<PAGE>
As Filed with the Securities and Exchange Commission on February 6, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
---------------
Advantica Restaurant Group, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 5812 13-3487402
<S> <C> <C>
(State or Other Jurisdiction of (Primary Standard Industrial Classification (I.R.S. Employer
Incorporation or Organization) Code Number) Identification No.)
</TABLE>
203 East Main Street
Spartanburg, South Carolina 29319-9966
(864) 597-8000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------
Rhonda J. Parish, Esq.
Senior Vice President and General Counsel
Advantica Restaurant Group, Inc.
203 East Main Street
Spartanburg, South Carolina 29319-9966
(864) 597-8000
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
---------------
Copy to:
Gary C. Ivey, Esq.
Parker, Poe, Adams & Bernstein L.L.P.
2500 Charlotte Plaza
Charlotte, North Carolina 28244
(704) 372-9000
---------------
Approximate date of commencement of proposed sale of the securities to the
public:
From time to time after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title of Each Class Proposed Maximum Proposed Maximum Amount of
of Securities to Amount to be Offering Price Aggregate Offering Registration
be Registered Registered Per Share (1) Price (1) Fee
<S> <C> <C> <C> <C>
Common Stock, $.01
par value ........... 9,526,775 $ 9.75 $92,886,056 $27,401
</TABLE>
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) based upon the last reported sales price for the Common
Stock on the NASDAQ National Market System on February 2, 1998.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED , 1998
PROSPECTUS
Advantica Restaurant Group, Inc.
9,526,775 Shares of Common Stock
This Prospectus relates to the offering from time to time (the "Offering")
by a certain selling shareholder (the "Selling Stockholder") of shares of
common stock, $.01 par value (the "Common Stock"), of Advantica Restaurant
Group, Inc. (formerly Flagstar Companies, Inc.), a Delaware corporation
("Advantica"). The shares of Common Stock being registered hereunder were
issued by Advantica under the Joint Plan of Reorganization, as amended (the
"Plan of Reorganization"), of Flagstar Companies, Inc., a Delaware corporation
("FCI"), and Flagstar Corporation, a Delaware corporation and a wholly-owned
subsidiary of FCI ("Flagstar"), under Chapter 11, Title 11 of the United States
Code (the "Bankruptcy Code"). The Plan of Reorganization was confirmed by the
United States Bankruptcy Court for the District of South Carolina (the
"Bankruptcy Court") by order entered by such court as of November 12, 1997 and
became effective on January 7, 1998 (the "Effective Date"). See "The Company --
The 1997 Restructuring."
All shares of Common Stock being offered for resale hereby are being so
offered for the account of the Selling Stockholder. Advantica will not receive
any proceeds from any resale of the Common Stock offered or sold pursuant
hereto.
The Common Stock is currently listed for trading in the NASDAQ National
Market System under the trading symbol "DINE."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN
MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN
THE SECURITIES OFFERED HEREBY.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The Selling Stockholder directly, through agents designated from time to
time, or through dealers or underwriters to be designated, may sell the Common
Stock from time to time on terms to be determined at the time of sale. To the
extent required, the specific amount of Common Stock to be sold, the purchase
price and public offering price, the names of any resale agent, dealer or
underwriter, and the terms of any amount of any applicable commission or
discount with respect to a particular offer will be set forth in a Prospectus
Supplement and/or post-effective amendment to the Registration Statement of
which this Prospectus constitutes a part. See "Plan of Distribution."
Advantica has agreed to bear all expenses of registration of the Common
Stock under federal and state securities laws and to indemnify the Selling
Stockholder against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act") and, in lieu thereof,
to contribute to payments required to be made by the Selling Stockholders. See
"Plan of Distribution."
The Selling Stockholder and any broker-dealers, agents or underwriters
that participate with the Selling Stockholder in the distribution of the Common
Stock may be deemed to be "underwriters" within the meaning of the Securities
Act, and any commissions received by them and any profit on the resale of the
Common Stock purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
The date of this Prospectus is , 1998.
<PAGE>
AVAILABLE INFORMATION
Advantica has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (the "Registration
Statement", which term shall encompass any amendments, exhibits and schedules
thereto) under the Securities Act with respect to the Common Stock offered for
resale hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to Advantica and the Common Stock, reference
is hereby made to such Registration Statement, exhibits and schedules.
Statements contained in this Prospectus, which constitutes part of the
Registration Statement, as to the contents of any agreement, instrument or
other document are not necessarily complete, and, in each instance, reference
is made to the copy of such agreement, instrument or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
its entirety by such reference.
Advantica is subject to the informational and reporting requirements of
the Securities Exchange Act of 1934, as amended, and, in accordance therewith,
files periodic reports, proxy statements and other information with the
Commission. The Registration Statement, including all exhibits and schedules
thereto, as well as such reports, statements and other information, may be
inspected and copied at the Public Reference Section of the Commission at its
principal office located at 450 Fifth Street, N.W., Washington, D.C. 20549, the
New York Regional Office, located at 7 World Trade Center, Suite 1300, New
York, New York 10048, and the Chicago Regional Office, located at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material can be obtained from any such office at
prescribed rates. Such material may also be accessed electronically by means of
the Commission's home page on the Internet at
http://www.sec.gov.
FORWARD-LOOKING STATEMENTS
The forward-looking statements included in the "Risk Factors", "Business",
"Legal Proceedings" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" sections of this Prospectus, which reflect
management's best judgment based on factors currently known, involve risks and
uncertainties. Words such as "expects", "anticipates", "believes", "intends",
and "hopes", variations of such words and similar expressions are intended to
identify such forward-looking statements. Actual results could differ
materially from those anticipated in these forward-looking statements as a
result of a number of factors, including but not limited to, the factors
discussed in such sections and those set forth in the cautionary statements
contained in Exhibit 99 to the Registration Statement. (See Exhibit 99 -- Safe
Harbor Under the Private Securities Litigation Reform Act of 1995).
Forward-looking information set forth in such sections are provided by
Advantica pursuant to the safe harbor established under the Private Securities
Litigation Reform Act of 1995 and should be evaluated in the context of these
factors.
2
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the more detailed information
and financial statements contained elsewhere in this Prospectus. Unless the
context otherwise requires, the term "Company," as used in this Prospectus,
refers to Advantica, including its predecessors, FCI and Flagstar, and its
subsidiaries on a consolidated basis.
The Company
Advantica, through its wholly-owned subsidiaries, is one of the largest
restaurant companies in the United States, operating (directly and through
franchisees) more than 3,200 moderately priced restaurants.
Advantica's operations are conducted through six restaurant chains or
concepts, four chains in the full-service mid-scale dining segment and two in
the quick-service segment. Denny's is the nation's largest chain of
family-style full-service restaurants, with more than 1,650 units in 49 states,
two U.S. territories and two foreign countries. Denny's largest domestic
concentration is in California and Florida, with 552 units in these two states.
Management believes that Denny's has the leading share of the national market
in the family-style category. Quincy's, with 180 locations, is one of the
largest chains of family-steak restaurants in the southeastern United States.
El Pollo Loco is a chain of 247 quick-service restaurants featuring
flame-broiled chicken and steak products and related Mexican food items. Coco's
is a regional bakery restaurant chain operating 493 units in seven western
states and three foreign countries, offering a wide variety of fresh-baked
goods and value priced meals that capitalize on emerging food trends in the
western United States. The Carrows chain, consisting of 154 units in seven
western states, specializes in traditional American food, with emphasis on
quality, homestyle fare at an excellent value. Hardee's is a chain of
quick-service restaurants of which Advantica, with 557 units located primarily
in the Southeast, is the largest franchisee. Although specializing in
sandwiches, Advantica's Hardee's restaurants serve fried chicken and offer a
breakfast menu that accounts for approximately 44% of total sales and features
the chain's famous "made-from-scratch" biscuits.
Although operating in two distinct segments of the restaurant industry --
full-service and quick-service -- the Company's restaurants benefit from a
single management strategy that emphasizes superior value and quality, friendly
and attentive service and appealing facilities.
FCI was organized as a holding company in 1988 in order to effect the 1989
acquisition of Flagstar. In 1992, FCI and Flagstar consummated the principal
elements of a recapitalization (the "1992 Recapitalization"), as a result of
which two partnerships affiliated with Kohlberg, Kravis, Roberts & Co. ("KKR")
acquired control of the Company. Prior to June 16, 1993, FCI and Flagstar had
been known, respectively, as TW Holdings, Inc. and TW Services, Inc.
As further described elsewhere herein, in early 1997, the Company's
management concluded, in light of operating trends experienced by the Company
since 1989 (and continuing into 1997) and the Company's liquidity and capital
needs, that the reorganizational alternative best designed to recapitalize the
Company's enterprise over the long-term and maximize the recovery of all
stakeholders was through a prepackaged plan pursuant to Chapter 11 of the
Bankruptcy Code. Toward that end, beginning in February 1997, FCI and Flagstar
commenced intensive negotiations with various creditors in an effort to enable
the Company to restructure its indebtedness through such a prepackaged filing.
The prepackaged plan, the principal terms of which were announced by FCI and
Flagstar on March 17, 1997 (the "Original Plan"), was the result of such
negotiation and effort. On June 5, 1997, FCI and Flagstar commenced a
solicitation of votes on the Original Plan by holders of impaired claims and
impaired equity interests entitled to vote thereon. The Original Plan was
accepted by all but one class that voted, and a voluntary Chapter 11 case was
commenced by Advantica on July 11, 1997 in the Bankruptcy Court. The Plan of
Reorganization (as amended following the resolution of certain issues before
the Bankruptcy Court) was confirmed by the Bankruptcy Court pursuant to an
order entered as of November 12, 1997 and became effective on January 7, 1998.
See "The Company -- The 1997 Restructuring." On the Effective Date, among other
things, Flagstar merged with and into FCI, the surviving corporation, FCI
changed its name to Advantica Restaurant Group, Inc., and Advantica issued
40,000,000 shares of Common Stock.
The Company's principal executive offices are located at 203 East Main
Street, Spartanburg, South Carolina 29319-9966. Its telephone number is (864)
597-8000.
3
<PAGE>
The Plan of Reorganization
Material features of the Plan of Reorganization, as it became effective as
of January 7, 1998, are as follows:
(a) Flagstar merged with and into FCI, the surviving corporation, and FCI
changed its name to Advantica Restaurant Group, Inc.;
(b) The following securities of Flagstar and FCI were cancelled,
extinguished, and retired as of the Effective Date: (i) Flagstar's
10 7/8% Senior Notes due 2002 (the "10 7/8% Senior Notes") and 10 3/4%
Senior Notes due 2001 (the "10 3/4% Senior Notes" and, collectively with
the 10 7/8% Senior Notes, the "Old Senior Notes"), (ii) Flagstar's 11.25%
Senior Subordinated Debentures due 2004 (the "11.25% Debentures") and
11 3/8% Senior Subordinated Debentures due 2003 (the "11 3/8% Debentures"
and, collectively with the 11.25% Debentures, the "Senior Subordinated
Debentures"), (iii) Flagstar's 10% Convertible Junior Subordinated
Debentures due 2014 (the "10% Convertible Debentures"), (iv) FCI's $2.25
Series A Cumulative Convertible Exchangeable Preferred Stock (the "Old
Preferred Stock") and (v) FCI's $.50 par value common stock (the "Old
Common Stock");
(c) Advantica had 100,000,000 authorized shares of Common Stock (of which
40,000,000 shares were issued and outstanding on the Effective Date) and
25,000,000 authorized shares of preferred stock (none of which are
currently outstanding). Under the terms of the Plan of Reorganization,
ten percent (10%) of the number of shares of Common Stock issued and
outstanding on the Effective Date, on a fully diluted basis, is reserved
for issuance under a new management stock option program. Additionally,
4,000,000 shares of Common Stock are reserved for issuance upon the
exercise of new warrants expiring January 7, 2005 that were issued and
outstanding on the Effective Date and entitle the holders thereof to
purchase in the aggregate 4,000,000 shares of Common Stock at an exercise
price of $14.60 per share (the "Warrants");
(d) Each holder of the Old Senior Notes received such holder's pro rata
portion of 100% of Advantica's 11 1/4% Senior Notes due 2007 (the "New
Senior Notes") in exchange for 100% of the principal amount of such
holders' Old Senior Notes and accrued interest through the Effective
Date;
(e) Each holder of the Senior Subordinated Debentures received such
holder's pro rata portion of shares of Common Stock equivalent to 95.5%
of the Common Stock issued on the Effective Date;
(f) Each holder of the 10% Convertible Debentures received such holder's
pro rata portion of (i) shares of Common Stock equivalent to 4.5% of the
Common Stock issued on the Effective Date and (ii) 100% of the Warrants
issued on the Effective Date; and
(g) The Company refinanced its prior credit facilities by entering into a
new credit agreement with The Chase Manhattan Bank ("Chase") and other
lenders named therein providing the Company (excluding FRI-M Corporation
"FRI-M", the subsidiary that operates the Company's Coco's and Carrows
operations) with a $200 million senior secured revolving credit facility
(the "Credit Facility").
For more detailed information concerning the Plan of Reorganization, see "The
Company -- The 1997 Restructuring."
The Offering
Common Stock Offered
for Resale. 9,526,775 shares. See "Description of Common Stock."
Common Stock Outstanding on the Effective Date
of the Plan of Reorganization... 40,000,000 shares.
NASDAQ Symbol for Common Stock... The Common Stock is listed for trading in
the NASDAQ National Market System under the
trading symbol "DINE."
Use of Proceeds................. All shares of Common Stock being offered
for resale hereby are being so offered for
the account of the Selling Stockholder.
Advantica will not receive any proceeds from
the sale of the Common Stock hereby.
4
<PAGE>
Certain Risk Factors
PURCHASERS OF THE COMMON STOCK OFFERED HEREBY SHOULD CAREFULLY CONSIDER
ALL THE INFORMATION CONTAINED IN THIS PROSPECTUS, ESPECIALLY THE FACTORS SET
FORTH IN THE FOLLOWING PARAGRAPH AS MORE FULLY DESCRIBED IN "RISK FACTORS."
Purchasers should consider that: (i) although consummation of the Plan of
Reorganization significantly reduced the Company's debt obligations, the
Company still has a substantial amount of indebtedness; (ii) the ability of
Advantica to gain access to additional capital, if needed, cannot be assured;
(iii) following consummation of the Plan of Reorganization and the transactions
contemplated thereby, the financial condition and operating results of
Advantica are not comparable in all respects to that reflected in Advantica's
predecessors' historical financial statements; (iv) the Company's restaurant
operations are subject to substantial competition from a variety of national,
regional and local restaurant companies, some of which have substantially
greater financial resources than the Company; and (v) the Company's restaurant
operations are subject to changes in consumer tastes, national, regional and
local economic conditions and demographic trends.
Recent Developments
On January 14, 1998 Advantica signed a letter of intent for the sale of
stock of Flagstar Enterprises, Inc. ("FEI"), a wholly-owned subsidiary which
operates the Company's Hardee's restaurants under licenses from Hardee's Food
Systems, Inc. ("HFS"). As contemplated by such letter of intent, the Company
would receive $369.1 million in cash (subject to certain adjustments) in
exchange for all of the outstanding stock of FEI. In addition, the purchaser
would assume $45.6 million of capital leases. The transaction is expected to be
completed by the end of the first quarter of 1998. Approximately $205 million
of the proceeds of such transaction, if consummated, will be applied to effect
an in-substance defeasance of certain Mortgage Financings (as herein defined)
of FEI and Quincy's Restaurants, Inc. with a book value of $183.9 million (and
a pro forma fair value of $204.1 million) at October 1, 1997. Such Mortgage
Financings are collateralized by certain assets of FEI and its wholly-owned
subsidiary Spardee's Realty, Inc. and certain assets of Quincy's Restaurants,
Inc. and its wholly-owned subsidiary Quincy's Realty, Inc. The Company intends
to replace such collateral by purchasing Defeasance Eligible Investments (as
defined in documents governing such Mortgage Financings) which will be
deposited in an irrevocable trust to satisfy principal and interest payments
under such Mortgage Financings through the stated maturity date in the year
2000.
5
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
Set forth below are certain summary financial data concerning the Company
for each of the five years ended December 31, 1996. Such data generally have
been derived from the Consolidated Financial Statements of the Company for such
periods, which have been audited. Also set forth below are summary financial
data for the three quarters ended September 30, 1996 and October 1, 1997, which
have been derived from the unaudited Consolidated Financial Statements of the
Company and which, in the opinion of management, include all adjustments
necessary for a fair presentation of the financial condition and results of
operations of the Company for such periods. The following information should be
read in conjunction with the Consolidated Financial Statements of the Company
and Notes thereto, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Pro Forma Financial Statements" presented
elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
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1992 (a) 1993 (a) 1994 (a) 1995 (a) 1996 (b)
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($ in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement data:
Operating revenue ....................... $ 2,443.0 $ 2,615.2 $ 2,666.0 $ 2,571.5 $ 2,542.3
Operating income (loss) ................. 196.7 (1,102.4)(c) 211.5 (d) 98.2 (e) 156.4
Loss from continuing operations (f) ..... ( 39.2) (1,238.6) ( 16.8) ( 132.9) ( 85.5)
Earnings (loss) per share (g) ...........
Cash dividends per common share (h) .....
Balance Sheet data (at end of period):
Current assets (i) ...................... 98.4 122.2 186.1 285.3 185.5
Working capital deficiency (i)(j) ....... ( 256.3) ( 273.0) ( 205.6) ( 122.2) ( 297.7)
Net property and equipment .............. 1,269.9 1,167.2 1,196.4 1,104.4 1,168.6
Total assets ............................ 3,170.9 1,538.9 1,587.5 1,507.8 1,687.4
Long-term debt .......................... 2,171.3 2,341.2 2,067.6 1,996.1 2,179.4
<CAPTION>
Three Quarters Ended
----------------------------------
Debtor-In-
Possession
September 30, October 1,
1996 1997
--------------- ------------------
($ in millions, except per share amounts) (unaudited)
<S> <C> <C>
Income Statement data:
Operating revenue ....................... $ 1,880.8 $ 1,989.4
Operating income (loss) ................. 119.2 113.5
Loss from continuing operations (f) ..... ( 57.3) ( 101.8)
Earnings (loss) per share (g) ...........
Cash dividends per common share (h) .....
Balance Sheet data (at end of period):
Current assets (i) ...................... 116.3
Working capital deficiency (i)(j) ....... ( 286.5)
Net property and equipment .............. 1,111.4
Total assets ............................ 1,552.1
Long-term debt .......................... 881.0 (k)
</TABLE>
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(a) Certain amounts for the four years ended December 31, 1995 have been
reclassified to conform to the 1996 presentation.
(b) Reflects the acquisition in May 1996 of Coco's and Carrows.
(c) Operating loss for the year ended December 31, 1993 reflects charges for
the write-off of goodwill and certain other intangible assets of $1,104.6
million and the provision for restructuring charges of $158.6 million.
(d) Operating income for the year ended December 31, 1994 reflects a recovery
of restructuring charges of $7.2 million.
(e) Operating income for the year ended December 31, 1995 reflects a provision
for restructuring charges of $15.9 million and a charge for impaired
assets of $51.4 million.
(f) The Company has classified as discontinued operations Canteen Corporation,
a food and vending subsidiary sold in 1994, TW Recreational Services, Inc.
("TWRS"), a recreation services subsidiary, and Volume Services, Inc.
("VS"), a stadium concessions subsidiary. TWRS and VS were sold during
1995.
(g) Historical earnings per share data not meaningful as a result of the
significant change in capital structure in connection with the
confirmation of the Plan of Reorganization.
(h) The Company's bank facilities have prohibited, and its public debt
indentures have significantly limited, distributions and dividends on
Advantica's (and its predecessors') common equity securities. See Note 4
to the accompanying Consolidated Financial Statements appearing elsewhere
herein.
(i) The current assets and working capital deficiency amounts presented exclude
assets held for sale of $480.8 million, $103.2 million, and $77.3 million
as of December 31, 1992, 1993 and 1994, respectively, and $5.1 million as
of December 31, 1996. Such assets held for sale relate primarily to the
Company's food and vending and concessions and recreation services
subsidiaries sold in 1994 and 1995.
(j) A negative working capital position is not unusual for a restaurant
operating company. The increase in the working capital deficiency from
December 31, 1992 to December 31, 1993 is attributable primarily to an
increase in restructuring and other liabilities. The decrease in the
working capital deficiency from December 31, 1993 to December 31, 1994 is
due primarily to an increase in cash following the sale of the Company's
food and vending subsidiary during 1994.
6
<PAGE>
The decrease in the working capital deficiency from December 31, 1994 to
December 31, 1995 is due primarily to an increase in cash following the 1995
sales of the Company's (i) distribution subsidiary, Proficient Food Company
("PFC"), net of current assets and liabilities of such subsidiary, and (ii)
concession and recreation services subsidiaries. The increase in the working
capital deficiency from December 31, 1995 to December 31, 1996 reflects the
use of the proceeds from the 1995 sales noted above and the proceeds of the
sale of both Portion-Trol Foods, Inc. and the Mother Butler Pies division of
Denny's, Inc., a subsidiary of Advantica (Portion-Trol Foods, Inc. and the
Mother Butler Pies division are hereinafter collectively referred to as
"PTF") for operating needs and for the acquisition of Coco's and Carrows.
The decrease in the working capital deficiency from December 31, 1996 to
October 1, 1997 is attributable primarily to the reclassification of $100.8
million of accrued interest to liabilities subject to compromise in
accordance with the AICPA's Statement of Position 90-7, "Financial Reporting
By Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"),
largely offset by a reduction in cash and cash equivalents which has been
used for Company operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
(k) Reflects the reclassification at October 1, 1997 of $1,496.7 million of
long-term debt to liabilities subject to compromise in accordance with SOP
90-7 as a result of the commencement of the Chapter 11 filing.
7
<PAGE>
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE COMMON STOCK SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS, AS WELL AS OTHER INFORMATION SET FORTH IN THIS
PROSPECTUS, PRIOR TO MAKING AN INVESTMENT DECISION WITH RESPECT TO THE COMMON
STOCK.
Highly Leveraged Position
Although consummation of the Plan of Reorganization significantly reduced
the Company's debt obligations, the Company still has substantial indebtedness
and debt service requirements, in absolute terms and in relation to
stockholders' equity. At October 1, 1997, the Company had indebtedness of
$2,237.4 million and a shareholders' deficit of $(1,329.3) million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 4 to the Consolidated Financial Statements of the Company
appearing elsewhere in this Prospectus. After giving effect to the Plan of
Reorganization, the Company's pro forma aggregate indebtedness totaled
approximately $1,359.7 million and shareholders' equity was $405.7 million. See
"Pro Forma Financial Statements."
The Company's management believes, based on its forecasts, that the
Company will have sufficient operating cash flow from operations (together with
funds available under the Credit Facility) to pay interest and scheduled
amortization on all of its outstanding indebtedness and to fund anticipated
capital expenditures through 1999, after giving effect to the Plan of
Reorganization. See "Pro Forma Financial Statements." Even with the completion
of the Plan of Reorganization, however, the Company's ability to meet its debt
service obligations will depend on a number of factors, including management's
ability to maintain operating cash flow, and there can be no assurance that
targeted levels of operating cash flow will actually be achieved. The Company's
ability to maintain or increase operating cash flow will depend upon consumer
tastes, the success of marketing initiatives and other efforts by the Company
to increase customer traffic in its restaurants, the success of the Company in
obtaining advantageous commercial real estate sites suitable for restaurants,
prevailing economic conditions and other factors, many of which are beyond the
control of the Company.
The Company's highly leveraged position may limit its ability to obtain
additional financing in the future on terms and subject to conditions deemed
acceptable by Company management. Even after the consummation of the Plan of
Reorganization, a substantial portion of the Company's cash flow from
operations must be dedicated to the payment of interest and principal on
outstanding debt. The agreements governing that debt impose significant
operating and financial restrictions on the Company. As further described
elsewhere in this Prospectus, Advantica has signed a letter of intent for the
sale of the stock of FEI, a wholly-owned subsidiary which operates the
Company's Hardee's restaurants under licenses from Hardee's Food Systems,
"HFS." See "Prospectus Summary -- Recent Developments." A portion of the
proceeds of such transaction, if consummated, will be applied to effect an
in-substance defeasance of certain Mortgage Financings (as herein defined) with
a book value of $183.9 million at October 1, 1997. Such Mortgage Financings
have a scheduled maturity date in the year 2000. See "Description of
Indebtedness -- Mortgage Financings." Even if the Company is able to consummate
such transaction and to effect an in-substance defeasance of such Mortgage
Financings as planned, the Company will nevertheless be required to refinance
additional Mortgage Financings currently having an outstanding principal amount
of $160 million also scheduled to mature in the year 2000. The Company's highly
leveraged position may limit its ability to do so on acceptable terms. See "The
Company -- The 1997 Restructuring", "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and Note 4 to the Consolidated Financial Statements of the Company
appearing elsewhere in this Prospectus.
Assumptions Regarding Value of the Company's Assets
It has been generally assumed in the preparation of the Pro Forma
Financial Statements included elsewhere in this Prospectus that the historical
book value of the Company's assets approximates the fair value thereof, except
for specific adjustments discussed in the notes to the Pro Forma Financial
Statements. See "Pro Forma Financial Statements." For financial reporting
purposes, the fair value of such assets must be determined as of the Effective
Date. Such determination will be based on appraisals and other studies.
Although such determination is not presently expected to result in values that
are materially greater or less than the values assumed in the preparation of
such Pro Forma Financial Statements, there can be no assurance with respect
thereto.
Business and Competition
Due to continuing declines in customer traffic resulting from aggressive
discounting by competitors and other factors, the Company's Hardee's operations
have experienced declines in comparable store sales for more than 36
consecutive months. Because the Company does not control the Hardee's brand, it
is limited in its ability to effect a turnaround of its
8
<PAGE>
Hardee's operations and there can be no assurance that it would be able to do
so in the future. For additional information, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Restaurants --
Hardee's." For information concerning the proposed sale of the Company's
Hardee's operation, see "Prospectus Summary --
Recent Developments."
The Company's future performance will be subject to a number of factors
that affect the restaurant industry generally, including competition. The
restaurant business is highly competitive and the competition can be expected
to increase. Price, restaurant location, food quality, quality and speed of
service and attractiveness of facilities are important aspects of competition
as are the effectiveness of marketing and advertising programs. The competitive
environment is also often affected by factors beyond the Company's or a
particular restaurant's control. The Company's restaurants compete with a wide
variety of restaurants ranging from national and regional restaurant chains
(some of which have substantially greater financial resources than the Company)
to locally-owned restaurants. There is also active competition for advantageous
commercial real estate sites suitable for restaurants.
Capital Requirements
Advantica's businesses are expected to have substantial capital
expenditure needs. The ability of Advantica to gain access to additional
capital, if needed, cannot be assured, particularly in view of the Company's
continuing highly leveraged condition, its recent emergence from Bankruptcy
Court protection, competitive factors and industry conditions. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" and "The Company -- The 1997 Restructuring."
Holding Company Structure
Advantica is a holding company, which currently conducts its operations
through consolidated subsidiaries. Substantially all of the assets of Advantica
are owned by Advantica's subsidiaries. Dividends, loans and advances from
certain subsidiaries to Advantica are subject to certain contractual
restrictions and are contingent upon the earnings of such subsidiaries.
Dividend Restrictions
Neither Advantica nor either of its predecessors FCI and Flagstar has ever
paid dividends on its common equity securities. Furthermore, restrictions
contained in the instruments governing the outstanding indebtedness of
Advantica restrict its ability to pay dividends on the Common Stock in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and Note 4 to the
accompanying Consolidated Financial Statements of the Company.
Noncomparability of Historical Financial Information
As a result of the consummation of the Plan of Reorganization and the
transactions contemplated thereby, the financial condition and results of
operations of Advantica from and after the Effective Date may not be comparable
to the financial condition or results of operations reflected in the historical
financial statements of Advantica's predecessors set forth elsewhere herein.
Seasonality
The Company's business is moderately seasonal. Restaurant sales are
generally greater in the second and third calendar quarters (April through
September) than in the first and fourth calendar quarters (October through
March). Occupancy and other operating costs, which remain relatively constant,
have a disproportionately negative effect on operating results during quarters
with lower restaurant sales. The Company's working capital requirements also
fluctuate seasonally, with its greatest working capital needs occurring during
its first and fourth quarters.
Employees
One of the Company's primary assets is its group of highly skilled
professionals who have the ability to leave the Company and so deprive it of
valuable skills and knowledge that increase the profitability of the Company's
business operations. Although the Company has taken steps to retain its key
management personnel, no assurance can be given that it will ultimately be able
to do so and, if not, that it will be able to replace such personnel with
comparable results.
9
<PAGE>
Economic, Market and Other Conditions
Food service businesses are often affected by changes in consumer tastes,
national, regional and local economic conditions and demographic trends. The
performance of individual restaurants may be adversely affected by factors such
as traffic patterns, demographic considerations and the type, number and
location of competing restaurants. Multi-unit food service chains such as the
Company's can also be materially and adversely affected by publicity resulting
from food quality, illness, injury or other health concerns or operating issues
stemming from one restaurant or a limited number of restaurants. Dependence on
frequent deliveries of fresh produce and groceries subjects food service
businesses to the risk that shortages or interruptions in supply, caused by
adverse weather or other conditions, could adversely affect the availability,
quality and cost of ingredients. In addition, unfavorable trends or
developments concerning factors such as inflation, increased food, labor and
employee benefit costs (including increases in hourly wage and minimum
unemployment tax rates), regional weather conditions and the availability of
experienced management and hourly employees may also adversely affect the food
service industry in general and the Company's results of operations and
financial condition in particular.
Importance of Locations
The success of Company and franchised restaurants is significantly
influenced by location. There can be no assurance that current locations will
continue to be attractive, as demographic patterns change. It is possible the
neighborhood or economic conditions where restaurants are located could decline
in the future, resulting in potentially reduced sales in those locations.
Government Regulations
The Company and its franchisees are subject to federal, state and local
laws and regulations governing health, sanitation, environmental matters,
safety, the sale of alcoholic beverages and hiring and employment practices.
Restaurant operations are also subject to federal and state laws that prohibit
discrimination and laws regulating the design and operation of facilities, such
as the Americans with Disabilities Act of 1990. The operation of the Company's
franchisee system is also subject to regulations enacted by a number of states
and rules promulgated by the Federal Trade Commission. The Company cannot
predict the effect on its operations, particularly on its relationship with
franchisees, caused by the future enactment of additional legislation
regulating the franchise relationship.
Uncertainties of the Public Market for the Common Stock
The Common Stock is listed for trading on the NASDAQ National Market
System under the trading symbol "DINE." While the NASDAQ listing is expected to
facilitate the trading of the Common Stock, there can be no assurance that an
active trading market will develop and continue. In addition, there can be no
assurance as to the degree of price volatility in the market for the Common
Stock that does develop. Accordingly, no assurance can be given that a holder
of Common Stock will be able to sell such securities in the future or as to the
price at which any such sale may occur. The price at which the Common Stock may
trade from time to time will depend upon many factors, including prevailing
interest rates, markets for similar securities, industry conditions, and the
performance of, and investor expectations for, Advantica and its subsidiaries.
See "Price Range of Common Stock and Dividend Policy" and "Plan of
Distribution."
THE COMPANY
General
Advantica, through its wholly-owned subsidiaries, is one of the largest
restaurant companies in the United States, operating (directly and through
franchisees) more than 3,200 moderately priced restaurants.
Advantica's operations are conducted through six restaurant chains or
concepts, four chains in the full-service mid-scale dining segment and two in
the quick-service segment. Denny's is the nation's largest chain of
family-style full-service restaurants, with more than 1,650 units in 49 states,
two U.S. territories and two foreign countries. Denny's largest domestic
concentration is in California and Florida, with 552 units in these two states.
Management believes that Denny's has the leading share of the national market
in the family-style category. Quincy's, with 180 locations, is one of the
largest chains of family-steak restaurants in the southeastern United States.
El Pollo Loco is a chain of 247 quick-service restaurants featuring
flame-broiled chicken and steak products and related Mexican food items. Coco's
is a regional bakery restaurant chain operating 493 units in seven western
states and three foreign countries, offering a wide variety of fresh-baked
goods and value priced meals that capitalize on emerging food trends in the
western United States. The Carrows chain, consisting of 154 units in seven
western states, specializes in traditional American food, with emphasis on
quality, homestyle fare at an
10
<PAGE>
excellent value. Hardee's is a chain of quick-service restaurants of which
Advantica, with 557 units located primarily in the Southeast, is the largest
franchisee. Although specializing in sandwiches, Advantica's Hardee's
restaurants serve fried chicken and offer a breakfast menu that accounts for
approximately 44% of total sales and features the chain's famous "made-from-
scratch" biscuits.
Although operating in two distinct segments of the restaurant industry --
full-service and quick-service -- the Company's restaurants benefit from a
single management strategy that emphasizes superior value and quality, friendly
and attentive service and appealing facilities.
FCI was organized as a holding company in 1988 in order to effect the 1989
acquisition of Flagstar. In 1992, FCI and Flagstar consummated the principal
elements of the 1992 Recapitalization, as a result of which two partnerships
affiliated with KKR acquired control of the Company. Prior to June 16, 1993,
FCI and Flagstar had been known, respectively, as TW Holdings, Inc. and TW
Services, Inc.
The Company's principal executive offices are located at 203 East Main
Street, Spartanburg, South Carolina 29319-9966. Its telephone number is (864)
597-8000.
The 1997 Restructuring
As indicated above, FCI and Flagstar filed voluntary petitions for relief
in the Bankruptcy Court under Chapter 11 of the Bankruptcy Code (the
"Reorganization Cases") on July 11, 1997 (the "Petition Date") to implement the
Original Plan. The subsidiaries that operate the Company's businesses did not
file bankruptcy petitions and were not parties to and were unaffected by the
Reorganization Cases. The Original Plan was developed in the course of
negotiations with an ad hoc committee (the "Ad Hoc Committee") of holders of
the Senior Subordinated Debentures and with the support of FCI's majority
shareholder. On March 24, 1997, FCI filed a Registration Statement on Form S-4
(No. 333-23875) (the "S-4 Registration Statement") with the Commission for the
purpose of soliciting prepetition acceptances of the Original Plan from holders
of claims against or interests in FCI's and Flagstar's estates whose legal
rights would be impaired by the Original Plan. On June 5, 1997, the S-4
Registration Statement was declared effective by the Commission, and FCI and
Flagstar commenced their solicitation of votes on the Original Plan. On July 7,
1997, FCI and Flagstar completed their solicitation of votes on the Original
Plan. The classes of holders of the Old Senior Notes and the classes of holders
of the Senior Subordinated Debentures (which together represented approximately
$1.5 billion in claims), as well as the classes of holders of the Old Preferred
Stock and the Old Common Stock, voted to accept the Original Plan by the
requisite majorities required by the Bankruptcy Code. The only impaired class
that voted to reject the Original Plan was the class of holders of the 10%
Convertible Debentures.
The Original Plan as filed proposed to modify the rights of certain
creditors of FCI and Flagstar in the following manner: (a) Flagstar would merge
into FCI, (b) general unsecured claims would be unimpaired, (c) each holder of
Old Senior Notes would receive such holder's pro rata portion of 100% of the
New Senior Notes in exchange for 100% of the principal amount of such holder's
Old Senior Notes and accrued interest (subject to the right of Advantica to pay
accrued interest in cash), (d) each holder of Senior Subordinated Debentures
would receive such holder's pro rata portion of Common Stock equivalent to
95.5% of the Common Stock to be outstanding upon the Effective Date plus the
remaining 4.5% of the Common Stock and certain warrants to be outstanding on
the Effective Date that otherwise would have gone to holders of the 10%
Convertible Debentures, the Old Preferred Stock and the Old Common Stock had
the class of 10% Convertible Debentures accepted the Original Plan. Because the
class of 10% Convertible Debentures voted to reject the Original Plan, that
class, and all junior classes, were not entitled under the Bankruptcy Code to a
recovery under the Original Plan. See Note 14 to the accompanying Consolidated
Financial Statements of the Company for information regarding such claims.
Notwithstanding the terms of the Original Plan and its rejection by holders of
the 10% Convertible Debentures, holders of the Senior Subordinated Debentures
agreed, at the time of their approval of the Original Plan, by supplemental
indenture, to make distributions to holders of the Old Preferred Stock and Old
Common Stock because the classes of Old Preferred Stock and Old Common Stock
each voted to accept the Original Plan. Specifically, the holders of the Senior
Subordinated Debentures agreed, in conjunction with (and subject to)
implementation of the Original Plan, to transfer (x) 1.25% of the Common Stock
to be outstanding on the Effective Date to the holders of Old Preferred Stock
and (y) warrants to purchase Common Stock representing 7% of the Common Stock
on a fully diluted basis to the holders of Old Common Stock.
The Original Plan's classification of the 10% Convertible Debentures as
subordinate to the Senior Subordinated Debentures was challenged in the
Bankruptcy Court by certain holders of the 10% Convertible Debentures. On July
15, 1997, FCI, Flagstar and the Ad Hoc Committee filed a motion with the
Bankruptcy Court (the "Classification Motion") seeking the entry of an order
confirming the classifications in the Original Plan and enforcing the
subordination provisions of the 10%
11
<PAGE>
Convertible Debentures as provided in the Indenture dated November 1, 1989 and
Supplemental Indenture dated as of August 7, 1992 between Flagstar and the
United States Trust Company of New York (the "Indenture Trustee") governing
such securities. On July 24, 1997, the United States Trustee appointed an
Official Committee of Convertible Junior Debentureholders (the "Official Junior
Committee"). The Official Junior Committee opposed the Classification Motion.
On November 6, l997, the Bankruptcy Court determined that the Supplemental
Indenture executed by the Indenture Trustee and Flagstar in August 1992
violated the Indenture governing the 10% Convertible Debentures. Following this
ruling, the Ad Hoc Committee, the Official Junior Committee, FCI and Flagstar
entered into negotiations concerning the recovery that the holders of the 10%
Convertible Debentures would receive in the Reorganization Cases. As a result
of these negotiations, on November 7, 1997, FCI and Flagstar filed the Plan of
Reorganization, which was confirmed by the Bankruptcy Court by order entered on
November 12, 1997 and become effective as of January 7, 1998. (The Bankruptcy
Court has retained jurisdiction over certain limited matters after such
Effective Date).
The material terms of the Plan of Reorganization remained identical to the
terms of the Original Plan described above with the following changes: (i) each
holder of 10% Convertible Debentures became entitled to receive, on account of
the unpaid principal amount of its 10% Convertible Debentures plus all unpaid
interest accrued thereon prior to the Petition Date, such holder's pro rata
share of (i) shares of Common Stock equivalent to 4.5% of the Common Stock and
(ii) 100% of the Warrants to be outstanding on the Effective Date, and (iii)
the remaining junior impaired classes (the classes of Old Common Stock and Old
Preferred Stock) would receive or retain no property.
On the Petition Date, FCI and Flagstar filed a motion seeking approval of
a $200 million debtor-in-possession financing facility (the "DIP Facility")
between FCI, Flagstar, certain subsidiaries of Flagstar, Chase and certain
other lenders named therein. At a hearing on July 15, 1997, the Bankruptcy
Court entered an interim order (the "Interim DIP Order") authorizing FCI and
Flagstar to obtain up to $135 million in emergency post-petition credit through
a combination of a revolving credit and a letter of credit facility. The
Interim DIP Order authorized FCI and Flagstar to use funds from the DIP
Facility for working capital and general corporate purposes and to refinance
and replace existing credit under its prepetition credit agreement with a
syndicate of banks (the "Prepetition Credit Agreement"). On July 16, 1997, the
initial extensions of credit were made pursuant to the Interim DIP Order. On
August 12, 1997, the Bankruptcy Court entered a final order authorizing FCI and
Flagstar to access the entire $200 million DIP Facility. The DIP Facility
remained in effect until the Effective Date.
For the period following the Effective Date, Chase had agreed to provide
the Company with the Credit Facility for the benefit of the Company's operating
subsidiaries (excluding FRI-M, the subsidiary operating the Company's Coco's
and Carrows operations). The Credit Facility refinanced Flagstar's prior credit
facilities on the Effective Date and is currently being used for working
capital and general corporate purposes and for letters of credit. The terms of
the agreement with Chase for the Credit Facility were approved by the
Bankruptcy Court pursuant to the terms of the order confirming the Plan of
Reorganization.
FCI and Flagstar were required to pay certain expenses of the Official
Junior Committee, including counsel and professional fees incurred in
connection with the Reorganization Cases, to the extent allowed by the
Bankruptcy Court. The Plan of Reorganization also contemplated payment by FCI
and Flagstar of expenses, including counsel and professional fees, of the Ad
Hoc Committee and of an informal committee representing holders of the Old
Senior Notes.
USE OF PROCEEDS
Advantica will not receive any of the proceeds from the sale of shares of
Common Stock offered hereby, all of which will be received by the Selling
Stockholder.
12
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Market Information
As indicated elsewhere in this Prospectus, on the Effective Date,
40,000,000 shares of Common Stock and Warrants to purchase up to 4,000,000
shares of Common Stock were issued by Advantica and distributed pursuant to the
Plan of Reorganization. Pursuant to the Plan of Reorganization, the Senior
Subordinated Debentures were converted into 95.5% of the shares of Common
Stock, the 10% Convertible Debentures were converted into (i) 4.5% of the
shares of Common Stock and (ii) the Warrants, as of the Effective Date, and the
Old Common Stock and Old Preferred Stock were canceled.
The Common Stock is listed for trading on the NASDAQ National Market
System under the symbol "DINE." The following table sets forth, for the period
indicated, the range of high and low sales prices for the Common Stock obtained
from the NASDAQ National Market.
<TABLE>
<CAPTION>
High Sales Price Low Sales Price
------------------ ----------------
<S> <C> <C>
January 9, 1998 to February 5 $11 1/16 $8 7/8
</TABLE>
Holders
The number of record holders of Common Stock as of the Effective Date was
approximately .
Dividends
Each share of Common Stock is entitled to participate equally in any
dividend declared by the Board of Directors and paid by Advantica. Advantica
has not paid and does not expect to pay dividends on the outstanding Common
Stock. Restrictions contained in the instruments governing the outstanding
indebtedness of Advantica restrict its ability to pay dividends on the Common
Stock. See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations --
Liquidity and Capital Resources" and Note 4 to the accompanying Consolidated
Financial Statements of the Company.
13
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated balance sheets and
unaudited pro forma condensed statements of consolidated operations presented
on the following pages are based upon the historical results of operations of
the Company for the year ended December 31, 1996 and the historical financial
position and results of operations of the Company as of and for the three
quarters ended October 1, 1997. The pro forma adjustments made to the
historical results of operations (based on the assumptions set forth below)
give effect to the acquisition of FRI-M, the disposition of FEI (relative to
which Advantica signed a letter of intent on January 14, 1998 (see "Prospectus
Summary -- Recent Developments" and " -- Adjustments for Disposition of FEI"
for further information)), and the consummation of the Plan of Reorganization
as if such acquisition, and disposition and the entire series of Plan of
Reorganization transactions, including (i) the merger of Flagstar and FCI into
a single corporate entity; (ii) the issuance of 38,200,000 shares of Common
Stock to holders of the Senior Subordinated Debentures; (iii) the issuance of
1,800,000 shares of Common Stock to holders of the 10% Convertible Debentures;
(iv) the issuance of the Warrants to holders of the 10% Convertible Debentures;
(v) the issuance of the New Senior Notes to holders of the Old Senior Notes;
and (vi) the cancellation of the Old Preferred Stock and Old Common Stock, had
occurred on January 1, 1996. In addition, since the Plan of Reorganization was
effectuated under Chapter 11 of the Bankruptcy Code, the provisions of
Statement of Position (SOP) 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code", which require the application of
fresh start reporting, have been reflected in the pro forma condensed
statements of consolidated operations as of January 1, 1996. The unaudited pro
forma condensed consolidated balance sheets as of October 1, 1997 presented
below are based upon the historical balance sheet as of October 1, 1997 and
include pro forma adjustments as if such disposition, reorganization
transactions and adoption of fresh start reporting had been completed on that
date. The pro forma condensed statements of consolidated operations and pro
forma condensed consolidated balance sheets are unaudited and were derived by
adjusting the historical financial statements of the Company for certain
transactions as described in the respective notes thereto. THESE PRO FORMA
FINANCIAL STATEMENTS ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED TO BE INDICATIVE OF THE FINANCIAL CONDITIONS OR RESULTS OF
OPERATIONS OF THE COMPANY HAD THE TRANSACTIONS DESCRIBED THEREIN BEEN
CONSUMMATED ON THE RESPECTIVE DATES INDICATED AND ARE NOT INTENDED TO BE
PREDICTIVE OF THE FINANCIAL CONDITION OR RESULTS OF OPERATIONS OF THE COMPANY
AT ANY FUTURE DATE OR FOR ANY FUTURE PERIOD.
The pro forma adjustments are based on available information and upon
certain assumptions that Advantica believes are reasonable under the
circumstances. The pro forma financial data and accompanying notes should be
read in conjunction with the historical Consolidated Financial Statements of
the Company, including the Notes thereto, and the other information pertaining
to the Company appearing elsewhere in this Prospectus.
14
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
October 1, 1997
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
-------------------------------------
Adjustments
for
($ in thousands) Historical Reorganization
- ----------------------------------------- --------------- ---------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ............. $ 29,678 $ (9,800)(1)
Receivables, net ...................... 14,343
Merchandise and supply inventories..... 27,809
Other ................................. 44,496
-------------
116,326 (9,800)
------------- --------------
Property:
Property owned -- net ................. 995,601
Property held under capital
leases -- net ........................ 115,793
-------------
1,111,394
-------------
Other Assets:
Goodwill, net ......................... 209,190
Other intangible assets, net .......... 26,408
Deferred financing costs. ............. 55,607 (30,350)(2)
Other ................................. 33,141
Reorganization value in excess of
amounts allocable to identifiable
assets ...............................
324,346 (30,350)
------------- --------------
$ 1,552,066 $ (40,150)
============= ==============
LIABILITIES
Current Liabilities:
Current maturities of long-term
debt ................................. $ 85,006
Accounts payable ...................... 99,610
Accrued salaries and vacations ........ 58,916
Accrued insurance ..................... 46,562
Accrued taxes ......................... 16,109
Accrued interest ...................... 15,639
Other ................................. 81,009
-------------
402,851
-------------
Long-Term Liabilities:
Debt, less current maturities ......... 655,703 575,998 (3)
Deferred income taxes ................. 15,392
Liability for self-insured claims ..... 53,565
Other non-current liabilities and
deferred credits ..................... 156,309
-------------
880,969 575,998
------------- --------------
Total liabilities not subject to
compromise ............................ 1,283,820 575,998
Liabilities subject to compromise ...... 1,597,531 (1,597,531)(4)
------------- --------------
Total liabilities ..................... 2,881,351 (1,021,533)
------------- --------------
Shareholders' Equity (Deficit):
Capital stock ......................... 21,848 (21,448)(5)
Paid-in capital ....................... 724,912 395,900 (6)
Deficit ............................... (2,075,123) 606,931 (7)
Minimum pension liability
adjustment ........................... (922)
-------------
(1,329,285) 981,383
------------- --------------
$ 1,552,066 $ (40,150)
============= ==============
<CAPTION>
After
After Reorganization,
Adjustments Reorganization Adjustments Frest Start
for Fresh Start and Fresh Start for Disposition Reporting and
($ in thousands) Reporting Reporting of FEI (15) Disposition
- ----------------------------------------- ----------------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ............. $ 19,878 $ 153,349 $ 173,227
Receivables, net ...................... 14,343 (1,263) 13,080
Merchandise and supply inventories..... 27,809 (6,801) 21,008
Other ................................. 44,496 9,574 54,070
---------- ---------- ----------
106,526 154,859 261,385
---------- ---------- ----------
Property:
Property owned -- net ................. 995,601 (298,056) 697,545
Property held under capital
leases -- net ........................ 115,793 (34,308) 81,485
---------- ---------- ----------
1,111,394 (332,364) 779,030
---------- ---------- ----------
Other Assets:
Goodwill, net ......................... (209,190)(8)
Other intangible assets, net .......... 26,408 (11,568) 14,840
Deferred financing costs. ............. 25,257 25,257
Other ................................. 33,141 188,157 221,298
Reorganization value in excess of
amounts allocable to identifiable
assets ............................... 1,007,097 (9) 1,007,097 (98,241) 908,856
--------- ---------- ---------- ----------
797,907 1,091,903 78,348 1,170,251
--------- ---------- ---------- ----------
$ 797,907 $2,309,823 $ (99,157) $2,210,666
=============== ========== ========== ==========
LIABILITIES
Current Liabilities:
Current maturities of long-term
debt ................................. $ 85,006 $ (4,391) $ 80,615
Accounts payable ...................... 99,610 (16,109) 83,501
Accrued salaries and vacations ........ 58,916 (6,960) 51,956
Accrued insurance ..................... 46,562 (6,586) 39,976
Accrued taxes ......................... 16,109 18,331 34,440
Accrued interest ...................... 15,639 (4,233) 11,406
Other ................................. 81,009 (5,252) 75,757
---------- ---------- ----------
402,851 (25,200) 377,651
---------- ---------- ----------
Long-Term Liabilities:
Debt, less current maturities ......... 43,034 (10) 1,274,735 (42,354) 1,232,381
Deferred income taxes ................. 15,392 (5,773) 9,619
Liability for self-insured claims ..... 53,565 (7,100) 46,465
Other non-current liabilities and
deferred credits ..................... 1,317 (11) 157,626 (18,730) 138,896
--------------- ---------- ---------- ----------
44,351 1,501,318 (73,957) 1,427,361
--------------- ---------- ---------- ----------
Total liabilities not subject to
compromise ............................ 44,351 1,904,169 (99,157) 1,805,012
Liabilities subject to compromise ......
