted 180,380,513 180,380,513 180,380,513
============ ============ ============
See accompanying notes to consolidated financial statements
F-4
PRANDIUM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND DECEMBER 26, 1999
($ in thousands)
Common Stock Additional
-------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
----------- ------ ---------- ----------- ---------
Balance at December 27, 1998 178,105,294 $1,781 $222,353 $(245,271) $ (21,137)
Net loss -- -- -- (36,491) (36,491)
Issuance of common stock 2,275,219 23 -- -- 23
----------- ------ -------- --------- ---------
Balance at December 26, 1999 180,380,513 1,804 222,353 (281,762) (57,605)
Net loss -- -- -- (41,772) (41,772)
----------- ------ -------- --------- ---------
Balance at December 31, 2000 180,380,513 1,804 222,353 (323,534) (99,377)
Net loss -- -- -- (63,277) (63,277)
----------- ------ -------- --------- ---------
Balance at December 30, 2001 180,380,513 $1,804 $222,353 $(386,811) $(162,654)
=========== ====== ======== ========= =========
See accompanying notes to consolidated financial statements
F-5
PRANDIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
For the Years Ended
------------------------------------------
December 30, December 31, December 26,
2001 2000 1999
------------ ------------ ------------
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Cash received from customers $ 289,970 $ 425,546 $ 537,619
Cash received from franchisees and licensees 1,329 1,581 1,726
Cash paid to suppliers and employees (295,634) (413,351) (520,792)
Interest received 1,919 2,142 365
Interest paid (1,761) (32,101) (16,645)
Opening costs (354) (762) (2,879)
Restructuring costs (3,715) -- --
Income taxes paid (479) (815) (596)
--------- --------- ---------
Net cash used in operating activities (8,725) (17,760) (1,202)
--------- --------- ---------
Cash flows from investing activites:
Proceeds from disposal of property and equipment 3,438 1,075 2,510
Proceeds from payments on notes receivable 693 711 2,238
Proceeds from sale of notes receivable, net -- -- 3,246
Cash required for Merger and Hamlet Acquistion -- -- (2,356)
Capital expenditures (5,483) (15,622) (30,335)
Lease termination payments (1,193) (974) (3,557)
Other divestment expenditures (1,873) (1,976) (2,307)
Proceeds from (cash required for) the El Torito sale, net (1,251) 111,660 --
Increase in restricted cash, net (7,921) (2,500) --
Other (1,147) (2,742) (1,520)
--------- --------- ---------
Net cash provided by (used in) investing activities (14,737) 89,632 (32,081)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from (repayments of) working capital borrowings, net -- (21,850) 21,850
Proceeds from equipment financing -- 2,672 --
Payment of debt issuance costs (616) -- (347)
Reductions of long-term debt, including capitalized lease obligations (1,445) (2,789) (2,327)
--------- --------- ---------
Net cash provided by (used in) financing activities (2,061) (21,967) 19,176
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (25,523) 49,905 (14,107)
Cash and cash eqivalents at beginning of year 53,505 3,600 17,707
--------- --------- ---------
Cash and cash equivalents at end of year $ 27,982 $ 53,505 $ 3,600
========= ========= =========
F-6
PRANDIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
($ in thousands)
For the Years Ended
------------------------------------------
December 30, December 31, December 26,
2001 2000 1999
------------ ------------ -----------
Reconciliation of Net Loss to Net Cash Used in Operating Activities
Net loss $(63,277) $(41,772) $(36,491)
-------- -------- --------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 15,691 22,852 28,031
Amortization of debt issuance costs and deferred gain 455 1,102 1,550
Loss on disposition of properties, net 1,449 4,104 5,265
Provision for divestitures and write-down of long-lived assets 17,043 58,027 484
Gain on sale of division -- (60,729) --
Accretion of interest on notes -- -- 6,954
Changes in operating assets and liabilities, net of
reclassification of Hamlet as property held for sale in 2001:
Decrease in receivables 56 967 1,285
Decrease in inventories 272 195 17
(Increase) decrease in other current assets (2,749) 1,005 70
Decrease in accounts payable (1,137) (2,555) (5,086)
Decrease in self-insurance reserves (800) (229) (3,457)
Increase (decrease) in other accrued liabilities 24,416 (612) 280
Decrease in income taxes payable (144) (115) (104)
-------- -------- --------
Total adjustments 54,552 24,012 35,289
-------- -------- --------
Net cash used in operating activities $ (8,725) $(17,760) $ (1,202)
======== ======== ========
Supplemental schedule of non-cash investing and financing activities:
Capital expenditures and cash flows from financing activities exclude
capitalized leases of $5,123 in 1999.
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 30, 2001
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Prandium, 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. At December 30, 2001, the Company operated 190 restaurants in
21 states, approximately 65% of which are located in California, Ohio,
Pennsylvania, Indiana and Michigan, and franchised and licensed 7 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 30, 2001
included 52 weeks, the fiscal year ended December 31, 2000 included 53 weeks and
the fiscal year ended December 26, 1999 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.
Cash and equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
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.
F-8
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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. Divestment charges include
liabilities for the net present value of any remaining lease obligations,
including executory costs, after the expected closure dates, net of estimated
sublease income, if any.
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. Advertising expenses were
$12,383,000, $16,829,000 and $18,779,000 for the years ended December 30, 2001,
December 31, 2000 and December 26, 1999, respectively.
