<PAGE>
As Filed with the Securities and Exchange Commission on March 25, 1998
Registration No. 333-45811
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
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 (1)
<S> <C> <C> <C> <C>
Common Stock, $.01
par value ........... 9,526,775 Not Applicable Not Applicable Not Applicable
</TABLE>
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(1) A registration fee of $27,401 was paid with the initial filing of this
Registration Statement on February 6, 1998. The fee was computed pursuant
to Rule 457(c) based upon the last reported sales price for the Common
Stock on The NASDAQ Stock MarketSM 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 as a NASDAQ National
Market security on The NASDAQ Stock MarketSM 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) approximately 3,300 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, the Company'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 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 (69
of which management intends to close during 1998), 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
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 47% 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 FCI and Flagstar 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 40,000,000 shares of
Common Stock were deemed issued and outstanding pursuant to the Plan of
Reorganization subject to the completion of the exchange of securities as
contemplated by such plan.
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 deemed issued and outstanding on the Effective
Date) and 25,000,000 authorized shares of preferred stock (none of which
are currently outstanding). Pursuant to 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 deemed 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) Advantica 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 Deemed 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 as a
NASDAQ National Market security on The NASDAQ
Stock MarketSM 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 February 18, 1998 Advantica entered into a definitive agreement with
CKE Restaurants, Inc. ("CKE") 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"), a
wholly-owned subsidiary of CKE. As contemplated by such agreement, the Company
would receive $380.8 million in cash (subject to certain adjustments) in
exchange for all of the outstanding stock of FEI. In addition, CKE would assume
$45.6 million of capital leases. The definitive agreement with CKE includes a
covenant not to compete which expires on the second anniversary of the closing
date of the transaction. In general, the convenant requires that the Company
not engage, directly or indirectly, in the quick-service hamburger restaurant
business in certain designated market areas. The transaction is expected to be
completed on or about April 1, 1998. Approximately $180 million of the proceeds
of such transaction, if consummated, (together with $20.7 million previously on
deposit with respect to certain Mortgage Financings as herein defined) will be
applied to effect an in-substance defeasance of such Mortgage Financings of FEI
and Quincy's Restaurants, Inc. with a book value of $177.6 million at December
31, 1997 plus accrued interest of $2.3 million. 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. 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.
As a result of the adoption of fresh start reporting as of the Effective
Date (as further discussed in Note 1 to the Consolidated Financial Statements
included herein), the net assets of FEI will be adjusted to fair value less
estimated costs of disposal based on the terms of the definitive agreement. To
the extent that the final terms of the disposition reflect a different fair
value than that used as of the Effective Date, the effect of such difference
will be an adjustment to the reorganization value in excess of amounts
allocable to identifiable assets. Accordingly, the Company anticipates that
there will be no additional gain or loss on the disposition of FEI in periods
subsequent to the Effective Date.
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, 1997. Such data generally have
been derived from the Consolidated Financial Statements of the Company for such
periods, which have been audited. 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,
--------------------------------------
1993(a) 1994(a)
(in millions, except per share amounts) ------------------- ------------------
<S> <C> <C>
Income Statement data:
Operating revenue ....................................... $ 2,615.2 $ 2,666.0
Operating income (loss) ................................. (1,102.4)(c) 211.5 (d)
Loss from continuing operations (g) ..................... (1,238.6) ( 16.8)
Basic and diluted loss per share applicable to
common shareholders (h):
Continuing operations ................................... ( 29.56) ( 0.73)
Discontinued operations (g) ............................ ( 9.67) 9.27
Net income (loss) (i) .................................. ( 40.14) 8.26
Cash dividends per common share (j) ..................... -- --
Ratio of earnings to fixed charges (k) .................. -- --
Deficiency in the coverage of fixed charges to
earnings before fixed charges (k) ...................... 1,318.2 19.3
Balance Sheet data (at end of period):
Current assets (l) ...................................... 122.2 186.1
Working capital (deficiency) (l)(m) ..................... ( 273.0) ( 205.6)
Net property and equipment .............................. 1,167.2 1,196.4
Total assets ............................................ 1,538.9 1,587.5
Long-term debt .......................................... 2,341.2 2,067.6
Other data:
EBITDA (o) .............................................. 331.0 333.9
Net cash flows provided by operating activities ......... 128.9 54.6
Net cash flows (used in) provided by investing
activities ............................................. ( 136.0) 296.9 (p)
Net cash flows provided by (used in) financing
activities ............................................. 10.6 ( 308.9)
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1995(a) 1996(a)(b) 1997
(in millions, except per share amounts) ------------------ ------------------ ------------------
<S> <C> <C> <C>
Income Statement data:
Operating revenue ....................................... $ 2,571.5 $ 2,542.3 $ 2,609.5
Operating income (loss) ................................. 98.2 (e) 156.4 130.4 (f)
Loss from continuing operations (g) ..................... ( 132.9) ( 85.5) ( 134.5)
Basic and diluted loss per share applicable to
common shareholders (h):
Continuing operations ................................... ( 3.47) ( 2.35) ( 3.50)
Discontinued operations (g) ............................ 1.82 -- --
Net income (loss) (i) .................................. ( 1.64) ( 2.35) ( 3.50)
Cash dividends per common share (j) ..................... -- -- --
Ratio of earnings to fixed charges (k) .................. -- -- --
Deficiency in the coverage of fixed charges to
earnings before fixed charges (k) ...................... 133.0 101.9 132.7
Balance Sheet data (at end of period):
Current assets (l) ...................................... 285.3 185.5 132.8
Working capital (deficiency) (l)(m) ..................... ( 122.2) ( 297.7) ( 248.9)
Net property and equipment .............................. 1,104.4 1,168.6 758.4
Total assets ............................................ 1,507.8 1,687.4 1,439.1
Long-term debt .......................................... 1,996.1 2,179.4 807.4 (n)
Other data:
EBITDA (o) .............................................. 298.3 286.3 296.9
Net cash flows provided by operating activities ......... 19.5 19.5 76.0
Net cash flows (used in) provided by investing
activities ............................................. 186.4 (q) ( 109.4)(r) ( 36.0)
Net cash flows provided by (used in) financing
activities ............................................. ( 75.6) ( 14.7) ( 78.3)
</TABLE>
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(a) Certain amounts for the four years ended December 31, 1996 have been
reclassified to conform to the 1997 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) Operating income for the year ended December 31, 1997 reflects a provision
for restructuring charges of $10.5 million and a charge for impaired
assets of $15.1 million.
(g) 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.
(h) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("FAS 128"). For such periods, under the new
standard, basic loss per share excludes any dilutive effects of options,
warrants and convertible securities, and diluted per share amounts do not
differ from basic per share amounts since the Company's options, warrants
and convertible debt and preferred stock have an antidilutive impact on
per share amounts due to losses from continuing operations in those
periods. For further
6
<PAGE>
discussion of earnings per share and the impact of FAS 128, see the Notes to
the Consolidated Financial Statements included herein.
(i) For the year ended December 31, 1993, net loss includes extraordinary
losses of $0.62 per share related to the repurchase of the 10% Convertible
Debentures and to the charge off of unamortized deferred financing costs
related to a prepayment of Flagstar's senior term loan; net loss for 1993
also includes a charge of $0.29 per share due to a change of accounting
method relating to the discount rate applied to the Company's liability
for self insurance claims pursuant to Staff Accounting Bulletin No. 92.
For the year ended December 31, 1994, net income includes an extraordinary
loss of $0.28 per share, relating to the charge off of unamortized
deferred financing costs associated with the Company's prepayment of its
senior term loan and working capital facility during the second quarter of
1994. For the year ended December 31, 1995, net loss includes a $0.01 per
share extraordinary gain relating to the repurchase of $25.0 million of
senior indebtedness net of the charge off of unamortized deferred
financing costs.
(j) The Company's bank facilities have prohibited, and its public debt
indentures have significantly limited, distributions and dividends on
Advantica's (and its predecessor's) common equity securities. See Note 8
to the accompanying Consolidated Financial Statements appearing elsewhere
herein.
(k) The ratio of earnings to fixed charges has been calculated by dividing
pre-tax earnings by fixed charges. Earnings, as used to compute the ratio,
equal the sum of income from continuing operations before income taxes and
fixed charges excluding capitalized interest. Fixed charges are the total
interest expense including capitalized interest, amortization of debt
expenses and a rental factor that is representative of an interest factor
(estimated to be one third) on operating leases.
(l) The current assets and working capital deficiency amounts presented exclude
assets held for sale of $103.2 million and $77.3 million as of December
31, 1993 and 1994, respectively, $5.1 million as of December 31, 1996 and
$242.5 million as of December 31, 1997. Such assets held for sale relate
to the Company's food and vending and concessions and recreation services
subsidiaries for the years ended December 31, 1993 and 1994. For the year
ended December 31, 1997, net assets held for sale relate to FEI.
(m) A negative working capital position is not unusual for a restaurant
operating company. 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 December 31, 1997 is attributable primarily to a
reclassification of accrued interest 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. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."
(n) Reflects the reclassification of $1,496.7 million of long-term debt 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") as a result of the commencement of the
Chapter 11 filing.
(o) EBITDA is defined by the Company as operating income before depreciation,
amortization and charges for (recoveries of) 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. The following restructuring and impairment
charges (recoveries) have been excluded from EBITDA for the periods
indicated: 1993-$1,263.2 million; 1994-($7.2 million); 1995-$67.3 million;
and 1997-$25.6 million.
(p) Net cash flows provided by investing activities include proceeds from sale
of discontinued operations of $447.1 million.
(q) Net cash flows provided by investing activities include proceeds from sale
of discontinued operations and subsidiaries of $294.6 million.
(r) Net cash flows used in investing activities include the acquisition of
Coco's and Carrows, net of cash acquired, of $127.1 million.
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
shareholders' equity. At December 31, 1997, the Company had indebtedness
(including long-term debt reclassified to liabilities subject to compromise) of
$2,152.2 million and a shareholders' deficit of $(1,362.5) million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 8 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 $1,318.6 million and shareholders' equity was $410.2 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 definitive agreement 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 $177.6 million at December 31, 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 8 to the Consolidated Financial Statements of the Company
appearing elsewhere in this Prospectus.
Assumptions Regarding Value of the Company's Assets
As further described in the Notes to the Consolidated Financial Statements
included herein, for financial reporting purposes, the fair values of the
Company's assets and liabilities must be determined as of the Effective Date.
The estimated fair values of assets and liabilities used in the preparation of
the Pro Forma Financial Statements included elsewhere in this Prospectus have
been determined based on certain valuations and other studies which are not yet
complete. The Company will continue to finalize these estimates and
consequently the value of those assets and liabilities and the reorganization
value in excess of amounts allocable to identifiable assets are subject to
change.
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 pending 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 8 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 greater negative effect on operating results during
quarters with lower restaurant sales.
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 as a NASDAQ National Market
security on The NASDAQ Stock MarketSM 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) approximately 3,300 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 (69 of which
management intends to close in 1998), 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
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
10
<PAGE>
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 47% of total sales and features
the chain's famous "made-from-scratch" biscuits. For information concerning the
pending 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
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
In early 1997, the Company hired Donaldson, Lufkin & Jenrette Securities
Corporation as a financial advisor to assist in exploring alternatives to
improve the Company's capital structure. Subsequently, the Company's management
concluded, in light of operating trends experienced by the Company and the
Company's liquidity and capital needs, that the reorganizational alternative
best designed to recapitalize the Company over the long-term and maximize the
recovery of all stakeholders was 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 Original Plan, the principal terms of which were
announced by FCI and Flagstar on March 17, 1997, 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 on July 11, 1997 (the "Petition
Date") FCI and Flagstar filed voluntary petitions for relief under the
Bankruptcy Code in the Bankruptcy Court. Flagstar Holdings, Inc. ("Holdings"),
a wholly-owned subsidiary of Flagstar, filed its petition on June 27, 1997.
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. 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
January 7, 1998. As a result of the reorganization, FCI and Flagstar
significantly reduced their debt and simplified their capital structure. For
more information concerning the restructuring and the Plan of Reorganization,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Prospectus Summary -- The Plan of Reorganization."
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.
11
<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 deemed issued and distributed by Advantica 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 as a NASDAQ National Market
security on The NASDAQ Stock MarketSM 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 Stock MarketSM.
<TABLE>
<CAPTION>
High Sales Price Low Sales Price
------------------ ----------------
<S> <C> <C>
January 12, 1998 to March 16, 1998 $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 8 to the
accompanying Consolidated Financial Statements of the Company.
12
<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 financial position and
results of operations of the Company for the year ended December 31, 1997. The
pro forma adjustments made to the historical results of operations (based on
the assumptions set forth below) give effect to the disposition of FEI
(relative to which Advantica signed a definitive agreement on February 18, 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 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, 1997. In addition, since the Plan of Reorganization was
effectuated under Chapter 11 of the Bankruptcy Code, the provisions of
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" ("SOP 90-7"), which require the application of fresh
start reporting, have been reflected in the pro forma condensed statements of
consolidated operations as of January 1, 1997. The unaudited pro forma
condensed consolidated balance sheets as of December 31, 1997 presented below
are based upon the historical balance sheet as of December 31, 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.
13
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------
Adjustments
for
Historical Reorganization
(In thousands) --------------- -----------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ......... $ 54,079 $ (8,900)(1)
Net assets held for sale .......... 242,479
Other ............................. 78,721
Restricted investments
securing in-substance
defeased debt ................... --
-------------
375,279 (8,900)
------------- ---------------
Property -- net .................... 758,373
-------------
Other Assets:
Goodwill, net ..................... 207,918
Other intangible assets, net ...... 14,897
Other ............................. 82,601 (20,319)(2)
Restricted investments
securing in-substance
defeased debt ................... --
Reorganization value in
excess of amounts
allocable to identifiable
assets .......................... --
-------------
305,416 (20,319)
------------- ---------------
$ 1,439,068 $ (29,219)
============= ===============
Liabilities
Current Liabilities
Current maturities of notes
and debentures .................. $ 37,572
Current maturities of capital
lease obligations ............... 19,657
Current maturities of
in-substance defeased debt....... --
Other current liabilities ......... 324,464
-------------
381,693
-------------
Long-Term Liabilities:
Notes and debentures, less
current maturities .............. 510,533 $ 590,867(3)
Capital lease obligations, less
current maturities .............. 87,703
In-substance defeased debt,
less current maturities ......... --
Other non-current liabilities ..... 209,189
-------------
807,425 590,867
------------- -----------------
Total liabilities not subject to
compromise ........................ 1,189,118 590,867
Liabilities subject to
compromise ........................ 1,612,400 (1,612,400) (4)
------------- -----------------
Total liabilities ................. 2,801,518 (1,021,533)
------------- -----------------
Shareholders' Equity:
Capital stock ..................... 21,848 (21,448) (5)
Paid-In capital ................... 724,912 404,912 (6)
Deficit ........................... (2,107,815) 608,850 (7)
Minimum pension liability
adjustment ...................... (1,395)
-------------
(1,362,450) 992,314
------------- -----------------
$ 1,439,068 $ (29,219)
============= =================
<CAPTION>
December 31, 1997
----------------------------------------------------------------------------
After
After Reorganization,
Adjustments Reorganization Adjustments Fresh Start
for Fresh Start and Fresh Start for Disposition Reporting and
Reporting Reporting of FEI(21) Disposition
(In thousands) ----------------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ......... $ 45,179 $ 202,041 $ 247,220
Net assets held for sale .......... $ 121,821(8) 364,300 (364,300) --
Other ............................. (1,004)(9) 77,717 (20,714) 57,003
Restricted investments
securing in-substance
defeased debt ................... -- 14,868 14,868
---------- ---------- ----------
120,817 487,196 (168,105) 319,091
--------------- ---------- ---------- ----------
Property -- net .................... 59,586 (10) 817,959 817,959
--------------- ---------- ----------
Other Assets:
Goodwill, net ..................... (207,918)(11) -- --
Other intangible assets, net ...... 207,925 (12) 222,822 222,822
Other ............................. (439) (13) 61,843 61,843
Restricted investments
securing in-substance
defeased debt ................... -- 184,605 184,605
Reorganization value in
excess of amounts
allocable to identifiable
assets .......................... 729,315 (14) 729,315 729,315
--------------- ---------- ----------
728,883 1,013,980 184,605 1,198,585
--------------- ---------- ---------- ----------
$ 909,286 $2,319,135 $ 16,500 $2,335,635
=============== ========== ========== ==========
Liabilities
Current Liabilities
Current maturities of notes
and debentures .................. $ 37,572 $ (12,548) $ 25,024
Current maturities of capital
lease obligations ............... 19,657 19,657
Current maturities of
in-substance defeased debt....... -- 12,548 12,548
Other current liabilities ......... $ 21,166(15) 345,630 16,500 362,130
---------------- ---------- ---------- ----------
21,166 402,859 16,500 419,359
---------------- ---------- ---------- ----------
Long-Term Liabilities:
Notes and debentures, less
current maturities .............. 72,286 (16) 1,173,686 (184,605) 989,081
Capital lease obligations, less
current maturities .............. 87,703 87,703
In-substance defeased debt,
less current maturities ......... -- 184,605 184,605
Other non-current liabilities ..... 35,466 (17) 244,655 244,655
---------------- ---------- ----------
107,752 1,506,044 -- 1,506,044
---------------- ---------- ---------- ----------
Total liabilities not subject to
compromise ........................ 128,918 1,908,903 16,500 1,925,403
Liabilities subject to
compromise ........................ --
----------
Total liabilities ................. 128,918 1,908,903 16,500 1,925,403
---------------- ---------- ---------- ----------
Shareholders' Equity:
Capital stock ..................... 400 400
Paid-In capital ................... (719,992) (18) 409,832 409,832
Deficit ........................... 1,498,965 (19) -- --
Minimum pension liability
adjustment ...................... 1,395 (20) -- --
---------------- ---------- ----------
780,368 410,232 410,232
---------------- ---------- ----------
$ 909,286 $2,319,135 $ 16,500 $2,335,635
================ ========== ========== ==========
</TABLE>
See notes to pro forma condensed consolidated balance sheets.
14
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
Adjustments for the Reorganization
The pro forma adjustments related to the Plan of Reorganization and
related transactions are summarized in the following table and are more fully
described in the notes thereto. Column numbers refer to footnotes from the Pro
Forma Condensed Consolidated Balance Sheets.
<TABLE>
<CAPTION>
Footnote
Number (1) (2) (3) (4) (5) (6) (7)
Deferred Debt, less Liabilities
Financing Current Subject to Capital Paid-in
($ in thousands) Cash Costs Maturities Compromise Stock Capital Deficit
- ------------------ ------------ ------------- ------------ ---------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(a) ............. $ (8,900) $ 5,300 $ (3,600)
(b) ............. (20,311) $ (915,396) $ 382 $352,385 542,318
(c) ............. (5,308) (106,137) 18 30,679 70,132
(d) ............. (21,848) 21,848
(e) ............. $590,867 (590,867)
-------- ------------
Total ........... $ (8,900) $ (20,319) $590,867 $ (1,612,400) $ (21,448) $404,912 $608,850
======== ========= ======== ============ ========= ======== ========
</TABLE>
- ---------
(a) To record estimated fees and expenses consisting of estimated deferred
financing costs ($5.3 million) and expenses related to the Plan of
Reorganization ($3.6 million). Fees and expenses totaling $31.1 million
were incurred through December 31, 1997. Total estimated fees and expenses
are $40.0 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 $542.3 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 December 30, 1997 through January 13, 1998
(on a "when issued" basis through January 8).
(c) To reflect the issuance of 1.8 million shares of Common Stock and 4.0
million Warrants to the holders of the 10% Convertible Debentures and the
estimated gain on such transaction of $70.1 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 and Warrants from December 30,
1997 through January 13, 1998 (on a "when issued" basis through January 8)
and from January 9 through January 15, respectively.
(d) To reflect the cancellation of the Old Common Stock and the Old Preferred
Stock.
(e) To reflect the issuance of the New Senior Notes in exchange for the Old
Senior Notes, including accrued and unpaid interest thereon through
December 31, 1997 of $40.8 million.
15
<PAGE>
Adjustments for Fresh Start Reporting
The specific pro forma adjustments related to fresh start reporting are
summarized in the following table and are more fully described in the notes
thereto. Column numbers refer to footnotes from the Pro Forma Condensed
Consolidated Balance Sheets.
<TABLE>
<CAPTION>
Footnote
Number (8) (9) (10) (11) (12) (13)
Net Assets Other
($ in thou- Held For Property Intangible
sands) Sale Other net Goodwill Assets, net Other
- --------------- ------------ ------------ ---------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
(a) ........... $ (207,918)
(b) ...........
(c) ...........
(d) ...........
(e) ...........
(f) ........... $121,821
(g) ........... $ (1,004)
(h) ........... $207,925
(i) ........... $ (3,925)
(j) ........... 3,486
(k) ...........
(l) ...........
(m) ...........
(n) ........... $59,586
-------
Total ......... $121,821 $ (1,004) $59,586 $ (207,918) $207,925 $ (439)
======== ======== ======= ========== ======== ========
<CAPTION>
Footnote
Number (14) (15) (16) (17) (18) (19) (20)
Notes
and
Reorgan- Debentures,
ization Other less Other Minimum
($ in thou- Value in Current Current Noncurrent Paid-in Pension
sands) Excess Liabilities Maturities Liabilities Capital Deficit Liability
- --------------- ----------------- ------------- ------------ ------------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(a) ........... $ 207,918
(b) ........... 72,286 $72,286
(c) ........... (719,992) $ (719,992)
(d) ........... 1,498,965 $1,498,965
(e) ........... 7,400 $ 6,005 $1,395
(f) ........... (121,821)
(g) ........... 1,004
(h) ........... (207,925)
(i) ........... 3,925
(j) ........... (3,486)
(k) ........... 26,733 $21,166 5,567
(l) ........... 28,739 28,739
(m) ........... (4,845) (4,845)
(n) ........... (59,586)
----------
Total ......... $ 729,315(o) $21,166 $72,286 $ 35,466 $ (719,992) $1,498,965 $1,395
========== ======= ======= ======== ========== ========== ======
</TABLE>
- ---------
(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 net of estimated curtailment gain
resulting from the disposition of FEI.
(f) To adjust the net assets of FEI to fair value less estimated costs of
disposal based on the terms of the definitive agreement.
(g) To adjust other current assets to estimated fair value.
(h) To adjust other intangible assets, primarily franchise rights and
tradenames, to estimated fair value.
(i) To reduce assets to reflect the impact of new accounting standards relating
to the costs of computer software obtained for internal use and preopening
costs.
(j) To adjust other assets to estimated fair value.
(k) To reflect liabilities associated with severance and other exit costs
($11.2 million), and adjustments to self-insured claims and contingent
liabilities resulting from a change in methodology ($15.5 million).
(l) To adjust unfavorable operating leases to estimated value.
(m) To record the tax effect of fresh start adjustments.
(n) To adjust property, net to estimated fair value.
(o) 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
16
<PAGE>
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 $1,729 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 definitive agreement related to the
disposition thereof, includes a value attributed to shareholders' equity of
$410 million and net long-term indebtedness contemplated by the Plan of
Reorganization of $1,319 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 assets and liabilities have been determined based on certain
valuations and other studies which are not yet complete. The Company has
recorded an intangible asset in the amount of $729 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. The Company does not 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 February 18, 1998
Advantica signed a definitive agreement 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 $380.8 million in cash (subject to
adjustment as outlined in such definitive agreement) 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 on or about
April 1, 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 $101.6 million
(and a pro forma fair value of $113.8 million) at December 31, 1997 are
collateralized by certain assets of FEI and its subsidiary Spardee's Realty,
Inc. and will not be 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 $76.0 million
(and a pro forma fair value of $85.1 million) at December 31, 1997.
(21) To reflect the disposition of FEI, including the receipt of cash
proceeds of an estimated $380.8 million and the incurrence of $16.5 million of
estimated transaction costs, and to reflect the use of $180 million of the
proceeds of such transaction (together with $20.7 million previously on deposit
with respect to certain Mortgage Financings herein defined) to purchase
Defeasance Eligible Investments (as defined in documents governing such
Mortgage Financings) to effect an in-substance defeasance of such Mortgage
Financings.
17
<PAGE>
PRO FORMA CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Year ended December 31, 1997
Pro Forma
----------------------------------
Adjustments
for
($ in thousands, except per share amounts) Historical Reorganization
- ------------------------------------------------ -------------- -------------------
<S> <C> <C>
Operating revenue ............................. $2,609,456
Operating expenses ............................ 2,479,028
---------- --
Operating income .............................. 130,428
----------
Other charges:
Interest and debt expense, net ............... 226,388 $ (48,984)(a)
Other, net ................................... 5,648
----------
232,036 (48,984)
---------- ----------
Income (loss) before reorganization
expenses and taxes ........................... (101,608) 48,984
Reorganization expenses ....................... 31,073 (31,073)(b)
---------- ----------
Income (loss) before income taxes ............. (132,681) 80,057
Provision for (benefit from) income taxes ..... 1,769
---------- ----------
Net (loss) income ............................. $ (134,450) $ 80,057
========== ==========
Basic and diluted loss per share applicable
to common shareholders ....................... $ (3.50)
==========
Average outstanding and equivalent
common shares ................................ 42,434
==========
<CAPTION>
Year ended December 31, 1997
Pro Forma
------------------------------------------------------------------
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 (f) Disposition
- ------------------------------------------------ ----------------- ----------------- ------------- ----------------
<S> <C> <C> <C> <C>
Operating revenue ............................. $2,609,456 $ (546,268) $2,063,188
Operating expenses ............................ $ 161,587(c) 2,640,615 (516,901) 2,123,714
---------- ---------- ---------- ----------
Operating income .............................. (161,587) (31,159) (29,367) (60,526)
---------- ---------- ---------- ----------
Other charges:
Interest and debt expense, net ............... (12,430)(d) 164,974 (7,129) 157,845
Other, net ................................... 5,648 (2,023) 3,625
---------- ---------- ----------
(12,430) 170,622 (9,152) 161,470
---------- ---------- ---------- ----------
Income (loss) before reorganization
expenses and taxes ........................... (149,157) (201,781) (20,215) (221,996)
Reorganization expenses ....................... --
----------
Income (loss) before income taxes ............. (149,157) (201,781) (20,215) (221,996)
Provision for (benefit from) income taxes ..... 14 (e) 1,783 (40) 1,743
---------- ---------- ---------- ----------
Net (loss) income ............................. $ (149,171) $ (203,564) $ (20,175) $ (223,739)
========== ========== ========== ==========
Basic and diluted loss per share applicable
to common shareholders ....................... $ (5.09) $ (5.59)
========== ==========
Average outstanding and equivalent
common shares ................................ 40,000 40,000
========== ==========
</TABLE>
18
<PAGE>
NOTES TO PRO FORMA CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
Adjustments for Reorganization
(a) The following table details the net adjustment to interest expense related
to the consummation of the Plan of Reorganization:
<TABLE>
<CAPTION>
Year Ended
($ in thousands) December 31, 1997
- -------------------------------------------------------------------------- ------------------
<S> <C>
Elimination of amortization of deferred financing cost on debt
securities retired ............................................. $ (1,903)
Elimination of interest on debt securities retired .............. (55,476)
Amortization of deferred financing cost of the Credit Facility .. 1,400
Increase in interest expense due to exchange of Old Senior Notes 6,995
---------
Net adjustment to interest expense .............................. $ (48,984)
=========
</TABLE>
- ---------
(b) To remove the impact of reorganization expenses which would not be
reflected in the post-reorganization statement of operations.
Adjustments for Fresh Start Reporting
(c) To reflect, for the year ended December 31, 1997; the removal of the
amortization of goodwill of $5.1 million; the estimated increase in
amortization of $11.4 million as a result of the revaluation of other
intangible assets to fair value; the estimated increase in depreciation
expense of $9.4 million as a result of the revaluation of property to
estimated fair value; and the addition of the amortization of reorganization
value in excess of amounts allocable to identifiable assets, assuming a
5-year life, of $145.9 million.
(d) To record, for the year ended December 31, 1997, the estimated impact on
interest expense of the amortization of the premium on long-term debt of
$12.4 million.
(e) To record the estimated income tax effects of fresh start reporting.
Adjustments for Disposition of FEI
(f) To remove the results of operations of FEI for the year ended December 31,
1997.
Material Non-Recurring Charges Not Reflected in the Pro Forma Condensed
Statements of Consolidated
Operations
Certain material non-recurring charges (gains) related to consummation of
the Plan of Reorganization are not reflected in the Pro Forma Condensed
Statements of Consolidated Operations as they are not expected to have a
continuing impact on the Company's operations. These charges (gains) will be
included in the Company's operating results for the period prior to
consummation of the Plan of Reorganization and are summarized below ($ in
millions):
<TABLE>
<S> <C>
Reorganization costs ................................ $ 40.0
Extraordinary gains on exchange of debt for equity
(including the elimination of accrued interest of $74.9
million) ............................................ (612.5)
Fresh start reporting adjustments. .................. 780.4
</TABLE>
19
<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, 1997. Such data generally have
been derived from the Consolidated Financial Statements of the Company for such
periods, which have been audited. 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 disposition of FEI and the consummation of the
Plan of Reorganization.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1993(a) 1994(a)
(in millions, except per share amounts) ------------------- ------------------
<S> <C> <C>
Income Statement data:
Operating revenue ........................................... $ 2,615.2 $ 2,666.0
Operating income (loss) ..................................... (1,102.4)(c) 211.5 (d)
Loss from continuing operations (g) ......................... (1,238.6) ( 16.8)
Basic and diluted loss per share applicable to common
shareholders (h):
Continuing operations ..................................... ( 29.56) ( 0.73)
Discontinued operations (g) ................................ ( 9.67) 9.27
Net income (loss) (i) ...................................... ( 40.14) 8.26
Cash dividends per common share (j) ......................... -- --
Ratio of earnings to fixed charges (k) ...................... -- --
Deficiency in the coverage of fixed charges to earnings
before fixed charges (k) .................................. 1,318.2 19.3
Balance Sheet data (at end of period):
Current assets (l) .......................................... 122.2 186.1
Working capital (deficiency) (l)(m) ......................... ( 273.0) ( 205.6)
Net property and equipment .................................. 1,167.2 1,196.4
Total assets ................................................ 1,538.9 1,587.5
Long-term debt .............................................. 2,341.2 2,067.6
Other data:
EBITDA (o) .................................................. 331.0 333.9
Net cash flows provided by operating activities ............. 128.9 54.6
Net cash flows (used in) provided by investing activities ... ( 136.0) 296.9 (p)
Net cash flows provided by (used in) financing activities ... 10.6 ( 308.9)
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1995(a) 1996(a)(b) 1997
(in millions, except per share amounts) ------------------ ------------------ ------------------
<S> <C> <C> <C>
Income Statement data:
Operating revenue ........................................... $ 2,571.5 $ 2,542.3 $ 2,609.5
Operating income (loss) ..................................... 98.2 (e) 156.4 130.4 (f)
Loss from continuing operations (g) ......................... ( 132.9) ( 85.5) ( 134.5)
Basic and diluted loss per share applicable to common
shareholders (h):
Continuing operations ..................................... ( 3.47) ( 2.35) ( 3.50)
Discontinued operations (g) ................................ 1.82 -- --
Net income (loss) (i) ...................................... ( 1.64) ( 2.35) ( 3.50)
Cash dividends per common share (j) ......................... -- -- --
Ratio of earnings to fixed charges (k) ...................... -- -- --
Deficiency in the coverage of fixed charges to earnings
before fixed charges (k) .................................. 133.0 101.9 132.7
Balance Sheet data (at end of period):
Current assets (l) .......................................... 285.3 185.5 132.8
Working capital (deficiency) (l)(m) ......................... ( 122.2) ( 297.7) ( 248.9)
Net property and equipment .................................. 1,104.4 1,168.6 758.4
Total assets ................................................ 1,507.8 1,687.4 1,439.1
Long-term debt .............................................. 1,996.1 2,179.4 807.4 (n)
Other data:
EBITDA (o) .................................................. 298.3 286.3 296.9
Net cash flows provided by operating activities ............. 19.5 19.5 76.0
Net cash flows (used in) provided by investing activities ... 186.4 (q) ( 109.4)(r) ( 36.0)
Net cash flows provided by (used in) financing activities ... ( 75.6) ( 14.7) ( 78.3)
</TABLE>
- ---------
(a) Certain amounts for the four years ended December 31, 1996 have been
reclassified to conform to the 1997 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) Operating income for the year ended December 31, 1997 reflects a provision
for restructuring charges of $10.5 million and a charge for impaired
assets of $15.1 million.
(g) 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.
(h) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("FAS 128"). For such periods, under the new
standard, basic loss per share excludes any dilutive effects of options,
warrants and convertible securities, and diluted per share amounts do not
differ from basic per share amounts since the Company's options, warrants
and preferred stock have an antidilutive impact on per share amounts due
to losses from continuing operations in those periods. For further
discussion of earnings per share and the impact of FAS 128, see the Notes
to the Consolidated Financial Statements included herein.
20
<PAGE>
(i) For the year ended December 31, 1993, net loss includes extraordinary
losses of $0.62 per share related to the repurchase of the 10% Convertible
Debentures and to the charge off of unamortized deferred financing costs
related to a prepayment of Flagstar's senior term loan; net loss for 1993
also includes a charge of $0.29 per share due to a change of accounting
method relating to the discount rate applied to the Company's liability
for self insurance claims pursuant to Staff Accounting Bulletin No. 92.