Total liabilities ..................... 44,351 1,904,169 (99,157) 1,805,012
--------------- ---------- ---------- ----------
Shareholders' Equity (Deficit):
Capital stock ......................... 400 400
Paid-in capital ....................... (715,558)(12) 405,254 405,254
Deficit ............................... 1,468,192 (13)
Minimum pension liability
adjustment ........................... 922 (14)
---------------
753,556 405,654 405,654
--------------- ---------- ----------
$ 797,907 $2,309,823 $ (99,157) $2,210,666
=============== ========== ========== ==========
</TABLE>
See notes to pro forma condensed consolidated balance sheets.
15
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
Adjustments for the Reorganization
The pro forma adjustments related to the Plan of Reorganization and
related transactions are summarized in the following table and are more fully
described in the notes thereto. Column numbers refer to footnotes from the Pro
Forma Condensed Consolidated Balance Sheets.
<TABLE>
<CAPTION>
Footnote
Number (1) (2) (3) (4) (5) (6) (7)
Deferred Debt, less Liabilities
Financing Current Subject to Capital Paid-in
($ in thousands) Cash Costs Maturities Compromise Stock Capital Deficit
- ------------------ ------------ ------------- ------------ ---------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(a) .............. $ (9,800) $ 8,400 $ (1,400)
(b) .............. (20,311) $ (915,396) $ 382 $357,220 537,483
(c) .............. (5,308) (106,137) 18 16,832 83,979
(d) .............. (21,848) 21,848
(e) .............. (13,131) (13,131)
(f) .............. $575,998 (575,998)
-------- ------------
Total ............ $ (9,800) $ (30,350) $575,998 $ (1,597,531) $ (21,448) $395,900 $ 606,931
======== ========= ======== ============ ========= ======== =========
</TABLE>
- ---------
(a) To record estimated fees and expenses consisting of estimated deferred
financing costs ($8.4 million) and expenses related to the Plan of
Reorganization ($1.4 million). Fees and expenses totaling $25.2 million
were incurred through October 1, 1997. Total estimated fees and expenses
are $35.0 million.
(b) To reflect the issuance of 38.2 million shares of Common Stock to the
holders of the Senior Subordinated Debentures and the estimated gain on
such transaction of $537.5 million. The gain is based on the difference
between the carrying value of the debt (including principal, accrued
interest and deferred financing costs) and the weighted average closing
price of the Common Stock from November 24, 1997 through January 14, 1998
(on a "when issued" basis through January 8).
(c) To reflect the issuance of 1.8 million shares of Common Stock to the
holders of the 10% Convertible Debentures and the estimated gain on such
transaction of $84 million. The gain is based on the difference between
the carrying value of the debt (including principal, accrued interest and
deferred financing costs) and the weighted average closing price of the
Common Stock from November 24, 1997 through January 14, 1998 (on a "when
issued" basis through January 8).
(d) To reflect the cancellation of the Old Common Stock and the Old Preferred
Stock.
(e) To write-off unamortized deferred financing costs associated with the Old
Senior Notes.
(f) To reflect the issuance of the New Senior Notes in exchange for the Old
Senior Notes, including accrued and unpaid interest thereon through
October 2, 1997 of $26.0 million.
Adjustments for Fresh Start Reporting
The specific pro forma adjustments related to fresh start reporting are
summarized in the following table and are more fully described in the notes
thereto. Column numbers refer to footnotes from the Pro Forma Condensed
Consolidated Balance Sheets.
<TABLE>
<CAPTION>
Footnote
Number (8) (9) (10) (11) (12) (13) (14)
Reorgan-
ization Debt, less Other Minimum
Value in Current Noncurrent Paid-in Pension
($ in thousands) Goodwill Excess Maturities Liabilities Capital Deficit Liability
- --------------------- -------------- ------------------- ------------ ------------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(a) .............. $ (209,190) $ 209,190
(b) .............. 43,034 $43,034
(c) .............. (715,558) $ (715,558)
(d) .............. 1,468,192 $1,468,192
(e) .............. 2,239 $1,317 $922
------------ ------ ----
Total ............ $ (209,190) $ 1,007,097(f) $43,034 $1,317 $ (715,558) $1,468,192 $922
========== ============ ======= ====== ============ =========== ====
</TABLE>
- ---------
16
<PAGE>
(a) To write-off unamortized goodwill.
(b) To adjust outstanding debt to estimated fair value.
(c) To establish the value attributed to shareholders' equity.
(d) To eliminate historical deficit.
(e) To eliminate minimum pension liability adjustment and to record excess of
the projected benefit obligation over the fair value of plan assets for
the Company's defined benefit plans.
(f) To record the reorganization value in excess of amounts allocable to
identifiable assets.
The Company will account for the consummation of the Plan of
Reorganization and related transactions using the principles of fresh start
reporting as required by SOP 90-7. The Company has estimated a range of
reorganization value between approximately $1,631 million and $1,776 million.
Such reorganization value is based upon a review of the operating performance
of seventeen companies in the restaurant industry that offer products and
service that are comparable to or competitive with the Company's various
operating concepts. The following multiples were established for these
companies: (i) enterprise value (defined as market value of outstanding equity,
plus debt, minus cash and cash equivalents)/revenues for the four most recent
fiscal quarters; (ii) enterprise value/earnings before interest, taxes,
depreciation, and amortization for the four most recent fiscal quarters; and
(iii) enterprise value/earnings before interest and taxes for the four most
recent fiscal quarters. The Company did not independently verify the
information for the comparative companies considered in its valuations, which
information was obtained from publicly available reports. The foregoing
multiples were then applied to the Company's financial forecast for each of its
six restaurant chains or concepts. Valuations achieved in selected merger and
acquisition transactions involving comparable businesses were used as further
validation of the valuation range. The valuation takes into account the
following factors, not listed in order of importance:
(A) The Company's emergence from Chapter 11 proceedings pursuant to the
Plan of Reorganization as described herein during the first quarter of 1998.
(B) The assumed continuity of the present senior management team.
(C) The tax position of Advantica.
(D) The general financial and market conditions as of the date of
consummation of the Plan of Reorganization.
The total reorganization value of $1,766 million, the midpoint of the
range of $1,631 million and $1,776 million adjusted to reflect an enterprise
value for FEI based on the terms of the letter of intent related to the
disposition thereof, includes a value attributed to shareholders' equity of
$405 million and net long-term indebtedness contemplated by the Plan of
Reorganization of $1,360 million. In accordance with fresh start accounting
principles, this reorganization value has been allocated, based on estimated
fair market values, to specific tangible and identifiable intangible assets.
The fair values of specific tangible and identified intangible assets have been
assumed to equal their carrying values. The Company has recorded an intangible
asset in the amount of $1,007 million which equals the Company's reorganization
value in excess of amounts allocable to identifiable assets. The Company will
continue to finalize the estimates of the fair value of its assets and
liabilities, and consequently the value of those assets and the reorganization
value in excess of amounts allocable to identifiable assets are subject to
change. The reorganization value in excess of amounts allocable to identifiable
assets will be amortized over five years. The amount of shareholders' equity in
the fresh start balance sheet is not an estimate of the trading value of the
Common Stock, which value is subject to many uncertainties and cannot be
reasonably estimated at this time. Neither the Company nor its financial
advisors make any representation as to the trading value of the shares of
Common Stock issued under the Plan of Reorganization.
Adjustments for Disposition of FEI
As further described elsewhere in this Prospectus, on January 14, 1998
Advantica signed a letter of intent for the sale of stock of FEI, a
wholly-owned subsidiary which operates the Company's Hardee's restaurants under
licenses from HFS. The Company would receive $369.1 million in cash (subject to
adjustment as outlined in such letter of intent) in exchange for all of the
outstanding stock of FEI. In addition, the purchaser would assume $45.6 million
of capital leases. The transaction is expected to be completed by the end of
the first quarter of 1998. The proposed transaction would require consents of
the lenders under the Credit Facility and the Company is currently negotiating
the terms of an amendment which would include such consent. For more
information see "Prospectus Summary -- Recent Developments."
Certain Mortgage Financings of FEI with a book value of $105.3 million
(and a pro forma fair value of $116.8 million) at October 1, 1997 are
collateralized by certain assets of FEI and its subsidiary Spardee's Realty,
Inc. and will not be
17
<PAGE>
assumed by the purchaser in the disposition. As a result, the Company will be
required to replace such collateral and intends to do so through the purchase
of Defeasance Eligible Investments which will be deposited in an irrevocable
trust to satisfy principal and interest payments under such Mortage Financings
through the stated maturity. Such action will constitute an in-substance
defeasance of such Mortgage Financings. At the same time, the Company also
intends to effect an in-substance defeasance of related Mortgage Financings of
Quincy's Restaurants, Inc. with a book value of $78.6 million (and a pro forma
fair value of $87.3 million) at October 1, 1997.
(15) To reflect the disposition of FEI, including the receipt of cash
proceeds of an estimated $369 million and the incurrence of $15 million of
estimated transaction costs, and to reflect the use of $205 million of the
proceeds of such transaction to purchase United States government securities to
effect an in-substance defeasance of certain Mortgage Financings.
18
<PAGE>
PRO FORMA CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Year ended December 31, 1996
-------------------------------
Historical
-------------------------------
(a) (b)
Flagstar FRI-M
($ in thousands, except per share amounts) Companies, Inc. Corporation
- -------------------------------------------- ----------------- -------------
<S> <C> <C>
Operating revenue ......................... $2,542,302 $195,943
Operating expenses ........................ 2,385,910 193,461
---------- --------
Operating income .......................... 156,392 2,482
---------- --------
Other charges:
Interest and debt expense, net ........... 254,707 4,658
Other, net ............................... 3,537 (5,437)
---------- --------
258,244 (779)
---------- --------
Income (loss) before income taxes ......... (101,852) 3,261
Provision (benefit) for income taxes ...... (16,392) 2,160
---------- --------
Net income (loss) ......................... $ (85,460) $ 1,101
========== ========
Basic and diluted loss per share
applicable to common shareholders (i).....
Average outstanding and equivalent
common shares (i) ........................
<CAPTION>
Pro Forma
--------------------------------------------------------
FRI-M Adjustments
Acquisition for
($ in thousands, except per share amounts) Adjustments Consolidated Reorganization
- -------------------------------------------- -------------------- -------------- --------------------
<S> <C> <C> <C>
Operating revenue ......................... $2,738,245
Operating expenses ........................ $ (4,720) (c) 2,574,651
---------- ---------- ---
Operating income .......................... 4,720 163,594
---------- ----------
Other charges:
Interest and debt expense, net ........... 5,445 (d) 264,810 $ (103,836)(f)
Other, net ............................... (1,900)
----------
5,445 262,910 (103,836)
---------- ---------- -----------
Income (loss) before income taxes ......... (725) (99,316) 103,836
Provision (benefit) for income taxes ...... (1,960) (e) (16,192) 15,621 (h)
---------- ---------- -----------
Net income (loss) ......................... $ 1,235 $ (83,124) $ 88,215
========== ========== ===========
Basic and diluted loss per share
applicable to common shareholders (i).....
Average outstanding and equivalent
common shares (i) ........................
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1996
--------------------------------------------------------------------------
Pro Forma
--------------------------------------------------------------------------
After After
Adjustments Acquisition, Adjustments Acquisition,
for Reorganization for Reorganization,
Fresh Start and Fresh Start Disposition Fresh Start Reporting
($ in thousands, except per share amounts) Reporting Reporting of FEI (l) and Disposition
- ------------------------------------------------ ------------------- ----------------- ------------- ----------------------
<S> <C> <C> <C> <C>
Operating revenue .............................. $2,738,245 $ (602,946) $2,135,299
Operating expenses ............................. $ 198,300(j) 2,772,951 (581,812) 2,191,139
---------- ---------- ---------- ----------
Operating income ............................... (198,300) (34,706) (21,134) (55,840)
---------- ---------- ---------- ----------
Other charges:
Interest and debt expense, net ................ (7,700) (k) 153,274 (11,008) 142,266
Other, net .................................... (1,900) (193) (2,093)
---------- ---------- ---------- ----------
(7,700) 151,374 (11,201) 140,173
---------- ---------- ---------- ----------
Income (loss) before income taxes .............. (190,600) (186,080) (9,933) (196,013)
Provision (benefit) for income taxes ........... (571) (5,353) (5,924)
---------- ---------- ----------
Net income (loss) .............................. $ (190,600) $ (185,509) $ (4,580) $ (190,089)
========== ========== ========== ==========
Basic and diluted loss per share applicable to
common shareholders (i) ....................... $ (4.64) $ (4.75)
========== ==========
Average outstanding and equivalent common shares
(i) 40,000 40,000
========== ==========
</TABLE>
19
<PAGE>
PRO FORMA CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(Unaudited) (Continued)
<TABLE>
<CAPTION>
Three Quarters ended October 1, 1997
Pro Forma
------------------------------------
Adjustments
for
($ in thousands, except per share amounts) Historical Reorganization
- ------------------------------------------------ -------------- ---------------------
<S> <C> <C>
Operating revenue ............................. $1,989,355
Operating expenses ............................ 1,875,901
---------- --
Operating income .............................. 113,454
----------
Other charges:
Interest and debt expense, net ............... 183,567 $ (55,568) (f)
Other, net ................................... 6,612
----------
190,179 (55,568)
---------- -----------
Income (loss) before reorganization
expenses and taxes ........................... (76,725) 55,568
Reorganization expenses ....................... 23,549 (23,549) (g)
---------- -----------
Income (loss) before income taxes ............. (100,274) 79,117
Provision (benefit) for income taxes .......... 1,484 (8,045)(h)
---------- -----------
Net income (loss) ............................. $ (101,758) $ 87,162
========== ===========
Basic and diluted loss per share applicable
to common shareholders (i) ...................
Average outstanding and equivalent
common shares (i) ............................
<CAPTION>
After
Adjustments After Adjustments Reorganization,
for Reorganization for Fresh Start
Fresh Start and Fresh Start Disposition Reporting and
($ in thousands, except per share amounts) Reporting Reporting of FEI (l) Disposition
- ------------------------------------------------ ------------------ ----------------- ------------- ----------------
<S> <C> <C> <C> <C>
Operating revenue ............................. $1,989,355 $ (416,923) $1,572,432
Operating expenses ............................ 147,400 (j) 2,023,301 (410,700) 1,612,601
------- ---------- ---------- ----------
Operating income .............................. (147,400) (33,946) (6,223) (40,169)
-------- ---------- ---------- ----------
Other charges:
Interest and debt expense, net ............... (5,800) (k) 122,199 (8,256) 113,943
Other, net ................................... 6,612 (2,758) 3,854
---------- ---------- ----------
(5,800) 128,811 (11,014) 117,797
-------- ---------- ---------- ----------
Income (loss) before reorganization
expenses and taxes ........................... (141,600) (162,757) 4,791 (157,966)
Reorganization expenses .......................
Income (loss) before income taxes ............. (141,600) (162,757) 4,791 (157,966)
Provision (benefit) for income taxes .......... (6,561) (1,919) (8,480)
---------- ---------- ----------
Net income (loss) ............................. $ (141,600) $ (156,196) $ 6,710 $ (149,486)
=========== ========== ========== ==========
Basic and diluted loss per share applicable
to common shareholders (i) ................... $ (3.90) $ (3.74)
========== ==========
Average outstanding and equivalent
common shares (i) ............................ 40,000 40,000
========== ==========
</TABLE>
20
<PAGE>
NOTES TO PRO FORMA CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
On May 23, 1996, FCI, through FRD Acquisition Co. ("FRD"), a newly-formed
subsidiary, consummated the acquisition of the Coco's and Carrows restaurant
chains. The acquisition price of $313.4 million was paid in exchange for all of
the outstanding stock of FRI-M, a subsidiary of Family Restaurants Inc. ("FRI")
which owns the Coco's and Carrows restaurant chains. The total purchase price
in such transaction and the components thereof were as follows:
<TABLE>
<CAPTION>
(in thousands)
- ----------------------------------------------
<S> <C>
FCI cash investment ........................ $ 75,000
Senior notes payable to FRI ................ 156,897
Proceeds of term loan ...................... 50,000
Assumption of capital lease obligations .... 31,500
--------
Acquisition price .......................... $313,397
========
</TABLE>
The purchase price to be allocated to the assets acquired and liabilities
assumed in such transaction in accordance with the purchase method of
accounting is calculated as follows:
<TABLE>
<S> <C>
Acquisition price ................ $ 313,397
Direct costs of the acquisition .. 3,100
Capital lease obligations assumed (31,500)
---------
$ 284,997
=========
</TABLE>
Such purchase price has been allocated to the assets acquired and
liabilities assumed based on their fair market values. This allocation is
summarized as follows:
<TABLE>
<S> <C>
Current assets .................... $ 10,896
Property, plant and equipment ..... 144,857
Goodwill .......................... 196,200
Other intangibles ................. 8,858
Other non-current assets .......... 19,800
Current liabilities ............... (71,713)
Long-term liabilities ............. (23,901)
---------
$ 284,997
=========
</TABLE>
The above reflects the allocation of the purchase price in such
transaction as the result of the finalization of valuation studies relative to
the assets acquired and the finalization by FRI of its income tax returns for
the calendar year 1996 (which returns included the operations of FRD through
May 23, 1996).
(a) Includes the results of operations of FRI-M for the period subsequent to
its acquisition by FRD.
(b) Includes the results of operations of FRI-M for the five months ended May
23, 1996.
(c) Includes the following pro forma adjustments as further described below:
<TABLE>
<CAPTION>
($ in thousands)
- -------------------------------------------------
<S> <C>
(1) Adjustment of amortization ................ $ (156)
(2) Adjustment for reduction in general and
administrative expenses ...................... (4,564)
--------
Total ........................................ $ (4,720)
========
</TABLE>
(1) To reflect the reversal of amortization expense related to previous
reorganization costs of FRI-M of $2,200,000 and to reflect the amortization
of the excess of the purchase price paid by FRD over the net assets
acquired of $2,044,000. The previous reorganization costs were being
amortized over a 30 year period, and acquisition related goodwill is being
amortized over a 40 year period.
(2) The adjustment for general and administrative expenses represents
reductions in corporate overhead charges of $3,892,000 and elimination of a
management fee of $1,630,000, both previously charged to FRI-M by its
former parent, offset by an estimated increase in overhead expense of
approximately 0.5% of FRI-M operating
21
<PAGE>
revenues. The net decrease in general and administrative expenses reflects
anticipated cost savings and efficiencies from combining the operations of
FRI-M and the Company's other operating subsidiaries.
(d) To reflect the elimination of interest of $5,658,000 on FRI-M's loan
payable to banks, including amortization of deferred financing costs and
to reflect interest on (i) the $156,897,000 of notes payable to FRI at an
annual interest rate of 12.5%, (ii) the $56,000,000 term loan (including
the current portion of $4,000,000) at an annualized interest rate of 8.5%,
(iii) assumed borrowings of $5,000,000 on the revolving portion of the
FRI-M Credit Facility (as defined below) at an assumed annual interest
rate of 8.5% and (iv) use of $23,000,000 of the revolving portion of the
FRI-M Credit Facility to support letters of credit at an annual interest
rate of 3.0% and a commitment fee of 0.5% annually on the unused portion
of the revolving portion of the FRI-M Credit Facility ($7,000,000). The
adjustment also includes amortization of the deferred financing costs
incurred in connection with the financing of the acquisition and the
accretion of interest on the discounted self-insurance reserves. The
deferred financing costs of $3,900,000 in connection with the FRI-M Credit
Facility and $600,000 on the notes are amortized over 39 months and 8
years, respectively. For information concerning the FRI-M Credit Facility,
see "Description of Indebtedness -- The FRI-M Credit Facility."
(e) The pro forma adjustment reflects the fact that FCI's net operating losses
will offset FRI-M's separate tax provision when calculated on a
consolidated basis, except for current foreign and state income taxes.
Adjustments for Reorganization
(f) The following table details the net adjustment to interest expense related
to the consummation of the Plan of Reorganization:
<TABLE>
<CAPTION>
Year Ended Three Quarters Ended
($ in thousands) December 31, 1996 October 1, 1997
- ------------------------------------------------------------------------- ------------------- ---------------------
<S> <C> <C>
Elimination of amortization of deferred financing cost on debt
securities retired .................................................. $ (2,921) $ (3,492)
Elimination of interest on debt securities retired ................... (105,415) (55,476)
Amortization of deferred financing cost of the Credit Facility ....... 1,200 900
Amortization of deferred financing cost related to exchange of Old
Senior Notes ........................................................ 400 300
Increase in interest expense due to exchange of Old Senior Notes ..... 2,900 2,200
---------- ---------
Net adjustment to interest expense ................................... $ (103,836) $ (55,568)
========== =========
</TABLE>
- ---------
(g) To remove the impact of reorganization expenses which would not be
reflected in the post-reorganization statement of operations.
(h) To record the estimated income tax effects of consummation of the Plan of
Reorganization.
(i) Historical loss per share data not meaningful due to the significant change
in capital structure in connection with the confirmation and effectiveness
of the Plan of Reorganization. The impact of warrants and options are not
dilutive and therefore a diluted presentation is not provided.
Adjustments for Fresh Start Reporting
(j) To reflect, for the year ended December 31, 1996 and the three quarters
ended October 1, 1997, the removal of the amortization of goodwill of $3.1
million and $3.7 million, respectively, and the addition of the amortization
of reorganization value in excess of amounts allocable to identifiable
assets, assuming a 5-year life, of $201.4 million and $151.1 million,
respectively.
(k) To record, for the year ended December 31, 1996 and the three quarters
ended October 1, 1997, the impact on interest expense of the amortization of
the premium on long-term debt of $7.7 million and $5.8 million,
respectively.
Adjustments for Disposition of FEI
(l) To remove the results of operations of FEI for the year ended December 31,
1996 and the three quarters ended October 1, 1997, including a reduction in
the amortization of reorganization value in excess of amounts allocable to
identifiable assets of $19.6 million and $14.7 million, respectively, due to
the disposition. The adjustment also reflects the estimated amount of
interest income earned ($11.0 million for the year ended December 31, 1996
and $8.3 million for the
22
<PAGE>
three quarters ended October 1, 1997, based on an assumed weighted average
rate of 5.4%) on approximately $205 million of Defeasance Eligible
Investments intended to be purchased with the proceeds of the disposition in
order to in-substance defease the secured debt of FEI. A .125% increase in
the assumed interest rate would result in an increase in interest income of
approximately $.3 million for the year ended December 31, 1996 and $.2
million for the three quarters ended October 1, 1997, conversely, a .125%
decrease in the assumed interest rate would result in a decrease in interest
income of approximately $.3 million for the year ended December 31, 1996 and
$.2 million for the three quarters ended October 1, 1997.
Material Non-Recurring Charges Not Reflected in the Pro Forma Condensed
Statements of Consolidated
Operations
Certain material non-recurring charges (gains) related to consummation of
the Plan of Reorganization are not reflected in the Pro Forma Condensed
Statements of Consolidated Operations as they are not expected to have a
continuing impact on the Company's operations. These charges (gains) will be
included in the Company's operating results for the period prior to
consummation of the Plan of Reorganization and are summarized below ($ in
millions):
<TABLE>
<S> <C>
Reorganization costs .................................... $ 25.0
Extraordinary gains on exchange of debt for equity
(including the elimination of accrued interest of $74.9
million) ................................................ (621.5)
Write-off of deferred financing costs related to terminated
credit facility. ........................................ 16.0
Fresh start reporting adjustments. ...................... (753.6)
</TABLE>
23
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
Set forth below are certain selected financial data concerning the Company
for each of the five years ended December 31, 1996. Such data generally have
been derived from the Consolidated Financial Statements of the Company for such
periods, which have been audited. Also set forth below are selected financial
data for the three quarters ended September 30, 1996 and October 1, 1997, which
have been derived from the unaudited Consolidated Financial Statements of the
Company and which, in the opinion of management, include all adjustments
necessary for a fair presentation of the financial condition and results of
operations of the Company for such periods. The following information should be
read in conjunction with the Consolidated Financial Statements of the Company
and Notes thereto, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Pro Forma Financial Statements" presented
elsewhere herein which give effect to the acquisition of FRI-M, the disposition
of FEI and the consummation of the Plan of Reorganization.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------
1992 (a) 1993 (a) 1994 (a) 1995 (a) 1996 (b)
------------- ------------------- ------------------ ------------------ -------------
($ in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement data:
Operating revenue .............. $ 2,443.0 $ 2,615.2 $ 2,666.0 $ 2,571.5 $ 2,542.3
Operating income (loss) ........ 196.7 (1,102.4)(c) 211.5 (d) 98.2 (e) 156.4
Loss from continuing
operations (f) ................ ( 39.2) (1,238.6) ( 16.8) ( 132.9) ( 85.5)
Earnings (loss) per
share (g) .....................
Cash dividends per common
share (h) .....................
Balance Sheet data (at end of
period):
Current assets (i) ............. 98.4 122.2 186.1 285.3 185.5
Working capital deficiency
(i)(j) ........................ ( 256.3) ( 273.0) ( 205.6) ( 122.2) ( 297.7)
Net property and equipment ..... 1,269.9 1,167.2 1,196.4 1,104.4 1,168.6
Total assets ................... 3,170.9 1,538.9 1,587.5 1,507.8 1,687.4
Long-term debt ................. 2,171.3 2,341.2 2,067.6 1,996.1 2,179.4
<CAPTION>
Three Quarters Ended
----------------------------------
Debtor-In-
Possession
September 30, October 1,
1996 1997
--------------- ------------------
($ in millions, except per share amounts)
<S> <C> <C>
Income Statement data:
Operating revenue .............. $ 1880.8 $ 1,989.4
Operating income (loss) ........ 119.2 113.5
Loss from continuing
operations (f) ................ ( 57.3) ( 101.8)
Earnings (loss) per
share (g) .....................
Cash dividends per common
share (h) .....................
Balance Sheet data (at end of
period):
Current assets (i) ............. 116.3
Working capital deficiency
(i)(j) ........................ ( 286.5)
Net property and equipment ..... 1,111.4
Total assets ................... 1,552.1
Long-term debt ................. 881.0 (k)
</TABLE>
- ---------
(a) Certain amounts for the four years ended December 31, 1995 have been
reclassified to conform to the 1996 presentation.
(b) Reflects the acquisition in May 1996 of Coco's and Carrows.
(c) Operating loss for the year ended December 31, 1993 reflects charges for
the write-off of goodwill and certain other intangible assets of $1,104.6
million and the provision for restructuring charges of $158.6 million.
(d) Operating income for the year ended December 31, 1994 reflects a recovery
of restructuring charges of $7.2 million.
(e) Operating income for the year ended December 31, 1995 reflects a provision
for restructuring charges of $15.9 million and a charge for impaired
assets of $51.4 million.
(f) The Company has classified as discontinued operations Canteen Corporation,
a food and vending subsidiary sold in 1994, TWRS, a recreation services
subsidiary, and VS, a stadium concessions subsidiary. TWRS and VS were
sold during 1995.
(g) Historical earnings per share data not meaningful as a result of the
significant change in capital structure in connection with the
confirmation and effectiveness of the Plan of Reorganization.
(h) The Company's bank facilities have prohibited, and its public debt
indentures have significantly limited, distributions and dividends on
Advantica's (and its predecessors') common equity securities. See Note 4
to the accompanying Consolidated Financial Statements appearing elsewhere
herein.
24
<PAGE>
(i) The current assets and working capital deficiency amounts presented exclude
assets held for sale of $480.8 million, $103.2 million, and $77.3 million
as of December 31, 1992, 1993 and 1994, respectively, and $5.1 million as
of December 31, 1996. Such assets held for sale relate primarily to the
Company's food and vending and concessions and recreation services
subsidiaries sold in 1994 and 1995.
(j) A negative working capital position is not unusual for a restaurant
operating company. The increase in the working capital deficiency from
December 31, 1992 to December 31, 1993 is attributable primarily to an
increase in restructuring and other liabilities. The decrease in the
working capital deficiency from December 31, 1993 to December 31, 1994 is
due primarily to an increase in cash following the sale of the Company's
food and vending subsidiary during 1994. The decrease in the working
capital deficiency from December 31, 1994 to December 31, 1995 is due
primarily to an increase in cash following the 1995 sales of the Company's
(i) distribution subsidiary, PFC, net of current assets and liabilities of
such subsidiary, and (ii) the concession and recreation services
subsidiaries. The increase in the working capital deficiency from December
31, 1995 to December 31, 1996 reflects the use of the proceeds from the
1995 sales noted above and the proceeds of the sale of PTF for operating
needs and for the acquisition of Coco's and Carrows. The decrease in the
working capital deficiency from December 31, 1996 to October 1, 1997 is
attributable primarily to the reclassification of $100.8 million of
accrued interest to liabilities subject to compromise in accordance with
SOP 90-7, largely offset by a reduction in cash and cash equivalents which
has been used for Company operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
(k) Reflects the reclassification at October 1, 1997 of $1,496.7 million of
long-term debt to liabilities subject to compromise in accordance with SOP
90-7 as a result of the commencement of the Chapter 11 filing.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Historical Financial Data and the Consolidated Financial Statements and other
more detailed financial information appearing elsewhere herein. For information
concerning, among other things, consummation of the Plan of Reorganization and
its pro forma effect on the Company, see "Pro Forma Financial Statements"
appearing elsewhere in this Prospectus.
Introduction
The Company's Management's Discussion and Analysis is divided into two
sections. The first section analyzes the Company's results of operations; first
on a consolidated basis, then for each of Advantica's six restaurant concepts.
The second section addresses the Company's liquidity and capital resources.
Results of Operations
Company Consolidated
- --------------------
<TABLE>
<CAPTION>
Three Quarters Ended
Year Ended December 31, ---------------------------
September 30, October 1,
1994 1995 1996 1996 1997
------------ --------- --------- --------------- -----------
($ in millions)
<S> <C> <C> <C> <C> <C>
Net Company Sales ................................. $2,620 $2,512 $2,471 $1,827 $1,928
Franchise Revenue ................................. 46 59 71 54 61
------ ------ ------ ------ ------
Total Revenue ..................................... 2,666 2,571 2,542 1,881 1,989
Operating Expenses ................................ 2,455 2,473 2,386 1,762 1,876
------ ------ ------ ------ ------
Operating Income .................................. 211 98 156 119 113
Net Interest Expense From Continuing Operations ... 227 229 255 189 184
Income Tax (Benefit) Provision .................... (2) 0 (16) (13) 1
Net Income (Loss) ................................. $ 364 $ (55) $ (85) $ (57) $ (102)
</TABLE>
26
<PAGE>
Restaurant Unit Activity
<TABLE>
<CAPTION>
Units
Converted
from
Ending Units Company to
Units Units Closed/ Franchise
12/31/95 Opened Sold (Turnkey)
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Denny's ..................
Company Owned ........... 933 (20) (19)
Franchised Units ........ 596 72 (10) 19
Int'l Licensees ......... 24 1 -- --
--- -- ----- ---
1,553 73 (30)
Hardee's ................. 593 1(b) (14) --
Quincy's ................. 203 -- (4) --
El Pollo Loco ............
Company Owned ........... 103 1 -- (8)
Franchised Units ........ 112 15 -- 8
Int'l Licensees ......... 2 8 -- --
----- -- ----- -----
217 24 -- --
----- -- ----- -----
Subtotal ................ 2,566 98 (48)
----- -- -----
Coco's (a) ...............
Company Owned ........... 188 -- (5) --
Franchised Units ........ 6 -- (1) --
Int'l Licensees ......... 252 26 -- --
----- -- ----- -----
446 26 (6) --
----- -- ------ -----
Carrows (a) ..............
Company Owned ........... 161 2 (3) --
Franchised Units ........ -- -- -- --
----- -- ----- -----
161 2 (3) --
----- -- ------ -----
Subtotal ................. 607 28 (9) --
----- -- ------ -----
3,173 126 (57)
===== === =====
<CAPTION>
Units
Converted
from
Ending Units Company to Ending Ending
Units Units Closed/ Franchise Units Units
12/31/96 Opened Sold (Turnkey) 10/1/97 9/30/96
------------ -------- ----------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Denny's ..................
Company Owned ........... 894 1 (3) (5) 887 902
Franchised Units ........ 677 61 (10) 5 733 653
Int'l Licensees ......... 25 1 -- -- 26 25
--- -- ----- ---- --- ---
1,596 63 (13) -- 1,646 1,580
Hardee's ................. 580(c) -- (22) -- 558(c) 579
Quincy's ................. 199 1 (3) -- 197(d) 199
El Pollo Loco ............
Company Owned ........... 96 3 -- (2) 97 98
Franchised Units ........ 135(c) 7 (1) 2 143(c) 128
Int'l Licensees ......... 10 -- (6) -- 4 8
----- -- ------ ---- ----- -----
241 10 (7) -- 244 234
----- -- ------ ---- ----- -----
Subtotal ................ 2,616 74 (45) -- 2,645 2,592
----- -- ----- ---- ----- -----
Coco's (a) ...............
Company Owned ........... 183 4 (1) -- 186 184
Franchised Units ........ 5 3 -- -- 8 6
Int'l Licensees ......... 278 15 (1) -- 292 266
----- -- ------ ---- ----- -----
466 22 (2) -- 486 456
----- -- ------ ---- ----- -----
Carrows (a) ..............
Company Owned ........... 160 -- (6) (1) 153 162
Franchised Units ........ -- 2 1 3(d)
----- -- ---- -----
160 2 (6) -- 156 162
----- -- ------ ---- ----- -----
Subtotal ................. 626 24 (8) -- 642 618
----- -- ------ ---- ----- -----
3,242 98 (53) -- 3,287 3,210
===== == ===== ==== ===== =====
</TABLE>
- ---------
(a) Coco's and Carrows were acquired by the Company in May of 1996.
Year-to-date December 31, 1996 data are provided for comparison purposes
only. Coco's and Carrows restaurant unit activity since their acquisition
by the Company for the year ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Units at Ending
Acquisition Units Units Units
Date Opened Closed 12/31/96
------------- -------- -------- ---------
<S> <C> <C> <C> <C>
Coco's
Company Owned ............ 184 (1) 183
Franchised Units ......... 6 (1) 5
Int'l Licensees .......... 257 21 278
Carrows ................... 163 (3) 160
--- --- ---
610 21 (5) 626
=== == === ===
</TABLE>
- ---------
(b) Represents the re-opening of a unit that was temporarily closed at December
31, 1995.
(c) Unit count includes one Hardee's and El Pollo Loco dual brand unit. The
unit's operating results are included in Hardee's operating results.
(d) Unit count includes one Quincy's unit converted to a Carrows that is
operated by Quincy's as a Carrows franchise. The unit's operating results
are included in Quincy's operating results. Intercompany franchise fees
are eliminated in consolidation.
27
<PAGE>
Company Consolidated
Three Quarters Ended October 1, 1997 Compared to Three Quarters Ended September
30, 1996
The Company's consolidated revenue for the three quarters ended October 1,
1997 increased by $108.5 million (5.8%) as compared with the 1996 comparable
period. This increase is primarily attributable to two factors: the estimated
$24.0 million impact of the additional days in the three quarters ended October
1, 1997 in comparison to the prior year period and an approximate $202.3
million impact of an additional five months of operations of Coco's and Carrows
in 1997 in comparison to 1996. Excluding the impact of the extra days and the
Coco's and Carrows acquisition, revenue for the 1997 period decreased $117.8
million in comparison to the prior year period. This decrease reflects
decreases in comparable store sales at all of the Company's concepts except for
El Pollo Loco and Coco's, as well as a 46-unit decrease in Company-owned units.
Such decreases are slightly offset by a $6.6 million increase in franchise
revenue due to a 123-unit increase in franchise units.
Consolidated operating expenses for the three quarters ended October 1,
1997 increased by $114.2 million (6.5%) as compared with the 1996 comparable
period. The expense increase is primarily attributable to two factors: the
estimated $20.3 million impact of the additional days in the 1997 period in
comparison to the prior year comparable period and a $190.6 million impact of
the additional five months of operations of Coco's and Carrows in the current
year period in comparison to the prior year comparable period. Excluding the
extra days and the impact of the Coco's and Carrows acquisition, operating
expenses for the 1997 period decreased $96.7 million in comparison to the prior
year comparable period. This decrease primarily reflects a decline in costs
associated with the decline in revenue, the positive impact of cost cutting
measures, and the impact on expenses of a 46-unit decrease in Company-owned
units.
Consolidated operating income for the three quarters ended October 1, 1997
decreased by $5.7 million (4.8%) as compared with the 1996 comparable period as
a result of the factors noted above.
Consolidated interest and debt expense, net totaled $183.6 million during
the 1997 period as compared with $189.1 million during the comparable 1996
period. The decrease is due principally to the fact that the Company ceased
recording interest on the Senior Subordinated Debentures and 10% Convertible
Debentures on July 11, 1997 in accordance with SOP 90-7. This decrease is
partially offset by the addition of $12.1 million of interest and debt expense
associated with the Coco's and Carrows acquisition in May 1996 and a $3.6
million charge representing interest and penalties associated with the early
termination of the Company's interest rate exchange agreements in 1997. Such
termination occurred in conjunction with the refinancing of the Company's bank
facility necessitated by FCI's and Flagstar's bankruptcy filings on July 11,
1997. In addition, interest income for the 1997 period decreased $3.2 million
in comparison to the prior year period due to decreased cash and cash
equivalents available for investment during the 1997 period.
Reorganization expenses include professional fees and other expenditures
incurred by the Company in conjunction with the Plan of Reorganization under
Chapter 11 of the Bankruptcy Code as further discussed in Note 15 to the
Consolidated Financial Statements included herein.
The provision for (benefit from) income taxes from continuing operations
for the period has been computed based on management's estimate of the annual
effective income tax rate applied to loss before taxes. The Company recorded an
income tax provision reflecting an effective income tax rate of approximately
1.5% for the 1997 period compared to a benefit for the comparable 1996 period
reflecting an approximate rate of (18.4%). The change in the effective income
tax rate from the prior year can be attributed to the recognition in the prior
year of anticipated refunds due to the carryback of prior year tax losses.
The net loss was $101.8 million in the 1997 period as compared to $57.3
million for the prior year comparable period. The increase in the net loss is
due to the factors noted above.
1996 vs. 1995
Operating Trends: During 1996, the Company experienced comparable store
sales increases at Denny's and El Pollo Loco, due to the continued success of
Denny's value menu strategy, El Pollo Loco's successful menu positioning and
new product introduction efforts, dual branding at El Pollo Loco with Foster's
Freeze, and favorable results from remodeled restaurants. However, the Company
continued to experience significant declines in comparable store sales at
Hardee's due to continued competitive promotions by quick-service competitors.
Quincy's also showed comparable store sales declines reflecting the general
trend in the mid-scale family-steak category as well as operational issues
relative to training, food quality, service and facilities. During the third
quarter management began to address these operational issues. New products were
developed and tested, training was implemented at all levels, facilities were
improved and management made plans to
28
<PAGE>
relaunch the Quincy's brand. Primarily as a result of the lower revenues at
Quincy's, the Company experienced a reduction in operating income of $7.3
million (after removing the impact on 1995 results of the restructuring and
impairment charges taken in 1995 and removing the impact on 1996 results of the
operating income decrease in 1996 resulting from the dispositions of PFC and
PTF and the increases in operating income in 1996 attributable to the
acquisition of Coco's and Carrows). Overall, the trends experienced by the
Company since the 1989 leveraged buyout generally continued through 1996;
operating income continued to be insufficient to cover the interest and debt
expense resulting in continued losses from continuing operations. As of
year-end 1996, the external factors that have contributed to these trends,
including increased competition and intensive pressure on pricing due to
discounting, were expected to continue.
In recognition of these matters, in addition to addressing the negative
trends at Hardee's and Quincy's, management began in early 1997 to formulate
steps to address the Company's debt burden and its impact on operations. For
further information, see "The Company -- The 1997 Restructuring" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The Company's consolidated revenue for 1996 was $2,542.3 million, a
decrease of $29.2 million, or 1.1%, compared to 1995. The impact on revenues of
the Coco's and Carrows acquisition ($163.7 million and $131.4 million,
respectively, in revenue was contributed by Coco's and Carrows in 1996) was
somewhat offset by the loss of revenue attributable to the dispositions of the
Company's food distribution and processing operations, PFC and PTF, in
September 1995 and 1996, respectively (the decrease in revenue in 1996 as
compared to 1995 as a result of these dispositions totaled $218.2 million).
Excluding the effects of such acquisition and dispositions, revenue, on a
comparable basis, was $2,245.9 million in 1996, a decrease of $106.0 million
(4.5%) compared to 1995. The revenue decrease primarily reflects the impact of
lower comparable store sales at Hardee's and Quincy's and 63 fewer
Company-operated restaurants as compared with the prior year (excluding the
impact of the Coco's and Carrows acquisition), somewhat offset by an increase
in franchise revenue of $11.7 million, reflecting 133 additional franchised
units in 1996. At Hardee's and Quincy's, comparable store sales decreased 7.2%
and 10.8%, respectively. Comparable store sales at Denny's and El Pollo Loco
increased 1.7% and 7.2%, respectively; however, due to decreases in the number
of Company-operated restaurants in comparison to 1995, neither concept reported
increases in revenue from Company-operated units.
Operating expenses decreased by $87.3 million (3.5%) in 1996 to $2,385.9
million as compared to 1995. This decrease reflects the impact of several
significant events which affect the comparability of 1996 and 1995 results,
including: a restructuring charge and charge for impaired assets totaling $67.2
million in 1995; a decrease in depreciation expense in 1996 of $5.4 million due
to the impairment write-down in 1995; and a decrease in expenses in 1996 of
$201.6 million due to the sales of PTF and PFC. These items are offset, in
part, by the impact of the operating expenses of Coco's and Carrows which were
acquired in 1996 and total $280.2 million.
Excluding the effect of the items noted above, operating expenses
decreased $93.3 million in 1996 in comparison to 1995. This decrease is
primarily attributable to a decline in costs associated with the decline in
operating revenue, the positive impact of cost cutting measures (reflected in
improved margins at Denny's, Hardee's and El Pollo Loco), and the increase of
$8.2 million of the current year amortization of the deferred gains
attributable to the sales of PFC and PTF over the prior year amount. This
amortization is recorded as a reduction of product costs. These decreases in
operating expense are somewhat offset by a decrease in gains from the sales of
restaurants to franchisees reflected in operating expenses from $24.5 million
in 1995 to $8.4 million in 1996 and an increase of $5.9 million in the cost to
administer the consent decree entered into in 1993 over the prior year, to
$11.3 million.
Operating income for 1996 increased by $58.2 million to $156.4 million in
comparison to 1995 as a result of the factors noted in the preceding
paragraphs.
Interest and debt expense, net, from continuing operations and
discontinued operations totaled $254.7 million for the year ended December 31,
1996 as compared to $248.0 million for the prior year. The net increase is due
principally to the addition of $17.6 million in interest and debt expense
associated with the Coco's and Carrows acquisition. This increase is partially
offset by the following: a decrease in interest expense of approximately $5.3
million due to a lower level of principal outstanding during the 1996 period
(excluding the impact of the Coco's and Carrows acquisition) resulting
primarily from the repurchase of approximately $25.0 million of senior
indebtedness on September 30, 1995 and the scheduled repayments of long-term
debt during 1996; an increase in interest income of $3.2 million during 1996
due to increased cash and cash equivalents prior to the acquisition of Coco's
and Carrows; a decline of $1.6 million in interest expense during the 1996
period associated with lower interest rates related to interest rate exchange
agreements; and the elimination of $0.8 million in interest expense associated
with various operations that were sold in 1995.
29
<PAGE>
The benefit from income taxes from continuing operations for the year
ended December 31, 1996 reflects an effective income tax rate of 16% compared
with 0% for 1995. The change from the prior year can be attributed to the
recognition of refunds in the current period due to the carryback of current
year tax losses and the reversal of certain reserves established in prior years
in connection with proposed deficiencies from the Internal Revenue Service. See
Note 6 to the accompanying Consolidated Financial Statements for additional
information.
The loss from continuing operations was $85.5 million for the year ended
December 31, 1996 as compared with $132.9 million for the prior year. The net
loss for the 1996 year end was $85.5 million compared to a net loss for the
prior year of $55.2 million. The prior year included $77.2 million of income
from discontinued operations reflecting gains of $77.9 million on the related
sales of the discontinued operations in the fourth quarter of 1995.
Restructuring
Effective in the fourth quarter of 1995, as a result of a comprehensive
financial and operational review, the Company approved a restructuring plan
resulting in a provision for restructuring of $15.9 million. The 1995
restructuring plan was substantially completed in 1996 except for certain asset
replacement projects (where the assets to be replaced were written down as part
of the restructuring) which were postponed in 1996 due to the Company's capital
constraints. Such projects were substantially completed in 1997. Pursuant to
the restructuring plan, approximately 74 employees, primarily corporate and
field management, were terminated as of December 31, 1996, resulting in
payments of approximately $4.5 million as of that date.
Accounting Change
In 1996, the Company adopted the disclosure-only provisions of Financial
Accounting Standards Board Statement 123, "Accounting for Stock Based
Compensation" (SFAS 123) while continuing to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its stock-based compensation plans. Under APB
25, because the exercise price of the Company's employee stock options equals
or exceeds the market price of the underlying stock on the date of grant, no
compensation expense is recognized. The adoption of SFAS 123 did not impact the
Statements of Consolidated Operations or the Consolidated Balance Sheets
included herein.
1995 vs. 1994
The Company's consolidated revenue for 1995 decreased by approximately
$94.5 million (3.5%) as compared with 1994 primarily reflecting the sale of PFC
in September 1995 coupled with the continued weakness of the Company's Hardee's
operations.
The Company's operating expenses, before considering the effects of the
provision for (recovery of) restructuring charges and charge for impaired
assets, decreased by $55.7 million (2.3%) in 1995 as compared with 1994. Such
decrease was principally due to a decrease of approximately $43.6 million
attributable to the sale of Denny's distribution subsidiary, PFC, which was
sold in September 1995, and an increase in gains on sales of restaurants from
$10.0 million in 1994 to $24.5 million in 1995.
Total interest and debt expense from continuing and discontinued
operations decreased by $18.1 million in 1995 as compared to 1994 (an $18.5
million decrease attributable to discontinued operations offset by a $0.4
million increase in continuing operations) principally as a result of a
reduction in interest expense of $7.0 million following the payment during June
1994 of the principal amount ($170.2 million) outstanding under the term
facility of the Company's credit agreement then outstanding and certain other
indebtedness upon the sale of the Company's food and vending subsidiary, a
reduction in interest expense of $4.0 million during 1995 for other
indebtedness related to other subsidiaries which had been sold, and a decrease
in interest expense of $6.1 million during 1995 related to interest rate
exchange agreements.
Discontinued Operations
The Company's concession and recreation services businesses were sold
during 1995 resulting in a net gain of $77.9 million. These businesses were
accounted for as discontinued operations and recorded operating revenues of
$322.3 million during 1995, a decrease of $3.1 million (0.9%) from 1994.
Revenues related to the stadium concession subsidiary increased $9.2 million
during 1995 to $190.8 million from $181.6 million in 1994. Operating income and
depreciation and amortization expense of the concession subsidiary were $2.4
million and $10.9 million, respectively, during 1995 as compared with $6.5
million and $9.8 million, respectively, in 1994. Such decrease in operating
income during 1995 was due principally to
30
<PAGE>
a decrease in average attendance at major league baseball games during the 1995
season. Revenues related to the recreation services subsidiary decreased by
$12.3 million during 1995 to $131.5 million from $143.8 million during 1994.
Operating income and depreciation and amortization expense of the recreation
services subsidiary for 1995 were $14.7 million and $3.8 million, respectively,
as compared with $16.3 million and $4.7 million, respectively, during 1994.
Such decrease in revenues and operating income of the recreation services
subsidiary was due principally to the loss of the service contract at the
Kennedy Space Center during 1995.
Restructuring
Effective in the fourth quarter of 1995, as a result of a comprehensive
financial and operational review, the Company approved a restructuring plan.