Franchise, license and royalty fees
Initial franchise, license and royalty fees are recognized when all
material services have been performed and conditions have been satisfied. No
initial fees were recognized in 2001 and 1999. Initial fees for 2000 totaled
$49,000. Monthly fees for all franchise, license and royalty arrangements are
accrued as earned based on the respective monthly sales. Such fees totaled
$1,313,000 for 2001, $1,530,000 for 2000 and $1,542,000 for 1999 and offset
general and administrative expenses.
Costs in excess of net assets of business acquired
Costs in excess of net assets of business acquired was amortized using the
straight-line method over 40 years. Costs in excess of net assets of business
acquired related to Hamburger Hamlet restaurant chain was amortized through the
third quarter of 2001 when the Company classified the net assets and liabilities
of the Hamburger Hamlet restaurant chain as property held for sale as further
discussed in Note 4. Costs in excess of net assets of business acquired related
to the Koo Koo Roo restaurant chain 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. The
Company evaluated 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 considered non-financial data such as
continuity of personnel, changes in the operating environment, name
identification, competitive information and market trends. Finally, the
evaluation considered changes in management's strategic direction or market
emphasis. When the foregoing considerations suggested that a deterioration of
the financial condition of the Company or any of its divisions had occurred, the
Company measured the amount of an impairment, if any, based on the estimated
fair value of the restaurant operations over the remaining amortization period.
F-9
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 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 $1,626,000 during
the fourth quarter of 2001 to reduce the assets' carrying value to their
estimated fair value. The Company also analyzed the carrying value of
restaurants impaired prior to 2001. In connection with this analysis, the
Company analyzed the carrying value of the long-lived assets of these
restaurants and recorded additional write-downs of long-lived assets of $410,000
during 2001 to reduce the assets' carrying value to their estimated fair value.
During 2000, the Company identified three unprofitable Chi-Chi's
restaurants, three unprofitable El Torito Express restaurants and two
unprofitable Koo Koo Roo 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 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 restaurant
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.
Opening costs
Opening costs are incurred in connection with the opening or remodeling of
a restaurant, are principally related to stocking the restaurant and training
its staff and are expensed as incurred. Opening costs incurred during 2001, 2000
and 1999 were $354,000, $762,000 and $2,879,000, respectively.
F-10
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 years presented.
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 30, 2001, December
31, 2000 and December 26, 1999, 18,015,000 shares, 21,252,000 shares and
25,801,000 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
The Company applies the provisions of SFAS No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information," which
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 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.
Insurance reserves
Insurance reserves are accounted for based on actuarial estimates of the
amount of loss inherent in that period's claims, including losses for claims
that have not yet heen reported. These estimates rely on actuarial calculations
of ultimate loss experience for similar historical events and an estimate of
incurred but not reported claims.
Revenue recognition
Restaurant sales are recorded when payment is tendered at the point of
sale.
F-11
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Reclassifications
Certain amounts as previously reported have been reclassified to conform to
the 2001 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
2001 consolidated financial statements, the Company incurred net losses of
$63,277,000, $41,772,000 and $36,491,000 for the fiscal years ended December 30,
2001, December 31, 2000 and December 26, 1999, respectively, and had a
stockholders' deficit of $162,654,000 on December 30, 2001.
During 1999 and the first half of fiscal 2000, the Company explored several
financing transactions and other strategic alternatives in an effort to meet its
debt service requirements. This process culminated in the sale to Acapulco
Acquisition Corp. ("Acapulco") of the El Torito restaurant division on June 28,
2000 (the "El Torito Sale"). A portion of the net cash proceeds from that
transaction was used to pay indebtedness of $25.9 million outstanding under the
Company's credit facility (the "Foothill Credit Facility") with Foothill Capital
Corporation ("Foothill"). In addition, Acapulco assumed $9.8 million of
long-term debt, consisting primarily of capitalized lease obligations, as part
of the El Torito Sale. However, even after completion of the El Torito Sale, the
Company has continued to be highly leveraged and has 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 deliberation among the Company and its legal and financial
advisors during January 2001 , the Company's subsidiary FRI-MRD Corporation
("FRI-MRD") elected not to pay the semi-annual interest payments due January 31,
2001 and July 31, 2001 and the principal and interest due January 24, 2002 on
its outstanding long-term debt (the "FRI-MRD Notes"). The Company also elected
not to pay the semi-annual interest payments due February 1, 2001 and August 1,
2001 and the principal and interest due February 1, 2002 on its outstanding
long-term debt (the "Prandium Notes"). Under the terms of the note agreements
governing the FRI-MRD Notes 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. As a result of these "Events of Default," the Company has classified all
debt outstanding under the FRI-MRD Notes and the Prandium Notes (approximately
$233.4 million at December 30, 2001) as current in the 2001 consolidated balance
sheet.
The Company is currently negotiating with certain of its creditors,
including Foothill and the holders of the FRI-MRD Notes and some of the holders
of the Prandium Notes, to reach agreement on a capital restructuring of the
Company and its subsidiaries and to that end has negotiated and executed a term
sheet on November 7, 2001 and subsequent letter agreement (the "Note Letter
F-12
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Agreement") on March 26, 2002 with an authorized representative of holders of a
majority of the FRI-MRD Notes (also see note 4). As currently contemplated, the
restructuring would involve a prepackaged plan of reorganization to be
implemented through the commencement of cases by the Company and FRI-MRD under
chapter 11 of the United States Bankruptcy Code (such cases, a "Reorganization
Case") and, either concurrent with or subsequent to the Reorganization Case, the
sale of the Hamburger Hamlet restaurant chain. In light of the amount that the
Company owes to creditors and the size of the Company's operations, the Company
anticipates that, under such a prepackaged plan, there will not be value
available for distribution to its current stockholders or the holders of the 10
7/8% subordinated Prandium Notes. The Company does not currently contemplate
that the Reorganization Case would involve any of the Company's operating
subsidiaries.