For the year ended December 31, 1994, net income includes an extraordinary
loss of $0.28 per share, relating to the charge off of unamortized
deferred financing costs associated with the Company's prepayment of its
senior term loan and working capital facility during the second quarter of
1994. For the year ended December 31, 1995, net loss includes a $0.01 per
share extraordinary gain relating to the repurchase of $25.0 million of
senior indebtedness net of the charge off of unamortized deferred
financing costs.
(j) The Company's bank facilities have prohibited, and its public debt
indentures have significantly limited, distributions and dividends on
Advantica's (and its predecessor's) common equity securities. See Note 8
to the accompanying Consolidated Financial Statements appearing elsewhere
herein.
(k) The ratio of earnings to fixed charges has been calculated by dividing
pre-tax earnings by fixed charges. Earnings, as used to compute the ratio,
equal the sum of income from continuing operations before income taxes and
fixed charges excluding capitalized interest. Fixed charges are the total
interest expense including capitalized interest, amortization of debt
expenses and a rental factor that is representative of an interest factor
(estimated to be one third) on operating leases.
(l) The current assets and working capital deficiency amounts presented exclude
assets held for sale of $103.2 million and $77.3 million as of December
31, 1993 and 1994, respectively, $5.1 million as of December 31, 1996 and
$242.5 million as of December 31, 1997. Such assets held for sale relate
to the Company's food and vending and concessions and recreation services
subsidiaries for the years ended December 31, 1993 and 1994. For the year
ended December 31, 1997, net assets held for sale relate to FEI.
(m) A negative working capital position is not unusual for a restaurant
operating company. 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 December 31, 1997 is attributable primarily to a
reclassification of accrued interest 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. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."
(n) Reflects the reclassification 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.
(o) EBITDA is defined by the Company as operating income before depreciation,
amortization and charges for (recoveries of) 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. The following restructuring and impairment
charges (recoveries) have been excluded from EBITDA for the periods
indicated: 1993-$1,263.2 million; 1994-($7.2 million); 1995-$67.3 million;
and 1997-$25.6 million.
(p) Net cash flows provided by investing activities include proceeds from sale
of discontinued operations of $447.1 million.
(q) Net cash flows provided by investing activities include proceeds from sale
of discontinued operations and subsidiaries of $294.6 million.
(r) Net cash flows used in investing activities include the acquisition of
Coco's and Carrows, net of cash acquired, of $127.1 million.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Historical Financial Data and the Consolidated Financial Statements and other
more detailed financial information appearing elsewhere herein. For information
concerning, among other things, consummation of the Plan of Reorganization and
its pro forma effect on the Company, see "Pro Forma Financial Statements"
appearing elsewhere in this Prospectus.
Results of Operations
Company Consolidated
- --------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1995 1996 1997
--------- --------- ---------
($ in millions)
<S> <C> <C> <C>
Net Company Sales ................................... $2,512 $2,471 $2,529
Franchise Revenue ................................... 59 71 81
------ ------ ------
Total Revenue ....................................... 2,571 2,542 2,610
Operating Expenses .................................. 2,473 2,386 2480
------ ------ ------
Operating Income .................................... 98 156 130
====== ====== ======
Net Interest Expense From Continuing Operations ..... 229 255 226
Income Tax (Benefit) Provision ...................... -- (16) 2
Net Income (Loss) ................................... $ (55) $ (85) $ (135)
</TABLE>
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
Units Units Closed/ Franchise Units
12/31/96 Opened Sold (Turnkey) 12/31/97
------------ ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Denny's ................
Company Owned ......... 894 1(b) (3) 2 894
Franchised Units ...... 677 76 (15) (2) 736
Int'l Licensees ....... 25 1 (4) -- 22
--- -- ------ ---- ---
1,596 78 (22) -- 1,652
Hardee's ............... 580(c) -- (23) -- 557(c)
Quincy's ............... 199 -- (19) -- 180(d)
El Pollo Loco ..........
Company Owned ......... 96 1 -- 1 98
Franchised Units ...... 135(c) 12 (1) (1) 145(c)
Int'l Licensees ....... 10 -- (6) -- 4
----- -- ------ ---- -----
241 13 (7) -- 247
----- -- ------ ---- -----
Subtotal .............. 2,616 91 (71) -- 2,636
----- -- ----- ---- -----
Coco's (a) .............
Company Owned ......... 183 4 (3) (6) 178
Franchised Units ...... 5 6 -- 6 17
Int'l Licensees ....... 278 26 (6) -- 298
----- -- ------ ---- -----
466 36 (9) -- 493
----- -- ------ ---- -----
Carrows (a) ............
Company Owned ......... 160 -- (8) (12) 140
Franchised Units ...... -- 2 -- 12 14(d)
----- -- ----- ----- -----
160 2 (8) -- 154
----- -- ------ ----- -----
Subtotal ............... 626 38 (17) -- 647
----- -- ----- ----- -----
3,242 129 (88) -- 3,283
===== === ===== ===== =====
</TABLE>
22
<PAGE>
- ---------
(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.
Company Consolidated
1997 vs. 1996
The 1997 Financial Restructuring
As discussed in more detail in "Business -- The 1997 Restructuring" and in
Note 1 to the Consolidated Financial Statements, FCI and Flagstar emerged from
bankruptcy on January 7, 1998. As described in Note 2 to the Consolidated
Financial Statements, the change in ownership of the Company effected by the
financial restructuring requires that the Company apply "fresh-start reporting"
effective January 7, 1998 in accordance with SOP 90-7. The bankruptcy
proceedings began when FCI, Flagstar and Holdings filed voluntary petitions for
relief under the Bankruptcy Code in the Bankruptcy Court. Holdings filed its
petition on June 27, 1997, and Flagstar and FCI both filed their petitions on
July 11, 1997. FCI's operating subsidiaries did not file bankruptcy petitions
and were not parties to the above mentioned Chapter 11 proceedings.
FCI and Flagstar filed their Chapter 11 cases to implement the Original
Plan which was developed in the course of negotiations with an ad hoc committee
of holders of the Senior Subordinated Debentures and with the support of FCI's
majority shareholder. During the bankruptcy proceedings, the Original Plan's
classification of 10% Convertible Debentures as subordinate to the Senior
Subordinated Debentures was challenged by certain holders of the 10%
Convertible Debentures. As a result of litigation of this issue and subsequent
negotiations with representatives of the holders of the 10% Convertible
Debentures, on November 7, 1997 FCI and Flagstar filed the Plan of
Reorganization, which was confirmed by the Bankruptcy Court on November 12,
1997.
Operating Results
The Company's consolidated revenue for 1997 increased by $67.2 million
(2.6%) as compared with 1996. This increase is primarily attributable to two
factors: (i) the estimated $24.0 million impact attributable to the additional
days in 1997 compared to 1996 due to the change in the Company's fiscal year
and (ii) an approximate $202.3 million impact resulting from five additional
months of operations of Coco's and Carrows in the 1997 reporting period
compared to 1996. Excluding the impact of the extra days and the Coco's and
Carrows acquisition, revenue for 1997 decreased $159.1 million compared to the
prior year. 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
65-unit decrease in Company-owned units. Such decreases are slightly offset by
a $9.7 million increase in franchise revenue due to a 106-unit increase in
franchise units.
Consolidated operating expenses for 1997 increased by $93.1 million (3.9%)
as compared with 1996. The expense increase is primarily attributable to three
factors: (i) the estimated $20.3 million impact of the additional days in the
1997 reporting period in comparison to the prior year comparable period, (ii) a
$190.6 million impact of the additional five months
23
<PAGE>
of operations of Coco's and Carrows in the current year in comparison to the
prior year, and (iii) special charges of $25.7 million primarily related to
Quincy's restructuring plan which began in 1997 (see discussion below).
Excluding the extra reporting days, the impact of the Coco's and Carrows
acquisition and the special charges, operating expenses for 1997 decreased
$143.5 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
65-unit decrease in Company-owned units. These decreases in operating expenses
are somewhat offset by a decrease in gains from sales of restaurants included
in operating expenses from $8.4 million in 1996 to $6.2 million in 1997.
Consolidated operating income for 1997 decreased by $26.0 million (16.6%)
as compared with 1996 as a result of the factors noted above.
Consolidated interest and debt expense, net totaled $226.4 million during
1997 compared to $254.7 million during 1996. The decrease occurred principally
because 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 an increase of $11.9 million of
interest and debt expense in 1997 as compared to 1996 related to 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 the bankruptcy
filing on July 11, 1997. In addition, interest income for the 1997 period
decreased $6.2 million compared to the prior year period because of decreased
cash and cash equivalents available for investment during the 1997 period and
the reclassification of interest earned during the bankruptcy period totaling
$1.2 million to reorganization items, in accordance with SOP 90-7.
Reorganization items include professional fees and other expenditures
incurred by the Company in conjunction with the reorganization under Chapter 11
of the Bankruptcy Code, as well as interest income earned during the bankruptcy
period, as further discussed in Note 6 to the Consolidated Financial Statements
included herein.
The provision for income taxes from continuing operations for the year
ended December 31, 1997 reflects an effective income tax rate of approximately
1.3 % for 1997 compared to a benefit for 1996 which reflects an approximate
rate of (16.1%). 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 and the reversal of
certain reserves established in prior years in connection with proposed
deficiencies from the Internal Revenue Service (See Note 10 to the accompanying
Consolidated Financial Statements for additional information).
The net loss was $134.5 million in 1997 compared to a net loss of $85.5
million for the prior year. The increase in the net loss is due to the factors
noted above.
Restructuring Plan and Impairment Charge
During the fourth quarter of 1997, the Company approved a restructuring
plan to significantly reduce the size of its Quincy's chain. In addition to the
sale or closure of restaurants, the restructuring plan will result in the
elimination of certain restaurant, field management and corporate support
positions. Relative to this plan, operating expenses for 1997 reflect a
provision for restructuring of $6.9 million including charges for severance of
$1.7 million, $1.8 million for operating lease reserves and $3.4 million for
various other charges. As a result of the restructuring plan, the Company
identified 88 underperforming units for sale or closure. In accordance with
Statement of Financial Accounting Standards 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"),
the carrying value of these units has been written down to estimated fair value
less costs to sell. In addition, six Quincy's units which will continue
operating were identified as impaired, as the estimated future undiscounted
cash flows of each of these units are insufficient to recover the related
carrying value. Accordingly, the carrying values of these units were written
down to the Company's estimate of fair value. Also included in the charge for
impaired assets is the impact of the writedown to sales price less costs to
sell of certain other long lived assets held for sale. Such assets consist
primarily of 19 Hardee's units which were disposed of prior to December 31,
1997. The total impairment charge included in operating expenses in 1997 is
$15.1 million.
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. Due
to the timing of this change, the year ended December 31, 1997 includes more
than 52 weeks of
24
<PAGE>
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 each include an additional day.
Accounting Changes
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128") in the quarter ended December 31, 1997. SFAS
128 replaced the calculation of primary and fully diluted earnings (loss) per
share with basic and diluted earnings (loss) per share. Unlike primary earnings
(loss) per share, basic earnings (loss) per share excludes any dilutive effects
of options, warrants and convertible securities. Diluted earnings (loss) per
share is very similar to the previously reported fully diluted earnings (loss)
per share.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130") which establishes standards for reporting and display of
comprehensive income and its components in the financial statements. SFAS 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company is in the process of determining
its preferred presentation format under the new standard. The adoption of SFAS
130 will have no impact on the Company's consolidated results of operations,
financial position or cash flows and will be implemented by the Company in the
fourth quarter of 1998.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131") which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS 131 is effective for
financial statements for fiscal years beginning after December 15, 1997.
Financial statement disclosures for prior periods are required to be restated.
The Company is in the process of evaluating the disclosure requirements. The
adoption of SFAS 131 will have no impact on the Company's consolidated results
of operations, financial position or cash flows and will be implemented by the
Company in the fourth quarter of 1998.
1996 vs. 1995
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-owned 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-owned restaurants in comparison to 1995, neither concept reported
increases in revenue from Company-owned 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
because of the impairment write-down in 1995; and a decrease in expenses in
1996 of $201.6 million because of 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
25
<PAGE>
$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.
The benefit from income taxes from continuing operations for the year
ended December 31, 1996 reflects an effective income tax rate of (16.1)%
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 10 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.
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 $2.9 million for various other charges.
Accounting Change
In 1996, the Company adopted the disclosure-only provisions of Financial
Accounting Standards Board Statement No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), while continuing to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"),
and related Interpretations in accounting for its stock-based compensation
plans. Under APB 25, because the exercise price of the Company's employee stock
options equals or exceeds the market price of the underlying stock on the date
of grant, no compensation expense is recognized. The adoption of SFAS 123 did
not impact the Statements of Consolidated Operations or the Consolidated
Balance Sheets included herein.
26
<PAGE>
Restaurant Operations
Denny's (a)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1996 1997
----------- ----------- -----------
($ in millions, except average unit and comparable store data)
<S> <C> <C> <C>
U. S. systemwide sales ........................................ $ 1,785 $ 1,850 $1,872
======= ======= ======
Net company sales ............................................. $ 1,222 $ 1,200 $1,146
Franchise and foreign licensing revenue ....................... 49 55 61
------- ------- ------
Total revenue ................................................ 1,271 1,255 1,207
Operating expenses ............................................ 1,199 1,141 1,087
------- ------- ------
Operating income (b) .......................................... $ 72 $ 114 $ 120
======= ======= ======
Average unit sales (in thousands):
Company-owned ................................................ $ 1,283 $ 1,313 $1,285
Franchise .................................................... 1,086 1,090 1,079
Comparable store data (Company-owned):
Comparable store sales increase (decrease) ................... 2.4 % 1.7 % (4.5 %)
Average guest check .......................................... $ 4.86 $ 5.04 $ 5.54
Operated units
Company-owned ................................................ 933 894 894
Franchise .................................................... 596 677 736
International ................................................ 24 25 22
------- ------- -------
Total ....................................................... 1,553 1,596 1,652
======= ======= =======
</TABLE>
- ---------
(a) Excludes the operating results of the Company's food processing (PTF) and
distribution (PFC) operations for all years presented.
(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 3 and 5 to the Consolidated Financial
Statements.
1997 vs. 1996
Denny's net company sales decreased by $54.0 million (4.5%) in 1997 as
compared to 1996. This change reflects a decrease in comparable store sales and
a 21-unit decrease in the number of Company-owned equivalent units operating
throughout 1997 as compared to 1996, reflecting the closure or sale of 40
Company-owned units since January 1, 1996. The decrease in sales is somewhat
offset by an estimated $21.7 million increase because of an additional five
days in the 1997 reporting period compared to the prior year period. 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 management's decision to eliminate certain value pricing initiatives
in September 1996 in favor of a broader brand positioning that included greater
focus on service and product quality. Franchise and foreign licensing revenue
for the period increased by $5.8 million (10.5 %), reflecting the effect of 56
more franchised units open at the end of 1997 than at the end of 1996. The
significant increase in franchise units over the prior year as compared to no
net change in the number of Company-owned units is consistent with the
Company's strategy of focusing on growth through franchising.
Denny's operating expenses for 1997 compared with 1996 decreased by $54.3
million (4.8 %), reflecting the impact of 21 fewer Company-owned equivalent
units, a decrease in labor costs associated with improved labor efficiencies
and lower guest counts and a $5.8 million reduction in operating expenses
resulting from various non-recurring items recognized in the fourth quarter,
consisting primarily of an insurance recovery related to costs associated with
the Consent Decree. These decreases were somewhat offset by an estimated $18.5
million impact from five additional days in 1997 compared to 1996, 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
included $7.7 million of gains on sales of restaurants in comparison to $0.7
million of gains in the current year. Food cost as a percent of revenue
improved during the year because of the elimination of certain value pricing
initiatives and a shift to higher margin products in 1997.
27
<PAGE>
Denny's operating income for 1997 increased $6.1 million (5.3%) over the
prior year as a result of the factors noted above.
1996 vs. 1995
Revenue from Company-owned units for 1996 decreased by $21.7 million
(1.8%) from 1995 to $1,200.3 million, primarily resulting from operating 39
fewer Company-owned restaurants in 1996 as compared to 1995, partially offset
by gains in comparable store sales. 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,
following management's decision to pursue a broader value position. This price
increase was triggered by commodity cost increases, minimum wage legislation
and labor rate pressures, but also reflected management's belief that a broader
value position would ultimately result in a more competitive business strategy.
While the price increase had a positive impact on guest check averages, this
increase was somewhat offset by an anticipated 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. An increase of $2.2 million 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 $57.4 million
(4.8%) to $1,141.4 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 and 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. 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 in
1996). The decrease in operating expenses 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.
As a result of the factors noted above, operating income for 1996 improved
by $41.7 million (57.8%) as compared to 1995, to $114.0 million.
Hardee's
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1996 1997
----------- ----------- -----------
($ in millions, except average unit and comparable store data)
<S> <C> <C> <C>
Revenue ........................................................ $ 660 $ 603 $ 546
Operating expenses ............................................. 656 562 521
------ ------ ------
Operating income (a) ........................................... $ 4 $ 41 $ 25
====== ====== ======
Average annual unit sales (in thousands) ....................... $1,104 $1,041 $ 960
Comparable store data:
Comparable store sales decrease .............................. (8.6 %) (7.2 %) (7.7 %)
Average guest check .......................................... $ 3.15 $ 3.16 $ 3.23
Operated units ................................................. 593 580 557
</TABLE>
- ---------
(a) Operating income reflects restructuring charge and charge for impaired
assets for the years ended December 31, 1995 and December 31, 1997 of $32
million and $4.7 million, respectively. For a discussion of the provision
for restructuring and charge for impaired assets, see Notes 3 and 5 to the
Consolidated Financial Statements.
28
<PAGE>
1997 vs. 1996
Hardee's revenue decreased by $56.7 million (9.4%) during 1997 as compared
with 1996, reflecting a 7.7% decline in comparable store sales, as well as a
23-unit decrease in comparison to the prior year. 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.
Excluding the impact of the 1997 restructuring and impairment charges,
Hardee's operating expenses in the 1997 period decreased by $45.3 million
(8.1%), 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
23-unit decrease in comparison to the prior year.
Hardee's operating income for the 1997 period decreased by $15.5 million
(38.2%) 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,
Advantica's Hardee's began focusing less on discounting and more on overall
value, introducing items which are somewhat higher priced but which management
believed offered good value for the money. One 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 $40.7 million, in
comparison to 1995 as a result of the factors described above.
Quincy's
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1995 1996 1997
----------- ------------ -----------
($ in millions, except average unit and comparable store data)
<S> <C> <C> <C>
Revenue ........................................................ $ 294 $ 259 $ 234
Operating expenses ............................................. 272 252 253
------- ------- ------
Operating income (loss) (a) .................................... $ 22 $ 7 $ (19)
======= ======= ======
Average annual unit sales (in thousands) ....................... $ 1,438 $ 1,301 $1,199
Comparable store data:
Comparable store sales increase (decrease) ................... 4.8 % (10.8 %) (8.5 %)
Average guest check .......................................... $ 5.87 $ 6.05 $ 6.25
Operated units ................................................. 203 199 180
</TABLE>
- ---------
29
<PAGE>
(a) Operating income reflects a restructuring charge and charge for impaired
assets of $1 million and $21 million for the years ended December 31, 1995
and December 31, 1997, respectively. For a discussion of the provision for
restructuring and charge for impaired assets see Notes 3 and 5 to the
Consolidated Financial Statements.
1997 vs. 1996
Quincy's revenue decreased by $25.6 million (9.9%) during 1997 as compared
with 1996, reflecting an 8.5% 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. Modest
improvements were seen after the implementation of the "Relaunch" program in
October 1996; however, sales trends fell well short of management's
expectations.
Excluding the impact of the 1997 restructuring and impairment charges,
Quincy's operating expenses in 1997 decreased by $20.0 million (7.9%) from the
prior year, 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 are somewhat offset by increased labor
costs due to the Federal minimum wage rate increase, and the fact that certain
labor and other fixed costs cannot be reduced in proportion to the significant
decline in sales.
Quincy's operating income for 1997 decreased by $26.4 million as compared
to the prior year 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, management 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
an increase in the amortization of the deferred gain attributable to the sales
of PFC and PTF in 1996 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 relaunching 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
$6.6 million, as a result of the factors described above.
30
<PAGE>
El Pollo Loco
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1996 1997
----------- ----------- -----------
($ in millions, except average unit and comparable store data)
<S> <C> <C> <C>
U. S. systemwide sales ......................................... $ 198 $ 218 $ 235
======= ======= =======
Net company sales .............................................. $ 117 $ 114 $ 115
Franchise and foreign licensing revenue ........................ 10 14 15
------- ------- -------
Total revenue ................................................. 127 128 130
Operating expenses ............................................. 114 114 115
------- ------- -------
Operating income ............................................... $ 13 $ 14 $ 15
======= ======= =======
Average annual unit sales (in thousands):
Company-owned ................................................. $ 1,019 $ 1,155 $ 1,206
Franchise ..................................................... 858 852 856
Comparable store data (Company-owned):
Comparable store sales increase ............................... 2.0 % 7.2 % 0.2 %
Average guest check ........................................... $ 6.76 $ 6.64 $ 6.77
Operated units:
Company-owned ................................................. 103 96 98
Franchise ..................................................... 112 135 145
International ................................................. 2 10 4
------- ------- -------
Total ....................................................... 217 241 247
======= ======= =======
</TABLE>
1997 vs. 1996
El Pollo Loco's net company sales increased $0.2 million during 1997 as
compared with 1996. This increase reflects an estimated $2.3 million impact
from the additional week in the 1997 reporting period compared with the prior
year period. Excluding the impact of the additional week, revenue decreased
$2.1 million in comparison to the prior year period, primarily reflecting a
four-unit decrease in the number of Company-owned equivalent units operating
throughout 1997 as compared to the entire prior year. Comparable store sales
were relatively unchanged as a result of lower customer counts offset by a
higher guest check average, 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 and foreign licensing revenue for 1997
compared with 1996 increased by $1.4 million (10.4%), primarily due to four
more franchise units open at the end of 1997 as compared with 1996, as well as
an increase in franchise average unit sales. This increase in franchise revenue
over the prior year 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 $0.7 million (0.6%), primarily
reflecting an estimated $1.8 million impact from the additional week in the
1997 reporting period in comparison to the prior year comparable period. Other
factors which contributed to the current year increase include an increase in
advertising expenses and an increase in labor costs primarily due to Federal
and state minimum wage increases. These increases were offset by gains on sales
of restaurants of $1.0 million in 1997 in comparison to $0.7 million of gains
in the prior year. These increases were also offset by lower chicken prices,
lower promotional discounting and the impact of a shift in product mix and
promotional emphasis.
El Pollo Loco's operating income for 1997 increased by $1.0 million (7.1%)
as compared to the prior year 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 in
1996 as well as other key promotions. Comparable store sales also benefited
from the Foster's Freeze rollout.
31
<PAGE>
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 $13.8 million as a result of the factors discussed above.
Coco's and Carrows
The following information for the years ended December 31, 1995 and 1996
is provided for analysis purposes only, as it includes information for periods
prior to the Company's acquisition of Coco's and Carrows on May 23, 1996.
Specifically, the discussion of 1997 vs. 1996 results includes a full year of
operating results for both years, although such operating results prior to May
23, 1996 are not included in consolidated operating results of the Company. For
1995 operating results, see the presentation of combined Coco's and Carrows
operating results, 1996 vs. 1995, following the separate discussions of Coco's
and Carrows 1997 vs. 1996 results.
Coco's
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1996 1997
----------- ----------- -----------
($ in millions, except average unit and comparable store data)
<S> <C> <C> <C>
U. S. systemwide sales ......................................... $ 278 $ 288
====== =======
Net company sales .............................................. $ 270 $ 276
Franchise and foreign licensing revenue ........................ 4 4
------ -------
Total revenue ................................................. 274 280
Operating expenses ............................................. 264 262
------ -------
Operating income ............................................... $ 10 $ 18
====== =======
Average annual unit sales (in thousands)
Company-owned ................................................. $1,506 $1,462 $ 1,492
Franchise ..................................................... 1,884 1,719 1,728
Comparable store data (Company-owned):
Comparable store sales decrease ............................... (5.0 %) (1.6 %) 0.0 %
Average guest check (a) ....................................... $ 6.72 $ 6.80 $ 6.77
Operated units:
Company-owned ................................................. 188 183 178
Franchise ..................................................... 6 5 17
International ................................................. 252 278 298
------- ------- -------
Total ....................................................... 446 466 493
======= ======= =======
</TABLE>
- ---------
(a) The method for determining weekly customer traffic and average guest check
was changed in September 1996 in order to conform better to Advantica's
methodology. Amounts for periods prior to September 1996 have not been
restated. Relative to Coco's, the revised method will generally result in
higher weekly traffic counts and lower average guest checks than
calculated under the previous method.
32
<PAGE>
1997 vs. 1996
Coco's net company sales for 1997 increased $5.9 million (2.2%) as
compared to 1996. This increase reflects an estimated $4.8 million impact from
the additional six days in the 1997 reporting period compared to the prior year
comparable period. In addition, four Carrows units were converted to Coco's
restaurants during 1997, contributing $3.3 million in sales. Offsetting these
increases is the impact of a decrease of nine Company-owned stores in 1997.
Coco's comparable store sales were flat in 1997 as compared to 1996. Franchise
and foreign licensing revenue increased by $0.5 million (12.9%) for 1997 as
compared to 1996. This increase is a result of the net increase of 20 foreign
licensed units as well as 12 additional domestic franchise units in the current
year.
Coco's operating expenses for 1997 decreased by $2.4 million (0.9%) as
compared to the prior year. This decrease is primarily a result of savings in
product and labor costs due to an increased operations focus on cost controls,
waste reduction and labor initiatives and $1.4 million of gains on sales of
restaurants, compared to no gains recorded in 1996. In addition, the prior year
included non-recurring adjustments of approximately $1.6 million, which
increased legal and workers' compensation expenses. No comparable charges are
included in the current year period. These decreases were partially offset by
the impact of an additional six days in the 1997 reporting period as compared
to the prior year comparable period and the increase in Federal and state
minimum wage rates.
Operating income for Coco's increased to $18.4 million in 1997 as a result
of the factors noted above.
Carrows
The following information for the years ended December 31, 1995 and 1996
is provided for analysis purposes only, as it includes information for periods
prior to the Company's acquisition of Coco's and Carrows on May 23, 1996.
Specifically, the discussion of 1997 vs. 1996 results includes a full year of
operating results for both years, although such operating results prior to May
23, 1996 are not included in consolidated operating results of the Company. For
1995 operating results, see the presentation of combined Coco's and Carrows
operating results, 1996 vs. 1995, following the separate discussions of Coco's
and Carrows 1997 vs. 1996 results.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1996 1997
----------- ----------- -----------
($ in millions, except average unit and comparable store data)
<S> <C> <C> <C>
U. S. systemwide sales ......................................... $ 217 $ 215
======= ======
Net company sales .............................................. $ 217 $ 211
Franchise and foreign licensing revenue ........................ -- 1
------- ------
Total revenue ................................................. 217 212
Operating expenses ............................................. 210 198
------- ------
Operating income ............................................... $ 7 $ 14
======= ======
Average annual unit sales (in thousands)
Company-owned ................................................. $1,372 $ 1,343 $1,362
Comparable store data (Company-owned):
Comparable store sales increase (decrease) .................... (0.2 %) 0.1 % (1.7 %)
Average guest check (a) ....................................... $ 6.09 $ 6.25 $ 6.49
Operated units:
Company-owned ................................................. 161 160 140
Franchise ..................................................... -- -- 14
------- ------- -------
Total ....................................................... 161 160 154
======= ======= =======
</TABLE>
- ---------
(a) The method for determining weekly customer traffic and average guest check
was changed in September 1996 in order to conform better to Advantica's
methodology. Amounts for periods prior to September 1996 have not been
restated. Relative to Carrows, the revised method will generally result in
lower weekly traffic counts and higher average guest checks than
calculated under the previous method.
1997 vs. 1996
Carrows' net company sales decreased $5.5 million (2.5%) for 1997 as
compared to 1996 in spite of an estimated $3.8 million impact from the
additional six days in the 1997 reporting period in comparison to the prior
year comparable
33
<PAGE>
period. The sales decrease is primarily the result of a 20-unit decrease in
Company-owned restaurants, 12 of which were converted to franchise units. It
also reflects a decrease in comparable store sales, reflecting a decrease in
traffic partially offset by an increase in average guest check. Franchise and
foreign licensing revenue increased by $0.6 million for 1997 as compared to
1996, reflecting the opening of 14 domestic franchise units.
Carrows' operating expenses decreased $12.0 million (5.7%) for 1997 as
compared to 1996, despite the impact of an additional six days in the 1997
reporting period as compared to the prior year comparable period and increases
in the Federal and state minimum wage rates. The decrease in expenses as
compared with the prior year reflects the impact of approximately $1.5 million
of non-recurring adjustments which increased legal and workers' compensation
expenses in 1996, as well as savings in product and labor costs in 1997 due to
increased focus by operations on cost control, waste reduction and labor
initiatives. In addition, operating expenses in 1997 include $3.2 million of
gains on sales of restaurants, compared to no gains recorded in 1996.
Operating income for Carrows increased to $13.6 million in 1997 as a
result of the factors noted above.
1996 vs. 1995
Coco's and Carrows
<TABLE>
<CAPTION>
1995 1996
------ -------
(In millions)
<S> <C> <C>
Net company sales .......... $502 $487
Franchise revenue .......... 4 4
---- ----
Total revenue .............. 506 491
Operating expenses ......... 474 474
---- ----
Operating income ........... $ 32 $ 17
==== ====
</TABLE>
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 post-acquisition 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. The Company expects to continue to rely on internally
generated funds, supplemented by available working capital advances under the
Credit Facility and other external borrowings, as its primary source of
liquidity. The Credit Facility replaced and refinanced the $200 million
debtor-in-possession financing facility (the "DIP Facility") between FCI,
Flagstar, Holdings, certain subsidiaries of Flagstar and Chase. The DIP
Facility was entered into on July 11, 1997 and refinanced the credit facility
of the Company that was in effect prior to commencement of FCI's and Flagstar's
Chapter 11 proceeding (the "Prepetition Credit Agreement"). At December 31,
1997, Advantica had no working capital advances outstanding under the DIP
Facility; however, letters of credit outstanding were $84.5 million.
The Credit Facility matures on January 7, 2003 (subject to early
termination under certain circumstances). See "Description of Indebtedness --
The Advantica Credit Agreement." The Credit Facility is generally secured by
liens on the same collateral that secured the Company's obligations under the
Prepetition Credit Agreement and the DIP Facility (and the Company's guarantee
and additional liens on the Company's corporate headquarters in Spartanburg,
South Carolina and accounts receivable). 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. 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.
34
<PAGE>
The following table sets forth, for each of the years 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 December 31,
------------------------
1996 1997
----------- ------------
(In millions)
<S> <C> <C>
Net loss .................................................................. $ (85.5) $ (134.5)
Charge for impaired assets ................................................ -- 15.1
Provision for restructuring charges ....................................... -- 10.5
Non-cash charges .......................................................... 119.9 110.9
Deferred income tax benefit ............................................... ( 9.0) ( 0.1)
Change in certain working capital items ................................... 10.2 41.7
Change in other assets and other liabilities, net ......................... (16.1) 21.5
Increase in liabilities from reorganization activities .................... -- 10.9
------- --------
Cash from operations available for debt repayment, dividends on the Old
Preferred Stock and capital expenditures ................................. $ 19.5 $ 76.0
======= ========
</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 set forth in the table above, were $21.2 million and
$17.1 million for the years ended December 31, 1996 and 1997, respectively.
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. See "Description of Indebtedness -- The FRI-M Credit Facility."
Since the leveraged buyout of Flagstar in 1989, the Company has not
achieved the revenue and earnings projections prepared at the time of the
transaction, so while the Company's cash flows have been sufficient to fund its
operations and make interest payments when due, the Company's core businesses
have not experienced cash flow growth sufficient to provide adequate funds to
invest for future growth. This is related in large part to increased
competition, intense pressure on pricing due to discounting, and relatively
limited capital resources to respond to these changes. Such trends have
generally continued into 1997.
These conditions presented both short-term and long-term financial
challenges to the Company. To address these matters, management took steps in
1997 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). Additionally, on January 21, 1997, the Company hired
Donaldson, Lufkin & Jenrette Securities Corporation as a financial advisor to
assist in exploring alternatives to improve the Company's capital structure.
After a review of the various alternatives available to the Company, management
concluded that the reorganizational alternative best designed to recapitalize
the Company over the long-term and maximize the recovery of all stakeholders
was a prepackaged plan pursuant to Chapter 11 of the Bankruptcy Code and on
July 11, 1997 FCI and Flagstar filed voluntary petitions for relief under the
Bankruptcy Code. 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.
The Plan of Reorganization dated as of November 7, 1997 (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 January 7, 1998. As a result of the
reorganization, FCI and Flagstar significantly reduced their debt and
simplified their capital structure. 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 shareholder's equity. With respect to the
long-term liquidity of the Company, management believes that, after giving
effect to the Plan of Reorganization, the Company will have sufficient 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. 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
35
<PAGE>
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,
prevailing economic conditions and other matters, many of which are beyond the
control of the Company.