The plan generally involved a reduction in personnel and a decision to
outsource the Company's information systems function. Operating expenses for
1995 reflect a provision for restructuring of $15.9 million including charges
for severance of $5.4 million, $7.6 million for the write-down of computer
hardware and other assets, and $2.9 million for various other charges.
Accounting Change
During 1995 the Company adopted Statement of Financial Accounting
Standards No. 121 which resulted in a charge to operating expenses of $51.4
million for the write-down of Denny's, Hardee's and Quincy's restaurant
properties. This charge reflected the write-down of 99 units which the Company
planned to continue to operate and an additional 36 units which were to be
closed or sold in 1996. Of the 36 units, the Company had closed 29 units
through 1996. Management intends to dispose of one of the remaining units and
will continue to operate the other six.
Extraordinary Items
The Company recognized an extraordinary gain totaling $0.5 million, net of
income taxes, during 1995 which represents a gain on the repurchase of $25.0
million principal amount of certain indebtedness, net of the charge-off of the
related unamortized deferred financing costs. During 1994, the Company also
recognized an extraordinary loss totaling $11.7 million, net of income tax
benefits, of $0.2 million representing the charge-off of unamortized deferred
financing costs associated with the prepayment in June 1994 of senior bank
debt.
Restaurant Operations
Denny's
<TABLE>
<CAPTION>
Three Quarters Ended
Year Ended December 31, -------------------------------
September 30, October 1,
1994 1995 1996 1996 1997
----------- ----------- ----------- --------------- ---------------
($ in millions, except Avg. Unit Data)
<S> <C> <C> <C> <C> <C>
Net Company Sales (a) .......................... $ 1,508 $ 1,442 $ 1,202 $ 913 $ 874
Franchise Revenue .............................. 40 49 55 41 46
------- ------- ------- ------- --------
Total Revenue (a) .............................. 1,548 1,491 1,257 954 920
Operating Expenses (a) ......................... 1,425 1,394 1,135 868 833
------- ------- ------- ------- --------
Operating Income (a)(b) ........................ $ 123 $ 97 $ 122 $ 86 $ 87
======= ======= ======= ======= ========
Comparable Store Sales Increase (Decrease) ..... 0.3 % 2.4 % 1.7 % 1.9 % (4.6 %)
AVERAGE UNIT DATA:
Average Unit Sales ($ in thousands):
Company Operated .............................. $1,248 $1,283 $1,313 $ 995 $ 978
Franchised .................................... 1,060 1,086 1,090 833 827
Average Guest Check ............................ $ 4.75 $ 4.86 $ 5.03 $ 4.93(c) $ 5.51(c)
Average Weekly Traffic Count ................... 5,047 5,071 5,025 --(d) --(d)
Operated Units
Company Operated .............................. 978 933 894 902 887
Franchise ..................................... 512 596 677 653 733
International ................................. 58 24 25 25 26
------- ------- ------- -------- --------
Total ....................................... 1,548 1,553 1,596 1,580 1,646
======= ======= ======= ======== ========
</TABLE>
- ---------
(a) Includes the operating results of the Company's food processing (PTF) and
distribution (PFC) operations.
31
<PAGE>
(b) Operating income reflects a provision for restructuring of $5 million and a
charge for impaired assets of $24 million for the year ended December 31,
1995. For a discussion of the provision for restructuring and charge for
impaired assets see Notes 1 and 3 to the Consolidated Financial
Statements.
(c) Calculated on a comparable store basis.
(d) Data not provided on a quarterly basis.
Three Quarters Ended October 1, 1997 Compared to Three Quarters Ended September
30, 1996
Denny's net company sales decreased by $39.5 million (4.3%) during the
1997 period as compared with the 1996 comparable period. This decrease reflects
15 fewer Company-owned units and a decrease in comparable store sales, somewhat
offset by an estimated $21.7 million increase because of an additional five
days in the 1997 period compared to the prior year period. The decrease in
Company-owned units, the majority of which were converted to franchise units,
is consistent with the Company's strategy of focusing on growth through
franchising and the sale of Company-owned restaurants to franchisees, along
with selected restaurant closures where continued operation is considered
uneconomical. The decline in comparable store sales was driven by lower guest
counts, partially offset by an increase in average guest check. Both
fluctuations reflect the impact of the September 1996 price increase that
eliminated certain value pricing. Franchise revenue for the period increased by
$4.9 million (11.9%), reflecting 81 more franchised units at the 1997 period
end than at the 1996 period end.
Denny's operating expenses for the 1997 period as compared with the 1996
comparable period decreased by $35.0 million (4.0%), reflecting the impact of
15 fewer Company-owned units and a decrease in labor costs associated with
improved labor efficiencies and lower guest counts. These decreases are
somewhat offset by an estimated $18.5 million impact from five additional days
in the 1997 period compared to the 1996 period, increased costs for produce,
coffee, bacon, and sausage and increases in the federal and state minimum wage
rates. In addition, operating expenses in the prior year period included $6.9
million of gains on sales of restaurants in comparison to $0.6 million of gains
in the current period. Food cost as a percent of revenue improved during the
period because of the September 1996 price increase and a shift to higher
margin products in the 1997 period.
Denny's operating income for the 1997 period increased by $0.4 million
(0.5%) as compared to the prior year comparable period as a result of the
factors noted above.
1996 vs. 1995
Revenue from Company-owned units for 1996 decreased by $240.1 million
(16.7%) from 1995 to $1,201.6 million. $218.2 million of this decrease can be
attributed to the dispositions of PFC and PTF in 1995 and 1996, respectively.
The remaining decrease of $52.2 million primarily results from operating 39
fewer Company-owned restaurants, partially offset by gains in comparable store
sales of $30.3 million.
Average unit sales in 1996 increased by 2.4% versus 1995. This increase is
comprised of a 0.7% gain resulting from the impact of closed restaurants and
those sold to franchisees, and a 1.7% gain in comparable store sales. The gains
in comparable store sales were driven by an increase in average guest check,
which was somewhat offset by a decrease in customer traffic. The full year
gains in average check were aided by a September price increase that eliminated
the $1.99 tier from the value menu. This price increase was triggered by
commodity cost increases, minimum wage legislation and labor rate pressures.
While the price increase had a positive impact on guest check averages, this
increase was somewhat offset by a decline in customer counts.
Franchise revenue in 1996 increased by $6.2 million (12.7%) over 1995, to
$55.1 million. The increase in franchise revenue is primarily attributable to
82 additional franchised units in 1996. $2.2 million of the increase was
generated from initial fees from new franchise openings while the balance
reflects an increase in royalties from units added in 1995 and 1996. Nineteen
Company-owned units were sold to franchisees during 1996, generating $7.7
million in gains which are reflected as a reduction in operating expense.
Operating expenses for 1996 compared to 1995 decreased by $258.9 million
(18.6%) to $1,134.9 million. This decrease is partially due to the
restructuring charge and charge for impaired assets included in the 1995
results ($5.4 million and $23.9 million, respectively), a $2.8 million decrease
in 1996 depreciation expense related to the 1995 impairment write-down, a $4.7
million increase in the current year amortization of the deferred gain
attributable to the sales of PFC and PTF over the prior year amounts and a
decrease of $201.6 million due to the dispositions of PFC and PTF. The effect
of these items is somewhat offset by a decrease in the gains from restaurants
sold to franchisees ($20.7 million in 1995 versus $7.7 million
32
<PAGE>
in 1996). Excluding these items, operating expenses decreased $33.5 million
from the prior year. This decrease reflects several factors. Food costs and
restaurant labor were favorable in comparison to 1995 by $14.0 million and $8.8
million, respectively, reflecting the decline in the number of Company-owned
restaurants as well as the positive impact of cost control measures in the
restaurants. These decreases were offset, in part, by higher commodity prices
(particularly for pork, dairy, eggs and bread) over the prior year and
increases in the federal and state minimum wages.
Operating income for 1996 improved by $25.1 million (25.8%), as compared
to 1995, to $121.9 million as a result of the factors noted above.
1995 vs. 1994
Denny's revenues decreased by $57.3 million (3.7%), of which $53.0 million
was attributable to a decrease in outside revenues at the Company's food
processing and distribution subsidiaries. Such revenue decrease reflects the
sale of the Company's distribution subsidiary during the third quarter of 1995.
The remaining decrease of $4.3 million was primarily due to a 45-unit net
decrease in the number of Company-owned restaurants at December 31, 1995 as
compared to December 31, 1994, which was partially offset by an 84-unit
increase in the number of franchised restaurants. Comparable store sales at
Denny's increased 2.4% during 1995 as compared with 1994, reflecting increases
in average check of 2.3% and 0.2% in traffic. During 1995, Denny's completed
remodels on 182 Company-owned restaurants.
Operating expenses before the provision for restructuring charges and
charge for impaired assets at Denny's decreased $59.9 million principally due
to decreases in product costs including $43.6 million attributable to Denny's
distribution subsidiary which was sold in September 1995. Operating expenses
for 1994 include twelve months of charges for the food distribution subsidiary;
whereas, 1995 includes approximately nine months of such charges. Denny's
operating expenses before the provision for restructuring charges and charge
for impaired assets were also reduced during 1995 by gains on the sale of
restaurants to franchisees of $20.7 million. This compares to gains in 1994 of
$8.8 million. Such decreases in operating expenses were offset, in part, by an
increase in advertising expense of $6.0 million.
Hardee's
<TABLE>
<CAPTION>
Year Ended December 31, Three Quarters Ended
----------------------------------- -------------------------------
September 30, October 1,
1994 1995 1996 1996 1997
----------- ----------- ----------- --------------- ---------------
($ in millions, except Avg. Unit Data)
<S> <C> <C> <C> <C> <C>
Revenue ................................. $ 701 $ 660 $ 603 $ 459 $ 417
Operating Expenses ...................... 625 656 562 434 396
------ ------ ------ -------- --------
Operating Income (a) .................... $ 76 $ 4 $ 41 $ 25 $ 21
====== ====== ====== ======== ========
Comparable Store Sales (Decrease) ....... (3.6 %) (8.6 %) (7.2 %) (6.9 %) (8.2 %)
AVERAGE UNIT DATA:
Average Unit Sales ($ in thousands)...... $ 1,206 $ 1,104 $ 1,041 $ 793 $ 727
Average Guest Check ..................... $ 3.11 $ 3.16 $ 3.17 $ 3.13(b) $ 3.23(b)
Average Weekly Traffic Count ............ 7,459 6,713 6,320 --(c) --(c)
Operated Units .......................... 595 593 580 579 558
</TABLE>
- ---------
(a) Operating income reflects a provision for restructuring of $8 million and a
charge for impaired assets of $24 million for the year ended December 31,
1995. For a discussion of the provision for restructuring and charge for
impaired assets, see Notes 1 and 3 to the Consolidated Financial
Statements.
(b) Calculated on a comparable store basis.
(c) Data not provided on a quarterly basis.
Three Quarters Ended October 1, 1997 Compared to Three Quarters Ended September
30, 1996
Hardee's revenue decreased by $42.3 million (9.2%) during the 1997 period
as compared with the 1996 comparable period, reflecting an 8.2% decline in
comparable store sales, as well as a 21-unit decrease in comparison to the
prior year period end. The decrease in comparable store sales reflects a
decline in traffic which was partially offset by an increase in average guest
check. The decrease in traffic count reflects the impact of continuing
aggressive promotions by competitors within the quick-service category
compounded by the persistent weakness of Hardee's brand positioning and
advertising programs.
33
<PAGE>
Hardee's operating expenses in the 1997 period decreased by $38.4 million
(8.8%), in spite of increased labor costs due to the federal minimum wage rate
increase and the fact that there is a base level of labor and other fixed costs
necessary regardless of sales levels. The net decrease primarily reflects the
impact of the cost reduction program implemented in the second half of 1996,
the impact on expenses from the lower comparable store sales noted above and a
21-unit decrease in comparison to the prior year period end.
Hardee's operating income for the 1997 period decreased by $3.9 million
(15.7%) as compared to the prior year period as a result of the factors noted
above.
1996 vs. 1995
Revenue for Hardee's for 1996 decreased by $56.9 million (8.6%) from 1995,
to $602.9 million. The revenue decrease was primarily driven by 13 fewer
restaurants in the Company's chain and a decrease in average unit sales in
comparison to 1995. Comparable store sales decreased by 7.2% primarily due to
decreased customer traffic in the face of continued aggressive
"value/discounting" promotions by competitors within the quick-service segment
and inclement weather during the first quarter. In the second half of the year,
the Company's Hardee's began focusing less on discounting and more on overall
value, introducing items which are somewhat higher priced but which management
believes still offer good value for the money. The latest such promotion
introduced the "Monster" line of items, featuring a large burger and a large
omelet biscuit. This strategy helped drive guest check averages; however, the
increased average guest check only marginally offset the decrease in traffic.
Operating expenses in 1996 decreased $93.4 million (14.2%), to $562.2
million, as compared to 1995. This decrease was partially driven by the
restructuring charge and charge for impaired assets included in the 1995
results ($7.8 million and $23.7 million, respectively), a $2.3 million decrease
in 1996 depreciation and amortization expense resulting from the impairment
write-down in 1995 and a $1.9 million increase in the current year amortization
of the deferred gain attributable to the sales of PFC and PTF over the prior
year amount. This decrease also reflects the impact of lower comparable store
sales, a decrease in the number of restaurants and management's increased focus
on achieving improvement in operating efficiencies. The success of such cost
control efforts was reflected by the fact that even after removing the impact
on 1995 of the restructuring and impairment charges and the related reduction
in depreciation in 1996, operating income would have increased $2.7 million
over 1995, despite a decrease in revenue of $56.9 million. Labor savings had
the most significant impact in reducing operating expenses. Labor as a percent
of sales was 1% lower than in 1995. This was accomplished primarily by reducing
in-store labor to become more competitive and more in line with quick-service
industry standards, allowing management to reduce costs despite the impact of
an increased Federal minimum wage.
Operating income for 1996 improved by $36.5 million, to $40.7 million, in
comparison to 1995 as a result of the factors described above.
1995 vs. 1994
Hardee's revenue decreased during 1995 by $40.6 million, to $659.9
million, from $700.5 million during 1994, principally due to a decline of 8.6%
in comparable store sales. The decrease in comparable store sales resulted from
a 10.0% decline in traffic which was mitigated by a 1.6% increase in average
check. The decline in traffic was impacted by continued aggressive promotions
and discounting by quick-service competitors. During 1995, the Company
remodeled 59 Hardee's restaurants.
At Hardee's, operating expenses before considering the effects of the
provision for restructuring charges and charge for impaired assets decreased by
$0.8 million. This reflects increased expenses during 1995 of $12.8 million for
general and administrative, payroll and benefits, restructuring of field
management, workers' compensation charges, and expenses related to promotional
programs. Such increases were more than offset by a $13.6 million decrease in
product costs directly associated with decreased revenues in 1995.
34
<PAGE>
Quincy's
<TABLE>
<CAPTION>
Year Ended December 31, Three Quarters Ended
-------------------------------- -------------------------------
September 30, October 1,
1994 1995 1996 1996 1997
--------- --------- ------------ --------------- ---------------
($ in millions, except Avg. Unit Data)
<S> <C> <C> <C> <C> <C>
Revenue ...................................... $ 284 $ 294 $ 259 $ 197 $ 183
Operating Expenses ........................... 261 272 252 189 179
------ ------ ------- --------- --------
Operating Income (a) ......................... $ 23 $ 22 $ 7 $ 8 $ 4
====== ====== ======= ========= ========
Comparable Store Sales Increase (Decrease) ... 2.9 % 4.8 % (10.8 %) (10.9 %) (7.0 %)
AVERAGE UNIT DATA:
Average Unit Sales ($ in thousands):.......... $1,350 $1,438 $ 1,301 $ 991 $ 923
Average Guest Check .......................... $ 5.79 $ 5.88 $ 6.06 $ 5.98(b) $ 6.27(b)
Average Weekly Traffic Count ................. 4,486 4,703 4,132 --(c) --(c)
Operated Units ............................... 207 203 199 199 197
</TABLE>
- ---------
(a) Operating income reflects a restructuring charge and charge for impaired
assets of $0.6 million for the year ended December 31, 1995. For a
discussion of the provision for restructuring and charge for impaired
assets see Notes 1 and 3 to the Consolidated Financial Statements.
(b) Calculated on a comparable store basis.
(c) Data not provided on a quarterly basis.
Three Quarters Ended October 1, 1997 Compared to Three Quarters Ended September
30, 1996
Quincy's revenue decreased by $14.2 million (7.2%) during the 1997 period
as compared with the 1996 comparable period, reflecting a 7.0% decline in
comparable store sales. The decrease in comparable store sales resulted from a
decrease in traffic which was partially offset by an increase in average guest
check. The decline in customer traffic reflects, among other things, continuing
traffic declines in the family-steak category in general and the difficulty, in
spite of product quality improvements and increased emphasis on consistency of
service, of "winning back" customers who have been lost over the past several
years.
Quincy's operating expenses in the 1997 period decreased by $10.1 million
(5.3%), primarily reflecting the impact on expenses of the lower comparable
store sales noted above and a decrease in product costs due to various cost
reduction initiatives including contract renegotiations and reviews of product
usage and packaging. These decreases were somewhat offset by increased labor
costs due to the federal minimum wage rate increase, and the fact that certain
labor and other fixed costs could not be reduced in proportion to the
significant decline in sales.
Quincy's operating income for the 1997 period decreased by $4.1 million as
compared to the prior year period as a result of the factors noted above.
1996 vs. 1995
Revenue for Quincy's in 1996 decreased by $35.1 million (11.9%) from 1995,
to $259.2 million. The revenue decrease was primarily driven by a decrease in
customer traffic, as well as four fewer restaurants, offset somewhat by an
increase in the average guest check. Customer traffic, which decreased by 12%
versus 1995, was primarily responsible for the 10.8% decrease in comparable
store sales. The significant decline in customer traffic reflects, among other
things, continued traffic declines in the family-steak category, in general, as
well as a difficult comparison to the prior year (which benefited from several
newly remodeled units), in addition to the unsuccessful introduction of a new
steak product earlier in the year. Also, over the prior two years management
had experimented with various formats at Quincy's, which led to some customer
confusion and a lack of focus for the concept.
To address this issue, in October 1996, management initiated a "Relaunch"
program to re-establish the brand and give customers a consistent experience.
In this regard, during the third quarter of 1996, new products were developed
and tested, training was implemented at all levels, facilities were improved,
and management rolled out a new value steak promotion, the "No Mistake Steak",
which also introduced a number of new products accompanied by increased media
advertising.
Operating expenses in 1996 as compared to 1995 decreased by $19.4 million
(7.1%), to $252.5 million. This decrease was driven by the decline in sales and
a $1.2 million increase in 1996 amortization of the deferred gain attributable
to the
35
<PAGE>
sales of PFC and PTF over the prior year amount. These decreases were partially
offset by the additional costs in product, labor and advertising to institute
the "Relaunch" program. Primarily due to the training efforts related to
re-launching the brand, labor costs increased $3.0 million (1.2%) over 1995.
Also, after a period of no advertising for Quincy's in August and September as
the Relaunch plan was formulated, advertising was increased significantly in
the fourth quarter to support the reintroduction of the brand, resulting in an
overall increase in advertising expense of approximately $3.0 million in 1996
over the prior year.
Operating income in 1996 as compared to 1995 declined by $15.7 million, to
$6.6 million, as a result of the factors described above.
1995 vs. 1994
Quincy's revenues increased by $9.9 million (3.5%) during 1995 as compared
to 1994 despite a four-unit decrease in the number of restaurants operated at
December 31, 1995 as compared to December 31, 1994. Such increase in revenues
was primarily due to a 4.8% increase in comparable store sales as a result of
increases of 3.3% in traffic and 1.5% in average check. During 1995, the
increased traffic was partially attributable to the remodeling of 35 of its
restaurants.
An increase in operating expenses was principally attributable to
increases in payroll and benefits expense of $4.4 million, product costs of
$3.3 million associated primarily with the increase in revenues during 1995,
and advertising expense of $2.7 million.
El Pollo Loco
<TABLE>
<CAPTION>
Year Ended December 31, Three Quarters Ended
----------------------------- ------------------------------
September 30, October 1,
1994 1995 1996 1996 1997
--------- --------- --------- --------------- --------------
($ in millions, except Avg. Unit Data)
<S> <C> <C> <C> <C> <C>
Net Company Sales ....................... $ 127 $ 117 $ 114 $ 87 $ 88
Franchise Revenue ....................... 6 10 14 10 11
------ ------ ------ ------- -------
Total Revenue ........................... 133 127 128 97 99
Operating Expenses ...................... 124 114 114 86 88
------ ------ ------ ------- -------
Operating Income. ....................... $ 9 $ 13 $ 14 $ 11 $ 11
====== ====== ====== ======= =======
Comparable Store Sales Increase ......... 6.5 % 2.0 % 7.2 % 7.7 % 0.0 %
AVERAGE UNIT DATA:
Average Unit Sales ($ in thousands):.....
Company Operated ....................... $ 932 $1,019 $1,155 $ 873 $ 921
Franchised ............................. 893 858 852 644 668
Average Guest Check ..................... $ 6.59 $ 6.76 $ 6.63 $ 6.56(a) $ 6.69(a)
Average Weekly Traffic Count ............ 2,720 2,894 3,350 --(b) --(b)
Operated Units:
Company Operated ....................... 127 103 96 98 97
Franchise .............................. 78 112 135 128 143
International .......................... 4 2 10 8 4
------ ------ ------ -------- --------
Total .................................. 209 217 241 234 244
====== ====== ====== ======== ========
</TABLE>
- ---------
(a) Calculated on a comparable store basis.
(b) Data not provided on a quarterly basis.
Three Quarters Ended October 1, 1997 Compared to Three Quarters Ended September
30, 1996
El Pollo Loco's net company sales increased $0.1 million (0.1%) during the
1997 period as compared with the 1996 comparable period. This increase reflects
an estimated $2.3 million impact from the additional week in the 1997 period
compared with the prior year comparable period. Excluding the impact of the
additional week, revenue decreased $2.2 million in comparison to the prior year
period, primarily reflecting a five-unit decrease in the number of units
operating for the entire 1997 period as compared to the entire prior year
period. Comparable store sales were unchanged as a result of lower
36
<PAGE>
customer counts offset by higher guest check averages, both of which are
largely explained by a shift in promotional emphasis during the first two
quarters of 1997. A menu price increase taken in March 1997 also contributed to
the increase in average check in comparison to 1996. Franchise revenue for the
1997 period compared with the 1996 comparable period increased by $1.3 million
(13.1%), primarily due to 11 more franchise units open at the end of the 1997
period as compared with the 1996 period, as well as an increase in franchise
average unit sales. This increase in revenue over the prior year comparable
period reflects the Company's strategy of focusing on growth through
franchising.
El Pollo Loco's operating expenses for the 1997 period as compared with
the 1996 comparable period increased by $1.5 million (1.7%), primarily
reflecting an estimated $1.8 million impact from the additional week in the
1997 period in comparison to the prior year comparable period. Other factors
which affected the 1997 period include an increase in advertising expenses,
expenses related to El Pollo Loco's current reengineering project, and a slight
increase in food costs over the comparable 1996 period. In addition, operating
expenses in the 1997 period include $0.4 million of gains on sales of
restaurants in comparison to $0.6 million of gains in the prior comparable
period. These increases were somewhat offset by lower promotional discounting
and the impact of a shift in promotional emphasis.
El Pollo Loco's operating income for the 1997 period decreased by $0.1
million (0.9%) as compared to the prior year comparable period as a result of
the factors noted above.
1996 vs. 1995
Revenue from Company-owned El Pollo Loco units for 1996 decreased by $1.6
million (1.4%) from 1995 to $114.7 million. The revenue decrease was primarily
driven by a net decrease of seven restaurants (eight units sold to franchisees,
one Company-owned unit opened), partially offset by gains in comparable store
sales.
Comparable store sales increased 7.2%, driven by increased guest traffic,
which on a comparable store basis, increased 9.9%. The increased traffic was
principally attributable to the highly successful "Pollo Bowl," rolled out in
late 1995, which in 1996 accounted for 11% of the menu mix, as well as other
key promotions. Comparable store sales also benefited from the Foster's Freeze
rollout. The decrease in average guest check was driven by a change in value
focus in 1996. During 1995, most of the value offerings featured very large
amounts of food (such as the $14.99 Holiday Feast), whereas in 1996, value was
approached on a quantity and price basis (such as the Pollo Bowl and $9.99 for
12 pieces of chicken).
Franchise revenue in 1996 increased $3.3 million (31.7%) over 1995 to
$13.7 million. The increase in revenue was primarily due to 31 additional
franchise units in 1996. Of the increase in revenue, $0.8 million was generated
from initial fees collected as new franchised units were opened, with the
remainder coming from the ongoing royalty stream of the additional units. Eight
units were sold to franchisees during 1996, generating $0.7 million in gains,
which are reflected as a reduction of operating expenses.
Operating expenses increased $0.5 million in 1996 over the prior year, to
$114.6 million, due to a decrease in gains recognized on the sale of
restaurants to franchisees, from $3.8 million in 1995 to $0.7 million in 1996.
Removing the impact of the decrease in restaurant sales to franchisees, El
Pollo Loco experienced a net decrease in operating expenses of $2.6 million
reflecting, among other things, lower product costs associated with the Pollo
Bowl and other new products, a decrease in direct labor costs due to improved
labor scheduling and staffing initiatives, food cost control measures and a
$0.4 million increase in 1996 amortization of the deferred gain attributable to
the sales of PFC and PTF over the prior year amount. These improvements were
attained despite an increase in chicken prices versus 1995, and the increased
federal and state minimum wages.
Operating income for 1996 in comparison to 1995, improved by $1.2 million
(9.5%) to $13.8 million as a result of the factors discussed above.
1995 vs. 1994
Revenues at El Pollo Loco decreased $6.4 million (4.8%) to $126.7 million
during 1995, from $133.1 million during 1994, primarily due to a 24-unit net
decrease in the number of Company-owned restaurants following the sale of units
to franchisees. Comparable store sales at Company-owned El Pollo Loco units
increased by 2.0% reflecting an increase in average check of 2.4% which was
partially offset by a 0.4% decrease in traffic. During 1995, El Pollo Loco
completed remodels on 57 of its Company-owned restaurants.
Operating expenses at El Pollo Loco decreased by $9.6 million during 1995
due primarily to a 24-unit net decrease at December 31, 1995 as compared with
December 31, 1994 in the number of Company-operated restaurants following the
37
<PAGE>
sale of restaurants to franchisees. El Pollo Loco's operating expenses during
1995 included gains on the sale of restaurants of $3.8 million as compared with
$1.2 million during 1994.
Coco's and Carrows
The following information for the years ended December 31, 1995 and 1996
and the three quarters ended September 30, 1996 is provided for analysis
purposes only as it includes information for periods prior to the acquisition
of Coco's and Carrows by the Company on May 23, 1996:
Consolidated
<TABLE>
<CAPTION>
Year Ended December 31, Three Quarters Ended
-------------------------- ------------------------------
September 30, October 1,
1995 1996 1996 1997
-------------- ----------- --------------- --------------
($ in millions, except Avg. Unit Data)
<S> <C> <C> <C> <C>
Net Company Sales ......................................... $ 502 $ 487 $ 364 $ 368
Franchise Revenue ......................................... 4 4 3 3
-------- ------- -------- --------
Total Revenue ............................................. 506 491 367 371
Operating Expenses ........................................ 474 477 354 349
-------- ------- -------- --------
Operating Income .......................................... $ 32 $ 14 $ 13 $ 22
======== ======= ======== ========
COCO'S
Comparable Store Sales (Decrease) Increase ................ (5.0 %) (1.6 %) (2.3 %) 0.1 %
AVERAGE UNIT DATA:
Average Unit Sales (Company-operated) ($ in thousands)..... $ 1,506 $ 1,462 $ 1,118 $ 1,119
Average Guest Check (c) ................................... $ 6.72 $ 6.79 $ 6.79(a) $ 6.70(a)
Average Weekly Traffic Count (c) .......................... 4,271 4,159 --(b) --(b)
Operated Units:
Company Operated ......................................... 188 183 184 186
Franchise ................................................ 6 5 6 8
International ............................................ 252 278 266 292
-------- ------- -------- --------
Total .................................................... 446 466 456 486
======== ======= ======== ========
CARROWS
Comparable Store Sales (Decrease) Increase ................ (0.2 %) 0.1 % (0.4 %) (1.5 %)
AVERAGE UNIT DATA:
Average Unit Sales (Company-operated)($ in thousands)...... $ 1,372 $ 1,343 $ 1,045 $ 1,028
Average Guest Check (c) ................................... $ 6.09 $ 6.26 $ 6.20(a) $ 6.46(a)
Average Weekly Traffic Count (c) .......................... 4,363 4,252 --(b) --(b)
Operated Units
Company Operated ......................................... 161 160 162 153
Franchise ................................................ -- -- -- 3
-------- ------- -------- --------
Total .................................................... 161 160 162 156
======== ======= ======== ========
</TABLE>
- ---------
(a) Calculated on a comparable unit basis.
(b) Data not provided on a quarterly basis.
(c) The method for determining weekly customer traffic and average guest check
was changed in September 1996 in order to better conform to the Company's
methodology. Amounts for periods prior to September 1996 have not been
restated. For Coco's, the new method will generally result in higher
weekly traffic counts and lower average guest checks than calculated under
the previous method. For Carrows, the new method will generally result in
lower weekly traffic counts and higher average guest checks.
Three Quarters Ended October 1, 1997 Compared to Three Quarters Ended September
30, 1996
Coco's net company sales increased $5.2 million (2.6%) for the three
quarters ended October 1, 1997 as compared to the prior year comparable period.
This increase reflects an estimated $4.8 million impact from the additional six
days in the
38
<PAGE>
1997 period in comparison to the prior year comparable period as well as a
slight increase in comparable store sales. The increase in comparable store
sales was driven by an increase in guest count somewhat offset by a decrease in
average guest check.
Franchise and foreign licensing revenue increased by $0.3 million (10.7%)
for the three quarters ended October 1, 1997 as compared to the prior year
comparable period. This increase is a result of two additional domestic
franchise units as well as an increase in the number of foreign licenses from
266 at September 26, 1996 to 292 at October 1, 1997.
Coco's operating expenses for the three quarters ended October 1, 1997
decreased by $0.6 million (0.3%) as compared to the prior year comparable
period, primarily as a result of savings in product and labor costs due to an
increased operations focus on cost controls, waste reduction and labor
initiatives. In addition, the prior year included non-recurring adjustments of
approximately $1.6 million, which increased legal and workers' compensation
expenses. No comparable charges were included in the 1997 period. These
decreases were partially offset by the impact of an additional six days in the
1997 period as compared to the prior year comparable period and the increase in
federal and state minimum wage rates.
Operating income for Coco's for the three quarters ended October 1, 1997
as compared to the prior year comparable period in 1996 increased $6.1 million
due to the factors noted above.
Carrows' net company sales decreased $1.8 million (1.1%) for the three
quarters ended October 1, 1997 as compared to the prior year comparable period
in spite of an estimated $3.8 million impact from the additional six days in
the 1997 period in comparison to the prior year comparable period. The sales
decrease was primarily the result of a nine-unit decrease in Company-owned
restaurants and also reflects a decrease in comparable store sales. The
decrease in comparable store sales was driven by a decrease in customer counts,
partially offset by an increase in average guest check. Carrows opened its
first domestic franchise location in the first quarter of 1997 and its second
and third in the third quarter of 1997.
Carrows' operating expenses decreased $4.6 million (2.9%) for the three
quarters ended October 1, 1997 as compared to the prior year comparable period,
despite the impact of an additional six days in the 1997 period as compared to
the prior year comparable period and increases in the federal and state minimum
wage rates. This expense decrease reflects the impact of approximately $1.5
million of non-recurring adjustments which increased legal and workers'
compensation expenses in the prior year comparable period and also reflects
savings in product and labor costs due to increased focus by operations on cost
control, waste reduction and labor initiatives.
Operating income for Carrows increased $3.0 million for the three quarters
ended October 1, 1997 as compared to the prior year comparable period due to
the factors noted above.
1996 vs. 1995
The Company's operating results for the year ended December 31, 1996
include 31 weeks of Coco's and Carrows operations subsequent to their
acquisition in May. Coco's and Carrows revenues for the period were $163.7
million and $131.4 million, respectively. Operating expenses for Coco's and
Carrows were $155.5 million and $124.7 million, respectively.
Liquidity and Capital Resources
Historically, the Company has met its liquidity requirements with
internally generated funds, external borrowings, and in recent years, proceeds
from asset sales. Prior to the Petition Date, the Company continued to rely on
internally generated funds, supplemented by available working capital advances
under the Prepetition Credit Agreement, and other external borrowings as its
primary sources of liquidity.
39
<PAGE>
The following table sets forth, for each of the periods indicated, a
calculation of the Company's cash from operations available for debt repayment,
dividends on the Old Preferred Stock and capital expenditures:
<TABLE>
<CAPTION>
Year Ended Three Quarters Ended
December 31, ---------------------------
September 30, October 1,
1995 1996 1996 1997
----------- ----------- --------------- -----------
($ in millions)
<S> <C> <C> <C> <C>
Net loss .................................................................... $ (55.2) $ (85.5) $ (57.3) $ (101.8)
Charge for impaired assets .................................................. 51.4 -- -- --
Provision for restructuring charges ......................................... 15.9 -- -- --
Non-cash charges ............................................................ 120.3 119.9 87.3 106.3
Deferred income tax benefit ................................................. ( 3.5) ( 9.0) ( 0.3) ( 0.7)
Discontinued operations ..................................................... (77.2) -- -- --
Extraordinary items, net .................................................... ( 0.5) -- -- --
Change in certain working capital items ..................................... ( 6.1) 7.4 (35.4) 0.7
Change in other assets and other liabilities, net ........................... (31.0) (16.1) (14.5) ( 18.4)
Reorganization activities ................................................... -- -- -- 3.2
------- ------- ------- --------
Cash from (used in) operations available for debt repayment, dividends on
Old Preferred Stock, and capital expenditures .............................. $ 14.1 $ 16.7 (20.2) ( 10.7)
======= ======= ======= ========
</TABLE>
The cash flows generated by Coco's and Carrows, which were acquired in May
1996, are required by the instruments governing the indebtedness incurred to
finance such acquisition to service the debt issued by FRD and, therefore,
other than for the payment of certain management fees and tax reimbursements
payable to Advantica under certain conditions, are currently unavailable to be
used to service the debt of Advantica and its other subsidiaries. Coco's and
Carrows' cash flows from operations, which are included in the Company's total
cash flow from operations as set forth in the table above, were $21.2 million
and $6.3 million for the year ended December 31, 1996 and the three quarters
ended October 1, 1997, respectively.
The Prepetition Credit Agreement, which was terminated on July 16, 1997
pursuant to the implementation of the DIP Facility, provided the Company with a
$150 million revolving credit facility. It was available for working capital
advances and letters of credit, with a working capital advance sublimit of $75
million. The Prepetition Credit Agreement and the indentures governing the
Company's then-outstanding public debt contained negative covenants that
restricted, among other things, the Company's ability to pay dividends, incur
additional indebtedness, further encumber its assets and purchase or sell
assets. In addition, the Prepetition Credit Agreement included provisions for
the maintenance of a minimum level of interest coverage, limitations on ratios
of indebtedness to earnings before interest, taxes, depreciation and
amortization ("EBITDA") and limitations on annual capital expenditures.
As discussed in Note 16 to the Consolidated Financial Statements, on July
11, 1997, FCI and Flagstar filed a motion with the Bankruptcy Court seeking
authorization to enter into the DIP Facility between FCI, Flagstar, certain
subsidiaries of Flagstar, Chase and certain other lenders named therein. The
DIP Facility refinanced the Prepetition Credit Agreement and was otherwise
available to the Company for working capital and general corporate purposes and
for letters of credit during the pendency of the Reorganization Cases. At a
hearing on July 15, 1997, the Bankruptcy Court entered the Interim DIP Order
and on July 16, 1997, the initial extensions of credit under the DIP Facility
were made pursuant to the Interim DIP Order. On August 12, 1997, the Bankruptcy
Court entered a final order authorizing FCI and Flagstar to access the entire
$200 million DIP Facility. As of October 1, 1997, the Company had working
capital advances outstanding of $23.0 million and letters of credit outstanding
of $79.9 million under the DIP Facility.
For the period following Advantica's emergence from Chapter 11, the
Company entered into the $200 million Credit Facility with Chase and certain
other lenders named therein for the benefit of certain of the Company's
operating subsidiaries. Such facility replaced the DIP Facility upon the
emergence of Advantica from Chapter 11 and is currently being used for working
capital and general corporate purposes and for letters of credit. The Credit
Facility matures on January 7, 2003 (subject to early termination under certain
circumstances). See "Description of Indebtedness -- The Advantica Credit
Agreement." The Company believes the Credit Facility, together with cash
generated from operations, various cash management measures and other sources,
will provide the Company with adequate liquidity to meet its working capital,
debt service and capital expenditure requirements for at least the next twelve
months.
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The DIP Facility was guaranteed by certain of the Company's operating
subsidiaries and generally was secured by liens on the same collateral that
secured the Company's obligations under the Prepetition Credit Agreement. The
Credit Facility has the benefit of similar guarantees and collateral security
(and the Company's guarantee and additional liens on the Company's corporate
headquarters in Spartanburg, South Carolina and accounts receivable). The DIP
Facility contained negative covenants that restricted, among other things, the
Company's ability to pay dividends, incur additional indebtedness, further
encumber its assets and purchase or sell assets (as defined). The Credit
Facility contains certain financial and negative covenants, conditions
precedent, events of default and other terms, conditions and provisions
customarily found in credit agreements for leveraged financings. The Credit
Facility was approved by the Bankruptcy Court pursuant to the order confirming
the Plan of Reorganization.
With respect to the long-term liquidity of the Company, the Company's
management believes that, after giving effect to the Plan of Reorganization,
the Company will have sufficient operating cash flow from operations (together
with funds available under the Credit Facility) to pay interest and scheduled
amortization on all of its outstanding indebtedness and to fund anticipated
capital expenditures through 1999. However, even though the Plan of
Reorganization has been consummated, the Company's ability to meet its debt
service obligations will depend on a number of factors, including management's
ability to maintain operating cash flow. See "Risk Factors -- Highly Leveraged
Position."
In connection with the acquisition of Coco's and Carrows, FRI-M, which
became thereby a wholly-owned subsidiary of the Company, obtained a new credit
facility consisting of a $56 million term loan, which matures on August 31,
1999, and a $35 million revolving credit facility, which is available until
August 31, 1999 for Coco's and Carrows general working capital advances and
letters of credit. Such facility is unavailable to Advantica and its other
subsidiaries.
As of December 31, 1996 and October 1, 1997 on a pro forma basis giving
effect for the reorganization and the disposition, scheduled debt maturities of
the Company's long-term debt for the years 1997 and thereafter are as follows:
<TABLE>
<CAPTION>
October 1, 1997
Historical Pro Forma
-------------------------- --------------------------
Company Company
Excluding FRD FRD Excluding FRD FRD
--------------- ---------- --------------- ----------
($ in millions)
<S> <C> <C> <C> <C>
1997 $ 43.3 $ 19.6 -- --
1998 34.2 23.6 $ 31.8 $ 23.5
1999 27.5 23.7 28.8 23.4
2000 323.3 3.4 357.0 3.1
2001 277.9 3.1 10.3 2.9
Thereafter ......... 1,298.0 164.7 609.8 179.5
</TABLE>
- ---------
Since the leveraged buyout of Flagstar in 1989, the Company has not
achieved the revenue and earnings projections prepared at the time of that
transaction, due in large part to increased competition, intensive pressure on
pricing due to discounting, adverse economic conditions and relatively limited
capital resources to respond to these changes. Such trends generally continued
into 1997. The Company's cash flows have been sufficient to fund its operations
and make interest payments when due (although in anticipation of the Original
Plan and related bankruptcy filings to implement the Original Plan, Flagstar
did not make the March 15, 1997 interest payment on the 11 3/8% Debentures or
the May 1, 1997 interest payments on the 11.25% Debentures or 10% Convertible
Debentures). However, the Company's core businesses have not experienced cash
flow growth sufficient to provide adequate funds to invest for future growth.
These conditions presented both short-term and long-term financial
challenges to the Company. To address these matters, management developed and
implemented certain plans to maintain the Company's liquidity and improve its
capital structure. Specifically, the Board of Directors elected not to declare
the January 15, 1997 and April 15, 1997 quarterly dividends on the Old
Preferred Stock (the July 15, 1997 and October 15, 1997 payments were also not
declared, in view of FCI's bankruptcy filing). In addition, on March 6, 1997,
the Prepetition Credit Agreement was amended to provide for less restrictive
financial covenants for measurement periods ending on April 2, 1997 and July 2,
1997, as well as to provide Flagstar flexibility to forego scheduled interest
payments due in March, May and June 1997 under the Old Senior Notes, the Senior
Subordinated Debentures and the 10% Convertible Debentures without triggering a
default under the Prepetition Credit Agreement, unless any such debt was
declared to be due and payable as a result of the failure to pay any such
interest. On March 17, 1997, Flagstar elected not to make an interest payment
due and payable as of that date with respect to the 11 3/8% Debentures. As a
result, and as a result of a continuation of such non-payment for 30 days
following the due date, Flagstar was in default under the indenture governing
the 11 3/8% Debentures. In addition, on May 1, 1997, Flagstar
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elected not to make interest payments due and payable as of that date with
respect to the 11.25% Debentures and the 10% Convertible Debentures. As a
result, and as a result of such non-payment for 30 days following the due date,
Flagstar was in default under the indentures governing such debentures. During
the pendency of the Reorganization Cases, Flagstar also missed the $14.5
million interest payment due September 15, 1997 on its 10 3/4% Senior Notes and
the $7.1 million interest payment due September 15, 1997 on its 11 3/8%
Debentures. The Reorganization Cases operated as an automatic stay of all
collection and enforcement actions by the holders of the Senior Subordinated
Debentures, the 10% Convertible Debentures, the Old Senior Notes, and by the
respective indenture trustees with respect to Flagstar's failure to make the
interest payments when due.
Management concluded that, over the long-term, a substantial restructuring
or refinancing of the Company's debt was required to allow the Company to meet
its long-term debt obligations and was a prerequisite to future growth through
additional investment in its restaurants. It was in this context that FCI and
Flagstar developed the Original Plan and ultimately consummated the Plan of
Reorganization. See "The Company -- The 1997 Restructuring."
The Company's principal capital requirements are those associated with
opening new restaurants and remodeling and maintaining its existing restaurants
and facilities. During 1996, total capital expenditures were approximately
$67.3 million, of which approximately $1.3 million was used to remodel existing
restaurants, $21.8 million was used to refurbish existing restaurants, $7.5
million was used for point-of-sale ("POS") systems and other information
technology assets, $0.8 million was used to open new restaurants, and $35.9
million was used to maintain existing facilities and equipment. Of the total
capital expenditures, approximately $12.3 million were financed through capital
leases. Cash capital expenditures during 1997 (excluding capital leases) are
expected to total approximately $65.0 million.
At October 1, 1997 and December 31, 1996, the Company had working capital
deficits, exclusive of net assets held for sale, of $286.5 million and $297.7
million, respectively, as compared with $122.2 million at the end of 1995. Such
increase from 1995 to 1996 reflects the use of the Company's excess cash at
December 31, 1995, which resulted from the sales of the Company's
non-restaurant business in 1995, to acquire the Coco's and Carrows restaurant
chains and to fund the Company's operations. The decrease in the deficit from
December 31, 1996 to October 1, 1997 is attributable primarily to a
reclassification at October 1, 1997 of accrued interest of $100.8 million from
current liabilities to liabilities subject to compromise, largely offset by a
reduction in cash and cash equivalents which has been used for Company
operations. The Company is able to operate with a substantial working capital
deficiency because: (i) restaurant operations are conducted primarily on a cash
(and cash equivalent) basis with a low level of accounts receivable, (ii) rapid
turnover allows a limited investment in inventories and (iii) accounts payable
for food, beverages, and supplies usually become due after the receipt of cash
from related sales.
On February 22, 1996, the Company entered into an agreement with
Integrated Systems Solutions Corporation ("ISSC"). The ten year agreement (as
amended) for $357.5 million requires annual payments by the Company ranging
from $24.0 million to $51.2 million and provides for ISSC to manage and operate
the Company's information systems, as well as develop and implement new systems
and applications to enhance information technology for the Company's corporate
headquarters, restaurants, and field management. ISSC will oversee data center
operations, applications development and maintenance, voice and data
networking, help desk operations, and POS technology under the agreement.
As further described elsewhere in this Prospectus, on January 14, 1998
Advantica signed a letter of intent for the sale of stock of FEI, a
wholly-owned subsidiary which operates the Company's Hardee's restaurants under
licenses for HFS. The Company would receive $369.1 million in cash (subject to
adjustment as outlined in such letter of intent) in exchange for all of the
outstanding stock of FEI. In addition, the purchaser would assume $45.6 million
of capital leases. The transaction is expected to be completed by the end of
the first quarter of 1998. The proposed transaction would require consents of
the lenders under the Credit Facility and the Company is currently negotiating
the terms of an amendment which would include such consent. For more
information see "Prospectus Summary -- Recent Developments."
Impact of Bankruptcy Petitions on Franchising
The operation of the Company's franchise system is subject to regulations
enacted by a number of states, and rules promulgated by the Federal Trade
Commission. Among other things, such regulations require that each franchising
entity annually renew its Uniform Franchise Offering Circular (the "UFOC")
which provides current information about the business. In addition, in the
event that any information in the UFOC becomes misleading, inaccurate or
incomplete during the year, the UFOC must be amended at that time to make
appropriate disclosures. When this occurs, the franchising entity must cease
its sale of new franchises until the UFOC has been updated to make the required
disclosures. In some states, the updated UFOC must be reviewed and approved by
a regulatory agency before the entity can resume franchise sales. Due to the
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involuntary Chapter 11 proceeding that was filed against Flagstar on June 17,
1997 (which was subsequently dismissed) and the subsequent filing of voluntary
petitions with the Bankruptcy Court by FCI and Flagstar on July 17, 1997,
management decided it would be appropriate for the Company's franchising
subsidiaries (Carrows, Coco's, Denny's and El Pollo Loco) to update their
offering circulars and to cease sales of new franchises until an updated UFOC
had been prepared and approved by the states that regulate the sale of
franchises. Denny's obtained approval and began selling franchises again in all
states in which it has significant operations in mid-July 1997; Carrows and
Coco's obtained approval and began selling franchises again in all states in
which they have significant operations in late July 1997; and El Pollo Loco
resumed franchising in early August 1997.
Due to the Bankruptcy Court's approval of the Plan of Reorganization by
order entered on November 12, 1997, management decided that it would be
appropriate for the Company's franchising subsidiaries again to update their
offering circulars and to cease sales of new franchises until an updated UFOC
had been prepared and approved by those states that regulate the sale of
franchises. Denny's began selling franchises again in all states in which it
has significant operations in mid-November 1997; Carrows and Coco's obtained
approval and began selling franchises again in all states in which they have
significant operations in late November 1997; and El Pollo Loco resumed
franchising in mid-December 1997.
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BUSINESS
Introduction
The Company is one of the largest restaurant companies in the United
States, operating (directly and through franchisees) more than 3,200 moderately
priced restaurants.
FCI was organized as a holding company in 1988 in order to effect the
leveraged buyout of Flagstar in 1989. On November 16, 1992, FCI and Flagstar
consummated the 1992 Recapitalization, which included, among other things, an
equity investment by affiliates of KKR. As a result of such transactions,
affiliates of KKR acquired control of the Company. Prior to June 16, 1993, FCI
and Flagstar had been known, respectively, as TW Holdings, Inc. and TW
Services, Inc.
As a result of the 1989 leveraged buyout of Flagstar, the Company became
and remains very highly leveraged. While the Company's cash flows have been
sufficient to cover interest costs, operating results since the buyout in 1989
have fallen short of expectations. Such shortfalls have resulted from negative
operating trends due to increased competition, intensive pressure on pricing
due to discounting, declining customer traffic, adverse economic conditions,
and relatively limited capital resources to respond to these changes. These
operating trends generally continued through 1997. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" for additional information. For information concerning the
Plan of Reorganization, which became effective January 7, 1998, see "The
Company -- The 1997 Restructuring" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
On May 23, 1996, the Company, through FRD, a newly-formed subsidiary,
consummated the acquisition of the Coco's and Carrows restaurant chains
consisting of 347 Company-owned units within the mid-scale family-style dining
category in order to capitalize on the Company's experience in the restaurant
industry and the California market and to maximize the synergies among the
Company's restaurant chains, including increased purchasing power. The ultimate
acquisition price of $313.4 million was paid in consideration for all of the
outstanding stock of FRI-M, then a subsidiary FRI, which owns the Coco's and
Carrows chains. The acquisition was accounted for using the purchase method of
accounting and is reflected in the Company's Consolidated Financial Statements
and Notes thereto included herein as of the acquisition date.