The Company cannot provide any assurance it will be able to reach an
acceptable agreement with its creditors on a capital restructuring, on the terms
of such an agreement, or on such an agreement's effect on the Company's
operations. If the Company cannot reach such an agreement, it will need to
consider other alternatives, including, but not limited to, a chapter 11
bankruptcy filing without a prearranged or prepackaged reorganization plan.
There can be no assurance that the Company would be able to reorganize
successfully in such a proceeding. Under any such circumstances, the Company
anticipates that there will not be value available for distribution to its
current stockholders or the holders of the 10 7/8% subordinated Prandium Notes.
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 a successful restructuring of
its obligations and its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to obtain modifications in its financial and
capital structure, to comply with the terms of any new financing agreements and
ultimately to attain profitable operations.
NOTE 3 - 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 Tortio 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, after a $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 at December 31, 2000. During 2001,
F-13
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
the Company received $2.5 million of the escrow balance, and the remaining $2.5
million is recorded as restricted cash at December 30, 2001.
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 $6,458,000, 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 - SALE OF HAMBURGER HAMLET RESTAURANTS:
A sale of the Hamburger Hamlet restaurant chain is contemplated by the Note
Letter Agreement and the Company's capital restructuring strategy. On October
23, 2001, FRI-MRD entered into an agreement to sell its chain of 14 Hamburger
Hamlet restaurants. The agreement terminated on February 6, 2002 in accordance
with its terms. The Company continues to explore and develop opportunities to
sell the Hamburger Hamlet restaurants and on March 14, 2002, entered into a
letter agreement with a prospective purchaser entitling such purchaser to a
30-day exclusive negotiation period. There can be no guarantee that the Company
will be able to sell the Hamburger Hamlet restaurants on acceptable terms.
At December 30, 2001, the assets and liabilities of the Hamburger Hamlet
restaurant chain have been written down to their estimated net realizable value
of $15,844,000 and classified as property held for sale in the accompanying
consolidated balance sheet. The related write-down of $8,172,000 is reported in
provision for divestitures and write-down of long-lived assets in the
accompanying 2001 consolidated statement of operations. During the third quarter
of 2001, the Company also recorded a write-down of $1,069,000 related to the
sale of another restaurant property.
The Hamburger Hamlet restaurant chain generated sales of $32,371,000 and
$33,006,000 for the fiscal years ended December 30, 2001 and December 31, 2000,
respectively, and related operating income of $1,948,000 and $2,039,000 for the
same periods, respectively. Such operating income includes charges for allocated
general and administrative expenses of $748,000 and $702,000 for the fiscal
years ended December 30, 2001 and December 31, 2000, respectively.
NOTE 5 - WRITE-OFF OF COSTS IN EXCESS OF NET ASSETS OF BUSINESS ACQUIRED:
On October 30, 1998, the Company, FRI-Sub, Inc., an indirect wholly-owned
subsidiary of the Company, and Koo Koo Roo, Inc. ("KKR") consummated a merger
(the "Merger"), pursuant to which FRI-Sub, Inc. was merged with and into KKR,
with KKR as the surviving corporation and an indirect wholly-owned subsidiary of
the Company. Since the Merger, Koo Koo Roo realized comparable restaurant sales
declines that continued through the fourth quarter of 2000. These sales declines
resulted in operating performance for Koo Koo Roo which was lower than
anticipated at
F-14
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
the time of the Merger. These operating results caused the Company to reevaluate
its business strategy for Koo Koo Roo.
Consistent with this strategic reevaluation, the Company 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
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 $47,771,000 in the fourth quarter of 2000.
NOTE 6 - RECEIVABLES:
A summary of receivables follows:
2001 2000
------ ------
($ in thousands)
Trade, principally credit cards $1,427 $1,557
License and franchise fees and related receivables 110 126
Notes receivable 53 53
Other 304 339
------ ------
$1,894 $2,075
====== ======
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. This provision consisted of costs
associated with lease terminations, subsidized subleases, brokerage fees and
other divestment costs. 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. In the first quarter of 2001, the Company recorded a
provision for severance costs of $189,000 associated with certain restaurant
managers in connection with the restaurants to be divested. During the year
ended December 30, 2001, these ten restaurants (including nine restaurants
divested or closed in 2001) had sales of $3,563,000 and restaurant level
operating losses of $790,000. For the year ended December 30, 2001, the Company
paid (i) $138,000 for severance costs associated with certain restaurant
managers who were
F-15
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
terminated in connection with the restaurants divested and (ii) $947,000 for net
costs associated with lease terminations, brokerage fees and other divestment
costs. For the year ended December 31, 2000, the Company paid $135,000 for such
costs. In the fourth quarter of 2001, four additional Koo Koo Roo restaurants
were designated for divestment. The Company recorded a provision for
divestitures of $814,000. This provision consisted of (i) $664,000 for the
write-down to net realizable value of the property and equipment associated with
such restaurants and (ii) $150,000 for costs associated with lease terminations,
subsidized leases, brokerage fees and other divestment costs. During 2001, these
four restaurants had sales of $2,522,000 and restaurant level operating losses
of $767,000.