As of December 31, 1997, and as of December 31, 1997 on a pro forma basis
giving effect to the reorganization and the disposition of FEI, scheduled
maturities of long-term debt relative to Advantica and its subsidiaries for the
years 1998 and thereafter are as follows:
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------------- --------------------------
Advantica Advantica
Excluding FRD FRD Excluding FRD FRD
(In millions) --------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
1998 ............... $ 33.7 $ 23.5 $ 33.7 $ 23.5
1999 ............... 28.9 23.4 28.9 23.4
2000 ............... 325.7 3.1 325.7 3.1
2001 ............... 280.4 2.9 10.4 2.9
2002 ............... 284.6 2.5 4.6 2.5
Thereafter ......... 979.9 163.6 624.1 163.6
</TABLE>
In addition to scheduled maturities of principal, on a consolidated basis
and giving effect to the reorganization, approximately $96.7 million of cash
will be required in 1998 to meet interest payments on long-term debt.
The Company's principal capital requirements are those associated with
opening new restaurants and remodeling and maintaining its existing restaurants
and facilities. During 1997, total capital expenditures were approximately
$82.8 million, of which approximately $1.7 million was used to remodel existing
restaurants, $4.9 million was used to refurbish existing restaurants, $20.2
million was used for POS systems and other information technology assets, $3.7
million was used to open new restaurants, and $46.6 million was used to
maintain existing facilities and to purchase equipment. Of the total capital
expenditures, approximately $19.2 million were financed through capital leases.
Capital expenditures during 1998, excluding the estimated $20 million
associated with the development or purchase of new software (see "Impact of the
Year 2000 Issue"), are expected to total approximately $87 million; however,
the Company is not committed to spending this amount and could spend less if
circumstances warrant.
The Company is able to operate with a substantial working capital
deficiency because (i) restaurant operations and most food service 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 the related sales. At
December 31, 1997, the Company's working capital deficiency, exclusive of net
assets held for sale, was $248.9 million as compared with $297.7 million at the
end of 1996. The decrease in the deficiency is attributable primarily to a
reclassification at December 31, 1997 of accrued interest of $115.7 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.
On February 22, 1996, the Company entered into an agreement with IBM
Global Services ("IBM") (formerly Integrated Systems Solutions Corporation).
The ten-year agreement for $358.1 million, as amended, requires annual payments
by the Company ranging from $24.0 million to $51.2 million. The agreement
provides for IBM to manage and operate the Company's information systems, as
well as to develop and implement new systems and applications to enhance
information technology for the Company's corporate headquarters, restaurants,
and field management. IBM will oversee data center operations, applications
development and maintenance, voice and data networking, help desk operations,
and POS technology. The disposition of FEI will reduce the future commitment
under the agreement with IBM. The Company is currently working with IBM to
quantify this impact.
As further discussed in "Prospectus Summary -- Recent Developments", on
February 18, 1998, Advantica entered into a definitive agreement for the sale
of stock of FEI. Upon the disposition of FEI, the Company will realize cash
proceeds of $380.8 million (subject to certain adjustments) in exchange for all
of the outstanding stock of FEI. Approximately $180 million of the proceeds
from such transaction (together with $20.7 million previously on deposit with
respect to certain Mortgage Financings as herein defined) will be applied to
effect an in-substance defeasance of such Mortgage Financings with a carrying
value of $177.6 million plus accrued interest of $2.3 million at December 31,
1997. Together with the capital lease obligations to be assumed by the buyer,
this will result in a reduced debt load for the Company. The remaining
proceeds, approximately $185 million after transaction expenses, will increase
the Company's short-term liquidity and be available for capital expenditures or
acquisitions, as appropriate.
Because of the classification of the net assets of FEI as assets held for
sale at December 31, 1997 and the adoption of fresh start reporting as of the
Effective Date, the operating results of FEI will be excluded from the
consolidated operating
36
<PAGE>
results of the Company subsequent to January 7, 1998. In 1997 FEI contributed
revenue of $546 million and operating income of $25 million, or 20.9% and 19.2%
of the Company's total revenue and operating income, respectively.
Impact of Bankruptcy Petitions on Franchising
The operation of the Company's franchise system is subject to laws 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
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.
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software which uses two
digits to define the applicable year may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in normal
business activities.
The Company has performed an assessment of the impact of the Year 2000
issue and determined that a significant portion of its software applications
will need to be modified or replaced so that its computer systems will properly
utilize dates beyond December 31, 1999. The Company presently believes that
with modifications to existing software and conversions to new software, the
impact of the Year 2000 issue can be mitigated. However, if such modification
or conversions are not made, or are not completed timely, the Year 2000 issue
could have a material impact on the operations of the Company.
For the most part, the Company intends to replace existing systems to
mitigate the impact of the Year 2000 issue and will utilize both external and
internal resources to do so. In this regard, the Company expects to spend
approximately $20 million in both 1998 and 1999 to develop or purchase new
software, the majority of which will be capitalized. Non-capital expenditures
associated with the Year 2000, which will be expensed when incurred, are
expected to be immaterial in both years.
During 1998, the Company intends to communicate with its significant
suppliers and franchisees to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issue. The Company's current estimate of costs associated with the Year 2000
issue excludes the potential impact of the Year 2000 issue on third parties.
There can be no guarantee that the systems of other companies on which the
Company's systems rely will be converted timely, or that a failure to convert
by another company, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company.
The Company believes, based on available information, that it will be able
to manage its Year 2000 transition without any material adverse effect on its
business operations. However, the costs of the project and the ability of the
Company to complete it on a timely basis are based on management's best
estimates, which were derived based on assumptions of future events including
the availability of certain resources, third party modification plans and other
factors. There can be no guarantee that these estimates will be achieved and
actual results may differ materially from those plans. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
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BUSINESS
Introduction
The Company is one of the largest restaurant companies in the United
States, operating (directly and through franchisees) approximately 3,300
moderately priced restaurants.
FCI was organized as a holding company in 1988 in order to effect the 1989
acquisition of Flagstar. 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 (even after giving effect to the Plan of Reorganization) 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 resulted from negative operating trends due to
increased competition, intensive pressure on pricing due to discounting,
declining customer traffic 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 of Family Restaurants Inc.
("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 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 (69
of which management intends to close during 1998), 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 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 47% 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 1997, the Company
continued its strategy of growth through franchising, adding a net 41 total
units to the system, representing an increase of 106 franchise/licensed units,
offset by a decline of 65 Company-operated units. The increase in franchise
units and the decrease in Company-operated units includes a net 15 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 1995, the Company identified 36 underperforming units for sale or
closure generally during 1996. As of December 31, 1997, two units remain
relative to the 1995 restructuring plan. Management intends to dispose of one
of the remaining units and to continue operating the other.
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
systemwide sales. 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, chicken, hamburgers and sandwiches) and provide both counter and
table service. Denny's sales are evenly distributed across each of its
dayparts; however, breakfast items account for the majority of Denny's sales.
Denny's restaurants had a 1997 average guest check of $5.54 and average unit
sales of $1.3 million. Denny's currently employs approximately 38,500 people.
Historically, Denny's has had the lowest average guest check within the
family-style category. This value position was reinforced through the
introduction of a value menu in January 1996, featuring value priced items for
breakfast, lunch and dinner with tiered pricing starting at $1.99, $2.99 and
$3.99, respectively. Denny's has sought to further expand the customer
perception of value through the use of themed, higher-quality new product
introductions such as "America's Favorite Omelets," "Major League Burgers" and
"Signature Skillets." These new products are supported through television
advertising and restaurant-based media including special menus, posters and
window clings. The Company expects to refine and accelerate these efforts in
1998.
Denny's has supported several capital spending initiatives designed to
enhance the competitive position of the brand. Over the last four years, the
restaurants in several market areas have been "reimaged," which involves an
updated exterior, new signage and an improved interior layout with more
comfortable seating and enhanced lighting. Most other restaurants have received
new landscaping, paint, exterior lighting and parking lot repairs. Furthermore,
the Company continues to focus on issues related to guest comfort and access,
including systematic remodels to bring restaurants into compliance with the
Americans with Disabilities Act ("ADA").
All domestic Company-owned restaurants received new point-of-sale
technology during 1997, along with certain other equipment designed to improve
operations and accommodate new product introductions. A restaurant reegineering
project, begun in late 1996, has progressed to the "mock up" stage, and
improved design elements and processes are being incorporated into new and
existing restaurants.
During 1997, Denny's franchisees opened two "Denny's Classic Diners."
These restaurants have an upbeat, nostalgic look and feel that appeals to
younger customers, while retaining Denny's core brand equities. The Classic
Diner features a modular, metal-skinned facility, new uniforms, music and a
tailored menu to create an energized dining experience. Operating trends to
date are encouraging, with a reduced per-unit investment producing
above-average sales when compared to the traditional Denny's restaurant. The
Company plans to accelerate the development of the Classic Diner format in
1998.
Denny's opened 77 new franchised units in 1997, a new record for the
Company, and management believes that over the last four years Denny's has
opened more new units cumulatively than any competitor in the mid-scale
segment. Denny's
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also continues to supplement its franchise development efforts by selectively
selling Company-owned units to franchisees. There were a total of 758
franchised/licensed units at the end of 1997, or 46% of all Denny's
restaurants. The initial fee for a single Denny's franchise is $35,000 and the
current royalty payment is 4% of gross sales.
Hardee's
As discussed above, the Company has entered into a definitive agreement to
sell its Hardee's operation. The Company would receive $380.8 million in cash
(subject to adjustment) 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 on or about April 1, 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,
the fifth largest sandwich chain in the United States based on national
systemwide sales. FEI is HFS' largest franchisee, operating 18% of Hardee's
restaurants nationwide. The 557 Hardee's restaurants operated by the Company at
December 31, 1997 were located primarily in six southeastern states. 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 52% of the chain's revenues in 1997. 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 on weekends. Hardee's
breakfast menu, featuring the chain's signature "made-from-scratch" biscuits,
accounts for approximately 47% of total sales at the Company's Hardee's
restaurants. The average guest check at the Company's Hardee's was $3.23 in
1997, and average annual unit sales for the Company's Hardee's restaurants was
$1.0 million. Advantica's Hardee's currently employ approximately 19,400
people.
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. An arbitration proceeding is pending between the
Company and HFS relating to certain matters arising under these license
agreements. Such proceeding has been suspended in connection with the pending
sale of FEI to HFS' parent company. If the pending sale is consummated, all
claims by the Company against HFS would be released.
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.
Quincy's
Quincy's is the sixth largest family steak chain in the United States
based on U.S. systemwide sales and one of the largest chains in the southeast
United States. The company owns and operates 180 restaurants in eight
southeastern states and one midwestern state, with its largest concentrations
in Florida, Alabama, North Carolina, and South Carolina. Quincy's currently
employs approximately 8,600 people. Quincy's menu consists principally of
steaks and an all-you-can-eat, buffet-style food bar (called "America's Home
Plate") that features a variety of meats, vegetables, soups and salads. All
Quincy's restaurants are open seven days a week for lunch and dinner, with most
offering breakfast on the weekend. The average guest check was $6.25 in 1997,
and average unit sales were $1.2 million.
After experimenting with a number of formats at Quincy's from 1993 to
1995, including operating a few restaurants as buffet only and implementing
restaurant-based home delivery in others, management determined that Quincy's
needed
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better food quality and the "No Mistake Steak" to regain lost market share.
These improvements were implemented in October 1996. Although modest
improvements were seen, sales trends fell well short of management's
expectation. Quincy's marketing strategy is currently being modified.
Additionally, a site-by-site analysis was completed in 1997. As a result,
the Company approved a restructuring plan and is divesting itself of 88
underperforming restaurants. Nineteen restaurants were closed in 1997. Such
divestitures will continue until the brand consists of strong operating assets.
As a part of this asset redeployment, one restaurant was converted to a
Carrows. This test is designed to determine whether the Carrows brand can
compete in the Southeast. Preliminary restaurant sales results since the
conversion have been encouraging.
Management is also testing full service in six restaurants in the
Montgomery, Alabama area in recognition of the fact that the "midscale steak"
niche in which Quincy's (as well as other direct competitors) operates is
shrinking because the pay-on-entry service system is losing favor in the
marketplace. Preliminary sales trends for these full-service restaurants are
encouraging.
El Pollo Loco
El Pollo Loco, which specializes in flame-broiled chicken, is one of the
leading chains in the quick-service chicken segment of the restaurant industry.
Of the total 247 El Pollo Loco restaurants, which are located in four
southwestern states, one southeastern state and two foreign countries, 88% 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 35% of the chain's
revenues in 1997. The dinner daypart for El Pollo Loco is the strongest,
representing 53% 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 1997 was $6.77 and average annual Company-owned
restaurant sales were approximately $1.2 million in 1997.
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. By the year 2000, the Company hopes
to add as many as 150 additional El Pollo Loco restaurant units. In the first
quarter of 1996, the Company purchased the international rights to the El Pollo
Loco brand to facilitate expansion opportunities in Mexico and other countries.
In 1997 the chain had a net increase of 12 units, representing an increase
of ten franchise units and two Company-owned 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 South Korea. Coco's, which
ranks among the top ten chains in the family-style category based on U.S.
systemwide sales, currently consists of 178 Company-operated, 17 domestic
franchised and 298 international licensed restaurants, and employs
approximately 8,900 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 generally open 18 hours a day. Coco's restaurants have uniform
menus and serve breakfast, lunch and dinner.
Lunch and dinner dayparts are Coco's strongest, comprising 37% and 38% of
1997 sales, respectively. In 1997, the average guest check was $6.77, with
average annual unit sales of approximately $1.5 million.
Coco's ranks among the top ten chains in international sales, and since
the Company acquired the chain in May 1996 41 international units have been
added to the system. Currently, Coco's is placing emphasis on domestic
franchising as an
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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 140
Company-owned units and employs approximately 6,200 people. Carrows began
aggressively implementing its strategy of focusing on growth through
franchising in 1997. 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 almost
half of the Company-owned units 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 (including "late night") dayparts are Carrows' strongest,
comprising 30% and 45% of 1997 sales, respectively. In 1997, the average guest
check was $6.49, with average annual unit sales of approximately $1.4 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 know how to perform
restaurant functions and are able to 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. While research
and development activities are important to the Company's business, amounts
expended for these activities are not material.
Financial and management control is facilitated by the use of
point-of-sale ("POS") systems in all of the Company's restaurants which
transmit detailed sales reports, payroll data and periodic inventory
information for management review. In July 1997, the Company completed the
rollout of a new POS system in its domestic Company-owned Denny's restaurants.
This system is helping restaurant management improve customer service through
faster and more accurate turnaround of customer orders. In addition, the new
POS system will aid in sales analysis and decision-making by providing
information on a more timely basis and at a higher level of detail. Over the
next two years, management intends to continue installing new POS systems in
all of Advantica's Company-owned restaurants pursuant to its information
services agreement with IBM as more fully discussed in "Management's Discussion
and Analysis of Financial Conditions and Results of Operations -- Liquidity and
Capital Resources."
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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 1997, the Company spent from 3% to 8% of each concepts' total revenue on
advertising.
In accordance with the HFS licensing agreements, the Company spent
approximately 7.9% of its Hardee's units' total gross sales on marketing and
advertising during 1997. Of this amount, approximately 3.3% 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 Company's franchise development groups work closely with franchisees and
real estate brokers to identify sites which meet specific standards. Sites are
evaluated on a variety of factors, including demographics, traffic patterns,
visibility, building constraints, competition, environmental restrictions, and
proximity to high-traffic consumer activities.
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 Portion-Trol Foods, Inc. and the Mother Butler Pies division of
Denny's, its two 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 greater negative effect on operating results during
quarters with lower restaurant sales.
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 considers its trademarks and service marks
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
43
<PAGE>
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.
The Company, through Denny's, Inc., its wholly-owned subsidiary, owns the
rights to one trademark used by Hardee's under a licensing agreement. All other
Hardee's trademarks are owned by HFS.
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 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, convenience and the attractiveness of their facilities.
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.
Economic, Market and Other Conditions
The restaurant industry is affected by many factors, including changes in
national, regional and local economic conditions affecting consumer spending,
changes in socio-demographic characteristics of areas in which restaurants are
located, changes in consumer tastes and preferences, increases in the number of
restaurants generally and in particular areas and unfavorable trends in
regional weather conditions.
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, 1997, 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 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. The California wage increased from
$4.25 to $5.00 per hour, effective March 1, 1997, and increased to $5.75 per
hour on 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 has attempted to offset increases in the minimum wage
through pricing and various cost control efforts; however, there can be no
assurance that the Company or its franchisees can continue to pass such
additional costs on to its customers.
44
<PAGE>
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.
Compliance with Consent Decrees
On May 24, 1994, the Company entered into two consent decrees (the
"Consent Decrees") resolving the class action litigation brought against
Denny's, Inc. alleging that Denny's, Inc. engaged in a pattern or practice of
racial discrimination in violation of the Civil Rights Act of 1964. The Company
denied any wrongdoing. The Consent Decrees enjoin the Company from racial
discrimination and require the Company to implement certain employee training
and testing programs and provide public notice of Denny's non-discrimination
policies. They carry no direct monetary penalties.
During 1997, Denny's continued to meet all of its obligations under the
Consent Decrees. As part of orientation, every new employee receives
notification of the Consent Decree requirements. All newly-hired hourly
employees who work in the restaurants complete video-based non-discrimination
training that focuses on employee responsibilities under the Decrees and public
accommodations law. During 1997, there were approximately 2,400 management
employees who attended the first phase of live management non-discrimination
training. In addition, during 1997 Denny's rolled out the second phase of live
management non-discrimination training. By year end, approximately 5,800
management employees had attended this training. Video training for hourly
employees and both phases of management training are ongoing and required for
every new employee.
Further, as required by the Consent Decrees, non-discrimination testing
was conducted by independent civil rights organizations in over 600 Denny's
restaurants in 1997. This non-discrimination testing compares the dining
experience of similarly matched test groups to determine if guests are treated
equally without regard to race, color or national origin.
Every Denny's restaurant displays a sign at each public entrance
emphasizing Denny's commitment to non-discrimination and providing an 800 phone
number directing customers to an independent civil rights monitor if they feel
they have been victims of disparate treatment. In addition, certain printed
advertising materials such as menus, magazine and newspaper advertising include
a statement assuring that all guests will receive fair and equal treatment.
Denny's television advertising includes diverse talent representing the
diversity of its customer base.
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 4,900 150
Coco's. ............... 35,000 5,600 150
Denny's ............... 42,000 4,750 140
El Pollo Loco ......... 20,000 2,100 60
Hardee's. ............. 52,000 3,400 95
Quincy's. ............. 60,000 6,800 200
</TABLE>
The following table sets forth certain additional information regarding
the Company's restaurant properties as of December 31, 1997:
<TABLE>
<CAPTION>
Land and Land Leased Land and
Building and Building Building
Concept Owned Owned Leased Total
- ---------------------------- ---------- -------------- --------- --------
<S> <C> <C> <C> <C>
Carrows ............... 3 10 127 140
Coco's. ............... 2 39 137 178
Denny's ............... 252 36 606 894
El Pollo Loco ......... 7 31 60 98
Hardee's. ............. 283 95 179 557
Quincy's. ............. 139 36 5 180
--- -- --- ---
Total ............... 686 247 1,114 2,047
=== === ===== =====
</TABLE>
45
<PAGE>
The number and location of the Company's restaurants in each chain as of
December 31, 1997 are presented below:
<TABLE>
<CAPTION>
Denny's El Pollo Loco
--------------------- ---------------------
Franchised/ Franchised/
State/Country Owned Licensed Hardee's Quincy's Owned Licensed
- ------------------------------ ------- ------------- ---------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alabama ..................... 1 8 155 42 -- --
Alaska ...................... -- 4 -- -- -- --
Arizona ..................... 28 48 -- -- -- 2
Arkansas .................... 1 8 3 -- -- --
California .................. 220 144 -- -- 98 130
Colorado .................... 25 13 -- -- -- --
Connecticut ................. 5 3 -- -- -- --
Delaware .................... 3 -- -- -- -- --
Florida ..................... 102 86 55 39 -- --
Georgia ..................... -- 23 10 10 -- --
Hawaii ...................... 4 3 -- -- -- --
Idaho ....................... -- 6 -- -- -- --
Illinois .................... 47 14 -- -- -- --
Indiana ..................... 14 10 -- -- -- --
Iowa ........................ -- 6 -- -- -- --
Kansas ...................... 9 1 -- -- -- --
Kentucky .................... -- 20 -- -- -- --
Louisiana ................... 7 4 1 -- -- --
Maine ....................... -- 4 -- -- -- --
Maryland .................... 14 16 -- -- -- --
Massachusetts ............... 9 -- -- -- -- --
Michigan .................... 37 3 -- -- -- --
Minnesota ................... 13 4 -- -- -- --
Mississippi ................. 2 2 38 5 -- --
Missouri .................... 28 7 -- -- -- --
Montana ..................... -- 5 -- -- -- --
Nebraska .................... -- 4 -- -- -- --
Nevada ...................... 11 6 -- -- -- 8
New Hampshire ............... 2 1 -- -- -- --
New Jersey .................. 11 2 -- -- -- --
New Mexico .................. 2 13 -- -- -- --
New York .................... 24 11 -- -- -- --
North Carolina .............. 7 11 58 36 -- --
North Dakota ................ -- 3 -- -- -- --
Ohio ........................ 33 23 1 1 -- --
Oklahoma .................... 9 18 -- -- -- --
Oregon ...................... 5 20 -- -- -- --
Pennsylvania ................ 51 2 -- -- -- --
South Carolina .............. 9 5 123 40 -- 1
South Dakota ................ -- 2 -- -- -- --
Tennessee ................... 3 11 110 5 -- --
Texas ....................... 60 72 -- -- -- --
Utah ........................ 7 12 -- -- -- 4
Vermont ..................... -- 2 -- -- -- --
Virginia .................... 19 10 3 2 -- --
Washington .................. 50 22 -- -- -- --
West Virginia ............... -- 3 -- -- -- --
Wisconsin ................... 12 7 -- -- -- --
Wyoming ..................... -- 6 -- -- -- --
Canada ...................... 10 28 -- -- -- --
Japan ....................... -- -- -- -- -- --
Korea ....................... -- -- -- -- -- --
Other International ......... -- 22 -- -- -- 4
--- --- --- -- -- ---
Total ..................... 894 758 557 180 98 149
=== === === === == ===
<CAPTION>
Coco's Carrows
--------------------- --------------------
Franchised/ Franchised/
State/Country Owned Licensed Owned Licensed
- ------------------------------ ------- ------------- ------- ------------
<S> <C> <C> <C> <C>
Alabama ..................... -- -- -- --
Alaska ...................... -- -- -- --
Arizona ..................... 21 2 5 --
Arkansas .................... -- -- -- --
California .................. 128 15 115 3
Colorado .................... 5 -- -- --
Connecticut ................. -- -- -- --
Delaware .................... -- -- -- --
Florida ..................... -- -- -- --
Georgia ..................... -- -- -- --
Hawaii ...................... -- -- -- --
Idaho ....................... -- -- -- --
Illinois .................... -- -- -- --
Indiana ..................... 3 -- -- --
Iowa ........................ -- -- -- --
Kansas ...................... -- -- -- --
Kentucky .................... -- -- -- --
Louisiana ................... -- -- -- --
Maine ....................... -- -- -- --
Maryland .................... -- -- -- --
Massachusetts ............... -- -- -- --
Michigan .................... -- -- -- --
Minnesota ................... -- -- -- --
Mississippi ................. -- -- -- --
Missouri .................... 2 -- -- --
Montana ..................... -- -- -- --
Nebraska .................... -- -- -- --
Nevada ...................... -- -- 7 1
New Hampshire ............... -- -- -- --
New Jersey .................. -- -- -- --
New Mexico .................. -- -- 4 --
New York .................... -- -- -- --
North Carolina .............. -- -- -- 1
North Dakota ................ -- -- -- --
Ohio ........................ -- -- -- --
Oklahoma .................... -- -- -- --
Oregon ...................... -- -- -- 8
Pennsylvania ................ -- -- -- --
South Carolina .............. -- -- -- --
South Dakota ................ -- -- -- --
Tennessee ................... -- -- -- --
Texas ....................... 13 -- 9 --
Utah ........................ -- -- -- --
Vermont ..................... -- -- -- --
Virginia .................... -- -- -- --
Washington .................. 6 -- -- 1
West Virginia ............... -- -- -- --
Wisconsin ................... -- -- -- --
Wyoming ..................... -- -- -- --
Canada ...................... -- -- -- --
Japan ....................... -- 260 -- --
Korea ....................... -- 37 -- --
Other International ......... -- 1 -- --
--- --- --- --
Total ..................... 178 315 140 14
=== === === ==
</TABLE>
46
<PAGE>
In addition to the restaurant locations set forth above, the Company also
owns a 19-story, 187,000 square foot office tower in Spartanburg, South
Carolina which serves as its corporate headquarters. The Company's corporate
offices currently occupy approximately 16 floors of the tower, with the balance
leased to others.
See "Description of Indebtedness -- The Advantica Credit Agreement" and "
- -- Mortgage Financings" and Note 8 to the accompanying Consolidated Financial
Statements for information concerning encumbrances on certain properties of the
Company.
Employees
At December 31, 1997, the Company had approximately 85,000 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 "Act"). The 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."
47
<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 50 Chairman 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 38 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., a
swimming pool equipment manufacturing and construction company (1995 to present);
President and Chief Executive Officer of KDI Corporation (1993 to 1995), President,
Chief Executive Officer of International Tropio-Cal, Inc. (1991 to 1992); Director of
C.R. Anthony Company, Insilco Corporation and Koll Real Estate Group Inc.
Irwin N. Gold 41 Director of Advantica; Senior Managing Director and Director of Houlihan, Lokey,
Howard and Zukin, Inc., a speciality investment banking firm (1993 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, a
private equity investment firm (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 68 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.
and Thermadyne Holdings Corporation.
Elizabeth A. Sanders 52 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 & Company, Wal-Mart Stores, Inc., Wellpoint
Health Networks Inc. and Wolverine Worldwide, Inc.
Donald R. Shepherd 61 Director of Advantica; Retired; Chairman of Loomis, Sayles & Company, L.P., Boston,
Massachusetts, an investment management firm (1992 to 1995); Chief Executive
Officer and Chief Investment 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 50 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 Executive Vice President of Advantica and President of Coco's/Carrows Division
(March 1998-present); Senior Vice President of Advantica and President of Hardee's
Division (May 1996-February 1998); 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).
</TABLE>
48
<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 48 Vice President and Treasurer of Advantica (August 1995-present); Vice President and
Treasurer of Leaseway Transportation Corp. (1988-1995).
Nelson J. Marchioli 48 Executive Vice President of Advantica (March 1998-present); Senior Vice President of
Advantica (May 1997-February 1998); 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 (1995-1996); Senior Vice President, Human Resources of Advantica
(1993-1995); Vice President, Education and Development of Advantica (1992-1993).
Rhonda J. Parish 41 Executive Vice President of Advantica (March 1998-present); General Counsel and
Secretary of Advantica (1995-present); Senior Vice President of Advantica
(1995-February 1998); Assistant General Counsel of Wal-Mart Stores, Inc. (1990-1994)
John A. Romandetti 47 Executive Vice President of Advantica (March 1998-present); Senior Vice President of
Advantica (1995-February 1998); President of Denny's Division (January 1997-present);
President of El Pollo Loco Division (1995-1996); Vice President of Operations for
Burger King Corporation (1989-1995).
Mark L. Shipman 48 Executive Vice President, Acquisitions and Development of Advantica (March
1998-present); Senior Vice President of Advantica and President of Coco's/Carrows
Division (May 1996-February 1998); Vice President of Acquisitions and Development
of Advantica (1995-1996); Vice President of Administration of Denny's Division
(1993-1995); Vice President of Operations (West) of Denny's Division (1991-1993).
Paul R. Wexler 54 Executive Vice President, Procurement and Distribution of Advantica (March 1998 to
present); Senior Vice President, Procurement and Distribution of Advantica
(1995-February 1998); Vice President, Procurement and Quality Assurance -- Marriott
International (1991-1995).
Stephen W. Wood 39 Executive Vice President, Human Resources and Corporate Affairs of Advantica (March
1998-present); Senior Vice President, Human Resources and Corporate Affairs of
Advantica (April 1996-February 1998); Vice President, Compensation, Benefits, and
Employee Information Systems and Corporate Office Human Resources of Advantica
(1993-1996); Senior Director, Compensation, Benefits and Employee Information
Systems of Advantica (1993); Director, Benefits and Executive Compensation of HFS
( 1991-1993).
</TABLE>
49
<PAGE>
MANAGEMENT COMPENSATION
Set forth below is information for 1997, 1996 and 1995 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
1997.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
Annual Compensation (1) Awards
All
Other
Name and Securities Underlying Compensation
Principal Position Year Salary ($)(2) Bonus ($)(3) Options (#)(4) ($)(5)(6)
- -------------------------------------------- ------ ------------------ -------------- ----------------------- -------------
<S> <C> <C> <C> <C> <C>
James B. Adamson 1997 $1,047,243 $100,000 -- $1,666,842
Chairman and Chief Executive 1996 947,068 -- 100,000 364,133
Officer of Advantica 1995 894,211 -- 800,000 1,250,693
C. Robert Campbell 1997 333,906 -- -- 50,000
Executive Vice President and 1996 320,799 40,000 150,000 50,000
Chief Financial Officer of Advantica 1995 214,300 (7) -- 100,000 405,957
Craig S. Bushey 1997 320,992 -- -- 73,801
Executive Vice President of Advantica and 1996 183,973 (7) 40,000 200,000 213,678
President, Coco's/Carrows Division 1995 -- -- -- --
John A. Romandetti 1997 355,149 10,122 -- 50,000
Executive Vice President of Advantica and 1996 226,275 112,200 125,000 90,793
President, Denny's Division 1995 7,078 (7) -- 75,000 --
Edna K. Morris 1997 283,555 -- -- 50,000
Executive Vice President of Advantica and 1996 238,352 40,000 150,000 --
President, Quincy's Division 1995 217,073 -- 100,000 --
</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 in the
respective year by the named executive officers under the Company's
Incentive Compensation Program.
(4) All the options listed in this column have been cancelled for no
consideration to the holder under the terms of the Plan of Reorganization,
which cancelled the Company's Old Common Stock and all underlying options
as of the Effective Date. Excluding Mr. Adamson, amounts shown for 1996
for each named executive officer reflect the 1996 option repricing 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.
(5) The amounts shown for 1995, 1996 and 1997 for Mr. Adamson consist of
Company paid life insurance premium payments of $8,440, $16,880 and
$16,880, respectively. Mr. Adamson's 1997 amount also reflects a retention
bonus payment in the amount of $1,550,000 as well as, Company-paid travel
expense of $37,004 for Mr. Adamson's spouse to accompany him on certain
business travel in 1997, reimbursements of certain incurred legal,
personal tax and financial planning expenses totaling $14,927 and certain
tax payments in the amount of $48,032. 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) Excluding Mr. Adamson, the 1997 amounts shown for each named executive
officer include retention bonus payments in the amount of $50,000. The
remaining amounts shown for Messrs. Bushey, Campbell and Romandetti
consist of additional compensation and/or expense reimbursement paid to
the respective named executive officers at or near the time of, or
otherwise arising in connection with, their initial employment with the
Company.
50
<PAGE>
(7) Reflects base salary paid for only the portion of the year in which the
named executive officer was employed by the Company.
Stock Options
There were no stock options granted to the named executive officers under
the Company's 1989 Non-Qualified Stock Option Plan (the "1989 Option Plan")
during the fiscal year ended December 31, 1997. The following table sets forth
information with respect to the 1997 year-end values of unexercised options,
all of which were granted by the Company pursuant to the 1989 Option Plan, held
by each of the persons named in the Summary Compensation Table above:
Aggregated Option Exercises in 1997 and
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised In-
Underlying the-Money Options
Unexercised at Fiscal
Options at Fiscal Year-End
Year-End (#) ($)
------------------- ------------------
Exercisable/ Exercisable/
Unexercisable Unexercisable
------------------- ------------------
<S> <C> <C>
James B. Adamson ........... 340,000/560,000 -- / --
C. Robert Campbell ......... 55,000/ 70,000 -- / --
Craig S. Bushey ............ 20,000/ 80,000 -- / --
John A. Romandetti ......... 35,000/ 65,000 -- / --
Edna K. Morris ............. 45,000/ 80,000 -- / --
--------------- ------------------
</TABLE>
No options held by the foregoing named executive officers were exercised
in 1997.
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 Pension Plan, 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.
<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 ........... $ 42,802 $ 57,070 $ 71,337 $ 85,604 $ 99,872
250,000 ........... 54,052 72,070 90,087 108,104 125,000
300,000 ........... 65,302 87,070 108,837 130,604 150,000
350,000 ........... 76,552 102,070 127,587 153,104 175,000
400,000 ........... 87,802 117,070 146,337 175,604 200,000
500,000 ........... 110,302 147,070 183,837 220,604 250,000
600,000 ........... 132,802 177,070 221,337 265,604 300,000
700,000 ........... 155,302 207,070 258,837 310,604 350,000
800,000 ........... 177,802 237,070 296,337 355,604 400,000
900,000 ........... 200,302 267,070 333,837 400,604 450,000
1,000,000 ......... 222,802 297,070 371,337 445,604 500,000
1,200,000 ......... 267,802 357,070 446,337 535,604 600,000
1,400,000 ......... 312,802 417,070 521,337 625,604 700,000
1,600,000 ......... 357,802 477,070 596,337 715,604 800,000
</TABLE>
51
<PAGE>
The Advantica Pension 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 Pension Plan at normal retirement age is calculated by
multiplying the number of years of participation in the Advantica Pension 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 Pension 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 Pension Plan is based on actuarial determinations.
Ancillary to the Advantica Pension Plan is a nonqualified plan for a
select group of management and highly compensated employees that provides for
benefits limited by the limits on benefits and compensation under the Internal
Revenue Code of 1986, as amended (the "Code"). "Compensation" and "Average
Compensation" are defined in this ancillary plan the same way they are defined
in the Advantica Pension Plan. Benefits payable under the ancillary plan are
included in the table above.
