10-Q 1 d10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2001 or [_] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________ to _______________ Commission file number 33-14051 -------- Prandium, Inc. -------------- (Exact name of registrant as specified in its charter) Delaware 33-0197361 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 18831 Von Karman Avenue, Irvine, California 92612 ----------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (949) 757-7900 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] As of November 9, 2001, the registrant had issued and outstanding 180,380,513 shares of common stock, $.01 par value per share. -1- PART I. FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements ------ PRANDIUM, INC. -------------- CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- ($ in thousands) ----------------
September 30, December 31, 2001 2000 ------------- ------------ (Unaudited) ASSETS ------ Current assets: Cash and cash equivalents $ 27,269 $ 53,505 Restricted cash 14,502 2,500 Receivables 2,635 2,075 Inventories 1,785 2,386 Other current assets 3,045 2,574 Property held for sale 18,991 - ------------ ---------- Total current assets 68,227 63,040 Property and equipment, net 103,432 124,922 Costs in excess of net assets of business acquired, net - 16,814 Other assets 11,211 15,736 ------------ ---------- $ 182,870 $ 220,512 ============ ========== LIABILITIES AND STOCKHOLDERS' DEFICIT ------------------------------------- Current liabilities: Current portion of long-term debt, including capitalized lease obligations $ 234,712 $ 2,060 Accounts payable 5,068 8,150 Current portion of self-insurance reserves 3,223 2,812 Other accrued liabilities 72,265 58,760 Income taxes payable 3,296 3,523 ------------ ---------- Total current liablities 318,564 75,305 Self-insurance reserves 4,945 5,298 Other long-term liabilities 2,718 3,590 Long-term debt, including capitalized lease obligations, less current portion 1,311 235,696 Commitments and contingencies Stockholders' deficit: Common stock - authorized 300,000,000 shares, par value $.01 per share, 180,380,513 shares issued and outstanding on September 30, 2001 and on December 31, 2000 1,804 1,804 Additional paid-in capital 222,353 222,353 Accumulated deficit (368,825) (323,534) ------------ ---------- Total stockholders' deficit (144,668) (99,377) ------------ ---------- $ 182,870 $ 220,512 ============ ==========
See accompanying notes to condensed consolidated financial statements -2- PRANDIUM, INC. -------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ----------------------------------------------- ($ in thousands, except per share amounts) ------------------------------------------ (Unaudited)
For the Quarters Ended ---------------------------- September 30, September 24, 2001 2000 ------------- ------------- Sales $ 70,864 $ 78,040 ----------- ----------- Product costs 18,535 21,656 Payroll and related costs 25,266 27,985 Occupancy and other operating expenses 19,822 22,284 Depreciation and amortization 4,077 4,476 General and administrative expenses 5,069 5,477 Opening costs 130 326 Loss on disposition of properties, net 330 582 Provison for divestitures and write-down of long-lived assets 9,228 1,730 Restructuring costs 522 - ----------- ----------- Total costs and expenses 82,979 84,516 ----------- ----------- Operating loss (12,115) (6,476) Interest expense, net 7,098 7,131 Gain on sale of division - (60,978) ----------- ----------- Income (loss) before income tax provision (19,213) 47,371 Income tax provision 38 1,272 ----------- ----------- Net income (loss) $ (19,251) $ 46,099 =========== =========== Net income (loss) per share - basic and diluted $ (0.11) $ 0.26 =========== =========== Weighted average shares outstanding - basic and diluted 180,380,513 180,380,513 =========== ===========
See accompanying notes to condensed consolidated financial statements -3- PRANDIUM, INC. -------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ----------------------------------------------- ($ in thousands, except per share amounts) ------------------------------------------ (Unaudited)
For the Nine Months Ended ---------------------------- September 30, September 24, 2001 2000 ------------- ------------- Sales $ 221,374 $ 349,009 ------------ ------------ Product costs 58,842 92,010 Payroll and related costs 79,382 124,001 Occupancy and other operating expenses 64,612 92,980 Depreciation and amortization 12,154 18,526 General and administrative expenses 16,784 20,953 Opening costs 237 412 Loss on disposition of properties, net 1,101 1,036 Provision for divestitures and write-down of long-lived assets 9,417 1,730 Restructuring costs 3,075 - ------------ ------------ Total costs and expenses 245,604 351,648 ------------ ------------ Operating loss (24,230) (2,639) Interest expense, net 20,810 24,280 Gain on sale of division - (60,978) ------------ ------------ Income (loss) before income tax provision (45,040) 34,059 Income tax provision 251 1,526 ------------ ------------ Net income (loss) $ (45,291) $ 32,533 ============ ============ Net income (loss) per share - basic and diluted $ (0.25) $ 0.18 ============ ============ Weighted average shares outstanding - basic and diluted 180,380,513 180,380,513 ============ ============
See accompanying notes to condensed consolidated financial statements -4- PRANDIUM, INC. -------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- ($ in thousands) (Unaudited)
For the Nine Months Ended --------------------------- September 30, September 24, 2001 2000 ------------- ------------- Cash flows from operating activities: Cash received from customers, franchisees and licensees $ 222,446 $ 350,945 Cash paid to suppliers and employees (226,664) (333,661) Interest received (paid), net 402 (30,517) Opening costs (237) (412) Restructuring costs (2,630) - Income taxes paid (478) (727) ----------- ----------- Net cash used in operating activities (7,161) (14,372) ----------- ----------- Cash flows from investing activities: Proceeds from disposal of property and equipment 215 1,075 Proceeds from payments on notes receivable 521 530 Capital expenditures (3,792) (10,824) Lease termination payments (840) (695) Other divestment expenditures (1,272) (1,583) Proceeds from (cash required for) the El Torito Sale, net (1,154) 113,572 Increase in restricted cash, net (9,448) - Other (2,233) (1,597) ----------- ----------- Net cash provided by (used in) investing activities (18,003) 100,478 ----------- ----------- Cash flows from financing activities: Repayments of working capital borrowings, net - (21,850) Proceeds from equipment financing - 2,672 Payment of debt issuance costs (150) - Reductions of long-term debt, including capitalized lease obligations (922) (2,424) ----------- ----------- Net cash used in financing activities (1,072) (21,602) ----------- ----------- Net increase (decrease) in cash and cash equivalents (26,236) 64,504 Cash and cash equivalents at beginning of period 53,505 3,600 ----------- ----------- Cash and cash equivalents at end of period $ 27,269 $ 68,104 =========== =========== Reconciliation of net income (loss) to net cash used in operating activities: Net income (loss) $ (45,291) $ 32,533 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 12,154 18,526 Amortization of debt issuance costs and deferred gain 270 997 Loss on disposition of properties 1,101 1,036 Provision for divestitures and write-down of long-lived assets 9,417 1,730 Gain on sale of division - (60,978) (Increase) decrease in receivables, inventories and other current assets (240) 1,751 Increase (decrease) in accounts payable, self- insurance reserves, other accrued liabilities and income taxes payable 15,428 (9,967) ----------- ----------- Net cash used in operating activities $ (7,161) $ (14,372) =========== ===========