In the fourth quarter of 1998, 48 non-strategic Chi-Chi's restaurants were
designated for divestment (the "CC Strategic Divestment Program"). In
conjunction with the CC Strategic Divestment Program, the Company recorded a
provision for divestitures of $22,884,000, including divestment reserves of
$12,256,000. During the fourth quarter of 1999, the Company determined that it
would not be able to satisfactorily negotiate lease terminations or subleases
for 20 operating restaurants of the 48 Chi-Chi's restaurants designated for
divestment. As a result, these 20 restaurants were removed from the CC Strategic
Divestment Program, and $1,048,000 previously recorded in conjunction with the
provision for divestitures was reversed during the fourth quarter of 1999. After
this reversal, the eight restaurants remaining in the CC Strategic Divestment
Program were divested during 2000. For the years ended December 30, 2001,
December 31, 2000 and December 26, 1999, the Company paid (i) $33,000, $225,000
and $287,000, respectively, for severance costs associated with certain
restaurant and regional managers who were terminated in connection with the
restaurants divested and (ii) $1,681,000, $2,124,000 and $1,913,000,
respectively, for net costs associated with lease terminations, subsidized
subleases, brokerage fees and other divestment costs. In the fourth quarter of
2001, sixteen additional Chi-Chi's restaurants were designated for divestment.
The Company recorded a provision for divestitures of $2,736,000. This provision
consisted of (i) $2,386,000 for the write-down to net realizable value of the
property and equipment associated with such restaurants and (ii) $350,000 for
costs associated with lease terminations, subsidized leases, brokerage fees and
other divestment costs. During 2001, these sixteen restaurants had sales of
$15,815,000 and restaurant level operating losses of $2,324,000. In December
2001, the Company recorded an additional provision for divestitures of
$2,029,000 for costs associated with lease terminations, subsidized leases,
brokerage fees and other divestment costs.
Three other non-strategic restaurants were identified for divestment during
2000. The Company recorded a provision for divestitures with respect to such
restaurants of $1,805,000 in 2000. This provision consisted of (i) $1,730,000
for the write-down 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. These restaurants were divested during the first
quarter of 2001. For the year ended December 30, 2001, the Company (i) paid
$2,000 for severance costs associated with certain restaurant managers who were
terminated in connection with these divested restaurants and (ii) paid $9,000 in
net divestment costs.
In the second quarter of 2001, the Company announced an organizational
restructuring that resulted in the elimination of approximately 40 positions in
the Company's support center. The
F-16
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Company recorded a provision of $1,607,000 for severance and outplacement
services and the amount is included in restructuring costs on the accompanying
2001 consolidated statements of operations. For the year ended December 30,
2001, a total of $1,521,000 was paid for severance and outplacement services.
NOTE 8 - PROPERTY AND EQUIPMENT:
A summary of property and equipment follows:
2001 2000
-------- --------
($ in thousands)
Land $ 12,217 $ 15,490
Buildings and improvements 93,065 110,023
Furniture, fixtures and equipment 60,039 62,850
Projects under construction 2,728 4,279
-------- --------
168,049 192,642
Accumulated depreciation and amortization (71,123) (67,720)
-------- --------
$ 96,926 $124,922
======== ========
Property under capitalized leases in the amount of $2,829,000 at December
30, 2001 and December 31, 2000 is included in buildings and improvements.
Accumulated amortization of this property under capitalized leases amounted to
$2,314,000 at December 30, 2001 and $2,254,000 at December 31, 2000. These
capitalized leases primarily relate to the buildings on certain restaurant
properties; the land portions of these leases are accounted for as operating
leases.
In addition, property under capitalized leases in the amount of $1,446,000
at December 30, 2001 and $2,092,000 at December 31, 2000 is included in
furniture, fixtures and equipment. Accumulated amortization of this property
under capitalized leases amounted to $1,146,000 at December 30, 2001 and
$1,127,000 at December 31, 2000.
Depreciation and amortization relating to property and equipment was
$15,169,000 for 2001, $20,436,000 for 2000 and $24,871,000 for 1999, of which
$237,000, $1,787,000 and $2,176,000, 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 2012 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 30,
2001, December 31, 2000 and December 26, 1999 was $0, $16,000 and $890,000,
respectively. Total rental expense for all operating leases comprised the
following:
F-17
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2001 2000 1999
------- ------- -------
($ in thousands)
Minimum rent $28,907 $36,373 $44,220
Contingent rent 911 1,719 1,798
Less: Sublease rent (4,473) (5,179) (6,163)
------- ------- -------
$25,345 $32,319 $39,855
======= ======= =======
At December 30, 2001, the present value of capitalized lease payments and
the future minimum lease payments on non-cancellable operating leases were:
Capitalized Operating
Due in Leases Leases
- ------ ---------- ---------
($ in thousands)
2002 $ 669 $ 27,813
2003 202 25,375
2004 107 21,763
2005 57 18,932
2006 0 13,202
Later years 0 37,547
------ --------
Total minimum lease payments 1,035 $144,632
========
Interest (100)
------
Present value of minimum lease payments $ 935
======
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:
2001 2000
------- -------
($ in thousands)
Liquor licenses $ 5,052 $ 5,203
Debt issuances costs 711 1,467
Notes receivable 3,731 4,677
Cash in escrow 0 2,500
Deferred compensation plan 0 477
Other 1,724 1,412
------- -------
$11,218 $15,736
======= =======
Debt issuance costs are amortized over the terms of the respective loan
agreements on a method approximating the effective interest method.