The maximum annual pension benefit payable under the Advantica Pension
Plan for 1997 was $125,000 (or, if greater, the participant's 1982 accrued
benefit).
Except for the accrual of certain nonqualified benefits as described
herein, the Compensation included under the Advantica Pension 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
and Romandetti and Ms. Morris was $1,050,000, $325,000, $338,004, $360,126 and
$285,000, respectively.
As of December 31, 1997, the estimated credited years of service under the
Advantica Pension Plan for Messrs. Adamson, Bushey, Campbell and Romandetti and
Ms. Morris at normal retirement age was 17, 1, 14, 19 and 23, respectively.
The early retirement provisions of the Advantica Pension 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 Advantica will employ Mr. Adamson as President and
Chief Executive Officer of Advantica 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 Advantica and the Board shall continue to
nominate Mr. Adamson as a director of the Company during his employment term.
The Adamson Employment Agreement prohibits
52
<PAGE>
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 value (based upon a fair
market value of $10 per share) 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 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 and Romandetti and Ms. Morris 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
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
53
<PAGE>
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.
By letter agreements dated December 3, 1997, these agreements were
replaced in their entireties except for the change of control and severance
provisions contained in the prior agreements (as discussed above) which were
not revoked, rescinded or cancelled unless and until a stock option agreement
(offered under the new management stock option program and providing for an
option to purchase 100,000 shares over a ten-year period with an exercise price
at the fair market value of the stock on the date of such grant) had been
executed by the named executive. Additionally the new letter agreements
contained identical retention bonus provisions as the January 1997 agreements
and provided for the payment of severance benefits (in a single lump amount
within 5 days following termination) equal to two times the named executives
current base pay (but not less than $450,000) plus an amount equal to actual
benefit credits for an eighteen-month period as well as accrued unused vacation
time. Such payment shall be guaranteed by certain subsidiaries of the Company.
The new letter agreements further provide that (i) the stock options referenced
immediately above 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, and
(ii) in the event the named executive officers are terminated during a calendar
year for which an annual bonus is paid by the Company, the annual bonus to
which the named Executive would have otherwise been entitled shall be prorated
and included as a part of his/her severance payment, provided the named
executive was employed for at least six (6) months during that year.
Compensation and Benefits Committee Interlocks and Insider Participation
Messrs. Paul E. Raether and Michael T. Tokarz served on the Company's
Compensation and Benefits Committee during 1997. Messrs. Tokarz and Raether
also served as officers of certain subsidiaries of the Company. Messrs. Raether
and Tokarz are general partners of KKR. In 1997, KKR earned an annual financial
advisory fee of $1,250,000, of which approximately $500,000 was paid in 1997
with the remaining amount being paid in 1998.
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.
54
<PAGE>
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.
(and related entities)
1251 Avenue of the Americas
New York, New York 10020 ........................................... 3,859,077(2) 7.91%
James B. Adamson .................................................... 200,000 *
Robert H. Allen ..................................................... 200 *
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 ..................................................... -- --
Edna K. Morris ...................................................... -- --
All current directors and executive officers as a group (20 persons) 200,200 *
</TABLE>
- ---------
* less than one (1) percent.
(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 deemed
issued and outstanding pursuant to the Plan of Reorganization subject to the
completion of the exchange of securities as contemplated by such plan.
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."
55
<PAGE>
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:
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
56
<PAGE>
(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, (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
57
<PAGE>
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, 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.
58
<PAGE>
Mortgage Financings
A subsidiary of Advantica had issued and outstanding, at December 31,
1997, $177.6 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 $152.6
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 146 Quincy's restaurants. In connection with
the pending sale of 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 $177.6 million at December 31, 1997 ($102 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 (as defined in the documents governing such Mortgage
Financings) 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.
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
(8.4375% at December 31, 1997).
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.
59
<PAGE>
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 1.85:1.00 on December 31, 1997 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 4.35:1.00 on December 31, 1997 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 $49.0 million for the Rolling Period ending December 31, 1997
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).
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 (none of
which are currently outstanding). 40,000,000 shares of Common Stock were deemed
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.
60
<PAGE>
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 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:
61
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
Owned and Registered
Selling Stockholder Hereunder
- -------------------------------------- ---------------------
<S> <C>
Loomis Sayles & Company, L.P(1)........ 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 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 as a NASDAQ National
Market security on The NASDAQ Stock Market(SM), 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
62
<PAGE>
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, 1996 and 1997 and the
statements of consolidated operations and cash flows for the three years ended
December 31, 1995, 1996 and 1997 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.
63
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Independent Auditors' Report ............................................................. F-2
Statements of Consolidated Operations for the Three Years Ended December 31, 1995, 1996 F-3
and 1997
Consolidated Balance Sheets as of December 31, 1996 and 1997 ............................. F-4
Statements of Consolidated Cash Flows for the Three Years Ended December 31, 1995, 1996 F-5
and 1997
Notes to Consolidated Financial Statements ............................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
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, 1996 and 1997, and the related statements of
consolidated operations and consolidated cash flows for each of the three years
in the period ended December 31, 1997. 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.
As discussed in Note 1 to the financial statements, on November 12, 1997,
the Bankruptcy Court entered an order confirming the plan of reorganization
which became effective after the close of business on January 7, 1998. As
described in Note 2, the change in ownership of the Company effected by the
plan of reorganization requires that the Company apply "fresh-start reporting"
effective January 7, 1998 in accordance with AICPA Statement of Position 90-7
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code",
as a new entity with assets, liabilities, and a capital structure having
carrying values not comparable with prior periods.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1996 and 1997 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Greenville, South Carolina
February 20, 1998
F-2
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1995 1996 1997
-------------- -------------- -------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net company sales .......................................................... $2,512,164 $2,471,247 $2,528,659
Franchise revenue .......................................................... 59,323 71,055 80,797
---------- ---------- ----------
Operating revenue .......................................................... 2,571,487 2,542,302 2,609,456
---------- ---------- ----------
Operating expenses:
Product cost .............................................................. 867,141 746,680 760,974
Payroll and benefits ...................................................... 914,315 943,164 976,189
Depreciation and amortization expense ..................................... 132,872 129,948 140,828
Utilities ................................................................. 98,212 104,477 110,138
Other ..................................................................... 393,482 461,641 465,285
Provision for restructuring charges ....................................... 15,873 -- 10,540
Charge for impaired assets ................................................ 51,358 -- 15,074
---------- ---------- ----------
2,473,253 2,385,910 2,479,028
---------- ---------- ----------
Operating income ........................................................... 98,234 156,392 130,428
---------- ---------- ----------
Other charges (credits):
Interest and debt expense (contractual interest for the year ended
December 31, 1997 is $278,061)........................................... 232,874 261,633 227,110
Interest income ........................................................... (3,725) (6,926) (722)
Other -- net .............................................................. 2,005 3,537 5,648
---------- ---------- ----------
231,154 258,244 232,036
---------- ---------- ----------
Loss before reorganization items and taxes ................................. (132,920) (101,852) (101,608)
Reorganization items ....................................................... -- -- 31,073
---------- ---------- ----------
Loss before income taxes ................................................... (132,920) (101,852) (132,681)
(Benefit from) provision for income taxes .................................. (14) (16,392) 1,769
---------- ---------- ----------
Loss from continuing operations ............................................ (132,906) (85,460) (134,450)
Gain on sale of discontinued operations, net of income tax provision of:
1995 -- $10,092............................................................ 77,877 -- --
Loss from discontinued operations, net of income tax provision of:
1995 -- $(1,361)........................................................... (636) -- --
---------- ---------- ----------
Loss before extraordinary items ............................................ (55,665) (85,460) (134,450)
Extraordinary items, net of income tax benefit of: 1995 -- $25.............. 466 -- --
---------- ---------- ----------
Net loss ................................................................... (55,199) (85,460) (134,450)
Dividends on preferred stock ............................................... (14,175) (14,175) (14,175)
---------- ---------- ----------
Net loss applicable to common shareholders ................................. ($ 69,374) ($ 99,635) ($ 148,625)
========== ========== ==========
Per share amounts applicable to common shareholders:
Basic and diluted earnings per share:
Loss from continuing operations ........................................... $ (3.47) $ (2.35) $ (3.50)
Income from discontinued operations, net .................................. 1.82 -- --
---------- ---------- ----------
Loss before extraordinary items ........................................... ( 1.65) ( 2.35) ( 3.50)
Extraordinary items, net .................................................. 0.01 -- --
---------- ---------- ----------
Net loss .................................................................. $ 1.64) $ 2.35) $ 3.50)
========== ========== ==========
Average outstanding and equivalent common shares .......................... 42,431 42,434 42,434
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Historical
December 31,
-------------------------------
1996 1997
--------------- ---------------
(In thousands)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ............................................................... $ 92,369 $ 54,079
Receivables, less allowance for doubtful accounts of: 1996 -- $2,405; 1997--$4,177....... 17,812 12,920
Loan receivable from former officer ..................................................... 13,922 --
Merchandise and supply inventories ...................................................... 31,543 20,700
Net assets held for sale ................................................................ 5,114 242,479
Other ................................................................................... 29,895 45,101
Restricted investments securing in-substance defeased debt .............................. -- --
------------- -------------
190,655 375,279
------------- -------------
Property:
Property owned:
Land ................................................................................... 253,067 195,743
Buildings and improvements ............................................................. 891,512 588,140
Other property and equipment ........................................................... 536,886 406,315
------------- -------------
Total property owned .................................................................... 1,681,465 1,190,198
Less accumulated depreciation ........................................................... 629,676 510,690
------------- -------------
Property owned -- net ................................................................... 1,051,789 679,508
------------- -------------
Buildings and improvements, vehicles, and other equipment held under capital leases ..... 210,533 164,691
Less accumulated amortization ........................................................... 93,740 85,826
------------- -------------
Property held under capital leases -- net ............................................... 116,793 78,865
------------- -------------
1,168,582 758,373
------------- -------------
Other Assets:
Goodwill net of accumulated amortization of: 1996 -- $3,077; 1997-- $8,061............... 205,389 207,918
Other intangible assets, net of accumulated amortization: 1996 -- $20,611; 1997--$16,781. 27,595 14,897
Deferred financing costs -- net ......................................................... 64,153 56,716
Other ................................................................................... 30,996 25,885
Restricted investments securing in-substance defeased debt .............................. -- --
Reorganization value in excess of amounts allocable to identifiable assets .............. -- --
------------- -------------
328,133 305,416
------------- -------------
$ 1,687,370 $ 1,439,068
============= =============
Liabilities
Current Liabilities:
Current maturities of notes and debentures .............................................. $ 39,161 $ 37,572
Current maturities of capital lease obligations ......................................... 23,729 19,657
Current maturities of in-substance defeased debt ........................................ -- --
Accounts payable ........................................................................ 160,444 109,778
Accrued salaries and vacations .......................................................... 58,838 58,232
Accrued insurance ....................................................................... 52,244 35,749
Accrued taxes ........................................................................... 25,060 25,927
Accrued interest and dividends .......................................................... 47,676 15,487
Other ................................................................................... 76,123 79,291
------------- -------------
483,275 381,693
------------- -------------
Long-Term Liabilities:
Notes and debentures, less current maturities ........................................... 2,044,179 510,533
Capital lease obligations, less current maturities ...................................... 136,497 87,703
In-substance defeased debt, less current maturities ..................................... -- --
Deferred income taxes ................................................................... 16,361 10,015
Liability for self-insured claims ....................................................... 57,665 54,669
Other non-current liabilities and deferred credits ...................................... 176,920 144,505
------------- -------------
2,431,622 807,425
------------- -------------
Total liabilities not subject to compromise .............................................. 2,914,897 1,189,118
Liabilities subject to compromise ........................................................ -- 1,612,400
------------- -------------
Total liabilities ....................................................................... 2,914,897 2,801,518
------------- -------------
Commitments and Contingencies
Shareholders' Equity (Deficit):
$2.25 Series A Cumulative Convertible Exchangeable Preferred Stock:
$0.10 par value; 1995 and 1996, 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; 1996 and 21,218 21,218
1997--42,434
Pro forma -- $0.01 par value; shares authorized--100,000; issued and outstanding--40,000. -- --
Paid-in capital ......................................................................... 724,912 724,912
Deficit ................................................................................. (1,973,365) (2,107,815)
Minimum pension liability adjustment .................................................... (922) (1,395)
------------- -------------
(1,227,527) (1,362,450)
------------- -------------
$ 1,687,370 $ 1,439,068
============= =============
<CAPTION>
Pro Forma
December 31,
1997
-------------
(In thousands) (Unaudited)
<S> <C>
Assets
Current Assets:
Cash and cash equivalents ............................................................... $ 247,220
Receivables, less allowance for doubtful accounts of: 1996 -- $2,405; 1997--$4,177....... 12,341
Loan receivable from former officer ..................................................... --
Merchandise and supply inventories ...................................................... 20,275
Net assets held for sale ................................................................ --
Other ................................................................................... 24,387
Restricted investments securing in-substance defeased debt .............................. 14,868
----------
319,091
----------
Property:
Property owned:
Land ................................................................................... 89,468
Buildings and improvements ............................................................. 468,748
Other property and equipment ........................................................... 152,633
----------
Total property owned .................................................................... 710,849
Less accumulated depreciation ........................................................... --
----------
Property owned -- net ................................................................... 710,849
----------
Buildings and improvements, vehicles, and other equipment held under capital leases ..... 107,110
Less accumulated amortization ........................................................... --
----------
Property held under capital leases -- net ............................................... 107,110
----------
817,959
----------
Other Assets:
Goodwill net of accumulated amortization of: 1996 -- $3,077; 1997-- $8,061............... --
Other intangible assets, net of accumulated amortization: 1996 -- $20,611; 1997--$16,781. 222,822
Deferred financing costs -- net ......................................................... 36,397
Other ................................................................................... 25,446
Restricted investments securing in-substance defeased debt .............................. 184,605
Reorganization value in excess of amounts allocable to identifiable assets .............. 729,315
----------
1,198,585
----------
$2,335,635
==========
Liabilities
Current Liabilities:
Current maturities of notes and debentures .............................................. $ 25,024
Current maturities of capital lease obligations ......................................... 19,657
Current maturities of in-substance defeased debt ........................................ 12,548
Accounts payable ........................................................................ 109,778
Accrued salaries and vacations .......................................................... 58,232
Accrued insurance ....................................................................... 35,749
Accrued taxes ........................................................................... 25,927
Accrued interest and dividends .......................................................... 15,487
Other ................................................................................... 116,957
----------
419,359
----------
Long-Term Liabilities:
Notes and debentures, less current maturities ........................................... 989,081
Capital lease obligations, less current maturities ...................................... 87,703
In-substance defeased debt, less current maturities ..................................... 184,605
Deferred income taxes ................................................................... 5,170
Liability for self-insured claims ....................................................... 60,236
Other non-current liabilities and deferred credits ...................................... 179,249
----------
1,506,044
----------
Total liabilities not subject to compromise .............................................. 1,925,403
Liabilities subject to compromise ........................................................ --
----------
Total liabilities ....................................................................... 1,925,403
----------
Commitments and Contingencies
Shareholders' Equity (Deficit):
$2.25 Series A Cumulative Convertible Exchangeable Preferred Stock:
$0.10 par value; 1995 and 1996, 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; 1996 and --
1997--42,434
Pro forma -- $0.01 par value; shares authorized--100,000; issued and outstanding--40,000. 400
Paid-in capital ......................................................................... 409,832
Deficit ................................................................................. --
Minimum pension liability adjustment .................................................... --
----------
410,232
----------
$2,335,635
==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1995 1996 1997
------------- ------------- --------------
(In thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss ...................................................................... $ (55,199) $ (85,460) $ (134,450)
Adjustments to Reconcile Net loss to Cash Flows from Operating Activities:
Provision for restructuring charges .......................................... 15,873 -- 10,540
Charge for impaired assets ................................................... 51,358 -- 15,074
Depreciation and amortization of property .................................... 126,488 120,059 127,529
Amortization of goodwill ..................................................... -- 3,077 5,081
Amortization of other intangible assets ...................................... 6,384 6,812 8,218
Amortization of deferred gains ............................................... (2,867) (11,188) (16,581)
Amortization of deferred financing costs ..................................... 7,504 8,920 9,551
Write-off of deferred financing costs ........................................ -- -- 2,533
Deferred income tax benefit .................................................. (3,451) (9,031) (178)
Other ........................................................................ (17,161) (7,816) (25,412)
Loss from discontinued operations, net ....................................... 636 -- --
Gain on sale of discontinued operations, net ................................. (77,877) -- --
Extraordinary items, net ..................................................... (466) -- --
Changes in Assets and Liabilities Net of Effects of Acquisition,
Dispositions and Restructurings:
Decrease (increase) in assets:
Receivables ................................................................ (4,713) 327 2,055
Inventories ................................................................ (848) (833) 2,981
Other current assets ....................................................... (7,086) (3,964) (540)
Other assets ............................................................... (2,622) (5,456) (8,220)
Increase (decrease) in liabilities:
Accounts payable ........................................................... 21,896 21,932 (30,257)
Accrued salaries and vacations ............................................. (5,551) 4,560 3,944
Accrued taxes .............................................................. (429) (5,502) 325
Other accrued liabilities .................................................. (4,014) (6,283) 63,188
Other noncurrent liabilities and deferred credits .......................... (28,364) (10,628) 29,777
---------- ---------- ----------
Net cash flows from operating activities before reorganization activities ..... 19,491 19,526 65,158
Increase in liabilities from reorganization activities ........................ -- -- 10,853
---------- ---------- ----------
Net cash flows from operating activities ...................................... 19,491 19,526 76,011
---------- ---------- ----------
Cash Flows from Investing Activities:
Purchase of property ......................................................... (123,739) (55,026) (63,616)
Proceeds from dispositions of property ....................................... 25,693 14,323 26,319
Advances to discontinued operations, net ..................................... (6,952) -- --
Proceeds from sale of discontinued operations ................................ 172,080 -- --
Proceeds from sales of subsidiaries .......................................... 122,500 62,992 --
Acquisition of business, net of cash acquired ................................ -- (127,068) --
Other long-term assets, net .................................................. (3,217) (4,670) 1,250
---------- ---------- ----------
Net cash flows provided by (used in) investing activities ..................... 186,365 (109,449) (36,047)
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1995 1996 1997
------------ ------------ -----------
(In thousands)
<S> <C> <C> <C>
Cash Flows from Financing Activities:
Net borrowings under credit agreements ............... $ -- $ 56,000 $ --
Deferred financing costs ............................. -- (9,591) (4,605)
Long-term debt payments .............................. (56,035) (44,108) (61,949)
Net bank overdrafts .................................. (5,400) (2,800) (11,700)
Cash dividends on preferred stock .................... (14,175) (14,175) --
--------- ---------- ---------
Net cash flows used in financing activities .......... (75,610) (14,674) (78,254)
--------- ---------- ---------
Increase (decrease) in cash and cash equivalents ..... 130,246 (104,597) (38,290)
Cash and Cash Equivalents at:
Beginning of period .................................. 66,720 196,966 92,369
--------- ---------- ---------
End of period ........................................ $ 196,966 $ 92,369 $ 54,079
========= ========== =========
Supplemental Cash Flow Information:
Income taxes paid .................................... $ 3,591 $ 2,196 $ 381
========= ========== =========
Interest paid ........................................ $ 238,832 $ 239,284 $ 123,278
========= ========== =========
Non-cash financing activities:
Capital lease obligations ........................... $ 5,505 $ 12,310 $ 19,170
========= ========== =========
Dividends declared but not paid ..................... $ 3,544 $ -- $ --
========= ========== =========
Non-cash investing activities:
Other investing ..................................... $ 8,185 $ -- $ 3,050
========= ========== =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 REORGANIZATION AND BASIS OF REPORTING
Advantica (formerly Flagstar Companies, Inc.), 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 49 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. The Coco's and Carrows restaurant chains,
acquired by Advantica in May 1996, compete in the family-style category and are
located primarily in the western United States.
On January 7, 1998 (the "Effective Date"), Flagstar Companies, Inc.
("FCI") and Flagstar Corporation ("Flagstar") 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. ("Advantica," or together
with its subsidiaries, the "Company"). 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");
(c) Advantica had 100 million authorized shares of Common Stock (of which 40
million were deemed issued and outstanding on the Effective Date
pursuant to the Plan subject to completion of the exchange of securities
as contemplated by such Plan) 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 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 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
F-7
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1 REORGANIZATION AND BASIS OF REPORTING -- Continued
(g) Advantica refinanced its prior credit facilities by entering the Credit
Facility (as defined below).
Pursuant to the Plan, Advantica's certificates of incorporation and
by-laws were amended and restated in their entirety.
FCI and Flagstar filed their Chapter 11 cases to implement their
Prepackaged Plan which was developed in the course of negotiations with an ad
hoc committee of holders of the Senior Subordinated Debentures and with the
support of FCI's majority shareholder. During the Bankruptcy proceedings, the
Prepackaged Plan's classification of the 10% Convertible Debentures as
subordinate to the Senior Subordinated Debentures was challenged by certain
holders of the 10% Convertible Debentures. As a result of litigation of this
issue and subsequent negotiations with representatives of the holders of the
10% Convertible Debentures, on November 7, 1997 FCI and Flagstar filed the Plan
which was confirmed by the Bankruptcy Court on November 12, 1997.
On the Effective Date, the automatic stay imposed by the Bankruptcy Code
was terminated and, other than in certain limited circumstances pursuant to the
terms of the Plan, Advantica is no longer subject to the jurisdiction and
supervision of the Bankruptcy Court. Additionally, on January 12, 1998, a
motion to dismiss the Chapter 11 case of Holdings pursuant to section 1112(b)
of the Bankruptcy Code was filed with the Bankruptcy Court. No objections were
filed and on March 6, 1998, the Bankruptcy Court entered an order dismissing
the case.
In connection with the reorganization, the Company will realize a gain
from the extinguishment of certain indebtedness. 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 7) 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 year ended
December 31, 1997 is disclosed in the accompanying Statements of Consolidated
Operations.
The following unaudited pro forma condensed consolidated balance sheets
and unaudited pro forma condensed statements of consolidated operations give
effect to the Plan discussed above and the disposition discussed in Note 18 as
if such Plan and disposition had been consummated, for balance sheet purposes,
on December 31, 1997 and, for statement of operations purposes, on January 1,
1997.
The pro forma information included herein is provided for informational
purposes only and should not be construed to be indicative of the financial
condition or results of operations of the company had the reorganization plan
or the disposition been consummated on the respective dates indicated and is
not intended to be predictive of future financial condition or results of
operations of the Company at any future date or for any future period.
F-8
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------
Adjustments
for
Historical Reorganization(a)
(In thousands) --------------- -------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ................ $ 54,079 $ (8,900)
Net assets held for sale ................. 242,479
Other .................................... 78,721
Restricted investments securing
in-substance defeased debt ............. --
-------------
375,279 (8,900)
------------- -------------
Property -- net ........................... 758,373
-------------
Other Assets:
Goodwill, net ............................ 207,918
Other intangible assets, net ............. 14,897
Other .................................... 82,601 (20,319)
Restricted investments securing
in-substance defeased debt ............. --
Reorganization value in excess of
amounts allocable to identifiable
assets ................................. --
-------------
305,416 (20,319)
------------- -------------
$ 1,439,068 $ (29,219)
============= =============
Liabilities
Current Liabilities
Current maturities of notes and
debentures ............................. $ 37,572
Current maturities of capital lease
obligations ............................ 19,657
Current maturities of in-substance
defeased debt .......................... --
Other current liabilities ................ 324,464
-------------
381,693
-------------
Long-Term Liabilities:
Notes and debentures, less current
maturities ............................. 510,533 $ 590,867
Capital lease obligations, less current
maturities ............................. 87,703
In-substance defeased debt, less
current maturities ..................... --
Other non-current liabilities ............ 209,189
-------------
807,425 590,867
------------- -------------
Total liabilities not subject to
compromise ............................... 1,189,118 590,867
Liabilities subject to compromise ......... 1,612,400 (1,612,400)
------------- -------------
Total liabilities ........................ 2,801,518 (1,021,533)
------------- -------------
Shareholders' Equity:
Capital stock ............................ 21,848 (21,448)
Paid-In capital .......................... 724,912 404,912
Deficit .................................. (2,107,815) 608,850
Minimum pension liability
adjustment ............................. (1,395)
-------------
(1,362,450) 992,314
------------- -------------
$ 1,439,068 $ (29,219)
============= =============
<CAPTION>
December 31, 1997
----------------------------------------------------------------------
After
After Reorganization,
Adjustments Reorganization Adjustments Fresh Start
for Fresh Start and Fresh Start for Disposition Reporting and
Reporting(b) Reporting of FEI(c) Disposition
(In thousands) ----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ................ $ 45,179 $ 202,041 $ 247,220
Net assets held for sale ................. $ 121,821 364,300 (364,300) --
Other .................................... (1,004) 77,717 (20,714) 57,003
Restricted investments securing
in-substance defeased debt ............. -- 14,868 14,868
---------- ---------- ----------
120,817 487,196 (168,105) 319,091
----------- ---------- ---------- ----------
Property -- net ........................... 59,586 817,959 817,959
----------- ---------- ----------
Other Assets:
Goodwill, net ............................ (207,918) -- --
Other intangible assets, net ............. 207,925 222,822 222,822
Other .................................... (439) 61,843 61,843
Restricted investments securing
in-substance defeased debt ............. -- 184,605 184,605
Reorganization value in excess of
amounts allocable to identifiable
assets ................................. 729,315 729,315 729,315
----------- ---------- ----------
728,883 1,013,980 184,605 1,198,585
----------- ---------- ---------- ----------
$ 909,286 $2,319,135 $ 16,500 $2,335,635
=========== ========== ========== ==========
Liabilities
Current Liabilities
Current maturities of notes and
debentures ............................. $ 37,572 $ (12,548) $ 25,024
Current maturities of capital lease
obligations ............................ 19,657 19,657
Current maturities of in-substance
defeased debt .......................... -- 12,548 12,548
Other current liabilities ................ $ 21,166 345,630 16,500 362,130
----------- ---------- ---------- ----------
21,166 402,859 16,500 419,359
----------- ---------- ---------- ----------
Long-Term Liabilities:
Notes and debentures, less current
maturities ............................. 72,286 1,173,686 (184,605) 989,081
Capital lease obligations, less current
maturities ............................. 87,703 87,703
In-substance defeased debt, less
current maturities ..................... -- 184,605 184,605
Other non-current liabilities ............ 35,466 244,655 244,655
----------- ---------- ----------
107,752 1,506,044 -- 1,506,044
----------- ---------- ---------- ----------
Total liabilities not subject to
compromise ............................... 128,918 1,908,903 16,500 1,925,403
Liabilities subject to compromise ......... --
----------
Total liabilities ........................ 128,918 1,908,903 16,500 1,925,403
----------- ---------- ---------- ----------
Shareholders' Equity:
Capital stock ............................ 400 400
Paid-In capital .......................... (719,992) 409,832 409,832
Deficit .................................. 1,498,965 -- --
Minimum pension liability
adjustment ............................. 1,395 -- --
----------- ---------- ----------
780,368 410,232 410,232
----------- ---------- ----------
$ 909,286 $2,319,135 $ 16,500 $2,335,635
=========== ========== ========== ==========
</TABLE>
- ---------
F-9
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(a) Reflects the cancellation of the Old Common Stock and Old Preferred Stock,
the issuance of Common Stock to the holders of the Senior Subordinated
Debentures, the issuance of Common Stock and Warrants to the holders of
the 10% Convertible Debentures and the estimated gain on such transactions
and the issuance of the New Senior Notes in exchange for the Old Senior
Notes, including accrued and unpaid interest.
(b) In accordance with the principles of SOP 90-7, the reorganization will
result in the application of fresh start reporting which results in the
revaluation of assets and liabilities to estimated current fair value. The
revaluation reflects adjustments for fresh start reporting, which include
(i) the increase in the value of net assets held for sale to their fair
value based on the terms of the definitive 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 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 to reflect the new value of common shareholders' equity based
on reorganization value, which was determined by estimating the fair value
of the Company. The fair value of identifiable assets and liabilities has
been determined based on certain valuations and other studies which are
not yet completed. Because the current valuation is preliminary in nature,
further adjustments may be required (See Note 2).
(c) Reflects cash proceeds of $380.8 million and the incurrence of $16.5
million of estimated sale costs. Approximately $180 million of the
proceeds (together with $20.7 million previously on deposit with respect
to certain Mortgage Financings as herein defined) will be used to purchase
Defeasance Eligible Investments (as defined in documents governing the
Mortgage Financings) which will be deposited in an irrevocable trust to
meet the debt service requirements under such Mortgage Financings through
the stated maturity date in the year 2000. Cash flows from the investments
will be used solely to satisfy the principal and interest obligations of
the debt. Accordingly, the investment securities are reflected in the Pro
Forma Consolidated Balance Sheets under the caption Investments securing
in-substance defeased debt. The related Mortgage Financings are reflected
under the caption In-substance defeased debt.
F-10
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
PRO FORMA CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-----------------------------------
Pro Forma
--------------------
Adjustments
for
Historical Reorganization (d)
-------------- --------------------
<S> <C> <C>
Operating revenue .................. $2,609,456
Operating expenses ................. 2,479,028
----------
Operating income ................... 130,428
Other charges:
Interest and debt expense,
net ............................. 226,388 $ (48,984)
Other, net ........................ 5,648
----------
232,036 (48,984)
---------- ---------
Income (loss) before
reorganization expenses and
taxes ............................ (101,608) 48,984
Reorganization expenses ............ 31,073 (31,073)
---------- ---------
Loss before income taxes ........... (132,681) 80,057
Provision for (benefit from)
income taxes ...................... 1,769
----------
Net (loss) income .................. $ (134,450) $ 80,057
========== =========
Basic and diluted loss per share
applicable to common
shareholders ...................... $ (3.50)
==========
Average outstanding and
equivalent shares ................. 42,434
==========
<CAPTION>
Year Ended December 31, 1997
----------------------------------------------------------------------
Pro Forma
----------------------------------------------------------------------
After
After Reorganization,
Adjustments Reorganization Adjustments Fresh Start
for Fresh-Start and Fresh Start for Disposition Reporting and
Reporting (e) Reporting of FEI (f) Disposition
----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Operating revenue .................. $2,609,456 $ (546,268) $2,063,188
Operating expenses ................. 161,587 2,640,615 (516,901) 2,123,714
------- ---------- ---------- ----------
Operating income ................... (161,587) (31,159) (29,367) (60,526)
Other charges:
Interest and debt expense,
net ............................. (12,430) 164,974 (7,129) 157,845
Other, net ........................ 5,648 (2,023) 3,625
---------- ---------- ----------
(12,430) 170,622 (9,152) 161,470
-------- ---------- ---------- ----------
Income (loss) before
reorganization expenses and
taxes ............................ (149,157) (201,781) (20,215) (221,996)
Reorganization expenses ............
Loss before income taxes ........... (149,157) (201,781) (20,215) (221,996)
Provision for (benefit from)
income taxes ...................... 14 1,783 (40) 1,743
-------- ---------- ---------- ----------
Net (loss) income .................. $ (149,171) $ (203,564) $ (20,175) $ (223,739)
========== ========== ========== ==========
Basic and diluted loss per share
applicable to common
shareholders ...................... $ (5.09) $ (5.59)
========== ==========
Average outstanding and
equivalent shares ................. 40,000 40,000
========== ==========
</TABLE>
- ---------
(d) Reflects the elimination of the amortization of deferred financing costs
and interest expense related to debt securities retired, the amortization
of deferred financing costs on the Credit Facility, an increase in
interest expense due to the exchange of the Old Senior Notes and the
elimination of reorganization expenses which would not be reflected in the
post-reorganization statement of operations.
(e) Reflects the amortization of the increase in intangible assets as a result
of the application of fresh start reporting over the estimated useful
lives of the related assets, including reorganization value in excess of
amounts allocable to identifiable assets over a five-year period;
tradenames over a 40-year period; and franchise rights over the estimated
average remaining term of the related franchise agreements (10 years).
Also reflects the estimated increase in depreciation expense as a result
of the adjustment of property to fair value, the removal of the
amortization of goodwill and the impact on interest expense of the
amortization of net premium on long-term debt.
(f) Reflects the removal of the results of operations of Flagstar Enterprises,
Inc.
NOTE 2 FRESH START REPORTING
As of the Effective Date of the Plan, Advantica will adopt 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 assets and
liabilities to be adjusted to their fair values as of the Effective Date in
conformity with the procedures specified by Accounting Principles Board Opinion
No. 16, "Business Combinations" ("APB 16"). In conjunction with the revaluation
of assets and liabilities, a reorganization value for the entity will be
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 amounts allocable to identifiable
assets." Advantica intends to amortize such amount
F-11
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 2 FRESH START REPORTING -- Continued
over a five-year amortization period. As a result of the application of fresh
start reporting, the Company's financial statements issued subsequent to the
Effective Date will not be comparable with those prepared before emergence,
including the historical financial statements in this annual report.
NOTE 3 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:
Consolidated Financial Statements. Consolidated Financial Statements
include the accounts of the Company and its subsidiaries. Certain prior
year amounts have been reclassified to conform to the current year
presentation.
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. Due to the timing of this change, the year
ended December 31, 1997 includes more than 52 weeks of operations. Denny's
includes an additional five days, El Pollo Loco includes an additional week
and Hardee's and Quincy's each include an additional day.