See accompanying notes to condensed consolidated financial statements -5- PRANDIUM, INC. -------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (Unaudited) 1. Company. Prandium, Inc. (together with its subsidiaries, the ------- "Company"), was incorporated in Delaware in 1986. The Company, through its subsidiaries, is primarily engaged in the operation of restaurants in the full- service and fast-casual segments. At September 30, 2001, the Company operated 191 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. 2. Financial Statements. The Condensed Consolidated Financial Statements -------------------- in this Form 10-Q have been prepared in accordance with Securities and Exchange Commission Regulation S-X. Reference is made to the Notes to the Consolidated Financial Statements for the Fiscal Year Ended December 31, 2000 included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (the "Form 10-K") for information with respect to the Company's significant accounting and financial reporting policies, as well as other pertinent information. The Company believes that all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the quarter and nine months ended September 30, 2001 and September 24, 2000 are not necessarily indicative of those for the full year. 3. 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 its Consolidated Financial Statements included in the Form 10-K, the Company incurred losses of $41,772,000, $36,491,000 and $63,133,000 for the fiscal years ended December 31, 2000, December 26, 1999 and December 27, 1998, respectively. As further shown in the Condensed Consolidated Financial Statements in this Form 10-Q, the Company incurred an additional loss of $45,291,000 for the nine months ended September 30, 2001 and had a stockholders' deficit of $144,668,000 on September 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. After completion of the El Torito Sale, however, 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 -6- 31, 2001 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 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 September 30, 2001) as current in the condensed 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 Prandium Notes, to reach agreement on an acceptable capital restructuring of the Company and its subsidiaries and to that end has negotiated and executed a term sheet (the "Note Term Sheet") with an authorized representative of holders of a majority of the FRI-MRD Notes. As currently contemplated, the restructuring would involve a prearranged or 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"). In light of the amount that the Company owes to creditors and the size of the Company's operations, the Company does not anticipate that, under such a prearranged or prepackaged plan, there will be value available for distribution to its current stockholders or the holders of the 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 federal 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 does not anticipate that there will be value available for distribution to its current stockholders or the holders of the 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 Condensed 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. 4. Sale of Hamburger Hamlet Restaurants. On October 23, 2001, FRI-MRD ------------------------------------ entered into a definitive agreement (the "Hamlet Agreement") to sell its chain of 14 Hamburger Hamlet -7- restaurants to Othello Holding Corporation ("Othello"). Under the terms of the Hamlet Agreement, the Company will receive, subject to certain post-closing adjustments based on closing financial statements, cash of $16.1 million ($1.0 million of which will be placed in escrow for a designated period following consummation of the sale). It is intended that the proceeds from the sale will be used to repay certain indebtedness under the FRI-MRD Notes. The Hamlet Agreement contemplates that the sale will occur after FRI-MRD has commenced a Reorganization Case and will be subject to approval by the court in which the Reorganization Case is pending. The sale is also subject to Othello receiving adequate financing to pay the purchase price and customary terms and conditions. There can be no assurances that the sale will be successfully completed. At September 30, 2001, the assets and liabilities of the Hamburger Hamlet restaurants have been written down to their net realizable value of $15,866,000 and classified as property held for sale in the accompanying condensed consolidated balance sheet. The related write-down of $8,149,000 is reported in provision for divestitures and write-down of long-lived assets in the accompanying condensed consolidated statements of operations. In addition, property held for sale includes $3,125,000 which represents the net realizable value of another restaurant property under contract for sale. The Hamburger Hamlet restaurants generated sales of $24,582,000 and $24,525,000 for the nine months ended September 30, 2001 and September 24, 2000, respectively, and related operating income of $1,496,000 and $1,703,000 for the same periods, respectively. Such operating income includes charges for allocated general and administrative expenses of $559,000 and $515,000 for the nine months ended September 30, 2001 and September 24, 2000, respectively. 5. 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 nine months ended September 30, 2001, these restaurants (including eight restaurants divested or closed in 2001) had sales of $3,312,000 and restaurant level operating losses of $719,000. For the nine months ended September 30, 2001, the Company paid (i) $127,000 for severance costs associated with certain restaurant managers who were terminated in connection with the restaurants divested and (ii) $638,000 for net costs associated with lease terminations, brokerage fees and other divestment costs. For the nine months ended September 24, 2000, the Company paid $55,000 for such costs. The KKR Strategic Divestment Program is scheduled to be completed by the end of fiscal 2001, and the designated restaurants' operating results will be included in the Company's consolidated statement of operations until the divestments are completed. -8- 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 nine months ended September 30, 2001 and September 24, 2000, the Company paid (i) $33,000 and $203,000, respectively, for severance costs associated with certain restaurant and regional managers who were terminated in connection with the restaurants divested and (ii) $1,284,000 and $1,689,000, respectively, for net costs associated with lease terminations, subsidized subleases, 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. During the quarter ended April 1, 2001, these restaurants were divested and had sales of $99,000 and restaurant level operating losses of $99,000. For the nine months ended September 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 $14,000 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 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 condensed consolidated statements of operations. Through the quarter ended September 30, 2001, a total of $1,162,000 was paid for severance and outplacement services. 