F-18
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 10 - LONG-TERM DEBT, INCLUDING CAPITALIZED LEASE OBLIGATIONS:
Long-term debt, including capitalized lease obligations, is comprised of
the following:
2001 2000
-------- --------
($ 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 935 1,697
Other 873 1,711
-------- --------
235,164 236,764
Deferred gain on debt exchange 74 992
-------- --------
235,238 237,756
Amounts due within one year 234,271 2,060
-------- --------
$ 967 $235,696
======== ========
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 "Prandium 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 required semiannual interest payments on February 1 and
August 1 of each year and matured on February 1, 2002. Cash interest payments on
the Discount Notes began on August 1, 1997, and such notes mature on February 1,
2004.
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 were 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
F-19
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Notes were used to fund the Company's capital expenditure programs and for
general corporate purposes.
On June 9, 1998, FRI-MRD entered into a Note Agreement pursuant to which
FRI-MRD issued $24 million aggregate face amount of MRD Merger Notes (together
with the Senior Discount Notes, the "FRI-MRD 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 were 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 such outstanding shares
of Hamlet.
The Company elected not to pay the semi-annual interest payments due
January 31, 2001 and July 31, 2001 and the principal and interest due January
24, 2002 on the FRI-MRD Notes. The Company also elected not to pay the
semi-annual interest payments due February 1, 2001 and August 1, 2001 and the
principal and interest due February 1, 2002 on the Prandium Notes. Under the
terms of the note agreements governing the FRI-MRD Notes 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. As a result of these "Events of Default," the
Company has classified all debt outstanding (approximately $233.4 million) under
the FRI-MRD Notes and the Prandium Notes as current in the consolidated balance
sheet at December 30, 2001.
On January 10, 1997, the Company entered into the five-year, $35 million
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 personal property of the Company
(other than Hamlet's capital stock), along with $10.2 million of cash collateral
(which is included as part of the Company's restricted cash balance on the 2001
consolidated balance sheet) and; (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.
The Company was not in compliance with certain of its financial ratios
under the Foothill Credit Facility at December 31, 2000, April 1, 2001, July 1,
2001, September 30, 2001 and December 30, 2001. 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 Events of Default.
F-20
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 $9,924,000 of such letters of
credit were outstanding as of December 30, 2001. There were no working capital
borrowings outstanding as of December 30, 2001 and December 31, 2000.
On March 29, 2001, May 15, 2001 and June 18, 2001, Foothill, FRI-MRD and
Chi-Chi's entered into a series of letter agreements whereby FRI-MRD and
Chi-Chi's acknowledged certain specified events of default and that as a result
of such events of default, Foothill has no further obligation to make advances
under the Foothill Credit Facility, and Foothill agreed that, subject to certain
conditions, it would forbear from exercising its remedies relative to such
events of default. Pursuant to the May 15, 2001 letter agreement, FRI-MRD paid a
forbearance fee in the amount of $100,000 and transferred $4,000,000 in cash to
Foothill to be held as cash collateral and as additional security for the
outstanding letters of credit. Pursuant to the June 18, 2001 letter agreement,
in which FRI-MRD and Chi-Chi's agreed to cash collateralize all letters of
credit outstanding under the Foothill Credit Facility in an amount equal to 105%
of face value, FRI-MRD transferred approximately $8,068,000 to Foothill,
bringing the total amount held by Foothill for that purpose to approximately
$12,068,000 at that time (cash collateral held by Foothill is included as part
of the restricted cash balance on the Company's 2001 consolidated balance
sheet). After receiving this amount, Foothill released its liens on the real
property of the Company and its subsidiaries.
On October 18, 2001, January 10, 2002 and March 13, 2002, the Company,
FRI-MRD, Chi-Chi's and certain other subsidiaries of the Company entered into
subsequent letter agreements with Foothill whereby the Company acknowledged that
certain specified events of default had occurred and reacknowledged that
Foothill has no further obligation to make advances or otherwise extend credit
under the Foothill Credit Facility. Foothill agreed that, subject to certain
conditions including the reaffirmation and consent by the Company, FRI-MRD and
certain other subsidiaries of the Company of their obligations under the
Foothill Credit Facility and the payment of forbearance fees in the amount of
$50,000 on October 18, 2001 and $60,000 on March 13, 2002, 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) June 30, 2002 (or such
later date as Foothill may designate in writing in its sole discretion); (ii)
the occurrence of any Event of Default under the Foothill Credit Facility (other
than those defaults set forth in, and certain future defaults contemplated by,
the letter agreement); and (iii) the failure of the Company to comply with
certain covenants set forth in the letter agreements. The Company also (A)
released Foothill from any claims they may have arising under the Foothill
Credit Facility, (B) agreed not to seek authority from any bankruptcy court to
obtain the use of any cash Foothill holds as cash collateral and additional
security for letters of credit outstanding under the Foothill Credit Facility
and (C) agreed that the Company and FRI-MRD would each commence a pre-negotiated
or prepackaged proceeding under chapter 11 of the United States Bankruptcy Code
on or before May 15, 2002. The Foothill Credit Facility was amended to extend
its maturity date to June 30, 2002, and to increase the amount of a substitute
letter of credit, which the Company must deliver to Foothill upon the Foothill
Credit Facility's termination, from 105% to 107% of the outstanding letters of
credit if Foothill is not released from all such letters of credit. The fee on
undrawn letters of credit was also increased from 3% to 5% per annum. As of
March 22, 2002, Foothill currently continues to hold approximately $10.2 million
as cash collateral for the outstanding letters of credit.