During the third quarter of 1996, the Company sold PTF, its food
processing operations, marking the last in a series of non-restaurant
divestitures which began with the sale of Canteen Corporation, the Company's
food and vending business, in 1994 and also included the 1995 sales of TWRS, a
concession and recreation services subsidiary; VS, a stadium concession
services subsidiary; and PFC, the Company's food distribution subsidiary.
Restaurants
Advantica's operations are conducted through six restaurant chains or
concepts, four chains in the full-service mid-scale dining segment and two in
the quick-service segment. Denny's, Advantica's largest concept, is the
nation's largest chain of family-style full-service restaurants, with more than
1,650 units in 49 states, two U.S. territories, and two foreign countries.
Denny's largest concentration domestically is in California and Florida with
552 units in these two states. Management believes that Denny's has the leading
share of the national market in the family-style category. Quincy's, with 180
locations, is one of the largest chains of family-steak restaurants in the
southeastern United States, offering steak, chicken and seafood entrees as well
as a buffet bar, called "America's Home Plate." A weekend breakfast buffet is
also available at most Quincy's locations. Advantica also operates El Pollo
Loco, a chain of 247 quick-service restaurants featuring flame-broiled chicken
and steak products and related Mexican food items, with a strong regional
presence in California. As indicated above, the Company acquired the Coco's and
Carrows chains in 1996. Coco's is a regional bakery restaurant chain operating
493 units in seven western states and three foreign countries. Coco's offers a
wide variety of fresh-baked goods and value priced meals that capitalize on
emerging food trends in the western United States. The Carrows chain,
consisting of 154 units in seven western states, specializes in traditional
American food, with an emphasis on quality, homestyle fare at an excellent
value. Hardee's is a chain of quick-service restaurants of which Advantica,
with 557 units located primarily in the Southeast, is the largest franchisee.
Although specializing in sandwiches, the Company's Hardee's restaurants serve
fried chicken and offer a breakfast menu that accounts for approximately 44% of
total sales and features the chain's famous "made-from-scratch" biscuits. For a
breakdown of the total revenues contributed by each referenced concept for the
last three years, see the corresponding section of "Management's Discussion and
Analysis of Financial Condition and Results of Operations." For information
concerning the proposed sale of the Company's Hardee's operation, see
"Prospectus Summary -- Recent Developments." Although operating in two distinct
segments of the restaurant industry -- full-service and quick-service --
the Company's restaurants benefit from a single management strategy that
emphasizes superior value and quality, friendly
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and attentive service and appealing facilities. During 1996, the Company
continued its strategy of growth through franchising, adding a net 66 total
units to the system (excluding the impact of the additional 610 units acquired
through the Coco's and Carrows acquisition), representing an increase of 133
franchise units, offset by a decline of 67 Company-operated units. The increase
in franchise units and the decrease in Company-operated units includes 27 units
which were sold to franchisees (turnkeyed). The Company intends to continue
focusing on growth in the franchise arena in 1998.
The Company believes its restaurant operations benefit from the diversity
of the restaurant concepts represented by its various chains, the generally
strong market positions and consumer recognition enjoyed by these chains, the
benefits of a centralized support system for purchasing, menu development,
human resources, management information systems, site selection, restaurant
design and construction, and an aggressive new management team. Denny's,
Quincy's, Coco's and Carrows may benefit from the demographic trend of aging
baby boomers and the growing population of elderly persons. The largest
percentage of "mid-scale" customers comes from the 35 and up age group. In the
quick-service segment, the Company expects El Pollo Loco to increase its strong
position in the Southwest.
During the fourth quarter of 1993, the Company approved a restructuring
plan for its restaurant concepts which included, among other things, the
identification of units for sale, closure or conversion to another concept. At
December 31, 1996, four units remained from the 1993 restructuring plan.
Management has decided to continue to operate two of the units, one has been
sold and one is scheduled for closure in 1998.
During 1995, the Company identified 36 additional underperforming units
for sale or closure, of which 29 units were disposed of through 1996.
Management intends to dispose of one of the remaining units and will continue
to operate the other six.
See Note 3 to the accompanying Consolidated Financial Statements of the
Company for additional information concerning these identified units.
Denny's
Denny's is the largest full-service family-style restaurant chain in the
mid-scale segment in the United States in terms of both number of units and
total revenues. Denny's restaurants currently operate in 49 states, two U.S.
territories, and two foreign countries, with principal concentrations in
California, Florida, Texas, Arizona, Washington, Illinois, Ohio, and
Pennsylvania. Denny's restaurants are designed to provide a casual dining
atmosphere with moderately priced food and quick, efficient service to a broad
spectrum of customers. The restaurants generally are open 24 hours a day, seven
days a week. All Denny's restaurants have uniform menus (with some regional and
seasonal variations) offering traditional family fare (including breakfast
items, steaks, seafood, hamburgers, chicken and sandwiches) and provide both
counter and table service. In 1996, Denny's sales were evenly distributed
across each of its dayparts, with breakfast and lunch representing
approximately 60% of total traffic. Denny's restaurants had a 1996 average
guest check of $5.03 and average annual unit sales of $1.3 million. Denny's
currently employs approximately 41,000 people.
In 1994, the Company began a "reimaging" strategy designed to enhance the
competitive positioning of Denny's. This reimaging strategy involved all
restaurants within a market area and included an updated exterior, new signage,
an improved interior layout with more comfortable seating and enhanced
lighting. The Company completed the reimaging of 306 restaurants through 1995.
During 1995, management curtailed this reimaging program in order to focus its
attention and resources on programs specifically designed to enhance the
customer's experience at Denny's by improving service and value positioning. In
1996, the Company started limited exterior refurbishments on 588 units
primarily focusing on exterior improvements, such as landscaping, exterior
lighting, sign replacement and parking lot repairs to enhance the curb appeal
of the restaurants. At December 31, 1996, approximately three-quarters of the
588 units scheduled to receive this limited refurbishment had been completed.
Historically, Denny's has had the lowest average guest check within the
family-style category. In January 1996, Denny's rolled out a value menu that
featured value priced items for breakfast, lunch and dinner with tiered pricing
starting at $1.99, $2.99 and $3.99, respectively. At the same time, the Company
launched several initiatives (including a more operationally focused
organizational structure, modern information systems and reengineered
restaurant processes) designed to deliver better service and more consistent
product quality. The Company refined and accelerated these efforts in 1997.
During 1997, the Company continued its focus on opening new franchise units to
capitalize on its status as a leading franchisor. For the last three years,
Denny's has opened more new units than any competitor in the mid-scale segment.
Furthermore, Denny's has supplemented its franchise development efforts by
selectively selling Company-owned units to franchisees.
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During 1996, the Company added a net 82 new Denny's franchise units,
including the sale of 19 Company-owned units to franchisees, bringing the total
franchised units to 702, or 44% of all Denny's restaurants. The initial fee for
a single Denny's franchise is $35,000, and the current royalty payment is
approximately 4% of gross sales.
Hardee's
As discussed above, the Company has signed a letter of intent to sell its
Hardee's operation. The Company would receive $369.1 million in cash (subject
to adjustment as outlined in the Letter of Intent) in exchange for all of the
outstanding stock of FEI, the Company's subsidiary which conducts the Hardee's
operation. In addition, the purchaser would assume $45.6 million of capital
leases. The transaction is expected to be completed by the end of the first
quarter of 1998. For information concerning such proposed sale, see "Prospectus
Summary -- Recent Developments." For additional information concerning the
Company's Hardee's operations, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company's Hardee's restaurants are operated under licenses from HFS.
FEI, the Company subsidiary, is HFS' largest franchisee, operating 16% of
Hardee's restaurants nationwide. HFS is the seventh largest chain in the United
States based on national system wide sales. Of the 580 Hardee's restaurants
operated by the Company at December 31, 1996, 557 were located in nine
southeastern states. The Company's Hardee's currently employ approximately
22,000 people. The Company's Hardee's restaurants provide uniform menus in a
quick-service format targeted to a broad spectrum of customers. The restaurants
offer hamburgers, chicken, roast beef and fish sandwiches, hot dogs and low-fat
yogurt, as well as a breakfast menu featuring Hardee's popular
"made-from-scratch" biscuits. To add variety to its menu, further differentiate
its restaurants from those of its major competitors and increase customer
traffic during the traditionally slower late afternoon and evening periods, HFS
completed the rollout of fresh fried chicken as a menu item in 1993.
Substantially all of the Company's Hardee's restaurants have drive-thru
facilities, which provided 51% of the chain's revenues in 1996. Most of the
restaurants are open 16-17 hours a day, seven days a week. Operating hours of
selected units have been extended to 24 hours a day, primarily on weekends.
Hardee's breakfast menu, featuring the chain's signature "made-from-scratch"
biscuits, accounts for approximately 44% of total sales at the Company's
Hardee's restaurants. The average guest check at the Company's Hardee's was
$3.17 in 1996, and average annual unit sales for the Company's Hardee's
restaurants was $1.0 million.
Management implemented several action plans in the second half of 1996 to
focus on customer satisfaction. These initiatives included new menu boards in
all of its units and a "touch-up" project in 276 units. The "touch-up" project
included new roofs, paint, trim and wallpaper as well as minor landscaping and
parking lot repairs and is substantially complete. Hardee's has also installed
new microwaves in all units and implemented procedures to provide customers
with a hot product. Additionally, management costs have been reduced by the
elimination of two layers of management and the streamlining of management
reporting relationships. During 1996, the Company closed 14 under-performing
Hardee's units.
Each Hardee's restaurant is operated under a separate license from HFS.
Each license grants the exclusive right, in exchange for a franchise fee,
royalty payments and certain covenants, to operate a Hardee's restaurant in a
described territory, generally a town or an area measured by a radius from the
restaurant site. Each license has a term of 20 years from the date the
restaurant is first opened for business and is non-cancelable by HFS, except
for the franchisee's failure to abide by its covenants. Earlier issued license
agreements are renewable under HFS' renewal policy; more recent license
agreements provide for successive five-year renewals upon expiration, generally
at rates then in effect for new licenses. Each year, a number of FEI's licenses
are scheduled for renewal. FEI has historically experienced no difficulty in
obtaining such renewals.
The Company's territorial development agreement with HFS, which called for
FEI to open a specified number of Hardee's restaurants in a development
territory in the Southeast (and certain adjacent areas) by the end of 1996, was
terminated during the fourth quarter of 1995. Termination of such agreement
makes FEI's development rights non-exclusive in the development territory. As a
result, HFS and other Hardee's franchisees along with FEI are permitted to open
Hardee's restaurants in such territory.
The Company does not believe HFS has satisfied its contractual obligations
to support the Hardee's franchise. On March 19, 1997, the Company notified HFS,
pursuant to its various license agreements, that FEI was seeking to arbitrate
certain claims against HFS. In its demand for arbitration, FEI alleges, among
other things (i) breach by HFS of its license agreements with FEI, (ii) breach
of fiduciary duty and negligence by HFS in mishandling and misapplying funds of
FEI held for advertising, and (iii) unfair trade practices. Such arbitration
proceeding has been suspended by the parties as a result of the Letter of
Intent for the sale of FEI to HFS' parent company (or an affiliate thereof). If
such proposed sale were not
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consummated and the arbitration proceeding were to resume, no assurance can be
given as to the outcome of such proceeding or its impact on the Company's
continuing Hardee's operations. If the proposed sale is consummated, all claims
made by the Company against HFS would be released.
Quincy's
Ranked by 1996 sales, Quincy's is the sixth largest family-steak (grill
buffet) chain in the country and is one of the largest such chains in the
southeastern United States. The Quincy's chain, employing approximately 11,000
people, currently consists of 180 Company-operated limited service restaurants,
which are designed to provide value conscious customers with a varied menu,
abundant portions and great steaks at moderate prices. The average guest check
at Quincy's in 1996 was $6.06. All Quincy's are open seven days a week for
lunch and dinner. The dinner daypart is Quincy's strongest, representing 63% of
total sales in 1996. The average annual unit sales for a Quincy's restaurant
was approximately $1.3 million in 1996. The restaurants serve steak, chicken
and seafood entrees along with a buffet-style food bar, called "America's Home
Plate," offering hot foods, soups, salads and desserts. In addition, weekend
breakfast service, which is available at most locations, allows Quincy's to
utilize its base assets more efficiently.
After experimenting with a number of formats at Quincy's from 1993 through
1995, including enhancements to the scatter bar buffet and a few buffet only
restaurants, management determined that a repositioning of Quincy's with better
quality food and the "No Mistake Steak" would provide a more effective
marketing strategy. In that regard, Quincy's initiated a "Relaunch" program in
October 1996 designed to improve service basics, food quality and the marketing
effectiveness of Quincy's, and to differentiate Quincy's from other
family-steak restaurants.
El Pollo Loco
El Pollo Loco is the leading chain specializing in flame-broiled chicken
in the quick-service segment of the restaurant industry. Of the total 247 El
Pollo Loco restaurants, which are located in five southwestern states and two
foreign countries, [86%] are located in Southern California. El Pollo Loco
currently employs approximately 2,500 people.
El Pollo Loco restaurants are generally open 12 hours a day, seven days a
week for lunch and dinner. A majority of the Company's El Pollo Loco
restaurants have drive-thru facilities, which provided 33% of the chain's
revenues in 1996. The dinner daypart for El Pollo Loco is the strongest,
representing 54% of total sales.
El Pollo Loco directs its marketing at customers desiring an alternative
to traditional fast food products, offering unique tasting and high quality
products which help position the brand as high quality fast food at a
competitive price. The restaurants are designed to facilitate customer viewing
of the preparation of the flame-broiled chicken, and the food is served
quickly, but prepared slowly, using fresh ingredients. Much of the brand's
recent growth can be attributed to successful menu positioning, new product
offerings, dual branding with the complementary Fosters Freeze dessert line,
which commenced in late 1995, and restaurant remodeling. The average guest
check at El Pollo Loco in 1996 was $6.63 and average annual Company-owned
restaurant sales reached record levels of approximately $1.2 million in 1996.
Based on El Pollo Loco's recent success, the Company is optimistic about
future expansion of the El Pollo Loco concept, principally through franchising
in Texas and in other California markets. In 1997, the Company opened
relatively few Company-owned El Pollo Loco restaurants and focused instead on
its franchising efforts. To accelerate the franchise expansion, in 1996 the
Company sold eight units to franchisees which were not part of the growth
strategy for Company-owned El Pollo Loco units. In the first quarter of 1996,
the Company secured the international rights to the El Pollo Loco brand to
facilitate expansion opportunities in Mexico and other countries.
In 1996 the chain had a net increase of 24 units, representing a net 31
franchise unit increase, offset by a Company-operated decrease of seven units.
The initial fee for a single El Pollo Loco franchise is $35,000 and the current
royalty payment rate is 4% of gross sales.
Coco's
Coco's is a regional bakery restaurant chain operating primarily in
California, Arizona, and Texas, as well as Japan and Korea. Coco's currently
consists of 178 Company-operated, 17 domestic franchised and 298 international
licensed restaurants, and employs approximately 9,000 people. Coco's offers a
variety of fresh-baked goods such as pies, muffins and cookies and
value-priced, innovative menu items that capitalize on emerging food trends in
the western United States. The chain has positioned itself at the upper end of
the mid-scale family-style category, offering a variety of great food, great
service, and a pleasant atmosphere at fair prices, to answer the needs of
quality conscious family diners. The restaurants are
47
<PAGE>
generally open 18 hours a day, with several units opened 24 hours a day on
weekends. Coco's restaurants have uniform menus and serve breakfast, lunch and
dinner, as well as a "late night" menu in those restaurants open around the
clock.
Lunch and dinner dayparts are Coco's strongest, comprising 37% and 39% of
1996 sales, respectively. In 1996, the average guest check was $6.79, with
average annual unit sales of approximately $1.5 million.
With a foreign presence that is among the largest of any U.S. based,
non-fast food restaurant chain, Coco's has laid the foundation to aggressively
expand its international operations. Internationally, 41 units have been added
to the system since the Company acquired the chain in May 1996. Additionally,
Coco's is placing new emphasis on domestic franchising as an opportunity to
achieve further growth of the brand. The initial fee for a single Coco's
franchise is $35,000 and the current royalty payment rate is 4% of net sales.
Carrows
Carrows is a regional mid-scale family-style restaurant chain operating
primarily in seven western states. Carrows currently consists of 154
Company-operated units and employs approximately 7,000 people. Carrows
specializes in traditional American food, with an emphasis on quality,
homestyle fare at an excellent value. The concept appeals strongly to families
with children as well as to mature adults -- two groups expected to grow
rapidly into the next century. The menu is always current, but not trendy, and
is revised regularly to reflect the most appealing foods that guests demand.
The restaurants are generally open 18 hours a day, with 25% open 24 hours a
day. Carrows restaurants have uniform menus and serve breakfast, lunch and
dinner, as well as a "late night" menu in those restaurants open 24 hours a
day.
Lunch and dinner dayparts are Carrows' strongest, comprising 30% and 44%
of 1996 sales, respectively. In 1996, the average guest check was $6.26, with
average annual unit sales of approximately $1.3 million.
Operations
The Company believes that successful execution of basic restaurant
operations in each of its restaurant chains is critical to its success.
Accordingly, significant effort is devoted to ensuring that all restaurants
offer quality food and service. Through a network of division, region, district
and restaurant level managers or leaders, the Company standardizes
specifications for the preparation and efficient service of quality food, the
maintenance and repair of its premises and the appearance and conduct of its
employees. Major emphasis is placed on the proper preparation and delivery of
the product to the consumer and on the cost-effective procurement and
distribution of quality products.
A principal feature of the Company's restaurant operations is the constant
focus on improving operations at the unit level. Unit managers are especially
hands-on and versatile in their supervisory activities. Region and district
leaders have no offices and spend substantially all of their time in the
restaurants. A significant majority of restaurant management personnel began as
hourly employees in the restaurants and therefore perform restaurant functions
and train by example. The Company benefits from an experienced management team.
Each of the Company's restaurant chains maintains training programs for
employees and restaurant managers. Restaurant managers and assistant managers
receive training at specially designated training units. Areas of training for
managers include customer interaction, kitchen management and food preparation,
data processing and cost control techniques, equipment and building maintenance
and leadership skills. Video training tapes demonstrating various restaurant
job functions are located at each restaurant location and are viewed by
employees prior to a change in job function or using new equipment or
procedures.
Each of the Company's restaurant chains continuously evaluates its menu.
New products are developed in Company test kitchens and then introduced in
selected restaurants to determine customer response and to ensure that
consistency, quality standards and profitability are maintained. If a new item
proves successful at the research and development level, it is usually tested
in selected markets, both with and without market support. A successful menu
item is then incorporated into the restaurant system. In the case of the
Hardee's restaurants, menu development is coordinated with HFS.
Financial and management control is facilitated by the use of POS systems
in all of the Company's restaurants which transmit detailed sales reports,
payroll data and periodic inventory information for management review. During
the fourth quarter of 1996, the Company began rolling out new POS systems in
its Company-owned Denny's restaurants. These systems are expected to help the
restaurants improve customer service by providing more accurate and faster
turnaround of customer orders and better inventory control. In addition, the
new POS systems will aid in decision-making by providing sales information on a
more timely basis, with a higher level of detail for better data analysis. Over
the next two years, management intends to install new POS systems in all
Company-owned restaurants pursuant to its information services
48
<PAGE>
agreement with ISSC as more fully discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Advertising
The Company uses an integrated process to promote its concepts, including
media, menu strategy, interior/exterior building design, style of service and
specialized promotions to help differentiate itself in the marketplace. Media
advertising is primarily product oriented, generally featuring high margin,
special entrees or meal combinations presented and priced to convey high value.
Such advertising is conducted through national, regional and local television
advertising as well as radio, outdoor and print advertising depending on the
target market. Sophisticated consumer marketing research techniques are
utilized to measure customer satisfaction and customers' evolving expectations.
During 1996, the Company spent from 3% to 7% of its concepts' gross sales on
advertising.
In accordance with the HFS licensing agreements, the Company spent
approximately 7.1% of its Hardee's units' total gross sales on marketing and
advertising during 1996. Of this amount, approximately 3.0% of total gross
sales is contributed to media cooperatives and HFS' national advertising fund.
The balance was directed by the Company at local levels.
Site Selection
The success of any restaurant is influenced significantly by its location.
The site selection process for Company-owned restaurants consists of three main
phases: strategic planning, site identification and detailed site review. The
planning phase ensures that restaurants are located in strategic markets. In
the site identification phase, the major trade areas within a market area are
analyzed and a potential site identified. The final and most time consuming
phase is the detailed site review. In this phase, the site's demographics,
traffic and pedestrian counts, visibility, building constraints and competition
are studied in detail. A detailed budget and return on investment analysis are
also completed. The Company considers its site selection standards and
procedures to be rigorous and will not compromise those standards or procedures
in order to achieve accelerated growth.
Raw Materials Sources and Availability
The Company has a centralized purchasing program which is designed to
ensure uniform product quality as well as reduced food, beverage and supply
costs. The Company's size provides it with significant purchasing power which
often enables it to obtain products at more favorable prices from several
nationally recognized manufacturers.
Food and packaging products for the Company's Hardee's restaurants are
purchased from HFS and independent suppliers approved by HFS. A substantial
portion of the products for the Company's Hardee's and Quincy's restaurants is
obtained from Meadowbrook Meat Company, Inc. ("MBM"), an independent
supplier/distributor. In connection with the 1995 sale of its distribution
subsidiary, PFC, to MBM, the Company entered into an eight year distribution
agreement, subsequently extended to ten years, with MBM under which PFC/MBM
will continue to distribute and supply certain products and supplies to the
Company's Denny's, Hardee's, Quincy's and El Pollo Loco restaurants. Beginning
in January 1998, Coco's and Carrows became subject to similar agreements. There
are no volume requirements relative to these agreements; however, the products
named therein must be purchased through PFC/MBM unless they are unable to make
delivery within a reasonable period. During the third quarter of 1996, the
Company sold PTF, its food processing operations. In conjunction with each of
these sales, the Company entered into a five year purchasing agreement with the
acquirer under which the Company is required to purchase certain minimum annual
volumes. If such volumes are not purchased, the agreements provide for the
payment of penalties.
The Company believes that satisfactory sources of supply are generally
available for all the items regularly used by its restaurants and has not
experienced any material shortages of food, equipment, or other products which
are necessary to its restaurant operations.
Seasonality
The Company's business is moderately seasonal. Restaurant sales are
generally greater in the second and third calendar quarters (April through
September) than in the first and fourth calendar quarters (October through
March). Occupancy and other operating costs, which remain relatively constant,
have a disproportionately negative effect on operating results during quarters
with lower restaurant sales. The Company's working capital requirements also
fluctuate seasonally, with its greatest needs occurring during its first and
fourth quarters.
49
<PAGE>
Trademarks and Service Marks
The Company, either directly or through wholly-owned subsidiaries, has
registered certain trademarks and service marks with the United States Patent
and Trademark office and in international jurisdictions, some of which include
Denny's(R), El Pollo Loco(R), Quincy's(R), Coco's(R), Carrows(R), and Grand
Slam Breakfast(R). The Company regards its trademarks and service marks as
important to the identification of its restaurants and believes they are of
material importance to the conduct of its business. Domestic trademark and
service mark registrations are renewable at various intervals from 10 to 20
years, while international trademark and service mark registrations have
various durations from five to 20 years. The Company generally intends to renew
trademarks and service marks which come up for renewal. The Company owns or has
rights to all trademarks it believes are material to its restaurant operations.
Research and Development
The Company engages in research and development on an ongoing basis,
testing new products and procedures for possible introduction into the
Company's systems. The Company has also frequently helped HFS develop and
test-market new products. While research and development activities are
important to the Company's business, amounts expended for these activities are
not material.
Competition
The restaurant industry can be divided into three main segments:
full-service restaurants, quick-service restaurants, and other miscellaneous
establishments. Since the early 1970s, growth in eating places has been driven
primarily by quick-service restaurants. On a segment-wide basis, the
full-service and quick-service restaurants currently have approximately the
same revenues and an equal share of the market. Full-service restaurants
include the mid-scale (family-style and family-steak), casual dining and
upscale (fine dining) segments. The mid-scale segment, which includes Coco's,
Carrows, Denny's and Quincy's, is characterized by complete meals, menu variety
and moderate prices ($5-$7 average check), and includes a small number of
national chains, many local and regional chains, and thousands of independent
operators. The casual dining segment, which typically has higher menu prices
($8-$16 average check) and availability of alcoholic beverages, primarily
consists of regional chains and small independents. The quick-service segment,
which includes Hardee's and El Pollo Loco, is characterized by low prices
(generally, $3-$5 average check), finger foods, fast service, and convenience.
A small number of large sandwich, pizza, and chicken chains overwhelmingly
dominate the quick-service segment.
The restaurant industry is highly competitive and affected by many
factors, including changes in economic conditions affecting consumer spending,
changes in socio-demographic characteristics of areas in which restaurants are
located, changes in customer tastes and preferences and increases in the number
of restaurants generally and in particular areas. Competition among a few major
companies that own or operate quick-service restaurant chains is especially
intense. Restaurants, particularly those in the quick-service segment, compete
on the basis of name recognition and advertising, the quality and perceived
value of their food offerings, the quality and speed of their service, the
attractiveness of their facilities and, to a large degree in a recessionary
environment, price and perceived value.
Management believes the Company's principal competitive strengths include
its restaurants' brand name recognition; the value, variety and quality of food
products served; the quality and training of its employees; and the Company's
market penetration, which has resulted in economies of scale in a variety of
areas, including advertising, distribution and field supervision.
Government Regulations
The Company and its franchisees are subject to various local, state and
federal laws and regulations governing various aspects of the restaurant
business, including, but not limited to, health, sanitation, environmental
matters, safety, disabled persons' access to its restaurant facilities, the
sale of alcoholic beverages and regulations regarding hiring and employment
practices. The operation of the Company's franchise system is also subject to
regulations enacted by a number of states and rules promulgated by the Federal
Trade Commission. The Company believes that it is in material compliance with
applicable laws and regulations, but it cannot predict the effect on operations
of the enactment of additional requirements in the future.
The Company is subject to federal and state laws governing matters such as
minimum wage, overtime and other working conditions. At December 31, 1996, a
substantial number of the Company's employees were paid the minimum wage.
Accordingly, increases in the minimum wage or decreases in the allowable tip
credit (which reduces the minimum wage that
50
<PAGE>
must be paid to tipped employees in certain states) increase the Company's
labor costs. This is especially the case in California, where there is no tip
credit. In November, 1996, an initiative in California was passed raising the
minimum wage in California from $4.25 to $5.00 per hour, effective March 1,
1997, and to $5.75 per hour effective March 1, 1998. Also the federal minimum
wage increased from $4.25 per hour to $4.75 per hour on October 1, 1996 and
increased again to $5.15 per hour on September 1, 1997. Employers must pay the
higher of the federal or state minimum wage. The Company will attempt to offset
increases in the minimum wage through pricing and other cost control efforts;
however, there can be no assurance that the Company or its franchisees will be
able to pass such additional costs on to its customers.
Environmental Matters
Federal, state and local environmental laws and regulations have not
historically had a material impact on the operations of the Company; however,
the Company cannot predict the effect on its operations of possible future
environmental legislation or regulations.
Properties
Most of the Company's restaurants are free-standing facilities. Presented
below is a schedule of the average property and building square footage, as
well as average seating capacity for each of the Company's concepts:
<TABLE>
<CAPTION>
Average Average Average
Property Building Seating
Concept Size in Sq. Ft. Size in Sq. Ft. Capacity
- ---------------------------- ----------------- ----------------- ---------
<S> <C> <C> <C>
Carrows ............... 35,000 5,400 160
Coco's. ............... 35,000 5,000 160
Denny's ............... 42,000 4,750 150
El Pollo Loco ......... 20,000 2,100 60
Hardee's. ............. 52,000 3,400 95
Quincy's. ............. 64,000 7,100 250
</TABLE>
The following table sets forth certain additional information regarding
the Company's restaurant properties as of December 31, 1996:
<TABLE>
<CAPTION>
Land and Land Leased Land and
Building and Building Building
Concept Owned Owned Leased Total
- ---------------------------- ---------- -------------- --------- --------
<S> <C> <C> <C> <C>
Carrows ............... 3 10 147 160
Coco's. ............... 2 39 142 183
Denny's ............... 254 36 604 894
El Pollo Loco ......... 9 33 54 96
Hardee's. ............. 288 100 192 580
Quincy's. ............. 152 41 6 199
--- --- --- ---
Total ............... 708 259 1,145 2,112
=== === ===== =====
</TABLE>
51
<PAGE>
The number and location of the Company's restaurants in each chain as of
December 31, 1996 are presented below:
<TABLE>
<CAPTION>
Denny's El Pollo Loco Coco's
-------------------- -------------------- -------------------
Franchised Franchised Franchised
State Owned Licensed Hardee's Quincy's Owned Licensed Owned Licensed Carrows
- ---------------------------------- ------- ------------ ---------- ---------- ------- ------------ ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama ...................... 1 8 156 45 -- -- -- -- --
Alaska ....................... -- 8 -- -- -- -- -- -- --
Arizona ...................... 27 47 -- -- 1 1 17 1 9
Arkansas ..................... 1 5 3 -- -- -- -- -- --
California ................... 223 129 -- -- 95 123 135 4 120
Colorado ..................... 25 13 -- -- -- -- 6 -- --
Connecticut .................. 5 3 -- -- -- -- -- -- --
Delaware ..................... 3 -- -- -- -- -- -- -- --
District of Columbia ......... -- -- -- -- -- -- -- -- --
Florida ...................... 102 77 56 41 -- -- -- -- --
Georgia ...................... -- 24 10 11 -- -- -- -- --
Hawaii ....................... 4 2 -- -- -- -- -- -- --
Idaho ........................ -- 7 -- -- -- -- -- -- --
Illinois ..................... 47 10 -- -- -- -- -- -- --
Indiana ...................... 14 9 -- -- -- -- 3 -- --
Iowa ......................... -- 5 -- -- -- -- -- -- --
Kansas ....................... 9 4 -- -- -- -- -- -- --
Kentucky ..................... -- 20 -- -- -- -- -- -- --
Louisiana .................... 7 2 1 -- -- -- -- -- --
Maine ........................ -- 4 -- -- -- -- -- -- --
Maryland ..................... 14 16 -- -- -- -- -- -- --
Massachusetts ................ 9 -- -- -- -- -- -- -- --
Michigan ..................... 38 2 -- -- -- -- -- -- --
Minnesota .................... 13 4 -- -- -- -- -- -- --
Mississippi .................. 2 2 40 8 -- -- -- -- --
Missouri ..................... 29 6 -- -- -- -- 2 -- --
Montana ...................... -- 5 -- -- -- -- -- -- --
Nebraska ..................... -- 4 -- -- -- -- -- -- --
Nevada ....................... 12 6 -- -- -- 6 -- -- 7
New Hampshire ................ 2 1 -- -- -- -- -- -- --
New Jersey ................... 11 2 -- -- -- -- -- -- --
New Mexico ................... 2 12 -- -- -- -- -- -- 4
New York ..................... 17 18 -- -- -- -- -- -- --
North Carolina ............... 7 12 58 39 -- -- -- -- --
North Dakota ................. -- 3 -- -- -- -- -- -- --
Ohio ......................... 33 22 18 1 -- -- -- -- --
Oklahoma ..................... 9 13 -- -- -- -- -- -- --
Oregon ....................... 5 18 -- -- -- -- -- -- 9
Pennsylvania ................. 51 3 2 -- -- -- -- -- --
Rhode Island ................. -- -- -- -- -- -- -- -- --
South Carolina ............... 9 5 123 42 -- 1 -- -- --
South Dakota ................. -- 1 -- -- -- -- -- -- --
Tennessee .................... 3 11 110 9 -- -- -- -- --
Texas ........................ 62 57 -- -- -- 4 14 -- 10
Utah ......................... 7 12 -- -- -- -- -- -- --
Vermont ...................... -- 2 -- -- -- -- -- -- --
Virginia ..................... 19 8 3 3 -- -- -- -- --
Washington ................... 50 19 -- -- -- -- 6 -- 1
West Virginia ................ -- 3 -- -- -- -- -- -- --
Wisconsin .................... 12 7 -- -- -- -- -- -- --
Wyoming ...................... -- 6 -- -- -- -- -- -- --
Canada ....................... 10 20 -- -- -- -- -- -- --
International ................ -- 25 -- -- -- 10 -- 278 --
--- --- --- -- -- --- --- --- ---
Total ....................... 894 702 580 199 96 145 183 283 160
=== === === === == === === === ===
</TABLE>
52
<PAGE>
In addition to the restaurant locations set forth above, the Company,
through wholly owned subsidiaries, also owns a nineteen story, 187,000 square
foot office tower, which serves as its corporate headquarters, located in
Spartanburg, South Carolina. The Company's corporate offices currently occupy
approximately sixteen floors of the tower, with the balance leased to others.
The Company recently sold its 107,000 square foot building located in Irvine,
California.
See "Description of Indebtedness -- The Advantica Credit Agreement" and "
- -- Mortgage Financings" and Note 4 to the accompanying Consolidated Financial
Statements for information concerning encumbrances on certain properties of the
Company.
Employees
At December 31, 1996, the Company had approximately 93,000 employees, none
of whom are subject to collective bargaining agreements. Many of the Company's
restaurant employees work part-time, and many are paid at or slightly above
minimum wage levels. The Company has experienced no significant work stoppages
and considers its relations with its employees to be satisfactory.
Legal Proceedings
FCI, Flagstar, El Pollo Loco and Denny's, along with several former
officers and directors of those companies, were named as defendants in an
action filed on August 28, 1991 in the Superior Court of Orange County,
California. The remaining plaintiffs, who are former El Pollo Loco franchisees,
allege that the defendants, among other things, failed or caused a failure to
promote, develop and expand the El Pollo Loco franchise system in breach of
contractual obligations to the plaintiff franchisees and made certain
misrepresentations to the plaintiffs concerning the El Pollo Loco system.
Asserting various legal theories, the plaintiffs seek actual and punitive
damages in excess of $90 million, together with declaratory and certain other
equitable relief. The defendants have denied all material allegations, and
certain defendants have filed cross-complaints against various plaintiffs in
the action for breach of contract and other claims. Since the filing of the
action the defendants have entered into settlements with six of the plaintiffs
leaving two plaintiff franchisees remaining in the lawsuit. With respect to the
remaining plaintiffs, the action has been stayed due to the bankruptcy filing
of the principal stockholder of the plaintiff corporations. Consequently, the
trial date to hear the outstanding issues in the case has been vacated and no
new trial date has been established.
In 1994, Flagstar was advised of proposed deficiencies from the Internal
Revenue Service for Federal income taxes totaling approximately $12.7 million.
The proposed deficiencies relate to examinations of certain income tax returns
filed by the Company for the seven taxable periods ended December 31, 1992. In
the third quarter of 1996 this proposed deficiency was reduced by approximately
$7.0 million as a direct result of the passage of the Small Business Jobs
Protection Act in August 1996. The Small Business Jobs Protection Act includes
a provision that clarified Internal Revenue Code Section 162(k) to allow for
amortization of borrowing costs incurred by a corporation in connection with a
redemption of its stock. The Company believes the remaining proposed
deficiencies relating to the proposed disallowance of certain costs incurred in
connection with the 1989 leveraged buyout of Flagstar are substantially
incorrect, and it intends to continue to contest such proposed deficiencies.
Other proceedings are pending against the Company, in many cases involving
ordinary and routine claims incidental to the business of the Company, and in
others presenting allegations that are nonroutine and include compensatory or
punitive damage claims. The ultimate legal and financial liability of the
Company with respect to the matters mentioned above and these other proceedings
cannot be estimated with certainty. However, the Company believes, based on its
examination of these matters and its experience to date, that the ultimate
disposition of these matters will not materially affect the financial position
or results of operations of the Company. For information concerning the
suspended arbitration matter with HFS and the Plan of Reorganization, see
"Prospectus Summary -- The Plan of Reorganization" and " -- Recent
Developments," "The Company -- The 1997 Restructuring" and "Business --
Restaurants -- Hardee's."
53
<PAGE>
MANAGEMENT
Directors of Advantica
The name, age, present principal occupation or employment, and the
material occupations, positions, offices or employments for the past five
years, of each director of Advantica are set forth below. Unless otherwise
indicated, each such person has held the occupation listed opposite his or her
name for at least the past five years.
<TABLE>
<CAPTION>
Current Principal Occupation or
Name Age Employment and Five-year Employment History
- ----------------------- ----- ---------------------------------------------------------------------------------------
<S> <C> <C>
James B. Adamson 49 Director of Advantica; President and Chief Executive Officer of Advantica
(1995-present); Chief Executive Officer of Burger King Corporation (1993-1995); Chief
Operating Officer of Burger King Corporation (1991-1993); President of Burger King
U.S.A. Retail Division (1991); Executive Vice President, Marketing of Revco, Inc.
(1988-1991). Director of Kmart Corporation and Oxford Health Plans, Inc.
Robert H. Allen 74 Director of Advantica; Marketing Consultant, R. H. Allen Associates, Westport,
Connecticut (1988 to present); Vice President and Product Group Manager of ITT
Corporation (1965 to 1987).
Ronald E. Blaylock 37 Director of Advantica; President and Chief Executive Officer of Blaylock and Partners,
L.P., New York, New York (1993 to present); Director of Fine Host Corporation.
Vera King Farris 57 Director of Advantica; President of The Richard Stockton College of New Jersey (1983
to present); Director of National Utilities Investors, Inc.
James J. Gaffney 57 Director of Advantica; President and Chief Executive Officer, General Aquatics, Inc.
(1995 to present); President and Chief Executive Office of KDI Corporation (1993 to
1995), President, Chief Executive Office of International Tropio-GI, Inc. (1991 to
1992); Director of C.R. Anthony, Insilce Corp. and Koll Real Estate.
Irwin N. Gold 40 Director of Advantica; Managing Director of the Financial Restructuring Group of
Houlihan, Lokey, Howard and Zukin, Inc. (1988 to present); Director of Cole National
Corporation and The Bibb Company.
Robert E. Marks 46 Director of Advantica; President of Marks Ventures, Inc., New York, New York (1994
to present); Managing Director of Carl Marks & Co., Inc. (1982 to 1994); Director of
Robert Fleming Capital Mutual Fund Group, Inc.
Charles F. Moran 67 Director of Advantica; Retired; Senior Vice President of Administration of Sears,
Roebuck and Co. (1989 to 1993); Senior Vice President and Chief Information Officer
of Sears, Roebuck and Co. (1988 to 1989); Director of SPS Transaction Services, Inc.,
Thermadyne Holdings Corporation and West Side Affordable Housing, Inc.
Elizabeth A. Sanders 51 Director of Advantica; Management consultant, The Sanders Partnership, Sutter Creek,
California (1990 to Present); Vice President and General Manager of Nordstrom, Inc.
(1981-1990); Director of H.F. Ahmanson & Co., Wal-Mart Stores,Inc., Wellpoint Health
Networks and Wolverine Worldwide, Inc.
Donald R. Shepherd 61 Director of Advantica; Retired; Chairman of Loomis, Sayles & Company, L.P., Boston,
Massachusetts (1992 to 1995); Chief Executive Officer and Chief Information Officer
of Loomis, Sayles & Company, L.P. (1990 to 1995).
</TABLE>
Executive Officers of Advantica
The following table sets forth information with respect to each executive
officer of Advantica.
<TABLE>
<CAPTION>
Current Principal Occupation or
Name Age Employment and Five-year Employment History
- ------------------- ----- -------------------------------------------------------------------------------------
<S> <C> <C>
James B. Adamson 49 Chairman, President and Chief Executive Officer of Advantica (1995-present); Chief
Executive Officer of Burger King Corporation (1993-1995); Chief Operating Officer of
Burger King Corporation (1991-1993); President of Burger King U.S.A. Retail Division
(1991); Executive Vice President, Marketing of Revco, Inc. (1988-1991).
Craig S. Bushey 42 Senior Vice President of Advantica and President of Hardee's Division (May
1996-present); Managing Director, Vice President (Western Europe) of Burger King
(1995-May 1996); Region Vice President (Central Region) of Burger King (1994-1995);
Burger King Reengineering Team (1993-1994); Region Vice President (Midwest Retail)
of Burger King (1992-1993); Region Vice President (Atlanta Retail) of Burger King
( 1990-1992).
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
Current Principal Occupation or
Name Age Employment and Five-year Employment History
- ---------------------- ----- --------------------------------------------------------------------------------------
<S> <C> <C>
C. Robert Campbell 53 Executive Vice President and Chief Financial Officer of Advantica (1995-present);
Executive Vice President of Human Resources and Administration for Ryder System,
Inc. (1991-1995); Executive Vice President -- Finance of Vehicle Leasing and Services
Division of Ryder System, Inc. (1981-1991).
Ronald B. Hutchison 47 Vice President and Treasurer of Advantica (May 1995-present); Vice President and
Treasurer of Leaseway Transportation Corp. (1988-1995).
Nelson Marchioli 48 Senior Vice President of Advantica and President of El Pollo Loco Division (May
1997-present); Executive Vice President and Chief Operating Officer of Bruegger's
Corporation (1996-May 1997); Senior Vice President of Worldwide Supply for Burger
King Corporation (1995-1996); Senior Vice President, International Operations and
Sales for Burger King Corporation (1994-1995); Vice President -- General Manager,
Latin America Restaurant Operations for Burger King Corporation (1994); Senior Vice
President, Quality and Cost, Burger King Corporation (1993-1994); Vice President,
Operations Standards and System Quality Assurance, Burger King Corporation
( 1989-1993).
Edna K. Morris 46 Executive Vice President of Advantica and President of Quincy's Division (April
1996-present); Executive Vice President, Human Resources and Corporate Affairs of
Advantica (1995-April 1996); Senior Vice President, Human Resources of Advantica
(1993-1995); Vice President, Education and Development of Advantica (1992-1993);
Senior Vice President/Human Resources of HFS (1987-1992).
Rhonda J. Parish 41 Senior Vice President, General Counsel and Secretary of Advantica (1995-present);
Assistant General Counsel of Wal-Mart Stores, Inc. (1990-1994); Corporate Counsel of
Wal-Mart Stores, Inc. (1983-1990).
John A. Romandetti 47 Senior Vice President of Advantica (1995-present) and President of Denny's Division
(January 1997-present); President of El Pollo Loco (1995-1996); Vice President of
Operations for Burger King Corporation (1989-1995).
Mark L. Shipman 48 Senior Vice President of Advantica and President of Coco's/Carrows Division (May
1996-present); Vice President of Acquisitions and Development of Advantica
(1995-May 1996); Vice President of Administration of Denny's Division (1993-1995);
Vice President of Operations (West) of Denny's Division (1991-1993).
Paul R. Wexler 53 Senior Vice President, Procurement and Distribution of Advantica (1995-present); Vice
President, Procurement and Quality Assurance -- Marriott International (1991-1995).
Stephen W. Wood 39 Senior Vice President, Human Resources and Corporate Affairs of Advantica (April
1996-present); Vice President, Compensation, Benefits, and Employee Information
Systems and Corporate Office Human Resources of Advantica (1993-April 1996);
Senior Director, Compensation, Benefits and Employee Information Systems of
Advantica (1993); Director, Benefits and Executive Compensation of HFS (1991-1993).
</TABLE>
55
<PAGE>
MANAGEMENT COMPENSATION
Set forth below is information for 1996, 1995 and 1994 with respect to
compensation for services to the Company of the Company's Chief Executive
Officer and the four most highly compensated executive officers, other than the
Chief Executive Officer, who were serving as executive officers at the end of
1996.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
Awards All Other
Annual Compensation (1) Securities Underlying Compensation
------------------------- ------------------------------- -------------
Name and
Principal Position Year Salary ($)(2) Bonus ($)(3) Options (#)(4) ($)(5)(6)
- ------------------------------------------ ------ ------------------ -------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
James B. Adamson 1996 $ 947,068 $ -- 100,000 $ 364,133
Chairman and Chief Executive 1995 894,211 -- 800,000 1,250,693
Officer of Advantica 1994 -- -- -- --
C. Robert Campbell 1996 320,799 40,000 150,000 50,000
Executive Vice President and 1995 214,300 (7) 100,000 405,957
Chief Financial Officer of Advantica 1994 -- -- -- --
Craig S. Bushey 1996 183,973 (7) 40,000 200,000 213,678
Senior Vice President of Advantica and 1995 -- -- -- --
President, Hardee's Division 1994 -- -- -- --
John A. Romandetti 1996 226,275 112,200 125,000 90,793
Senior Vice President of Advantica and 1995 7,078 (7) -- 75,000 --
President, Denny's Division 1994 -- -- -- --
Mark L. Shipman 1996 223,384 47,400 175,000 149,047
Senior Vice President of Advantica and 1995 149,423 65,762 25,000 17,102
President, Coco's/Carrows Division 1994 127,017 -- -- --
</TABLE>
- ---------
(1) The amounts shown for each named executive officer exclude perquisites and
other personal benefits that did not exceed, in the aggregate, the lesser
of either $50,000 or 10% of the total of annual salary and bonus reported
for the named executive officer for any year included in this table.
(2) The amounts in this column reflect certain costs and credits to the named
executive officers relating to certain life, health and disability
insurance coverage provided through the Company.
(3) The amounts shown in this column reflect payments received by the named
executive officers under the Company's 1996 Incentive Compensation Plan.
(4) Excluding Mr. Adamson, amounts shown for 1996 for each named executive
officer reflect the 1996 option repricing (more fully described in note 2
to the 1996 Option Grant table under "Management Compensation -- Stock
Options") which for the purposes of this table is shown for 1996 as a
grant of an option to purchase a number of shares of the Old Common Stock
corresponding to the number of such Old Common Stock shares underlying all
of the outstanding options granted to the named executive officer under
the Company's stock option plan as of the date of such repricing. The 1995
amount shown for Mr. Shipman reflects an option repricing on June 21, 1995
with respect to an option representing 10,000 shares.
(5) The amounts shown for 1995 and 1996 for Mr. Adamson consist of Company paid
life insurance premium payments of $8,440 and $16,880, respectively. The
1996 amount for Mr. Adamson also reflects tax payments in the amount of
$16,920 as well as additional compensation and/or reimbursement paid
($330,333) in connection with the renegotiation and amendment of Mr.
Adamson's employment agreement related to the extension of his employment
term. The remaining amount for 1995 for Mr. Adamson reflects additional
compensation and/or expense reimbursement paid to Mr. Adamson at or near
the time of, or otherwise arising in connection with, his initial
employment with the Company. For additional information see "Management
Compensation -- Employment Agreements -- Adamson Employment Agreement."
(6) The amounts shown for Messrs. Bushey, Campbell and Romandetti consist of
additional compensation and/or expense reimbursement paid to the
respective named executive officers at or near the time of, or otherwise
arising in connection with, their initial employment with the Company. The
1996 amount for Mr. Shipman includes $118,417 paid to him in connection
with his promotion to Senior Vice President of Advantica and President of
the Coco's and Carrows division
56
<PAGE>
and his related relocation to California as well as a $30,630 bonus paid to
him in connection with the Company's acquisition of Coco's and Carrows. The
1995 amount for Mr. Shipman reflects payments made to him in connection with
his service on the Company's re-engineering team.
(7) Reflects base salary paid for only the portion of the year in which the
named executive officer was employed by the Company.
Stock Options
Set forth below is information with respect to individual grants of stock
options with respect to the Old Common Stock made pursuant to the Company's
1989 Non-Qualified Stock Option Plan (the "1989 Option Plan") during 1996 to
Messrs. Adamson, Bushey, Campbell, Romandetti and Shipman.
Option Grants in 1996
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------------
% of
Total Potential Realizable
Number of Options Value at Assumed
Securities Granted Annual Rates of Stock
Underlying to Exercise Price Appreciation for
Options Employees or Base Option Term
Granted in Price Expiration -------------------------
Name (#)(1) 1997 (6) ($/sh)($) Date (5) 5% ($) 10% ($)
- ----------------------- ---------------------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
James B. Adamson 100,000 2.6% $ 2.75 08-13-06 $172,946 $438,279
C. Robert Campbell 25,000 .6 2.75 08-13-06 43,237 109,570
100,000(2)(3) 2.6 1.25 05-01-05 53,738 138,960
25,000(2) .6 1.25 08-13-06 16,326 43,337
Craig S. Bushey 75,000 1.9 6.00 05-20-06 38,668 328,123
25,000 .6 2.75 08-13-06 43,237 109,570
75,000(2) 1.9 1.25 05-20-06 47,364 125,100
25,000(2) .6 1.25 08-13-06 16,326 43,337
John A. Romandetti 25,000 .6 2.75 08-13-06 43,237 109,570
75,000(2) 1.9 1.25 12-15-05 44,452 116,364
25,000(2) .6 1.25 08-13-06 16,326 43,337
Mark A. Shipman 50,000 1.3 6.00 05-23-06 20,689 210,643
25,000 .6 2.75 08-13-06 43,237 109,570
25,000(2) .6 1.25 06-21-05 13,740 35,625
50,000(2) 1.3 1.25 05-23-06 31,614 83,514
25,000(2) .6 1.25 08-13-06 16,326 43,337
</TABLE>
- ---------
(1) Except as otherwise noted, such options listed for the named executive
officers had a term of 10 years and were to become exercisable at a rate
of 20% per annum for five consecutive years beginning on the date of
grant. The date of grant of each option listed was exactly ten years
preceding the expiration date listed for each option.
