SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended April 1, 1998 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___________ to
__________
Commission file number 0-18051
ADVANTICA RESTAURANT GROUP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3487402
- ------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
203 East Main Street
Spartanburg, South Carolina 29319-9966
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(864) 597-8000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
As of May 15, 1998, 40,002,259 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Advantica Restaurant Group, Inc
Statements of Consolidated Operations
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Successor Company
---------------------------
Twelve Weeks Ended
April 1, 1998
---------------------------
(In thousands, except per share amounts)
Net company sales $ 417,916
Franchise and licensing revenue 18,793
-------------
Operating revenue 436,709
-------------
Operating expenses:
Product costs 118,704
Payroll and benefits 172,910
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 34,922
Depreciation and amortization of property 21,924
Amortization of other intangibles 3,778
Utilities expense 18,922
Other 79,098
-------------
450,258
-------------
Operating (loss) income (13,549)
Other charges (credits):
Interest and debt expense, net (contractual interest, net, for the one
week ended January 7, 1998 is $4,795) 28,269
Other, net 762
-------------
(Loss) income before reorganization items and taxes (42,580)
Reorganization items ---
-------------
(Loss) income before taxes (42,580)
Provision for (benefit from) income taxes 500
--------------
(Loss) income from continuing operations (43,080)
Discontinued operations:
Reorganization items of discontinued operation, net of income tax
provision of $11,227 ---
Loss from operations of discontinued operation, net of applicable
income tax benefit of : 1998 -- $0; 1997 -- $ (192) ---
--------------
(Loss) income before extraordinary item (43,080)
Extraordinary item ---
--------------
Net (loss) income (43,080)
Dividends on preferred stock ---
--------------
Net (loss) income applicable to common shareholders $ (43,080)
==============
Per share amounts applicable to common shareholders:
Basic (loss) income per share:
(Loss) income from continuing operations $ (1.08)
(Loss) income from discontinued operations ---
Extraordinary item ---
--------------
Net (loss) income $ (1.08)
==============
Average outstanding and equivalent common shares 40,000
==============
Diluted (loss) income per share:
(Loss) income from continuing operations $ (1.08)
(Loss) income from discontinued operations ---
Extraordinary item ---
--------------
Net (loss) income $ (1.08)
==============
Average outstanding and equivalent common shares 40,000
==============
<CAPTION>
<S> <C>
Predecessor Company
-------------------------------------------
One Week Ended Quarter Ended
January 7, 1998 April 2, 1997
------------------ -----------------
(In thousands, except per share amounts)
Net company sales $ 35,530 $ 519,348
Franchise and licensing revenue 1,602 18,895
---------------- --------------
Operating revenue 37,132 538,243
---------------- --------------
Operating expenses:
Product costs 10,031 152,680
Payroll and benefits 15,134 214,414
Amortization of reorganization value in excess of amounts
allocable to identifiable assets --- ---
Depreciation and amortization of property 1,836 23,026
Amortization of other intangibles 24 2,531
Utilities expense 1,233 21,936
Other 300 103,510
----------------- --------------
28,558 518,097
----------------- --------------
Operating (loss) income 8,574 20,146
Other charges (credits):
Interest and debt expense, net (contractual interest, net, for the one
week ended January 7, 1998 is $4,795) 2,745 53,383
Other, net (74) 545
---------------- --------------
(Loss) income before reorganization items and taxes 5,903 (33,782)
Reorganization items (656,083) 4,006
---------------- --------------
(Loss) income before taxes 661,986 (37,788)
Provision for (benefit from) income taxes (17,547) 816
---------------- --------------
(Loss) income from continuing operations 679,533 (38,604)
Discontinued operations:
Reorganization items of discontinued operation, net of income tax
provision of $11,227 103,291
Loss from operations of discontinued operation, net of applicable
income tax benefit of : 1998 -- $0; 1997 -- $ (192) (751) (13,124)
---------------- -------------
(Loss) income before extraordinary item 782,073 (51,728)
Extraordinary item (612,845) ---
---------------- --------------
Net (loss) income 1,394,918 (51,728)
Dividends on preferred stock (273) (3,544)
---------------- -------------
Net (loss) income applicable to common shareholders $ 1,394,645 $ (55,272)
================= =============
Per share amounts applicable to common shareholders:
Basic (loss) income per share:
(Loss) income from continuing operations $ 16.01 $ ( 0.99)
(Loss) income from discontinued operations 2.42 ( 0.31)
Extraordinary item 14.44 ---
----------------- --------------
Net (loss) income $ 32.87 $ (1.30)
================= ==============
Average outstanding and equivalent common shares 42,434 42,434
================= ==============
Diluted (loss) income per share:
(Loss) income from continuing operations $ 12.33 $ ( 0.99)
(Loss) income from discontinued operations 1.86 ( 0.31)
Extraordinary item 11.11 ---
----------------- -------------
Net (loss) income $ 25.30 $ (1.30)
================= =============
Average outstanding and equivalent common shares 55,132 42,434
================= =============
</TABLE>
See accompanying notes
2
<PAGE>
Advantica Restaurant Group, Inc.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Successor Company Predecessor Company
April 1, 1998 December 31, 1997
--------------- ------------------
(In thousands)
Assets
Current Assets:
Cash and cash equivalents $ 228,262 $ 54,079
Receivables, less allowance for doubtful accounts of:
1998 -- $4,044; 1997 -- $4,177 12,301 12,920
Inventories 19,958 20,700
Net assets held for sale 33,766 242,479
Other 20,521 45,101
Restricted investments securing in-substance defeased debt 17,099 --
---------------- -------------
331,907 375,279
---------------- -------------
Property and equipment 791,346 1,354,889
Less accumulated depreciation 21,924 596,516
---------------- -------------
769,422 758,373
---------------- -------------
Other Assets:
Reorganization value in excess of amounts allocable to identifiable assets,
net of accumulated amortization of :
1998 -- $34,922 723,379 ---
Goodwill, net of accumulated amortization of: 1997 -- $8,061 --- 207,918
Other intangible assets, net of accumulated amortization of:
1998 -- $3,778; 1997 -- $1,376 232,487 14,897
Deferred financing costs, net 31,566 56,716
Other 24,933 25,885
Restricted investments securing in-substance defeased debt 184,614 ---
---------------- -------------
1,196,979 305,416
---------------- -------------
Total Assets $ 2,298,308 $ 1,439,068
================ =============
</TABLE>
See accompanying notes
3
<PAGE>
Advantica Restaurant Group, Inc.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Successor Company Predecessor Company
April 1, 1998 December 31, 1997
--------------- ------------------
(In thousands)
Liabilities
Current Liabilities:
Current maturities of notes and debentures $ 23,314 $ 37,572
Current maturities of capital lease obligations 19,347 19,657
Current maturities of in-substance defeased debt 12,548 --
Accounts payable 89,558 109,778
Accrued salaries and vacations 52,049 58,232
Accrued insurance 39,980 35,749
Accrued taxes 41,291 25,927
Accrued interest 32,100 15,487
Other 124,681 79,291
------------ -------------
434,868 381,693
------------ -------------
Long-Term Liabilities:
Notes and debentures, less current maturities 982,217 510,533
Capital lease obligations, less current maturities 83,453 87,703
In-substance defeased debt, less current maturities 186,389 --
Deferred income taxes 4,477 10,015
Liability for self-insured claims 55,541 54,669
Other noncurrent liabilities and deferred credits 177,116 144,505
------------ -------------
1,489,193 807,425
------------ -------------
Total liabilities not subject to compromise 1,924,061 1,189,118
Liabilities subject to compromise --- 1,612,400
------------ -------------
Total liabilities 1,924,061 2,801,518
------------ -------------
Shareholders' Equity (Deficit) 374,247 (1,362,450)
------------ ------------
Total Liabilities and Shareholders' Equity (Deficit) $ 2,298,308 $ 1,439,068
============ =============
</TABLE>
See accompanying notes
4
<PAGE>
Advantica Restaurant Group, Inc.