6. Segment Information. The Company operates exclusively in the food- ------------------- service industry. Substantially all revenues result from the sale of menu products at restaurants operated by the Company. The Company's reportable segments are based on restaurant operating divisions. Operating income (loss) includes the operating results before interest. The corporate component of sales, depreciation and amortization and operating income (loss) represents operating results of the two full-service and four fast-casual restaurants not included in the El Torito Sale, as well as corporate general and administrative expenses. Corporate assets include corporate cash, restricted cash, investments, receivables, asset portions of financing instruments and the two full-service and four fast-casual restaurants not included in the El Torito Sale. Fiscal year 2000 segment information for the El Torito restaurant division has been restated to exclude the results of the two full-service and four fast-casual restaurants not included in the El Torito Sale. -9-
For the Quarters Ended For the Nine Months Ended ------------------------------------ --------------------------------------- September 30, September 24, September 30, September 24, 2001 2000 2001 2000 --------------- --------------- --------------- ----------------- (Unaudited) ($ in thousands) Sales El Torito Division $ - $ 910 $ - $ 112,409 Chi-Chi's Division 50,624 54,195 156,683 166,050 Koo Koo Roo Division 19,041 21,272 60,909 65,389 Corporate 1,199 1,663 3,782 5,161 --------------- --------------- --------------- ----------------- Total Sales $ 70,864 $ 78,040 $ 221,374 $ 349,009 =============== =============== =============== ================= Depreciation and Amortization El Torito Division $ - $ 76 $ - $ 5,367 Chi-Chi's Division 2,655 2,635 8,067 8,005 Koo Koo Roo Division 1,086 1,368 3,089 4,028 Corporate 336 397 998 1,126 --------------- --------------- --------------- ----------------- Total Depreciation and $ 4,077 $ 4,476 $ 12,154 $ 18,526 Amortization =============== =============== =============== ================= Operating Income (Loss) El Torito Division $ - $ (2,280) $ - $ 5,411 Chi-Chi's Division (491) (2,318) (5,308) (5,166) Koo Koo Roo Division (8,577) (981) (10,340) (1,481) Corporate (3,047) (897) (8,582) (1,403) --------------- --------------- --------------- ----------------- Total Operating Income (Loss) $ (12,115) $ (6,476) $ (24,230) $ (2,639) =============== =============== =============== ================= Interest Expense, net El Torito Division $ - $ 7 $ - $ 1,227 Chi-Chi's Division 84 115 290 945 Koo Koo Roo Division 39 52 128 129 Corporate 6,975 6,957 20,392 21,979 --------------- --------------- --------------- ----------------- Total Interest Expense, net $ 7,098 $ 7,131 $ 20,810 $ 24,280 =============== =============== =============== ================= Capital Expenditures El Torito Division $ - $ - $ - $ 934 Chi-Chi's Division 484 3,990 1,686 6,144 Koo Koo Roo Division 253 1,038 1,841 2,226 Corporate 61 650 265 1,520 --------------- --------------- --------------- ----------------- Total Capital Expenditures $ 798 $ 5,678 $ 3,792 $ 10,824 =============== =============== =============== ================= September 30, December 31, 2001 2000 --------------- ----------------- (Unaudited) ($ in thousands) Total Assets Chi-Chi's Division $ 98,013 $ 104,387 Koo Koo Roo Division 34,339 46,202 Corporate 50,518 69,923 --------------- ----------------- Total Assets $ 182,870 $ 220,512 =============== =================
-10- Item 2. 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; . determinations of any judicial court involved in the restructuring of the Company; . the continuing development of successful marketing strategies for each of the Company's concepts; . the effect of national and regional economic conditions; . the availability of adequate working capital; . competitive products and pricing; . changes in legislation; . demographic changes; . the ability to attract and retain qualified personnel; . changes in business strategy or development 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. -11- 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. The following should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" presented in the Form 10-K. As used herein, "comparable restaurants" means restaurants operated by the Company for at least eighteen months and that continued in operation through the end of the third quarter of 2001. Liquidity and Capital Resources ------------------------------- A. Liquidity The Company reported net cash used in operating activities of $7.2 million for the nine months ended September 30, 2001 and net cash used in operating activities of $14.4 million for the nine months ended September 24, 2000. Cash needs are being funded by available cash balances which resulted from the El Torito Sale. The Company's viability is dependent upon its ability to restructure its 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 does not anticipate that, in such a restructuring, there will be value available for recovery by the current stockholders or the holders of the subordinated Prandium Notes. If the Company cannot reach agreement with Foothill, the holders of the FRI-MRD Notes and the holders of the Prandium Notes, the Company will need to consider other alternatives, including but not limited to, a federal bankruptcy filing 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 nine months ended September 30, 2001, net cash used in operating activities was $7.2 million compared to $14.4 million for the same period in 2000. This change was primarily due to a $30.9 million reduction in interest paid, partially offset by a $21.5 million decline in cash received from customers, franchisees and licensees net of cash paid to suppliers and employers and $2.6 million in restructuring costs. For the first nine months of 2001, net cash used in investing activities was $18.0 million compared to $100.5 million provided by investing activities for the same period in 2000. This change was primarily due to $113.6 million in net proceeds from the sale of the El