Struggling Family eyes Coco's, Carrows sales

Nation's Restaurant News, Nov 27, 1995 by Richard L. Papiernik

Bank debts pressure company to examine all possible cash sources

IRVINE, Calif. - Family Restaurants Inc., already in technical default of its loan covenants and under pressure to pay down its bank loans, has signaled its willingness to throw all of its four chains and 672 restaurants into the sales pot.

The decision to sell the company's most prized assets - its Coco's and Carrows restaurants - at the right price is a sign that FRI's bankers are tiring of waiting for an operational turnaround, industry observers said.

The bottom line, according to several analysts and FRI's own officials, is that attempts to sell off the lower-performing Chi-Chi's and El Torito Mexican food concepts have failed to bring in the buyers. And cash flow, needed to fund operations, has been insufficient to cover interest payments let alone any debt reduction.

So the company has been forced to look at the sale of its most attractive assets as the quickest way of bringing in cash to pay down some loans.

Company officials have confirmed that the action significantly broadened the company's approach to selling off assets. It previously was letting the word out that its poorer-performing divisions and operations were up for sale in an attempt to get the cash necessary to pay down some of its nearly $100 million in debt.

In essence, they said, the "book is out" on all of the restaurants - a phrase that tells the financial community that the restaurants are now being shopped actively to assess interest of potential buyers.

FRI's chief executive, Lawrence Ramaekers, confirmed that a continuing decline in sales and earnings is forcing the company to explore "strategic alternatives" actively.

FRI has retained Donaldson, Lufkin & Jenrette Securities Corp., Ramaekers said, "as financial advisers to evaluate options, including divestitures of our restaurant divisions to financial or strategic buyers."

In October, Ramaekers was able to convince lenders to extend to Jan. 31 the waiver for FRI compliance with financial covenants needed to prevent triggering a default on its loans. Technically, the company is now in default on those loans.

In addition, another interest payment of $14.6 million is due Feb. 1. Earlier this year, FRI had to borrow funds to meet a previous $14 million interest payment.

"We owe the bank group in excess of $90 million, and we continue to have to meet other debt requirements," said Robert Trebing, FRI's chief financial officer. He said it was necessary to explore the sale of assets because "cash flow now is being used to run the business."

Donaldson, Lufkin & Jenrette is "exploring the marketplace," Trebing noted, adding that there are no solid offers "at this point in time."

The "deterioration in operating cash flow" was cited by the company in its decision to suspend all remodeling expenditures at its restaurants.

Continuing problems with declining sales and negative returns at its Chi-Chi's chain have been draining off proceeds from FRI's other chains, which include El Torito and Chi-Chi's in the Mexican Division and Coco's and Carrows in FRI's Family division, according to Ramaekers.

He also said the Family Division was "on track," and the El Torito chain was "performing well."

But because of the deteriorating value of the Chi-Chi's restaurants, FRI reported that it had written down the chain to its "fair market value" by taking a charge of $41.9 million in its third quarter. The company said seven Chi-Chi's were closed during the quarter, and "60 others are on the block," but little interest has been seen in their purchase.

Chi-Chi's president, Jack McGregor, disputed reports that the company was considering an imminent shutdown of those low-performing units.

"We've gone through an economic analysis and concluded that the losses we would incur by shutting them down would cost more than keeping them open," he said, explaining that having some cash flow from operations helps offset rent and occupancy costs.

"The best-case scenario," he said, "would be to have another tenant take over the property so that we could eliminate the negative cash flow entirely. The next best scenario - if it comes to that - would be to negotiate a satisfactory settlement with the landlord.

"Right now I'm trying to rebuild the restaurants and the organization," McGregor continued. "A few years ago Chi-Chi's had enjoyed fantastic revenues, and then for a number of reasons it just deterioted. My job is to try to undo some of that."

McGregor and Ramaekers, principals in the Southfield, Mich.-based corporate restructuring firm Jay Alix & Associates, have been brought in by FRI's chief investors to help turn around the faltering FRI operations and finances.

It won't be an easy job, according to several analysts. For the nine months ended Sept. 24, the privately held FRI suffered a 44-percent declined in earnings before interest, taxes, depreciation and amortization, or EBITDA, to $42.6 million, and a 2.5-percent dip in revenues, to $852 million. It posted a $62.6 million net loss in the third quarter. In the year-ago quarter, FRI lost $3.1 million.