Statements of Consolidated Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Successor Company Predecessor Company
Twelve Weeks Ended One Week Ended Quarter Ended
April 1, 1998 January 7, 1998 April 2, 1997
--------------- ----------------- -------------
(In thousands)
Cash Flows from Operating Activities:
Net (loss) income $ (43,080) $ 1,394,918 $ (51,728)
Adjustments to reconcile net loss to cash flows from
operating activities:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 34,922 --- ---
Depreciation and amortization of property 21,924 1,836 23,026
Amortization of other intangible assets 3,778 24 2,531
Amortization of deferred financing costs 1,336 137 2,109
Amortization of deferred gains (3,146) (278) (3,289)
Deferred income tax provision (benefit) (278) (17,547) 286
Loss (gain) on disposition of assets 9 (7,653) (124)
Extraordinary gain --- (612,845) --
Noncash reorganization items --- (656,426) --
Equity in (income) loss from discontinued operation, net --- (102,540) 13,124
Other (2,092) (342) 608
Decrease (increase) in assets:
Receivables 6,027 (2,219) 3,485
Inventories 45 272 1,294
Other current assets (4,441) 2,319 6,234
Assets held for sale (5,354) (1,019) (3,730)
Other assets 22,702 1,488 (2,914)
Increase (decrease) in liabilities:
Accounts payable (15,441) (5,118) (37,154)
Accrued payroll and related (14,950) 6,177 (34)
Accrued taxes (3,931) (1,045) (2,397)
Other accrued liabilities 4,928 9,692 6,815
Other noncurrent liabilities and deferred credits 1,890 (1,226) 1,844
-------------- ------------- --------------
Net cash flows from (used in) operating activities 4,848 8,605 (40,014)
-------------- ------------- --------------
Cash Flows from Investing Activities:
Purchase of property (8,119) (1) (7,145)
Proceeds from disposition of property --- 7,255 6,985
(Advances to) receipts from discontinued operation (1,022) 687 (900)
Proceeds from sale of discontinued operation, net 379,457 --- ---
Purchase of investments securing in-substance defeased
debt (201,713) --- ---
Other, net (1,611) --- (31)
------------- -------------- --------------
Net cash flows from (used in) investing activities 166,992 7,941 (1,091)
-------------- -------------- --------------
</TABLE>
See accompanying notes
5
<PAGE>
Advantica Restaurant Group, Inc.
Statements of Consolidated Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Successor Company Predecessor Company
Twelve Weeks Ended One Week Ended Quarter Ended
April 1, 1998 January 7, 1998 April 2, 1997
--------------- -------------- --------------
(In thousands)
Cash Flows from Financing Activities:
Long-term debt payments $ (2,331) $ (6,901) $ (19,489)
Deferred financing costs --- (4,971) --
---------------- ---------------- ----------------
Net cash flows used in financing activities (2,331) (11,872) (19,489)
--------------- ---------------- ---------------
Increase (decrease) in cash and cash equivalents 169,509 4,674 (60,594)
Cash and Cash Equivalents at:
Beginning of period 58,753 54,079 92,369
---------------- ----------------- ----------------
End of period $ 228,262 $ 58,753 $ 31,775
================ ================= ================
</TABLE>
See accompanying notes
6
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 1, 1998
(UNAUDITED)
Note 1. General
Advantica Restaurant Group, Inc. (formerly Flagstar Companies, Inc.)
("Advantica" or, together with its subsidiaries including precedessors, the
"Company"), 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, Coco's, Carrows, El Pollo Loco and
Quincy's Family Steakhouse restaurant brands. On April 1, 1998 the Company
consummated the sale of Flagstar Enterprises, Inc. ("FEI"), the wholly-owned
subsidiary which operated Hardee's restaurants under licenses from Hardee's Food
Systems ("HFS") (See Note 5).
The consolidated financial statements of Advantica and its subsidiaries included
herein are unaudited and include all adjustments management believes are
necessary for a fair presentation of the results of operations for such interim
periods. All such adjustments are of a normal and recurring nature. The interim
consolidated financial statements should be read in conjunction with the
Consolidated Financial Statements and notes thereto for the year ended December
31, 1997 and the related Management's Discussion and Analysis of Financial
Condition and Results of Operations, both of which are contained in the
Advantica Restaurant Group, Inc. 1997 Annual Report on Form 10-K (the "Advantica
10-K"). The results of operations for the twelve weeks ended April 1, 1998 and
the one week ended January 7, 1998 are not necessarily indicative of the results
for the entire fiscal year ending December 30, 1998.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Note 2. Reorganization
On January 7, 1998 (the "Effective Date"), Flagstar Companies, Inc. ("FCI") and
Flagstar Corporation ("Flagstar" and collectively with FCI, the "Debtors")
emerged from proceedings under Chapter 11 of Title 11 of the United States Code
(the "Bankruptcy Code") pursuant to FCI and Flagstar's Amended Joint Plan of
Reorganization dated as of November 7, 1997 (the "Plan"). On the Effective Date,
Flagstar, a wholly-owned subsidiary of FCI, merged with and into FCI, the
surviving corporation, and FCI changed its name to Advantica Restaurant Group,
Inc. The bankruptcy proceedings began when FCI, Flagstar and Flagstar Holdings,
Inc. ("Holdings") filed voluntary petitions for relief under the Bankruptcy Code
in the Bankruptcy Court for the District of South Carolina. Holdings filed its
petition on June 27, 1997, and Flagstar and FCI both filed their petitions on
July 11, 1997 (the "Petition Date"). FCI's operating subsidiaries, Denny's
Holdings, Inc., Spartan Holdings, Inc. and FRD Acquisition Co. (and their
respective subsidiaries) did not file bankruptcy petitions and were not parties
to the above mentioned Chapter 11 proceedings.
Material features of the Plan as it became effective as of January 7, 1998, are
as follows:
(a) On the Effective Date, Flagstar merged with and into FCI, the
surviving corporation, and FCI changed its name to Advantica Restaurant
Group, Inc.;
(b) The following securities of FCI and Flagstar were canceled,
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 due 2002, 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% Senior Subordinated
Debentures due 2004, 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");
7
<PAGE>
(c) Advantica had 100 million authorized shares of Common Stock (of which
40 million were issued and outstanding on the Effective Date) and 25
million authorized shares of preferred stock (none of which are currently
outstanding). Pursuant to the Plan, 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 million 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 million 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 2008 (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 each
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) Advantica refinanced its prior credit facilities by entering the
Credit Facility (as defined below).
On the Effective Date, the automatic stay imposed by the Bankruptcy Code was
terminated.
In connection with the reorganization, the Company realized a gain from the
extinguishment of certain indebtedness (See Note 4). This gain will not be
taxable since the gain results from a reorganization under the Bankruptcy Code.
However, the Company will be required, as of the beginning of its 1999 taxable
year, to reduce certain tax attributes related to Advantica, exclusive of its
operating subsidiaries, including (i) net operating loss carryforwards ("NOLS"),
(ii) certain tax credits and (iii) tax bases in assets in an amount equal to
such gain on extinguishment.
The reorganization of the Company on January 7, 1998 constituted an ownership
change under Section 382 of the Internal Revenue Code and therefore the use of
any of the Company's NOLS and tax credits generated prior to the ownership
change, that are not reduced pursuant to the provisions discussed above, will be
subject to an overall annual limitation of approximately $21 million for NOLS or
$7 million for tax credits.
The Company's financial statements as of December 31, 1997 have been presented
in conformity with the American Institute of Certified Public Accountants' (the
"AICPA") 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 8) are segregated in the Company's Consolidated Balance
Sheet as liabilities subject to compromise. These liabilities are recorded at
the amounts allowed as claims by the Bankruptcy Court in accordance with the
Plan. 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. The contractual interest
expense for the week ended January 7, 1998 is disclosed in the accompanying
Statements of Consolidated Operations.