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 the amounts of
revenues and expenses during the period reported. Actual results could
differ from those estimates.
Cash and Cash Equivalents. The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Inventories. Merchandise and supply inventories are valued primarily at the
lower of average cost (first-in, first-out) or market.
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:
Buildings -- Five to thirty years
Equipment -- Three to ten years
Leasehold Improvements -- Estimated useful life limited by the lease
period.
Goodwill and Other Intangible Assets. The excess of cost over the fair
value of the net assets acquired of FRI-M Corporation (see Note 4 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.
Impairment of Long-Lived Assets. During 1995, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("SFAS No. 121"). 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 5 for further discussion of the
impairment of long-lived assets and Note 18 for further discussion of
assets to be disposed of.
F-12
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Deferred Financing Costs. Costs related to the issuance of debt are
deferred and amortized as a component of interest and debt expense using
the interest method over the terms of the respective debt issues.
Preopening Costs. The Company capitalizes certain direct incremental costs
incurred in conjunction with the opening of restaurants and amortizes such
costs over a 12-month period from the date of opening.
Insurance. Through June 30, 1997, the Company was primarily self-insured
for workers' compensation, general liability, and automobile risks which
are supplemented by stop-loss type insurance policies. As of July 1, 1997,
the Company changed to a guaranteed cost program to cover workers'
compensation insurance in most states. At December 31, 1997, the Company
remains self-insured for workers' compensation in only six states. 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, 1996 and 1997 were $100.1 million and $90.4
million respectively, reflecting a 4% discount rate for 1996 and a 5%
discount rate for 1997. The related undiscounted amounts at such dates were
$111.1 million and $100.6 million, respectively.
Interest Rate Exchange Agreements. As a hedge against fluctuations in
interest rates, the Company from time to time 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. No such agreements were outstanding as of December 31, 1997.
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, 1995, 1996 and 1997
was $93.0 million, $114.3 million, and $116.9 million, respectively.
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 year ended
December 31, 1995 was $18.9 million.
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, which was
subsequently extended to ten years. 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 a five-year purchasing
agreement with the acquirer. 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, 1996, and 1997 was approximately $2.8 million, $11.1
million, and $16.6 million, respectively.
Cash Overdrafts. The Company has included in accounts payable on the
accompanying consolidated balance sheets cash overdrafts totaling $51.6
million and $39.9 million at December 31, 1996 and 1997, respectively.
Franchise and License Fees. Initial franchise and license fees are
recognized when all of the material obligations have been performed and
conditions have been satisfied, typically when operations have commenced.
Initial fees for all periods presented are insignificant. Continuing fees,
based upon a percentage of net sales, are recorded as income on a monthly
basis.
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 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, 1995, 1996, and 1997, the Company recognized gains
related to
F-13
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
sales of Company-owned restaurants of approximately $24.5 million, $8.4
million, and $6.2 million, respectively. Such gains are included as a
reduction of other operating expenses in the accompanying Statements of
Consolidated Operations. Cash proceeds received from sales of Company-owned
restaurants totaled $26.1 million, $8.5 million and $7.9 million for the
years ended December 31, 1995, 1996 and 1997, respectively. Deferred gains
and the non-cash portion of proceeds related to such transactions are not
significant.
Earnings per Share. The Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"), in the quarter ended
December 31, 1997. SFAS 128 replaced the calculation of primary and fully
diluted earnings (loss) per share with basic and diluted earnings (loss)
per share. Unlike primary earnings (loss) per share, basic earnings (loss)
per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings (loss) per share is very similar
to the previously reported fully diluted earnings (loss) per share.
New Accounting Standards. In June 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), which establishes standards
for reporting and display of comprehensive income and its components in the
financial statements. SFAS 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The Company
is in the process of determining its preferred presentation format under
the new standard. The adoption of SFAS 130 will have no impact on the
Company's consolidated results of operations, financial position or cash
flows and will be implemented by the Company in the fourth quarter of 1998.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"), which establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. SFAS 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. Financial statement disclosures for
prior periods are required to be restated. The Company is in the process of
evaluating the disclosure requirements. The adoption of SFAS 131 will have
no impact on the Company's consolidated results of operations, financial
position or cash flows and will be implemented by the Company in the fourth
quarter of 1998.
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 external
and internal direct costs of developing or obtaining internal-use software
to be capitalized 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 2), the Company will adopt 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 will result in
the write-off of previously capitalized pre-opening costs totaling $0.6
million. Subsequent to the Effective Date, pre-opening costs will be
expensed as incurred. The adoption of SOP 98-1 at January 7, 1998 will
result 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 will be expensed
as incurred.
NOTE 4 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
F-14
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 4 ACQUISITION -- Continued
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 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
periods subsequent to the acquisition.
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 $216
million, as adjusted. The resulting goodwill is being amortized on a
straight-line basis over 40 years.
NOTE 5 RESTRUCTURING AND IMPAIRMENT OF LONG-LIVED ASSETS
During the fourth quarter of 1997, the Company approved a restructuring
plan to significantly reduce the size of its Quincy's chain. In addition to the
sale or closure of restaurants, the restructuring plan will result in the
elimination of certain restaurant, field management and corporate support
positions. As a result of this plan, the Company identified 88 underperforming
units for sale or closure. In accordance with SFAS 121, the carrying value of
these units has been written down to estimated fair value less costs to sell.
In addition, six Quincy's units which will continue operating were identified
as impaired, as the estimated future undiscounted cash flows of each of these
units is insufficient to recover the related carrying value. Accordingly, the
carrying values of these units were written down to the Company's estimate of
fair value. Also included in the charge for impaired assets is the impact of
the write-down to sales price less costs to sell of certain other long-lived
assets held for sale. Such assets consist primarily of 19 Hardee's units which
were disposed of prior to December 31, 1997.
In conjunction with the completion of the 1995 restructuring plan (as
further described below), the Company recorded an additional restructuring
charge of $3.8 million in 1997 representing the additional write-down of the
carrying value of certain assets.
Charges attributable to the restructuring plan and the impairment of
long-lived assets during the year ended December 31, 1997 are comprised of the
following (in thousands):
<TABLE>
<S> <C>
Restructuring:
Severance ............................................................... $ 1,676
Reserve for operating leases ............................................ 1,747
Adjustment of 1995 restructuring charge ................................. 3,758
Other ................................................................... 3,359
-------
$10,540
=======
Impairment of long-lived assets:
Write-down attributable to restaurant units the Company will continue
operating .............................................................. $ 3,109
Write-down attributable to restaurant units to be disposed of ........... 11,965
-------
$15,074
=======
</TABLE>
Approximately $6.9 million of the restructuring charges represent cash
charges of which an immaterial amount was paid in 1997. Unpaid amounts are
included in other current liabilities in the accompanying Consolidated Balance
Sheet. Of the 88 units identified for disposal in 1997, 19 units were closed
prior to December 31, 1997. The 88 units had aggregate operating revenues of
approximately $80.4 million and negative operating income of $5.8 million
during 1997, and an aggregate carrying value prior to the impairment write-down
of approximately $48.5 million as of December 31, 1997. The Company anticipates
completion of its restructuring plan by the end of 1998.
F-15
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 5 RESTRUCTURING AND IMPAIRMENT OF LONG-LIVED ASSETS -- Continued
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. In addition, the Company
adopted SFAS No. 121 during 1995 (see Note 3). In connection with such
adoption, 99 restaurant units which the Company intended to continue operating
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, 1997, two units remain relative to the 1995 restructuring plan.
Management intends to dispose of one of the remaining units and to continue
operating the other. The unit to be disposed of had operating revenues of
approximately $0.6 million and immaterial operating income during 1997 and an
aggregate carrying amount of $0.2 million at December 31, 1997.
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>
<CAPTION>
(In thousands)
<S> <C>
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 restaurant units the Company will continue
operating .......................................................... $41,670
Write-down attributable to restaurant units to be disposed of ....... 9,688
-------
$51,358
=======
</TABLE>
The 1995 restructuring plan was substantially completed in 1997.
NOTE 6 REORGANIZATION ITEMS
Reorganization expenses included in the accompanying Statement of
Consolidated Operations consist of the following items:
<TABLE>
<CAPTION>
December 31, 1997
(In thousands) ------------------
<S> <C>
Professional fees and other .............. $ 29,245
Debtor-in-possession financing expenses .. 3,062
Interest earned on accumulated cash ...... (1,234)
--------
$ 31,073
========
</TABLE>
F-16
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 7 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
(see Note 8 for additional information).
<TABLE>
<CAPTION>
December 31, 1997
------------------
(In thousands)
<S> <C>
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 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>
F-17
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 8 DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, Pro Forma
---------------------------- December 31,
1996 1997 1997
------------- -------------- -------------
(In thousands) (Unaudited)
<S> <C> <C> <C>
Notes and Debentures:
10 3/4% Senior Notes due September 15, 2001, interest payable semi-annually ..... $ 270,000 (a) --
10 7/8% Senior Notes due December 1, 2002, interest payable semi-annually ....... 280,025 (a) --
11.25% Senior Subordinated Debentures due November 1, 2004, interest
payable semi-annually .......................................................... 722,411 (a) --
11 3/8% Senior Subordinated Debentures due September 15, 2003, interest
payable semi-annually .......................................................... 125,000 (a) --
10% Convertible Junior Subordinated Debentures due 2014, interest payable
semi-annually; convertible into Company common stock any time prior to
maturity at $24.00 per share ................................................... 99,259 (a) --
11 1/4% Senior Notes due January 15, 2008, interest payable semi-annually ....... -- -- $ 590,867
12.5% Senior Notes of FRD due July 15, 2004, interest payable semi-annually 156,897 $156,897 156,897
Mortgage Notes Payable:
10.25% Guaranteed Secured Bonds due 2000 ....................................... 190,164 177,615 --
11.03% Notes due 2000 .......................................................... 160,000 160,000 160,000
Term loan of FRI-M, principal payable in quarterly installments ................. 56,000 40,000 40,000
Other notes payable, maturing over various terms to 20 years, payable in
monthly or quarterly installments with interest rates ranging from 7.5% to
13.25% (b) ..................................................................... 14,844 10,076 10,076
Notes payable secured by equipment, maturing over various terms up to 7
years, payable in monthly installments with interest rates ranging from
8.5% to 9.64% (c) .............................................................. 8,740 3,516 3,516
Capital lease obligations (see Note 9) ............................................ 160,226 107,361 107,361
In-substance defeased debt (See Note 1) ........................................... -- -- 177,615
---------- -------- ----------
2,243,566 655,465 1,246,332
---------- -------- ----------
Reorganization premium (discount):
11 1/4% Senior Notes, effective rate 10.79% ..................................... -- -- 26,589
12.5% Senior Notes of FRD, effective rate 10.95% ................................ -- -- 13,336
11.03% Notes, effective rate 8.18% .............................................. -- -- 12,800
In-substance defeased debt, effective rate 5.29% ................................ -- -- 21,315
Other notes payable ............................................................. -- -- (1,347)
Notes payable secured by equipment .............................................. -- -- (407)
---------- -------- ----------
Total .......................................................................... 2,243,566 655,465 1,318,618
Less current maturities ........................................................... 62,890 57,229 57,229
---------- -------- ----------
Total long term debt .............................................................. $2,180,676 $598,236 1,261,389
========== ======== ==========
</TABLE>
- ---------
(a) Included in liabilities subject to compromise at December 31, 1997 ( See
Note 7).
(b) Collateralized by restaurant and other properties with a net book value of
$14.3 million at December 31, 1997.
(c) Collateralized by equipment with a net book value of $13.0 million at
December 31, 1997.
F-18
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Aggregate annual maturities of long-term debt during the next five years,
excluding capital lease obligations of FEI (See Note 18), are as follows:
<TABLE>
<CAPTION>
Pro Forma
December 31, 1997 December 31, 1997
(In millions) ------------------- ------------------
<S> <C> <C>
Year:
1998 ............. $ 57.2 $ 57.2
1999 ............. 52.3 52.3
2000 ............. 328.8 328.8
2001 ............. 283.3 13.3
2002 ............. 287.1 7.1
</TABLE>
As discussed in Note 1, pursuant to the Plan, Flagstar's Old Senior Notes,
Senior Subordinated Debentures and 10% Convertible Debentures which are
included in liabilities subject to compromise (See Note 7) in the accompanying
Consolidated Balance Sheet at December 31, 1997, were canceled, extinguished
and retired as of the Effective Date. In addition, each holder of the Old
Senior Notes received such holder's pro rata portion of 100% of New Senior
Notes in exchange for 100% of the principal amount of such holders' Old Senior
Notes and accrued interest through the Effective Date. The above unaudited pro
forma summary of long-term debt gives effect to these transactions as if they
were consummated on December 31, 1997. The unaudited pro forma summary also
gives effect to the revaluation of long-term debt to fair value as required
under fresh start reporting (See Note 2) and the impact of the disposition of
FEI. The fair value computations are based on market quotations for the same or
similar debt issues or the estimated borrowing rates available to the Company.
On March 7, 1997, FCI's Second Amended and Restated Credit Agreement (the
"Credit Agreement") was amended to provide for less restrictive financial
covenants for measurement periods ending on March 31, 1997 and June 30, 1997,
as well as to provide FCI flexibility to forego certain scheduled interest
payments due in March, May and June 1997 without triggering a default under the
agreement, unless any such debt was declared due and payable as a result of the
failure to pay such interest.
On March 17, 1997, in connection with the financial restructuring
discussed in Note 1, Flagstar elected not to make the 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 restructuring, Flagstar elected not to
make the interest payments due and payable as of that date to holders of the
11.25% Debentures and 10% Convertible Debentures. 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 was in default under the terms of the
indentures governing such debentures. During the pendency of Flagstar's
bankruptcy proceedings, Flagstar also failed to make the interest payments due
September 15, 1997 on its 10 3/4% Senior Notes and 11 3/8% Debentures, the
interest payments due November 1, 1997 on its 11.25% Debentures and 10%
Convertible Debentures and the interest payment due December 1, 1997 on its
10 7/8% Senior Notes. 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 indentures trustees with respect to Flagstar's failure to make
the interest payments when due.
On July 11, 1997 FCI entered into a $200 million debtor-in-possession
financing facility (the "DIP Facility") between FCI, Flagstar, Holdings,
certain subsidiaries of Flagstar and The Chase Manhattan Bank ("Chase") for
working capital and general corporate purposes and letters of credit. The DIP
Facility refinanced the Credit Agreement and is guaranteed by certain operating
subsidiaries of FCI and generally is secured by liens on the same collateral
that secured FCI's obligations under the Credit Agreement, including the stock
of certain operating subsidiaries and certain of FCI's trade and service marks.
At December 31, 1997, Advantica had no working capital advances outstanding
under the DIP Facility; however, letters of credit outstanding were $84.5
million.
The DIP Facility and indentures under which the debt securities have been
issued contain a number of restrictive covenants. Such covenants restrict,
among other things, (i) 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, (ii)
mergers and acquisitions, (iii) sales of assets, (iv) transactions with
affiliates and (v) the payment of dividends. In addition, the DIP Facility
contains financial covenants including provisions for the maintenance of a
minimum level of
F-19
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 8 DEBT -- Continued
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 DIP Facility at
December 31, 1997. Under the most restrictive provision of the DIP Facility
(minimum EBITDA, as defined), for the month of December 1997, the Company's
EBITDA could be $2.1 million less and the Company would still be in compliance.
On the Effective Date, Advantica entered into a credit agreement with
Chase and other lenders named therein which established the $200 million senior
secured Credit Facility (the "Credit Facility"). The Credit Facility refinances
the DIP Facility and will be used for working capital advances, letters of
credit and general corporate purposes by certain of Advantica's operating
subsidiaries which are borrowers thereunder. The Credit Facility is guaranteed
by Advantica and, subject to certain exceptions, by Advantica's subsidiaries
that are not borrowers thereunder and generally is secured by liens on the same
collateral that formerly secured Advantica's obligations under the Credit
Agreement.
The Credit Facility includes a working capital and letter of credit
facility of up to a total of $200 million. The Credit Facility matures on
January 7, 2003 (the "Maturity Date"), subject to earlier termination on March
31, 2000 in the event that certain mortgage financings of Advantica 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. The Credit Facility is subject to mandatory
prepayments and commitment reductions under certain circumstances upon
Advantica's sale of assets or incurrence of additional debt.
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 including provisions for the maintenance of a minimum level of
interest coverage (as defined) and a minimum level of fixed charges coverage
(as defined), limitations on ratios of indebtedness (as defined) to earnings
before interest, taxes, depreciation and amortization (EBITDA) (as defined),
and limitations on annual capital expenditures.
At December 31, 1997, the 10.25% guaranteed bonds were secured by, among
other things, mortgage loans on 384 restaurants, a lien on the related
restaurant equipment, assignment of intercompany lease agreements, and the
stock of the issuing subsidiaries. At December 31, 1997, the restaurant
properties and equipment had a net book value of $305.1 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 $152.6 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
$20.6 million in 1998 and increasing each year to $23.7 million in 2000 (See
Note 18 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, 1997 of
$218.1 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
F-20
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 8 DEBT -- Continued
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,
1997, there were no working capital borrowings outstanding; however, letters of
credit outstanding were $19.8 million. Beginning February 28, 1997, the
principal installments of the FRI-M Term Loan were payable quarterly as
follows: $4.0 million per quarter for four consecutive quarters; $5.0 million
for four consecutive quarters beginning February 28, 1998; $6.0 million on
February 28, 1999; and $7.0 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 (8.4375% at December 31, 1997) and are secured by the issued
and outstanding stock, as well as substantially all the assets, of FRD 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 the payment of certain management fees and tax
reimbursements payable to Advantica under certain conditions, are currently
unavailable to service the debt of Advantica 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 and $17.1 million in
1997.
FRD and its subsidiaries were in compliance with the terms of the FRI-M
Credit Facility at December 31, 1997. Under the most restrictive provision of
the FRI-M Credit Facility (ratio of indebtedness to EBITDA), at December 31,
1997, FRD could incur approximately $4.7 million of additional indebtedness.
The estimated fair value of the Company's long-term debt including
long-term debt which has been reclassified to liabilities subject to compromise
(excluding capital lease obligations) is approximately $1.5 billion at December
31, 1997. Such computations are based on market quotations for the same or
similar debt issues or the estimated borrowing rates available to the Company.
NOTE 9 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.
Buildings and facilities leased from others primarily are for restaurants
and support facilities. Restaurants are 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 20 years exclusive of options to renew. Leases of other equipment
primarily consist of restaurant equipment, computer systems and vehicles.
F-21
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 9 LEASES AND RELATED GUARANTEES -- Continued
Information regarding the Company's leasing activities at December 31,
1997, excluding the capital lease obligations of FEI (See Note 18), 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:
1998 .................................... $ 31,723 $ 3,285 $ 56,186 $ 7,124
1999 .................................... 27,283 2,722 52,564 6,658
2000 .................................... 22,362 2,214 48,150 5,901
2001 .................................... 18,345 1,771 43,371 5,132
2002 .................................... 11,118 1,404 38,180 4,431
Subsequent years .......................... 51,731 6,573 201,974 20,233
-------- ------- -------- -------
Total ................................... 162,562 $17,969 $440,425 $49,479
======= ======== =======
Less imputed interest ..................... 55,201
--------
Present value of capital lease obligations $107,361
========
</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, 1995, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Base rents ............... $48,269 $59,322 $72,010
Contingent rents ......... 11,274 10,929 13,241
------- ------- -------
Total .................... $59,543 $70,251 $85,251
======= ======= =======
</TABLE>
Total rental expense does not reflect sublease rental income of $14.4
million, $16.3 million and $15.9 million for the years ended December 31, 1995,
1996, and 1997, respectively.
F-22
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 10 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 December 31,
-----------------------------------
1995 1996 1997
(In thousands) ----------- ------------ ----------
<S> <C> <C> <C>
Current:
Federal ....................................................... $ 1,940 $ (6,074) $ --
State, Foreign and Other ...................................... 1,497 (1,287) 1,947
-------- --------- ------
3,437 (7,361) 1,947
-------- --------- ------
Deferred:
Federal ....................................................... -- (6,797) --
State, Foreign and Other ...................................... (3,451) (2,234) (178)
-------- --------- ------
(3,451) (9,031) (178)
-------- --------- ------
(Benefit from) provision for income taxes ...................... $ (14) $ (16,392) $1,769
======== ========= ======
The total provision for (benefit from) income taxes related to:
Loss before discontinued operations and extraordinary items ... $ (14) $ (16,392) $1,769
Discontinued operations ....................................... 8,731 -- --
Extraordinary items ........................................... 25 -- --
-------- --------- ------
Total provision for (benefit from) income taxes ................ $ 8,742 $ (16,392) $1,769
======== ========= ======
</TABLE>
For the year ended December 31, 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 $75 million. 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 proposed deficiencies from the Internal
Revenue Service.
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,
--------------------------
1996 1997
------------ -------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Deferred income .................................. $ 39,953 $ 29,312
Self-insurance reserves .......................... 43,006 35,056
Capitalized leases ............................... 19,869 14,961
Amortization of intangible assets ................ 2,949 7,155
Other accruals and reserves ...................... 18,054 31,521
Alternative minimum tax credit carryforwards ..... 10,459 10,459
General business credit carryforwards ............ 19,232 50,840
Capital loss carryforwards ....................... -- 10,400
Net operating loss carryforwards ................. 32,135 85,155
Less: valuation allowance ........................ (83,828) (212,375)
--------- ----------
Total deferred tax assets ........................ 101,829 62,484
Deferred tax liabilities:
Depreciation of fixed assets ..................... 118,190 72,499
--------- ----------
Total deferred income tax liability .............. $ 16,361 $ 10,015
========= ==========
</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.
F-23
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 10 INCOME TAXES -- Continued
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 December 31,
----------------------------
1995 1996 1997
-------- -------- ----------
<S> <C> <C> <C>
Statutory rate .......................................................................... 35% 35% 35%
Differences:
State, foreign, and other taxes, net of federal income tax benefit ..................... -- 2 (1)
Amortization of goodwill ............................................................... -- 1 (1)
Reversal of certain reserves established in connection with proposed Internal Revenue
Service deficiencies ................................................................. -- 7 --
Non-deductible costs related to the reorganization ..................................... (4)
Non-deductible wages related to the FICA tip credit .................................... (2)
Portion of losses and income tax credits not benefited as a result of the establishment
of
valuation allowance .................................................................. (35) (29) (28)
--- --- -----
Effective tax rate ..................................................................... --% 16% (1%)
==== === =====
</TABLE>
At December 31, 1997, the Company has available, to reduce income taxes
that become payable in the future, general business credit carryforwards of
approximately $51 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
$180 million which expire in 2007 through 2012 and AMT net operating loss
carryforwards of approximately $142 million which expire in 2011and 2012. 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 is 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 was not subject to any limitation as of the end of
1997.
In connection with the purchase of FRI-M in 1996, the Company acquired
certain income tax attributes which may be used to offset FRI-M's separate
taxable income. Approximately $33 million of regular net operating loss
carryfowards and $26 million of regular and AMT capital loss carryforwards are
available to reduce the future separate taxable income of FRI-M and its
subsidiaries. Due to FRI-M's ownership changes in January 1994 and again in May
1996, FRI-M's ability to utilize these loss carryforwards, which arose prior to
the ownership changes, is limited.
The annual limitation for the utilization of approximately $22 million of
FRI-M's net operating loss carryforwards which were generated after January
1994 is approximately $4 million. The remaining $11 million of FRI-M's net
operating loss carryforwards which were generated prior to January 1994 can
only be utilized to offset any pre-January 1994 built-in-gains which are
recognized in certain future periods. These net operating loss carryforwards
expire principally in 2006 through 2010. FRI-M's remaining capital loss
carryforward of $26 million can only be utilized to offset capital gains
generated by FRI-M or its subsidiaries. FRI-M's capital loss carryforwards are
also subject to the same $4 million annual limitation as the net operating
losses generated after January 1994. In 1997, FRI-M recognized approximately $4
million of capital gains which were utilized to offset some of the capital loss
carryover. The remaining capital loss carryforward of approximately $26 million
will expire in 2000.
The Company's reorganization, which became effective January 7, 1998, will
impact the Company's ability to utilize certain net operating loss, general
business credit and AMT credit carryforwards. See Note 1 which discusses the
reorganization including the impact on the Company's carryover tax benefits and
its tax basis in its assets.
F-24
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 11 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, 1995, 1996, and 1997 amounted to $5.6 million, $3.5 million, and
$4.9 million, respectively, of which $3.3 million is related to funded defined
benefit plans for each year, and $2.3 million, $0.2 million and $1.6 million is
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, 1995, 1996, and 1997 determined
under SFAS No. 87 follow:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1996 1997
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Service cost ........................................................................ $ 2,829 $ 3,151 $ 3,354
Interest cost on projected benefit obligations ...................................... 2,651 2,895 2,926
Actual return on plan assets ........................................................ (3,722) (2,277) (5,374)
Net amortization and deferral ....................................................... 2,074 (242) 2,636
Curtailment/settlement losses (due to early retirement of certain participants) ..... 1,762 -- 1,342
-------- -------- --------
Net pension cost .................................................................... $ 5,594 $ 3,527 $ 4,884
======== ======== ========
</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,
-------------------------
1996 1997
------------ ------------
(In thousands)
<S> <C> <C>
Actuarial present value of accumulated benefit obligations:
Vested benefits ...................................................... $ 27,661 $ 34,736
Non-vested benefits .................................................. 1,488 2,685
--------- ---------
Accumulated benefit obligations ....................................... $ 29,149 $ 37,421
========= =========
Plan assets at fair value ............................................. $ 31,109 $ 37,342
Projected benefit obligation .......................................... (36,416) (46,800)
--------- ---------
Funded status ......................................................... (5,307) (9,458)
Unrecognized net loss from past experience different from that assumed 6,890 10,774
Additional liability .................................................. -- (1,395)
--------- ---------
Prepaid (accrued) pension costs ....................................... $ 1,583 $ (79)
========= =========
</TABLE>
Assets held by the Company's plans are invested in money market and other
fixed income funds as well as equity funds.
F-25
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 11 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,
-------------------------
1996 1997
------------- -----------
(In thousands)
<S> <C> <C>
Actuarial present value of accumulated benefit obligations:
Vested benefits ............................................................ $ 4,924 $ 134
Non-vested benefits ........................................................ 33 168
------- -----
Accumulated benefit obligations .............................................. $ 4,957 $ 302
======= =====
Plan assets at fair value .................................................... $ -- $ --
Projected benefit obligation ................................................. (5,051) (401)
------- -----
Funded status ................................................................ (5,051) (401)
Unrecognized net loss (gain) from past experience different from that assumed 616 (49)
Unrecognized prior service cost .............................................. 68 27
Unrecognized net asset at January 1, 1987 being amortized over 15 years ...... (9) (1)
Additional liability ......................................................... (974) --
--------- -------
Accrued pension costs ........................................................ $(5,350) $(424)
========= =======
</TABLE>
Significant assumptions used in determining net pension cost and funded
status information for all the periods shown above are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Discount rate ................................ 8.0% 8.0% 7.0%
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. Under these plans the Company makes matching contributions, with certain
limitations. Amounts charged to income under these plans were $3.9 million and
$2.4 million for the years ended December 31, 1995 and 1997, 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, 1995, 1996, and 1997 were as follows: $0.6 million, $1.9 million,
and $3.8 million, respectively. 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, 1997, 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 Old 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 at a rate of 20%
per annum beginning on the first anniversary date of the grant. Options granted
to non-officer level
F-26
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 11 EMPLOYEE BENEFIT PLANS -- Continued
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 Old Common Stock
(Note 13) and granted an option under the 1989 Stock Option Plan to purchase
800,000 shares of the Company's Old 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 Old 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.
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 Old 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 were not affiliated with Gollust Tierney & Oliver, Incorporated, a former
shareholder of the Company. Such plan authorizes the issuance of up to 110,000
shares of Old Common Stock. The plan is substantially similar in all respects
to the 1989 Plan described above. At both December 31, 1996 and 1997, options
outstanding under the 1990 Option Plan totaled 10,000 shares.
During January 1997, the Company issued 291,000 options relative to the
1989 Plan. Options forfeited during the year totaled approximately 1,070,000.
No options were exercised during the year. On the Effective Date of the
Company's emergence from bankruptcy, pursuant to the Plan, FCI's Old Common
Stock was canceled, extinguished and retired. As a result, all stock options
outstanding as of that date, including those under both the 1989 Plan and the
1990 Plan, were effectively canceled. Due to the insignificant quantity of
options issued during 1997 and the fact that all options were issued at an
exercise price which exceeded the market price of the Old Common Stock upon
issuance and through January 7, 1998, the date upon which all outstanding
options were effectively canceled, the effect on the accompanying Statement of
Consolidated Operations for the year ended December 31, 1997 of the
compensation expense calculated under SFAS 123 related to such issuance is not
material and accordingly, is not included in the pro forma information
presented below.
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 1997
(in thousands) ------------- ------------- --------------
<S> <C> <C> <C>
Pro forma net loss ......... $ (57,719) $ (87,124) $ (136,559)
Pro forma loss per share:
Basic and diluted ......... (1.68) (2.39) (3.55)
</TABLE>
F-27
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 11 EMPLOYEE BENEFIT PLANS -- Continued
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.
A summary of the Company's stock option plans as of December 31, 1996 and
the changes during the year ended December 31, 1996 is presented below. This
summary and the following summary of information about stock options
outstanding are not updated for 1997 activity as discussed above, based on the
insignificance of such activity and the cancellation of all stock option plans
relative to the Old Common Stock effective January 7, 1998.
<TABLE>
<CAPTION>
1996
-----------------------------
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>
Pursuant to the Plan, and shortly after its effective date, the Company
adopted The Advantica Restaurant Group Stock Option Plan (the "Non-Officer
Plan") and The Advantica Restaurant Group Officer Stock Option Plan (the
"Officer Plan" and, together with the Non-Officer Plan, the "New Stock Option
Plans"). The New Stock Option Plans are designed to facilitate awarding stock
options as incentives to employees and consultants of Advantica.
The New Stock Option Plans shall be administered by the Compensation and
Incentives Committee of the Advantica Board, who shall have sole discretion to
determine the exercise price, term and vesting schedule of options awarded
under such plans. A total of 4,888,888 shares of Advantica Common Stock are
authorized to be issued under these plans.
Under the terms of the plans, optionees who terminate for any reason other
than cause or death will be allowed 60 days after the termination date to
exercise "vested" options. "Vested" options are exercisable for one year when
termination is by a reason other than voluntary termination or for cause. If
termination is for cause, no option shall be exercisable after the termination
date.
F-28
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 11 EMPLOYEE BENEFIT PLANS -- Continued
In addition to the New Stock Option Plans, the Company has adopted The
Advantica Restaurant Group Director Stock Option Plan (the "Director Plan"),
the terms of which are substantially similar to the terms of the New Stock
Option Plans. A total of 200,000 shares of Advantica Common Stock are
authorized to be issued under the Director Plan. Both the Director Plan and the
Officer Plan are contingent upon receiving shareholder approval at Advantica's
1998 annual shareholders' meeting.
NOTE 12 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, 1997, 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 FCI 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.
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 or
results of operations of the Company.
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
makes a number of claims, including, (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
definitive agreement for the sale of Flagstar Enterprises, Inc. ("FEI"), the
wholly-owned subsidiary which operates the Company's Hardee's restaurants, to
HFS' parent company. 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 18 regarding potential disposition of
the Company's Hardee's restaurants.
On February 22, 1996, the Company entered into an agreement with IBM
Global Services ("IBM") (formerly Integrated Systems Solutions Corporation).
The ten-year agreement (as amended) for $358.1 million, which requires annual
payments ranging from $24.0 million to $51.2 million, provides for IBM 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, IBM 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. The disposition
of FEI will reduce the future commitment under the agreement with IBM. The
Company is currently working with IBM to quantify this impact. Additionally,
the Company expects to spend approximately $20 million in both 1998 and 1999,
which is not included in this agreement, to develop or purchase new software.
F-29
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 12 COMMITMENTS AND CONTINGENCIES -- Continued
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, 1997 relative to Portion-Trol Foods, Inc.
and Mother Butler Pies, respectively, are approximately $360 million and $43
million.
NOTE 13 SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Total Shareholders'
Other Equity Deficit Equity (Deficit)
-------------- ---------------- -----------------
(In thousands)
<S> <C> <C> <C>
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 11) ......... 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 ................................... -- (134,450) (134,450)
Minimum pension liability adjustment ....... (473) -- (473)
-------- ------------ ------------
Balance December 31, 1997 .................... $745,365 $ (2,107,815) $ (1,362,450)
======== ============ ============
</TABLE>
Each share of the $2.25 Series A Cumulative Convertible Exchangeable
Preferred Stock (the "Old Preferred Stock") is convertible at the option of the
holder, unless previously redeemed, into 1.359 shares of Old Common Stock. The
Old 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 Old 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 Old Common Stock of the
Company.
The Old 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 the first, second,
third and fourth quarter 1997 dividend payments on its Old Preferred Stock.
Such cumulative dividends that have not been declared or paid total $17.7
million, or $.42 per share, at December 31, 1997.
At December 31, 1997, there are warrants outstanding which entitle the
holder, an affiliate of Kohlberg, Kravis, Roberts & Co. (KKR), a shareholder of
the Company at December 31, 1997, to purchase 15 million shares of Company Old
Common Stock at $17.50 per share, subject to adjustment for certain events.
Such warrants may be exercised through November 16, 2000.