F-21
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company is currently negotiating with Foothill to replace the existing
Foothill Credit Facility with a new credit facility. The new credit facility
would provide for letters of credit, a line of credit for the ongoing working
capital needs of the Company and the release of the cash collateral held by
Foothill. While a term sheet between the parties expired on March 31, 2002,
negotiations are continuing. There can be no assurance that an agreement can be
reached with Foothill or on the terms of such an agreement.
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 29, 2002 are as follows: $381,000 in 2003, $194,000 in
2004, $157,000 in 2005, $113,000 in 2006 and $122,000 thereafter.
NOTE 11 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The recorded amounts of the Company's cash and cash equivalents, restricted
cash, receivables, accounts payable, self-insurance reserves, other accrued
liabilities and certain financial instruments included in other assets at
December 30, 2001 and December 31, 2000 approximate fair value due to their
short term nature. The fair value of the Company's long-term debt, excluding
capitalized lease obligations, is estimated as follows:
2001 2000
------------------ ------------------
Recorded Fair Recorded Fair
Amount Value Amount Value
-------- ------- -------- -------
($ in thousands)
Senior Notes $103,456 $ 3,621 $103,456 $20,691
Discount Notes 30,900 0 30,900 6,180
Senior Discount Notes 75,000 57,821 75,000 71,250
Senior Secured Discount Notes 24,000 18,503 24,000 22,800
Other 873 750 1,711 1,569
The fair values of the Senior Notes are based on an average market price of
these instruments as of the end of 2001 and 2000. The fair value of the Discount
Notes as of the end of 2001 is based on the Company's assessment that under the
current reorganization plan, there will be no value available for distribution
to the holders of these notes. The fair value of the Discount Notes as of the
end of 2000 was based on an average market price. The fair values of the Senior
Discount Notes and Senior Secured Discount Notes as of the end of 2001 are based
on the current reorganization plan, which includes cash payments plus the
issuance of new notes. The fair values were calculated as the amount of cash
payments plus the accreted value of the new notes discounted at rates which the
Company believes would be available to it for debt with similar terms and
maturity date. The fair value of the other debt is estimated using discount
rates which the Company believes would be available to it for debt with similar
terms and average maturities.
The Company does not believe it has any instruments or transactions subject
to the provisions of SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended.
F-22
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 12 - OTHER ACCRUED LIABILITIES:
A summary of other accrued liabilities follows:
2001 2000
------- -------
($ in thousands)
Wages, salaries and bonuses $13,021 $13,077
Carrying costs of closed properties 5,399 5,943
Reserve for divestitures 7,798 7,969
Interest 39,928 11,870
Property taxes 1,910 1,976
Sales tax 1,382 2,068
Utilities 1,297 1,413
Gift certificates 1,719 1,667
Deferred license fees 0 413
Other 8,663 12,364
------- -------
$81,117 $58,760
======= =======
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 incurred a loss for tax purposes in 2001, had taxable income
before application of net operating losses in 2000 and incurred a loss for tax
purposes in 1999. Net operating losses were used in 2000 to offset 100% of
regular taxable income and 90% of alternative minimum taxable income. The income
tax provisions for 2001 and 1999 primarily reflect certain state and local
taxes. The 2000 income tax provision reflects Federal alternative minimum tax
and state and local income taxes. On a tax return basis, the remaining Federal
regular operating loss carryforwards amounted to approximately $329.5 million
($349.0 million of alternative minimum tax operating loss carryforwards) and
expire in 2009 through 2022. The Company has approximately $707,000 of tax
credit carryforwards which expire in 2003 and 2004.
At December 30, 2001, the Company and its subsidiaries had tax credit
carryforwards of approximately $455,000 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
F-23
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 $608,000.
A reconciliation of income tax expense (benefit) to the amount of income
tax benefit that would result from applying the Federal statutory rate of 35% to
loss before income taxes is as follows:
Fiscal Year Ended
--------------------------------
Dec. 30, Dec. 31, Dec. 26,
2001 2000 1999
-------- -------- --------
($ in thousands)
Benefit for income taxes at statutory rate $(22,030) $(14,375) $(12,600)
State taxes, net of Federal income tax
benefit 243 300 311
Nondeductible goodwill 16 17,531 1,071
Change in deferred tax asset attributable
to continuing operations subject to
a full valuation reserve and other 22,106 (2,756) 11,710
-------- -------- --------
$ 335 $ 700 $ 492
======== ======== ========
At December 30, 2001 and December 31, 2000, the Company's deferred tax
assets were $189,499,000 and $169,139,000, respectively, and deferred tax
liabilities were $2,001,000 and $3,685,000, respectively. The major components
of the Company's net deferred taxes of $187,498,000 at December 30, 2001 and
$165,454,000 at December 31, 2000 are as follows:
F-24
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2001 2000
--------- ---------
($ in thousands)
Depreciation $ (2,001) $ (3,168)
Net operating loss and credit carryforwards 166,886 146,678
Capitalized leases 68 129
Carrying costs and other reserves 5,592 6,197
Self-insurance reserves 3,249 3,304
Straight-line rent 1,045 1,172
Reorganization costs 6,611 5,720
Intangibles 2,355 (517)
Other 3,693 5,939
--------- ---------
187,498 165,454
Valuation allowance (187,498) (165,454)
--------- ---------
$ 0 $ 0
========= =========
NOTE 14 - OTHER LONG-TERM LIABILITIES:
A summary of other long-term liabilities follows:
2001 2000
------ ------
($ in thousands)
Straight-line rents $2,564 $3,011
Deferred compensation 0 512
Other 84 67
------ ------
$2,648 $3,590
====== ======
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 $4,966,000, $3,787,000 and $4,827,000
for 2001, 2000 and 1999, 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 1% to 15% 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 $117,000, $149,000 and $186,000 in 2001, 2000
and 1999, respectively. A participant's right to Company contributions vests at
a rate of 25% per year of service.