Note 3. Fresh Start Reporting
As of the Effective Date, Advantica adopted fresh start reporting pursuant to
the guidance provided by SOP 90-7. Fresh start reporting assumes that a new
reporting entity has been created and requires the adjustment of assets and
liabilities to their fair values as of the Effective Date in conformity with the
procedures specified by Accounting Principles Board Opinion No. 16,
8
<PAGE>
"Business Combinations" ("APB 16"). In conjunction with the revaluation of
assets and liabilities, a reorganization value for the entity is determined
which generally approximates the fair value of the entity before considering
debt and approximates the amount a buyer would pay for the assets of the entity
after reorganization. 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 reported as
"reorganization value in excess of amount allocable to identifiable assets."
Advantica is amortizing such amount over a five-year period. All financial
statements for any period subsequent to the Effective Date are referred to as
"Successor Company," as they reflect the periods subsequent to the
implementation of fresh start reporting and are not comparable to the financial
statements for periods prior to the Effective Date.
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 17 companies in the restaurant industry
that offer products and services 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 also 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 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.
The total reorganization value of $1,729 million, the midpoint of the range of
$1,631 million and the $1,776 million adjusted to reflect an enterprise value of
FEI based on the terms of the stock purchase agreement related to the
disposition thereof, includes a value attributed to shareholders' equity of $417
million and long-term indebtedness contemplated by the Plan of $1,312 million.
The results of operations in the accompanying Statement of Operations for the
week ended January 7, 1998 reflect the results of operations prior to
Advantica's emergence from bankruptcy and the effects of fresh start reporting
adjustments. In this regard, the Statement of Operations reflects an
extraordinary gain on the discharge of certain debt as well as reorganization
items consisting primarily of gains and losses related to the adjustments of
assets and liabilities to fair value. The fair value of assets and liabilities
has been determined based on certain valuations and other studies which are not
yet complete. Because the current valuation is preliminary in nature, further
adjustments may be required but are not expected to be material.
9
<PAGE>
The effect of the Plan and the adoption of fresh start reporting on the
Company's January 7, 1998 balance sheet are as follows:
<TABLE>
<CAPTION>
<S> <C>
Predecessor Adjustments Adjustments Successor
Company for for Fresh Company
(In thousands) January 7, 1998 Reorganization Start Reporting January 7, 1998
--------------- -------------- --------------- ---------------
(a) (b)
Assets
Current Assets:
Cash and cash equivalents $ 58,753 $ 58,753
Receivables, net 15,247 $ (689) 14,558
Inventories 20,424 (425) 19,999
Net assets held for sale 288,039 110,027 398,066
Other 43,670 (496) 43,174
Property and equipment, net 719,152 64,501 783,653
Other Assets:
Goodwill, net 207,820 (207,820) ---
Other intangible assets, net 12,954 216,995 229,949
Deferred financing costs, net 58,590 $ (25,218) (61) 33,311
Other 22,416 (6,684) 15,732
Reorganization value in excess of amounts
allocable to identifiable assets --- 761,736 761,736
-------------- -------------- ---------------- --------------
$ 1,447,065 $ (25,218) $ 937,084 $ 2,358,931
============== ============== ================ ==============
Liabilities and Shareholders' Equity
Liabilities
Current Liabilities:
Current maturities of notes and debentures $ 30,913 $ 30,913
Current maturities of capital lease obligations 17,863 17,863
Accounts payable 106,678 106,678
Accrued salaries and vacations 62,648 $ 4,355 67,003
Accrued insurance 36,104 292 36,396
Accrued taxes 40,142 2,662 42,804
Accrued interest and dividends 16,652 16,652
Other 95,152 8,008 103,160
Long-Term Liabilities:
Notes and debentures, less current maturities 510,523 $ 592,005 72,388 1,174,916
Capital lease obligations, less current maturities 87,667 216 87,883
Deferred income taxes 5,097 5,097
Liability for self-insured claims 55,444 4,700 60,144
Other noncurrent liabilities and deferred credits 134,187 57,908 192,095
Liabilities subject to compromise 1,613,532 (1,613,532) ---
Shareholders' Equity (1,365,537) 996,309 786,555 417,327
----------- ------------- --------------- --------------
$ 1,447,065 $ (25,218) $ 937,084 $ 2,358,931
============ ============= =============== ==============
</TABLE>
(a) To record the transactions relative to the consummation of the Plan as
described in Note 2.
(b) To record (i) the increase in the value of net assets held for sale to
their fair value based on the terms of the stock purchase agreement, (ii)
the adjustment of property, net to estimated fair value, (iii) the
write-off of unamortized goodwill and establishment of estimated fair
value of other intangible assets (primarily franchise rights and
tradenames) (iv) the establishment of reorganization value in excess of
amounts allocable to identifiable assets, (v) the increase in value of
debt to reflect estimated fair value, (vi) the recognition of liabilities
associated with severance and other exit costs, and the adjustments to
self-insured claims and contingent liabilities reflecting a change in
methodology, and (vii) the adjustment
10
<PAGE>
to reflect the new value of common shareholders' equity based on
reorganization value, which was determined by estimating the fair value
of the Company.
Note 4. Extraordinary Gain
The implementation of the Plan resulted in the exchange of the Senior
Subordinated Debentures and the 10% Convertible Debentures for 40 million shares
of Common Stock and Warrants to purchase 4 million shares of Common Stock. The
difference between the carrying value of such debt (including principal, accrued
interest and deferred financing costs of $946.7 million, $74.9 million and $25.6
million, respectively) and the fair value of the Common Stock and Warrants
resulted in a gain on debt extinguishment of $612.8 million which was recorded
as an extraordinary item.
Note 5. Disposition of Flagstar Enterprises, Inc.
On April 1, 1998 (the "Disposition Date"), the Company completed the sale to CKE
Restaurants, Inc. ("CKE") of the stock of FEI, which operated the Company's
Hardee's restaurants under licenses from HFS, a wholly-owned subsidiary of CKE,
for $427 million, which includes the assumption by CKE of $46 million of capital
leases. Approximately $173.1 million of the proceeds (together with $28.6
million already on deposit with respect to certain Mortgage Financings as
defined below) was applied to in-substance defease the 10.25% Guaranteed Secured
Bonds due 2000 (the "Mortgage Financings") of Spardee's Realty, Inc., a
wholly-owned subsidiary of FEI, and Quincy's Realty, Inc., a wholly-owned
subsidiary of Quincy's Restaurants, Inc., with a book value of $198.9 million
plus accrued interest of $6.9 million at April 1, 1998. Such Mortgage Financings
were collateralized by certain assets of Spardee's Realty, Inc. and Quincy's
Realty, Inc. The Company replaced such collateral through the purchase of a
portfolio of United States Government and AAA rated investment securities which
were deposited with the collateral agent with respect to such Mortgage
Financings to satisfy principal and interest payments under such Mortgage
Financings through the stated maturity date in the year 2000. Such investments
are reflected in the Consolidated Balance Sheet under the caption "Restricted
investments securing in-substance defeased debt." The Mortgage Financings are
reflected in the Consolidated Balance Sheet under the caption "In-substance
defeased debt."
The Statements of Consolidated Operations and Cash Flows presented herein have
been restated for the 1997 period to reflect FEI as a discontinued operation in
accordance with Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." Revenue and operating income of the discontinued operation for
the week ended January 7, 1998 and the quarter ended April 2, 1997 were $9.1
million and $0.1 million, and $137.5 million and $2.9 million, respectively.
As a result of the adoption of fresh start reporting, as of the Effective Date
the net assets of FEI were adjusted to fair value less estimated costs of
disposal based on the terms of the stock purchase agreement. The net gain
resulting from this adjustment is reflected as "Reorganization items of
discontinued operation" in the Statements of Consolidated Operations. As a
result of this adjustment, no gain or loss on disposition is reflected in the
twelve weeks ended April 1, 1998. Additionally, the operating results of FEI
subsequent to January 7, 1998 and through the disposition date were reflected as
an adjustment to "Net assets held for sale" prior to the disposition. The
adjustment to "Net assets held for sale" as a result of the net loss of FEI for
the twelve weeks ended April 1, 1998 was ($2.0) million. Revenue and operating
income of FEI for the twelve weeks ended April 1, 1998 were $116.2 million and
$5.7 million, respectively.