As discussed in Note 1, pursuant to the Plan, Flagstar's 10% Convertible
Debentures, FCI's $2.25 Series A Cumulative Convertible Exchangeable Preferred
Stock and FCI's $.50 par value common stock were canceled, extinguished and
retired as of the Effective Date. In addition, the warrants related to such Old
Common Stock were also canceled.
F-30
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 13 SHAREHOLDERS' EQUITY (DEFICIT) -- Continued
Pursuant to the Plan and as of the Effective Date, the Company issued
warrants to purchase in the aggregate, 4 million shares of Common Stock. Each
warrant, when exercised, will entitle the holder thereof to purchase one share
of Common Stock at an exercise price of $14.60 per share, subject to adjustment
for certain events. Such warrants may be exercised through January 7, 2005.
Also 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 (See Note
11).
NOTE 14 EARNINGS (LOSS) PER SHARE APPLICABLE TO COMMON SHAREHOLDERS
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
1995 1996 1997
-------------- ------------- --------------
<S> <C> <C> <C>
Numerator:
Loss from continuing operations $ (132,906) $ (85,460) $ (134,450)
Preferred stock dividends (14,175) (14,175) (14,175)
---------- --------- ----------
Numerator for basic diluted loss per share -- loss
from continuing operations available to common
shareholders $ (147,081) $ (99,635) $ (148,625)
========== ========= ==========
Denomininator:
Denominator for basic and diluted loss per share --
weighted-average shares 42,431 42,434 42,434
========== ========= ==========
Basic and diluted loss per share from continuing
operations $ (3.47) $ (2.35) $ (3.50)
========== ========= ==========
</TABLE>
The calculations of basic and diluted loss per share have been based on the
weighted average number of Company shares outstanding. The warrants, options,
$2.25 Preferred Stock and 10% Convertible Debentures have been omitted from the
calculations because they have an antidilutive effect on loss per share. For
additional disclosures regarding the warrants, options, $2.25 Preferred Stock
and 10% Convertible Debentures, see Notes 1, 8, 11 and 13.
NOTE 15 EXTRAORDINARY ITEMS
The Company recorded losses from extraordinary items as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1995
-------------------------------------
Income
Tax
Gain Provision Gain (Loss),
(Loss) (Benefits) Net of Taxes
---------- ------------ -------------
(In thousands)
<S> <C> <C> <C>
Repurchase of Senior Indebtedness:
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 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 16 RELATED PARTY TRANSACTIONS
The Company recorded charges against income of approximately $1.3 million
for the years ended December 31, 1995, 1996, and 1997 relative to KKR's
financial advisory fees.
F-31
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 16 RELATED PARTY TRANSACTIONS -- Continued
During January 1997, the Company settled its employment and benefits
arrangements 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 is
included in other non-operating expenses in the 1996 Statement of Consolidated
Operations.
Interest income for the loan receivable from the former officer for the
years ended December 31, 1995 and 1996 totaled $886,000 and $935,000,
respectively.
NOTE 17 DISCONTINUED OPERATIONS
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 TW
Recreational Services, Inc. and Volume Services, Inc. as discontinued
operations in accordance with Accounting Principles Board Opinion No. 30.
Revenue and operating income of the discontinued operations for the year ended
December 31, 1995 were $32.6 million and $17.1 million, respectively.
NOTE 18 SUBSEQUENT EVENT
On February 18, 1998 Advantica entered into a definitive agreement with
CKE Restaurants, Inc. ("CKE") 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"), a
wholly-owned subsidiary of CKE. As contemplated by such agreement, the Company
would receive $380.8 million in cash (subject to certain adjustments) in
exchange for all of the outstanding stock of FEI. In addition, CKE would assume
$45.6 million of capital leases. The transaction is expected to be completed on
or about April 1, 1998. Approximately $180 million of the proceeds of such
transaction, if consummated, (together with $20.7 million previously on deposit
with respect to certain Mortgage Financings defined herein) will be applied to
effect an in-substance defeasance of the Company's 10.25% guaranteed bonds (the
"Mortgage Financings") of FEI and Quincy's Restaurants, Inc. with a book value
of $177.6 million (and a pro forma fair value of $198.9 million) at December
31, 1997, plus accrued interest of $2.3 million. 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. 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. The net assets of FEI are included in net
assets held for sale in the accompanying Consolidated Balance Sheet at December
31, 1997, and consist of the following:
F-32
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 18 SUBSEQUENT EVENT -- Continued
<TABLE>
<S> <C>
Assets
Current assets ............................................... $ 8,715
Property owned, net .......................................... 290,621
Property held under capital leases, net ...................... 32,619
Other assets ................................................. 13,338
--------
345,293
--------
Less liabilities
Current liabilities
Current portion of obligations under capital lease ......... 3,874
Other current liabilities .................................. 28,368
--------
32,242
--------
Long-term liabilities
Obligations under capital lease, non current ............... 41,339
Other long term liabilities ................................ 29,233
--------
70,572
--------
Total liabilities ............................................ 102,814
--------
Net assets held for sale ..................................... $242,479
========
</TABLE>
F-33
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 19 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. During the fourth quarter of 1997 the Company recorded a $5.8
million reduction in operating expenses resulting from various non-recurring
items consisting primarily of an insurance recovery. 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 1996 and 1997
are as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Year Ended December 31, 1996:
Operating revenue ..................................................... $ 550,425 $ 626,570 $ 703,838 $ 661,469
Operating expenses:
Product costs ....................................................... 160,752 185,499 207,390 193,039
Payroll and benefits ................................................ 213,807 234,948 258,000 236,409
Depreciation and 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)
========= ========= ========= =========
Basic and diluted loss per share applicable to common shareholders:
Net loss ............................................................ $ (0.73) $ (0.49) $ (0.38) $ (0.75)
========= ========= ========= =========
Year Ended December 31, 1997:
Operating revenue ................................................... $ 675,775 $ 659,428 $ 654,153 $ 620,100
Operating expenses:
Product costs ...................................................... 197,692 192,261 191,026 179,995
Payroll and benefits ............................................... 256,787 243,446 235,826 240,130
Depreciation and amortization expense .............................. 34,682 33,546 38,672 33,928
Utilities expense .................................................. 27,480 26,508 28,968 27,182
Other .............................................................. 136,107 117,505 115,394 96,279
Provision for restructuring charges ................................ -- -- -- 10,540
Charge for impaired assets ......................................... -- -- -- 15,074
--------- --------- --------- ---------
Operating income ...................................................... $ 23,027 $ 46,162 $ 44,267 $ 16,972
========= ========= ========= =========
Loss before extraordinary item ........................................ $ (51,728) $ (32,271) $ (17,759) $ (32,692)
========= ========= ========= =========
Net loss applicable to common shareholders ............................ $ (55,272) $ (35,815) $ (21,302) $ (36,236)
========= ========= ========= =========
Basic and diluted loss per share applicable to common shareholders:
Net loss ............................................................ $ (1.30) $ (0.84) $ (0.50) $ (0.86)
========= ========= ========= =========
</TABLE>
F-34
<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 ........................................... 11
Price Range of Common Stock and Dividend
Policy ................................................. 12
Pro Forma Financial Statements ............................ 13
Selected Historical Financial Data ........................ 20
Management's Discussion and Analysis of
Financial Condition and Results of Operations .......... 22
Business .................................................. 38
Management ................................................ 48
Management Compensation ................................... 50
Ownership of Capital Securities ........................... 55
Certain Transactions ...................................... 55
Description of Indebtedness ............................... 56
Description of Common Stock ............................... 60
Selling Stockholder ....................................... 61
Plan of Distribution ...................................... 62
Legal Matters ............................................. 63
Experts ................................................... 63
</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.
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 deemed issued by Advantica
II-1
<PAGE>
and distributed pursuant to the Plan of Reorganization, subject to completion
of exchange of securities as contemplated by the Plan of Reorganization. Such
issuance of Common Stock and Warrants was exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 1145(a)(1) of Chapter
11, Title 11 of the United States Code.
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).
*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).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- --------------- -------------------------------------------------------------------------------------------------------
<S> <C>
*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")).
*4.20 Fourth Amendment and Limited Waiver, dated July 9, 1997 to the FRI-M Credit Agreement
(incorporated by reference to Exhibit 4.2 to FCI's quarterly report on Form 10-Q for the quarter ended
October 1, 1997).
4.21 Fifth Amendment to the FRI-M Credit Agreement, dated as of December 9, 1997.
5.1 Form of 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 Form of Mortgage related to Secured Restaurants Trust transaction (incorporated by reference to
Exhibit 10.1 to the Form S-11).
*10.6 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).
*10.7 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).
*10.8 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).
*10.9 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).
*10.10 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).
*10.11 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).
*10.12 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).
*10.13 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).
*10.14 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).
*10.15 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).
*10.16 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).
*10.17 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).
*10.18 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).
*10.19 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).
*10.20 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).
*10.21 Form of Hardee's License Agreement related to Secured Restaurants Trust transaction (incorporated by
reference to Exhibit 10.14 to the Form S-11).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- --------------------- ---------------------------------------------------------------------------------------------------------
<S> <C>
*10.22 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).
*10.23 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).
*10.24 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).
*10.25 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).
*10.26 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).
*10.27 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).
*10.28 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).
*10.29 Form of Agreement providing certain severance benefits (incorporated by reference to Exhibit 10.48 to
the 1994 Form 10-K).
*10.30 Amended Consent Decree dated May 24, 1994 (incorporated by reference to Exhibit 10.50 to the 1994
Form 10-K).
*10.31 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).
*10.32 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).
**10.33 Form of Agreement dated December 3, 1997 providing certain retention incentives and severance
benefits for Company management.
*10.34 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).
*10.35 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).
*10.36 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).
*10.37 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).
10.38 Employment Agreement, amended and restated as of January 7, 1998, between Advantica and James B.
Adamson.
*10.39 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).
*10.40 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).
*10.41 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).
*10.42 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).
10.43 Advantica Restaurant Group Stock Option Plan, as adopted January 28, 1998.
10.44 Advantica Restaurant Group Officer Stock Option Plan, as adopted January 28, 1998.
10.45 Advantica Restaurant Group Director Stock Option Plan, as adopted January 28, 1998.
12 Computation of Ratio of Earnings to Fixed Charges.
*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.
**99 Safe Harbor Under the Private Securities Litigation Reform Act of 1995.
</TABLE>
II-4
<PAGE>
- ---------
* 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 Amendment to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Spartanburg, State of South Carolina, on March 25, 1998.
ADVANTICA RESTAURANT GROUP, INC.
By: /s/ RHONDA J. PARISH
------------------------------------
Rhonda J. Parish
Executive Vice President,
General Counsel and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the 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>
* Director, Chairman, President and Chief March 25, 1998
----------------------------------
(James B. Adamson) Executive Officer
(Principal Executive Officer)
* Executive Vice President and Chief March 25, 1998
----------------------------------
(C. Robert Campbell) Financial Officer (Principal Financial
and Accounting Officer)
* Director March 25, 1998
----------------------------------
(Robert H. Allen)
* Director March 25, 1998
----------------------------------
(Ronald E. Blaylock)
* Director March 25, 1998
----------------------------------
(Vera King Farris)
* Director March 25, 1998
----------------------------------
(James J. Gaffney)
* Director March 25, 1998
----------------------------------
(Irwin N. Gold)
* Director March 25, 1998
----------------------------------
(Robert E. Marks)
* Director March 25, 1998
----------------------------------
(Charles F. Moran)
* Director March 25, 1998
----------------------------------
(Elizabeth A. Sanders)
* Director March 25, 1998
----------------------------------
(Donald R. Shepherd)
*By: /s/ RHONDA J. PARISH
------------------------------
(Rhonda J. Parish)
(attorney-in-fact for each of the persons indicated)
</TABLE>
II-6
Exhibit 3.2
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
FLAGSTAR CORPORATION
INTO
FLAGSTAR COMPANIES, INC.
Flagstar Companies, Inc., a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY:
FIRST: That the Corporation was incorporated on the 29th day of
September 1988, pursuant to the General Corporation Law of the State of
Delaware.
SECOND: That the Corporation owns all of the outstanding shares of each
class of the capital stock of Flagstar Corporation, a corporation incorporated
on the 15th day of April 1980 (then known as Trans World Food Systems, Inc. and
later known as TW Services, Inc.), pursuant to the General Corporation Law of
the State of Delaware.
THIRD: That pursuant to a plan of reorganization (as further defined
and described below), Flagstar Corporation, a joint debtor with the Corporation
under such plan of reorganization, shall be merged with and into the Corporation
(such merger to be referred to hereinafter as the "Merger.")
FOURTH: The Merger was duly authorized and approved in all respects and
for all purposes pursuant to the Corporation's and Flagstar Corporation's
Amended Joint Plan of Reorganization (the "Amended Joint Plan"), dated July 11,
1997 (amended November 7, 1997) and confirmed by order of the United States
Bankruptcy Court for the District of South Carolina (the "Bankruptcy Court")
entered on November 12, 1997 pursuant to Chapter 11 of Title 11 of the United
States Code, and otherwise in accordance with Section 253 and other applicable
provisions of the General Corporation Law of the State of Delaware.
FIFTH: Pursuant to the Amended Joint Plan, the Merger shall be deemed
to be effective January 7, 1998, the effective date of the Amended Joint Plan,
without any requirement of action or further action by the Corporation's
shareholders or its board of directors.
SIXTH: Pursuant to the Amended Joint Plan and the Merger, on the
Amended Joint Plan's effective date, the Corporation shall adopt a Restated
Certificate of Incorporation and pursuant thereto shall change its corporate
name to Advantica Restaurant Group, Inc. in accordance with Section 253 of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said Flagstar Companies, Inc. has caused this
Certificate to be signed by Rhonda J. Parish, its Senior Vice President, General
Counsel and Secretary and attested by C. Robert Campbell, its Assistant
Secretary, this 5th day of January, 1998.
FLAGSTAR COMPANIES, INC.
By: /s/ Rhonda J. Parish
Its: Senior Vice President, General Counsel
and Secretary
Attest:
By:___________________________
Its:___________________________
<PAGE>
Exhibit 4.21
FRI-M CORPORATION
FIFTH AMENDMENT TO CREDIT AGREEMENT
This FIFTH AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is
dated as of December 9, 1997 and entered into by and among FRD ACQUISITION CO.,
a Delaware corporation ("HOLDINGS"), FRI-M CORPORATION, a Delaware corporation
("COMPANY"), the other Credit Support Parties (as defined in Section 4 hereof),
THE FINANCIAL INSTITUTIONS LISTED ON THE SIGNATURE PAGES HEREOF (each
individually referred to herein as a "LENDER" and collectively as "LENDERS"),
BANKERS TRUST COMPANY, THE CHASE MANHATTAN BANK (formerly known as CHEMICAL
BANK) and CITICORP USA, INC., as co-syndication agents for Lenders (in such
capacity, each individually referred to herein as a "CO-SYNDICATION AGENT" and
collectively as "CO-SYNDICATION AGENTS"), and CREDIT LYONNAIS NEW YORK BRANCH,
as administrative agent for Lenders (in such capacity, "ADMINISTRATIVE AGENT"),
and is made with reference to that certain Credit Agreement dated as of May 23,
1996, by and among Holdings, Company, Lenders, Co-Syndication Agents and
Administrative Agent, as amended by the First Amendment to Credit Agreement,
Guaranties and Certain Collateral Documents dated as of July 1, 1996, the Second
Amendment to Credit Agreement, Guaranties and Certain Collateral Documents dated
as of November 19, 1996, the Third Amendment to Credit Agreement dated as of
March 7, 1997, the Consent dated as of March 7, 1997, and the Fourth Amendment
to Credit Agreement dated as of July 9, 1997 (as so amended, the "CREDIT
AGREEMENT"), and to other Loan Documents. Capitalized terms used herein without
definition shall have the same meanings herein as set forth in the Credit
Agreement.
RECITALS
WHEREAS, Loan Parties and Lenders desire to amend the Credit
Agreement to permit Borrower to make Asset Sales having a fair market value not
in excess of $20,000,000.
NOW, THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, the parties hereto agree
as follows:
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SECTION 1. AMENDMENT TO THE CREDIT AGREEMENT
1.1 AMENDMENT TO SECTION 7.7: RESTRICTION ON FUNDAMENTAL
CHANGES; ASSET SALES AND ACQUISITIONS
Subsection 7.7(vi) of the Credit Agreement is hereby amended by
deleting the reference to "$10,000,000" therein and substituting "$20,000,000"
therefor.
SECTION 2. CONDITIONS TO EFFECTIVENESS
Section 1 of this Amendment shall become effective only upon
the prior or concurrent satisfaction of all of the following conditions
precedent (the date of satisfaction of such conditions being referred to herein
as the "AMENDMENT EFFECTIVE DATE"):
A. On or before the Amendment Effective Date, Company shall
deliver to Lenders (or to Administrative Agent for Lenders) the following, each,
unless otherwise noted, dated the Amendment Effective Date:
1. Resolutions of its Board of Directors of each of
Holdings and Company approving and authorizing the execution, delivery,
and performance of this Amendment, certified as of the Amendment
Effective Date by its corporate secretary or an assistant secretary as
being in full force and effect without modification or amendment;
2. Signature and incumbency certificates of the
officers of each of Holdings and Company certified by its corporate
secretary or assistant secretary; and
3. Counterparts of this Amendment executed by
Requisite Lenders and each of the other parties hereto.
B. On or before the Amendment Effective Date, all corporate and
other proceedings taken or to be taken in connection with the transactions
contemplated hereby and all documents incidental thereto not previously found
acceptable by Administrative Agent, acting on behalf of Lenders, and its counsel
shall be satisfactory in form and substance to Administrative Agent and such
counsel, and Administrative Agent and such counsel shall have received all such
counterpart originals or certified copies of such documents as Administrative
Agent may reasonably request.
SECTION 3. REPRESENTATIONS AND WARRANTIES
In order to induce Lenders to enter into this Amendment and to
amend the Credit Agreement in the manner provided herein, each of Holdings,
Company and each
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other Loan Party party hereto represents and warrants to each Lender that the
following statements are true, correct and complete:
A. CORPORATE POWER AND AUTHORITY. Each Loan Party party hereto
has all requisite corporate power and authority to enter into this Amendment and
to carry out the transactions contemplated hereby and each of Holdings, Company
and each other Loan Party party hereto has all requisite corporate power and
authority to carry out the transactions contemplated by, and perform its
obligations under, the Credit Agreement as further amended by this Amendment
(the "AMENDED AGREEMENT").
B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of
this Amendment and the performance of the Amended Agreement have been duly
authorized by all necessary corporate action on the part of Holdings, Company
and each of the other Loan Parties party hereto, as the case may be.
C. NO CONFLICT. The execution and delivery by each Loan Party
party hereto of this Amendment and the performance by such Loan Party of this
Amendment and the performance by Holdings and Company of the Amended Agreement
do not and will not (i) violate any provision of any law or any governmental
rule or regulation applicable to Holdings or any of its Subsidiaries, the
Certificate or Articles of Incorporation or Bylaws of Holdings or any of its
Subsidiaries or any order, judgment or decree of any court or other agency of
government binding on Holdings or any of its Subsidiaries, (ii) conflict with,
result in a breach of or constitute (with due notice or lapse of time or both) a
default under the Holdings Note Indenture or the Holdings Note or any other
Contractual Obligation of Holdings or any of its Subsidiaries, (iii) result in
or require the creation or imposition of any Lien upon any of the properties or
assets of Holdings or any of its Subsidiaries (other than any Liens created
under any of the Loan Documents in favor of Administrative Agent on behalf of
Lenders), or (iv) require any approval of stockholders or any approval or
consent of any Person under any Contractual Obligation of Holdings or any of its
Subsidiaries.
D. GOVERNMENTAL CONSENTS. The execution and delivery by each
Loan Party party hereto of this Amendment and the performance by such Loan Party
of this Amendment and the performance by Holdings and Company of the Amended
Agreement do not and will not require any registration with, consent or approval
of, or notice to, or other action to, with or by, any federal, state or other
governmental authority or regulatory body.
E. BINDING OBLIGATION. This Amendment has been duly executed
and delivered by each Loan Party party hereto and this Amendment and the Amended
Agreement are the legally valid and binding obligations of such Loan Party,
enforceable against such Loan Party in accordance with their respective terms,
except as may be limited by bankruptcy, insolvency, reorganization, moratorium
or similar laws relating to or limiting creditors' rights generally or by
equitable principles relating to enforceability.
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F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM CREDIT
AGREEMENT. The representations and warranties contained in Section 5 of the
Credit Agreement and the Amended Credit Agreement are and will be true, correct
and complete in all material respects on and as of the Amendment Effective Date
to the same extent as though made on and as of that date, except to the extent
such representations and warranties specifically relate to an earlier date, in
which case they were true, correct and complete in all material respects on and
as of such earlier date.
G. ABSENCE OF DEFAULT. No event has occurred and is continuing
or will result from the consummation of the transactions contemplated by this
Amendment that would constitute an Event of Default or a Potential Event of
Default.
SECTION 4. ACKNOWLEDGEMENT AND CONSENT
Company is a party to certain Collateral Documents, in each
case as amended through the Amendment Effective Date, pursuant to which Company
has created Liens in favor of Administrative Agent on certain Collateral to
secure the Obligations. Each of the other Loan Parties party hereto is a party
to certain Collateral Documents, the Subsidiary Guaranty or the Holdings
Guaranty, in each case as amended through the Amendment Effective Date, pursuant
to which each such Loan Party has (i) guarantied the Obligations and (ii)
created Liens in favor of Administrative Agent on certain Collateral to secure
the obligations of such Loan Party under the Subsidiary Guaranty or the Holdings
Guaranty, as the case may be. The Loan Parties party hereto are collectively
referred to herein as the "CREDIT SUPPORT PARTIES", and the Collateral
Documents, the Subsidiary Guaranty and the Holdings Guaranty are collectively
referred to herein as the "CREDIT SUPPORT DOCUMENTS".
Each Credit Support Party hereby acknowledges that it has
reviewed the terms and provisions of the Credit Agreement, the Collateral
Documents and Guaranties and this Amendment and consents to the further
amendment of the Credit Agreement effected pursuant to this Amendment. Each
Credit Support Party hereby confirms that each Credit Support Document to which
it is a party or otherwise bound and all Collateral encumbered thereby will
continue to guaranty or secure, as the case may be, to the fullest extent
possible the payment and performance of all "Obligations," "Guarantied
Obligations" and "Secured Obligations," as the case may be (in each case as such
terms are defined in the applicable Credit Support Document), including without
limitation the payment and performance of all such "Obligations," "Guarantied
Obligations" or "Secured Obligations," as the case may be, in respect of the
Obligations of Company now or hereafter existing under or in respect of the
Amended Agreement and the Notes defined therein.
Each Credit Support Party acknowledges and agrees that any of
the Credit Support Documents to which it is a party or otherwise bound shall
continue in full force and effect and that all of its obligations thereunder
shall be valid and enforceable and shall
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not be impaired or limited by the execution or effectiveness of this Amendment.
Each Credit Support Party represents and warrants that all representations and
warranties contained in the Amended Agreement and the other Credit Support
Documents to which it is a party or otherwise bound are true, correct and
complete in all material respects on and as of the Amendment Effective Date to
the same extent as though made on and as of that date, except to the extent such
representations and warranties specifically relate to an earlier date, in which
case they were true, correct and complete in all material respects on and as of
such earlier date.
Each Credit Support Party (other than Holdings and Company)
acknowledges and agrees that (i) notwithstanding the conditions to effectiveness
set forth in this Amendment, such Credit Support Party is not required by the
terms of the Credit Agreement or any other Loan Document to consent to the
amendments to the Credit Agreement effected pursuant to this Amendment and (ii)
nothing in the Credit Agreement, this Amendment or any other Loan Document shall
be deemed to require the consent of such Credit Support Party to any future
amendments to the Credit Agreement.
SECTION 5. MISCELLANEOUS
A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE
OTHER LOAN DOCUMENTS.
(i) On and after the Amendment Effective Date, each reference
in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import referring to the Credit Agreement, and
each reference in the other Loan Documents to the "Credit Agreement",
"thereunder", "thereof" or words of like import referring to the Credit
Agreement shall mean and be a reference to the Amended Agreement.
(ii) Except as specifically amended by this Amendment, the
Credit Agreement and the other Loan Documents shall remain in full
force and effect and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this Amendment
shall not, except as expressly provided herein, constitute a waiver of
any provision of, or operate as a waiver of any right, power or remedy
of Agent or any Lender under, the Credit Agreement or any of the other
Loan Documents.
B. FEES AND EXPENSES. Company acknowledges that all reasonable
costs, fees and expenses as described in subsection 11.2 of the Credit Agreement
incurred by Administrative Agent and its counsel with respect to this Amendment
and the documents and transactions contemplated hereby shall be for the account
of Company.
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C. HEADINGS. Section and subsection headings in this Amendment
are included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose or be given any substantive effect.
D. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW
YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW
OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
E. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument; signature pages may be detached from multiple separate
counterparts and attached to a single counterpart so that all signature pages
are physically attached to the same document. This Amendment (other than the
provisions of Section 1, which shall become effective upon the satisfaction of
each of the conditions set forth in Section 2 hereof) shall become effective
upon the execution of a counterpart hereof by Requisite Lenders and each of the
other parties hereto and receipt by Company and Administrative Agent of written
or telephonic notification of such execution and authorization of delivery
thereof.
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IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first written above.
FRD ACQUISITION CO.
By:_______________________________________
Title:____________________________________
FRI-M CORPORATION
By:_______________________________________
Title:____________________________________
FRI-FRD CORPORATION
By:_______________________________________
Title:____________________________________
CFC FRANCHISING COMPANY
By:_______________________________________
Title:____________________________________
FRI-J CORPORATION
By:_______________________________________
Title:____________________________________
JOJOS RESTAURANTS, INC.
By:_______________________________________
Title:____________________________________
S-1
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JOJOS CALIFORNIA FAMILY
RESTAURANTS, INC.
By:_______________________________________
Title:____________________________________
COCO'S RESTAURANTS, INC.
By:_______________________________________
Title:____________________________________
FRI-C CORPORATION
By:_______________________________________
Title:____________________________________
CARROWS RESTAURANTS, INC.
By:_______________________________________
Title:____________________________________
CARROWS CALIFORNIA FAMILY
RESTAURANTS, INC.
By:_______________________________________
Title:____________________________________
FRI-DHD CORPORATION
By:_______________________________________
Title:____________________________________
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FAR WEST CONCEPTS, INC.
By:_______________________________________
Title:____________________________________
FRI-NA CORPORATION
By:_______________________________________
Title:____________________________________
LENDERS: CREDIT LYONNAIS NEW YORK BRANCH,
individually and as Administrative Agent
By:_______________________________________
Title:____________________________________
BANKERS TRUST COMPANY, individually and
as Co-Syndication Agent
By:_______________________________________
Title:____________________________________
THE CHASE MANHATTAN BANK (FORMERLY
KNOWN AS CHEMICAL BANK), individually and as
Co-Syndication Agent
By:_______________________________________
Title:____________________________________
CITICORP USA, INC., individually and as Co-
Syndication Agent
By:_______________________________________
Title:____________________________________
S-3
EXHIBIT 5.1
[Form of Opinion of Parker, Poe, Adams & Bernstein]
, 1998
Board of Directors
Advantica Restaurant Group, Inc.
203 East Main Street
Spartanburg, South Carolina 29319-9966
Dear Ladies and Gentlemen:
We are acting as counsel to Advantica Restaurant Group, Inc., a Delaware
corporation (the "Company"), in connection with the preparation, filing and
processing, with the Securities and Exchange Commission (the "Commission"),
pursuant to the Securities Act of 1933, as amended (the "Act"), of a
Registration Statement (No. 333-45811) on Form S-1 (as amended through the date
hereof, the "Registration Statement") and the offer and sale of the Shares
referred to below. This opinion is furnished to you for filing with the
Commission pursuant to Item 601(b)(5) of Regulation S-K promulgated under the
Act.
The Registration Statement covers the offer and sale from time to time of
9,526,775 shares (the "Shares") of the Company's common stock, par value $.01
per share (the "Common Stock") by Loomis Sayles & Company, L.P. as a selling
shareholder (the "Selling Shareholder").
In our representation of the Company, we have examined the Registration
Statement, the Company's Restated Certificate of Incorporation and Bylaws, as
amended to date, all actions of the Company's Board of Directors recorded in
the Company's minute book, the form of certificate evidencing the Shares, a
certificate of good standing from the State of Delaware, and such other
documents as we have considered necessary for purposes of rendering the
opinions expressed below.
Based upon the foregoing, we are of the following opinion:
1. The Company is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Delaware.
2. The Shares are and, when sold by the Selling Shareholder in accordance
with an effective Registration Statement, will be, duly authorized,
validly issued, fully paid and nonassessable.
The opinions expressed herein are limited to the laws of the State of
North Carolina, the General Corporation Law of the State of Delaware and the
Act.
We hereby consent to the use of this opinion letter as Exhibit 5.1 to the
Registration Statement and to the use of our name under the heading "Legal
Matters" in related prospectuses. In giving this consent, we do not admit that
we are in the category of persons whose consent is required under Section 7 of
the Act or the rules and regulations of the Commission promulgated thereunder.
Very truly yours,
Exhibit 10.38
EMPLOYMENT AGREEMENT
BETWEEN ADVANTICA RESTAURANT GROUP, INC. AND JAMES B. ADAMSON
AS AMENDED AND RESTATED AS OF JANUARY 7, 1998
This Employment Agreement ("Agreement") is amended and restated as of
January 7, 1998 (the "Effective Date") between Advantica Restaurant Group, Inc.,
a Delaware corporation (the "Company") and James B. Adamson (the "Executive")
residing at 2110 Cleveland Street Extension, Greenville, SC 29607.
WITNESSETH:
WHEREAS, Flagstar Corporation, a Delaware corporation ("Flagstar") and
the Executive originally entered into this Agreement January 10, 1995 providing
for the Executive's employment as President and Chief Executive Officer of
Flagstar, as well as for the Executive's service as a Director of Flagstar on
the terms, and subject to the conditions set forth therein;
WHEREAS, Flagstar and the Executive have amended the Agreement as of
February 27, 1995 and December 31, 1996;
WHEREAS, the Company (formerly known as Flagstar Companies, Inc.
("FCI")) is the successor to Flagstar as a result of the merger of Flagstar into
FCI pursuant to the reorganization of FCI and Flagstar under Title 11 of Chapter
11 of the U.S. Code (the "Bankruptcy Code") which was effective as of January 7,
1998 (the "Effective Time"); and
WHEREAS, the Company and the Executive desire to further amend this
Agreement and restate it to incorporate all prior amendments;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and obligations hereinafter set forth, the parties agree as follows:
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1. EMPLOYMENT
The Executive's employment under the terms of this Agreement shall
commence on the Effective Date and shall continue until terminated pursuant to
section 5. (Such period of employment under this Agreement is hereinafter
referred to as the "Employment Term.") The Executive shall provide services to
the Company hereunder as President and Chief Executive Officer of the Company.
During the Employment Term, the Executive, if elected or appointed thereto,
shall also serve as a Director of the Company and as Chairman of the Board of
Directors of the Company (the "Board"). During the Employment Term and for so
long as the Executive is an active employee of the Company in good standing, the
Board shall nominate the Executive for election as a Director of the Company
whenever his term as a Director of the Company expires. The Executive will serve
the Company subject to the general supervision, advice and direction of the
members of the Board other than the Executive (the "Disinterested Directors")
and upon the terms and conditions set forth in this Agreement.
2. DUTIES
(a) During the Employment Term, and while serving as President and
Chief Executive Officer of the Company the Executive shall have such authority
and duties as are customary in such positions, and shall perform such other
services and duties as the Disinterested Directors may from time to time
designate consistent with such positions. During the Employment Term, the
Executive agrees to live in the environs of the Company's headquarters.
(b) The Executive shall report solely to the Board. All senior officers
of the Company shall report, directly or indirectly through other senior
officers, to the Executive, and the Executive shall be responsible for reviewing
the performance of the other senior officers of the
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Company, and shall from time to time present to the Board his recommendations
for any adjustments to the salaries of and bonus payments to such officers. The
Executive shall be responsible for, and, subject to discussion with and
ratification by the Board, have the authority to enter into, employment
contracts on behalf of the Company with other executives of the Company.
(c) The Executive shall devote his full business time and best efforts
to the business affairs of the Company; however, the Executive may devote
reasonable time and attention to:
(i) serving as a director or member of a committee of
any not-for-profit organization or engaging in other charitable or
community activities;
(ii) serving as a director or as a board committee
member of Kmart Corporation and Oxford Health Plans, Inc. (corporations
that the Executive presently serves) or such other corporations and
organizations that the Board approves; and
(iii) serving as an employee, officer, trustee, agent
or representative of another business or service, but only with the
advance approval of the Board.
3. COMPENSATION AND BENEFITS
(a) Base Compensation. For the calendar year ending December 31, 1998,
the Company shall pay the Executive a base salary (the "Base Salary"), as
compensation for his employment under this Agreement, in the amount of
$1,100,000. For each calendar year thereafter within the Employment Term, the
Base Salary shall be as determined by the Board but shall not be less than
$1,100,000, unless the Company implements a broad scale salary reduction
initiative. During the Employment Term such Base Salary shall be paid in equal
installments and at least once in each calendar month.
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(b) Annual Bonus. For each calendar year ending during the Employment
Term, the Executive's bonus compensation ("Annual Bonus") shall be at an annual
rate equal to a percentage between 0% and 200% of his Base Salary in effect on
December 31 of such calendar year, with a target of 75% of Base Salary (the
"Targeted Bonus") if the Company and the Executive achieve budgeted financial
and other performance targets which shall be established by the Compensation and
Incentives Committee of the Board (the "Compensation Committee") and
communicated to the Executive. The Executive's Annual Bonus earned with respect
to each year shall be paid at the same time as annual incentive bonuses with
respect to that year are paid to other senior executives of the Company
generally.