(2) These amounts reflect the December 13, 1996 repricing of all the
outstanding options of certain 1989 Option Plan participants to $1.25, the
closing price of the Old Common Stock on December 12, 1996 (the "December
13, 1996 Option Repricing"). The December 13, 1996 Option Repricing did
not amend or adjust the vesting terms or expiration dates of such options
repriced.
(3) This option to purchase 100,000 shares was to become exercisable at a rate
of 50% as of May 1, 1997 and an additional 25% each of the next two
anniversary dates thereafter.
(4) With the exception of certain options granted in 1996 to Messrs. Bushey and
Shipman which had exercise prices greater than the fair market value of
the Old Common Stock as of the date of grant and the December 13, 1996
Option Repricing, the exercise price for these options was established at
the closing sales price for the Old Common Stock as of the date of grant.
Under the 1989 Option Plan, the exercise price upon the exercise of an
option could be paid in cash or by surrender of other shares of Old Common
Stock having a fair market value on the date of exercise equal to such
exercise price, or in a combination of cash and such shares.
57
<PAGE>
(5) Upon termination of employment of a holder, all of such holder's options
not then exercisable would have expired and terminated. If such
termination were by reason of death, retirement or disability, such
holder's exercisable options remained exercisable for one year following
termination. If such termination were voluntary or without cause, such
holder's exercisable options generally remained exercisable for sixty days
following termination. If such termination were for cause, such holder's
exercisable options expired and terminated as of the date of termination.
(6) Includes options deemed granted pursuant to the December 13, 1996 Option
Repricing, described in further detail in note 2 above.
The following table sets forth information with respect to the 1996
year-end values of unexercised options, all of which were granted by the
Company pursuant to the 1989 Option Plan, held by each of the persons named in
the Summary Compensation Table above:
Aggregated Option Exercises in 1996 and
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised In-
Underlying the-Money Options
Unexercised at Fiscal
Options at Fiscal Year-End
Year-End (#) ($)
------------------- ------------------
Exercisable/ Exercisable/
Unexercisable Unexercisable
------------------- ------------------
<S> <C> <C>
James B. Adamson ........... 160,000/740,000 -- / --
C. Robert Campbell ......... -- /125,000 -- / --
Craig S. Bushey ............ -- /100,000 -- / --
John A. Romandetti ......... 15,000/ 85,000 -- / --
Mark A. Shipman ............ 5,000/ 95,000 -- / --
--------------- ------------------
</TABLE>
No options held by the foregoing named executive officers were exercised
in 1996.
All options granted under the 1989 Option Plan were cancelled for no
consideration to the holder under the terms of the Plan of Reorganization.
Retirement Plans
A tax qualified defined benefit retirement plan is maintained by Advantica
and certain other Advantica subsidiaries. Such plan is described below.
The following table shows the estimated annual benefits for a single life
annuity that could be payable under the Advantica Retirement Plan (as defined),
as amended, and the ancillary plan described below upon a person's normal
retirement at age 65 if that person were in one of the following
classifications of assumed compensation and years of credited service.
58
<PAGE>
<TABLE>
<CAPTION>
Average Annual Years of Service
Remuneration
Over
a Five-Year Period 15 20 25 30 35
- -------------------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$200,000 ........... $ 42,932 $ 57,242 $ 71,553 $ 85,864 $100,000
250,000 ........... 54,182 72,242 90,303 108,364 125,000
300,000 ........... 65,432 87,242 109,053 130,864 150,000
350,000 ........... 76,682 102,242 127,803 153,364 175,000
400,000 ........... 87,932 117,242 146,553 175,864 200,000
500,000 ........... 110,432 147,242 184,053 220,864 250,000
600,000 ........... 132,932 177,242 221,553 265,864 300,000
700,000 ........... 155,432 207,242 259,053 310,864 350,000
800,000 ........... 177,932 237,242 296,553 355,864 400,000
900,000 ........... 200,432 267,242 334,053 400,864 450,000
1,000,000 ......... 222,932 297,242 371,553 445,864 500,000
1,200,000 ......... 267,932 357,242 446,553 535,864 600,000
1,400,000 ......... 312,932 417,242 521,553 625,864 700,000
1,600,000 ......... 357,932 477,242 596,553 715,864 800,000
</TABLE>
The Advantica Pension Plan (the "Advantica Retirement Plan") is
noncontributory and generally covers all employees of Advantica and its
subsidiaries (other than employees of the Denny's, El Pollo Loco, Coco's and
Carrows concepts) who have attained the age of 21 and who have completed one
thousand hours of service. There are two entry dates per year for new
employees, January 1 and July 1. As a result of a plan amendment effective
January 1, 1989, a participant's annual retirement benefit under the Advantica
Retirement Plan at normal retirement age is calculated by multiplying the
number of years of participation in the Advantica Retirement Plan (not to
exceed 35 years) by the sum of one percent of the average Compensation (as
defined below) paid during 60 consecutive calendar months chosen to produce the
highest average ("Average Compensation" for the purposes of this paragraph)
plus an additional one-half of one percent of the Average Compensation in
excess of the average Social Security wage base. Benefits payable cannot exceed
50% of the Average Compensation. Plan benefits are normally in the form of a
life annuity or, if the retiree is married, a joint and survivor annuity.
"Compensation" for the purposes of this paragraph generally consists of all
remuneration paid by the employer to the employee for services rendered as
reported or reportable on Form W-2 for federal income tax withholding purposes
(including the amount of any 1996 year-end bonus paid in 1997), excluding
reimbursements and other expense allowances, fringe benefits, moving expenses,
deferred compensation and welfare benefits (such exclusions including, without
limitation, severance pay, relocation allowance, gross-up pay to compensate for
taxable reimbursements, hiring bonuses, cost of living differentials, special
overseas premiums, compensation resulting from participation in, or
cancellation of, stock option plans, contributions by the employer to the
Advantica Retirement Plan or any other benefit plan and imputed income
resulting from the use of Company property or services). Except for limited
purposes described in the plan, Compensation also includes any deferred
compensation under a Section 401(k) plan maintained by the employer and salary
reduction amounts under a Section 125 plan maintained by the employer. The
funding of the Advantica Retirement Plan is based on actuarial determinations.
Ancillary to the Advantica Retirement Plan is a nonqualified plan for key
executive employees that provides future service benefits and benefits in
excess of the annual maximum benefits limit under the Code to certain key
employees. "Compensation" and "Average Compensation" are defined in this
ancillary plan the same way they are defined in the Advantica Retirement Plan.
Benefits payable under the ancillary plan are included in the table above.
The maximum annual pension benefit payable under the Advantica Retirement
Plan for 1996 was $120,000 (or, if greater, the participant's 1982 accrued
benefit).
Except for the exclusion of 1996 bonuses paid in 1997 and the accrual of
certain nonqualified benefits as described herein, the Compensation included
under the Advantica Retirement Plan (including the ancillary nonqualified plan)
generally corresponds with the annual compensation of the named executive
officers in the Summary Compensation Table above. Includable Compensation for
1997 for Messrs. Adamson, Bushey, Campbell, Romandetti and Shipman was
$950,000, $261,538, $486,875, $0 and $154,364, respectively.
As of December 31, 1996, the estimated credited years of service under the
Advantica Retirement Plan for Messrs. Adamson, Bushey, Campbell, Romandetti and
Shipman at normal retirement age was 18, 24, 14, 20 and 41, respectively.
59
<PAGE>
The early retirement provisions of the Advantica Retirement Plan were
amended effective January 1, 1989 to provide an improved benefit for long
service employees. Employees with age and service equaling or exceeding 85 and
who are within five years of the Social Security retirement age will receive no
reduction of accrued benefits. Employees who are at least 55 years of age with
15 years of service will receive a reduction of three percent in accrued
benefits for the first five years prior to normal retirement date and six
percent for the next five years. Accrued benefits for employees retiring with
less than 15 years of service will be actuarially reduced beginning at age 55.
Vesting of retirement benefits was also changed to comply with the law from
12-year graduating vesting to five-year cliff vesting for the plan.
Employment Agreements
Adamson Employment Agreement
Mr. Adamson and Advantica entered into an employment agreement (as amended
on February 27, 1995, December 31, 1996 and amended and restated as of January
7, 1998, the "Adamson Employment Agreement") which took effect on January 23,
1995 and which provides that FCI will employ Mr. Adamson as President and Chief
Executive Officer of FCI until his death or termination of employment by reason
of permanent disability, voluntary termination of employment or involuntary
termination with or without cause (as defined). Pursuant to the Adamson
Employment Agreement, Mr. Adamson was appointed the Chairman of the Board of
Directors of FCI. The Adamson Employment Agreement prohibits Mr. Adamson from
soliciting for employment the employees of the Company or its affiliates and
from engaging in certain competitive activities generally during his term of
employment and for a period of two years after the later of the termination of
his employment or the date on which the Company is no longer required to make
certain termination benefits. The Adamson Employment Agreement further
prohibits Mr. Adamson from using or disclosing certain "confidential" or
"proprietary" information for purposes other than carrying out his duties with
the Company.
Under the Adamson Employment Agreement, Mr. Adamson is entitled to receive
(i) an annual base salary in the amount of $1,100,000 for the calendar year
ending December 31, 1998 (for each calendar year thereafter during Mr.
Adamson's term of employment, such base salary shall be determined by the Board
but shall not be less than $1,100,000, unless the Company implements a broad
scale salary reduction initiative), (ii) an annual performance bonus at an
annual rate up to 200% of his base salary (targeted to equal 75% of his base
salary) if the Company and Mr. Adamson achieve budgeted financial and other
performance targets to be established by the Compensation and Incentives
Committee, (iii) a grant (as soon as practical after January 7, 1998) of an
option (the "Adamson Option"), under the Company's newly adopted stock option
plan, to purchase 500,000 shares of the Common Stock, with an exercise price
equal to the fair market value of the Common Stock on the date of grant (30% of
such option grant will be exercisable immediately upon shareholder approval of
the underlying stock option plan with the remaining portion of the option
becoming exercisable at rate of 20% per year for the first and second
anniversary dates of the option grant and 15% per year for the third and fourth
anniversary dates, provided, that such options shall become 100% exercisable in
the event of (a) termination without cause, (b) a dissolution or liquidation of
Advantica, (c) a sale of all or substantially all of Advantica's assets, (d) a
merger or consolidation involving Advantica where Advantica is not the
surviving corporation or where holders of the Common Stock receive securities
from another corporation, or (e) a tender offer for at least a majority of the
outstanding Common Stock, (iv) as soon as practical after January 7, 1998, a
number of shares of Common Stock with an aggregate fair market value most
nearly equal to $2,000,000, (v) on the date of grant of the Common Stock
referenced in (iv) above, a cash payment equal to $1,750,000 which payment is
intended to assist Mr. Adamson in the payment of federal, state and local
income taxes associated with the above referenced receipt of common stock, and
(vi) life insurance coverage maintained by the Company with death benefits of
at least $3,250,000 in the aggregate. The Adamson Employment Agreement also
entitles Mr. Adamson to certain other privileges and benefits, including
participation in all of the Company's benefit plans generally applicable to the
Company's executive officers.
In the event of Mr. Adamson's termination of employment during the term of
the Adamson Employment Agreement, the Company is required to make payments as
follows based upon the cause of such termination: (i) if by reason of death,
Mr. Adamson's surviving spouse is entitled to be paid an amount equal to Mr.
Adamson's base salary and annual bonus and continuation of certain benefits for
a one-year period after his death; (ii) if by reason of permanent disability,
Mr. Adamson is entitled to be paid one-half of his base salary and annual bonus
and continuation of certain benefits for a period of two years after
termination of employment; and (iii) if by the Company other than for "cause,"
Mr. Adamson is, in general, entitled to (a) a lump sum in an amount equal to
two years' base salary, (b) 200% of his targeted annual bonus, (c) the
immediate vesting of 100% of the Adamson Option to be exercisable as of the
date of termination, and (d) continuation of certain benefits and other
contract rights. Furthermore, in the event of termination for "cause" or
voluntary termination, the
60
<PAGE>
Company shall pay Mr. Adamson generally the benefits due him under the
Company's benefit plans for his services rendered to the Company through his
date of termination.
Other Employment Arrangements
During 1996, Messrs. Bushey, Campbell, Romandetti and Shipman were each
party to employment arrangements with the Company providing for specified base
salaries, subject to annual adjustment by the Compensation and Benefits
Committee, an annual performance bonus and options to purchase Old Common
Stock. These agreements also contained provisions for the payment of certain
additional compensation to each of the named executive officers at or near the
time of their initial employment. See the Summary Compensation Table above.
Additionally, these agreements contained termination provisions for the payment
of severance benefits (generally equal to two years' annual base salary) upon
termination of employment under certain circumstances. In January 1997, these
agreements were amended further to provide: (1) retention bonuses at June 30 in
amounts of $50,000 and at December 31 in amounts of $100,000, $125,000 and
$175,000 for years 1997, 1998 and 1999, respectively, provided the named
executive officers remain employed with the Company as of such dates; (2) a
change of control benefit entitling the named executive to tender his
resignation, at any time during the first six months after a change of control
(defined as the date on which designees of KKR affiliates no longer constitute
a majority of the Board of Directors of FCI), and receive within five (5)
business days, subject to certain provisions pertaining to Section 280G of the
Code, (a) 200% of the executive's base salary, (b) 200% of the executive's
target performance bonus under the Company's Incentive Plan, and (c) 167% of
the Company's actual subsidy for the executive's (and his family members')
medical coverage for an 18 month period following such resignation; (3) for the
payment of the above referenced severance benefit within five (5) business days
following any such termination; and (4) that such payment obligations of the
Company with respect to the above referenced retention bonus, change of control
and severance payment benefits shall be guaranteed by certain subsidiaries of
the Company.
Five other senior level executives entered into employment arrangements
with the Company which provided for retention bonuses, change of control
benefits and severance arrangements with substantially the same terms as
described above for Messrs. Bushey, Campbell, Romandetti and Shipman.
Additionally, certain other officers of the Company (vice presidents and
above) are entitled to receive, as long as they remain employed as officers
with the Company, retention bonuses at June 30 in amounts generally of $10,000
for the years 1997 and 1998 and $25,000 for 1999, and at December 31 in amounts
of $15,000 for the years 1997 and 1998 and $50,000 for 1999. Further, such
officers and certain other employees are entitled to receive severance
benefits, upon termination of employment under certain circumstances,
consisting of the continuation of base pay for periods ranging from two weeks
to one year.
Advantica assumed the Adamson Employment Agreement and related agreements
and all of the other above-described employment agreements in connection with
the confirmation and effectiveness of the Plan of Reorganization.
Post-Petition Employment Arrangements
In connection with the Plan of Reorganization, a new management incentive
program was developed for the management of Advantica which provides for the
following: (1) the existing retention bonus, incentive bonus, and severance
program for management as outlined above will generally remain in effect, (2)
ten percent (10%) of the Common Stock, on a fully diluted basis, is reserved
for a new management stock option program, (3) payment will be made to Mr.
Adamson, as soon as practicable following January 7, 1998 of shares of Common
Stock (to be purchased by the Company on the open market) the value of which,
along with a corresponding tax gross-up, will equal $3.75 million, in lieu of
the January 1999 $3 million retention bonus payment, described above, and in
exchange for his relinquishing his right to voluntarily terminate employment
and receive a severance package upon a change of control, as described above,
and (4) stock option grants to each member of management under the stock option
program referred to in (2) above contingent upon his or her relinquishing the
right to the change of control benefits described above.
Compensation and Benefits Committee Interlocks and Insider Participation
Messrs. Raether, Robbins and Tokarz served on the Company's Compensation
and Benefits Committee during 1996. Messrs. Tokarz and Raether also served as
officers of certain subsidiaries of the Company. Messrs. Raether, Robbins and
Tokarz are general partners of KKR. In 1996, KKR received an annual financial
advisory fee of $1,250,000.
61
<PAGE>
Compensation of Directors
Directors of the Company other than Mr. Adamson receive the following
compensation: (i) a $20,000 annual cash retainer (paid in $5,000 installments
on a quarterly basis), (ii) a $10,000 annual restricted stock retainer (paid on
a quarterly basis with a requirement that the restricted stock be held until
the director resigns or retires from the board), (iii) a $1,000 cash payment
for each "face-to-face" (non-telephonic) board or board committee meeting
attended, and (iv) an annual stock option grant with an exercise price (based
upon the Common Stock's fair market value on the date of grant) equal in value
to $20,000. Such options will have a term of 10 years and become exercisable at
a rate of 25% per annum for four consecutive years beginning on the first
anniversary of the date of grant.
OWNERSHIP OF CAPITAL SECURITIES
The following table sets forth, as of January 7, 1998, the beneficial
ownership of the Common Stock by each stockholder known by Advantica to own
more than 5% of the outstanding shares, by each director of Advantica, by each
executive officer of the Company included in the Summary Compensation Table in
"Management Compensation" above, and by all directors and executive officers of
Advantica as a group. Except as otherwise noted, the persons named in the table
below have sole voting and investment power with respect to all shares shown as
beneficially owned by them.
<TABLE>
<CAPTION>
Amount and Nature of Percentage of
Beneficial Owner Beneficial Ownership Common Stock
- --------------------------------------------------------------------- ---------------------- --------------
<S> <C> <C>
Loomis Sayles & Company, L.P. ....................................... 9,526,775(1) 23.82%
(and related entities)
One Financial Center
Boston, MA 02111
Moore Capital Management, Inc. ...................................... 3,859,077(2) 7.91%
(and related entities)
1251 Avenue of the Americas
New York, New York 10020 ...........................................
James B. Adamson .................................................... -- --
Robert H. Allen ..................................................... -- --
Ronald E. Blaylock .................................................. -- --
Vera King Farris .................................................... -- --
James J. Gaffney .................................................... -- --
Irwin N. Gold ....................................................... -- --
Robert E. Marks ..................................................... -- --
Charles F. Moran .................................................... -- --
Elizabeth A. Sanders ................................................ -- --
Donald R. Shepherd .................................................. -- --
Craig S. Bushey ..................................................... -- --
C. Robert Campbell .................................................. -- --
John Romandetti ..................................................... -- --
Mark L. Shipman ..................................................... -- --
All current directors and executive officers as a group (20 persons) -- --
</TABLE>
- ---------
(1) Shares shown as beneficially owned by Loomis Sayles & Company, L.P.
("Loomis") and certain related entities are as reported on the latest
Schedule 13D filing by Loomis. According to such Schedule 13D filing,
Loomis is an investment adviser to certain managed accounts (the "Loomis
Managed Accounts"), each of which is entitled to the pecuniary interest
(including, without limitation, the sole right to receive dividends,
proceeds and profits from sale) in the shares allocated to such Loomis
Managed Account. According to such Schedule 13D, as investment adviser to
the Loomis Managed Accounts, Loomis retains the right to dispose of, and
either retains or shares with the Loomis Managed Accounts the right to
vote, such shares. According to such Schedule 13D, no Loomis Managed
Account holds more than 5% of the outstanding shares of the Common Stock.
(2) Shares shown as owned by Moore Capital Management, Inc. ("Moore Capital")
and related entities are as reported on the latest 13D filing by Moore
Capital.
As of January 7, 1998, 40,000,000 shares of Common Stock were issued and
outstanding.
62
<PAGE>
Adamson Shareholder Agreement
Pursuant to a shareholder agreement (the "Adamson Shareholder Agreement")
dated January 10, 1995 between Mr. Adamson and a KKR affiliate, the KKR
affiliate agreed to vote all shares of Old Common Stock owned by it to elect
Mr. Adamson to the Board of Directors of FCI as long as Mr. Adamson is employed
by FCI. If at any time during Mr. Adamson's Employment Term (as defined in the
Adamson Employment Agreement) while Mr. Adamson was an active employee of the
Company, the KKR affiliate proposed to sell or exchange any shares of its Old
Common Stock to any third party which was not a KKR affiliate, then Mr. Adamson
had the right to have included in such sale or exchange a number of his shares
of Old Common Stock determined by multiplying (i) the total number of shares of
Old Common Stock proposed to be sold or exchanged by the KKR affiliate by (ii)
a fraction, the numerator of which is equal to the number of such shares of Old
Common Stock owned by Mr. Adamson and the denominator of which is equal to the
aggregate number of such shares of Old Common Stock owned by Mr. Adamson and
the number of shares owned by the KKR affiliate.
The Adamson Shareholder Agreement was terminated in connection with the
consummation and effectiveness of the Plan of Reorganization described
elsewhere in this Prospectus.
CERTAIN TRANSACTIONS
For information concerning certain transactions in which KKR (and their
affiliates) and Mr. Adamson have an interest, see "Management Compensation" and
"Ownership of Capital Securities."
DESCRIPTION OF INDEBTEDNESS
The following summary of the principal terms of the indebtedness of the
Company does not purport to be complete and is qualified in its entirety by
reference to the documents governing such indebtedness, including the
definitions of certain terms therein, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
Whenever particular provisions of such documents are referred to herein, such
provisions are incorporated by reference, and the statements are qualified in
their entirety by such reference.
The Advantica Credit Agreement
On the Effective Date the Company entered into a credit agreement with
Chase and other lenders named therein which established the $200 million senior
secured Credit Facility.
Such facility will be used for working capital advances, letters of credit
and general corporate purposes by the Company's principal operating
subsidiaries (other than FRI-M) which are borrowers thereunder (the
"Borrowers"). The Credit Facility is guaranteed by Advantica and, subject to
certain exceptions, by the Company's subsidiaries that are not borrowers
thereunder and generally are secured by liens on the same collateral that
formerly secured the Company's obligations under the Prepetition Credit
Agreement (with additional liens on the Company's corporate headquarters in
Spartanburg, South Carolina and accounts receivable).
The Credit Facility matures on the date that is five years after the
Effective Date (the "Maturity Date"), subject to earlier termination on March
31, 2000 in the event that the Mortgage Financings have not, on or prior to
such date, been refinanced with other indebtedness that (a) matures at least 90
days after the Maturity Date, and (b) is otherwise satisfactory to the lenders.
Commitments under the Credit Facility will be reduced in amounts equal to (a) a
percentage of the net cash proceeds of all non-ordinary course asset sales or
other dispositions of property by Advantica, subject to certain exceptions, and
(b) 100% of the net cash proceeds of issuances of debt obligations of
Advantica, subject to certain exceptions (including exceptions for certain
subordinated indebtedness).
The Credit Facility contains covenants customarily found in credit
agreements for leveraged financings that, among other things, place limitations
on (i) dividends on capital stock; (ii) redemptions and repurchases of capital
stock; (iii) prepayments, redemptions and repurchases of debt (other than loans
under the Credit Facility); (iv) liens and sale-leaseback transactions; (v)
loans and investments; (vi) incurrence of debt; (vii) capital expenditures;
(viii) operating leases; (ix) mergers and acquisitions; (x) asset sales; (xi)
transactions with affiliates; (xii) changes in the business conducted by
Advantica and its subsidiaries; and (xiii) amendment of debt and other material
agreements.
The Credit Facility also contains covenants that require Advantica and its
subsidiaries on a consolidated basis to meet certain financial ratios and tests
described below:
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Total Debt to EBITDA Ratio. Advantica is required not to permit the ratio
of (a) Total Debt (as defined below) outstanding on the last day of any fiscal
quarter to (b) EBITDA (as defined below) of Advantica, the Borrowers and the
Specified Subsidiaries (as defined) on a consolidated basis for the period of
four consecutive fiscal quarters then ended to be more than a specified ratio,
ranging from a ratio of 5.10:1.00 applicable on March 31, 1998 to a ratio of
4.00:1.00 applicable on or after December 31, 2001.
Senior Secured Debt Ratio. Advantica is required not to permit the ratio
of (a) Senior Secured Debt (as defined below) outstanding on the last day of
any fiscal quarter to (b) EBITDA of Advantica, the Borrowers and the Specified
Subsidiaries on a consolidated basis for the period of four consecutive fiscal
quarters then ended to be more than a specified ratio, ranging from a ratio of
2.35:1.00 applicable on March 31, 1998 to a ratio of 2.00:1.00 applicable on or
after September 30, 1999.
Interest Ratio Coverage. Advantica is required not to permit the ratio,
determined on the last day of each fiscal quarter for the period of four
consecutive fiscal quarters then ended, of (a) EBITDA of Advantica, the
Borrowers and the Specified Subsidiaries on a consolidated basis to (b) Cash
Interest Expense (as defined below) to be less than a specified ratio, ranging
from a ratio of 1.65:1.00 applicable on December 31, 1997 to a ratio of
1.85:1.00 applicable on or after December 31, 1999.
Fixed Charge Coverage Ratio. Advantica is required not to permit the
ratio, determined on the last day of each fiscal quarter for the period of four
consecutive fiscal quarters then ended, of (a) the sum of (i) EBITDA of
Advantica, the Borrowers and the Specified Subsidiaries on a consolidated basis
and (ii) Lease Expense (as defined below) to (b) the sum of (i) Cash Interest
Expense and (ii) Lease Expense to be less than a specified ratio, ranging from
a ratio of 1.35:1.00 applicable on December 31, 1997 to a ratio of 1.55:1.00
applicable on or after December 31, 2000.
Capital Expenditures Test. Advantica is required not to permit Advantica,
the Borrowers and the Specified Subsidiaries on a consolidated basis to incur
Capital Expenditures (as defined below) in excess of $90.0 million in the
aggregate for the fiscal year ending December 31, 1997 and $100 million in the
aggregate for the fiscal years ending December 31, 1998 and thereafter.
Certain Defined Terms. As used in the Credit Facility, the following terms
shall have the following meanings.
"Capital Expenditures" means, for any period, without duplication, the sum
of the aggregate of all expenditures (whether paid in cash or other
consideration or accrued as a liability) by Advantica, the Borrowers and the
Specified Subsidiaries during such period that, in conformity with GAAP, would
be included in "additions to property, plant or equipment" or comparable items
reflected in the consolidated statement of cash flows of Advantica, the
Borrowers and the Specified Subsidiaries for such period, including (a) Capital
Lease Obligations (as defined) and (b) expenditures for equipment that is
purchased simultaneously with the trade-in of existing equipment owned by any
Borrower or any of the Specified Subsidiaries to the extent of the gross amount
of the purchase price less the book value of the equipment being traded in at
such time, but excluding (c) interest capitalized during construction and (d)
expenditures made in connection with the replacement or restoration of assets,
to the extent reimbursed or financed from insurance proceeds paid on account of
the loss of or the damage to the assets being replaced or restored, or from
awards of compensation arising from the taking by condemnation or eminent
domain of such assets being replaced, and net of cash amounts received by the
Borrowers and the Specified Subsidiaries from other persons during that period
in reimbursement of Capital Expenditures made by the Borrowers and the
Specified Subsidiaries.
"Cash Interest Expense" means, for any period, Interest Expense minus (a)
interest not paid in cash (including amortization of (i) discount and deferred
debt expenses (but excluding any capitalized interest expense with respect to
the Old Senior Notes) and (ii) fees with respect to Interest Rate Protection
Agreements (as defined) payable in connection with the incurrence of
Indebtedness to the extent included in interest expense in accordance with GAAP
(including fees and expenses in connection with the transactions relating to
the Plan of Reorganization, plus (b) the amortization of the write-up of
indebtedness relating to the fresh-start accounting treatment (in accordance
with GAAP) of Advantica's consolidated financial statements resulting from the
Reorganization Cases and Advantica's emergence therefrom.
"EBITDA" means, with respect to Advantica, the Borrowers and the Specified
Subsidiaries for any period, all as determined in accordance with GAAP on a
consolidated basis after eliminating intercompany items, the net income (or net
loss) for such period, plus (a) to the extent deducted in computing such net
income (or net loss) the sum of (i) depreciation expense, (ii) amortization
expense, (iii) other non-cash charges, (iv) provisions for LIFO adjustment for
inventory valuation,
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(v) net total federal, state and local income tax expense, (vi) Interest
Expense, (vii) extraordinary losses, (viii) any non-recurring charge or
restructuring charge that in accordance with GAAP is excluded from operating
income, (ix) the cumulative effect of any change in accounting principles and
(x) "Chapter 11 expenses" (or "administrative costs reflecting Chapter 11
expenses") as shown on Advantica's consolidated statement of income for such
period minus (b) extraordinary gains minus (c) the amount of cash expended in
such period in respect of any amount that, under clause (viii) above, was taken
into account in determining EBITDA for such or any prior period.
"Indebtedness" of any person means, without duplication, (a) all
indebtedness of such person for borrowed money; (b) all indebtedness of such
person for the deferred purchase price of property or services (other than
property, including inventory, and services purchased, and expense accruals and
deferred compensation items arising, in the ordinary course of business); (c)
all obligations of such person evidenced by notes, bonds, debentures or other
similar instruments (other than performance, surety and appeal bonds arising in
the ordinary course of business); (d) all indebtedness of such person created
or arising under any conditional sale or other title retention agreement with
respect to property acquired by such person (even though the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property); (e) all Capital Lease
Obligations of such person; (f) all reimbursement, payment or similar
obligations of such person, contingent or otherwise, under acceptance, letter
of credit or similar facilities; (g) all obligations of such person in respect
of (i) currency swap agreements, currency future or option contracts and other
similar agreements designed to hedge against fluctuations in foreign interest
rates and (ii) interest rate swap, cap or collar agreements, interest rate
future or option contracts and other similar agreements designed to hedge
against fluctuations in interest rates; (h) all Guarantees (as defined) by such
person of Indebtedness referred to in clauses (a) through (g) above; and (i)
all Indebtedness referred to in clauses (a) through (h) above secured by (or
for which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien (as defined) upon or in property
(including accounts and contract rights) owned by such person, even though such
person has not assumed or become liable for the payment of such Indebtedness.
The Indebtedness of any person shall include the Indebtedness of any
partnership in which such person is a general partner. Notwithstanding the
foregoing, the amount of Indebtedness of Advantica and the Subsidiaries (or any
of them) shall exclude, for all purposes in the Credit Facility, the fair
market value write-up of indebtedness relating to the fresh-start accounting
treatment (in accordance with GAAP) of Advantica's consolidated financial
statements resulting from the Reorganization Cases and Advantica's emergence
therefrom.
"Interest Expense" means, for any period, all interest expense (including
the interest component in respect of Capital Lease Obligations), net of
interest income, accrued or paid by Advantica, the Borrowers and the Specified
Subsidiaries during such period in respect of Indebtedness of Advantica, the
Borrowers and the Specified Subsidiaries, including (a) any amortization of
initial debt discount or any fees (including fees with respect to Interest Rate
Protection Agreements) payable in connection with the incurrence of
Indebtedness to the extent included in interest expense in accordance with GAAP
(including fees and expenses in connection with the transactions relating to
the Plan of Reorganization), (b) any commitment fees, agent's and other
regularly scheduled fees and charges in respect of such Indebtedness, (c)
commissions and other fees and charges payable in connection with letters of
credit, (d) the net payment, if any, payable in connection with all interest
rate protection contracts and (e) interest capitalized during construction, all
determined on a consolidated basis in accordance with GAAP after eliminating
all intercompany items.
"Lease Expense" means, for any period, all payment obligations of
Advantica, the Borrowers and the Specified Subsidiaries during such period
under Operating Leases (as defined), as determined on a consolidated basis for
Advantica, the Borrowers and the Specified Subsidiaries in accordance with
GAAP.
"Senior Secured Debt" means, at any date and without duplication, Total
Debt at such date minus (a) the aggregate principal amount of New Senior Notes
outstanding on such date and (b) to the extent included in computing such Total
Debt, the aggregate amount of other unsecured Indebtedness of Advantica at such
date on a consolidated basis in accordance with GAAP.
"Total Debt" means, at any date and without duplication, the aggregate
amount of all Indebtedness of Advantica, the Borrowers and the Specified
Subsidiaries at such date on a consolidated basis in accordance with GAAP
(other than (a) the undrawn amount of (i) outstanding letters of credit and
(ii) other obligations under similar facilities and (b) Indebtedness of the
type described in clause (g) of the definition of the term "Indebtedness" or
Indebtedness of the type referred to in clause (h) or (i) or the final sentence
of such definition to the extent that the Indebtedness of the other person
referred to in such clause (h) or (i) or such final sentence is Indebtedness of
the type referred to in clause (a) or (b) above).
Under the Credit Facility, an event of default includes, among other
things, a reversal, modification or stay, in whole or in part, of any of the
orders issued by the Bankruptcy Court, nonpayment of principal or interest,
violations of covenants,
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breaches of representations and warranties, the triggering of certain
cross-default and cross-acceleration provisions, certain events of bankruptcy,
material judgments against Advantica or its subsidiaries, and the occurrence of
a "Change in Control", as defined in the Credit Agreement. If such an event of
default were to occur, the lenders under the Credit Facility would be entitled
to exercise a number of remedies, including acceleration of all amounts owed
under the Credit Facility.
Advantica Public Debt
Pursuant to the Plan of Reorganization, Advantica issued on January 7,
1998, $592,005,000 million aggregate principal amount of 11 1/4% Senior Notes.
The New Senior Notes are senior unsecured obligations of Advantica and rank
pari passu in right of payment to all Senior Indebtedness, including the Credit
Facility. Interest on the New Senior Notes accrues at a rate equal to 11 1/4%
per annum and is payable semi-annually in arrears on each July 15 and January
15, beginning July 15, 1998. They will mature on January 15, 2008.
The New Senior Notes will be redeemable, in whole or in part, at the
option of Advantica at any time on or after January 15, 2003, initially at a
redemption price equal to 105.625% of the principal amount thereof to and
including January 14, 2004, at 103.750% of the principal amount thereof to and
including January 14, 2005, at 101.875% of the principal amount thereof to and
including January 14, 2006, and thereafter at 100% of the principal amount
thereof, together in each case with accrued interest.
Notwithstanding the foregoing, from January 15, 1998 until January 15,
2001, Advantica may redeem up to 35% of the aggregate principal amount of New
Senior Notes outstanding on the date of the Indenture at a redemption price
(expressed as a percentage of the principal amount) of 110%, plus accrued and
unpaid interest, if any, to the redemption date, from the net proceeds of any
public offering for cash of any equity securities of Advantica or any
subsidiary thereof.
Mortgage Financings
A subsidiary of Advantica had issued and outstanding, at December 31,
1996, $190.2 million in aggregate principal amount of 10 1/4% Guaranteed
Secured Bonds due 2000. Interest is payable semi-annually in arrears on each
November 15 and May 15. As a result of the downgrade of Advantica's outstanding
debt securities during 1994, certain payments by the Company which fund such
interest payments are due and payable on a monthly basis. Principal payments
total $12.5 million annually for the years 1997 through 1999; and $152.7
million in 2000. The bonds are secured by a financial guaranty insurance policy
issued by Financial Security Assurance, Inc. and by collateral assignment of
mortgage loans on 238 Hardee's and 148 Quincy's restaurants. In connection with
the transaction to sell FEI, as described elsewhere in this Prospectus, the
Company intends to use a portion of the proceeds from the disposition to effect
an in-substance defeasance of certain of such Mortgage Financings with a book
value of $183.9 million at October 1, 1997 ($105.3 of which is collateralized
by the assets of FEI). Such Mortgage Financings will not be retained or assumed
by the purchaser in the disposition. The Company intends to purchase Defeasance
Eligible Investments which will be deposited in an irrevocable trust to satisfy
principal and interest payments on the related bonds through the stated
maturity.
Another subsidiary of Advantica has outstanding $160 million aggregate
principal amount of 11.03% Notes due 2000. Interest is payable quarterly in
arrears, with the principal maturing in a single installment payable in July
2000. These notes are redeemable, in whole, at the subsidiary's option, upon
payment of a premium. They are secured by a pool of cross-collateralized
mortgages on approximately 240 Denny's restaurant properties.
The foregoing financings by subsidiaries of Advantica, as described in the
two preceding paragraphs, are referred to collectively and separately in this
Prospectus as the "Mortgage Financings."
The FRI-M Credit Facility
In connection with the acquisition by FRD of Coco's and Carrows on May 23,
1996, FRI-M, a wholly-owned subsidiary of FRD, obtained a new credit facility
(the "FRI-M Credit Facility") consisting of a $56 million term loan (the "FRI-M
Term Loan") and a $35 million working capital facility (the "FRI-M Revolver").
Proceeds from the FRI-M Term Loan were used to fund the Coco's and Carrows
acquisition and to pay the transactions costs associated therewith. Proceeds
from the FRI-M Revolver are to be used for working capital requirements and
other general corporate purposes, which may include the making of intercompany
loans to any of FRI-M's wholly-owned subsidiaries for their own working capital
and other general corporate purposes. Letters of credit may be issued under the
FRI-M Revolver for the purpose of supporting (i) workers' compensation
liabilities of FRI-M or any of its subsidiaries; (ii) the obligations of third
party insurers of FRI-M or any of its subsidiaries; and (iii) certain other
obligations of FRI-M and its subsidiaries.
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The FRI-M Term Loan matures on August 31, 1999. Principal installments of
the FRI-M Term Loan are payable quarterly as follows: $4 million per quarter
for four consecutive quarters beginning February 28, 1997; $5 million for four
consecutive quarters beginning February 28, 1998; $6 million on February 28,
1999; and $7 million for two consecutive quarters beginning May 31, 1999. All
amounts owing under the FRI-M Term Loan are required to be repaid on August 31,
1999. The commitment to make loans or issue letters of credit pursuant to the
FRI-M Revolver expires, and all amounts outstanding under the FRI-M Revolver
must be repaid, on August 31, 1999. All borrowings under the FRI-M Credit
Facility accrue interest at a variable rate based on a base rate (as defined
therein) or an adjusted Eurodollar rate. The rate at year end 1996 was 8.125%.
The FRI-M Credit Facility requires FRI-M to make mandatory prepayments in
certain circumstances out of its Consolidated Excess Cash Flow (as defined
therein), out of cash proceeds of certain asset sales, out of assets
distributed to FRD, FRI-M or any of FRI-M's direct or indirect subsidiaries
(each, a "Loan Party") in connection with an employee benefit plan termination
and out of net cash proceeds received by a Loan Party from certain other
sources. Any mandatory partial prepayment of the FRI-M Term Loan shall be
applied to installments scheduled to be paid during the twelve months
immediately following the date of such prepayment, with any excess being
applied ratably to the scheduled installments of the FRI-M Term Loan.
The FRI-M Credit Facility contains certain restrictive covenants which,
among other things, limit (subject to certain exceptions) FRI-M and its
subsidiaries with respect to (a) incurrence of debt; (b) the existence of
liens; (c) investments and joint ventures; (d) the declaration or payment of
dividends; (e) the making of guarantees and other contingent obligations; (f)
the amendment or waiver of certain related agreements; (g) mergers,
consolidations, liquidations and sales of assets (including sale and leaseback
transactions); (h) payment obligations under leases; (i) transactions with
shareholders and affiliates; (j) the sale, assignment, pledge or other
disposition of shares of FRI-M or its subsidiaries by FRI-M or its
subsidiaries; (k) capital expenditures; and (l) material changes in their
business.
The FRI-M Credit Facility also imposes on FRD, FRI-M and its subsidiaries
certain financial tests and minimum ratios which, among other things, require
that FRI-M (a) shall not permit the ratio determined on the last day of each
fiscal quarter for such quarter and the three preceding quarters ("Rolling
Period") then ended of Consolidated Adjusted EBITDA (as defined therein) to
Consolidated Interest Expense (as defined therein) to be less than levels
increasing from 1.50:1.00 on September 26, 1996 to 2.10:1.00 on September 23,
1999 and each fiscal quarter end thereafter; (b) permit the ratio determined on
the last day of each fiscal quarter for the Rolling Period then ended of
Consolidated Total Debt (as defined therein) to Consolidated Adjusted EBITDA
(as defined) to exceed a level varying from 5.65:1.00 on September 26, 1996 to
3.65:1.00 on September 23, 1999 and each fiscal quarter end thereafter; and (c)
shall not permit Consolidated Adjusted EBITDA determined on the last day of
each fiscal quarter for the Rolling Period then ended to be less than an amount
increasing from $11.2 million for the Rolling Period ending September 26, 1996
to $49.5 million for the Rolling Period ending June 25, 1998 and each Rolling
Period thereafter.
FRD and all of FRI-M's subsidiaries have guaranteed the obligations of
FRI-M under the FRI-M Credit Facility and the other Loan Documents (as defined
therein). All of the issued and outstanding common stock of FRI-M and its
subsidiaries has been pledged as security for the obligations of FRD under the
FRI-M Credit Facility and the other Loan Documents. The obligations of FRI-M
under the FRI-M Credit Facility and the other Loan Documents are secured by
substantially all assets of FRI-M and its subsidiaries.
The FRD Senior Notes
In connection with the May 23, 1996 acquisition of FRI-M, FRD issued
$156.9 million principal amount of 12 1/2% FRD Senior Notes due 2004 (the "FRD
Notes"). Interest on the FRD Notes accrues at the rate of 12 1/2% per annum and
is payable semi-annually in arrears on January 15 and July 15, commencing on
July 15, 1996. They will mature on July 15, 2004. The FRD Notes are senior
unsecured, general obligations of FRD and rank senior in right of payment to
all existing and future subordinated indebtedness of FRD and rank pari passu in
right of payment with all existing and future unsubordinated indebtedness of
FRD. The FRD Notes are effectively subordinated to secured indebtedness of FRD,
including borrowings under the FRI-M Credit Facility to the extent of the value
of FRD's assets securing such indebtedness. Borrowings under the FRI-M Credit
Facility are secured by substantially all of FRD's assets (The FRD Notes are
structurally subordinated to all indebtedness of FRI-M (as defined above),
including its indebtedness under the FRI-M Credit Facility).
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DESCRIPTION OF COMMON STOCK
General
Advantica has 100,000,000 authorized shares of Common Stock, par value
$.01 per share, and 25,000,000 authorized shares of preferred stock. 40,000,000
shares of Common Stock were issued in connection with the consummation and
effectiveness of the Plan of Reorganization (not including shares issuable upon
the exercise of the Warrants and shares issuable upon the exercise of stock
options granted to Advantica's employees and directors under bona fide employee
benefit plans). All of the Common Stock issued and outstanding as of the
Effective Date are fully paid and nonassessable.
The following summary description of the Common Stock does not purport to
be complete and is qualified in its entirety by this reference to Advantica's
Certificate of Incorporation and Bylaws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
The holders of validly issued and outstanding shares of Common Stock are
entitled to one vote per share of record on all matters to be voted upon by
Advantica stockholders. At a meeting of stockholders at which a quorum is
present, a majority of the votes cast decides all questions, unless the matter
is one upon which a different vote is required by express provision of law or
Advantica's Certificate of Incorporation or Bylaws. There is no cumulative
voting with respect to the election of directors (or any other matter). The
holders of a majority of the shares at a meeting at which a quorum is present
are able to elect all of the directors to be elected.
The holders of Common Stock will have no preemptive rights and have no
rights to convert the Common Stock into any other securities.
Subject to the rights of holders of preferred stock of Advantica, if any,
in the event of a liquidation, dissolution or winding up of Advantica, holders
of Common Stock are entitled to participate equally, share for share, in all
assets remaining after payment of liabilities.
The holders of Common Stock are entitled to receive ratably such dividends
as the Board of Directors may declare out of funds legally available therefor,
when and if so declared. The Credit Facility and the indenture governing the
New Senior Notes contain negative covenants that restrict, among other things,
the ability of Advantica to pay dividends.
The Board of Directors of Advantica is authorized to issue, from time to
time, up to 25,000,000 shares of preferred stock. The Board of Directors may
issue preferred stock in one or more series and may fix the relative rights and
preferences for each such series, including annual dividend rates, redemption
prices, sinking fund provisions, liquidation preferences, conversion rights and
voting rights.
Registration Rights of Affiliates
Flagstar and FCI undertook, pursuant to the terms of the Original Plan, to
enter into a registration rights agreement on the Effective Date with each
holder of more than 10% of the Common Stock. Advantica entered into a
Registration Rights Agreement (the "Registration Rights Agreement") on the
Effective Date with the Selling Stockholder, then the only holder of 10% or
more of the Common Stock. Pursuant to the Registration Rights Agreement,
Advantica agreed to file and use its best efforts to cause to become effective
the shelf Registration Statement of which this Prospectus is a part covering
resales by the Selling Stockholder from time to time, and use its best efforts
to cause this Registration Statement to remain effective for a period of three
years from the Effective Date (or five years from the Effective Date if
Advantica becomes entitled to use a registration statement on Form S-3 under
the Securities Act). In addition, the Selling Stockholder may make three
written demands on Advantica for registration under the Securities Act of all
or a part of the Common Stock issued to it pursuant to the Plan of
Reorganization, and may make unlimited demands for registrations so long as
such registrations may be effected on Form S-3 registration statements. In
addition, the Selling Stockholder has customary "piggyback" registration rights
to include its shares of Common Stock, subject to certain limitations, in other
registration statements filed by Advantica under the Securities Act.
Advantica agreed to pay all expenses in connection with the performance of
the obligations to effect the shelf, demand and piggyback registrations under
the Securities Act of the Common Stock covered by the Registration Rights
Agreement, other than (a) underwriting fees, discounts, commissions or other
similar selling expenses attributable to the sale of Common Stock under the
Registration Rights Agreement; and (b) any expenses (other than internal
expenses of its own officers and employees) in connection with any additional
demand registration on Form S-3 after the three designated demand
registrations. Advantica agreed to indemnify and hold harmless, to the fullest
extent permitted by law, the Selling Stockholder against certain securities law
liabilities (including, under certain circumstances, liabilities unrelated to
the participation of
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the Selling Stockholder in a registered offering or sale of the Common Stock)
and, in lieu thereof, to contribute to payments required to be made by such
Selling Stockholder.
The obligations of Advantica to effect and maintain the effectiveness of
any registration required by the Registration Rights Agreement terminates upon
the earliest of (a) the sale of all shares of the Common Stock subject to the
Registration Rights Agreement that are held by the Selling Stockholder; (b)
upon notice from the Selling Stockholder that it no longer needs the benefits
of the Registration Rights Agreement; and (c) when the Selling Stockholder owns
or holds (on a fully-diluted basis) less than 10% of the shares of Common Stock
then outstanding (on a fully-diluted basis) and Advantica has delivered to the
Selling Stockholder an opinion of recognized securities counsel to the effect
that the Common Stock held by it may be freely resold by it without resort to
the provisions of Rule 144.
SELLING STOCKHOLDER
The following table provides certain information with respect to the
Common Stock held by the Selling Stockholder as of January 7, 1998. The Selling
Stockholder received the 9,526,775 shares offered hereunder (the "Shares") as a
distribution under the Original Plan in respect of approximately $211,772,000
in principal amount of the 11.25% Debentures owned by the Selling Stockholder
on behalf of the Loomis Managed Accounts prior to consummation of the Plan of
Reorganization. In addition, the Selling Stockholder owned shares of the Old
Preferred Stock on behalf of the Loomis Managed Accounts prior to consummation
of the Plan of Reorganization, and received no distribution in respect thereof.
The obligations of the Company in respect of the 11.25% Debentures and the Old
Preferred Stock were discharged as a result of the Reorganization Cases. Other
than the ownership of such securities and except as otherwise noted elsewhere
in this Prospectus, the Selling Stockholder has not held any position, office,
or other material relationship with Advantica or any of its predecessors or
affiliates within the past three years other than as a result of the ownership
of the Common Stock. The Shares may be offered from time to time by the Selling
Stockholder named below:
<TABLE>
<CAPTION>
Number of Shares
Owned and Registered
Selling Stockholder Hereunder
- -------------------------------------- ---------------------
<S> <C>
Loomis Sayles & Company, L.P 9,526,775
One Financial Center
Boston, MA 02111
</TABLE>
- ---------
(1) According to the latest Schedule 13D filing by Loomis, Loomis is an
investment adviser to the Loomis Managed Accounts, each of which is
entitled to the pecuniary interest (including, without limitation, the
sole right to receive dividends, proceeds and profits from sale) in Shares
being sold which are allocated to such Loomis Managed Account. According
to such Schedule 13D, as investment adviser to the Loomis Managed
Accounts, Loomis retains the right to dispose of, and either retains or
shares with the Loomis Managed Accounts the right to vote, such Shares.
According to such Schedule 13D, no Loomis Managed Account holds more than
5% of the outstanding shares of Common Stock.
Because the Selling Stockholder may sell all, some or none of the Shares
to be sold hereunder from time to time, the number of Shares and percentage of
the class held by the Selling Stockholder after the offering cannot be
determined at this time.