The Company has allocated to the discontinued operation a pro-rata portion of
interest and debt expense based on a ratio of the net assets of the discontinued
operation to the Company's consolidated net assets as of the 1989 acquisition
date of Flagstar Corporation by Flagstar Companies, Inc. for periods prior to
January 7, 1998 and based on a ratio of the net assets of the discontinued
operation to the Company's net assets after the adoption of fresh start
reporting for periods subsequent to January 7, 1998. Such allocated interest
expense (which is in addition to interest expense incurred by FEI) included in
FEI's operating results for the twelve weeks ended April 1, 1998, the week ended
January 7, 1998 and the quarter ended April 2, 1997 are $3.1 million, $0.4
million and $10.6 million, respectively.
11
<PAGE>
Note 6. Net Assets Held for Sale
Net assets held for sale at April 1, 1998 represents 88 Quincy's units which
were identified for sale or closure in conjunction with the 1997 restructuring
plan. The assets are recorded at their estimated fair value less estimated costs
to sell.
Note 7. Reorganization Items
Reorganization items included in the accompanying Statements of Consolidated
Operations consist of the following items:
<TABLE>
<CAPTION>
<S> <C>
Week Ended
January 7, 1998
---------------
(In thousands)
Gains and losses related to adjustments of assets and liabilities
to fair value $ (676,092)
Professional fees and other 8,809
Severance and other exit costs 11,200
--------------
$ (656,083)
=============
</TABLE>
Note 8. Liabilities Subject To Compromise
Liabilities subject to compromise are obligations which were outstanding on the
Petition Date and were subject to compromise under the terms of the Plan.
<TABLE>
<CAPTION>
<S> <C>
December 31, 1997
-----------------
(In thousands)
10 3/4% Senior Notes due September 15, 2001, interest payable semi-annually $ 270,000
10 7/8% Senior Notes due December 1, 2002, interest payable semi-annually 280,025
11.25% Senior Subordinated Debentures due November 1, 2004, interest payable semi-annually 722,411
11 3/8% Senor Subordinated Debentures due September 15, 2003, interest payable semi-annually 125,000
10% Convertible Junior Subordinated Debentures due 2014, interest payable semi-annually;
convertible into Company Old Common Stock any time prior to maturity at $24.00 per share 99,259
Accrued interest 115,705
-------------
Total liabilities subject to compromise $ 1,612,400
===========
</TABLE>
Note 9. The Advantica Credit Facility
On the Effective Date the Company entered into a credit agreement with The Chase
Manhattan Bank ("Chase") and other lenders named therein providing the Company
(excluding FRD Acquisition Co.) with a $200 million senior secured revolving
credit facility (the "Credit Facility"). In connection with the closing of the
sale of FEI, the Credit Facility was amended to accommodate the FEI sale
transaction and corresponding in-substance defeasance. In addition, the Credit
Facility was amended to provide the Company flexibility to reinvest the residual
FEI sale proceeds through additional capital expenditures and /or strategic
acquisitions, as well as to modify certain other covenants and financial tests
affected by the FEI sale transaction. The commitments under the Credit Facility
were not reduced as a result of the FEI sale.
12
<PAGE>
Note 10. Earnings Per Share Applicable to Common Shareholders
The following table sets forth the computation of basic and diluted loss per
share.
<TABLE>
<CAPTION>
<S> <C>
For the Week ended January 7, 1998
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Income before discontinued operations and extraordinary item $ 679,533
Less: Preferred stock dividends ( 273)
------------
BASIC EPS
Income available to common shareholders 679,260 42,434 $ 16.01
============
EFFECT OF DILUTIVE SECURITIES
$2.25 Series A Cumulative Convertible Exchangeable Preferred Stock 273 8,562
10 % Convertible Subordinated Debentures --- 4,136
--------------- ---------
DILUTED EPS
Income available to common shareholders plus assumed conversions $ 679,533 55,132 $ 12.33
========== ========= ============
</TABLE>
Options and warrants to purchase shares of common stock were outstanding during
the week ended January 7, 1998 but were not included in the computation of
diluted earnings per share because the related exercise prices were greater than
the average market price of the common shares. The options and warrants were
effectively terminated as a result of the reorganization of the Company. See
Note 2.
Note 11. New Accounting Standards
In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"),
which provides guidance on accounting for the costs of computer software
developed or obtained for internal use. SOP 98-1 requires capitalization of
external and internal direct costs of developing or obtaining internal-use
software as a long-lived asset and also requires training costs included in the
purchase price of computer software and costs associated with research and
development to be expensed as incurred. In addition, in the second quarter of
1998, the AICPA is expected to issue a statement of position which provides
additional guidance on the financial reporting of start-up costs, requiring
costs of start-up activities to be expensed as incurred. Both statements of
position are effective for fiscal years beginning after December 15, 1997.
In accordance with the adoption of fresh start reporting upon emergence from
bankruptcy (see Note 3), the Company adopted both statements of position as of
January 7, 1998. The adoption of the statement of position relative to start-up
costs at January 7, 1998 resulted in the write-off of previously capitalized
pre-opening costs totaling $0.6 million. Subsequent to the Effective Date,
pre-opening costs are being expensed as incurred. The adoption of SOP 98-1 at
January 7, 1998 resulted in the write-off of previously capitalized direct costs
of obtaining computer software associated with research and development totaling
$3.4 million.
Subsequent to the Effective Date, similar costs are being expensed as incurred.
Effective January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting of Comprehensive Income"
("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components in the financial statements.
Comprehensive income is comprised of net income and other comprehensive income
items, such as revenues, expenses, gains and losses that under generally
accepted accounting principles are excluded from net income and reflected as a
component of equity. For the twelve weeks ended April 1, 1998, the one week
ended January 7, 1998 and the quarter ended April 2, 1997, there were no
differences between net income and comprehensive income.
13
<PAGE>
Note 12. 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 13-week quarters
during the year with each quarter ending on a Wednesday. As a result of the
timing of this change, the first quarter of 1997 includes more than 13 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 Quincy's
includes an additional day. The 1998 comparable period consisted of 13 weeks.
Note 13. Subsequent Event
On May 13, 1998 the Company entered into a definitive agreement for the sale of
stock of Quincy's Restaurants, Inc. ("Quincy's"), a wholly-owned subsidiary
which operates its Quincy's Family Steakhouse division. As contemplated by such
agreement, the Company would receive $81.5 million in cash in exchange for all
of the outstanding stock of Quincy's. In addition, the purchaser would assume
$4.2 million in capital leases. The transaction is expected to be completed
during the second quarter of 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to highlight significant changes in
financial position as of April 1, 1998 and the results of operations for the
twelve weeks ended April 1, 1998 and one week ended January 7, 1998 as compared
to the quarter ended April 2, 1997. For purposes of providing a meaningful
comparison of the Company's quarterly operating performance, the following
discussion and presentation of the results of operations for the twelve weeks
ended April 1, 1998 and the one week ended January 7, 1998 will be combined and
referred to as the quarter ended April 1, 1998. Where appropriate, the impact of
the adoption of fresh start reporting on the results of operations during this
period will be separately disclosed.
The forward-looking statements included in Management's Discussion and Analysis
of Financial Condition and Results of Operations, which reflect management's
best judgment based on factors currently known, involve risks, uncertainties,
and other factors which may cause the actual performance of Advantica Restaurant
Group, Inc., its subsidiaries, and underlying concepts to be materially
different from the performance indicated or implied by such statements. Such
factors include, among others: competitive pressures from within the restaurant
industry; the level of success of the Company's operating initiatives and
advertising and promotional efforts, including the initiatives and efforts
specifically mentioned herein; adverse publicity; changes in business strategy
or development plans; terms and availability of capital; regional weather
conditions; overall changes in the general economy, particularly at the retail
level; and other factors included in the discussion below, or in the
Management's Discussion and Analysis and in Exhibit 99 to the Company's Annual
Report on Form 10-K for the period ended December 31, 1997.