(c) Stock Options. On January 28, 1998, (the "Grant Date"), the Company
shall grant to the Executive an option (the "Option") to purchase 500,000 shares
of common stock of the Company, $.01 par value per share (the "Stock"). The
Option shall be granted subject to the following terms: (i) the exercise price
with respect to shares under the Option shall be $10.00 per share, the fair
market value of the Stock which for purposes of this Agreement was calculated by
taking the closing price of the Stock on the day immediately preceding the Grant
Date; (ii) the Option shall be exercisable as follows: 30% of the Option shall
be immediately exercisable upon shareholder approval of the underlying Company
stock option plan, an additional 20% shall be exercisable on each of the first
and second anniversaries of the Grant Date, and an additional 15% shall be
exercisable on each of the third and fourth anniversaries of the Grant Date, and
(iii) the Option shall be exercisable for a period of ten years. The Executive
shall immediately become 100% vested in, and eligible to exercise, the Option,
and others that may be granted to him in the future, in the event of (a) his
termination without Cause (as defined in section 5(c)(ii))
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under Section 5(a)(iii), (b) a dissolution or liquidation of the Company, (c) a
sale of all or substantially all of the Company's assets, (d) a merger or
consolidation involving the Company in which the Company is not the surviving
corporation, (e) a merger or consolidation involving the Company in which the
Company is the surviving corporation but the holders of shares of common stock
receive securities of another corporation and/or other property, including cash,
or (f) a tender offer for at least a majority of the outstanding stock of the
Company. If immediate vesting occurs because of a termination without Cause, the
Option shall be exercisable for 60 days following the effective date of such
termination; in all other events the option will remain exercisable under the
terms of the grant.
(d) Stock Grant. (i) Grant of Stock. As soon as is administratively
feasible following the Grant Date, the Company shall issue to the Executive a
number of whole shares of Stock with an aggregate value (based upon a fair
market value of $10.00 per share of the Stock on the Grant Date as described in
Section 3(c)(i)) most nearly equal to $2,000,000 (the "Stock Value"). The
difference, if any, between the Stock Value and $2,000,000, positive or negative
(the "Adjustment Amount"), shall be an adjustment to the Balance Payment
described in section 3(d)(ii), below. The Stock shall be fully vested and
non-forfeitable on the Grant Date.
(ii) Tax Payment. On the Grant Date, the Company shall award
Executive with a payment equal to $1,750,000 which payment is intended to assist
Executive in the payment of federal, state and local income taxes associated
with the receipt of the Stock. A portion of the payment shall be treated as an
amount withheld from wages and remitted to the proper taxing authorities as
follows: $1,050,000 shall be deposited with respect to federal income taxes,
$54,375 shall be deposited with respect to federal medicare taxes, and $262,500
shall be
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deposited with respect to South Carolina income taxes. The balance of the tax
payment (the "Balance Payment") of $383,125 (as adjusted if necessary by the
Adjustment Amount) shall be paid to Executive within five days after the Grant
Date.
(e) Vacation. During each calendar year of the Employment Term, the
Executive shall be entitled to no fewer than four weeks of paid vacation,
unless, based on his length of service with the Company and his position with
the Company, the Executive is entitled to a greater number of weeks paid
vacation under the Company's generally applicable vacation policy.
(f) Benefits. During the Employment Term, the Executive shall be
entitled to participate in all pension, profit sharing and other retirement
plans, all incentive compensation plans and all group health, hospitalization
and disability insurance plans and other employee welfare benefit plans in which
other senior executives of the Company may participate on terms and conditions
no less favorable than those which apply to such other senior executives of the
Company.
(g) Insurance Policy. Notwithstanding the provisions of section 3(f),
during the Employment Term the Company shall maintain in effect term life
insurance coverage for the Executive with death benefits of at least $3,250,000
in the aggregate, subject to the Executive's insurability and with the
beneficiary or beneficiaries thereof designated by the Executive.
Notwithstanding section 8 of this Agreement, such life insurance policy or
policies may be assigned to a trust for the benefit of any beneficiary
designated by the Executive.
4. REIMBURSEMENT OF EXPENSES
(a) Expenses Incurred in Performance of Employment. In addition to the
compensation provided for under section 3 hereof, upon submission of proper
vouchers, the Company will pay or reimburse the Executive for all normal and
reasonable expenses incurred by the Executive
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during the Employment Term in connection with the Executive's responsibilities
to the Company, including the Executive's first class travel expenses and, for a
reasonable number of trips chosen by the Executive each calendar year, first
class travel expenses (or travel on board the Company's aircraft) for the
Executive's spouse to accompany him on such business travel. Any income required
to be imputed to Executive by reason of his spouse's travel with him under this
provision shall be grossed up for taxes.
(b) Legal Fees and Expenses in Relation Hereto. The Company agrees to
reimburse the Executive for the reasonable legal fees and expenses incurred in
relation to this Agreement and its subject matter.
(c) Personal Tax and Financial Planning Expenses. The Company agrees to
reimburse the Executive for reasonable legal, accounting and financial advisor
fees and expenses incurred by the Executive for personal tax, financial and
estate planning services in an amount not to exceed $15,000 for each calendar
year, such amount to be grossed up for taxes if the reimbursement is included in
Executive's income.
5. TERMINATION
(a) Events of Termination. The Employment Term shall terminate upon the
first to occur of the following events:
(i) the death of the Executive;
(ii) the close of business on the 180th day following
the date on which the Company gives the Executive written notice of the
termination of his employment as a result of his "Permanent Disability"
(as defined in subsection (c));
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(iii) the close of business on the date on which the
Company gives the Executive written notice of the Company's termination
of his employment as a "Termination without Cause" (as defined in
subsection (c)) or the close of business on the effective date of a
termination of the Executive's employment with the Company pursuant to
subsection (c)(iii);
(iv) the close of business on the date on which the
Company gives the Executive written notice of the Company's termination
of his employment for "Cause" (as defined in subsection (c)); and
(v) the close of business on the effective date of a
"Voluntary Termination" (as defined in subsection (c)) by the Executive
of his employment with the Company.
(b) Termination Benefits. Upon the termination of the Executive's
employment with the Company for any reason set forth in subsection (a), the
Company shall provide the Executive (or, in the case of his death, his estate or
other legal representative) benefits due him under the Company's benefits plans
and policies for his services rendered to the Company prior to the date of such
termination (according to the terms of such plans and policies), and the Company
shall pay the Executive not later than 90 days after such termination, in a lump
sum, all Base Salary earned through the date of such termination. The Executive
shall be entitled to the payments and benefits described below only as each is
applicable to such termination of employment.
(i) In the event of a termination as a result of the
Executive's death, and in addition to any other death benefits payable
under the Company's benefit plans or policies, (A) for so long as the
Executive's surviving spouse is receiving any Base Salary payment under
clause (B) below, the Executive's eligible family dependents
(collectively,
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"Family") shall be entitled to receive and participate in the
disability, health, medical and other welfare benefit plans which the
Executive and/or his Family would otherwise have been entitled to
hereunder if the Executive had not terminated employment (the "Welfare
Benefits") in addition to any continuation coverage which the
Executive's Family is entitled to elect under Section 4980B of the
Code; and (B) for a period of one year following the date of the
Executive's death, the Executive's surviving spouse shall be paid (x)
the Base Salary in effect at the date of the Executive's death, payable
in monthly installments, and (y) the Annual Bonus that would have been
paid under section 3(b) to the Executive during such period, payable as
and when annual incentive bonuses with respect to such period are paid
by the Company to other senior executives of the Company generally.
(ii) In the event of a termination as a result of the
Executive's Permanent Disability, for a period of two years after the
date of such termination of the Executive's employment, (A) the
Executive and/or his Family shall be entitled to receive and
participate in the Welfare Benefits in addition to any continuation
coverage which the Executive and/or his Family is entitled to elect
under Section 4980B of the Code; and (B) the Executive shall be paid
(x) one-half of the Base Salary in effect at such date of termination,
payable in monthly installments, and (y) one-half of the Annual Bonus
that would be payable under section 3(b) for such period, payable as
and when annual incentive bonuses with respect to such period are paid
by the Company to other senior executives of the Company generally.
(iii) In the event of a "Termination without Cause"
under subsection (a)(iii), (A) the Executive and/or his Family shall be
entitled until the earlier of (x) the
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second anniversary of the date of such termination of employment or (y)
the commencement of coverage of the Executive and/or his Family by
another group medical benefits plan providing substantially comparable
benefits to the Welfare Benefits and which does not contain any
pre-existing condition exclusions or limitations, to receive and
participate in the Welfare Benefits in addition to any continuation
coverage which the Executive and/or his Family is entitled to elect
under Section 4980B of the Code; (B) not later than 90 days after such
termination, the Company shall pay to the Executive in a lump sum an
amount equal to two hundred percent (200%) of the Executive's Base
Salary plus two hundred percent (200%) of his Target Bonus; and (C) the
Option shall be one hundred percent (100%) vested and exercisable as of
the date of such termination for a period of sixty (60) days following
the effective date of such termination.
(iv) In the event of a termination for Cause under
subsection (a)(iv) and in the event of a Voluntary Termination under
subsection (a)(v), the Executive shall not be entitled to any benefits
or payments from the Company except as provided in the first sentence
of subsection (b) above.
(c) For purposes of this Agreement:
(i) "Permanent Disability" shall mean the Executive's
inability to perform the material duties contemplated by this Agreement
by reason of a physical or mental disability or infirmity which has
continued for more than 180 consecutive days. The Executive agrees to
submit such medical evidence regarding such disability or infirmity as
is reasonably requested by the Company, including, but not limited to,
an examination by a physician selected by the Company in its sole
discretion.
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(ii) "Cause" shall mean (A) the Executive's habitual
neglect of his material duties, (B) an act or acts by the Executive, or
any omission by him, constituting a felony, and the Executive has
entered a guilty plea or confession to, or has been convicted of, such
felony, (C) the Executive's failure to follow any lawful directive of
the Board consistent with the Executive's position and duties, (D) an
act or acts of fraud or dishonesty by the Executive which results or is
intended to result in financial or economic harm to the Company, or (E)
breach of a material provision of this Agreement by the Executive;
provided, that the Company shall provide the Executive (x) written
notice specifying the nature of the alleged Cause, and, with respect to
clauses (A), (C) and (E), (y) a reasonable opportunity to appear before
the Board to discuss the matter, and (z) a reasonable opportunity to
cure any such alleged Cause.
(iii) (A) "Voluntary Termination" shall mean any
voluntary termination by the Executive of his employment with the
Company provided that the Executive shall give the Company at least 120
days' prior written notice of the effective date of such termination.
(B) For purposes of this Agreement, the Executive shall not be deemed
to have incurred a "Voluntary Termination" if upon 10 days' prior
written notice from the Executive, the Executive notifies the Company
that his termination of employment with the Company is a result of (x)
a breach by the Company of a material provision of this Agreement or
(y) a change by the Company of the Executive's title, duties or
responsibilities as Chairman of the Board and Chief Executive Officer
of the Company without his consent, and such breach or change is not
corrected by the Company within 30 days or such longer reasonable
amount of time required to correct such breach or change, not to
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exceed 90 days, after the Executive notifies the Board in writing of
the action or omission which the Executive believes constitutes such a
breach or change. In such event, the Executive shall be deemed to have
been terminated without Cause, and the benefits described under section
(b)(iii) shall apply.
(iv) "Termination without Cause" shall mean a
termination by the Company of the Executive's employment without Cause
(as defined above), and shall be deemed to include any termination
under the circumstances described in subsection (c)(iii)(B).
(d) Notwithstanding any other provision of this Agreement, if any
payment or benefit from the Company would be subject to the tax (the "Excise
Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended
(the "Code"), the Executive shall designate which payments or benefits or
portion thereof shall be reduced to the extent necessary so that no portion
thereof shall be subject to Section 4999 of the Code; but only if, by reason of
such reduction, the benefit to the Executive of all amounts payable under
section 5 plus all other payments and benefits that the Executive receives or is
then entitled to receive from the Company that would constitute a "parachute
payment" within the meaning of Section 280G of the Code, net of income and
excise taxes with respect thereto (the "Net After Tax Benefit") is greater than
the Net After Tax Benefit if the reduction were not made.
(e) In the event of any termination of the Executive's employment by
the Company or by the Executive under circumstances described in subsection
(c)(iii)(B), the Executive shall not be required to seek other employment to
mitigate damages, and any income earned by the
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Executive from other employment or self-employment shall not be offset against
any obligations of the Company to the Executive under this Agreement.
6. PROTECTED INFORMATION; PROHIBITED SOLICITATION AND COMPETITION
(a) The Executive hereby recognizes and acknowledges that during the
course of his employment by the Company, the Company will furnish, disclose or
make available to the Executive confidential or proprietary information related
to the Company's business, including, without limitation, customer lists, ideas,
processes, inventions and devices, that such confidential or proprietary
information has been developed and will be developed through the Company's
expenditure of substantial time and money, and that all such confidential
information could be used by the Executive and others to compete with the
Company. The Executive hereby agrees that all such confidential or proprietary
information shall constitute trade secrets, and further agrees to use such
confidential or proprietary information only for the purpose of carrying out his
duties with the Company and not otherwise to disclose such information unless
otherwise required to do so by subpoena or other legal process. No information
otherwise in the public domain (i.e., information that has been disclosed to the
general public, the marketplace or to governmental regulatory agencies) shall be
considered confidential.
(b) The Executive hereby agrees, in consideration of his employment
hereunder and in view of the confidential position to be held by the Executive
hereunder, that during the Employment Term and for the period ending on the date
which is two years after the later of (1) the termination of the Employment Term
and (2) the date on which the Company is no longer required to provide the
payments and benefits described in section 5(b) (other than any
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continuation coverage which the Executive and/or his Family is entitled to elect
under Section 4980B of the Code), the Executive shall not, without the written
consent of the Company, knowingly solicit, entice or persuade any other
employees of the Company or any affiliate of the Company to leave the services
of the Company or such affiliate for any reason.
(c) The Executive further agrees that, he shall not (except as to the
activities described in section 2(c)) for so long as he is receiving any
benefits under section 5(b) enter into any relationship whatsoever, either
directly or indirectly, alone or in partnership, or as an officer, director,
employee or stockholder (beneficially owning stock or options to acquire stock
totaling more than five percent of the outstanding shares) of any corporation
(other than the Company), or otherwise acquire or agree to acquire a significant
present or future equity or other proprietorship interest, whether as a
stockholder, partner, proprietor or otherwise, with any enterprise, business or
division thereof (other than the Company), which is engaged in the restaurant or
food services business in those states within the United States in which the
Company or any of its subsidiaries is at the time of such termination of
employment conducting its business and which has annual sales of at least
$50,000,000.
(d) The restrictions in this section 6 shall survive the termination of
this Agreement and shall be in addition to any restrictions imposed upon the
Executive by statute or at common law.
(e) The parties hereby acknowledge that the restrictions in this
section 6 have been specifically negotiated and agreed to by the parties hereto
and are limited to only those restrictions necessary to protect the Company from
unfair competition. The parties hereby agree that if the scope or enforceability
of any provision, paragraph or subparagraph of this section 6 is in any
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way disputed at any time, and should a court find that such restrictions are
overly broad, the court may modify and enforce the covenant to the extent that
it believes to be reasonable under the circumstances. Each provision, paragraph
and subparagraph of this section 6 is separable from every other provision,
paragraph, and subparagraph and constitutes a separate and distinct covenant.
7. INJUNCTIVE RELIEF
The Executive hereby expressly acknowledges that any breach or
threatened breach by the Executive of any of the terms set forth in section 6 of
this Agreement may result in significant and continuing injury to the Company,
the monetary value of which would be impossible to establish. Therefore, the
Executive agrees that the Company shall be entitled to apply for injunctive
relief in a court of appropriate jurisdiction. The provisions of this section
shall survive the Employment Term.
8. PARTIES BENEFITED; ASSIGNMENTS
This Agreement shall be binding upon the Executive, his heirs and his
personal representative or representatives, and upon the Company and its
successors and assigns. Neither this Agreement nor any rights or obligations
hereunder may be assigned by the Executive, other than by will or by the laws of
descent and distribution.
9. NOTICES
Any notice required or permitted by this Agreement shall be in writing,
sent by registered or certified mail, return receipt requested, addressed to the
Board and the Company at its then principal office, or to the Executive at the
address set forth in the preamble, as the case may be, or to such other address
or addresses as any party hereto may from time to time specify in writing
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for the purpose in a notice given to the other parties in compliance with this
section. Notices shall be deemed given when received.
10. GOVERNING LAW
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of South Carolina, without regard to
conflict of law principles.
11. INDEMNIFICATION AND INSURANCE; LEGAL EXPENSES
The Company shall indemnify the Executive to the fullest extent
permitted by the laws of the State of Delaware, as in effect at the time of the
subject act or omission, and shall advance to the Executive reasonable
attorney's fees and expenses as such fees and expenses are incurred (subject to
an undertaking from the Executive to repay such advances if it shall be finally
determined that by a judicial decision which is not subject to appeal that the
Executive was not entitled to the reimbursement of such fees and expenses) and
he will be entitled to the protection of any insurance policies the Company may
elect to maintain generally for the benefit of its directors and officers
against all costs, charges and expenses incurred or sustained by him in
connection with any action, suit or proceeding to which he may be made a party
by reason of his being or having been a director, officer or employee of the
Company or any of its subsidiaries or his serving or having served any other
enterprise as a director, officer or employee at the request of the Company
(other than any dispute, claim or controversy arising under or relating to this
Agreement).
12. DISPUTES
Any dispute or controversy arising under, out of, in connection with or
in relation to this Agreement shall, at the election and upon written demand of
either the Executive or the
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Company, be finally determined and settled by arbitration in the city of the
Company's headquarters in accordance with the rules and procedures of the
American Arbitration Association, and judgment upon the award may be entered in
any court having jurisdiction thereof.
13. MISCELLANEOUS
This Agreement contains the entire agreement of the parties relating to
the subject matter hereof. This Agreement supersedes any prior written or oral
agreements or understandings between the parties relating to the subject matter
hereof. No modification or amendment of this Agreement shall be valid unless in
writing and signed by or on behalf of the parties hereto. A waiver of the breach
of any term or condition of this Agreement shall not be deemed to constitute a
waiver of any subsequent breach of the same or any other term or condition. This
Agreement is intended to be performed in accordance with, and only to the extent
permitted by, all applicable laws, ordinances, rules and regulations. If any
provision of this Agreement, or the application thereof to any person or
circumstance, shall, for any reason and to any extent, be held invalid or
unenforceable, such invalidity and unenforceability shall not affect the
remaining provisions hereof and the application of such provisions to other
persons or circumstances, all of which shall be enforced to the greatest extent
permitted by law. The compensation provided to the Executive pursuant to this
Agreement shall be subject to any withholdings and deductions required by any
applicable tax laws. Any amounts payable under this Agreement to the Executive
after the death of the Executive shall be paid to the Executive's estate or
legal representative. The headings in this Agreement are inserted for
convenience of reference only and shall not be a part of or control or affect
the meaning of any provision hereof.
[signature page follows]
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IN WITNESS WHEREOF, the parties have duly executed and delivered this
Agreement as of the date first written above.
ADVANTICA RESTAURANT GROUP, INC.
By: /s/ Donald R. Shepherd
-----------------------------------
Name: Donald R. Shepherd
Title: Chairman, Compensation and
Incentives Committee of the Board
of Directors
By: /s/ Stephen W. Wood
-----------------------------------
Name: Stephen W. Wood
Title: Senior Vice President
Advantica Restaurant Group, Inc.
By: /s/ James B. Adamson
-----------------------------------
Name: James B. Adamson
Exhibit 10.43
ADVANTICA RESTAURANT GROUP
STOCK OPTION PLAN
1. Purpose of the Plan
This Advantica Restaurant Group Stock Option Plan (the "Plan") is
intended to promote the interest of Advantica Restaurant Group, Inc.
("Advantica" or the "Company") by providing the employees of and certain
consultants to Advantica, who are largely responsible for the management, growth
and protection of the business of the Company, with incentives and rewards to
encourage them to continue in their employment or consulting relationship with
the Company.
2. Definitions
As used in the Plan, the following definitions apply to the terms
indicated below:
(a) "Agreement" shall mean the agreement, in the form the Committee may
approve from time to time, which evidences an Option granted pursuant to the
Plan and entered into, at the direction of the Committee, with an Optionee.
(b) "Board of Directors" shall mean the Board of Directors of
Advantica.
(c) "Cause" when used in connection with the termination of a
Participant's employment or consulting relationship with the Company, shall mean
the termination of the Participant's employment by or consulting relationship
with the Company because of (A) an act or acts by him, or any omission by him,
constituting a felony, if the Participant has entered a guilty plea or
confession to, or has been convicted of, such felony, (B) any act of fraud or
dishonesty by the Participant which results in or is intended to result in any
material financial or economic harm to the Company as determined by the
Committee in its sole discretion or (C) a breach of a material provision of any
employment or consulting agreement between the Participant and the Company.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(e) "Committee" shall mean the Committee designated by the Board of
Directors pursuant to Section 4 hereof from time to time.
(f) "Common Stock" shall mean Advantica's common stock, $.01 par value
per share.
(g) "Company" shall mean Advantica, a Delaware corporation, and each of
its Subsidiaries.
(h) "Disability" shall mean any physical or mental condition which
would qualify a Participant for a disability benefit under the long-term
disability plan maintained by the Company and applicable to that particular
Participant.
<PAGE>
(i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(j) "Fair Market Value" of a share of Common stock on any day shall be
the fair market value of the Common Stock on such day as determined by utilizing
a reasonable valuation method established by the Committee in its sole
discretion to be applied on a consistent basis to all optionees.
(k) "Incentive Stock Option" shall mean an Option that is intended to
satisfy the requirements applicable to an "incentive stock option" as that term
is described in Section 422(b) of the Code.
(l) "Nonqualified Stock Option" shall mean an Option that is not
intended to be treated as an "incentive stock option" as that term is described
in Section 422(b) of the Code.
(m) "Officer" shall mean any vice president or higher ranking officer
of the Company.
(n) "Option" shall mean an option to purchase shares of Common Stock
granted pursuant to Section 6 hereof. Each Option shall be identified by the
Committee in the Agreement as either a Nonqualified Stock Option or an Incentive
Stock Option.
(o) "Participant" shall mean an individual who is eligible to
participate in the Plan pursuant to Section 5 hereof and to whom an Option is
granted pursuant to the Plan, and, upon his death, his successors, heirs,
executors, and administrators, as the case may be.
(p) "Plan" shall mean this Advantica Restaurant Group Stock Option
Plan, as it may be amended from time to time.
(q) "Securities Act" shall mean the Securities Act of 1933, as amended.
(r) "Subsidiary" shall mean any corporation in which, at the time of
reference, Advantica owns, directly or indirectly, stock comprising more than
fifty percent of the total combined voting power of all classes of stock of such
corporation.
(s) "Voluntary Termination" shall mean any voluntary termination by the
Participant of his employment or consulting relationship with the Company.
3. Stock Subject to the Plan
Subject to the adjustment as provided in Section 7 hereof, the
Committee may grant Options under the Plan with respect to a number of shares of
Common Stock that, in the aggregate when combined with the total number of
shares authorized under the Advantica Restaurant Group Officer Stock Option
Plan, does not exceed 4,888,888 shares and, with respect to any individual
Participant, does not exceed 3,000,000 shares during any calendar year. In the
event that any outstanding Option expires, terminates or is canceled for any
reason, the shares of
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Common Stock subject to the unexercised portion of such Option shall again be
available for grants under the Plan for purposes of the 4,888,888 share limit
stated above. Shares of Common Stock issued under the Plan may be either newly
issued shares or treasury shares, at the discretion of the Committee.
4. Administration of the Plan
The Plan shall be administered by a Committee of the Board of Directors
consisting of three or more persons as designated by the Board of Directors. The
Committee shall have full authority to designate, from time to time, those
individuals who shall be granted Options and the number of shares of Common
Stock covered by such Options.
The Committee shall have full authority to administer the Plan,
including authority to interpret and construe any provision of the Plan and the
terms of any Option issued under it and to adopt such rules and regulations for
administering the Plan as it may deem necessary. Decisions of the Committee
shall be final and binding on all parties.
The Committee may, in its absolute discretion, accelerate the date on
which any Option becomes exercisable or upon termination of employment, permit
the term of a terminated employee's options to continue for the remainder of the
term of such options or any portion thereof. In addition, the Committee may, in
its absolute discretion, grant Options to Participants on the condition that
such Participants surrender to the Committee for cancellation such other Options
(including, without limitation, Options with higher exercise prices) as the
Committee specifies. In such case, both the option that is deemed to be canceled
and the option that is deemed to be granted shall reduce the maximum number of
shares for which options may be granted to any individual participant as set
forth in Section 3.
The Committee shall determine whether an authorized leave of absence or
absence in military or government service shall constitute termination of
employment.
The Committee shall have full authority to delegate to a subcommittee
of directors (the "Subcommittee") any and all authority granted to the Committee
with respect to the Plan, such Subcommittee to be constituted and to have such
authority as may be necessary to satisfy any and all requirements of Rule 16b-3
promulgated under Section 16 of the Exchange Act and/or Section 162(m) of the
Code and the regulations thereunder with respect to any Option granted or
exercised pursuant to the terms of the Plan.
No member of the Committee or Subcommittee shall be liable for any
action, omission, or determination relating to the Plan, and Advantica shall
indemnify and hold harmless each member of the Committee or Subcommittee and
each other director or employee of the Company to whom any duty or power
relating to the administration or interpretation of the Plan has been delegated
against any cost or expense (including counsel fees) or liability (including any
sum paid in settlement of a claim with the approval of Advantica) arising out of
any action, omission or determination relating to the Plan, unless, in either
case, such action, omission or determination
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was taken or made by such member, director or employee in bad faith and without
reasonable belief that it was in the best interests of the Company.
5. Eligibility
The persons who shall be eligible to receive Options pursuant to the
Plan shall be (1) such employees of the Company who are responsible for the
management, growth and protection of the business of the Company (excluding
Officers and directors of Advantica) as the Committee in its sole discretion
shall select from time to time, and (2) those persons who provide consulting
services to the Company as the Committee in its sole discretion shall select
from time to time.
6. Options
Options granted pursuant to the Plan shall be evidenced by an
Agreement. Options shall comply with and be subject to the following terms and
conditions:
(a) Identification of Options
All Options granted under the Plan shall be identified in the Agreement
as either a Nonqualified Stock Option or an Incentive Stock Option.
(b) Exercise Price
The exercise price in respect of each share of Common Stock covered by
any Option granted under the Plan shall be such price as the Committee shall
determine on the date on which such Option is granted.
(c) Term and Exercise of Options
(1) Each Option shall be exercisable on such date or dates, during such
period and for such number of shares of Common Stock as shall be determined by
the Committee on the day on which such Option is granted and set forth in the
Option Agreement with respect to such Option; provided, however, that each
Option shall be subject to earlier termination, expiration or cancellation as
provided in this Plan.
(2) Each Option shall be exercisable in whole or in part. Any partial
exercise of an Option shall not cause the expiration, termination or
cancellation of the remaining portion thereof.
(3) Subject to the provisions of Section 11 hereof, an Option shall be
exercised by delivering notice to Advantica's principal office, to the attention
of its Secretary or his or her designee, in such form and in accordance with
such procedures as may be provided from time to time by the office of the
Secretary of Advantica which may include the requirement that such notice: (i)
specify the number of shares of Common Stock with respect to which the Option is
being exercised and (ii) specify the effective date of the proposed exercise.
The Participant may
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withdraw such notice at any time prior to the opening of business on the
business day of the proposed exercise. Payment for shares of Common Stock
purchased upon the exercise of an Option shall be made on the effective date of
such exercise either (i) in cash, by certified check, bank cashier's check or
wire transfer; (ii) subject to the disallowance by the Committee (such
disallowance may be made, in the Committee's sole discretion, for any reason
whatsoever or for no reason), in shares of Common Stock owned by the Participant
and valued at their Fair Market Value on the effective date of such exercise, or
partly in shares of Common Stock with the balance in cash, by certified check,
bank cashier's check or wire transfer, or (iii) subject to the disallowance by
the Committee (such disallowance may be made in the Committee's sole discretion,
for any reason whatsoever or for no reason) and at the election of the
Participant, the Company shall withhold a number of such shares determined by
such Participant, the Fair Market Value of which at the exercise date the
Committee determines to be sufficient to pay the exercise price. Any payment in
shares of Common Stock shall be effected by the delivery of such shares to the
Secretary of Advantica, duly endorsed in blank or accompanied by stock powers
duly endorsed in blank, together with any other documents and evidences as the
Secretary of Advantica shall require from time to time.
(4) Certificates for shares of Common Stock purchased upon the exercise
of an Option shall be issued in the name of the Participant or, at the election
of the Participant, in the name of a broker designated by the Committee, in its
sole discretion, to hold such shares on behalf of and for the benefit of the
Participant. Such shares shall be delivered accordingly as soon as practicable
following the effective date on which the Option is exercised.
(5) During the lifetime of a Participant, unless otherwise so provided
in the Agreement, each Option granted to him shall be exercisable only by him.
No option shall be assignable or transferable otherwise than by will or by the
laws of descent and distribution. Notwithstanding the foregoing, an Agreement
may provide, at the sole discretion of the Committee, that certain identified
Options are transferable by gift to such persons or entities and under such
terms and conditions as specified in the Agreement.
(d) Effect of Termination of Employment
Except as otherwise provided in the Agreement and subject to the
provisions of Section 4 hereof:
(1) In the event that the employment or consulting relationship of a
Participant with the Company shall terminate for any reason other than for Cause
or by reason of Voluntary Termination (i) Options granted to such Participant,
to the extent that they were exercisable at the time of such termination of the
employment or consulting relationship, shall remain exercisable until the
expiration of one year after such termination, on which date they shall expire
and terminate; and (ii) Options granted to such Participant, to the extent that
they were not exercisable at the time of such termination, shall expire and
terminate at the close of business on the date of such termination; provided,
however, that no Option shall be exercisable after the expiration of its term.
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(2) In the event of the Voluntary Termination of a Participant's
employment or consulting relationship, all outstanding Options, to the extent
that they were exercisable on the date of termination, shall continue to be
exercisable for a period of 60 days from the date of termination. After the
lapse of such 60 days, all Options, exercisable or not exercisable on the date
of termination, shall expire and be terminated; provided, however, that no
Option shall be exercisable after the expiration of its term.
(3) In the event of the termination of a Participant's employment or
consulting relationship for Cause, all outstanding Options granted to such
Participant, exercisable or not exercisable, shall expire and terminate at the
commencement of business on the date of such termination.
7. Adjustment Upon Changes in Common Stock
(a) Shares Available for Grants
In the event of any change in the number of shares of Common Stock
outstanding by reason of any stock dividend or split, recapitalization, merger,
consolidation, combination or exchange of shares or similar corporate change,
the maximum aggregate number of shares of Common Stock with respect to which the
Committee may grant Options shall be appropriately adjusted by the Committee. In
the event of any change in the number of shares of Common Stock outstanding by
reason of any other event or transaction, the Committee may, but need not, make
such adjustments in the number and class of shares of Common Stock with respect
to which Options may be granted as the Committee may deem appropriate.
(b) Outstanding Options - Increase or Decrease in Issued Shares
Without Consideration
Subject to any required action by the shareholders of Advantica, in the
event of any increase or decrease in the number of issued shares of Common Stock
resulting from a subdivision or consolidation of shares of Common Stock or the
payment of a stock dividend (but only on the shares of Common Stock), or any
other increase or decrease in the number of such shares effected without receipt
of consideration by Advantica, the Committee shall proportionally adjust the
number of shares of Common Stock subject to each outstanding Option and the
exercise price per share of Common Stock in respect of each such Option.
(c) Outstanding Options - Certain Mergers
Subject to any required action by the shareholders of Advantica, in the
event that Advantica shall be the surviving corporation in any merger or
consolidation (except a merger or consolidation as a result of which the holders
of shares of Common Stock receive securities of another corporation), each
Option outstanding on the date of such merger or consolidation shall pertain to
and apply to the securities which a holder of the number of shares of Common
Stock subject to such Option would have received in such merger or
consolidation.
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(d) Outstanding Options - Certain Other Transactions
In the event of (i) a dissolution or liquidation of Advantica, (ii) a
sale of all or substantially all of Advantica's assets, (iii) a merger or
consolidation involving Advantica in which Advantica is not the surviving
corporation or (iv) a merger or consolidation involving Advantica in which
Advantica is the surviving corporation but the holders of shares of Common Stock
receive securities of another corporation and/or other property, including cash,
the Committee shall, in its absolute discretion, have the power to:
(i) cancel, effective immediately prior to the occurrence of such
event, each Option outstanding immediately prior to such event (whether
or not then exercisable), and, in full consideration of such
cancellation, pay to the Participant to whom such Option was granted an
amount in cash for each share of Common Stock subject to such Option,
equal to the excess of (a) the value, as determined by the Committee in
its absolute discretion, of the property (including cash) received or
to be received by the holder of a share of Common Stock as a result of
such event over (b) the exercise price in respect of each share of
Common Stock covered by such Option; or
(ii) provide for the exchange of each Option outstanding immediately
prior to such event (whether or not then exercisable) for an option on
some or all of the property for which each share of Common Stock
subject to such Option is exchanged and, incident thereto, make an
equitable adjustment as determined by the Committee in its absolute
discretion in the exercise price of the Option, or the number of shares
or amount of property subject to the Option or, if appropriate, provide
for a cash payment to the Participant to whom such Option was granted
in partial consideration for the exchange of the Option.