In June 2001, the Company terminated its non-qualified deferred
compensation plan. The plan 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
F-25
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
a split-dollar investment vehicle. This plan allowed participants to defer up to
50% of their salary on a pre-tax basis. The Company contributed 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 $13,000, $71,000 and
$87,000 in 2001, 2000 and 1999, respectively.
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 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.
On July 30, 2001, the Company entered into indemnification agreements with
each of its directors that provide that the Company shall indemnify its
directors to the fullest extent permitted by the law. In addition, the
indemnification agreements set forth the procedures by which indemnification is
to be provided.
NOTE 17 - STOCK OPTIONS:
At December 30, 2001, 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 611,000 shares during 2001, 805,000 shares during 2000 and
1,202,000 shares during 1999 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 had a ten year term, provided, however, that one year
after a director is no longer a director of the Company, the options terminate.
All stock options granted to directors have been terminated. Under the Company's
1998 Stock Incentive Plan, approximately 6,244,000 shares of common stock are
available for stock option grants.
F-26
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
A summary of the status of the Company's plans as of December 30, 2001,
December 31, 2000 and December 26, 1999 and changes during the years then ended
is presented below:
Dec. 30, 2001 Dec. 31, 2000 Dec. 26, 1999
---------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Number Exercice Number Exercise Number Exercise
of Options Price of Options Price of Options Price
---------- --------- ---------- --------- ---------- ---------
Outstanding at beginning of year 21,251,704 $1.15 25,800,767 $1.18 26,299,689 $1.21
Granted 611,000 .05 805,000 .21 1,202,000 .54
Cancelled (3,847,530) 1.13 (5,354,063) 1.18 (1,700,922) 1.20
---------- ---------- ----------
Outstanding at end of year 18,015,174 $1.13 21,251,704 $1.15 25,800,767 $1.18
==========
Options exercisable at end of
year 15,749,656 16,657,302 16,373,231
========== ========== ==========
Options granted to 66 employees during 2001 represented less than 1% of the
weighted average common shares outstanding. There were no options exercised
during the periods presented.
Options Outstanding Options Exercisable
December 30, 2001 December 30, 2001
-------------------------------------- ---------------------
Weighted- Weighted- Weighted-
Range of Average Average Average
Exercise Number of Remaining Exercise Number of Exercise
Prices Options Life (Years) Price Options Price
- -------------- ---------- ------------ ---------- ---------- ---------
$.02 to $.50 7,576,697 3.10 $ .44 6,661,447 $ .49
$.51 to $1.00 6,974,904 6.88 .87 5,625,404 .87
$1.01 to $3.00 1,990,156 5.14 1.56 1,989,388 1.56
$3.01 to $7.75 1,473,417 2.96 5.27 1,473,417 5.27
---------- ----------
$.02 to $7.75 18,015,174 4.77 $1.13 15,749,656 $1.21
========== ===== ===== ========== =====
Pro forma net loss and net loss per common share were determined as if the
Company had accounted for its employee stock options under the fair value method
of SFAS 123 and are presented in the table below ($ in thousands, except per
share amounts):
F-27
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Dec. 30,2001 Dec. 31,2000 Dec. 26,1999
------------ ------------ ------------
Net loss - pro forma $(63,280) $(41,789) $(36,554)
Net loss per common share -
pro forma - basic and
diluted $ (.35) $ (.23) $ (.20)
Weighted average fair value
of options granted $ .02 $ .08 $ .19
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 management's opinion, the existing models do not provide a
reliable single measure of the value of employee stock options. The following
weighted average assumptions were used to estimate the fair value of these
options:
Dec. 30, 2001 Dec. 31, 2000 Dec. 26, 1999
------------- ------------- -------------
Expected dividend yield 0% 0% 0%
Expected stock price volatility 10% 10% 10%
Risk free interest rate 4.75% 5.00% 6.00%
Expected life of options
(in years) 10 10 10
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. The Koo Koo Roo Division includes the operations
of Koo Koo Roo and Hamburger Hamlet restaurants. Operating income (loss)
primarily 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) primarily 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.