PLAN OF DISTRIBUTION
The Company will receive none of the proceeds from this offering. The
Shares may be sold from time to time to purchasers in privately negotiated
transactions or in open market transactions. The Selling Stockholder may from
time to time offer the Shares directly or through underwriters, brokers,
dealers or agents, pursuant to (a) a block trade in which a broker or dealer
will attempt to sell the Shares as agent but may position and resell a portion
of the block as principal to facilitate the transaction; (b) purchases by a
broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus; or (c) ordinary brokerage transactions and
transactions in which the broker or dealer solicits purchasers. In effecting
such sales, underwriters, brokers or dealers engaged by the Selling
Stockholder, may arrange for other brokers or dealers to participate in the
resales. Such sales may be effected at market prices and on terms prevailing at
the time of sale, at prices related to such market prices, at negotiated prices
or at fixed prices. In addition, the Selling Stockholder may engage in hedging
or other similar transactions, and may pledge the Shares being offered, and,
upon default, the pledgee may effect sales of the pledged shares pursuant to
this Prospectus. In connection with any hedging transactions, broker-dealers
may engage in short sales of the Shares registered hereunder in the course of
hedging the positions they assume with
69
<PAGE>
the Selling Stockholder. The Selling Stockholder may also sell Common Stock
short and redeliver the Shares to close out such short positions. The Selling
Stockholder may also enter into option or other transactions with
broker-dealers which require the delivery to the broker-dealer of the Shares
registered hereunder. Underwriters, brokers, dealers and agents may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Selling Stockholder or the purchasers of Shares for whom they may act
as agent. The Selling Stockholder and any underwriters, dealers or agents that
participate in any distribution of Shares may be deemed to be "underwriters"
within the meaning of the Securities Act and any profit on the sale of Shares
by them and any discounts, commissions or concessions received by any such
underwriters, dealers or agents might be deemed to be underwriting discounts
and commissions under the Securities Act.
At the time a particular offering of Shares is made, a Prospectus
Supplement or a post-effective amendment to the Registration Statement, if
required, will be distributed which will set forth the aggregate amount and
type of Shares being offered and the terms of the offering, including the name
or names of any underwriters, dealers or agents, any discounts, commissions and
other terms constituting compensation from the Selling Stockholder and any
discounts, commissions or concessions allowed or reallowed or paid to dealers.
There is no assurance that the Selling Stockholder will sell any of the
Shares. In addition, any Shares covered by this Prospectus which qualify for
sale pursuant to Rule 144 under the Securities Act may be sold pursuant to Rule
144 rather than pursuant to this Prospectus.
The Common Stock is currently listed for trading on the NASDAQ National
Market System, and its trading symbol is "DINE." There can be no assurance that
an active trading market will be sustained for the Common Stock.
Pursuant to the Registration Rights Agreement, Advantica will pay
substantially all of the expenses incident to the registration, offering and
sale of the Shares to the public other than commissions, fees and discounts of
underwriters, dealers or agents. Under the Registration Rights Agreement,
Advantica will indemnify the Selling Stockholder and any underwriter it may
utilize against certain civil liabilities, including liabilities under the
Securities Act and, in lieu thereof, will contribute to payments required to be
made by the Selling Stockholder.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock offered hereby
will be passed upon for Advantica by Parker, Poe, Adams & Bernstein L.L.P.,
2500 Charlotte Plaza, Charlotte, North Carolina 28244.
EXPERTS
The consolidated balance sheets as of December 31, 1995 and 1996 and the
statements of consolidated operations and cash flows for the three years ended
December 31, 1994, 1995 and 1996 of Advantica Restaurant Group, Inc. included
in this Prospectus have been audited by Deloitte & Touche LLP, independent
public accountants, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing. The combined statements of operations
and net combined equity and cash flows of FRI-M and its subsidiaries for the
year ended December 26, 1993, the one month ended January 26, 1994, the eleven
months ended December 25, 1994 and the year ended December 31, 1995 included in
this Prospectus have been audited by KPMG Peat Marwick LLP, independent
auditors, as stated in their report appearing herein and elsewhere in the
Registration Statement. Such financial statements have been so included in
reliance upon such reports given upon the authority of these firms as experts
in accounting and auditing.
70
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Consolidated Financial Statements of Advantica Restaurant Group, Inc. (formerly
Flagstar Companies, Inc.)
Independent Auditors' Report ............................................................. F-2
Statements of Consolidated Operations for the Three Years Ended December 31, 1994, 1995
and
1996 and for the (unaudited) Three Quarters Ended September 30, 1996 and October 1, 1997 F-3
Consolidated Balance Sheets as of December 31, 1995 and 1996 and (unaudited) October 1, F-4
1997
Statements of Consolidated Cash Flows for the Three Years Ended December 31, 1994, 1995
and
1996 and for the (unaudited) Three Quarters Ended September 30, 1996 and October 1, 1997 F-5
Notes to Consolidated Financial Statements ............................................... F-7
FRI-M Combined Financial Statements
Independent Auditors' Report ............................................................. F-31
Combined Statements of Operations for the Year Ended December 26, 1993, the One Month
Ended
January 26, 1994 (FRI-Predecessor Company), the Eleven Months Ended December 25, 1994
and the Year
Ended December 31, 1995 (FRI-Successor Company) ......................................... F-32
Combined Statements of Cash Flows for the Year Ended December 26, 1993, the One Month
Ended
January 26, 1994 (FRI-Predessor Company), the Eleven Months Ended December 25, 1994 and
the Year
Ended December 31, 1995 (FRI-Successor Company) ......................................... F-33
Notes to Combined Financial Statements ................................................... F-34
FRI-M Unaudited Combined Condensed Financial Statements
Combined Condensed Statements of Operations for the three months ended March 26, 1995
(unaudited) and the three months ended March 31, 1996 (unaudited) ....................... F-39
Combined Condensed Statements of Cash Flows for the three months ended March 26, 1995
(unaudited) and the three months ended March 31, 1996 (unaudited) ....................... F-40
Notes to Combined Condensed Financial Statements (unaudited) ............................. F-41
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
ADVANTICA RESTAURANT GROUP, INC.
We have audited the accompanying consolidated balance sheets of Advantica
Restaurant Group, Inc. (formerly Flagstar Companies, Inc.) and subsidiaries
(the Company) as of December 31, 1995 and 1996, and the related statements of
consolidated operations and consolidated cash flows for each of the three years
in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1995 and 1996 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1995
the Company changed its method of accounting for the impairment of long-lived
assets.
DELOITTE & TOUCHE LLP
Greenville, South Carolina
February 13, 1997
F-2
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1994 1995
-------------- --------------
<S> <C> <C>
($ in thousands except per share amounts)
Operating revenue ................................................ $2,665,966 $2,571,487
---------- ----------
Operating expenses:
Product cost .................................................... 919,087 864,505
Payroll & benefits .............................................. 919,928 916,951
Depreciation & amortization expense ............................. 129,633 132,872
Utilities expenses .............................................. 99,021 98,212
Other ........................................................... 394,012 393,482
Provision for (recovery of) restructuring charges (Note 3) ...... (7,207) 15,873
Charge for impaired assets (Note 3) ............................. -- 51,358
---------- ----------
2,454,474 2,473,253
---------- ----------
Operating income ................................................. 211,492 98,234
---------- ----------
Other charges (credits):
Interest and debt expense (contractual interest for the three
quarters ended October 1, 1997 is $207,482) (Note 4)............ 232,515 232,874
Interest income (Note 12) ....................................... (5,077) (3,725)
Other -- net (Note 12) .......................................... 3,087 2,005
---------- ----------
230,525 231,154
---------- ----------
Loss before reorganization expenses and taxes .................... (19,033) (132,920)
Reorganization expenses .......................................... -- --
---------- ----------
Loss before income taxes ......................................... (19,033) (132,920)
(Benefit from) provision for income taxes (Note 6) ............... (2,213) (14)
---------- ----------
Loss from continuing operations .................................. (16,820) (132,906)
Gain on sale of discontinued operation, net of income tax
provision of: 1994 -- $9,999; 1995--$10,092 (Note 13)............ 399,188 77,877
Loss from discontinued operations, net of income tax provision
(benefit) of: 1994 -- $471; 1995--$(1,361) (Note 13)............. (6,518) (636)
---------- ----------
Income (loss) before extraordinary items ......................... 375,850 (55,665)
Extraordinary items, net of income tax provision
(benefit) of: 1994 -- $(174); 1995--$25
(Note 11) ....................................................... (11,757) 466
---------- ----------
Net income (loss) ................................................ 364,093 (55,199)
Dividends on preferred stock ..................................... (14,175) (14,175)
---------- ----------
Net income (loss) applicable to common shareholders (Note 10) $ 349,918 $ (69,374)
========== ==========
<CAPTION>
Three Quarters Ended
-----------------------------
Debtor-In-
Year Ended Possession
December 31, September 30, October 1,
1996 1996 1997
-------------- --------------- -------------
(unaudited)
<S> <C> <C> <C>
($ in thousands except per share amounts)
Operating revenue ................................................ $2,542,302 $1,880,834 $1,989,355
---------- ---------- ----------
Operating expenses:
Product cost .................................................... 744,072 572,732 580,979
Payroll & benefits .............................................. 945,772 708,749 736,059
Depreciation & amortization expense ............................. 129,948 92,606 106,902
Utilities expenses .............................................. 104,477 77,781 82,956
Other ........................................................... 461,641 309,792 369,005
Provision for (recovery of) restructuring charges (Note 3) ...... -- -- --
Charge for impaired assets (Note 3) ............................. -- -- --
---------- ---------- ----------
2,385,910 1,761,660 1,875,901
---------- ---------- ----------
Operating income ................................................. 156,392 119,174 113,454
---------- ---------- ----------
Other charges (credits):
Interest and debt expense (contractual interest for the three
quarters ended October 1, 1997 is $207,482) (Note 4)............ 261,633 193,924 185,171
Interest income (Note 12) ....................................... (6,926) (4,793) (1,604)
Other -- net (Note 12) .......................................... 3,537 228 6,612
---------- ---------- ----------
258,244 189,359 190,179
---------- ---------- ----------
Loss before reorganization expenses and taxes .................... (101,852) (70,185) (76,725)
Reorganization expenses .......................................... -- -- 23,549
---------- ---------- ----------
Loss before income taxes ......................................... (101,852) (70,185) (100,274)
(Benefit from) provision for income taxes (Note 6) ............... (16,392) (12,923) 1,484
---------- ---------- ----------
Loss from continuing operations .................................. (85,460) (57,262) (101,758)
Gain on sale of discontinued operation, net of income tax
provision of: 1994 -- $9,999; 1995--$10,092 (Note 13)............ -- -- --
Loss from discontinued operations, net of income tax provision
(benefit) of: 1994 -- $471; 1995--$(1,361) (Note 13)............. -- -- --
---------- ---------- ----------
Income (loss) before extraordinary items ......................... (85,460) (57,262) (101,758)
Extraordinary items, net of income tax provision
(benefit) of: 1994 -- $(174); 1995--$25
(Note 11) ....................................................... -- -- --
---------- ---------- ----------
Net income (loss) ................................................ (85,460) (57,262) (101,758)
Dividends on preferred stock ..................................... (14,175) (10,631) (10,631)
---------- ---------- ----------
Net income (loss) applicable to common shareholders (Note 10) $ (99,635) $ (67,893) $ (112,389)
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1995
---------------
<S> <C>
($ in thousands, except par value)
Assets
Current Assets:
Cash and cash equivalents .............................................................. $ 196,966
Receivables, less allowance for doubtful accounts of: 1995 -- $2,506; 1996--$2,405;
1997 -- $3,190......................................................................... 29,844
Loan receivable from former officer (Note 12) .......................................... --
Merchandise and supply inventories ..................................................... 32,445
Net assets held for sale ............................................................... --
Other .................................................................................. 26,087
----------
285,342
----------
Property:
Property owned (at cost) (Notes 2, 3 and 4):
Land .................................................................................. 255,719
Buildings and improvements ............................................................ 838,956
Other property and equipment .......................................................... 484,684
----------
Total property owned .................................................................... 1,579,359
Less accumulated depreciation ........................................................... 569,079
----------
Property owned -- net ................................................................... 1,010,280
----------
Buildings and improvements, vehicles, and other equipment held under capital leases (Note
5) 170,859
Less accumulated amortization ........................................................... 76,778
----------
Property held under capital leases -- net ............................................... 94,081
----------
1,104,361
----------
Other Assets:
Goodwill net of accumulated amortization of: 1996 -- $3,077; 1997--$6,789 (Note 2)...... --
Other intangible assets, net of accumulated amortization: 1995 -- $17,051;
1996 -- $20,611; 1997--$16,589......................................................... 22,380
Deferred financing costs -- net (Note 11) .............................................. 63,482
Other (including loan receivable from former officer of: 1995 -- $16,454) (Note 12)..... 32,186
Reorganization value in excess of amounts allocable to identifiable assets .............. --
----------
118,048
----------
$1,507,751
==========
Liabilities
Current Liabilities:
Current maturities of long-term debt (Notes 4 and 16) .................................. $ 38,835
Accounts payable ....................................................................... 125,467
Accrued salaries and vacations ......................................................... 41,102
Accrued insurance ...................................................................... 48,060
Accrued taxes .......................................................................... 30,705
Accrued interest and dividends ......................................................... 42,916
Other .................................................................................. 80,445
----------
407,530
----------
Long-Term Liabilities:
Debt, less current maturities (Notes 4 and 16) ......................................... 1,996,111
Deferred income taxes (Note 6) ......................................................... 18,175
Liability for self-insured claims ...................................................... 53,709
Other non-current liabilities and deferred credits ..................................... 163,203
----------
2,231,198
----------
Total liabilities not subject to compromise ............................................. 2,638,728
Liabilities subject to compromise (Note 14) ............................................. --
----------
Total liabilities ...................................................................... 2,638,728
Commitments and Contingencies (Notes 4, 5 and 8)
Shareholders' Equity (Deficit) (Notes 7, 9 and 16):
$2.25 Series A Cumulative Convertible Exchangeable Preferred Stock:
$0.10 par value; 1995, 1996 and 1997, 25,000 shares authorized; 6,300 shares issued
and outstanding; liquidation preference $157,500, excluding dividends in arrears...... 630
Common Stock:
$0.50 par value; shares authorized--200,000; issued and outstanding 1995, 1996 and
1997 -- 42,434
Pro forma -- $0.01 par value; shares authorized--100,000; issued and
outstanding -- 40,000 ................................................................ 21,218
Paid-in capital ........................................................................ 724,912
Deficit ................................................................................ (1,877,274)
Minimum pension liability adjustment ................................................... (463)
----------
(1,130,977)
----------
$1,507,751
==========
<CAPTION>
Debtor-In-
Possession
December 31, October 1,
1996 1997
--------------- ---------------
(unaudited)
<S> <C> <C>
($ in thousands, except par value)
Assets
Current Assets:
Cash and cash equivalents .............................................................. $ 92,369 $ 29,678
Receivables, less allowance for doubtful accounts of: 1995 -- $2,506; 1996--$2,405;
1997 -- $3,190......................................................................... 17,812 14,343
Loan receivable from former officer (Note 12) .......................................... 13,922 --
Merchandise and supply inventories ..................................................... 31,543 27,809
Net assets held for sale ............................................................... 5,114 --
Other .................................................................................. 29,895 44,496
------------- ------------
190,655 116,326
------------- ------------
Property:
Property owned (at cost) (Notes 2, 3 and 4):
Land .................................................................................. 253,067 250,590
Buildings and improvements ............................................................ 891,512 889,374
Other property and equipment .......................................................... 536,886 552,389
------------- ------------
Total property owned .................................................................... 1,681,465 1,692,353
Less accumulated depreciation ........................................................... 629,676 696,752
------------- ------------
Property owned -- net ................................................................... 1,051,789 995,601
------------- ------------
Buildings and improvements, vehicles, and other equipment held under capital leases (Note
5) 210,533 225,323
Less accumulated amortization ........................................................... 93,740 109,530
------------- ------------
Property held under capital leases -- net ............................................... 116,793 115,793
------------- ------------
1,168,582 1,111,394
------------- ------------
Other Assets:
Goodwill net of accumulated amortization of: 1996 -- $3,077; 1997--$6,789 (Note 2)...... 205,389 209,190
Other intangible assets, net of accumulated amortization: 1995 -- $17,051;
1996 -- $20,611; 1997--$16,589......................................................... 27,595 26,408
Deferred financing costs -- net (Note 11) .............................................. 64,153 55,607
Other (including loan receivable from former officer of: 1995 -- $16,454) (Note 12)..... 30,996 33,141
Reorganization value in excess of amounts allocable to identifiable assets .............. -- --
------------- ------------
328,133 324,346
------------- ------------
$ 1,687,370 $ 1,552,066
============= ============
Liabilities
Current Liabilities:
Current maturities of long-term debt (Notes 4 and 16) .................................. $ 62,890 $ 85,006
Accounts payable ....................................................................... 160,444 99,610
Accrued salaries and vacations ......................................................... 58,838 58,916
Accrued insurance ...................................................................... 52,244 46,562
Accrued taxes .......................................................................... 25,060 16,109
Accrued interest and dividends ......................................................... 47,676 15,639
Other .................................................................................. 76,123 81,009
------------- ------------
483,275 402,851
------------- ------------
Long-Term Liabilities:
Debt, less current maturities (Notes 4 and 16) ......................................... 2,179,393 655,703
Deferred income taxes (Note 6) ......................................................... 16,361 15,392
Liability for self-insured claims ...................................................... 57,665 53,565
Other non-current liabilities and deferred credits ..................................... 178,203 156,309
------------- ------------
2,431,622 880,969
------------- ------------
Total liabilities not subject to compromise ............................................. 2,914,897 1,283,820
Liabilities subject to compromise (Note 14) ............................................. -- 1,597,531
------------- ------------
Total liabilities ...................................................................... 2,914,897 2,881,351
Commitments and Contingencies (Notes 4, 5 and 8)
Shareholders' Equity (Deficit) (Notes 7, 9 and 16):
$2.25 Series A Cumulative Convertible Exchangeable Preferred Stock:
$0.10 par value; 1995, 1996 and 1997, 25,000 shares authorized; 6,300 shares issued
and outstanding; liquidation preference $157,500, excluding dividends in arrears...... 630 630
Common Stock:
$0.50 par value; shares authorized--200,000; issued and outstanding 1995, 1996 and
1997 -- 42,434
Pro forma -- $0.01 par value; shares authorized--100,000; issued and
outstanding -- 40,000 ................................................................ 21,218 21,218
Paid-in capital ........................................................................ 724,912 724,912
Deficit ................................................................................ (1,973,365) (2,075,123)
Minimum pension liability adjustment ................................................... (922) (922)
------------- ------------
(1,227,527) (1,329,285)
------------- ------------
$ 1,687,370 $ (1,552,066)
============= ============
<CAPTION>
Pro Forma
October 1,
1997
-------------
Note 1, 16
<S> <C>
($ in thousands, except par value)
Assets
Current Assets:
Cash and cash equivalents .............................................................. $ 173,227
Receivables, less allowance for doubtful accounts of: 1995 -- $2,506; 1996--$2,405;
1997 -- $3,190......................................................................... 13,080
Loan receivable from former officer (Note 12) ..........................................
Merchandise and supply inventories ..................................................... 21,008
Net assets held for sale ...............................................................
Other .................................................................................. 54,070
----------
261,385
----------
Property:
Property owned (at cost) (Notes 2, 3 and 4):
Land .................................................................................. 197,389
Buildings and improvements ............................................................ 611,022
Other property and equipment .......................................................... 384,342
----------
Total property owned .................................................................... 1,192,753
Less accumulated depreciation ........................................................... 495,208
----------
Property owned -- net ................................................................... 697,545
----------
Buildings and improvements, vehicles, and other equipment held under capital leases (Note
5) 163,660
Less accumulated amortization ........................................................... 82,175
----------
Property held under capital leases -- net ............................................... 81,485
----------
779,030
----------
Other Assets:
Goodwill net of accumulated amortization of: 1996 -- $3,077; 1997--$6,789 (Note 2)...... --
Other intangible assets, net of accumulated amortization: 1995 -- $17,051;
1996 -- $20,611; 1997--$16,589......................................................... 14,840
Deferred financing costs -- net (Note 11) .............................................. 25,257
Other (including loan receivable from former officer of: 1995 -- $16,454) (Note 12)..... 221,298
Reorganization value in excess of amounts allocable to identifiable assets .............. 908,856
----------
1,170,251
----------
$2,210,666
==========
Liabilities
Current Liabilities:
Current maturities of long-term debt (Notes 4 and 16) .................................. $ 80,615
Accounts payable ....................................................................... 83,501
Accrued salaries and vacations ......................................................... 51,956
Accrued insurance ...................................................................... 39,976
Accrued taxes .......................................................................... 34,440
Accrued interest and dividends ......................................................... 11,406
Other .................................................................................. 75,757
----------
377,651
----------
Long-Term Liabilities:
Debt, less current maturities (Notes 4 and 16) ......................................... 1,232,381
Deferred income taxes (Note 6) ......................................................... 9,619
Liability for self-insured claims ...................................................... 46,465
Other non-current liabilities and deferred credits ..................................... 138,896
----------
1,427,361
----------
Total liabilities not subject to compromise ............................................. 1,805,012
Liabilities subject to compromise (Note 14) ............................................. --
----------
Total liabilities ...................................................................... 1,805,012
Commitments and Contingencies (Notes 4, 5 and 8)
Shareholders' Equity (Deficit) (Notes 7, 9 and 16):
$2.25 Series A Cumulative Convertible Exchangeable Preferred Stock:
$0.10 par value; 1995, 1996 and 1997, 25,000 shares authorized; 6,300 shares issued
and outstanding; liquidation preference $157,500, excluding dividends in arrears...... --
Common Stock:
$0.50 par value; shares authorized--200,000; issued and outstanding 1995, 1996 and
1997 -- 42,434
Pro forma -- $0.01 par value; shares authorized--100,000; issued and
outstanding -- 40,000 ................................................................ 400
Paid-in capital ........................................................................ 405,254
Deficit ................................................................................ --
Minimum pension liability adjustment ................................................... --
----------
405,654
----------
$2,210,666
==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
Three Quarters Ended
------------------------------
Debtor-In-
Year Ended Year Ended Year Ended Possession
December 31, December 31, December 31, September 30, October 1,
1994 1995 1996 1996 1997
-------------- -------------- -------------- --------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
($ in thousands)
Cash Flows from Operating Activities:
Net income (loss) ................................. $ 364,093 $ (55,199) $ (85,460) $ (57,262) $ (101,758)
Adjustments to Reconcile Net Income (Loss)
to Cash Flows from Operating Activities:
Provision for (recovery of) restructuring
charges ........................................ (7,207) 15,873 -- -- --
Charge for impaired assets ....................... -- 51,358 -- -- --
Depreciation and amortization of property ........ 122,870 126,488 120,059 85,320 96,910
Amortization of goodwill ......................... -- -- 3,077 2,425 3,786
Amortization of other intangible assets .......... 6,763 6,384 6,812 4,861 6,205
Amortization of deferred financing costs ......... 6,453 7,504 8,920 6,183 7,639
Deferred income tax benefit ...................... (2,793) (3,451) (9,031) (269) (745)
Gains on sales of Company-owned
restaurants .................................... (10,007) (24,456) (8,360) (7,532) (956)
Write-off deferred financing costs ............... -- -- -- -- 2,533
Other ............................................ 2,644 4,428 (10,644) (4,046) (9,812)
Loss from discontinued operations, net ........... 6,518 636 -- -- --
Gain on sale of discontinued operation, net....... (399,188) (77,877) -- -- --
Extraordinary items, net ......................... 11,757 (466) -- -- --
Changes in Assets and Liabilities Net of Effects
of Acquisition, Dispositions and Restruc-
turings:
Decrease (increase) in assets:
Receivables ...................................... (4,452) (4,713) 327 8,910 1,332
Inventories ...................................... 340 (848) (833) (865) 3,734
Other current assets ............................. (11,849) (7,086) (3,964) (10,482) (1,699)
Other assets ..................................... 2,241 (2,622) (5,456) (15,925) (8,562)
Increase (decrease) in liabilities:
Accounts payable ................................. 9,029 16,496 19,132 (21,661) (59,770)
Accrued salaries and vacations ................... 8,821 (5,551) 4,560 1,261 1,612
Accrued taxes .................................... (9,582) (429) (5,502) (6,018) 4,138
Other accrued liabilities ........................ (16,696) (4,014) (6,283) (6,541) 51,359
Other noncurrent liabilities and deferred
credits ........................................ (25,198) (28,364) (10,628) 1,453 (9,886)
---------- ---------- ---------- ---------- ----------
Net cash flows from (used in) operating
activities before reorganization activities ....... 54,557 14,091 16,726 (20,188) (13,940)
Increase in liabilities from reorganization
activities:
Accrued salaries and vacations .................... -- -- -- -- 795
Other accrued liabilities ......................... -- -- -- -- 2,417
---------- ---------- ---------- ---------- ----------
Net cash flows provided by (used in) operating
activities ........................................ 54,557 14,091 16,726 (20,188) (10,728)
---------- ---------- ---------- ---------- ----------
Cash Flows from Investing Activities:
Purchase of property .............................. (154,480) (123,739) (55,026) (24,699) (42,171)
Proceeds from dispositions of property ............ 20,135 25,693 14,323 10,499 14,342
Advances to discontinued operations, net .......... (9,670) (6,952) -- -- --
Proceeds from sale of discontinued
operations ....................................... 447,073 172,080 -- -- --
Proceeds from sales of subsidiaries ............... -- 122,500 62,992 60,592 --
Acquisition of business, net of cash acquired ..... -- -- (127,068) (127,068) --
Other long-term assets, net ....................... (6,205) (3,217) (4,670) 421 (283)
---------- ---------- ---------- ---------- ----------
Net cash flows provided by (used in) investing
activities ........................................ 296,853 186,365 (109,449) (80,255) (28,112)
---------- ---------- ---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Three Quarters Ended
---------------------------
Debtor-In-
Year Ended Year Ended Year Ended Possession
December 31, December 31, December 31, September 30, October 1,
1994 1995 1996 1996 1997
-------------- -------------- -------------- --------------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
($ in thousands)
Cash Flows from Financing Activities:
Net borrowings (repayments) under credit
agreements ...................................... $ (93,000) $ -- $ 56,000 $ 56,000 $ 23,000
Deferred financing costs ......................... (25) -- (9,591) (7,995) (1,533)
Long-term debt payments .......................... (201,664) (56,035) (44,108) (28,353) (45,318)
Cash dividends on preferred stock ................ (14,175) (14,175) (14,175) (10,631) --
---------- --------- ---------- --------- ---------
Net cash flows (used in) provided by financing
activities ...................................... (308,864) (70,210) (11,874) 9,021 (23,851)
---------- --------- ---------- --------- ---------
Increase (decrease) in cash and cash
equivalents ..................................... 42,546 130,246 (104,597) (91,422) (62,691)
Cash and Cash Equivalents at:
Beginning of period .............................. 24,174 66,720 196,966 196,966 92,369
---------- --------- ---------- --------- ---------
End of period .................................... $ 66,720 $ 196,966 $ 92,369 $ 105,544 $ 29,678
========== ========= ========== ========= =========
Supplemental Cash Flow Information:
Income taxes paid ................................ $ 8,035 $ 3,591 $ 2,196
========== ========= ==========
Interest paid .................................... $ 244,478 $ 238,832 $ 239,284
========== ========= ==========
Non-cash financing activities:
Capital lease obligations ....................... $ 18,800 $ 5,505 $ 12,310
========== ========= ==========
Dividends declared but not paid ................. $ 3,544 $ 3,544 $ --
========== ========= ==========
Non Cash investing activities:
Notes receivable related to sales of
restaurants .................................... $ 3,024 $ 3,738 $ 1,217
========== ========= ==========
Other investing ................................. $ -- $ 8,185 $ --
========== ========= ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three quarters ended September 30, 1996 and
October 1, 1997 is unaudited)
Introduction
On January 7, 1998, the Plan of Reorganization of Flagstar Companies, Inc.
("FCI") became effective (as further described in Note 16). On the effective
date, Flagstar Corporation ("Flagstar"), a wholly-owned subsidiary, merged with
and into FCI, with FCI being the surviving corporation, and FCI changed its
name to Advantica Restaurant Group, Inc. ("Advantica" or, together with its
subsidiaries, the "Company"). FCI was incorporated under the laws of the State
of Delaware on September 24, 1988 to effect the acquisition of Flagstar. Prior
to June 16, 1993 FCI and Flagstar had been known, respectively, as TW Holdings,
Inc. and TW Services, Inc.
Advantica, through its wholly-owned subsidiaries, Denny's Holdings, Inc.,
Spartan Holdings, Inc. and FRD Acquisition Co. (and their respective
subsidiaries), owns and operates the Denny's, El Pollo Loco, Quincy's Family
Steakhouse, Coco's and Carrows restaurant brands and is the largest franchisee
of Hardee's. Denny's, a family-style restaurant chain, operates in forty-nine
states, two U.S. territories, and two foreign countries, with principal
concentrations in California, Florida, Texas, Washington, Arizona,
Pennsylvania, Illinois, and Ohio. Hardee's competes in the quick-service
hamburger category and Quincy's operates in the family-steak restaurant
category. The Company's Hardee's and Quincy's restaurant chains are located
primarily in the southeastern United States; El Pollo Loco is a quick-service
flame-broiled chicken concept which operates primarily in southern California.
Coco's and Carrows restaurant chains, acquired by Flagstar in May 1996, compete
in the family-style category and are located primarily in the western United
States.
The Company's financial statements as of October 1, 1997 have been
presented in conformity with the AICPA's Statement of Position 90-7, "Financial
Reporting By Entities In Reorganization Under the Bankruptcy Code" ("SOP
90-7"). Accordingly, all prepetition liabilities of the Debtors that are
subject to compromise under the Plan (as defined in Note 16) are segregated in
the Company's consolidated balance sheets as liabilities subject to compromise.
These liabilities are recorded at the amounts expected to be allowed as claims
by the Bankruptcy Court rather than estimates of the amounts for which those
allowed claims may be settled as a result of the plan of reorganization
approved by the Bankruptcy Court. In addition, SOP 90-7 requires the Company to
report interest expense during the bankruptcy proceeding only to the extent
that it will be paid during the proceedings or that it is probable to be an
allowed priority, secured, or unsecured claim. Accordingly, and in view of the
terms of the Plan, as of July 11, 1997, the Company ceased recording interest
on its 11.25% Debentures, 11 3/8% Debentures and 10% Convertible Debentures
(each as defined in Note 16 below). The contractual interest expense for the
three quarters ended October 1, 1997 is disclosed in the accompanying
Statements of Consolidated Operations.
As of the effective date of the Plan (the "Effective Date"), the Company
will adopt "fresh start" reporting pursuant to the guidance provided by SOP
90-7. Under "fresh start" reporting, the reorganization value of the entity is
allocated to the entity's assets. If any portion of the reorganization value
cannot be attributed to specific tangible or identified intangible assets of
the emerging entity, such amount is to be reported as "reorganization value in
excess of amounts allocable to identifiable assets". The Company intends to
amortize such amount over a five-year amortization period. As a result of
adopting "fresh start" reporting upon emerging from Chapter 11, the Company's
financial statements will not be comparable with those prepared before the
Effective Date, including the historical financial statements included in this
report.
Prior year comparative balances have not been reclassified to conform with
the current year's balances stated under SOP 90-7. The most significant
difference between the current and prior years' presentations is the
reclassification of substantially all of the outstanding debt of the Debtors to
"liabilities subject to compromise". See Note 14 for a detailed description of
liabilities subject to compromise at October 1, 1997.
The consolidated financial statements include the accounts of the
operating subsidiaries of the Company which are not parties to the previously
described Chapter 11 proceedings. The following condensed financial statements
of the Debtors have been prepared using the equity method of accounting for
reporting the results of all wholly-owned subsidiaries of FCI that are not
parties to such Chapter 11 proceedings.
F-7
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
Flagstar Companies, Inc., Flagstar Corporation and Flagstar Holdings, Inc.
(Debtors-in-Possession)
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Quarters Ended
October 1, 1997
---------------------
<S> <C>
(In thousands)
Operating revenue ....................... $ --
Operating expenses ...................... 16,974
---------
Operating loss .......................... (16,974)
Equity in earnings of subsidiaries ...... 47,203
Other charges:
Interest ............................... 108,442
Other .................................. (4)
------------
Loss before reorganization expenses ..... (78,209)
Reorganization expenses ................. 23,549
-----------
Net loss ................................ $(101,758)
===========
</TABLE>
Flagstar Companies, Inc., Flagstar Corporation and Flagstar Holdings, Inc.
(Debtors-in-Possession)
Condensed Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
October 1, 1997
----------------
<S> <C>
(In thousands)
Assets
Current assets .................................. $ 3,273
Investment in operating subsidiaries, net ....... (9,303)
Property owned, net ............................. 2,791
Property held under capital leases, net ......... 2,220
Other assets:
Deferred financing costs ............................... 15,886
Receivable from operating subsidiaries ................. 341,329
Other .................................................. 19,693
------------
Total assets .................................... $ 375,889
============
Liabilities
Liabilities not subject to compromise
Current liabilities .................................... $ 49,461
Long-term liabilities .................................. 58,182
------------
Total liabilities not subject to compromise ..... 107,643
Liabilities subject to compromise ............... 1,597,531
------------
Total liabilities ............................... 1,705,174
------------
Shareholders' deficit ........................... (1,329,285)
------------
Total liabilities and shareholders' deficit ..... $ 375,889
============
</TABLE>
F-8
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting policies and methods of their application that significantly
affect the determination of financial position, cash flows and results of
operations are as follows:
The consolidated balance sheet as of October 1, 1997 and the statements of
consolidated operations and cash flows for the three quarters ended September
30, 1996 and October 1, 1997 are unaudited. In the opinion of management, these
statements contain all adjustments necessary to present fairly the financial
position of the Company and subsidiaries as of October 1, 1997 and the results
of their operations and their cash flows for the three quarters ended September
30, 1996 and October 1, 1997. All such adjustments are of a normal recurring
nature.
(a) Consolidated Financial Statements. The Consolidated Financial
Statements include the accounts of the Company, and its subsidiaries.
Certain prior year amounts have been reclassified to conform to the 1996
presentation.
(b) Financial Statement Estimates. The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and revenues and
expenses during the period reported. Actual results could differ from
those estimates.
(c) Cash and Cash Equivalents. The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less
to be cash equivalents.
(d) Inventories. Merchandise and supply inventories are valued primarily
at the lower of average cost or market.
(e) Property and Depreciation. Owned property is stated at cost and is
depreciated on the straight-line method over its estimated useful life.
Property held under capital leases (at capitalized value) is amortized
over its estimated useful life, limited generally by the lease period.
The following estimated useful service lives were in effect during all
periods presented in the financial statements:
Merchandising equipment -- Principally five to ten years
Buildings -- Fifteen to forty years
Other equipment -- Two to ten years
Leasehold improvements -- Estimated useful life limited by the lease
period.
(f) Goodwill and Other Intangible Assets. The excess of cost over the fair
value of the net assets acquired of FRI-M Corporation (see Note 2 for
further details) is being amortized over a 40-year period on the
straight-line method. Other intangible assets consist primarily of costs
allocated to tradenames, franchise and other operating agreements. Such
assets are being amortized on the straight-line basis over the useful
lives of the franchise or the contract period of the operating
agreements. The Company assesses the recoverability of goodwill and other
intangible assets by projecting future net income related to the acquired
business, before the effect of amortization of intangible assets, over
the remaining amortization period of such assets.
(g) Impairment of Long-Lived Assets. During 1995, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 121 (SFAS
No. 121) "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of ". Pursuant to this statement, the
Company reviews long-lived assets and certain identifiable intangibles to
be held and used for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. In addition, long-lived assets and certain identifiable
intangibles to be disposed of are reported at the lower of carrying
amount or estimated fair value less costs to sell. See Note 3 for further
discussion of the impairment of long-lived assets.
(h) Deferred Financing Costs. Costs related to the issuance of debt are
deferred and amortized as a component of interest and debt expense over
the terms of the respective debt issues using the interest method.
(i) Preopening Costs. The Company capitalizes certain direct incremental
costs incurred in conjunction with the opening of restaurants and
amortizes such costs over a twelve month period from the date of opening.
(j) Income Taxes. Income taxes are accounted for under the provisions of
Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes."
F-9
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
(k) Insurance. The Company is primarily self insured for workers
compensation, general liability, and automobile risks which are
supplemented by stop loss type insurance policies. The liabilities for
estimated incurred losses are discounted to their present value based on
expected loss payment patterns determined by independent actuaries or
experience. The total discounted self-insurance liabilities recorded at
December 31, 1995 and 1996 were $91.0 million and $100.1 million
respectively, reflecting a 4% discount rate. The related undiscounted
amounts at such dates were $98.0 million and $111.1 million,
respectively.
(l) Interest Rate Exchange Agreements. As a hedge against fluctuations in
interest rates, the Company has entered into interest rate exchange
agreements to swap a portion of its fixed rate interest payment
obligations for floating rates without the exchange of the underlying
principal amounts. The Company does not speculate on the future direction
of interest rates nor does the Company use these derivative financial
instruments for trading purposes. Since such agreements are not entered
into on a speculative basis, the Company uses the settlement basis of
accounting. See Note 4 for further discussion of the interest rate
exchange agreements.
(m) Advertising Costs. Production costs for radio and television
advertising are expensed as of the date the commercials are initially
aired. Advertising expense for the years ended December 31, 1994, 1995
and 1996 was $85.8 million, $93.0 million, and $114.3 million,
respectively.
(n) Discontinued Operations. The Company has allocated to discontinued
operations a pro-rata portion of interest and debt expense related to its
acquisition debt based on a ratio of the net assets of its discontinued
operations to its total consolidated net assets as of the 1989
acquisition date. Interest included in discontinued operations for the
years ended December 31, 1994 and 1995 was $37.4 million and $18.9
million, respectively.
(o) Deferred Gains. In September 1995, the Company sold its distribution
subsidiary, Proficient Food Company (PFC), for approximately $122.5
million. In conjunction with the sale, the Company entered into an eight
year distribution contract with the acquirer of PFC. This transaction
resulted in a deferred gain of approximately $72.0 million that is being
amortized over the life of the distribution contract as a reduction of
product cost. During the third quarter of 1996, the Company sold
Portion-Trol Foods, Inc. and the Mother Butler Pies division of Denny's,
its two food processing operations. The sales were finalized in the
fourth quarter of 1996 pursuant to the purchase price adjustment
provisions of the related agreements. Consideration from the sales
totaled approximately $72.1 million, including the receipt of
approximately $60.6 million in cash. In conjunction with each of the
sales, the Company entered into five year purchasing agreements with the
acquirers. These transactions resulted in deferred gains totaling
approximately $41.5 million that are being amortized over the lives of
the respective purchasing agreements as a reduction of product cost. The
portion of the deferred gains recognized as a reduction in product costs
in 1995 and 1996 was approximately $2.8 million and $11.1 million,
respectively.
(p) Cash overdrafts. The Company has included in accounts payable on the
accompanying consolidated balance sheets cash overdrafts totalling $54.4
million and $51.6 million at December 31, 1995 and 1996, respectively.
(q) Franchise and License Fees. Initial franchise and license fees are
recognized when all material services have been performed and conditions
have been satisfied. Initial fees for all periods presented are
insignificant. Monthly fees are accrued as earned based on the respective
monthly sales. Such fees totaled $46.4 million, $59.3 million, and $71.1
million for the years ended December 31, 1994, 1995 and 1996,
respectively.
(r) Gains on Sales of Company-Owned Restaurants. Gains on the sales of
Company-owned restaurants to franchisees are recognized in accordance
with Statement of Financial Accounting Standards Statement No. 66,
"Accounting for Sales of Real Estate". In this regard, gains on such
sales are recognized when the cash proceeds from the sale exceed 20% of
the sales price. During the years ended December 31, 1994, 1995 and 1996
the Company recognized gains related to sales of Company-owned
restaurants of approximately $10.0 million, $24.5 million and $8.4
million, respectively, receiving cash proceeds of $11.1 million, $26.1
million and $8.5 million, respectively. Such gains are included as a
reduction of other operating expenses in the accompanying statements of
consolidated operations. Deferred gains and the non-cash portion of
proceeds related to such transactions are not significant.
F-10
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
(s) Unaudited Pro Forma Information. The unaudited pro forma consolidated
balance sheet information gives effect to the restructuring plan and the
disposition discussed in Note 16, as if such plan and disposition had
been consummated on October 1, 1997. In conjunction with the
restructuring plan, the Company effected a restructuring of its debt and
preferred stock through "prepackaged" bankruptcy filings made under
Chapter 11 of the Bankruptcy Code by Flagstar Companies, Inc., and its
wholly-owned subsidiary, Flagstar Corporation. The Company's operating
subsidiaries were not a party to any such filings under the Bankruptcy
Code. In accordance with the principles of AICPA Statement of Position
No. 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code", the restructuring will result in the application of
fresh start reporting. Such reporting results in the revaluation of
assets and liabilities to estimated current fair value. The unaudited pro
forma consolidated balance sheet information reflects the impact of the
conversion of certain issuances of long-term debt and preferred stock to
common stock, the revaluation of the net assets of the Company to
estimated reorganization value, the revaluation of debt obligations not
compromised to estimated current fair value, and the elimination of
goodwill and deferred financing costs. The reorganization value was
determined by estimating the fair value of the Company. The carrying
values of the identifiable assets and liabilities other than debt
obligations were assumed to represent their fair values for purposes of
this pro forma information; such carrying values are subject to revision
following the results of appraisals and other studies. Relative to the
disposition, the unaudited pro forma consolidated balance sheet
information reflects the impact of the receipt of cash proceeds of $369
million, the incurrence of $15 million of estimated sale costs and the
use of $205 million of the proceeds to purchase Defeasance Eligible
Investments (as defined in the documents governing such mortgage
financings) to in substance defease mortgage debt with a book value of
$183.9 million at October 1, 1997.
(t) Change in Fiscal Year. Effective January 1, 1997, the Company changed
its fiscal year end from December 31 to the last Wednesday of the
calendar year. Concurrent with this change, the Company changed to a
four-four-five week quarterly closing calendar which is the restaurant
industry standard, and generally results in four thirteen-week quarters
during the year with each quarter ending on a Wednesday. Due to the
timing of this change, the first quarter of 1997 includes more than
thirteen weeks of operations. Carrows and Coco's include an additional
six days, Denny's includes an additional five days, El Pollo Loco
includes an additional week and Hardee's and Quincy's include an
additional day. The prior year comparable quarter consisted of thirteen
weeks.
(u) Pro Forma Earnings per Share. The Company will adopt Statement of
Financial Accounting Standards Statement No. 128, "Earnings per Share" in
the quarter ended December 31, 1997. This standard will require the
presentation of "basic" and "diluted" earnings (loss) per share. As
discussed in Note 10, historical earnings (loss) per share amounts are
not meaningful due to the significant change in capital structure in
connection with the confirmation of the Company's Plan of Reorganization.
For the pro forma three quarters ended October 1, 1997, basic loss per
share under the new standard will not differ from loss per share as
presented in the pro forma condensed consolidated financial statements.
(See Note 16)
NOTE 2 ACQUISITION
On May 23, 1996, the Company, through FRD Acquisition Co. ("FRD"), a newly
formed subsidiary, consummated the acquisition of the Coco's and Carrows
restaurant chains consisting of 347 company-owned units within the family-style
category. The acquisition price of $313.4 million plus acquisition costs (which
was paid in exchange for all of the outstanding stock of FRI-M Corporation
("FRI-M"), the subsidiary of Family Restaurants Inc. ("FRI") which owns the
Coco's and Carrows chains) was financed with $125.0 million in cash ($75.0
million of which was provided from the Company's cash balances and the
remaining $50.0 million pursuant to bank term loans which totaled $56.0 million
with the remaining $6.0 million being used to pay transaction fees), the
issuance of $156.9 million in senior notes of FRD to the seller, including an
additional $6.9 million principal amount of notes issued by FRD to FRI pursuant
to the purchase price adjustment provisions of the Stock Purchase Agreement on
September 4, 1996 and the assumption of certain capital lease obligations of
approximately $31.5 million. The acquisition was accounted for using the
purchase method of accounting. Accordingly, the assets and liabilities and
results of operations of Coco's and Carrows are included in the Company's
consolidated financial statements for the period subsequent to the acquisition.
F-11
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
NOTE 2 ACQUISITION -- Continued
In accordance with the purchase method of accounting, the purchase price
has been allocated to the underlying assets and liabilities of FRI-M based on
their estimated respective fair values at the date of acquisition. The purchase
price exceeded the fair value of the net assets acquired by approximately $209
million. The resulting goodwill is being amortized on a straight line basis
over 40 years. This amount reflects a decrease from the original estimate of
approximately $12 million. The revision, which was recorded during the fourth
quarter of 1996, is primarily due to the completion of certain valuations and
other studies which were prepared in order to estimate the fair value of the
net assets acquired. No further revisions to the purchase price allocation are
expected except for the potential impact of adjustments related to deferred
income taxes, which are expected to be resolved in early 1997.
The following unaudited pro forma financial information shows the results
of operations of the Company as though the acquisition occurred as of January
1, 1995. These results include the straight-line amortization of the excess of
purchase price over the net assets acquired over a 40-year period, a reduction
of overhead expenses resulting from the elimination of management fees formerly
paid to FRI, an increase in interest expense as a result of the debt issued to
finance the acquisition, and a reduction in FRI-M's income tax expense to
reflect the fact that the Company's net operating losses will offset FRI-M's
separate income tax provision (except for current foreign and state income
taxes) when calculated on a consolidated basis.
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------------------
1995 1996
------------- -------------
($ in thousands, except per share amounts)
<S> <C> <C>
Revenue .......................... $ 3,077.1 $ 2,738.2
Loss from continuing operations .. ( 126.6) ( 83.4)
Net Loss ......................... ( 48.9) ( 83.4)
Loss per common share:
Loss from continuing operations . ( 3.32) ( 2.30)
Net loss ........................ ( 1.49) ( 2.30)
</TABLE>
The pro forma financial information presented above does not purport to be
indicative of either (i) the results of operations had the acquisition taken
place on January 1, 1995 or (ii) future results of operations of the combined
businesses.
NOTE 3 RESTRUCTURING AND IMPAIRMENT OF LONG-LIVED ASSETS
Effective in the fourth quarter of 1995, as a result of a comprehensive
financial and operational review, the Company approved a restructuring plan.
The plan generally involved the reduction in personnel and a decision to
outsource the Company's information systems function.
In addition, the Company adopted SFAS No. 121 during 1995 (see Note 1(g)).
In connection with such adoption, 99 restaurant units, which the Company
intended to continue to operate were identified as impaired as the future
undiscounted cash flows of each of these units was estimated to be insufficient
to recover the related carrying value. As such, the carrying values of these
units were written down to the Company's estimate of fair value based on sales
of similar units or other estimates of selling price.
During 1995, the Company also identified 36 underperforming units for sale
or closure generally during 1996. The carrying value of these units was written
down to estimated fair value, based on sales of similar units or other
estimates of selling price, less costs to sell. The 36 units identified in 1995
for disposal had aggregate operating revenues of approximately $26.1 million,
an operating loss of approximately $2.9 million during 1995, and an aggregate
carrying value of approximately $5.8 million as of December 31, 1995. As of
December 31, 1996, 29 units have been closed or sold. Management intends to
dispose of two of the remaining units in 1997 and continue to operate the other
five. The two units to be disposed of in 1997 had aggregate operating revenues
of approximately $1.6 million and operating income of $0.04 million during 1996
and an aggregate carrying amount of $0.3 million at December 31, 1996.
F-12
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
NOTE 3 RESTRUCTURING AND IMPAIRMENT OF LONG-LIVED ASSETS -- Continued
Charges attributable to the restructuring plan and the adoption of SFAS
No. 121 during the year ended December 31, 1995 are comprised of the following:
<TABLE>
<S> <C>
($ in thousands)
Restructuring:
Severance ....................................................... $ 5,376
Write-down of computer hardware and software and other assets ... 7,617
Other ........................................................... 2,880
-------
$15,873
=======
Impairment of Long-lived Assets:
Write-down attributable to the restaurant units the Company
will continue to operate ....................................... $41,670
Write-down attributable to the restaurant units to be disposed .. 9,688
-------
$51,358
=======
</TABLE>
The 1995 restructuring plan was substantially completed in 1996 except for
certain asset replacement projects (where the assets to be replaced were
written down as part of the restructuring) which were postponed in 1996 due to
the Company's capital constraints. Such projects are expected to be completed
in 1997. Pursuant to the restructuring plan, approximately 74 employees,
primarily corporate and field management, have been terminated as of December
31, 1996, resulting in payments of approximately $4.5 million as of that date.