Torito Division in 2000, partially offset by an increase in restricted cash, net of $9.4 million and a $7.0 million reduction in capital expenditures in 2001. For the first nine months of 2001, net cash used in financing activities was $1.1 million compared to $21.6 million for the same period in 2000. During the first nine months of 2000, $21.9 million in net working capital borrowings were repaid. -12- EBITDA. For the first nine months of 2001, the Company reported EBITDA (defined as earnings (loss) before opening costs, loss (gain) on disposition of properties, provision for divestitures, restructuring costs, interest, taxes, and depreciation and amortization) of $1.8 million, compared to $19.1 million in the same period of 2000. After reporting negative EBITDA in both the first and second quarters of 2001, the Company reported EBITDA of $2.2 million for the third quarter of 2001, compared to $0.6 million in the same period of 2000. The $17.3 million decrease for the first nine months of 2001 was composed of (i) a $13.0 million decrease as the result of the sale of the El Torito Division on June 28, 2000; (ii) a $0.8 million decrease in the Chi-Chi's Division; (iii) a $1.1 million decrease in the Koo Koo Roo Division; and (iv) $2.4 million of incremental general and administrative expenses that were previously allocated to the El Torito Division which have not been eliminated. As a result of the sale of the El Torito Division and, if completed, the sale of the Hamburger Hamlet restaurants, the Company will be operating at lower EBITDA levels for the foreseeable future. The Company has included information concerning EBITDA herein because it understands that such information is used by certain investors as one measure of an issuer's historical ability to service debt. EBITDA should not be considered as an alternative to, or more meaningful than, operating income (loss) as an indicator of operating performance or 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 working capital deficiency because: . restaurant operations are conducted primarily on a cash (and cash equivalent) basis with a low level of accounts receivable; . rapid turnover allows a limited investment in inventories; and . cash from sales is applied to the payment of related accounts payable for food, beverages and supplies which are generally purchased on trade credit terms. The Company had a working capital deficiency of $250.3 million on September 30, 2001. This amount includes property held for sale of approximately $19.0 million and the classification of approximately $233.4 million in debt outstanding under the FRI-MRD Notes and Prandium Notes as current. 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 acquisition of Koo Koo Roo, Inc. and The Hamlet Group, Inc. ("Hamlet") on October 30, 1998, the Company increased the Foothill Credit Facility to $55 million. In connection with the El Torito Sale, (i) the Company used a portion of the cash proceeds from the sale to repay $25.9 million outstanding under the Foothill Credit Facility and (ii) the Foothill Credit Facility was amended and restated to adjust all restrictive covenants to reflect the El Torito Sale and reduce the credit facility to a maximum of $20 million (subject to certain limitations) of letters of credit and revolving cash borrowings. The Foothill Credit Facility: -13- . 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; . contains covenants which restrict, among other things, the Company's ability to incur debt, pay dividends on or redeem capital stock, make certain types of investments, make dispositions of assets and engage in mergers and consolidations; and . expires on January 10, 2002. The Company was not in compliance with certain financial ratios at 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 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 ($9.4 million of letters of credit were outstanding as of November 9, 2001, all of which were cash collateralized as described below). No working capital borrowings were outstanding as of September 30, 2001 and November 9, 2001. 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. This amount is included in restricted cash on the Company's September 30, 2001 condensed 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, the Company, FRI-MRD, Chi-Chi's and certain other subsidiaries of the Company entered into a subsequent letter agreement 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 a forbearance fee in the amount of $50,000 (which was paid to Foothill by the Company on October 18, 2001), 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) January 10, 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 agreement. 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 -14- Foothill Credit Facility and (C) agreed, prior to the commencement of any bankruptcy proceeding, to provide a copy of a commitment letter that either secures a letter of credit in favor of Foothill in an amount equal to 105% of the outstanding letters of credit or replaces and releases all such letters of credit. The fee on undrawn letters of credit was also increased from 3% to 5% per annum. As of November 9, 2001, Foothill currently continues to hold approximately $10 million as cash collateral for the outstanding letters of credit. The Company is currently negotiating with a different lender to replace the Foothill Credit Facility with a new credit facility. The new credit facility would provide for letters of credit and a line of credit for the ongoing working capital needs of the Company and would provide for the release of the cash collateral held by Foothill. There can be no assurance that an agreement can be reached with a different lender or on the terms of such an agreement. 2. FRI-MRD and Prandium Notes. After completion of the El Torito Sale, -------------------------- the Company continues 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 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 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. On November 7, 2001, the Company executed the Note Term Sheet with an authorized representative of the holders of the FRI-MRD Notes. The Note Term Sheet contemplates 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, the maturity date of the FRI-MRD Notes would be extended from January 24, 2002 to January 31, 2005, the interest rates of both the 14% FRI-MRD Notes and the 15% FRI-MRD Notes would be reset at 12%, and all existing and prior defaults as well as accrued interest as of the effective date would be waived. 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. Concurrently with the Closing, the proceeds of the sale of the Hamburger Hamlet restaurants would be used to prepay a portion of the 14% FRI-MRD Notes. In addition, at the Closing, the Company would pay an additional $30 million in cash to the holders of the FRI-MRD Notes. The Company would also become subject to additional limitations on indebtedness and capital expenditures. The restructuring contemplated by the Note Term Sheet 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. -15- 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 does not anticipate that, under a prearranged or prepackaged plan of reorganization or otherwise, there will be value available for distribution to the holders of the 10 7/8% Prandium Notes. 