Results of Operations
Quarter Ended April 1, 1998 Compared to Quarter Ended April 2, 1997
The Company's CONSOLIDATED REVENUE for the first quarter of 1998 decreased by
$64.4 million (12.0%) as compared with the 1997 comparable quarter. The revenue
decrease is partially attributable to an estimated $32.6 million impact due to
fewer reporting days in the 1998 quarter versus the 1997 comparable period
because of the change in the Company's fiscal year end in 1997. Excluding the
impact of fewer days in the 1998 reporting period, revenue for the 1998 quarter
decreased $31.8 million compared to the prior year quarter. This decrease is
principally because of a 108-unit decrease in Company-owned units (excluding the
impact of the FEI disposition) and includes a net 14 unit decrease at Denny's
associated primarily with the sale of units to franchisees and a 71 unit
decrease at Quincy's related to the restructuring plan adopted in the fourth
quarter of 1997. Additionally, the Company's concepts experienced declines in
comparable store sales. The decrease in Company sales is slightly offset by a
$1.5 million (8.0%) increase in franchise and licensing revenue attributed to a
107-unit increase in franchised and licensed units.
14
<PAGE>
CONSOLIDATED OPERATING EXPENSES for the first quarter of 1998 decreased by $39.3
million compared to the 1997 quarter. The comparability of 1998 and 1997
operating results is significantly affected by the impact of the adoption of
fresh start reporting as of January 7, 1998. Specifically, the amortization of
reorganization value in excess of amounts allocable to identifiable assets,
which is over a five-year period, totaled $34.9 million for the twelve weeks
ended April 1, 1998. In addition, the adjustment of property and equipment and
other intangible assets to fair value as a result of the adoption of fresh start
reporting combined with the impairment write-down of certain property and
equipment at December 31, 1997, resulted in an estimated net increase in
amortization and depreciation of approximately $3.6 million. Excluding the
effect of the estimated impact of fresh start reporting, operating expenses
decreased $77.8 million (15.0%), primarily reflecting the effect of fewer
reporting days than in the prior year comparable quarter, an increase of
$7.6 million in gains on sales of units which are reflected as a credit to
operating expenses, food cost controls and the 108-unit decrease in
Company-owned restaurants.
Excluding the impact of the adoption of fresh start reporting as discussed
above, CONSOLIDATED OPERATING INCOME for the first quarter of 1998 increased by
$13.4 million compared to the 1997 comparable quarter as a result of the factors
noted above.
CONSOLIDATED INTEREST AND DEBT EXPENSE, NET totaled $31.0 million during the
first quarter of 1998 as compared with $53.4 million during the comparable 1997
period. The decrease is primarily due to the significant reduction of debt
resulting from the implementation of the Plan which became effective January 7,
1998 and the lower effective yield on Company debt resulting from the
revaluation of such debt to fair value in accordance with fresh start reporting.
REORGANIZATION ITEMS include professional fees and other expenditures incurred
by the Company in conjunction with the reorganization as well as the impact of
adjusting assets and liabilities to fair value in accordance with SOP 90-7 as
discussed in Note 3 to the consolidated financial statements included herein.
The PROVISION FOR (BENEFIT FROM) income taxes from continuing operations for the
twelve-week 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 1.2% for the twelve weeks ended April 1, 1998 compared to a
provision for the 1997 quarter reflecting an approximate rate of 2.2%. The
benefit from income taxes from continuing operations for the one week period of
approximately $17.5 million includes adjustments of approximately $12.5 million
of various tax accruals. The remaining benefit of approximately $5.0 million
relates to the tax effect of the revaluation of certain Company assets and
liabilities in accordance with fresh start accounting.
The EXTRAORDINARY GAIN is due to the implementation of the Plan which resulted
in the exchange of the Senior Subordinated Debentures and the 10% Convertible
Debentures for 40 million shares of Common Stock and Warrants to purchase 4
million shares of Common Stock. The difference between the carrying value of
such debt (including principal, accrued interest and deferred financing costs)
and the fair value of the Common Stock and Warrants resulted in a gain on debt
extinguishment of $612.8 million which was recorded as an extraordinary item.
The Statements of Consolidated Operations and Cash Flows presented herein have
been restated for the 1997 period to reflect FEI as a DISCONTINUED OPERATION in
accordance with Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." Revenue and operating income of the discontinued operation for
the week ended January 7, 1998 and the quarter ended April 2, 1997 were $9.1
million and $0.1 million, and $137.5 million and $2.9 million, respectively. The
operating results of FEI subsequent to January 7, 1998 and through the
disposition date were reflected as an adjustment to "Net assets held for sale"
prior to the disposition. The adjustment to "Net assets held for sale" as a
result of the net loss of FEI for the twelve weeks ended April 1, 1998 was
($2.0) million. Revenue and operating income of FEI for the twelve weeks ended
April 1, 1998 were $116.2 million and $5.7 million, respectively.
NET INCOME was $1,351.8 million in the first quarter of 1998 as compared to a
net loss of ($51.7) million for the prior year quarter primarily as a result of
the adoption of fresh start reporting and the extraordinary gain discussed
above.
15
<PAGE>
EBITDA, as set forth below, is defined by the Company as operating income before
depreciation, amortization and charges for restructuring and impairment and is a
key internal measure used to evaluate the amount of cash flow available for debt
repayment and funding of additional investments. EBITDA is not a measure defined
by generally accepted accounting principles and should not be considered as an
alternative to net income or cash flow data prepared in accordance with
generally accepted accounting principles, or as a measure of a company's
profitability or liquidity. The Company's measure of EBITDA may not be
comparable to similarly titled measures reported by other companies.
<TABLE>
<CAPTION>
<S> <C>
Quarter Ended
April 1, 1998 April 2, 1997 (a)
--------------- ------------------
(in millions)
Denny's $ 44.3 $ 36.1
Coco's 8.1 8.4
Carrows 4.4 6.2
El Pollo Loco 5.0 4.3
Quincy's 3.2 3.3
Corporate and other (7.3) (12.6)
--------------- ---------------
$ 57.7 $ 45.7
============== ===============
</TABLE>
(a) Excludes the EBITDA of Hardee's of $12.0 million for comparability purposes.
16
<PAGE>
Restaurant Operations:
The table below summarizes restaurant unit activity for the quarter ended April
1, 1998.
<TABLE>
<CAPTION>
<S> <C>
Ending Units
Units Units Sold/ Unit Ending Units Ending Units
12/31/97 Opened Closed Conversions 4/1/98 4/2/97
-------- ------ ------ ----------- ------ ------
Denny's
Company-owned units 894 2 (1) (18) 877 891
Franchised units(a) 740 12 (7) 18 763 698(a)
Licensed units (a) 18 -- -- -- 18 21(a)
------- ------ ------ ------ ------ -------
1,652 14 (8) -- 1,658 1,610
Coco's
Company-owned units 178 -- (1) (1) 176 184
Franchised units 17 -- -- 1 18 5
Licensed units 298 1 (4) -- 295 281
------- ----- ------ ----- ----- ------
493 1 (5) -- 489 470
Carrows
Company-owned units 140 -- -- (1) 139 158
Franchised units 14(b) 1 -- 1 16(b) 1
------- ------ ----- ----- ------ --------
154 1 -- -- 155 159
El Pollo Loco
Company-owned units 98 1 -- -- 99 95
Franchised units 145 4 (1) -- 148 139
Licensed units 4 -- -- -- 4 10
------- ------ ----- ----- ------ --------
247 5 (1) -- 251 244
Quincy's 180(b) -- (52) -- 128(b) 199
Hardee's 557 -- (557)(c) -- -- 580
------- ----- ----- ----- ------ ------
3,283 21 (623) -- 2,681 3,262
======= ===== ===== ===== ====== =====
</TABLE>
(a) Certain units have been reclassified to conform to the 1998
presentation.
(b) Unit count includes one Quincy's unit converted to a Carrows that is
operated by Quincy's as a Carrows franchise. The unit's operating
results are included in Quincy's operating results. Intercompany
franchise fees are eliminated in consolidation.