Effective in the fourth quarter of 1993, the Company approved a
restructuring plan, which, among other things, resulted in the identification
for sale, conversion to another concept or closure of 240 restaurants. As of
December 31, 1996, four units remain relative to the 1993 restructuring plan,
of which two are scheduled for disposal in 1997. Management has decided to
continue to operate the remaining two units. The two units to be disposed of in
1997 had operating revenues of approximately $1.3 million and operating income
of $0.03 million during 1996 and an aggregate carrying amount that was
immaterial at December 31, 1996.
NOTE 4 DEBT
At December 31, 1996, the Flagstar Second Amended and Restated Credit
Agreement (the "Credit Agreement") includes a working capital and letter of
credit facility of up to a total of $150.0 million which includes a working
capital advance sublimit of $75.0 million. At such date, the Company had no
working capital advances outstanding; however, letters of credit outstanding
were $79.7 million. The Credit Agreement terminates on April 10, 1999 and is
subject to mandatory prepayments and commitment reductions under certain
circumstances upon the Company's sale of assets or incurrence of additional
debt. See also the discussion below.
F-13
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
NOTE 4 DEBT -- Continued
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1996
------------- -------------
($ in thousands)
<S> <C> <C>
Notes and Debentures:
10.75% Senior Notes due September 15, 2001, interest payable semi-annually ............. $ 270,000 $ 270,000
10.875% Senior Notes due December 1, 2002, interest payable semi-annually .............. 280,025 280,025
11.25% Senior Subordinated Debentures due November 1, 2004, interest payable
semi-annually ......................................................................... 722,411 722,411
11.375% Senior Subordinated Debentures due September 15, 2003, interest payable
semi-annually ......................................................................... 125,000 125,000
10% Convertible Junior Subordinated Debentures due 2014 (10% Convertible
Debentures), interest payable semi-annually; convertible into Company common stock
any time prior to maturity at $24.00 per share......................................... 99,259 99,259
12.5% Senior Notes of FRD due July 15, 2004, interest payable semi-annually ............ -- 156,897
Mortgage Notes Payable:
10.25% Guaranteed Secured Bonds due 2000 ............................................... 202,715 190,164
11.03% Notes due 2000 .................................................................. 160,000 160,000
Term loan of FRI-M, principal payable in quarterly installments .......................... -- 56,000
Other notes payable, mature over various terms to 20 years, payable in monthly or
quarterly installments with interest rates ranging from 7.5% to 13.25% (a) ............ 17,415 13,561
Capital lease obligations (see Note 5) ................................................... 144,573 160,226
Notes payable secured by equipment, mature over various terms up to 7 years, payable in
monthly installments with interest rates ranging from 8.5% to 9.64%(b) ................. 13,548 8,740
---------- ----------
Total .................................................................................... 2,034,946 2,242,283
Less current maturities (c) .............................................................. 38,835 62,890
---------- ----------
$1,996,111 $2,179,393
========== ==========
</TABLE>
- ---------
(a) Collateralized by restaurant and other properties with a net book value of
$20.9 million at December 31, 1996.
(b) Collateralized by equipment with a net book value of $13.2 million at
December 31, 1996.
(c) Aggregate annual maturities during the next five years of long-term debt
are as follows ($ in thousands): 1997 --
$62,890; 1998 -- $57,830; 1999 -- $51,169; 2000 -- $326,666; and 2001 --
$280,999. See Note 14 for discussion regarding current maturities at April
2, 1997.
The borrowings under the Credit Agreement are secured by the stock of
certain operating subsidiaries and certain of the Company's trade and service
marks and are guaranteed by certain operating subsidiaries. Such guarantees are
further secured by certain operating subsidiary assets.
The Credit Agreement and indentures under which the debt securities have
been issued contain a number of restrictive covenants. Such covenants restrict,
among other things, the ability of Flagstar and its restricted subsidiaries to
incur indebtedness, create liens, engage in business activities which are not
in the same field as that in which the Company currently operates, mergers and
acquisitions, sales of assets, transactions with affiliates and the payment of
dividends. In addition, the Credit Agreement contains financial covenants
including provisions for the maintenance of a minimum level of interest
coverage (as defined), limitations on ratios of indebtedness (as defined) to
earnings before interest, taxes, depreciation and amortization (EBITDA), and
limitations on annual capital expenditures.
The Company was in compliance with the terms of the Credit Agreement at
December 31, 1996. Under the most restrictive provision of the Credit Agreement
(ratio of senior debt to EBITDA, as defined), at December 31, 1996, the Company
could incur approximately $28.4 million of additional indebtedness.
F-14
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
NOTE 4 DEBT -- Continued
With respect to short-term liquidity, management believes that through a
combination of cash generated from operations, funds available through the bank
credit facility, various cash management measures and other sources, adequate
liquidity exists to meet the Company's working capital, debt service and
capital expenditure requirements for at least the next twelve months. Although
no assurances can be given in this regard, management believes, based on the
Company's historical relationship with its banks, that it will be able, as
necessary, to maintain access to funds available under the credit agreement.
See also Note 14, "Subsequent Events -- Financial Restructuring (unaudited)."
At December 31, 1996, the 10.25% guaranteed bonds were secured by, among
other things, mortgage loans on 386 restaurants, a lien on the related
restaurant equipment, assignment of intercompany lease agreements, and the
stock of the issuing subsidiaries. At December 31, 1996, the restaurant
properties and equipment had a net book value of $317.6 million. In addition,
the bonds are insured with a financial guaranty insurance policy written by a
company that engages exclusively in such coverage. Principal and interest on
the bonds are payable semiannually; certain payments are made by the Company on
a monthly basis. Principal payments total $12.5 million annually through 1999
and $152.7 million in 2000. The Company through its operating subsidiaries
covenants that it will maintain the properties in good repair and expend
annually (or on a five year average basis) to maintain the properties at least
$19.3 million in 1997 and increasing each year to $23.7 million in 2000. (See
Note 16 regarding the Company's plans to in-substance defease the 10.25%
guaranteed bonds).
The 11.03% mortgage notes are secured by a pool of cross collateralized
mortgages on 240 restaurants with a net book value at December 31, 1996 of
$220.9 million. In addition, the notes are collateralized by, among other
things, a security interest in the restaurant equipment, the assignment of
intercompany lease agreements and the stock of the issuing subsidiary. Interest
on the notes is payable quarterly with the entire principal due at maturity in
2000. The notes are redeemable, in whole, at the issuer's option, upon payment
of a premium. The Company through its operating subsidiary covenants that it
will use each property as a food service facility, maintain the properties in
good repair and expend at least $5.3 million per annum and not less than $33
million, in the aggregate, in any five year period to maintain the properties.
In connection with the acquisition by FRD of Coco's and Carrows on May 23,
1996, FRI-M (the "Borrower"), a wholly-owned subsidiary of FRD, obtained a new
credit facility (the "FRI-M Credit Facility") consisting of a $56 million,
39-month term loan (the "FRI-M Term Loan") and a $35 million working capital
facility (the "FRI-M Revolver"). Proceeds from the FRI-M Term Loan were used to
fund the Coco's and Carrows acquisition, and to pay the transactions costs
associated therewith. Proceeds from the FRI-M Revolver are to be used for
working capital requirements and other general corporate purposes, which may
include the making of intercompany loans to any of the Borrower's wholly owned
subsidiaries for their own working capital and other general corporate
purposes. Letters of credit may be issued under the FRI-M Revolver for the
purpose of supporting (i) workers' compensation liabilities of the Borrower or
any of its subsidiaries; (ii) the obligations of third party insurers of the
Borrower or any of its subsidiaries; and (iii) certain other obligations of the
Borrower and its subsidiaries. At December 31, 1996, there were no working
capital borrowings outstanding; however, letters of credit outstanding were
$20.8 million. Principal installments of the FRI-M Term Loan are payable
quarterly as follows: $4.0 million per quarter for four consecutive quarters
beginning February 28, 1997; $5.0 million for four consecutive quarters
beginning February 28, 1998; $6 million on February 28, 1998; and $7 million
for two consecutive quarters beginning May 31, 1999. The FRI-M Credit Facility
expires, and all amounts under the Facility must be repaid, on August 31, 1999.
All borrowings under the FRI-M Credit Facility accrue interest at a variable
rate based on a base rate or an adjusted Eurodollar rate (8.125% at year end
1996) and are secured by the issued and outstanding stock, as well as
substantially all the assets, of FRI-M and its subsidiaries.
The FRI-M Credit Facility and the indenture under which the 12.5% senior
notes have been issued contain a number of restrictive covenants which, among
other things, limit (subject to certain exceptions) FRD and its subsidiaries
with respect to the incurrence of debt, existence of liens, investments and
joint ventures, the declaration or payment of dividends, the making of
guarantees and other contingent obligations, mergers, the sale of assets,
capital expenditures and material change in their business. In addition, the
FRI-M Credit Facility contains certain financial covenants including provisions
for the maintenance of a minimum level of interest coverage (as defined),
limitations on ratios of indebtedness (as defined) to earnings before interest,
taxes, depreciation and amortization (EBITDA), maintenance of a minimum level
of EBITDA, and limitations on annual capital expenditures. The cash flows from
FRD are required to be used to service the debt issued in the Coco's and
Carrows acquisition (the FRI-M Credit Facility and the 12.5% Senior Notes),
and, therefore, other than for
F-15
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
NOTE 4 DEBT -- Continued
the payment of certain management fees and tax reimbursements payable to
Flagstar under certain conditions, are currently unavailable to service the
debt of Flagstar and its other subsidiaries. FRD's cash flows from operating
activities, included in the Company's total cash flow from operating
activities, were $21.2 million in 1996.
FRD and its subsidiaries were in compliance with the terms of the FRI-M
Credit Facility at December 31, 1996. Under the most restrictive provision of
the FRI-M Credit Facility (ratio of Consolidated Adjusted EBITDA to interest
expense), at December 31, 1996, FRD's consolidated EBITDA for the six months
ended December 31, 1996 could be $5.6 million less and the Company would still
be in compliance.
At December 31, 1996, the Company has $575 million aggregate notional
amount in effect of reverse interest rate exchange agreements with maturities
ranging from one to thirty-six months. These notional amounts reflect only the
extent of the Company's involvement in these financial instruments and do not
represent the Company's exposure to market risk. The Company receives interest
at fixed rates calculated on such notional amounts and pays interest at
floating rates based on six months LIBOR in arrears calculated on like notional
amounts. The net expense from such agreements is reflected in interest and debt
expense and totalled $9.2 million, $3.1 million, and $1.4 million for the years
ended December 31, 1994, 1995, and 1996, respectively. Management intends to
maintain its exchange agreements until maturity, unless there is a material
change in the underlying hedged instruments of the Company.
The counterparties to the Company's interest rate exchange agreements are
major financial institutions who participate in the Company's senior bank
credit facility. Such financial institutions are leading market-makers in the
financial derivatives markets, are well capitalized, and are expected to fully
perform under the terms of such exchange agreements, thereby mitigating the
credit risk to the Company.
The Company is exposed to market risk for such exchange agreements due to
the interest rate differentials described above. The Company monitors its
market risk by periodically preparing sensitivity analyses of various interest
rate fluctuation scenarios and the results of such scenarios on the Company's
cash flows on a nominal and discounted basis. In addition, the Company obtains
portfolio mark-to-market valuations from market-makers of financial derivatives
products.
Information regarding the Company's reverse interest rate exchange
agreements at December 31, 1996 is as follows ($ in millions):
<TABLE>
<CAPTION>
Weighted
Average
Amount of Interest Rate
Year of Notional ---------------------
Maturity Payment Received Paid
- ---------- ---------- ---------- ----------
<S> <C> <C> <C>
1997 $275 5.22% 5.74%
1998 200 5.58% 5.72%
1999 100 5.82% 5.72%
---- ---- ----
$575 5.45% 5.73%
==== ==== ====
</TABLE>
The estimated fair value of the Company's long-term debt (excluding
capital lease obligations) is approximately $1.7 billion at December 31, 1996.
Such computations are based on market quotations for the same or similar debt
issues or the estimated borrowing rates available to the Company. At December
31, 1996, the estimated fair value of the $575 million notional amount of
reverse interest rate swaps was a net payable of approximately $3.7 million and
represents the estimated amount that the Company would be required to pay to
terminate the swap agreements at December 31, 1996. This estimate is based upon
a mark-to-market valuation of the Company's swap portfolio obtained from a
major financial institution which is one of the counterparties to the exchange
agreements.
See Note 16 "Subsequent Events -- Financial Restructuring (Unaudited)".
NOTE 5 LEASES AND RELATED GUARANTEES
The Company's operations utilize property, facilities, equipment and
vehicles leased from others. In addition, certain owned and leased property,
facilities and equipment are leased to others.
F-16
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
NOTE 5 LEASES AND RELATED GUARANTEES -- Continued
Buildings and facilities leased from others primarily are for restaurants
and support facilities. At December 31, 1996, restaurants were operated under
lease arrangements which generally provide for a fixed basic rent, and, in some
instances, contingent rental based on a percentage of gross operating profit or
gross revenues. Initial terms of land and restaurant building leases generally
are not less than twenty years exclusive of options to renew. Leases of other
equipment primarily consist of merchandising equipment, computer systems and
vehicles, etc.
Information regarding the Company's leasing activities at December 31,
1996 is as follows:
<TABLE>
<CAPTION>
Capital Leases Operating Leases
--------------------- --------------------
Minimum Minimum Minimum Minimum
Lease Sublease Lease Sublease
Payments Receipts Payments Receipts
---------- ---------- ---------- ---------
($ in thousands)
<S> <C> <C> <C> <C>
Year:
1997 $ 41,517 $ 6,865 $ 61,395 $ 7,589
1998 35,321 6,363 58,514 7,422
1999 29,221 5,753 54,997 7,067
2000 23,380 4,938 51,173 6,749
2001 20,257 4,285 44,655 6,402
Subsequent years ......................... 124,917 21,353 238,326 45,957
-------- ------- -------- -------
Total .................................. 274,613 $49,557 $509,060 $81,186
======= ======== =======
Less imputed interest ..................... 114,387
--------
Present value of capital lease obligations $160,226
========
</TABLE>
Payments for certain FRD operating leases are being made by FRI in
accordance with the provisions of the Stock Purchase Agreement. As such, these
payments have been excluded from the amount of minimum lease payments and
minimum sublease receipts reported above.
The total rental expense included in the determination of operating income
for the years ended December 31, 1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1994 1995 1996
-------------- -------------- -------------
($ in thousands)
<S> <C> <C> <C>
Base rents ............... $49,234 $48,269 $59,322
Contingent rents ......... 12,178 11,274 10,929
------- ------- -------
Total ................... $61,412 $59,543 $70,251
======= ======= =======
</TABLE>
Total rental expense does not reflect sublease rental income of
$9,975,000, $14,426,000, and $16,282,000 for the years ended December 31, 1994,
1995, and 1996, respectively.
F-17
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
NOTE 6 INCOME TAXES
A summary of the provision for (benefit from) income taxes attributable to
the loss before discontinued operations and extraordinary items is as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1994 1995 1996
-------------- -------------- -------------
($ in thousands)
<S> <C> <C> <C>
Current:
Federal ...................................................... $ 365 $ 1,940 $ (6,074)
State, Foreign and Other ..................................... 215 1,497 (1,287)
-------- -------- ---------
580 3,437 (7,361)
-------- -------- ---------
Deferred:
Federal ...................................................... -- -- (6,797)
State, Foreign and Other ..................................... (2,793) (3,451) (2,234)
-------- -------- ---------
(2,793) (3,451) (9,031)
-------- -------- ---------
Benefit from income taxes ..................................... $ (2,213) $ (14) $ (16,392)
======== ======== =========
The total provision for (benefit from) income taxes related to:
Loss before discontinued operations and extraordinary items .. $ (2,213) $ (14) $ (16,392)
Discontinued operations ...................................... 10,470 8,731 --
Extraordinary items .......................................... (174) 25 --
-------- -------- ---------
Total provision for (benefit from) income taxes ............... $ 8,083 $ 8,742 $ (16,392)
======== ======== =========
</TABLE>
For the years ended December 31, 1994 and 1995, the provision for income
taxes relating to discontinued operations was reduced due to the utilization of
regular tax net operating loss carryforwards of approximately $89 million in
1994 and $75 million in 1995. In addition, for the year ended December 31,
1996, the Company recorded a $7.3 million deferred Federal tax benefit related
to the reversal of certain reserves established in connection with the proposed
deficiencies from the Internal Revenue Service.
F-18
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
NOTE 6 INCOME TAXES -- Continued
The following represents the approximate tax effect of each significant
type of temporary difference and carryforward giving rise to deferred income
tax liabilities or assets:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1996
------------ ------------
($ in thousands)
<S> <C> <C>
Deferred tax assets:
Deferred income ...................................... $ 24,326 $ 39,953
Self-insurance reserves .............................. 33,522 43,006
Capitalized leases ................................... 15,823 19,869
Amortization of intangible assets .................... -- 2,949
Other accruals and reserves .......................... 6,924 18,054
Alternative minimum tax credit carryforwards ......... 18,444 10,459
General business credit carryforwards ................ 21,623 19,232
Net operating loss carryforwards ..................... 9,764 32,135
Less: valuation allowance ............................ (54,452) (83,828)
--------- ---------
Total deferred tax assets ............................ 75,974 101,829
--------- ---------
Deferred tax liabilities:
Depreciation of fixed assets ......................... 89,787 118,190
Amortization of intangible assets .................... 4,362 --
--------- ---------
Total deferred tax liabilities ....................... 94,149 118,190
--------- ---------
Total deferred income tax liability .................. $ 18,175 $ 16,361
========= =========
</TABLE>
The Company has provided a valuation allowance for the portion of the
deferred tax asset for which it is more likely than not that a tax benefit will
not be realized.
The difference between the statutory federal income tax rate and the
effective tax rate on loss from continuing operations before discontinued
operations and extraordinary items is as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1994 1995 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Statutory rate ................................................................... 35% 35% 35%
Differences:
State, foreign, and other taxes, net of federal income tax benefit .............. 12 -- 2
Amortization of goodwill ........................................................ -- -- 1
Reversal of certain reserves established in connection with proposed
Internal Revenue Service deficiencies ......................................... -- -- 7
Portion of losses not benefited as a result of the establishment of valuation
allowance ..................................................................... (35) (35) (29)
--- --- ---
Effective tax rate ............................................................... 12% --% 16%
=== ==== ===
</TABLE>
At December 31, 1996, the Company has available, to reduce income taxes
that become payable in the future, general business credit carryforwards of
approximately $19 million, most of which expire in 2002 through 2007; and
alternative minimum tax (AMT) credits of approximately $10 million. The AMT
credits may be carried forward indefinitely. In addition, the Company has
available regular income tax net operating loss carryforwards of approximately
$92 million which expire in 2007 through 2011. Due to the recapitalization of
the Company which occurred during 1992, the Company's ability to utilize
general business credits and AMT credits which arose prior to the
recapitalization will be limited to a specified annual amount. The annual
limitation for the utilization of the tax credit carryforwards is approximately
$8 million. The net operating loss carryforward arose subsequent to the
recapitalization and is presently not subject to any annual limitation.
F-19
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
NOTE 7 EMPLOYEE BENEFIT PLANS
The Company maintains several defined benefit plans which cover a
substantial number of employees. Benefits are based upon each employee's years
of service and average salary. The Company's funding policy is based on the
minimum amount required under the Employee Retirement Income Security Act of
1974. The Company also maintains defined contribution plans.
Total net pension cost of defined benefit plans for the years ended
December 31, 1994, 1995, and 1996 amounted to $4.0 million, $5.6 million and
$3.5 million, respectively, of which $3.3 million related to funded defined
benefit plans for all three years and $0.7 million, $2.3 million and $0.2
million related to nonqualified unfunded supplemental defined benefit plans for
executives.
The components of net pension cost of the funded and unfunded defined
benefit plans for the years ended December 31, 1994, 1995, and 1996 determined
under SFAS No. 87 follow:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1994 1995 1996
-------------- -------------- -------------
($ in thousands)
<S> <C> <C> <C>
Service cost .................................................................... $ 3,076 $ 2,829 $ 3,151
Interest cost on projected benefit obligations .................................. 2,427 2,651 2,895
Actual return on plan assets .................................................... 761 (3,722) (2,277)
Net amortization and deferral ................................................... (2,269) 2,074 (242)
Curtailment/settlement losses (due to early retirements of certain participants) -- 1,762 --
-------- -------- --------
Net pension cost ................................................................ $ 3,995 $ 5,594 $ 3,527
======== ======== ========
</TABLE>
The following table sets forth the funded status and amounts recognized in
the Company's balance sheet for its funded defined benefit plans:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1996
------------ ------------
($ in thousands)
<S> <C> <C>
Actuarial present value of accumulated benefit obligations:
Vested benefits ...................................................... $ 23,993 $ 27,661
Non-vested benefits .................................................. 1,466 1,488
--------- ---------
Accumulated benefit obligations ....................................... $ 25,459 $ 29,149
========= =========
Plan assets at fair value ............................................. $ 26,513 $ 31,109
Projected benefit obligation .......................................... (32,059) (36,416)
--------- ---------
Funded status ......................................................... (5,546) (5,307)
Unrecognized net loss from past experience different from that assumed 6,301 6,890
Unrecognized prior service cost ....................................... 69 --
--------- ---------
Prepaid pension costs ................................................. $ 824 $ 1,583
========= =========
</TABLE>
Assets held by the Company's plans are invested in money market and other
fixed income funds as well as equity funds.
F-20
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
NOTE 7 EMPLOYEE BENEFIT PLANS -- Continued
The following sets forth the funded status and amounts recognized in the
Company's balance sheet for its unfunded defined benefit plans:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1996
----------- -------------
($ in thousands)
<S> <C> <C>
Actuarial present value of accumulated benefit obligations: ..................
Vested benefits ............................................................ $ 4,080 $ 4,924
Non-vested benefits ........................................................ 12 33
-------- -------
Accumulated benefit obligations .............................................. $ 4,092 $ 4,957
======== =======
Plan assets at fair value .................................................... $ -- $ --
Projected benefit obligation ................................................. (4,188) (5,051)
-------- -------
Funded status ................................................................ (4,188) (5,051)
Unrecognized net (gain) loss from past experience different from that assumed (112) 616
Unrecognized prior service cost .............................................. 109 68
Unrecognized net asset at January 1, 1987 being amortized over 15 years ...... (49) (9)
Additional liability ......................................................... (543) (974)
Other ........................................................................ 24 --
-------- ---------
Accrued pension costs ........................................................ $ (4,759) $(5,350)
======== =========
</TABLE>
Significant assumptions used in determining net pension cost and funded
status information for all the periods shown above are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Discount rate ................................ 8.3% 8.0% 8.0%
Rates of salary progression .................. 4.0% 4.0% 4.0%
Long-term rates of return on assets .......... 10.0% 10.0% 10.0%
</TABLE>
In addition, the Company has defined contribution plans whereby eligible
employees can elect to contribute from 1%-15% of their compensation to the
plans. These plans include profit sharing and savings plans under which the
Company makes matching contributions, with certain limitations. Amounts charged
to income under these plans were $3.9 million for the years ended December 31,
1994 and 1995 respectively. The Company made no matching contributions for the
year ended December 31, 1996.
Incentive compensation plans provide for awards to management employees
based on meeting or exceeding certain levels of income as defined by such plans
The amounts charged to income under the plans for the years ended December 31,
1994, 1995, and 1996 were as follows: $4.2 million, $0.6 million, and $1.9
million. In addition to these incentive compensation plans, certain operations
have incentive plans in place under which regional, divisional and local
management participate.
At December 31, 1996, the Company has two stock-based compensation plans,
which are described below. The company has adopted the disclosure-only
provisions of Financial Accounting Standards Board Statement 123, "Accounting
for Stock Based Compensation" (SFAS 123) while continuing to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25) and related Interpretations in accounting for its stock-based
compensation plans. Under APB 25, because the exercise price of the Company's
employee stock options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
The 1989 Stock Option Plan (the 1989 Plan) permits a Committee of the
Board of Directors to grant options to key employees of the Company and its
subsidiaries to purchase shares of common stock of the Company at a stated
price established by the Committee. Such options are exercisable at such time
or times either in whole or part, as determined by the Committee. The 1989 Plan
authorizes grants of up to 6.5 million common shares. The exercise price of
each option equals or exceeds the market price of the Company's stock on the
date of grant. Options granted to officer level employees vest
F-21
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
NOTE 7 EMPLOYEE BENEFIT PLANS -- Continued
at a rate of 20% per annum beginning on the first anniversary date of the
grant. Options granted to non-officer level employees prior to August 13, 1996
vest at a rate of 25% per annum. Those granted on August 13, 1996 or subsequent
thereto, vest at a rate of 20% per annum If not exercised, all options expire
ten years from the date of grant.
During January 1995, the Company issued 65,306 shares of common stock
(Note 9) and granted an option under the 1989 Stock Option Plan to purchase
800,000 shares of the Company's common stock to an executive officer, at market
value at date of grant, for a ten year period. Such grant becomes exercisable
at a rate of 20% per year beginning on January 9, 1996 and each anniversary
thereafter.
On June 21, 1995, generally all of the outstanding options held by the
then current employees of the Company under the 1989 Plan were repriced to
$6.00 per share, the market value of the common stock on that date. All officer
level employees were given the choice of either retaining their current options
at their existing exercise prices and vesting schedule or surrendering their
existing options in exchange for an option to purchase the same number of
shares exercisable at a rate of 20% per annum beginning on the first
anniversary date of the new grant. All non-officer employees received the new
exercise price of $6.00 per share and retained their original vesting schedules
for all of their outstanding options previously granted.
Options of 4.3 million were outstanding at December 31, 1995, of which
728,221 were exercisable. Such options had exercise prices of between $5.13 and
$17.50 per share. During 1995 no options were exercised.
On December 13, 1996, the outstanding options of certain officers and
senior staff, representing approximately 2.2 million outstanding options, were
repriced to $1.25 per share, the closing price of the common stock on December
12, 1996. The repricing did not impact the option vesting schedules.
In 1990, the Board of directors adopted a 1990 Non-qualified Stock Option
Plan (the 1990 Plan) for its directors who do not participate in management and
are not affiliated with GTO (See Note 12). Such plan authorizes the issuance of
up to 110,000 shares of common stock. The plan is substantially similar in all
respects to the 1989 Plan described above. At both December 31, 1995 and 1996,
options outstanding under the 1990 Option Plan totaled 10,000 shares.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options granted or repriced during 1995 and 1996 under
the fair value method of that statement. The fair value of these options was
estimated at the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants in 1995 and
1996, respectively: dividend yield of 0.0% for both years; expected volatility
of 0.438 for both years; risk-free interest rates of 5.6% and 5.7%; and a
weighted average expected life of the options of 8.3 years and 8.9 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------------
1995 1996
($ in thousands, except for earnings per share) ------------- -------------
<S> <C> <C>
Pro forma net loss ........................ $ (57,719) $ (87,124)
Pro forma loss per share:
Primary ................................. (1.68) (2.39)
Fully diluted ........................... (1.68) (2.39)
</TABLE>
Due to the fact that the pro forma amounts above include only the impact
of the application of fair value accounting to options issued in 1995 and 1996
as prescribed by Statement 123, they are not, and will not be, indicative of
future pro forma amounts until fair value accounting is applied to all
outstanding nonvested awards.
F-22
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
NOTE 7 EMPLOYEE BENEFIT PLANS -- Continued
A summary of the Company's stock option plans as of December 31, 1996 and
changes during the year ended December 31, 1996 is presented below:
<TABLE>
<CAPTION>
Options Weighted-Average
(000) Exercise Price
----------- -----------------
<S> <C> <C>
Outstanding at beginning of year .................... 4,338 $ 8.02
Granted
Exercise price equals fair value at grant date ..... 687 2.75
Exercise price exceeds fair value at grant date .... 3,167 2.68
Exercised ...........................................
Forfeited/Expired ................................... (3,873) 6.05
------ -------
Outstanding at end of year .......................... 4,319 $ 5.04
====== =======
Exercisable at year-end ............................. 1,154 $ 9.84
====== =======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Number Weighted-Average Number
Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average
Range of Exercise Prices 12/31/96 Contractual Life Exercise Price 12/31/96 Exercise Price
- -------------------------- ---------------- ------------------ ------------------ ---------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 1.25-$1.25 2,210,895 9.06 $ 1.25 191,358 $ 1.25
$ 2.75-$2.75 126,700 9.62 2.75 -- --
$ 6.00-$6.13 1,381,280 7.71 6.07 482,475 6.04
$ 15.00-$17.50 600,000 1.88 17.08 480,000 17.08
--------- ---- ------ ------- ------
4,318,875 7.64 $ 5.04 1,153,833 $ 9.84
========= ==== ====== ========= ======
</TABLE>
The weighted average fair value per option of options granted during the
years ended December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Exercise price equals fair value at grant date ... $ 3.06 $ 1.65
Exercise price exceeds fair value at grant date .. 2.97 .78
</TABLE>
NOTE 8 COMMITMENTS AND CONTINGENCIES
There are various claims and pending legal actions against or indirectly
involving the Company, including actions concerned with civil rights of
employees and customers, other employment related matters, taxes, sales of
franchise rights and businesses, and other matters. Certain of these are
seeking damages in substantial amounts. The amounts of liability, if any, on
these direct or indirect claims and actions at December 31, 1996, over and
above any insurance coverage in respect to certain of them, are not
specifically determinable at this time.
In 1994, Flagstar was advised of proposed deficiencies from the Internal
Revenue Service for federal income taxes totaling approximately $12.7 million.
The proposed deficiencies relate to examinations of certain income tax returns
filed by the Company and Flagstar for the seven taxable periods ended December
31, 1992. In the third quarter of 1996, this proposed deficiency was reduced by
approximately $7.0 million as a direct result of the passage of the Small
Business Jobs Protection Act ("the Act") in August 1996. The Act included a
provision that clarified Internal Revenue Code Section 162(k) to allow for the
amortization of borrowing costs incurred by a corporation in connection with a
redemption of its stock. As the Company believes the remaining proposed
deficiencies are substantially incorrect, it intends to continue to contest
such proposed deficiencies.
F-23
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
NOTE 8 COMMITMENTS AND CONTINGENCIES -- Continued
The Company's Hardee's restaurants are operated under licenses from
Hardee's Food Systems, Inc. ("HFS"). The Company does not believe HFS has
satisfied its contractual obligations to support the Hardee's franchise, and on
March 19, 1997, the Company notified HFS, pursuant to its various license
agreements, that its subsidiary was seeking to arbitrate certain claims of the
subsidiary against HFS. In its demand for arbitration, the Company's subsidiary
alleges (i) breach by HFS of its license agreements with the Company's
subsidiary, (ii) breach of fiduciary duty and negligence by HFS in mishandling
and misapplying funds of the Company's subsidiary held for advertising, and
(iii) unfair trade practices. Such arbitration proceeding has been suspended by
the parties as a result of the letter of intent of the sale of FEI, the
wholly-owned subsidiary which operates the company's Hardee's restaurants, to
HFS' parent company (or an affiliate thereof). If such proposed sale were not
consummated and the arbitration proceeding were to resume, no assurance can be
given as to the outcome of such proceeding or its impact on the Company's
continuing Hardee's operations. If the proposed sale is consummated all claims
made by the Company against HFS would be released. See Note 16 regarding
potential disposition of the Company's Hardee's restaurants.
It is the opinion of Management (including General Counsel), after
considering a number of factors, including but not limited to the current
status of the litigation (including any settlement discussions), the views of
retained counsel, the nature of the litigation or proposed tax deficiencies,
the prior experience of the consolidated companies, and the amounts which the
Company has accrued for known contingencies that the ultimate disposition of
these matters will not materially affect the consolidated financial position,
liquidity or results of operations of the Company.
The Company is guarantor on capital lease obligations of approximately
$4.5 million at December 31, 1996 from the sale of PFC. See Note 1(o).
On February 22, 1996, the Company entered into an agreement with
Integrated Systems Solutions Corporation (ISSC). The ten year agreement (as
amended) for $357.5 million, which requires annual payments ranging from $24.0
million to $51.2 million, provides for ISSC to manage and operate the Company's
information systems, as well as develop and implement new systems and
applications to enhance information technology for the Company's corporate
headquarters, restaurants and field management. Under the agreement, ISSC has
full oversight responsibilities for the data center operations, applications
development and maintenance, voice and data networking, help desk operations,
and point-of-sale technology.
In conjunction with the sales of Portion-Trol Foods, Inc. and the Mother
Butler Pies division of Denny's, the Company entered into five year purchasing
agreements with the acquirers under which the Company is required to make
minimum annual purchases over the contract terms. The aggregate estimated
commitments remaining at December 31, 1996 relative to Portion-Trol Foods, Inc.
and Mother Butler Pies, respectively, are approximately $450 million and $54
million.
F-24
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
NOTE 9 SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Total
Total Shareholders'
Other Equity Deficit Equity (Deficit)
-------------- ---------------- -----------------
($ in thousands)
<S> <C> <C> <C>
Balance December 31, 1993 .................... $735,269 $ (2,157,818) $ (1,422,549)
Activity:
Net Income ................................. -- 364,093 364,093
Dividends declared on Preferred Stock ...... -- (14,175) (14,175)
Minimum pension liability adjustment ....... 10,131 -- 10,131
-------- ------------ ------------
Balance December 31, 1994 .................... 745,400 (1,807,900) (1,062,500)
Activity:
Net Loss ................................... -- (55,199) (55,199)
Dividends declared on Preferred Stock ...... -- (14,175) (14,175)
Issuance of Common Stock (Note 7) .......... 400 -- 400
Minimum pension liability adjustment ....... 497 -- 497
-------- ------------ ------------
Balance December 31, 1995 .................... 746,297 (1,877,274) (1,130,977)
Activity:
Net Loss ................................... -- (85,460) (85,460)
Dividends declared on Preferred Stock ...... -- (10,631) (10,631)
Minimum pension liability adjustment ....... (459) (459)
-------- ------------
Balance December 31, 1996 .................... 745,838 (1,973,365) (1,227,527)
Activity:
Net Loss ................................... (101,758) (101,758)
------------ ------------
Balance October 1, 1997 ...................... $745,838 $ (2,075,123) $ (1,329,285)
======== ============ ============
</TABLE>
Each share of the $2.25 Series A Cumulative Convertible Exchangeable
Preferred Stock ($2.25 Preferred Stock) is convertible at the option of the
holder, unless previously redeemed, into 1.359 shares of common stock. The
Preferred Stock may be exchanged at the option of the Company, in up to two
parts, at any dividend payment date for the Company's 9% Convertible
Subordinated Debentures (Exchange Debentures) due July 15, 2017 in a principal
amount equal to $25.00 per share of $2.25 Preferred Stock. Each $25.00
principal amount of Exchange Debenture, if issued, would be convertible at the
option of the holder into 1.359 shares of common stock of the Company. The
$2.25 Preferred Stock may be redeemed at the option of the Company, in whole or
in part, on or after July 15, 1994 at $26.80 per share if redeemed during the
twelve month-period beginning July 15, 1994, and thereafter at prices declining
annually to $25.00 per share on or after July 15, 2002.
The Company did not make the fourth quarter 1996 or first, second or third
quarter 1997 dividend payments on its Preferred stock. Such cumulative
dividends that have not been declared or paid total $3.5 million, at December
31, 1996 and $14.2 million at October 1, 1997.
At December 31, 1996, there are warrants outstanding which entitle the
holder, an affiliate of Kohlberg, Kravis, Roberts & Co. (KKR), a shareholder of
the Company, to purchase 15 million shares of Company common stock at $17.50
per share, subject to adjustment for certain events. Such warrants may be
exercised through November 16, 2000.
NOTE 10 EARNINGS (LOSS) PER SHARE APPLICABLE TO COMMON SHAREHOLDERS
Historical earnings (loss) per share amounts are not presented as they are
not considered meaningful due to the significant change in the capital
structure of the Company in connection with the confirmation and effectiveness
of the Company's Plan of Reorganization (See Note 16 for discussion of the
Company's Plan of Reorganization).
F-25
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
NOTE 11 EXTRAORDINARY ITEMS
The Company recorded losses from extraordinary items as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1994
--------------------------------
Income Losses,
Tax Net of
Losses Benefits Taxes
---------- ---------- ----------
<S> <C> <C> <C>
($ in thousands)
Prepayment of Term Loan:
Write-off of unamortized deferred financing costs on indebtedness retired ... $11,931 $ (174) $11,757
======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1995
----------------------------------
Income Gain
Tax (Loss),
Gain Provision Net of
(Loss) (Benefits) Taxes
---------- ------------ ----------
<S> <C> <C> <C>
($ in thousands)
Repurchase of Senior Indebtness:
Gain on repurchase of senior indebtedness ...................................... $1,461 $ 74 $1,387
Write-off of deferred financing costs on repurchase of senior indebtedness ..... (970) (49) (921)
------ ----- ------
Total ........................................................................... $ 491 $ 25 $ 466
====== ===== ======
</TABLE>
During the second quarter of 1994, the Company sold Canteen Corporation, a
wholly-owned subsidiary. A portion of the proceeds from the sale was used to
prepay $170.2 million of term loans and $126.1 million of working capital
advances which were outstanding under the Company's Restated Credit Agreement
resulting in a charge-off of $11.9 million of unamortized deferred financing
costs.
During the third quarter of 1995, the Company recognized an extraordinary
gain totaling $0.5 million, net of income taxes, which represents the
repurchase of $25.0 million principal amount of certain senior indebtedness,
net of the charge-off of the related unamortized deferred financing costs of
$0.9 million.
NOTE 12 RELATED PARTY TRANSACTIONS
The Company expensed annual advisory fees of $250,000 for the year ended
December 31, 1994 for Gollust Tierney & Oliver, Incorporated (GTO), a
stockholder of the Company.
KKR received annual financial advisory fees of approximately $1.3 million
for the years ended December 31, 1994, 1995, and 1996.
During January 1997, the Company settled its employment and benefits
arrangments with, and loan receivable from, a former officer previously
scheduled to mature in November 1997. The Company received net proceeds of $8.2
million and recorded a net charge of approximately $3.5 million which has been
included in other non-operating expenses in the accompanying 1996 Statement of
Consolidated Operations.
Interest income for the loan receivable from the former officer for the
years ended December 31, 1994, 1995 and 1996 totaled $842,000, $886,000 and
$935,000, respectively.
NOTE 13 DISCONTINUED OPERATIONS
During April 1994, the Company announced the signing of a definitive
agreement to sell the food and vending business and its intent to dispose of
the remaining concession and recreation services businesses of its subsidiary,
Canteen Holdings, Inc. The Company sold Canteen Corporation, a food and vending
subsidiary, for $447.1 million during June 1994, and recognized a net gain of
approximately $399.2 million, net of income taxes, during the year ended
December 31, 1994.
F-26
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
NOTE 13 DISCONTINUED OPERATIONS -- Continued
During December 1995, the Company sold TW Recreational Services, Inc., a
concession and recreation services subsidiary, for $98.7 million and Volume
Services, Inc., a stadium concession services subsidiary for $75.8 million, and
recognized gains totaling $77.9 million, net of income taxes.
The financial statements and related notes presented herein classify
Canteen Holdings, Inc. and its subsidiaries as discontinued operations in
accordance with Accounting Principles Board Opinion No. 30. Revenues and
operating income (loss) of the discontinued operations for the years ended
December 31, 1994, and 1995 were $859.7 million, and $322.3 million and $32.6
million, and $17.1 million, respectively.
NOTE 14 LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise are obligations which were outstanding
on the Petition Date and are subject to compromise under the terms of the Plan.
<TABLE>
<CAPTION>
October 1, 1997
----------------
<S> <C>
(In thousands)
10 3/4% Senior Notes Due 2001 ............................... $ 270,000
10 7/8% Senior Notes Due 2002 ............................... 280,025
11.25% Senior Subordinated Debentures Due 2004 .............. 722,411
11 3/8% Senior Subordinated Debentures Due 2003 ............. 125,000
10% Convertible Junior Subordinated Debentures Due 2014 ..... 99,259
Accrued interest ............................................ 100,836
----------
Total liabilities subject to compromise ..................... $1,597,531
==========
</TABLE>
NOTE 15 REORGANIZATION EXPENSES
Reorganization expenses included in the accompanying Statements of
Consolidated Operations for the three quarters ended October 1, 1997 consist of
the following items:
<TABLE>
<S> <C>
(In thousands)
Professional fees ............................... $15,186
Debtor-in-possession financing expenses ......... 2,963
Other reorganization items ...................... 5,400
-------
$23,549
=======
</TABLE>
NOTE 16 SUBSEQUENT EVENTS (UNAUDITED)
Financial Restructuring
Flagstar Holdings, Inc. ("Holdings"), a wholly-owned subsidiary of
Flagstar, filed on June 27, 1997, and FCI and Flagstar each filed on July 11,
1997, their respective petitions for relief under Chapter 11 of Title 11 of the
United States Code (the "Bankruptcy Code") in the United States Bankruptcy
Court for the District of South Carolina (the "Bankruptcy Court"). FCI,
Flagstar and Holdings (collectively referred to as the "Debtors") sought
bankruptcy protection in order to implement their joint prepackaged plan of
reorganization (the "Prepackaged Plan"). On November 12, 1997, the Bankruptcy
Court entered an order confirming an Amended Joint Plan of Reorganization (the
"Amended Plan"), subject to notice to creditors. The Company's operating
subsidiaries, Denny's Holdings, Inc., Spartan Holdings, Inc. and FRD
Acquisition Co. (and their respective subsidiaries), are not parties to and are
unaffected by these Chapter 11 proceedings. On January 7, 1998 (the "Effective
Date") the Amended Plan became effective. Material features of the Amended Plan
are as follows:
F-27
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
NOTE 16 SUBSEQUENT EVENTS (UNAUDITED) -- Continued
(a) On the Effective Date, Flagstar merged with and into FCI, and FCI, the
surviving corporation, changed its name to Advantica Restaurant Group,
Inc.;
(b) The following securities of Flagstar and FCI were cancelled,
extinguished, and retired as of the Effective Date: (i) Flagstar's
10 7/8% Senior Notes due 2002 (the "10 7/8% Senior Notes") and 10 3/4%
Senior Notes due 2001 (the "10 3/4% Senior Notes" and, collectively with
the 10 7/8% Senior Notes, the "Old Senior Notes"), (ii) Flagstar's 11.25%
Senior Subordinated Debentures due 2004 (the "11.25% Debentures") and
11 3/8% Senior Subordinated Debentures due 2003 (the "11 3/8% Debentures"
and, collectively with the 11.25% Debentures, the "Senior Subordinated
Debentures"), (iii) Flagstar's 10% Convertible Junior Subordinated
Debentures due 2014 (the "10% Convertible Debentures"), (iv) FCI's $2.25
Series A Cumulative Convertible Exchangeable Preferred Stock (the "Old
Preferred Stock") and (v) FCI's $.50 par value common stock (the "Old
Common Stock");
(c) Advantica had 100,000,000 authorized shares of Common Stock (of which
40,000,000 shares were issued and outstanding) and 25,000,000 authorized
shares of preferred stock (none of which are currently outstanding).
Under the terms of the Plan of Reorganization, ten percent (10%) of the
number of shares of Common Stock, issued and outstanding on the effective
date, on a fully diluted basis, is reserved for issuance under a new
management stock option program. Additionally, 4,000,000 shares of Common
Stock are reserved for issuance upon the exercise of new warrants
expiring January 7, 2005 that were issued and outstanding on the
Effective Date and entitle the holders thereof to purchase an aggregate
of 4,000,000 shares of Common Stock at an exercise price of $14.60 per
share (the "Warrants");
(d) Each holder of the Old Senior Notes received such holder's pro rata
portion of 100% of Advantica's 11 1/4% Senior Notes due 2007 (the "New
Senior Notes") in exchange for 100% of the principal amount of Old Senior
Notes and accrued interest through the Effective Date;
(e) Each holder of the Senior Subordinated Debentures received such
holder's pro rata portion of shares of Common Stock equivalent to 95.5%
of the Common Stock issued on the Effective Date;
(f) Each holder of the 10% Convertible Debentures received such holder's
pro rata portion of shares of (i) Common Stock equivalent to 4.5% of the
Common Stock issued on the Effective Date and (ii) 100% of the Warrants
outstanding on the Effective Date; and
(g) The Company refinanced its prior credit facility by entering into a
credit agreement with the Chase Manhattan Bank ("Chase") and other
lenders named therein providing the Company (excluding FRI-M Corporation
"FRI-M", the subsidiary that operates the Company's Coco's and Carrows
operations) with a $200 million senior secured revolving credit facility
(the "Credit Facility").
On March 17, 1997, in connection with the Prepackaged Plan, Flagstar
elected not to make the $7.1 million interest payment due and payable as of
that date to holders of the 11 3/8% Debentures. In addition, on May 1, 1997,
also in connection with the Prepackaged Plan, Flagstar elected not to make the
$40.6 million and $5.0 million interest payments due and payable as of that
date to holders of the 11.25% Debentures and the 10% Convertible Debentures,
respectively. As a result of these nonpayments, and as a result of a
continuation of such nonpayments for 30 days past their respective due dates,
Flagstar is in default under the terms of the indentures governing such
debentures. During the pendency of Flagstar's bankruptcy proceeding, Flagstar
also failed to make the $14.5 million interest payment due September 15, 1997
on its 10 3/4% Senior Notes and the $7.1 million interest payment due September
15, 1997 on its 11 3/8% Debentures. The bankruptcy filings operate as an
automatic stay of all collection and enforcement actions by the holders of the
Senior Subordinated Debentures, 10% Convertible Debentures, the Old Senior
Notes and the respective indenture trustees with respect to Flagstar's failure
to make the interest payments when due.
Disposition
On January 14, 1998 the Company signed a letter of intent (the "Letter of
Intent") to sell Flagstar Enterprises, Inc. ("FEI"), a wholly-owned subsidiary
which operates Hardee's restaurants under licenses from Hardee's Food Systems.
The Company would receive $369.1 million of cash (subject to adjustment as
outlined in the Letter of Intent) in exchange for
F-28
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
NOTE 16 SUBSEQUENT EVENTS (UNAUDITED) -- Continued
all of the outstanding stock of FEI. In addition, the purchaser would assume
$45.6 million of capital leases. The transaction is expected to be completed by
the end of the first quarter of 1998. The proposed transaction would require
consents of the lenders under the Credit Facility and the Company is currently
negotiating the terms of an amendment which would include such consent.
Certain secured bonds of FEI with a book value of $105.3 million at
October 1, 1997 which are collateralized by the assets of FEI, will not be
assumed by the purchaser in the disposition. As a result, the Company will be
required to replace the collateral and intends to do so through the purchase of
Defeasance Eligible Investments which will be deposited in an irrevocable trust
to satisfy principal and interest payments on the related bonds through the
stated maturity and will constitute an in-substance defeasance. At the same
time, the Company also intends to in substance defease similar secured bonds of
Quincy's Restaurants, Inc. with a book value of $78.6 million at October 1,
1997.
Pro Forma Financial Information
The following unaudited pro forma financial information shows the results
of operations of the Company as though the acquisition discussed in Note 2, and
the restructuring plan and disposition discussed above had occurred as of
January 1, 1996. Relative to the acquisition, for the year ended December 31,
1996 these results include a reduction of overhead expenses resulting from the
elimination of management fees formerly paid to FRI, an increase in interest
expense as a result of the debt issued to finance the acquisition, and a
reduction in FRI-M's income tax expense to reflect the fact that the Company's
net operating losses will offset FRI-M's separate income tax provision (except
for current foreign and state income taxes) when calculated on a consolidated
basis. Relative to the disposition, for the year ended December 31, 1996 and
the three quarters ended October 1, 1997 these results reflect the removal of
the results of operations of FEI as well as a reduction in interest expense due
to the in-substance defeasance of certain secured bonds. Relative to the
restructuring plan, for the year ended December 31, 1996 and the three quarters
ended October 1, 1997 these results reflect the elimination of amortization of
deferred financing costs and interest on debt securities retired, amortization
of deferred financing costs related to the exchange of the Old Senior Notes,
amortization of deferred financing costs related to the Exit Facility, an
increase in interest expense due to the exchange of the Old Senior Notes, the
impact on interest expense of the amortization of the premium on long-term
debt, and the amortization of reorganization value in excess of amounts
allocable to identifiable assets over a five-year period.