3. Equity Holders. In light of the amount owed to creditors and the -------------- size of the Company's operations, the Company does not anticipate that there will be value available for recovery by the current stockholders. 4. Other. On October 23, 2001, FRI-MRD entered into the Hamlet Agreement to ----- sell its chain of 14 Hamburger Hamlet restaurants to Othello. Under the terms of the Hamlet Agreement, the Company will receive, subject to certain post-closing adjustments based on closing financial statements, cash of $16.1 million ($1.0 million of which will be placed in escrow for a designated period following the consummation of the sale). The proceeds of the sale will be used to prepay the 14% FRI-MRD Notes, and to the extent cash remains, to prepay the 15% FRI-MRD Notes. In connection with the sale, the Company and FRI-MRD have agreed, subject to certain limitations, to indemnify Othello against certain potential losses, primarily related to events prior to the closing of the sale. Othello has agreed, subject to certain limitations, to indemnify the Company against certain potential losses, primarily related to events occurring after the closing of the sale. The Hamlet Agreement contemplates that the sale will occur after FRI-MRD has commenced a Reorganization Case and will be subject to approval by the court in which the Reorganization Case is pending. The sale is also subject to Othello receiving adequate financing to pay the purchase price and customary terms and conditions. There can be no assurances that the sale will be successfully completed. B. Capital Expenditures Net cash used in investing activities was $18.0 million for the first nine months of 2001, including $3.8 million used for capital expenditures, as compared to net cash provided by investing activities of $100.5 million for the same period in 2000. The change in net cash used in investing activities for the first nine months of 2001 was primarily due to $113.6 million in net proceeds from the sale of the El Torito Division in 2000, partially offset by an increase in restricted cash of $9.4 million and a $7.0 million reduction in capital expenditures in 2001. Capital expenditures of up to approximately $8.4 million have been identified for fiscal 2001. In fiscal 2001, the Company opened one new Koo Koo Roo restaurant and anticipates expanding a new Koo Koo Roo test menu to up to seven restaurants. Actual capital expenditures for 2001 will be dependent on the availability of required funds. During the first nine months of 2001, total capital expenditures were $3.8 million, which were used to construct a new Koo Koo Roo in Woodland Hills, California and to repair and replace equipment in the normal course of business. -16- Recent Accounting Pronouncements -------------------------------- In July 2001, the FASB issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 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. Statement 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 Statement 142. Statement 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 Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Company is required to adopt the provisions of Statement 141 immediately and the provisions of Statement 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 Statement 142. As a result of the anticipated sale of the Company's Hamburger Hamlet restaurant chain, the Company will no longer have goodwill or intangible assets to analyze in connection with the adoption of Statement 141 and Statement 142. The FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations," in September 2001. Statement No. 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 application of this standard will have any impact on the Company's financial position, results of operations or liquidity. The FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," in October 2001. Statement No. 144 is effective for fiscal years beginning after December 15, 2001 and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Management does not believe that the application of this standard will cause a material variation from the Company's current accounting policies. Results of Operations. --------------------- The Company's total sales of $70,864,000 for the third quarter of 2001 decreased by $7,176,000 or 9.2% as compared to the same period in 2000. For the first nine months of 2001, total Company sales of $221,374,000 decreased by $127,635,000 or 36.6% as compared to the same period in 2000. These decreases were the result of (i) the sale of the El Torito Division on June 28, 2000; (ii) sales decreases for restaurants sold or closed, other than those included in the sale of the El Torito Division; and (iii) declines in comparable restaurant sales for Chi-Chi's and Koo Koo Roo, partially offset by an increase in comparable restaurant sales for Hamburger Hamlet, with all such decreases partially offset by sales from new Koo Koo Roo restaurants. The breakdown of the sales decreases for the third quarter and first nine months of 2001 is shown in the following table: -17-
Change in Change in Third Quarter First Nine Months 2001 Sales 2001 Sales ------------------- ------------------- ($ in thousands) Decrease in Sales From the Sale of the El Torito Division $ (909) $(112,409) Decrease in Sales from Restaurants Sold or Closed Other Than Those Included in the Sale of the El Torito Division (2,895) (9,115) Net Decrease in Sales of Comparable Restaurants (3,724) (7,679) Sales from New Restaurants 352 1,568 ------- --------- Total $(7,176) $(127,635) ======= =========
Overall, sales for comparable restaurants were $68,707,000 for the third quarter of 2001, a $3,724,000 or 5.1% decline from the same period in 2000. For the first nine months of 2001, sales of comparable restaurants of $212,681,000 decreased by $7,679,000 or 3.5% as compared to the same period in 2000. As shown in the following table, these declines resulted from decreased sales in comparable Chi-Chi's and Koo Koo Roo restaurants, partially offset by increased sales in comparable Hamburger Hamlet restaurants.
Change in Third Change in First Nine Quarter 2001 Sales Months 2001 Sales ------------------------------ ---------------------------- Amount Percent Amount Percent -------------- -------------- ------------- ------------- ($ in thousands) Comparable Chi-Chi's $(2,655) (5.0)% $(4,930) (3.1)% Comparable Koo Koo Roo (1,079) (9.7) (2,806) (8.1) Comparable Hamburger Hamlet 10 0.1 57 0.2 ------- ------- Total $(3,724) (5.1)% $(7,679) (3.5)% ======= ===== ======= =====