(c) Reflects the consummation of the sale of stock of FEI to CKE on April
1, 1998.
17
<PAGE>
Denny's
- -------
<TABLE>
<CAPTION>
<S> <C>
Quarter Ended %
April 1, 1998 April 2, 1997 Increase/(Decrease)
------------- ------------- -------------------
($ in millions, except average unit and comparable store data)
U.S. systemwide sales $ 453.7 $ 486.4 (6.7)
============= ===========
Net company sales $ 265.7 $ 300.1 (11.5)
Franchise and licensing revenue 15.5 14.9 4.0
------------- -----------
Total revenue 281.2 315.0 (10.7)
------------- -----------
Operating expenses:
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 18.2 -- NM
Other 253.4 291.0 (12.9)
------------- -----------
Total operating expenses 271.6 291.0 (6.7)
------------- -----------
Operating income $ 9.6 $ 24.0 (60.0)
============== ===========
Average unit sales
Company-owned $ 302,900 $ 336,300 (9.9)
Franchise $ 253,500 $ 276,300 (8.3)
Comparable store data (Company-owned)
Comparable store sales increase (decrease) (2.9%) (2.4%)
Average guest check $5.74 $5.39 6.5
</TABLE>
NM = Not Meaningful
Denny's NET COMPANY SALES decreased by $34.4 million (11.5%) during the 1998
quarter as compared with the prior year's comparable quarter. The decrease
primarily reflects a $21.7 million impact resulting from five fewer reporting
days in the first quarter of 1998 in comparison to the prior year quarter, a
$3.0 million impact associated with 14 fewer Company-owned units and a $9.0
million impact related to the decrease in comparable store sales. The decrease
in Company-owned units is consistent with the Company's strategy of focusing on
growth through franchising and the sale of Company-owned units to franchisees to
stimulate such growth, along with selected closures where continued Company
operation is considered uneconomical. The decline in the comparable store sales
was driven by lower guest counts, partially offset by an increase in the average
guest check. The average guest check increase resulted from menu price increases
initiated to keep pace with minimum wage and other cost increases and from
successful promotions of higher-priced menu items. FRANCHISE AND LICENSING
REVENUE increased by $0.6 million (4.0%), reflecting 65 additional franchised
units at the 1998 quarter end compared to the 1997 quarter end, a direct result
of 1997 franchising efforts which resulted in the opening of 77 Denny's
franchise units, a record number for the Company.
Denny's OPERATING EXPENSES decreased by $19.4 million compared to the prior year
quarter. The comparability of 1998 and 1997 operating results is significantly
affected by the impact of the adoption of fresh start reporting as of January 7,
1998. Specifically, the amortization of reorganization value in excess of
amounts allocable to identifiable assets, which is over a five-year period,
totaled $18.2 million for the twelve weeks ended April 1, 1998. In addition, the
adjustment of property and equipment and other intangible assets to fair value
resulted in an estimated increase in amortization and depreciation of
approximately $4.8 million. Excluding the effect of fresh start reporting,
operating expenses decreased by $42.4 million (14.6%), reflecting the effect of
five fewer reporting days, the impact on expenses of lower revenues and an
increase of $7.6 million in gains on sales of units in comparison to the 1997
quarter. Additionally, Denny's operating expenses for the quarter have been
reduced by $3.0 million to reflect a nonrecurring real estate transaction,
whereby Denny's has agreed to the inclusion of a Company-owned unit in a
redevelopment project. Excluding the impact of the gains, the nonrecurring
transaction and fresh start accounting, operating expenses were flat as a
percent of sales compared to the 1997 quarter because of improved margins on
menu items, offset by increased labor costs primarily related to the minimum
wage increases.
18
<PAGE>
Excluding the impact of fresh start reporting, Denny's OPERATING INCOME for the
1998 quarter increased by $8.6 million (35.8%) compared to the prior year
quarter as a result of the factors noted above.
<TABLE>
<CAPTION>
<S> <C>
Coco's
- ------
Quarter Ended %
April 1, 1998 April 2, 1997 Increase/(Decrease)
------------- ------------- -------------------
($ in millions, except average unit and comparable store data)
U.S. systemwide sales $ 69.9 $ 73.1 (4.4)
====== ======
Net company sales $ 64.3 $ 70.8 (9.2)
Franchise and licensing revenue 1.0 0.7 42.9
-------------- ---------------
Total revenue 65.3 71.5 (8.7)
-------------- --------------
Operating expenses:
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 5.2 --- NM
Other 60.9 67.2 (9.4)
-------------- --------------
Total operating expenses 66.1 67.2 (1.6)
-------------- --------------
Operating (loss) income $ (0.8) $ 4.3 NM
============== ==============
Average unit sales
Company-owned $ 364,900 $ 385,600 (5.4)
Franchised $ 327,100 $ 441,700 (25.9)
Comparable store data (Company-owned)
Comparable store sales decrease (0.2%) (0.8%)
Average guest check $6.99 $6.60 5.9
</TABLE>
NM = Not Meaningful
Coco's NET COMPANY SALES for the first quarter ended April 1, 1998 decreased
$6.5 million (9.2%) as compared to the prior year comparable quarter. This
decrease reflects a $4.8 million impact due to six fewer reporting days in the
first quarter of 1998 compared to the prior year quarter. The remaining decrease
of $1.7 million reflects an eight-unit decrease in the number of Company-owned
restaurants as well as a slight decrease in comparable store sales. The decrease
in comparable store sales reflects a decrease in customer traffic, largely
offset by an increase in average guest check. The increase in average guest
check resulted from menu price increases instituted in August 1997 and February
1998 in response to minimum wage increases. FRANCHISE AND LICENSING REVENUE
increased by $0.3 million (42.9%) for the first quarter of 1998 as compared to
the first quarter of 1997, reflecting the addition of 13 domestic franchised
units and the net increase of 14 foreign licensed units over the prior year
quarter. The increase in the number of franchised units also explains the large
variance in franchise average unit sales as the calculation for the prior year
reflected only a small number of franchised units (five units).
Coco's OPERATING EXPENSES for the first quarter of 1998 decreased by $1.1
million compared to the prior year quarter. The comparability of 1998 to 1997
operating results is significantly affected by the impact of the adoption of
fresh start reporting as of January 7, 1998. Specifically, the amortization of
reorganization value in excess of amounts allocable to identifiable assets,
which is over a five-year period, totaled $5.2 million for the twelve weeks
ending April 1, 1998. The increase in amortization related to the reorganization
value is offset by the effect of the adjustment of property and equipment and
other intangible assets to fair value, which resulted in an estimated decrease
in amortization and depreciation of approximately $0.3 million. Excluding the
effect of the estimated impact of fresh start reporting, operating expenses
decreased $6.0 million (8.9%), reflecting the effect of six fewer reporting days
than the prior year comparable quarter, an eight-unit decrease in Company-owned
restaurants and management's continued focus on product cost controls.
19
<PAGE>
Excluding the impact of the adoption of fresh start reporting, OPERATING INCOME
for the first quarter of 1998 decreased $0.2 million from the prior year
comparable quarter as a result of the factors noted above.