<TABLE>
<CAPTION>
Three
Quarters
Year Ended Ended
December 31, October 1,
1996 1997
-------------- -------------
<S> <C> <C>
(in thousands, except per share amounts)
Revenue ................................ $ 2,135.3 $ 1,572.4
Net loss ............................... ( 190.1) ( 149.5)
Loss per common share .................. ( 4.75) ( 3.74)
Number of shares ....................... 40,000 40,000
</TABLE>
F-29
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- Continued
NOTE 17 QUARTERLY DATA (UNAUDITED)
The results for each quarter include all adjustments which are, in the
opinion of management, necessary for a fair presentation of the results for
interim periods. The consolidated financial results on an interim basis are not
necessarily indicative of future financial results on either an interim or an
annual basis. Selected consolidated financial data for each quarter within 1995
and 1996 are as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------- ------------- -------------
($ in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Year Ended December 31, 1995:
Operating revenue ....................................... $ 636,464 $ 681,464 $ 676,899 $ 576,660
Operating expenses:
Product costs ......................................... 218,246 238,514 229,446 178,299
Payroll & benefits .................................... 228,809 238,889 229,368 219,885
Depreciation & amortization expense ................... 33,249 33,748 32,802 33,073
Utilities expense ..................................... 23,261 23,708 27,361 23,882
Other ................................................. 95,561 96,471 101,634 99,816
Provision for restructuring charges ................... -- -- -- 15,873
Charge for impaired assets ............................ -- -- -- 51,358
--------- --------- --------- ---------
Operating income (loss) ................................. $ 37,338 $ 50,134 $ 56,288 $ (45,526)
========= ========= ========= =========
Income (loss) before extraordinary item ................. $ (31,060) $ (13,554) $ 13,765 $ (24,816)
========= ========= ========= =========
Net income (loss) applicable to common shareholders ..... $ (34,604) $ (17,098) $ 10,688 $ (28,360)
========= ========= ========= =========
Year Ended December 31, 1996:
Operating revenue ....................................... $ 550,425 $ 626,570 $ 703,838 $ 661,469
Operating expenses:
Product costs ......................................... 160,028 184,842 206,777 192,425
Payroll & benefits .................................... 214,531 235,605 258,613 237,023
Depreciation & amortization expense ................... 29,047 30,006 33,555 37,340
Utilities expense ..................................... 22,754 24,329 30,698 26,696
Other ................................................. 96,579 108,428 125,868 130,766
--------- --------- --------- ---------
Operating income ........................................ $ 27,486 $ 43,360 $ 48,327 $ 37,219
========= ========= ========= =========
Loss before extraordinary item .......................... $ (27,310) $ (17,435) $ (12,519) $ (28,196)
========= ========= ========= =========
Net loss applicable to common shareholders .............. $ (30,854) $ (20,979) $ (16,062) $ (31,740)
========= ========= ========= =========
Three Quarters Ended October 1, 1997
Operating Revenue ....................................... $ 675,775 $ 659,428 $ 654,153
Operating expenses:
Product costs ......................................... 197,692 192,261 191,026
Payroll & benefits .................................... 256,787 243,446 235,826
Depreciation & amortization expense ................... 34,682 33,546 38,672
Utilities expense ..................................... 27,480 26,508 28,968
Other ................................................. 136,107 117,505 115,394
--------- --------- ---------
Operating income ........................................ $ 23,027 $ 46,162 $ 44,267
========= ========= =========
Net loss applicable to common shareholders .............. $ (55,272) $ (35,815) $ (21,302)
========= ========= =========
</TABLE>
Historical earnings (loss) per share not meaningful due to the significant
change in the Company's capital structure in connection with the confirmation
and effectiveness of the Company's Plan of Reorganization.
During the fourth quarter of 1995, the Company sold its concession and
recreation services subsidiaries and recorded a $77.9 million net gain on the
sales of such discontinued operations.
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
FRD Acquisition Co.:
We have audited the accompanying combined statements of operations and net
combined equity and cash flows of FRI-M which includes FRI-M Corporation, a
wholly owned subsidiary of Family Restaurants, Inc. (The Parent), and certain
subsidiaries including those restaurants that make up the Family Restaurant
Division and including the FRD Commissary (collectively FRI-M or the Company)
for the year ended December 26, 1993 and the one month ended January 26, 1994
(FRI-Predecessor Company), and the eleven months ended December 25, 1994 and
the year ended December 31, 1995 (FRI-Successor Company). These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the results of the Company's operations and
their cash flows for the year ended December 26, 1993 and the one month ended
January 26, 1994 (FRI-Predecessor Company), and the eleven months ended
December 25, 1994 and the year ended December 31, 1995 (FRI-Successor Company)
in conformity with generally accepted accounting principles.
As discussed in note 1 to the combined financial statements, the Parent
commenced a Chapter 11 bankruptcy case on November 23, 1993, which was
confirmed by the United States Bankruptcy Court for the District of Delaware on
January 7, 1994. Accordingly, the accompanying combined financial statements
have been prepared in conformity with American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Reporting for Entities in
Reorganization Under the Bankruptcy Code."
KPMG PEAT MARWICK LLP
Orange County, California
February 9, 1996 except as to note 8
which is as of May 23, 1996
F-31
<PAGE>
FRI-M (NOTE 1)
COMBINED STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
FRI-Predecessor Company FRI-Successor Company
---------------------------- -----------------------------
For the year One month Eleven months For the year
ended ended ended ended
December 26, January 26, December 25, December 31,
1993 1994 1994 1995
-------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Operating revenues ............................... $487,433 $43,538 $ 460,636 $ 501,248
-------- ------- --------- ---------
Product cost ..................................... 143,619 12,946 131,436 143,206
Payroll and benefits ............................. 187,757 17,175 170,346 180,922
Occupancy and other operating expenses ........... 78,370 7,130 72,509 79,331
Depreciation and amortization .................... 10,042 778 23,221 28,447
General, administrative and selling expenses ..... 41,035 4,341 40,083 43,535
Franchise fees ................................... (4,850) (539) (5,389) (4,371)
Loss on disposition of properties, net ........... 938 -- 3,064 2,269
-------- ------- --------- ---------
456,911 41,831 435,270 473,339
-------- ------- --------- ---------
Operating income ................................. 30,522 1,707 25,366 27,909
Interest expense ................................. 4,594 458 6,476 16,515
-------- ------- --------- ---------
Income before income taxes........................ 25,928 1,249 18,890 11,394
Pro forma income tax provision ................... 10,692 532 9,496 6,670
-------- ------- --------- ---------
Net income ...................................... $ 15,236 $ 717 9,394 4,724
======== =======
Net combined equity, beginning of period ......... 242,275 192,354
Intercompany and equity activity, net ............ (59,315) (44,477)
--------- ---------
Net combined equity, end of year ................. $ 192,354 $ 152,601
========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-32
<PAGE>
FRI-M (NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FRI-Predecessor Company FRI-Successor Company
---------------------------- -----------------------------
For the year One month Eleven months For the year
ended ended ended ended
December 26, January 26, December 25, December 31,
1993 1994 1994 1995
-------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Increase (decrease) in cash:
Cash flows from operating activities:
Net income .................................................... $ 15,236 $ 717 $ 9,394 $ 4,724
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ................................ 10,042 778 23,221 28,447
Amortization of debt issuance costs .............................. -- -- 463 4,785
Loss on disposition of properties ............................ 938 -- 3,064 2,269
(Increase) decrease in assets:
Receivables ................................................ (3,032) 503 (486) 1,975
Inventories ................................................ 1,413 199 (377) 775
Other current assets ....................................... (1,510) 3,365 (3,941) (2,888)
Increase (decrease) in liabilities:
Accounts payable ........................................... (748) (312) (4,376) 4,386
Self-insurance reserves .................................... 1,917 (2,430) (1,776) 2,998
Other accrued liabilities .................................. (2,003) 2,029 3,431 (1,598)
Total adjustments ......................................... 7,017 4,132 19,223 41,149
Net cash provided by operating activities ................. 22,253 4,849 28,617 45,873
--------- -------- --------- ---------
Cash flows from investing activities -- proceeds from disposal
of property and equipment ...................................... 346 -- 283 7,866
Capital expenditures ............................................. (14,720) (412) (23,742) (22,890)
Other ............................................................ 650 317 (199) (881)
--------- -------- --------- ---------
Net cash used in investing activities ..................... (13,724) (95) (23,658) (15,905)
--------- -------- --------- ---------
Cash flows from financing activities:
Net intercompany and equity activity ........................... (5,730) (4,425) (59,315) (44,477)
Borrowings (repayments) of loans payable to bank and
long-term debt, including capitalized lease obligations ....... (1,746) (686) 56,184 15,786
--------- -------- --------- ---------
Net cash used in financing activities ..................... (7,476) (5,111) (3,131) (28,691)
--------- -------- --------- ---------
Net increase (decrease) in cash and cash
equivalents .............................................. 1,053 (357) 1,828 1,277
Cash and cash equivalents at beginning of period ................. 1,696 2,749 2,392 4,220
--------- -------- --------- ---------
Cash and cash equivalents at end of period ....................... $ 2,749 $ 2,392 $ 4,220 $ 5,497
========= ======== ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-33
<PAGE>
FRI-M (NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
December 25, 1994 and December 31, 1995
(1) ORGANIZATION AND BASIS OF PRESENTATION
The FRI-M combined financial statements combine operations of FRI-M
Corporation, a wholly owned subsidiary of Family Restaurants, Inc. (the
Parent), and certain subsidiaries including those restaurants that make up the
Family Restaurant Division (FRD) and including the FRD Commissary, a division
of the Parent (collectively, the Company). FRD primarily represents the Coco's
and Carrows concept restaurants. The FRI-M combined financial statements
exclude the financial position and operations of FRI-MRD Corporation, a wholly
owned subsidiary of the FRI-M Corporation which owns El Torito Restaurants,
Inc. and Chi-Chi's, Inc., the Traditional Dinnerhouse Division, which operates
the Charley Brown's and Reuben's concept restaurants, FRI-Admin Corporation and
the Parent. See note 8 regarding the sale of the Company.
Reference to the "FRI-Predecessor Company" refers to the period of ownership of
the Company by The Restaurant Enterprises Group, Inc. prior to January 27,
1994. Reference to the "FRI-Successor Company" refers to the period of
ownership of the Company by Family Restaurants, Inc. giving effect to
information about events occurring upon the Parent's emergence from a Chapter
11 bankruptcy code reorganization (the Reorganization).
At December 31, 1995, the Company operated 349 full-service restaurants located
in 10 states, with approximately 74% of its restaurants located in California.
FRD restaurants primarily offer moderately priced breakfast, lunch and dinner
items. Additionally, as of December 31, 1995, the Company was the licensor of
251 full-service restaurants in Japan and South Korea and the franchisor of 6
family restaurants in the United States.
The combined financial statements of the FRI-Predecessor Company were prepared
on a going concern basis, which contemplated continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. While the reorganization plan was in process, the Parent continued in
possession of its properties and operated and managed its business as a
debtor-in-possession pursuant to the bankruptcy code. The Company applied the
provisions of the American Institute of Certified Public Accountants Statement
of Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code," (SOP 90-7) in the December 23, 1993 combined financial
statements.
Pursuant to SOP 90-7, the FRI-Predecessor Parent qualified for fresh start
reporting as of January 27, 1994. Under this concept, all assets and
liabilities of the Parent are restated to current value at the date of
reorganization. The Parent obtained an appraisal of the assets and liabilities
of the FRI-Successor Company. This appraisal determined the reorganization
value (i.e., fair value) of the assets and liabilities of the FRI-Successor
Company. The Company utilized the results of this appraisal to implement fresh
start reporting, which resulted in reorganization value in excess of amounts
allocable to identifiable assets of $155,540,000 at January 27, 1994.
The accompanying combined statements of operations for the eleven months ended
December 25, 1994 and the year ended December 31, 1995 represent that of the
FRI-Successor Company which, in effect, is a new entity with assets and
liabilities having carrying values not comparable with prior periods. The
accompanying combined statements of operations for the year ended December 26,
1993 and for the one month ended January 26, 1994 represent that of the
FRI-Predecessor Company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company reported 1993 and 1994 results of operations based on 52 weeks
ending on last Sunday in December.
The Company reported 1995 results of operations based on 53 weeks ending on the
last Sunday in December.
F-34
<PAGE>
FRI-M (NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS-- Continued
Principles of Combination
The combined financial statements include the operations described in note 1
including their affiliated subsidiaries. All significant affiliated
intercompany transactions have been eliminated.
Estimations
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the combined financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Inventories
Inventories consist primarily of food and liquor and are stated at the lower of
cost or market. Costs are determined using the first-in, first-out (FIFO)
method.
Pre-Opening Expenses
Certain costs incurred in connection with opening a restaurant which consist
solely of direct incremental costs which the Company believes provide a
specific quantifiable benefit to future periods and are probable of recovery
(principally stocking the restaurant and training staff) are capitalized and
amortized on a straight-line basis over one year after opening. Amortization of
pre-opening expenses, included in depreciation and amortization in the combined
statements of income, was $2,747,000 for the year ended December 26, 1993,
$235,000 for the one month ended January 26, 1994, $2,644,000 for the eleven
months ended December 25, 1994 and $1,917,000 for the year ended December 31,
1995.
Property and Equipment
Property and equipment are stated at appraised value or cost and are
depreciated on a straight-line basis over 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 estimated useful lives or the terms of 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 date of disposal.
Reorganization Value
Reorganization value in excess of amounts allocable to identifiable assets is
amortized using the straight-line method over 30 years. Accumulated
amortization of reorganization value amounted to $4,912,000 and $10,192,000 at
December 25, 1994 and December 31, 1995, respectively.
Self-Insurance Reserves
The Parent is self-insured for workers compensation and general liability
claims up to $500,000. Provisions for expected future payments are accrued
based on the Parent's estimate of its aggregate liability for all open claims,
using actuarially determined methods.
Franchise and License Fees
Initial franchise and license fees are recognized when all material services
have been performed and conditions have been satisfied. Initial fees for all
periods presented are insignificant. Monthly fees are accrued as earned based
on the respective monthly sales. Such fees totaled $4,850,000 for the year
ended December 26, 1993, $539,000 for the one month ended January 26, 1994,
$5,389,000 for the eleven months ended December 25, 1994 and $4,371,000 for the
year ended December 31, 1995.
F-35
<PAGE>
FRI-M (NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS-- Continued
Advertising
Production costs of commercials, programming and the costs of other
advertising, promotion and marketing programs are expensed in the year incurred
and are included in occupancy and other operating expenses in the combined
statement of operations. Such costs totaled $12,910,000 for the year ended
December 26, 1993, $1,318,000 for the one month ended January 26, 1994,
$13,068,000 for the eleven months ended December 25, 1994 and $16,328,000 for
the year ended December 31, 1995.
Pro Forma Income Taxes
The accompanying combined financial statements combine the accounts of
subsidiaries and divisions and exclude some operations of the combined
entities. Some combined entities are not taxable entities, but all are included
in the consolidated tax return of the parent. For financial reporting purposes,
a pro forma tax expense has been provided at 40% of reported combined income
excluding amortization of certain intangibles.
(3) PROPERTY AND EQUIPMENT
Depreciation and amortization relating to property and equipment was $6,494,000
for the year ended December 26, 1993, $463,000 for the one month ended January
26, 1994, $15,728,000 for the eleven months ended December 25, 1994, and
$21,297,000 for the year ended December 31, 1995, of which $2,600,000,
$204,000, $4,647,000 and $4,624,000, respectively, was related to amortization
of property under capitalized leases.
A majority of the capitalized and operating leases have original terms of 25
years, and substantially all of these leases expire in the year 2005 or later.
Most leases have renewal options. The leases generally provide for payment of
minimum annual rent, real estate taxes, insurance and maintenance and, in most
cases, contingent rent, calculated as a percentage of sales, in excess of
minimum rent. The total amount of contingent rent under capitalized leases for
the year ended December 26, 1993, the one month ended January 26, 1994, the
eleven months ended December 25, 1994 and the year ended December 31, 1995 was
$3,089,000, $207,000, $2,914,000 and $3,107,000 respectively. Total rental
expense for all operating leases comprised the following:
<TABLE>
<CAPTION>
One month Eleven months
Year ended ended ended Year ended
December 26, January 26, December 25, December 31,
1993 1994 1994 1995
-------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Minimum rent .................. $11,130,000 $ 845,000 $11,066,000 $12,568,000
Contingent rent ............... 1,651,000 113,000 1,621,000 2,245,000
Leased equipment rent ......... 2,070,000 189,000 1,810,000 1,343,000
Sublease rent ................. (81,000) (5,000) (174,000) (321,000)
----------- ---------- ----------- -----------
$14,770,000 $1,142,000 $14,323,000 $15,835,000
=========== ========== =========== ===========
</TABLE>
F-36
<PAGE>
FRI-M (NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS-- Continued
(4) OTHER ASSETS
Franchise operating rights are stated at their appraised value determined as of
the date of the Reorganization, based on royalty income streams, and are
amortized over 15 years. Debt issuance costs are amortized over the term of the
related debt agreement.
(5) PRO FORMA INCOME TAXES
The Company reported income before income tax provision for the year ended
December 26, 1993, the one month ended January 26, 1994, the eleven months
ended December 25, 1994 and the year ended December 31, 1995. For financial
reporting purposes, a pro forma tax expense equal to 40% of reported earnings,
excluding certain amortization of intangibles, has been provided in the
statements of operations.
Upon the Reorganization on January 27, 1994, the Parent's net operating loss
carryovers and other tax attributes were reduced significantly for Federal
income tax purposes. In addition, because the consummation of the
Reorganization triggered an ownership change of the Parent for Federal income
tax purposes, the Parent's and the Company's post-Reorganization use of its
remaining net operating loss carryovers for regular and alternative minimum
Federal income tax purposes is subject to an annual limitation in an amount
equal to the product of (i) the long-term tax-exempt rate prevailing on the
closing date of the Reorganization and (ii) the value of the Parent's stock,
increased to reflect the cancellation of indebtedness pursuant to the
Reorganization (but without taking into account contributions to capital
pursuant to the Reorganization). The Parent's annual limit is approximately
$5,300,000.
At December 31, 1995, the Parent and its subsidiaries had additional tax credit
carryforwards of approximately $1,981,000 not utilized by a former owner
(Former Owner). In accordance with a previous acquisition, the Parent must
reimburse the Former Owner for 75% of the benefit of these tax credits if they
are utilized in future Company tax returns.
(6) RELATIONSHIPS WITH PARENT
The Company's FRI-Successor and FRI-Predecessor Parent provide certain
financial, administrative, legal and staff functions and services. These costs
are allocated to the Company based on number of opened and operating units. The
Company believes that this method is reasonable. The management fee for these
services was $3,410,000 for the year ended December 26, 1993, $257,000 for the
one month ended January 26, 1994, $2,626,000 for the eleven months ended
December 25, 1994, and $2,634,000 for the year ended December 31, 1995. These
costs are included in general and administrative expenses in the combined
statements of operations. Further, interest expense associated with the
revolving credit loan is also allocated to the subsidiaries, based on current
liabilities outstanding. The Company deposits cash in excess of its operating
requirements with its Parent, and the Parent advances funds to the Company to
finance expansion of its restaurant business. These deposits and advances have
been made on an interest-free basis.
The Company is charged premiums by its Parent for certain insurance coverage
provided under the Parent's insurance plans (employee group medical and life,
workers compensation, general liability and property insurance). During the
year ended December 26, 1993, the one month ended January 26, 1994, the eleven
months ended December 25, 1994 and the year ended December 31, 1995, such
premium charges amounted to $16,393,000, $1,286,000, $14,358,000 and
$12,730,000, respectively.
F-37
<PAGE>
FRI-M (NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS-- Continued
A summary of intercompany and equity activity, for 1994 and 1995 follows.
FRI-Predecessor information is not presented as it is not considered relevant.
<TABLE>
<CAPTION>
Eleven months
ended Year ended
December 25, December 31,
1994 1995
-------------- -------------
<S> <C> <C>
Net combined equity, beginning of period ................. $ 242,275 $ 192,354
Allocation of management expenses ........................ 2,626 2,634
Pro forma income tax provision ........................... 9,496 6,670
(Borrowings) repayments on revolving credit facility ..... (56,184) (15,786)
Self-insurance premium charges ........................... 14,358 12,730
Change in intercompany ................................... (29,611) (50,725)
Net income ............................................... 9,394 4,724
--------- ---------
Net combined equity, end of period ....................... $ 192,354 $ 152,601
========= =========
</TABLE>
(7) BENEFIT PLANS
The Parent maintains several incentive compensation and related plans for
executives and key operating personnel of its subsidiaries, including
restaurant and field management. Total expenses for these plans included in the
combined statements of operations were $5,252,000 for the year ended December
26, 1993, $413,000 for the one month ended January 26, 1994, $4,718,000 for the
eleven months ended December 25, 1994 and $2,235,000 for the year ended
December 31, 1995.
The Company participated in savings and investment plans sponsored by the
Parent. Substantially all of the Company's salaried employees were eligible to
participate in the plans. The Company's expenses under such plans for the year
ended December 26, 1993, the one month ended January 26, 1994, the eleven
months ended December 25, 1994, and the year ended December 31, 1995 were
$15,000, $0, $17,000 and $159,000, respectively.
(8) SUBSEQUENT EVENTS
Flagstar Corporation (Flagstar), through a newly-formed company, FRD
Acquisition Co. (Acquisition Co.), acquired 100% of the capital stock of FRI-M
Corporation and certain of its Family Restaurant Division operating
subsidiaries (see note 1) on May 23, 1996 for a purchase price of approximately
$306,000,000 (the Acquisition). Acquisition Co. financed the Acquisition with
$125,000,000 in cash, $150,000,000 in 12 1/2% senior notes and the assumption
of approximately $31,000,000 in lease and other debt obligations of FRI-M
Corporation. The $125,000,000 in cash paid to the Parent was funded by a
$75,000,000 equity investment from Flagstar and a $50,000,000 loan from FRI-M
Corporation. In order to fund the loan and provide a source of working capital,
FRI-M obtained at the May 23, 1996 closing of the Acquisition, a new credit
facility consisting of a $56,000,000, 39-month senior term loan and a
$35,000,000 working capital facility to support letters of credit and for
working capital purposes.
F-38
<PAGE>
FRI-M (NOTE 1)
COMBINED CONDENSED STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 26, March 31,
1995 1996
-------------- -------------
(Unaudited)
<S> <C> <C>
Operating revenues ............................... $ 117,596 $ 118,996
--------- ---------
Product cost ..................................... 33,503 33,090
Payroll and benefits ............................. 44,492 45,271
Occupancy and other operating expenses ........... 23,330 22,347
Depreciation and amortization .................... 6,471 6,926
General and administrative expenses .............. 6,878 7,361
Franchise fees ................................... (1,415) (844)
Loss on disposition of properties, net ........... 5 120
--------- ---------
113,264 114,271
--------- ---------
Operating income ................................. 4,332 4,725
Interest expense, net ............................ 2,750 3,931
--------- ---------
Income before income taxes ....................... 1,582 794
Income tax provision ............................. 1,161 846
--------- ---------
Net income (loss) ................................ $ 421 $ (52)
Net combined equity, beginning of period ......... 192,354 152,601
Intercompany and equity activity, net ............ (36,253) (20,350)
--------- ---------
Net combined equity, end of period ............... $ 156,522 $ 132,199
========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-39
<PAGE>
FRI-M
COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 26, March 31,
1995 1996
-------------- -------------
(Unaudited)
<S> <C> <C>
Increase (decrease) in cash:
Cash flows from operating activities:
Net income (loss) ..................................................................... $ 421 $ (52)
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization ........................................................ 6,471 6,926
Amortization of debt issuance costs .................................................. 5,052 738
Loss on disposition of properties .................................................... 5 120
(Increase) decrease in assets:
Receivables ......................................................................... (1,396) (1,519)
Inventories ......................................................................... 682 104
Other current assets ................................................................ 816 (1,083)
Increase (decrease) in liabilities:
Accounts payable .................................................................... 2,215 (1,393)
Self-insurance reserves ............................................................. 4,630 1,223
Other accrued liabilities ........................................................... (5,427) (5,034)
--------- ---------
Total adjustments ................................................................. 13,048 82
Net cash provided by operating activities ......................................... 13,469 30
--------- ---------
Cash flows from investing activities -- proceeds from disposal of property and equipment . 5,166 11,649
Capital expenditures ..................................................................... (8,825) (1,335)
Other .................................................................................... -- (26)
--------- ---------
Net cash provided by (used in) investing activities ............................... (3,659) 10,288
--------- ---------
Cash flows from financing activities:
Net intercompany and equity activity .................................................... (36,253) (20,350)
Repayment of loans payable to bank and long-term debt, including capitalized lease
obligations ........................................................................... 27,589 9,945
--------- ---------
Net cash used in financing activities ............................................. (8,664) (10,405)
--------- ---------
Net increase (decrease) in cash and cash equivalents .............................. 1,146 (87)
Cash and cash equivalents at beginning of period ......................................... 4,220 5,497
--------- ---------
Cash and cash equivalents at end of period ............................................... $ 5,366 $ 5,410
========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-40
<PAGE>
FRI-M
NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS
March 26, 1995 and March 31, 1996
(Unaudited)
(1) ORGANIZATION AND BASIS OF PRESENTATION
The combined condensed financial statements combine the financial position
and operations of FRI-M Corporation, a wholly owned subsidiary of Family
Restaurants, Inc. (the Parent), and certain subsidiaries including those
restaurants that make up the Family Restaurant Division (FRD) and including the
FRD Commissary, a division of the Parent (collectively, the Company). FRD
primarily represents the Coco's and Carrows concept restaurants.
(2) FINANCIAL STATEMENTS
The accompanying combined condensed financial statements have been
prepared in accordance with Securities and Exchange Commission Regulation S-X.
Reference is made to the notes to the combined financial statements for the
year ended December 31, 1995, 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 ended March 31, 1996, are not necessarily indicative
of those for the full year.
F-41
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesman or any other person has been authorized to give any
information or to make any representation in connection with this offering
other than those contained in this Prospectus and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of these securities in any jurisdiction to
any person to whom it is unlawful to make such offer or solicitation in such
jurisdiction. The delivery of this Prospectus at any time does not imply that
the information contained herein is correct as of any time subsequent to its
date.
--------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Available Information ..................................... 2
Prospectus Summary ........................................ 3
Risk Factors .............................................. 8
The Company ............................................... 10
Use of Proceeds ........................................... 12
Price Range of Common Stock and Dividend
Policy ................................................. 13
Pro Forma Financial Statements ............................ 14
Selected Historical Financial Data ........................ 24
Management's Discussion and Analysis of
Financial Condition and Results of Operations .......... 26
Business .................................................. 44
Management ................................................ 54
Management Compensation ................................... 56
Ownership of Capital Securities ........................... 62
Certain Transactions ...................................... 63
Description of Indebtedness ............................... 63
Description of Common Stock ............................... 68
Selling Stockholder ....................................... 69
Plan of Distribution ...................................... 69
Legal Matters ............................................. 70
Experts ................................................... 70
</TABLE>
Advantica Restaurant Group, Inc.
9,526,775 Shares of Common Stock
----------------------
PROSPECTUS
----------------------
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth an estimate of the expenses that will be
incurred by the registrant in connection with the distribution of the
securities being registered hereby:
<TABLE>
<S> <C>
SEC registration fee ................. $27,401
NASD filing fees ..................... *
Legal fees and expenses .............. *
Accounting fees and expenses ......... *
Miscellaneous ........................ *
-------
Total ............................. $ *
=======
</TABLE>
- ---------
* To be supplied by amendment
Item 14. Indemnification and Limitation of Liability of Directors and Officers.
Advantica is a Delaware corporation. Reference is made to Section
102(b)(7) of the Delaware General Corporation Law (the "DGCL"), which enables a
corporation in its original certificate of incorporation or an amendment
thereto to eliminate or limit the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except (i) for any breach of the director's duty of loyalty
to the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) pursuant to Section 174 of the DGCL (providing for liability of directors
for unlawful payment of dividends or unlawful stock purchases or redemptions)
or (iv) for any transaction from which a director derived an improper personal
benefit.
Reference is also made to Section 145 of the DGCL, which provides that a
corporation may indemnify any persons, including officers and directors, who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
such corporation), by reason of the fact that such person is or was an officer,
director, employee or agent of such corporation or is or was serving at the
request of such corporation as an officer, director, employee or agent of
another corporation or enterprise. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided such officer, director, employee or agent acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the corporation's best interests and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was unlawful. A
Delaware corporation may indemnify officers, directors, employees and agents in
an action by or in the right of the corporation under the same conditions,
except that no indemnification is permitted without judicial approval if the
officer, director, employee or agent is adjudged to be liable to the
corporation. Where an officer, director, employee or agent is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses that such officer,
director, employee or agent actually and reasonably incurred.
Advantica's Restated Certificate of Incorporation and By-Laws that were
adopted pursuant to the Plan of Reorganization provide for indemnification of
its officers and directors to the full extent permitted under Delaware law.
Specifically, Articles Sixth and Seventh of the Restated Certificate of
Incorporation provide for indemnification of officers and directors to the
extent permitted by Section 145 of the DGCL and the elimination of liability of
directors to the extent permitted by Section 102(b)(7) of the DGCL, and Article
5, Section 14 of the By-Laws provides for indemnification of officers and
directors to the extent permitted by Section 145 of the DGCL. The Adamson
Employment Agreement (attached as Exhibit 10.30 to this Registration Statement)
also provides for indemnification by the Company to the extent permitted by
Delaware law and, in connection therewith, calls for the advancement of
attorney's fees and expenses (subject to repayment in certain circumstances).
The Registration Rights Agreement (attached as Exhibit 4.2 to this Registration
Statement) provides for indemnification by Advantica of the holder of
registrable securities that is a party thereto for control person liability, if
any, in respect of certain claims under the Securities Act.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
On January 7, 1998 (the Effective Date of the Plan of Reorganization (as
defined and described in the Prospectus) 40,000,000 shares of Common Stock, par
value $.01 per share, of Advantica (the "Common Stock"), and warrants to
purchase up to 4,000,000 shares of Common Stock at a per share exercise price
of $14.60 were issued by Advantica and distributed pursuant to the Plan of
Reorganization.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
The following is a complete list of Exhibits filed as part of this
Registration Statement, which are incorporated herein:
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- -------------------------------------------------------------------------------------------------------
<S> <C>
*2.1 Joint Plan of Reorganization of FCI and Flagstar, as amended November 7, 1997 and as confirmed by
order of the United States Bankruptcy Court for the District of South Carolina entered November 12,
1997 (incorporated by reference to Exhibit 2.1 to FCI's Form 8-K, filed November 21, 1997 (the
"1997 Form 8-K")).
*3.1 Restated Certificate of Incorporation of Advantica dated January 7, 1998 (incorporated by reference to
Exhibit 3.1 to Form 8-A of Advantica filed January 7, 1998 relating to the Common Stock (the "Form
8-A")).
**3.2 Certificate of Ownership and Merger of Advantica dated January 7, 1998.
*3.3 By-Laws of Advantica as amended through January 7, 1998 (incorporated by reference to Exhibit 3.2
to the Form 8-A).
**4.1 Specimen certificate of Common Stock of Advantica.
*4.2 Registration Rights Agreement (incorporated by reference to Exhibit 10.1 to the Form 8-A).
*4.3 Indenture of Mortgage, Deed of Trust, Security Agreement, Financing Statement, Fixture Filing, and
Assignment of Leases and Rents, from Denny's Realty, Inc. to State Street Bank and Trust Company,
dated July 12, 1990 (incorporated by reference to Exhibit 4.9 to Post-effective Amendment No. 1 to
the Registration Statement on Form S-1 (No. 33-29769) of FCI (the "Form S-l Amendment")).
*4.4 Lease between Denny's Realty, Inc. and Denny's, Inc., dated as of December 29, 1989, as amended
and restated as of July 12, 1990 (incorporated by reference to Exhibit 4.10 to the Form S-l
Amendment).
*4.5 Indenture dated as of July 12, 1990 between Denny's Realty, Inc. and State Street Bank and Trust
Company relating to certain mortgage notes (incorporated by reference to Exhibit 4.11 to the Form S-l
Amendment).
*4.6 Mortgage Note in the amount of $10,000,000 of Denny's Realty, Inc., dated as of July 12, 1990
(incorporated by reference to Exhibit 4.15 to the Registration Statement on Form S-4 (No. 33-48923)
of Flagstar (the "11.25% Debentures S-4")).
*4.7 Mortgage Note in the amount of $52,000,000 of Denny's Realty, Inc., dated as of July 12, 1990
(incorporated by reference to Exhibit 4.16 to the 11.25% Debentures S-4).
*4.8 Mortgage Note in the amount of $98,000000 of Denny's Realty, Inc., dated as of July 12, 1990
(incorporated by reference to Exhibit 4.16 to the 11.25% Debentures S-4).
*4.9 Indenture between Secured Restaurants Trust and The Citizens and Southern National Bank of South
Carolina, dated as of November 1, 1990, relating to certain secured bonds (incorporated by reference
to Exhibit 4.18 to the 11.25% Debentures S-4).
*4.10 Amended and Restated Trust Agreement between Spartan Holdings, Inc., as Depositor for Secured
Restaurants Trust, and Wilmington Trust Company, dated as of October 15, 1990 (incorporated by
reference to Exhibit 3.3 to the Registration Statement on Form S-11 (No. 33-36345) of Secured
Restaurants Trust (the "Form S-11")).
*4.11 Credit Agreement, dated as of May 23, 1996, among FRD, FRI-M, certain lenders and co-agents
named therein, and Credit Lyonnais New York Branch as administrative agent (the "FRI-M Credit
Agreement") (incorporated by reference to Exhibit 10.1 to the Registration Statement on Forms S-1
and S-4 (333-07601) of FRD (the "FRD Form S-l/S-4").
*4.12 First Amendment to the FRI-M Credit Agreement, dated July 1, 1996 (incorporated by reference to
Exhibit 10.3.1 to FCI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996).
*4.13 Second Amendment to the FRI-M Credit Agreement, dated November 19, 1996 (incorporated by
reference to Exhibit 4.24 to FCI's 1996 Form 10-K, File No. 0-18051 (the "1996 Form 10-K")).
*4.14 Indenture dated as of May 23, 1996 between FRD and the Bank of New York, as Trustee (the "FRD
Indenture") (incorporated by reference to Exhibit 4.1 to the FRD Form S-l/S-4).
*4.15 Form of First Supplemental Indenture to the FRD Indenture dated as of August 23, 1996 (incorporated
by reference to Exhibit 4.1.1 to the FRD Form S-l/S-4).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- --------------- -------------------------------------------------------------------------------------------------------
<S> <C>
*4.16 Stock Purchase Agreement dated as of March 1, 1996 by and among FCI, Flagstar, FRD and FRI
(incorporated by reference to Exhibit 4.2 to the FRD Form S-l/S-4).
*4.17 Indenture relating to the New Senior Notes (including the form of security) dated as of January 7,
1998, between Advantica and First Trust National Association, as Trustee (incorporated by reference to
Exhibit 4.1 to Advantica's Form 8-K filed January 15, 1998 (the "1998 Form 8-K").
*4.18 Warrant Agreement (including the form of Warrant) (incorporated by reference to Exhibit 10.1 to the
Form 8-A).
*4.19 Third Amendment to the FRI-M Credit Agreement, dated as of March 17, 1997 (incorporated by
reference to Exhibit 4.2 to FCI's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
(the "1997 First Quarter Form 10-Q")).
**5.1 Opinion of Parker, Poe, Adams & Bernstein L.L.P regarding the legality of securities to be issued.
*10.1 Consent Order dated March 26, 1993 between the U.S. Department of Justice, Flagstar and Denny's,
Inc. (incorporated by reference to Exhibit 10.42 to the Registration Statement on Form S-2 (No.
33-49843) of Flagstar (the "Form S-2")).
*10.2 Fair Share Agreement dated July 1, 1993 between Flagstar and the NAACP (incorporated by reference
to Exhibit 10.43 to the Form S-2).
*10.3 Form of Agreement providing certain supplemental retirement benefits (incorporated by reference to
Exhibit 10.7 to FCI's 1992 Form 10-K, File No. 0-18051 (the "1992 Form 10-K")).
*10.4 Form of Supplemental Executive Retirement Plan Trust of Advantica (incorporated by reference to
Exhibit 10.8 to the 1992 Form 10-K).
*10.5 FCI's 1989 Non-Qualified Stock Option Plan, as adopted December 1, 1989 and amended through
December 13, 1996 (incorporated by reference to Exhibit 10.8 to the 1996 Form 10-K).
*10.6 FCI's 1990 Non-Qualified Stock Option Plan, as adopted July 31, 1990 and amended through April 28,
1992 (incorporated by reference to Exhibit 10.10 to the 1994 Form 10-K).
*10.7 Form of Non-Qualified Stock Option Award Agreement pursuant to FCI's 1990 Non-Qualified Stock
Option Plan (incorporated by reference to Exhibit 10.10 to the Form S-l Amendment).
*10.8 Form of Mortgage related to Secured Restaurants Trust transaction (incorporated by reference to
Exhibit 10.1 to the Form S-11).
*10.9 Mortgage Note in the amount of $521,993,982, made by Flagstar Enterprises, Inc. in favor of Spartan
Holdings, Inc., dated as of February 1, 1990, as amended and restated November 15, 1990
(incorporated by reference to Exhibit 10.12 to the 11.25% Debentures S-4).
*10.10 Mortgage Note in the amount of $210,077,402, made by Quincy's Restaurants, Inc. in favor of Spartan
Holdings, Inc., dated as of February 1, 1990, as amended and restated November 15, 1990
(incorporated by reference to Exhibit 10.13 to the 11.25% Debentures S-4).
*10.11 Loan Agreement between Secured Restaurants Trust and Spardee's Realty, Inc., dated as of November
1, 1990 (incorporated by reference to Exhibit 10.14 to the 11.25% Debentures S-4).
*10.12 Loan Agreement between Secured Restaurants Trust and Quincy's Realty, Inc., dated as of November
1, 1990 (incorporated by reference to Exhibit 10.15 to the 11.25% Debentures S-4).
*10.13 Insurance and Indemnity Agreement, dated as of November 1, 1990, related to Secured Restaurants
Trust transaction (incorporated by reference to Exhibit 10.16 to the 11.25% Debentures S-4).
*10.14 Intercreditor Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust
transaction (incorporated by reference to Exhibit 10.17 to the 11.25% Debentures S-4).
*10.15 Bank Intercreditor Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust
transaction (incorporated by reference to Exhibit 10.18 to the 11.25% Debentures S-4).
*10.16 Indemnification Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust
transaction (incorporated by reference to Exhibit 10.19 to the 11.25% Debentures S-4).
*10.17 Liquidity Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.20 to the 11.25% Debentures S-4).
*10.18 Financial Guaranty Insurance Policy, issued November 15, 1990, related to Secured Restaurants Trust
transaction (incorporated by reference to Exhibit 10.21 to the 11.25% Debentures S-4).
*10.19 Amended and Restated Lease between Quincy's Realty Inc. and Quincy's Restaurants, Inc., dated as of
November 1, 1990 (incorporated by reference to Exhibit 10.22 to the 11.25% Debentures S-4).
*10.20 Amended and Restated Lease between Spardee's Realty, Inc. and Spardee's Restaurants, Inc., dated as
of November 1, 1990 (incorporated by reference to Exhibit 10.23 to the 11.25% Debentures S-4).
*10.21 Collateral Assignment Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust
transaction (incorporated by reference to Exhibit 10.24 to the 11.25% Debentures S-4).
*10.22 Form of Assignment of Leases and Rents related to Secured Restaurants Trust transaction (incorporated
by reference to Exhibit 10.12 to the Form S-11).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------------- ---------------------------------------------------------------------------------------------------------
<S> <C>
*10.23 Spartan Guaranty, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.26 to the 11.25% Debentures S-4).
*10.24 Form of Hardee's License Agreement related to Secured Restaurants Trust transaction (incorporated by
reference to Exhibit 10.14 to the Form S-11).
*10.25 Stock Pledge Agreement among Flagstar Enterprises, Inc. and Secured Restaurants Trust, dated as of
November 1, 1990 (incorporated by reference to Exhibit 10.28 to the 11.25% Debentures S-4).
*10.26 Stock Pledge Agreement among Quincy's Restaurants, Inc. and Secured Restaurants Trust, dated as of
November 1, 1990 (incorporated by reference to Exhibit 10.29 to the 11.25% Debentures S-4).
*10.27 Management Agreement, dated as of November 1, 1990, related to the Secured Restaurants Trust
transaction (incorporated by reference to Exhibit 10.30 to the 11.25% Debentures S-4).
*10.28 Form of Collateral Assignment of Security Documents related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.17 to the Form S-11).
*10.29 Indemnity Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.32 to the 11.25% Debentures S-4).
*10.30 Employment Agreement, dated as of January 10, 1995, between FCI and James B. Adamson
(incorporated by reference to Exhibit 10.42 to the 1994 Form 10-K).
*10.31 Adamson Shareholder Agreement, dated as of January 10, 1995, between Associates and James B.
Adamson (incorporated by reference to Exhibit 10.43 to the 1994 Form 10-K).
*10.32 Amendment to Employment Agreement, dated as of February 27, 1995, between FCI and James B.
Adamson (incorporated by reference to Exhibit 10.44 to the 1994 Form 10-K).
*10.33 Form of Agreement providing certain severance benefits (incorporated by reference to Exhibit 10.48 to
the 1994 Form 10-K).
*10.34 Amended Consent Decree dated May 24, 1994 (incorporated by reference to Exhibit 10.50 to the 1994
Form 10-K).
*10.35 Consent Decree dated May 24, 1994 among certain named claimants, individually and on behalf of all
others similarly situated, Flagstar and Denny's, Inc. (incorporated by reference to Exhibit 10.51 to the
1994 Form 10-K).
*10.36 Second Amendment to Employment Agreement, dated December 31, 1996, between FCI and James B.
Adamson (incorporated by reference to Exhibit 10.47 to the 1996 Form 10-K).
*10.37 Form of Agreement providing certain retention incentives, severance and change of control benefits for
Company management (incorporated by reference to Exhibit 10.48 to the 1996 Form 10-K).
*10.38 Information Systems Management Agreement, dated February 22, 1996, between Flagstar and
Integrated Systems Solutions Corporation (incorporated by reference to Exhibit 10.49 to the 1996 Form
10-K).
*10.39 Employment Agreement, dated as of April 24, 1995, between Flagstar and C. Robert Campbell
(incorporated by reference to Exhibit 10.50 to the 1996 Form 10-K).
*10.40 Employment Agreement, dated as of April 22, 1996, between Flagstar and Craig S. Bushey
(incorporated by reference to Exhibit 10.51 to the 1996 Form 10-K).
*10.41 Employment Agreement, dated as of November 21, 1995, between Flagstar and John A. Romandetti
(incorporated by reference to Exhibit 10.52 to the 1996 Form 10-K).
*10.42 Employment Agreement, dated as of May 24, 1996, between Flagstar and Mark L. Shipman
(incorporated by reference to Exhibit 10.53 to the 1996 Form 10-K).
*10.43 Guaranty and Security Agreement, dated as of January 16, 1997, among Denny's, Inc., El Pollo Loco,
Inc., DFO, Inc., Flagstar Enterprises, Inc., Quincy's Restaurants, Inc. and James B. Adamson
(incorporated by reference to Exhibit 10.1 to the 1997 First Quarter Form 10-Q).
*10.44 Agreement Concerning Voting dated as of March 21, 1997 by and among Advantica, Magten Asset
Management Corporation, Loomis Sayles & Company and Moore Capital Management, Inc.
(incorporated by reference to Exhibit 0.00 to the 1998 Form 8-K).
*10.45 Supplement to Agreement Concerning Voting dated as of May 21, 1997 by and among Advantica,
Magten Asset Management Corporation, Loomis Sayles & Company and Moore Capital Management,
Inc. (incorporated by reference to Exhibit 0.00 to the 1998 Form 8-K).
*10.46 Credit Agreement, dated January 7, 1998, among Denny's, Inc., El Pollo Loco, Inc., Flagstar
Enterprises, Inc., Flagstar Systems, Inc. and Quincy's Restaurants, Inc., as borrowers, Advantica, as a
guarantor, the lenders named therein, and The Chase Manhattan Bank, as administrative agent
(incorporated by reference to Exhibit 10.1 to the 1998 Form 8-K).
*10.47 Revolving Credit and Guaranty Agreement, dated as of July 11, 1997, among Flagstar, as borrower,
FCI, Flagstar Holdings, Inc., TWS Funding, Inc. and each of the other direct or indirect subsidiaries of
Flagstar named therein, as guarantors, the lenders named therein, and The Chase Manhattan Bank, as
administrative agent (incorporated by reference to Exhibit 0.00 to the 1998 Form 8-K).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------------- -----------------------------------------------------------------------------------------------
<S> <C>
**10.48 Advantica Restaurant Group Stock Option Plan, as adopted January 28, 1998.
**10.49 Advantica Restaurant Group Officer Stock Option Plan, as adopted January 28, 1998.
**10.50 Advantica Restaurant Group Director Stock Option Plan, as adopted January 28, 1998.
*21 Subsidiaries of Advantica (incorporated by reference to Exhibit 21 to the 1996 Form 10-K).
**23.1 Consent of Parker, Poe, Adams & Bernstein L.L.P. (included in Exhibit 5.1 to this Registration
Statement).
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of KPMG Peat Marwick LLP.
24 Power of Attorney (contained on the signature page to this Registration Statement).
**99 Safe Harbor Under the Private Securities Litigation Reform Act of 1995.
</TABLE>
- ---------
* Certain of the exhibits to this Registration Statement on Form S-1,
indicated by an asterisk, are hereby incorporated by reference to other
documents on file with the Commission with which they are physically filed,
to be part hereof as of their respective dates.
** To be filed by amendment.
(b) Financial Statement Schedules:
No schedules are filed herewith because of the absence of conditions under
which they are required or because the information called for is in the
Consolidated Financial Statements or Notes thereto.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions in Item 14 above, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in such Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than payment
by the registrant of expenses incurred or paid by a director or officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in
such Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement; and
(iii) To include any material information with respect to the Plan of
Distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Spartanburg, State of
South Carolina, on February 6, 1998.
ADVANTICA RESTAURANT GROUP, INC.
By: /s/ RHONDA J. PARISH
-------------------------------------
Rhonda J. Parish
Senior Vice President, General Counsel and Secretary
Each person whose signature appears below constitutes and appoints Rhonda
J. Parish as his or her lawful attorney-in-fact and agent, acting alone, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any or all amendments
(including, post-effective Amendments) to this Registration Statement and to
file the same, with all exhibits thereto, and other documents, in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, acting alone, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, acting alone, or his or her substitute or
substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to
the requirements of the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------------- ----------------------------------------- -----------------
<S> <C> <C>
/s/ JAMES B. ADAMSON Director, Chairman, President and Chief February 6, 1998
----------------------------------
(James B. Adamson) Executive Officer
(Principal Executive Officer)
/s/ C. ROBERT CAMPBELL Executive Vice President and Chief February 6, 1998
----------------------------------
(C. Robert Campbell) Financial Officer (Principal Financial
and Accounting Officer)
/s/ ROBERT H. ALLEN Director February 6, 1998
----------------------------------
(Robert H. Allen)
/s/ RONALD E. BLAYLOCK Director February 6, 1998
----------------------------------
(Ronald E. Blaylock)
/s/ VERA KING FARRIS Director February 6, 1998
----------------------------------
(Vera King Farris)
/s/ JAMES J. GAFFNEY Director February 6, 1998
----------------------------------
(James J. Gaffney)
/s/ IRWIN N. GOLD Director February 6, 1998
----------------------------------
(Irwin N. Gold)
/s/ ROBERT E. MARKS Director February 6, 1998
----------------------------------
(Robert E. Marks)
/s/ CHARLES F. MORAN Director February 6, 1998
----------------------------------
(Charles F. Moran)
/s/ ELIZABETH A. SANDERS Director February 6, 1998
----------------------------------
(Elizabeth A. Sanders)
/s/ DONALD R. SHEPHERD Director February 6, 1998
----------------------------------
(Donald R. Shepherd)
</TABLE>
II-6
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement on Form S-1 of our
report on Advantica Restaurant Group, Inc. (formerly Flagstar Companies, Inc.)
dated February 13, 1997, appearing in the Prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
Greenville, South Carolina
February 6, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
FRD Acquisition Co.:
We consent to the use of our report dated February 9, 1996, except as to
note 8 which is as of May 23, 1996, with respect to the combined statements of
operations and net combined equity and cash flows of FRI-M, which includes
FRI-M Corporation, a wholly owned subsidiary of Family Restaurants, Inc., and
certain subsidiaries including those restaurants that make up the Family
Restaurant Division and including the FRD Commissary for the year ended
December 26, 1993 and the one month ended January 26, 1994 (Predecessor
Company), and the eleven months ended December 25, 1994 and the year ended
December 31, 1995 (Successor Company) in the registration statement on Form S-1
of Advantica Restaurant Group, Inc. dated February 6, 1998 and to the reference
to our firm under the heading "Experts" in the registration statement.
As discussed in note 1 to the combined financial statements, Family
Restaurants, Inc. commenced a Chapter 11 bankruptcy case on November 23, 1993,
which was confirmed by the United States Bankruptcy Court for the District of
Delaware on January 7, 1994. Accordingly, the combined financial statements
have been prepared in conformity with American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Reporting for Entities in
Reorganization Under the Bankruptcy Code."
KPMG PEAT MARWICK LLP
Orange County, California
February 6, 1998