Sales for comparable Chi-Chi's restaurants declined 5.0% in the third quarter of 2001 compared to the same period in 2000. The major promotions during the third quarter were All You Can Eat Enchiladas, which ran from July 14 through September 9 and Grilled Tacos Baja Style, which began September 17 and continues into the fourth quarter. Both promotions were supported by broadcast media and in-store merchandising. The Grilled Tacos Baja Style promotion was also supported with print advertising. The events of September 11 had a negative impact on sales, particularly in the Baltimore and Washington D.C. markets where certain restaurants were closed for one or more days. However, the media promotion of the Grilled Tacos Baja Style began the following week and sales improved significantly for the last two weeks of the quarter. During the third quarter of 2001, sales of comparable Koo Koo Roo restaurants were 9.7% lower than the same period in 2000. Koo Koo Roo continues to test and refine new menu items that may have an appeal to a broader audience. Third quarter 2001 comparable sales for -18- Hamburger Hamlet were 0.1% higher than the third quarter of 2000. During this quarter, Hamburger Hamlet featured new dinner specials including the Asian Sampler Platter, Orange Chicken and the Santa Fe Steak Platter. These new menu items were supported by print advertising and in-store merchandising. The impact of the events of September 11 were seen more in Hamburger Hamlet than the other concepts because several of their highest volume restaurants are in the Washington, D.C. market. Additionally, the restaurant near Ronald Reagan National Airport suffered significant sales declines from the extended closure of the 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 2001 included no operations for El Torito, while results for 2000 included six months 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 absence of the El Torito restaurant division's operating results in 2001. Product costs of $18,535,000 for the third quarter of 2001 decreased $3,121,000 or 14.4% compared to the same period in 2000. For the first nine months of 2001, product costs of $58,842,000 decreased by $33,168,000 or 36.0% as compared to the same period in 2000. Product costs as a percentage of sales for the third quarter of 2001 decreased 1.5% points from 27.7% in 2000 to 26.2% in 2001. For the first nine months of 2001, product costs as a percentage of sales increased 0.2% point from 26.4% in 2000 to 26.6% in 2001. The sale of the El Torito Division accounted for $27,851,000 (84.0%) of the nine-month decrease. The remainder of the product costs decreases were related to the sales declines from comparable and closed restaurants and favorable cheese prices, particularly in the first quarter of 2001. If the results of the El Torito Division were excluded from 2000, product costs as a percentage of sales decreased 0.5% point, from 27.1% to 26.6% for the first nine months of 2001. Payroll and related costs of $25,266,000 decreased $2,719,000 or 9.7% for the third quarter of 2001 as compared to the third quarter of 2000. For the first nine months of 2001, payroll and related costs of $79,382,000 decreased $44,619,000 or 36.0% as compared to the same period in 2000. As a percentage of sales, payroll and related costs were 35.7% in the third quarter of 2001, 0.2% point lower than the same period in 2000. For the first nine months of 2001, payroll and related costs were 35.9% of sales, 0.4% point higher than the same period in 2000. The sale of the El Torito Division accounted for $39,278,000 (88.0%) of the total nine-month variance and 0.3% point of the first nine months variance related to payroll and related costs as a percentage of sales. The remainder of the payroll and related costs decreases were related to the sales declines from comparable and closed restaurants. The primary component of the remaining increases as a percentage of sales was increased claims expense in employee health insurance. The Company is subject to Federal and state laws governing matters such as minimum wages, overtime and other working conditions. Approximately half of the Company's employees are paid at rates related to the minimum wage. Therefore, increases in the minimum wage or decreases in the allowable tip credit (tip credits reduce the minimum wage that must be paid to tipped employees in certain states) increase the Company's labor costs. This is especially true in California, where there is no tip credit. In October 2000, the California Industrial Welfare Commission voted to increase the state's minimum wage by 50c to $6.25 on January 1, 2001 with another 50c increase to occur on January 1, 2002. No increases to the $5.15 Federal minimum wage are currently scheduled for 2001. In response to previous minimum wage increases, the Company -19- has implemented various menu price increases, and each of the Company's concepts raised prices in early 2001. Occupancy and other operating expenses were $19,822,000 for the third quarter of 2001, $2,462,000 or 11.0% lower than the same period in 2000. For the first nine months of 2001, occupancy and other operating expenses of $64,612,000 decreased by $28,368,000 or 30.5% as compared to the same period in 2000. As a percentage of sales, occupancy and other operating expenses were 28.0% in the third quarter of 2001, 0.6% point lower than the same period in 2000. For the first nine months of 2001, occupancy and other operating expenses were 29.2% as a percentage of sales, 2.6% points higher than the same period in 2000. The sale of the El Torito Division contributed $26,612,000 (93.8%) of the nine-month variance and 1.5% points of the nine-month percentage of sales variance. Historically, the Company accrued utility expense based on the latest utility bill received. In the second quarter of 2001, the volatile cost of natural gas and uncertainty related to the California electricity crisis caused the Company to accrue at higher rates than had been experienced theretofore. As natural gas prices decreased and stabilized and as California electric providers implemented new rate structures, the Company reassessed its utility liability. Consequently, the third quarter includes a credit to utility expense of approximately $460,000. For the third quarter, the remainder of the variance was primarily related to the implementation of Menu 2000 in the prior year at Chi-Chi's. For the first nine months of 2001, the remainder of the variance is related to the closure of restaurants and the implementation of Menu 2000 in the prior year at Chi-Chi's. Depreciation and amortization of $4,077,000 for the third quarter of 2001 decreased by $399,000 or 8.9% as compared to the same period in 2000. For the first nine months of 2001, depreciation and amortization of $12,154,000 decreased by $6,372,000 or 34.4% as compared to the same period in 2000. The nine-month decrease was primarily due to the El Torito Sale which accounts for $5,367,000 (84.2%) of the decrease. General and administrative expenses for the third quarter of 2001 were $5,069,000, $408,000 or 7.4% lower than the same period in 2000. For the first nine months of 2001, general and administrative expenses were $16,784,000, $4,169,000 or 19.9% lower than the first nine months of 2000. As a percentage of sales, general and administrative expenses were 7.2% in the third quarter 2001, 0.2% point higher than the same period in 2000, and 7.6% in the first nine months of 2001, 1.6% points higher than the first nine months of 2000. The sale of the El Torito Division accounted for $5,684,000 or 136.3% of the first nine months variance, offset by approximately $2.4 million in the first nine months of 2001 of certain incremental general and administrative expenses which were previously allocated to the El Torito Division and have not been eliminated. The reduction in general and administration expenses reflects the elimination of approximately 97 positions in the Company's support center since the end of 1999. Opening costs of $130,000 in the third quarter of 2001 decreased $196,000 or 60.1% from 2000, and opening costs of $237,000 in the first nine months of 2001 decreased $175,000 or 42.5% from 2000 as the Company opened one new Koo Koo Roo restaurant in Woodland Hills, California and began a test of a new, expanded menu in certain restaurants. 