Carrows
- -------
<TABLE>
<CAPTION>
<S> <C>
Quarter Ended %
April 1, 1998 April 2, 1997 Increase/(Decrease)
------------- ------------- -------------------
($ in millions, except average unit and comparable store data)
U.S. systemwide sales $ 50.2 $ 55.6 (9.7)
=============== ==============
Net company sales $ 46.0 $ 55.6 (17.3)
Franchise and licensing revenue 0.3 --- NM
--------------- --------------
Total revenue 46.3 55.6 (16.7)
--------------- --------------
Operating expenses:
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 4.1 --- NM
Other 44.8 52.8 (15.2)
--------------- --------------
Total operating expenses 48.9 52.8 (7.4)
--------------- --------------
Operating (loss) income $ (2.6) $ 2.8 NM
============== ==============
Average unit sales
Company-owned $ 327,900 $ 349,300 (6.1)
Franchise $ 284,200 NM
Comparable store data (Company-owned)
Comparable store sales increase (decrease) (1.4%) (0.8%)
Average guest check $6.79 $6.37 6.6
</TABLE>
NM = Not Meaningful
Carrows' NET COMPANY SALES for the quarter ended April 1, 1998 decreased $9.6
million (17.3%) as compared to the prior year comparable quarter. This decrease
reflects a $3.8 million impact due to six fewer reporting days in the first
quarter of 1998 compared to the prior year quarter. The additional decrease of
$5.8 million reflects a 19-unit decrease in the number of Company-owned
restaurants, 12 of which were converted to franchise units, and a decrease in
comparable store sales. The decrease in comparable sales reflects a decrease in
customer traffic, partially offset by an increase in average guest check. The
increase in average guest check resulted from menu price increases instituted in
July 1997 and February 1998 in response to minimum wage increases. FRANCHISE AND
LICENSING REVENUE was $0.3 million for the first quarter of 1998, reflecting the
addition of 15 franchised units over the prior year quarter.
Carrows' OPERATING EXPENSES for the first quarter of 1998 decreased by $3.9
million compared to the prior year quarter. The comparability of 1998 and 1997
operating results is significantly affected by the impact of the adoption of
fresh start reporting as of January 7, 1998. Specifically, the amortization of
reorganization value in excess of amounts allocable to identifiable assets,
which is over a five-year period, totaled $4.1 million for the twelve weeks
ended April 1, 1998. The increase in amortization related to the reorganization
value is offset by the effect of the adjustment of property and equipment and
other intangible assets to fair value, which resulted in an estimated decrease
in amortization and depreciation of approximately $0.3 million. Excluding the
effect of the estimated impact of fresh start reporting, operating expenses
decreased $7.7 million (14.6%), reflecting the effect of six fewer reporting
days than in the prior year comparable quarter, a 19-unit decrease in
Company-owned restaurants and management's continued focus on product cost
controls.
Excluding the impact of the adoption of fresh start reporting, OPERATING INCOME
for the first quarter of 1998 decreased $1.6 million from the prior year
comparable quarter as a result of the factors noted above.
20
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
El Pollo Loco
- -------------
Quarter Ended %
April 1, 1998 April 2, 1997 Increase/(Decrease)
------------- ------------- -------------------
($ in millions, except average unit and comparable store data)
U.S. systemwide sales $ 56.7 $ 56.2 0.9
================= ================
Net company sales $ 27.7 $ 28.6 (3.1)
Franchise and licensing revenue 3.6 3.4 5.9
----------------- ----------------
Total revenue 31.3 32.0 (2.2)
----------------- ----------------
Operating expenses:
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 2.8 --- NM
Other 28.0 29.1 (3.8)
----------------- ----------------
Total operating expenses 30.8 29.1 5.8
----------------- ----------------
Operating income $ 0.5 $ 2.9 (82.8)
================== ================
Average unit sales
Company-owned $ 281,200 $ 300,000 (6.3)
Franchise $ 202,700 $ 220,900 (8.2)
Comparable store data (Company-owned)
Comparable store sales increase (decrease) (1.6%) (3.6%)
Average guest check $6.82 $6.58 3.6
</TABLE>
NM = Not Meaningful
El Pollo Loco's NET COMPANY SALES decreased $0.9 million (3.1%) during the 1998
quarter as compared with the prior year comparable quarter. The decrease is
mainly attributable to a decline in comparable store sales which reflects lower
guest counts, due in part to adverse weather conditions on the West Coast where
the majority of El Pollo Loco's units are located. The lower guest count was
partially offset by an increase in the average guest check which resulted from
increased menu pricing implemented in response to minimum wage increases. The
effect of fewer reporting days in the current quarter compared to the prior
quarter was offset by the revenue attributed to the four-unit increase in the
number of Company-owned restaurants. FRANCHISE AND LICENSING REVENUE increased
by $0.2 million (5.9%) to $3.6 million, reflecting nine additional franchised
units in the 1998 quarter compared to the 1997 quarter end.
El Pollo Loco's OPERATING EXPENSES increased by $1.7 million compared to the
1997 quarter. The comparability of 1998 to 1997 operating results is
significantly affected by the impact of the adoption of fresh start reporting as
of January 7, 1998. Specifically, the amortization of reorganization value in
excess of amounts allocable to identifiable assets, which is over a five-year
period, totaled $2.8 million for the twelve weeks ended April 1, 1998. In
addition, the adjustment of property and equipment and other intangible assets
to fair value resulted in an estimated increase in amortization and depreciation
of approximately $0.5 million. Excluding the impact of fresh start accounting,
operating expenses were approximately $1.6 million (5.5%) favorable to the 1997
quarter due to fewer reporting days in the current quarter, higher margin menu
items and aggressive food cost controls. Labor, as a percent of sales, was flat
compared to prior year due to labor efficiencies, offset by the impact of the
minimum wage increases.
Excluding the impact of the adoption of fresh start reporting, El Pollo Loco's
OPERATING INCOME for the 1998 quarter increased by $0.9 million (31.0%) compared
to the prior year quarter as a result of the factors noted above.
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Quincy's
- --------
Quarter Ended %
April 1, 1998 April 2, 1997 Increase/(Decrease)
--------------- ---------------- -------------------
($ in millions, except average unit and comparable store data)
Revenue $ 49.7 $ 64.2 (22.6)
-------------- ----------------
Operating expenses:
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 1.2 --- NM
Other 47.6 63.9 (25.5)
-------------- ---------------
Total operating expenses 48.8 63.9 (23.6)
-------------- ---------------
Operating income $ 0.9 $ 0.3 NM
=============== =================
Average unit sales $ 308,200 $ 322,500 (4.4)
Comparable store data
Comparable store sales increase (decrease) (9.5%) (6.8%)
Average guest check $6.11 $6.30 (3.0)
</TABLE>
NM = Not Meaningful
Quincy's REVENUE decreased $14.5 million (22.6%) during the 1998 quarter as
compared with the 1997 quarter, reflecting the closure of 71 restaurants
pursuant to the restructuring plan adopted in late 1997 and a 9.5% decline in
comparable store sales. The decrease in comparable store sales resulted from
both a decrease in traffic and a decrease in average guest check. The decrease
in guest check average is due to lower priced promotions in the current year
compared to the prior year quarter. Quincy's is attempting to stabilize average
guest check with new product offerings aimed at improving overall value to the
customer. Quincy's is also expanding its testing of full-service restaurants,
which have shown encouraging preliminary sales trends.
Quincy's OPERATING EXPENSES in the 1998 quarter decreased $15.1 million compared
to the 1997 quarter. The comparability of 1998 and 1997 operating results is
slightly affected by the impact of the adoption of fresh start reporting as of
January 7, 1998. Specifically, the amortization of reorganization value in
excess of amounts allocable to identifiable assets, which is over a five-year
period, resulted in an increase in amortization expense of $1.2 million for the
twelve weeks ended April 1, 1998. However, this increase is largely offset by
the impact of the adjustment of property and equipment and other intangible
assets to fair value as a result of the adoption of fresh start reporting
combined with the impairment write-down of certain property and equipment at
December 31, 1997, which resulted in an estimated decrease in amortization and
depreciation of approximately $1.1 million. Excluding the effect of the
estimated impact of fresh start reporting, operating expenses decreased $15.2
million due primarily to the closure of 52 restaurants in the first quarter and
a total decrease of 71 restaurants from the prior year quarter. Product costs as
a percentage of sales also decreased due to ongoing cost reduction initiatives
begun in 1997.
Excluding the impact of the adoption of fresh start reporting, Quincy's
OPERATING INCOME for the 1998 quarter increased $0.7 million as a result of the
factors noted above.