F-28
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Dec. 30, 2001 Dec. 31, 2000 Dec. 26, 1999
------------- ------------- -------------
($ in thousands)
Sales
El Torito Division $ 0 $112,409 $214,681
Chi-Chi's Division 205,851 217,469 227,716
Koo Koo Roo Divison 79,152 87,947 88,252
Corporate 4,867 6,807 5,930
-------- -------- --------
Total Sales $289,870 $424,632 $536,579
======== ======== ========
Depreciation and Amortization
El Torito Division $ 0 $ 5,367 $ 10,155
Chi-Chi's Division 10,669 10,521 11,189
Koo Koo Roo Division 3,737 5,512 5,213
Corporate 1,285 1,452 1,474
-------- -------- --------
Total Depreciation
and Amortization $ 15,691 $ 22,852 $ 28,031
======== ======== ========
Operating Income (Loss)
El Torito Division $ 0 $ 5,411 $ 6,458
Chi-Chi's Division (12,492) (16,380) (3,161)
Koo Koo Roo Division (10,596) (58,810) (2,482)
Corporate (11,632) (1,181) (5,443)
-------- -------- --------
Total Operating Loss $(34,720) $(70,960) $ (4,628)
======== ======== ========
Interest Expense, net
El Torito Division $ 0 $ 1,227 $ 1,356
Chi-Chi's Division 368 986 818
Koo Koo Roo Division 162 172 72
Corporate 27,692 28,456 29,125
-------- -------- --------
Total Interest Expense, net $ 28,222 $ 30,841 $ 31,371
======== ======== ========
Capital Expenditures
El Torito Division $ 0 $ 934 $ 8,810
Chi-Chi's Division 2,271 8,988 15,379
Koo Koo Roo Division 2,082 3,914 3,297
Corporate 1,130 1,786 2,849
-------- -------- --------
Total Capital Expenditures $ 5,483 $ 15,622 $ 30,335
======== ======== ========
Total Assets
El Torito Division $ 0 $ 0 $ 55,835
Chi-Chi's Division 90,784 104,387 111,077
Koo Koo Roo Division 43,028 46,202 100,607
Corporate 40,070 69,923 19,114
-------- -------- --------
Total Assets $173,882 $220,512 $286,633
======== ======== ========
F-29
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 19 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Quarter
--------------------------------------------
1st 2nd 3rd 4th
-------- -------- -------- --------
($ in thousands, except per share amounts)
Fiscal 2001
Total sales $ 75,982 $ 74,528 $ 70,864 $ 68,496
Operating loss (5,661) (6,454) (12,115) (10,490)
Net loss $(12,413) $(13,627) $(19,251) $(17,986)
======== ======== ======== ========
Net loss per share - basic and diluted $ (0.07) $ (0.08) $ (0.11) $ (0.10)
======== ======== ======== ========
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)
======== ======== ======== ========
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 had 14 weeks.
At December 30, 2001, the assets and liabilities of the Hamburger Hamlet
restaurant chain have been written down to their estimated net realizable value
of $15,844,000 and classified as property held for sale in the accompanying 2001
consolidated balance sheet. The related write-down of $8,172,000 was reported in
provision for divestitures and write-down of long-lived assets in the third
quarter of 2001. During the third quarter of 2001, the Company also recorded a
write-down of $1,069,000 related to the sale of another restaurant property.
In the fourth quarter of 2001, the Company recorded the following charges:
(i) a $1,626,000 write-down of long-lived assets for three Chi-Chi's
restaurants, (ii) an $814,000 provision for divestitures for four Koo Koo Roo
restaurants, (iii) a $2,736,000 provision for divestitures for sixteen Chi-Chi's
restaurants, and (iv) a $2,029,000 additional provision for Chi-Chi's
divestitures. The Company also recorded a $410,000 additional write-down of
long-lived assets during 2001.
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.
F-30
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 20 - CONTINGENCIES:
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 arose 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 alleged that
Mr. Relyea improperly usurped the stock purchase opportunity from the Company
and also alleged constructive fraud.
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
arose out of the same set of facts as the suit filed on January 26, 2001 and
sought similar damages and fees. On April 25, 2001, the court ruled that the two
cases were related and would proceed before the same judge. However, on June 28,
2001, the court in the case filed on February 13, 2001 granted the plaintiff's
request to dismiss his complaint without prejudice. While the Company and Mr.
Relyea believe that there exist valid defenses to each of the claims asserted,
it was determined that a potentially successful defense of the suit would likely
be more expensive than settlement.
The Company, Mr. Relyea, and the plaintiff in the suit filed on January 26,
2001 have executed a Stipulated Settlement of Derivative Claims, under which Mr.
Relyea agreed to certain restrictions on the sale of the block of the Company's
stock purchased on December 29, 2000. Without admitting liability, the Company
and Mr. Relyea agreed not to oppose an application for attorney's fees by
plaintiff's counsel of $99,000 as part of the settlement. On March 14, 2002, the
Board of Directors voted to approve the Stipulated Settlement of Derivative
Claims, with Mr. Relyea abstaining from voting. The plaintiff recently filed a
Motion to Approve Settlement of Action and for an Award of Attorney's Fees. The
Superior Court is currently scheduled to hold a hearing on this motion on April
9, 2002. It is expected that the cost of the settlement will be covered by
insurance.
The Company is involved in various other litigation matters incidental to
its business. The Company does not believe that any of the claims or actions
filed against it will have a material adverse effect upon the consolidated
financial position or results of operations of the Company.
F-31
SCHEDULE II
PRANDIUM, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND DECEMBER 26,1999
($ 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 2001 $3,149 $ 12 $0 $ (74)(1) $3,087
For the year 2000 3,306 0 0 (157)(1) 3,149
For the year 1999 3,462 138 0 (294)(1) 3,306
(1) Represents write-off of uncollectible receivables against allowance and
includes transfers to other accounts.
See accompanying independent auditors' report.
S-1