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. -20- The Company reported a loss on disposition of properties of $330,000 in the third quarter of 2001 as compared to a loss of $582,000 for the third quarter in 2000. For the first nine months of 2001, the Company reported a loss on disposition of properties of $1,101,000 as compared to a loss on disposition of properties of $1,036,000 for the same period in 2000. The Company reported a provision for divestitures and write-down of long- lived assets of $9,228,000 for the quarter ended September 30, 2001 and $9,417,000 for the nine months ended September 30, 2001. These costs are primarily comprised of the $8,149,000 write-down related to the Company's planned sale of its 14 Hamburger Hamlet restaurants and the $1,079,000 write- down related to the sale of another restaurant property. The Company reported restructuring costs of $522,000 in the third quarter of 2001 and $3,075,000 in the first nine months of 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 for the third quarter of 2001 of $7,098,000 decreased by $33,000 or 0.5% as compared to the same period in 2000. For the first nine months of 2001, interest expense, net of $20,810,000 decreased by $3,470,000 or 14.3% as compared to the same period in 2000. The decrease for the nine-month period is primarily the result of no working capital borrowings required during the first nine months of 2001 and increased interest income on invested cash balances. The Company recorded a pretax gain of $60,978,000 in the third quarter of 2000 as a result of the sale of the El Torito Division. Seasonality. ----------- The Company, as a whole, does not experience significant seasonal fluctuations in sales. However, the Company's sales tend to be slightly greater during the spring and summer months. Selected Division Operating Data. -------------------------------- The following table sets forth certain information regarding (i) the Company; (ii) its ongoing Chi-Chi's restaurant division, Koo Koo Roo restaurant division and other operating restaurants; and (iii) the El Torito restaurant division divested on June 28, 2000. At September 30, 2001, the Company's Chi- Chi's restaurant division operated 139 full-service restaurants, the Company's Koo Koo Roo restaurant division operated 50 fast-casual and full-service restaurants and the Company also operated two other restaurants for a total of 191. -21-
For the Quarters Ended ----------------------------------------------- Sept. 30, Sept. 24, Sept. 26, 2001 2000 1999 ------------ ----------- ---------- ($ in thousands, except average check amount) Chi-Chi's Restaurant Division ----------------------------- Restaurants Open at End of Period: Owned/operated 139 143 152 Franchised and Licensed 7 13 13 Sales $50,624 $54,195 $ 56,894 Restaurant Level Cashflow (a) 5,227 4,156 5,290 Divisional EBITDA (b) 2,337 999 1,900 Percentage increase (decrease) in comparable restaurant sales (5.0)% (0.2)% (1.0)% Average check (excluding alcoholic beverage sales) $ 10.86 $ 10.00 $ 9.24 Koo Koo Roo Restaurant Division (c) ------------------------------------- Restaurants Open at End of Period: Owned/operated 50 57 56 Franchised and Licensed - - 1 Sales $19,041 $21,272 $ 21,677 Restaurant Level Cashflow (a) 1,962 2,083 2,335 Divisional EBITDA (b) 757 571 927 Percentage decrease in comparable restaurant sales (5.6)% (4.3)% N.A. Average check (Koo Koo Roo restaurants only) $ 9.70 $ 9.37 $ 9.11 Other Operating Restaurants --------------------------- Restaurants Open at End of Period: Owned/operated 2 6 5 Franchised and Licensed - - - Sales $ 1,199 $ 1,663 $ 1,635 Restaurant Level Cashflow (a) 52 (1) 62 Divisional EBITDA (b) (860) (657) (23) Ongoing Operations ------------------ Restaurants Open at End of Period: Owned/operated 191 206 213 Franchised and Licensed 7 13 14 Sales $70,864 $77,130 $ 80,206 Restaurant Level Cashflow (a) 7,241 6,288 7,687 Divisional EBITDA (b) 2,234 913 2,804 Divested Operations (d) ----------------------- Restaurants Open at End of Period: Owned/operated - - 94 Franchised and Licensed - - 8 Sales $ - $ 910 $ 54,058 Restaurant Level Cashflow (a) - (123) 8,278 Divisional EBITDA (b) - (256) 5,592 Total Company ------------- Restaurants Open at End of Period: Owned/operated 191 206 307 Franchised and Licensed 7 13 22 Sales $70,864 $78,040 $134,264 EBITDA (e) 2,172 638 8,328 For the Nine Months Ended ----------------------------------------------- Sept. 30, Sept. 24, Sept. 26, 2001 2000 1999 ---------- --------- --------- ($ in thousands, except average check amount) Chi-Chi's Restaurant Division ----------------------------- Restaurants Open at End of Period: Owned/operated 139 143 152 Franchised and Licensed 7 13 13 Sales $156,683 $166,050 $174,599 Restaurant Level Cashflow (a) 12,442 13,727 16,189 Divisional EBITDA (b) 3,194 3,964 5,319 Percentage increase (decrease) in comparable restaurant sales (3.1)% 0.4 % 0.5 % Average check (excluding alcoholic beverage sales) $ 10.85 $ 9.68 $ 9.17 Koo Koo Roo Restaurant Division (c) ------------------------------------- Restaurants Open at End of Period: Owned/operated 50 57 56 Franchised and Licensed - - 1 Sales $ 60,909 $ 65,389 $ 66,445 Restaurant Level Cashflow (a) 5,996 7,451 7,895 Divisional EBITDA (b) 1,753 2,825 3,578 Percentage decrease in comparable restaurant sales (4.6) % (3.7)% N.A. Average check (Koo Koo Roo restaurants only) $ 9.69 $ 9.28 $ 8.98 Other Operating Restaurants --------------------------- Restaurants Open at End of Period: Owned/operated 2 6 5 Franchised and Licensed - - - Sales $ 3,782 $ 5,161 $ 4,307 Restaurant Level Cashflow (a) 100 172 236 Divisional EBITDA (b) (3,049) (621) (43) Ongoing Operations ------------------ Restaurants Open at End of Period: Owned/operated 191 206 213 Franchised and Licensed 7 13 14 Sales $221,374 $236,600 $245,351 Restaurant Level Cashflow (a) 18,538 21,350 24,320 Divisional EBITDA (b) 1,898 6,208 8,854 Divested Operations (d) ----------------------- Restaurants Open at End of Period: Owned/operated - - 94 Franchised and Licensed - - 8 Sales $ - $112,409 $163,486 Restaurant Level Cashflow (a) - 18,668 26,602 Divisional EBITDA (b) - 12,984 17,742 Total Company ------------- Restaurants Open at End of Period: Owned/operated 191 206 307 Franchised and Licensed 7 13 22 Sales $ 221,374 $349,009 $408,837 EBITDA (e) 1,754 19,065 26,414