Liquidity and Capital Resources
On the Effective Date the Company entered into a credit agreement with The Chase
Manhattan Bank ("Chase") and other lenders named therein providing the Company
(excluding FRD Acquisition Co.) with a $200 million senior secured revolving
credit facility (the "Credit Facility"). In connection with the closing of the
sale of FEI, the Credit Facility was amended to accommodate the FEI sale
transaction and corresponding in-substance defeasance. In addition, the Credit
Facility was amended to provide the Company flexibility to reinvest the residual
FEI sale proceeds through additional capital expenditures and /or strategic
acquisitions, as well as to modify certain other covenants and financial tests
affected by the FEI sale transaction. The commitments under the Credit Facility
were not reduced as a result of the FEI sale.
22
<PAGE>
As of April 1, 1998 and December 31, 1997, the Company had working capital
deficits, exclusive of net assets held for sale, of $136.7 million and $248.9
million, respectively. The decrease in the deficit is attributable primarily to
an increase in cash and cash equivalents from the sale of FEI. As discussed in
further detail in Note 5 to the consolidated financial statements included
herein, on April 1, 1998 the Company sold FEI, receiving cash proceeds of $380.8
million. Approximately $173.1 million of the proceeds (together with $28.6
million already on deposit with respect to the Mortgage Financings) was used to
effect an in-substance defeasance of the Mortgage Financings. Together with
capital lease obligations assumed by the buyer, this resulted in a reduced debt
load for the Company. The remaining proceeds from the sale after transaction
expenses will increase the Company's short-term liquidity and be available for
capital expenditures or acquisitions, as appropriate. 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.
23
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In conjunction with the sale of FEI, described elsewhere herein, the previously
disclosed arbitration proceeding between the Company and HFS under various
license agreements has been terminated, and all claims relating thereto have
been released.
For information concerning confirmation of the Plan under the Bankruptcy Code
relating to the emergence of FCI and Flagstar from Bankruptcy Court protection,
see Note 2 of the Notes to Consolidated Financial Statements in Item 1 of Part I
of this Form 10-Q.
ITEM 2. CHANGES IN SECURITIES
The information required by this item is furnished by incorporation by reference
to the information regarding the material features of the Plan contained in Note
2 -- Reorganization, of the Notes to Consolidated Financial Statements in Item 1
of Part I of this Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The following are included as exhibits to this report:
EXHIBIT
NO. DESCRIPTION
* 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")).
* 10.1 Employment Agreement, amended and restated as of January 7, 1998,
between Advantica and James B. Adamson (incorporated by reference to
Exhibit 10.38 to Amendment No. 1 to the Registration Statement (No.
333-45811) of Advantica (the "Advantica Form S-1 Amendment No. 1")).
* 10.2 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
Advantica's Form 8-K filed January 15, 1998).
* 10.3 Advantica Restaurant Group Stock Option Plan, as adopted January 28,
1998 (incorporated by reference to Exhibit 10.43 to the Advantica Form
S-1 Amendment No. 1).
* 10.4 Advantica Restaurant Officer Group Stock Option Plan, as adopted
January 28, 1998 (incorporated by reference to Exhibit 10.44 to the
Advantica Form S-1 Amendment No. 1).
* 10.5 Advantica Restaurant Director Group Stock Option Plan, as adopted
January 28, 1998 (incorporated by reference to Exhibit 10.45 to the
Advantica Form S-1 Amendment No. 1).
* 10.6 Second Amendment to Loan Agreement between Secured Restaurants Trust
and Spardee's Realty, Inc., dated as of April 1, 1998 (incorporated by
reference to Exhibit 10.47 to Amendment No. 2 to the Registration
Statement (No. 333- 45811) of Advantica (the "Advantica Form S-1
Amendments No. 2")).
24
<PAGE>
* 10.7 Second Amendment to Loan Agreement between Secured Restaurants Trust
and Quincy's Realty, Inc. dated as of April 1, 1998 (incorporated by
reference to Exhibit 10.48 to the Advantica Form S-1 Amendment No. 2).
* 10.8 Assignment and Assumption Agreement between Spardee's Realty, Inc. and
Quincy's Realty, Inc. dated as of April 1, 1998 (incorporated by
reference to Exhibit 10.49 to the Advantica Form S-1 Amendment No. 2).
* 10.9 First Amendment to Stock Pledge Agreement among Quincy's Restaurants,
Inc. and Secured Restaurants Trust, dated as of April 1, 1998
(incorporated by reference to Exhibit 10.50 to the Advantica Form S-1
Amendment No. 2).
* 10.10 First Amendment to Collateral Assignment Agreement, dated as of
April 1, 1998 related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.51 to the Advantica Form S-1
Amendment No. 2).
* 10.11 Letter Agreement, dated as of April 1, 1998, relating to Secured
Restaurants Trust mortgage note defeasance (incorporated by reference
to Exhibit 10.52 to the Advantica Form S-1 Amendment No. 2).
* 10.12 Amendment No. 1 and Waiver, dated as of March 16, 1998, relating to
Credit Agreement, dated as of January 7, 1998, among certain Advantica
subsidiaries, as borrowers, Advantica, as a guarantor, the lenders
named therein, and The Chase Manhattan Bank, as administrative agent
(incorporated by reference to Exhibit 10.53 to the Advantica Form S-1
Amendment No. 2).
* 10.13 Stock Purchase Agreement among Advantica Restaurant Group, Inc.,
Spartan Holdings, Inc., Flagstar Enterprises, Inc., and CKE
Restaurants, Inc., dated as of February 18, 1998 (incorporated by
reference to Exhibit 99.1 to Advantica's Form 8-K filed April 16,
1998).
27 Financial Data Schedule
- --------------------------
* Certain of the exhibits to this Quarterly Report on Form 10-Q,
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 a part hereof as of their respective dates.
b. On January 15, 1998, the Company filed a report on Form 8-K reporting
under Item 5 the effective date of FCI's and Flagstar's Plan and under
Item 1 the resulting changes in control of the Company. Additionally,
the Company filed a report on Form 8-K on January 28, 1998 reporting
under Item 5 of such report that on January 15, 1998, a letter of
intent to sell the subsidiary which operates its franchised Hardee's
units was signed. The filing set forth the material terms of the
agreement. No financial statements were included in the filings.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<CAPTION>
<S> <C>
ADVANTICA RESTAURANT GROUP, INC.
Date: May 18, 1998 By: /s/ Rhonda J. Parish
-------------------------------------------------------------
Rhonda J. Parish
Executive Vice President,
General Counsel and Secretary
Date: May 18, 1998 By: /s/ Ronald B. Hutchison
-------------------------------------------------------------
Ronald B. Hutchison
Executive Vice President and
Chief Financial Officer
</TABLE>
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Twelve weeks ended April 1, 1998
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-30-1998
<PERIOD-START> JAN-08-1998
<PERIOD-END> APR-01-1998
<CASH> 228,262
<SECURITIES> 0
<RECEIVABLES> 16,345
<ALLOWANCES> 4,044
<INVENTORY> 19,958
<CURRENT-ASSETS> 331,907
<PP&E> 791,346
<DEPRECIATION> 21,924
<TOTAL-ASSETS> 2,298,308
<CURRENT-LIABILITIES> 434,868
<BONDS> 1,252,059
0
0
<COMMON> 400
<OTHER-SE> 373,847
<TOTAL-LIABILITY-AND-EQUITY> 2,298,308
<SALES> 0
<TOTAL-REVENUES> 436,709
<CGS> 0
<TOTAL-COSTS> 450,258
<OTHER-EXPENSES> 762
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,269
<INCOME-PRETAX> (42,580)
<INCOME-TAX> 500
<INCOME-CONTINUING> (43,080)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (43,080)
<EPS-PRIMARY> (1.08)
<EPS-DILUTED> (1.08)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Week ended January 7, 1998
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JAN-07-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 37,132
<CGS> 0
<TOTAL-COSTS> 28,558
<OTHER-EXPENSES> (656,157)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,745
<INCOME-PRETAX> 661,986
<INCOME-TAX> (17,547)
<INCOME-CONTINUING> 679,533
<DISCONTINUED> 102,540
<EXTRAORDINARY> 612,845
<CHANGES> 0
<NET-INCOME> 1,394,918
<EPS-PRIMARY> 32.87
<EPS-DILUTED> 25.30
</TABLE>