(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 that would have been allocated to the El Torito Division prior to the sale of that division are being charged to Other Operating Restaurants subsequent to the sale so as not to distort the year-over-year comparisons of the Chi-Chi's and Koo Koo Roo Restaurant Divisions. (c) Includes both Koo Koo Roo and Hamburger Hamlet restaurant operations which were acquired on October 30, 1998. On October 23, 2001, FRI-MRD entered into an agreement to sell the Hamburger Hamlet restaurant operations. See "--A. Liquidity. 4. Other." (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, gain (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. 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. -22- Item 3. Quantitative and Qualitative Disclosure about Market Risk ------ 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 September 30, 2001 and November 9, 2001. 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. -23- PART II. OTHER INFORMATION --------------------------- Item 1. 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 alleges 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 recently agreed to a settlement in principal, by which Mr. Relyea will agree 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 would agree not to oppose an application for attorney's fees by plaintiff's counsel of $99,000 as part of the contemplated settlement. Approval of the Superior Court will be sought for the settlement. 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 existing claims or actions will have a material adverse effect upon the consolidated financial position or results of operations of the Company. Item 2. Changes in Securities and Use of Proceeds ------ None. Item 3. Defaults Upon Senior Securities ------ The Company has failed to pay the interest that came due February 1, 2001 and August 1, 2001 with respect to the Prandium Notes. Under the terms of the Prandium Notes, the grace periods for the payment of interest due February 1, 2001 and August 1, 2001 has expired. In addition, the Company's subsidiary FRI- MRD Corporation has failed to pay the interest due January 31, 2001 and -24- July 31, 2001 with respect to the FRI-MRD Notes. Under the terms of the FRI-MRD Notes, the grace periods for the payment of interest due January 31, 2001 and July 31, 2001 have expired. 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. The unpaid principal amount on the FRI-MRD Notes as of November 14, 2001 amounted to $99,000,000 and the amount of interest due and not paid on the FRI-MRD Notes as of November 14, 2001 amounted to $18,912,000. The unpaid principal amount on the Prandium Notes as of November 14, 2001 amounted to $134,356,000 and the amount of interest due and not paid on the Prandium Notes as of November 14, 2001 amounted to $17,407,000. The effect of these Events of Default on the Company will depend on the results of the negotiations described in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations A. Liquidity" including a successful capital restructuring of the Company and its subsidiaries. Item 4. Submission of Matters to a Vote of Security Holders ------ None. Item 5. Other Information ------ None. Item 6. Exhibits and Reports on Form 8-K ------ (a) 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. (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 as of 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.) *2 (d) Stock Purchase Agreement dated as of October 23, 2001, by and between FRI-MRD Corporation and Othello Holding Corporation. 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.) -25- 3 (b) Second Amended and Restated Bylaws of the Company. (Filed as Exhibit 3(c) to the Company's Form 10-K filed with the SEC on March 29, 1999.) 4 (a) Indenture Dated as of January 27, 1994 Re: $300,000,000 9-3/4% Senior Notes Due 2002. (Filed as Exhibit 4(a) to the Company's Form 10-K filed with the SEC on March 28, 1994.) 4 (b) Indenture Dated as of January 27, 1994 Re: $150,000,000 10-7/8% Senior Subordinated Discount Notes Due 2004. (Filed as Exhibit 4(b) to the Company's Form 10-K filed with the SEC on March 28, 1994.) 4 (c) First Supplemental Indenture, dated as of July 3, 1996, between the Registrant and IBJ Schroder Bank & Trust Company, a New York Banking corporation, as Trustee. (Filed as Exhibit 10.1 to the Company's Form 8-K filed with the SEC on July 9, 1996.) 4 (d) First Supplemental Indenture, dated as of July 3, 1996, between the Registrant and Fleet National Bank, as successor by merger to Fleet National Bank of Massachusetts, formerly known as Shawmut Bank, N.A., as Trustee. (Filed as Exhibit 10.2 to the Company's Form 8-K filed with the SEC on July 9, 1996.) 4 (e) Note Agreement Dated as of August 12, 1997 Re: Up to $75,000,000 FRI-MRD Corporation Senior Discount Notes Due January 24, 2002. (Filed as Exhibit 4(e) to the Company's Form 10-Q filed with the SEC on November 12, 1997.) 4 (f) Joinder Agreement Dated as of January 14, 1998 Re: FRI-MRD Corporation Senior Discount Notes due January 24, 2002. (Filed as Exhibit 4(f) to the Company's Form 10-K filed with the SEC on March 30, 1998.) 4 (g) First Amendment dated as of June 9, 1998 to the Note Agreement dated August 12, 1997. (Filed as Exhibit 4.7 to the Company's Form S-4 filed with the SEC on July 1, 1998.) 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.) -26- 4 (i) First Amendment dated as of October 30, 1998 to the Note Agreement dated as of June 9, 1998. (Filed as Exhibit 4(i) to the Company's Form 10-Q filed with the SEC on November 12, 1998.) 4 (j) Waiver dated as of January 29, 1999 to the Note Agreements dated as of August 12, 1997 and June 9, 1998. (Filed as Exhibit 4(j) to the Company's Form 10-K filed with the SEC on March 29, 1999.) 10 (a) 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 (b) 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 (c) 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 (d) Letter Agreement, effective as of October 18, 2001 by and among Foothill Capital Corporation, the Company, FRI-MRD Corporation and certain of its subsidiaries. *10 (e) Letter Agreement, dated as of November 7, 2001 by and among the Company, FRI-MRD Corporation and MacKay Shields Financial Corporation. (b) Reports on Form 8-K. On August 3, 2001, the Company filed a report on Form 8-K announcing that it had elected not to make interest payments on certain of its debt and the debt of FRI-MRD Corporation. ______________ * Filed herewith. -27- SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Prandium, Inc. (Registrant) By: /S/ Robert T. Trebing, Jr. -------------------------- Robert T. Trebing, Jr. Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) Date: November 14, 2001 -28-