(e) Outstanding Options - Other Changes
In the event of any change in the capitalization of Advantica or
corporate change other than those specifically referred to in Section 7(a),(b),
or (d) hereof, the Committee may, in its absolute discretion, make such
adjustments in the number and class of shares subject to Options outstanding on
the date on which such change occurs and in the per share exercise price of each
such Option as the Committee may consider appropriate to prevent dilution or
enlargement of rights.
(f) No Other Rights
Except as expressly provided in the Plan, no Participant shall have any
rights by reason of any subdivision or consolidation of shares of stock of any
class, the payment of any dividend, any increase or decrease in the number of
shares of stock of any class or any dissolution, liquidation, merger or
consolidation of Advantica or any other corporation. Except as expressly
provided in the Plan, no issuance by Advantica of shares of stock of any class,
or securities convertible into shares of stock of any class, shall affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Common Stock subject to an Option or the exercise price of any Option.
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8. Rights as a Stockholder
No person shall have any rights as a stockholder with respect to any
shares of Common Stock covered by or relating to any Option granted pursuant to
this Plan until the date of the issuance of a stock certificate with respect to
such shares. Except as otherwise expressly provided in Section 7 hereof, no
adjustment to any Option shall be made for dividends or other rights for which
the record date occurs prior to the date on which such stock certificate is
issued.
9. No Special Employment Rights; No Right to Option
Nothing contained in the Plan or any Option shall confer upon any
Participant any right with respect to the continuation of his employment or
consulting relationship with the Company or interfere in any way with the right
of the Company, subject to the terms of any separate employment agreement to the
contrary, at any time to terminate such relationship or to increase or decrease
the compensation of the Participant from the rate in existence at the time of
the grant of an Option.
No person shall have any claims or right to receive an Option
hereunder. The Committee's granting of an Option to a Participant at any time
shall neither require the Committee to grant an Option to such Participant or
any other Participant or other person at any time nor preclude the Committee
from making subsequent grants to such Participant or any other Participant or
other person.
10. Securities Law Matters
(a) Advantica shall be under no obligation to effect the registration
pursuant to the Securities Act of any shares of Common Stock to be issued
hereunder or to effect similar compliance under any state laws. Notwithstanding
anything herein to the contrary, Advantica shall not be obligated to cause to be
issued or delivered any certificates evidencing shares of Common Stock pursuant
to the Plan unless and until Advantica is advised by its counsel that the
issuance and delivery of such certificates is in compliance with all applicable
laws, regulations of governmental authority and the requirements of any
securities exchange on which shares of Common Stock are traded. The Committee
may require, as a condition of the issuance and delivery of certificates
evidencing shares of Common Stock pursuant to the terms hereof, that the
recipient of such shares make such covenants, agreements and representations,
and that such certificates bear such legends, as the Committee, in its sole
discretion, deems necessary or desirable.
(b) The exercise of any Option granted hereunder shall only be
effective at such time as counsel to Advantica shall have determined that the
issuance and delivery of shares of Common Stock pursuant to such exercise is in
compliance with all applicable laws, regulations of governmental authority and
the requirements of any securities exchange or market on which shares of Common
Stock are traded. Advantica may, in its sole discretion, defer the effectiveness
of any exercise of an Option granted hereunder in order to allow the issuance of
shares of
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Common Stock pursuant thereto to be made pursuant to an effective registration
statement or an exemption from such registration or other methods for compliance
available under federal or state securities laws. Advantica shall inform the
Participant in writing of its decision to defer the effectiveness of the
exercise of an Option granted hereunder. During the period that the
effectiveness of the exercise of an Option has been deferred, the Participant
may, by written notice, withdraw such exercise and obtain the refund of any
amount paid or delivered with respect thereto.
11. Withholding Taxes
(a) Cash Remittance
Whenever shares of Common Stock are to be issued upon the exercise of
an Option, the Participant shall be required, as a condition to the exercise of
the related Option, to remit to the Company in cash an amount sufficient to
satisfy federal, state and local withholding tax requirements, if any,
attributable to such exercise prior to the delivery of any certificate or
certificates for such shares.
(b) Stock Remittance
At the election of the Participant, subject to the disallowance of the
Committee (such disallowance may be made by the Committee in its sole discretion
for any reason whatsoever or for no reason), when shares of Common Stock are to
be issued upon the exercise of any Option, in lieu of the cash remittance
required by Section 11(a) hereof, the Participant may tender to the Company a
number of shares of Common Stock determined by such Participant, the Fair Market
Value of which at the tender date the Committee determines, in its sole
discretion, to be sufficient to satisfy the federal, state and local withholding
tax requirements, if any, attributable to such exercise and not greater than the
Participant's calculated total federal, state and local tax obligations
associated with such exercise.
(c) Stock Withholding
At the election of the Participant, subject to the disallowance of the
Committee (such disallowance may be made by the Committee in its sole discretion
for any reason whatsoever or for no reason), when shares of Common Stock are to
be issued upon the exercise of an Option, in lieu of the cash remittance
required by Section 11(a) hereof, the Company shall withhold a number of such
shares determined by such Participant, the Fair Market Value of which at the
exercise date the Committee determines (in its sole discretion) to be sufficient
to satisfy the federal, state and local withholding tax requirements, if any,
attributable to such exercise and not greater than the Participant's calculated
total federal, state and local tax obligations associated with such exercise.
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12. Amendment of the Plan
The Board of Directors or the Committee may at any time suspend,
discontinue, or terminate the Plan. Additionally, the Board of Directors or the
Committee may revise or amend the Plan in any respect whatsoever subject only to
any applicable law, regulation or exchange/market requirement, provided that no
amendment or discontinuance may, in the absence of written consent to the change
by the affected Participant, adversely affect the rights of any Participant
under any Option granted under the Plan prior to the date such amendment is
adopted by the Board or the Committee. The Plan shall continue in existence
until terminated by the Board pursuant to the terms set forth herein.
13. No Obligation to Exercise
The grant to a Participant of an Option shall impose no obligation upon
such Participant to exercise such Option.
14. Transfers Upon Death
Unless otherwise provided in the Agreement, upon the death of a
Participant, outstanding Options granted to such Participant may be exercised
only by the executors or administrators of the Participant's estate or by any
person or persons who shall have acquired such right to exercise by will or by
the laws of descent and distribution. No transfer by will or the laws of descent
and distribution of any Option, or the right to exercise any Option, shall be
effective to bind the Company unless the Committee shall have been furnished
with (a) written notice thereof and with a copy of the will and/or such evidence
as the Committee may deem necessary to establish the validity of the transfer
and (b) an agreement by the transferee to comply with all the terms and
conditions of the Option that are or would have been applicable to the
Participant and to be bound by the acknowledgments made by the Participant in
connection with the grant of the Option.
15. Expenses
The expenses of the Plan shall be paid by the Company.
16. Failure to Comply
In addition to the remedies of the Company elsewhere provided for
herein, if a Participant shall fail to comply with any of the terms or
conditions of the Plan or the Agreement, the Committee may cancel such Option
and cause such Option to be forfeited, in whole or in part, as the Committee, in
its absolute discretion, may determine, unless such failure is remedied by such
Participant within ten days after such Participant's receipt of written notice
of such failure from the Committee or the Company.
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17. Effective Date and Term of the Plan
The Plan shall be effective on the date that the Plan is approved by
the Board of Directors.
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Exhibit 10.44
ADVANTICA RESTAURANT GROUP
OFFICER STOCK OPTION PLAN
1. Purpose of the Plan
This Advantica Restaurant Group Officer Stock Option Plan (the "Plan")
is intended to promote the interest of Advantica Restaurant Group, Inc.
("Advantica" or the "Company") by providing the Officers of Advantica, who are
largely responsible for the management, growth and protection of the business of
the Company, with incentives and rewards to encourage them to continue in their
employment with the Company.
2. Definitions
As used in the Plan, the following definitions apply to the terms
indicated below:
(a) "Agreement" shall mean the agreement, in the form the Committee may
approve from time to time, which evidences an Option granted pursuant to the
Plan and entered into, at the direction of the Committee, with an Optionee.
(b) "Board of Directors" shall mean the Board of Directors of
Advantica.
(c) "Cause" when used in connection with the termination of service of
an officer of the Company, shall mean the termination of the Participant as an
Officer of the Company because of (A) an act or acts by him, or any omission by
him, constituting a felony, if the Participant has entered a guilty plea or
confession to, or has been convicted of, such felony, (B) any act of fraud or
dishonesty by the Participant which results in or is intended to result in any
material financial or economic harm to the Company as determined by the
Committee in its sole discretion or (C) a breach of a material provision of any
employment agreement between the Participant and the Company.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(e) "Committee" shall mean the Committee designated by the Board of
Directors pursuant to Section 4 hereof from time to time.
(f) "Common Stock" shall mean Advantica's common stock, $.01 par value
per share.
(g) "Company" shall mean Advantica, a Delaware corporation, and each of
its Subsidiaries.
(h) "Disability" shall mean any physical or mental condition which
would qualify a Participant for a disability benefit under the long-term
disability plan maintained by the Company and applicable to that particular
Participant.
<PAGE>
(i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(j) "Fair Market Value" of a share of Common stock on any day shall be
the fair market value of the Common Stock on such day as determined by utilizing
a reasonable valuation method established by the Committee in its sole
discretion to be applied on a consistent basis to all optionees.
(k) "Incentive Stock Option" shall mean an Option that is intended to
satisfy the requirements applicable to an "incentive stock option" as that term
is described in Section 422(b) of the Code.
(l) "Nonqualified Stock Option" shall mean an Option that is not
intended to be treated as an "incentive stock option" as that term is described
in Section 422(b) of the Code.
(m) "Officer" shall mean any vice president or higher ranking officer
of the Company.
(n) "Option" shall mean an option to purchase shares of Common Stock
granted pursuant to Section 6 hereof. Each Option shall be identified by the
Committee in the Agreement as either a Nonqualified Stock Option or an Incentive
Stock Option.
(o) "Participant" shall mean an individual who is eligible to
participate in the Plan pursuant to Section 5 hereof and to whom an Option is
granted pursuant to the Plan, and, upon his death, his successors, heirs,
executors, and administrators, as the case may be.
(p) "Plan" shall mean this Advantica Restaurant Group Officer Stock
Option Plan, as it may be amended from time to time.
(q) "Securities Act" shall mean the Securities Act of 1933, as amended.
(r) "Subsidiary" shall mean any corporation in which, at the time of
reference, Advantica owns, directly or indirectly, stock comprising more than
fifty percent of the total combined voting power of all classes of stock of such
corporation.
(s) "Voluntary Termination" shall mean any voluntary termination by the
Participant as an Officer of the Company.
3. Stock Subject to the Plan
Subject to the adjustment as provided in Section 7 hereof, the
Committee may grant Options under the Plan with respect to a number of shares of
Common Stock that, in the aggregate when combined with the total number of
shares authorized under the Advantica Restaurant Group Stock Option Plan, does
not exceed 4,888,888 shares and, with respect to any individual Participant,
does not exceed 3,000,000 shares during any calendar year. In the event that any
outstanding Option expires, terminates or is canceled for any reason, the shares
of
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Common Stock subject to the unexercised portion of such Option shall again be
available for grants under the Plan for purposes of the 4,888,888 share limit
stated above. Shares of Common Stock issued under the Plan may be either newly
issued shares or treasury shares, at the discretion of the Committee.
4. Administration of the Plan
The Plan shall be administered by a Committee of the Board of Directors
consisting of three or more persons as designated by the Board of Directors. The
Committee shall have full authority to designate, from time to time, those
individuals who shall be granted Options and the number of shares of Common
Stock covered by such Options.
The Committee shall have full authority to administer the Plan,
including authority to interpret and construe any provision of the Plan and the
terms of any Option issued under it and to adopt such rules and regulations for
administering the Plan as it may deem necessary. Decisions of the Committee
shall be final and binding on all parties.
The Committee may, in its absolute discretion, accelerate the date on
which any Option becomes exercisable or upon termination of the Participant's
service as an Officer, permit the term of a terminated Officer's options to
continue for the remainder of the term of such options or any portion thereof.
In addition, the Committee may, in its absolute discretion, grant Options to
Participants on the condition that such Participants surrender to the Committee
for cancellation such other Options (including, without limitation, Options with
higher exercise prices) as the Committee specifies. In such case, both the
option that is deemed to be canceled and the option that is deemed to be granted
shall reduce the maximum number of shares for which options may be granted to
any individual participant as set forth in Section 3.
The Committee shall have full authority to delegate to a subcommittee
of directors (the "Subcommittee") any and all authority granted to the Committee
with respect to the Plan, such Subcommittee to be constituted and to have such
authority as may be necessary to satisfy any and all requirements of Rule 16b-3
promulgated under Section 16 of the Exchange Act and/or Section 162(m) of the
Code and the regulations thereunder with respect to any Option granted or
exercised pursuant to the terms of the Plan.
No member of the Committee or Subcommittee shall be liable for any
action, omission, or determination relating to the Plan, and Advantica shall
indemnify and hold harmless each member of the Committee or Subcommittee and
each other director or employee of the Company to whom any duty or power
relating to the administration or interpretation of the Plan has been delegated
against any cost or expense (including counsel fees) or liability (including any
sum paid in settlement of a claim with the approval of Advantica) arising out of
any action, omission or determination relating to the Plan, unless, in either
case, such action, omission or determination was taken or made by such member,
director or employee in bad faith and without reasonable belief that it was in
the best interests of the Company.
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5. Eligibility
The persons who shall be eligible to receive Options pursuant to the
Plan shall be such Officers of the Company who are responsible for the
management, growth and protection of the business of the Company (whether or not
they are directors of Advantica) as the Committee in its sole discretion shall
select from time to time.
6. Options
Options granted pursuant to the Plan shall be evidenced by an
Agreement. Options shall comply with and be subject to the following terms and
conditions:
(a) Identification of Options
All Options granted under the Plan shall be identified in the Agreement
as either a Nonqualified Stock Option or an Incentive Stock Option.
(b) Exercise Price
The exercise price in respect of each share of Common Stock covered by
any Option granted under the Plan shall be such price as the Committee shall
determine on the date on which such Option is granted.
(c) Term and Exercise of Options
(1) Each Option shall be exercisable on such date or dates, during such
period and for such number of shares of Common Stock as shall be determined by
the Committee on the day on which such Option is granted and set forth in the
Option Agreement with respect to such Option; provided, however, that each
Option shall be subject to earlier termination, expiration or cancellation as
provided in this Plan.
(2) Each Option shall be exercisable in whole or in part. Any partial
exercise of an Option shall not cause the expiration, termination or
cancellation of the remaining portion thereof.
(3) Subject to the provisions of Section 11 hereof, an Option shall be
exercised by delivering notice to Advantica's principal office, to the attention
of its Secretary or his or her designee, in such form and in accordance with
such procedures as may be provided from time to time by the office of the
Secretary of Advantica which may include the requirement that such notice: (i)
specify the number of shares of Common Stock with respect to which the Option is
being exercised and (ii) specify the effective date of the proposed exercise.
The Participant may withdraw such notice at any time prior to the opening of
business on the business day of the proposed exercise. Payment for shares of
Common Stock purchased upon the exercise of an Option shall be made on the
effective date of such exercise either (i) in cash, by certified check,
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bank cashier's check or wire transfer; (ii) subject to the disallowance by the
Committee (such disallowance may be made, in the Committee's sole discretion,
for any reason whatsoever or for no reason), in shares of Common Stock owned by
the Participant and valued at their Fair Market Value on the effective date of
such exercise, or partly in shares of Common Stock with the balance in cash, by
certified check, bank cashier's check or wire transfer, or (iii) subject to the
disallowance by the Committee (such disallowance may be made in the Committee's
sole discretion, for any reason whatsoever or for no reason) and at the election
of the Participant, the Company shall withhold a number of such shares
determined by such Participant, the Fair Market Value of which at the exercise
date the Committee determines to be sufficient to pay the exercise price. Any
payment in shares of Common Stock shall be effected by the delivery of such
shares to the Secretary of Advantica, duly endorsed in blank or accompanied by
stock powers duly endorsed in blank, together with any other documents and
evidences as the Secretary of Advantica shall require from time to time.
(4) Certificates for shares of Common Stock purchased upon the exercise
of an Option shall be issued in the name of the Participant or, at the election
of the Participant, in the name of a broker designated by the Committee, in its
sole discretion, to hold such shares on behalf of and for the benefit of the
Participant. Such shares shall be delivered accordingly as soon as practicable
following the effective date on which the Option is exercised.
(5) During the lifetime of a Participant, unless otherwise so provided
in the Agreement, each Option granted to him shall be exercisable only by him.
No option shall be assignable or transferable otherwise than by will or by the
laws of descent and distribution. Notwithstanding the foregoing, an Agreement
may provide, at the sole discretion of the Committee, that certain identified
Options are transferable by gift to such persons or entities and under such
terms and conditions as specified in the Agreement.
(d) Effect of Termination as an Officer
Except as otherwise provided in the Agreement or in an employment
agreement executed by the Company's President and subject to the provisions of
Section 4 hereof:
(1) In the event that the a Participant terminates as an Officer of the
Company for any reason other than for Cause or by reason of Voluntary
Termination (i) Options granted to such Participant, to the extent that they
were exercisable at the time of such termination, shall remain exercisable until
the expiration of one year after such termination, on which date they shall
expire and terminate; and (ii) Options granted to such Participant, to the
extent that they were not exercisable at the time of such termination, shall
expire and terminate at the close of business on the date of such termination;
provided, however, that no Option shall be exercisable after the expiration of
its term.
(2) In the event of a Voluntary Termination, all outstanding Options,
to the extent that they were exercisable on the date of termination, shall
continue to be exercisable for a period of 60 days from the date of termination.
After the lapse of such 60 days, all Options, exercisable or
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not exercisable on the date of termination, shall expire and be terminated;
provided, however, that no Option shall be exercisable after the expiration of
its term.
(3) In the event the termination of a Participant as an Officer is for
Cause, all outstanding Options granted to such Participant, exercisable or not
exercisable, shall expire and terminate at the commencement of business on the
date of such termination.
7. Adjustment Upon Changes in Common Stock
(a) Shares Available for Grants
In the event of any change in the number of shares of Common Stock
outstanding by reason of any stock dividend or split, recapitalization, merger,
consolidation, combination or exchange of shares or similar corporate change,
the maximum aggregate number of shares of Common Stock with respect to which the
Committee may grant Options shall be appropriately adjusted by the Committee. In
the event of any change in the number of shares of Common Stock outstanding by
reason of any other event or transaction, the Committee may, but need not, make
such adjustments in the number and class of shares of Common Stock with respect
to which Options may be granted as the Committee may deem appropriate.
(b) Outstanding Options - Increase or Decrease in Issued Shares
Without Consideration
Subject to any required action by the shareholders of Advantica, in the
event of any increase or decrease in the number of issued shares of Common Stock
resulting from a subdivision or consolidation of shares of Common Stock or the
payment of a stock dividend (but only on the shares of Common Stock), or any
other increase or decrease in the number of such shares effected without receipt
of consideration by Advantica, the Committee shall proportionally adjust the
number of shares of Common Stock subject to each outstanding Option and the
exercise price per share of Common Stock in respect of each such Option.
(c) Outstanding Options - Certain Mergers
Subject to any required action by the shareholders of Advantica, in the
event that Advantica shall be the surviving corporation in any merger or
consolidation (except a merger or consolidation as a result of which the holders
of shares of Common Stock receive securities of another corporation), each
Option outstanding on the date of such merger or consolidation shall pertain to
and apply to the securities which a holder of the number of shares of Common
Stock subject to such Option would have received in such merger or
consolidation.
(d) Outstanding Options - Certain Other Transactions
In the event of (i) a dissolution or liquidation of Advantica, (ii) a
sale of all or substantially all of Advantica's assets, (iii) a merger or
consolidation involving Advantica in which
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<PAGE>
Advantica is not the surviving corporation or (iv) a merger or consolidation
involving Advantica in which Advantica is the surviving corporation but the
holders of shares of Common Stock receive securities of another corporation
and/or other property, including cash, the Committee shall, in its absolute
discretion, have the power to:
(i) cancel, effective immediately prior to the occurrence of such
event, each Option outstanding immediately prior to such event (whether
or not then exercisable), and, in full consideration of such
cancellation, pay to the Participant to whom such Option was granted an
amount in cash for each share of Common Stock subject to such Option,
equal to the excess of (a) the value, as determined by the Committee in
its absolute discretion, of the property (including cash) received or
to be received by the holder of a share of Common Stock as a result of
such event over (b) the exercise price in respect of each share of
Common Stock covered by such Option; or
(ii) provide for the exchange of each Option outstanding immediately
prior to such event (whether or not then exercisable) for an option on
some or all of the property for which each share of Common Stock
subject to such Option is exchanged and, incident thereto, make an
equitable adjustment as determined by the Committee in its absolute
discretion in the exercise price of the Option, or the number of shares
or amount of property subject to the Option or, if appropriate, provide
for a cash payment to the Participant to whom such Option was granted
in partial consideration for the exchange of the Option.
(e) Outstanding Options - Other Changes
In the event of any change in the capitalization of Advantica or
corporate change other than those specifically referred to in Section 7(a),(b),
or (d) hereof, the Committee may, in its absolute discretion, make such
adjustments in the number and class of shares subject to Options outstanding on
the date on which such change occurs and in the per share exercise price of each
such Option as the Committee may consider appropriate to prevent dilution or
enlargement of rights.
(f) No Other Rights
Except as expressly provided in the Plan, no Participant shall have any
rights by reason of any subdivision or consolidation of shares of stock of any
class, the payment of any dividend, any increase or decrease in the number of
shares of stock of any class or any dissolution, liquidation, merger or
consolidation of Advantica or any other corporation. Except as expressly
provided in the Plan, no issuance by Advantica of shares of stock of any class,
or securities convertible into shares of stock of any class, shall affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Common Stock subject to an Option or the exercise price of any Option.
8. Rights as a Stockholder
No person shall have any rights as a stockholder with respect to any
shares of Common Stock covered by or relating to any Option granted pursuant to
this Plan until the date of the issuance of a stock certificate with respect to
such shares. Except as otherwise expressly
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provided in Section 7 hereof, no adjustment to any Option shall be made for
dividends or other rights for which the record date occurs prior to the date on
which such stock certificate is issued.
9. No Special Employment Rights; No Right to Option
Nothing contained in the Plan or any Option shall confer upon any
Participant any right with respect to the continuation of his employment or
Officer status with the Company or interfere in any way with the right of the
Company, subject to the terms of any separate employment agreement to the
contrary, at any time to terminate such relationship or to increase or decrease
the compensation of the Participant from the rate in existence at the time of
the grant of an Option.
No person shall have any claims or right to receive an Option
hereunder. The Committee's granting of an Option to a Participant at any time
shall neither require the Committee to grant an Option to such Participant or
any other Participant or other person at any time nor preclude the Committee
from making subsequent grants to such Participant or any other Participant or
other person.
10. Securities Law Matters
(a) Advantica shall be under no obligation to effect the registration
pursuant to the Securities Act of any shares of Common Stock to be issued
hereunder or to effect similar compliance under any state laws. Notwithstanding
anything herein to the contrary, Advantica shall not be obligated to cause to be
issued or delivered any certificates evidencing shares of Common Stock pursuant
to the Plan unless and until Advantica is advised by its counsel that the
issuance and delivery of such certificates is in compliance with all applicable
laws, regulations of governmental authority and the requirements of any
securities exchange on which shares of Common Stock are traded. The Committee
may require, as a condition of the issuance and delivery of certificates
evidencing shares of Common Stock pursuant to the terms hereof, that the
recipient of such shares make such covenants, agreements and representations,
and that such certificates bear such legends, as the Committee, in its sole
discretion, deems necessary or desirable.
(b) The exercise of any Option granted hereunder shall only be
effective at such time as counsel to Advantica shall have determined that the
issuance and delivery of shares of Common Stock pursuant to such exercise is in
compliance with all applicable laws, regulations of governmental authority and
the requirements of any securities exchange or market on which shares of Common
Stock are traded. Advantica may, in its sole discretion, defer the effectiveness
of any exercise of an Option granted hereunder in order to allow the issuance of
shares of Common Stock pursuant thereto to be made pursuant to an effective
registration statement or an exemption from such registration or other methods
for compliance available under federal or state securities laws. Advantica shall
inform the Participant in writing of its decision to defer the effectiveness of
the exercise of an Option granted hereunder. During the period that the
effectiveness of the exercise of an Option has been deferred, the Participant
may, by written
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notice, withdraw such exercise and obtain the refund of any amount paid or
delivered with respect thereto.
11. Withholding Taxes
(a) Cash Remittance
Whenever shares of Common Stock are to be issued upon the exercise of
an Option, the Participant shall be required, as a condition to the exercise of
the related Option, to remit to the Company in cash an amount sufficient to
satisfy federal, state and local withholding tax requirements, if any,
attributable to such exercise prior to the delivery of any certificate or
certificates for such shares.
(b) Stock Remittance
At the election of the Participant, subject to the disallowance of the
Committee (such disallowance may be made by the Committee in its sole discretion
for any reason whatsoever or for no reason), when shares of Common Stock are to
be issued upon the exercise of any Option, in lieu of the cash remittance
required by Section 11(a) hereof, the Participant may tender to the Company a
number of shares of Common Stock determined by such Participant, the Fair Market
Value of which at the tender date the Committee determines, in its sole
discretion, to be sufficient to satisfy the federal, state and local withholding
tax requirements, if any, attributable to such exercise and not greater than the
Participant's calculated total federal, state and local tax obligations
associated with such exercise.
(c) Stock Withholding
At the election of the Participant, subject to the disallowance of the
Committee (such disallowance may be made by the Committee in its sole discretion
for any reason whatsoever or for no reason), when shares of Common Stock are to
be issued upon the exercise of an Option, in lieu of the cash remittance
required by Section 11(a) hereof, the Company shall withhold a number of such
shares determined by such Participant, the Fair Market Value of which at the
exercise date the Committee determines (in its sole discretion) to be sufficient
to satisfy the federal, state and local withholding tax requirements, if any,
attributable to such exercise and not greater than the Participant's calculated
total federal, state and local tax obligations associated with such exercise.
12. Amendment of the Plan; Term of the Plan
The Board of Directors or the Committee may at any time suspend,
discontinue, or terminate the Plan. Additionally, the Board of Directors or the
Committee may revise or amend
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the Plan in any respect whatsoever subject only to any applicable law,
regulation or exchange/market requirement, provided that no amendment or
discontinuance may, in the absence of written consent to the change by the
affected Participant, adversely affect the rights of any Participant under any
Option granted under the Plan prior to the date such amendment is adopted by the
Board or the Committee. The Plan shall continue in existence until terminated by
the Board of Directors pursuant to the terms set forth herein.
13. No Obligation to Exercise
The grant to a Participant of an Option shall impose no obligation upon
such Participant to exercise such Option.
14. Transfers Upon Death
Unless otherwise provided in the Agreement, upon the death of a
Participant, outstanding Options granted to such Participant may be exercised
only by the executors or administrators of the Participant's estate or by any
person or persons who shall have acquired such right to exercise by will or by
the laws of descent and distribution. No transfer by will or the laws of descent
and distribution of any Option, or the right to exercise any Option, shall be
effective to bind the Company unless the Committee shall have been furnished
with (a) written notice thereof and with a copy of the will and/or such evidence
as the Committee may deem necessary to establish the validity of the transfer
and (b) an agreement by the transferee to comply with all the terms and
conditions of the Option that are or would have been applicable to the
Participant and to be bound by the acknowledgments made by the Participant in
connection with the grant of the Option.
15. Expenses
The expenses of the Plan shall be paid by the Company.
16. Failure to Comply
In addition to the remedies of the Company elsewhere provided for
herein, if a Participant shall fail to comply with any of the terms or
conditions of the Plan or the Agreement, the Committee may cancel such Option
and cause such Option to be forfeited, in whole or in part, as the Committee, in
its absolute discretion, may determine, unless such failure is remedied by such
Participant within ten days after such Participant's receipt of written notice
of such failure from the Committee or the Company.
17. Effective Date
The Plan shall be effective on the date that the Plan is approved by
the Board of Directors, contingent upon approval of the Plan by shareholders of
the Company at the next annual meeting of shareholders following such Board of
Director approval.
Page 10
Exhibit 10.45
ADVANTICA RESTAURANT GROUP
DIRECTOR STOCK OPTION PLAN
1. Purpose of the Plan
This Advantica Restaurant Group Director Stock Option Plan (the "Plan")
is intended to promote the interest of Advantica Restaurant Group, Inc.
("Advantica" or the "Company") by providing members of the Board of Directors of
Advantica options to purchase common stock of the Company.
2. Definitions
As used in the Plan, the following definitions apply to the terms
indicated below:
(a) "Agreement" shall mean the agreement, in the form the Committee may
approve from time to time, which evidences an Option granted pursuant to the
Plan and entered into, at the direction of the Committee, with an Optionee.
(b) "Board of Directors" shall mean the Board of Directors of
Advantica.
(c) "Cause" when used in connection with the termination as a director
of the Company, shall mean the termination of the Participant as a director of
the Company because of (A) an act or acts by him, or any omission by him,
constituting a felony, if the Participant has entered a guilty plea or
confession to, or has been convicted of, such felony, (B) any act of fraud or
dishonesty by the Participant which results in or is intended to result in any
material financial or economic harm to the Company as determined by the
Committee in its sole discretion or (C) a breach of a material provision of any
agreement between the Participant and the Company.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(e) "Committee" shall mean the Committee designated by the Board of
Directors pursuant to Section 4 hereof from time to time.
(f) "Common Stock" shall mean Advantica's common stock, $.01 par value
per share.
(g) "Company" shall mean Advantica, a Delaware corporation, and each of
its Subsidiaries.
(h) "Disability" shall mean any physical or mental condition which
would qualify a Participant for a disability benefit under the long-term
disability plan maintained by the Company and applicable to that particular
Participant.
(i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
<PAGE>
(j) "Fair Market Value" of a share of Common stock on any day shall be
the fair market value of the Common Stock on such day as determined by utilizing
a reasonable valuation method established by the Committee in its sole
discretion to be applied on a consistent basis to all optionees.
(k) "Incentive Stock Option" shall mean an Option that is intended to
satisfy the requirements applicable to an "incentive stock option" as that term
is described in Section 422(b) of the Code.
(l) "Nonqualified Stock Option" shall mean an Option that is not
intended to be treated as an "incentive stock option" as that term is described
in Section 422(b) of the Code.
(m) "Outside Director" shall mean a member of the Board of Directors
who is not an employee of the Company.
(n) "Option" shall mean an option to purchase shares of Common Stock
granted pursuant to Section 6 hereof. Each Option shall be identified by the
Committee in the Agreement as either a Nonqualified Stock Option or an Incentive
Stock Option.
(o) "Participant" shall mean an individual who is eligible to
participate in the Plan pursuant to Section 5 hereof and to whom an Option is
granted pursuant to the Plan, and, upon his death, his successors, heirs,
executors, and administrators, as the case may be.
(p) "Plan" shall mean this Advantica Restaurant Group Director Stock
Option Plan, as it may be amended from time to time.
(q) "Securities Act" shall mean the Securities Act of 1933, as amended.
(r) "Subsidiary" shall mean any corporation in which, at the time of
reference, Advantica owns, directly or indirectly, stock comprising more than
fifty percent of the total combined voting power of all classes of stock of such
corporation.
(s) "Voluntary Termination" shall mean any voluntary termination by the
Participant as a member of the Board of Directors.
3. Stock Subject to the Plan
Subject to the adjustment as provided in Section 7 hereof, the
Committee may grant Options under the Plan with respect to a number of shares of
Common Stock that, in the aggregate when combined with the total number of
shares authorized under the Advantica Restaurant Group Stock Option Plan, does
not exceed 200,000 shares. In the event that any outstanding Option expires,
terminates or is canceled for any reason, the shares of Common Stock subject to
the unexercised portion of such Option shall again be available for grants under
the Plan
Page 2
<PAGE>
for purposes of the 200,000 share limit stated above. Shares of Common
Stock issued under the Plan may be either newly issued shares or treasury
shares, at the discretion of the Committee.
4. Administration of the Plan
The Plan shall be administered by a Committee of the Board of Directors
consisting of three or more persons as designated by the Board of Directors. The
Committee shall have full authority to designate, from time to time, those
individuals who shall be granted Options and the number of shares of Common
Stock covered by such Options.
The Committee shall have full authority to administer the Plan,
including authority to interpret and construe any provision of the Plan and the
terms of any Option issued under it and to adopt such rules and regulations for
administering the Plan as it may deem necessary. Decisions of the Committee
shall be final and binding on all parties.
The Committee may, in its absolute discretion, accelerate the date on
which any Option becomes exercisable or upon termination as a member of the
Board of Directors, permit the term of such terminated director's options to
continue for the remainder of the term of such options or any portion thereof.
In addition, the Committee may, in its absolute discretion, grant Options to
Participants on the condition that such Participants surrender to the Committee
for cancellation such other Options (including, without limitation, Options with
higher exercise prices) as the Committee specifies. In such case, both the
option that is deemed to be canceled and the option that is deemed to be granted
shall reduce the maximum number of shares for which options may be granted to
any individual participant as set forth in Section 3.
The Committee shall have full authority to delegate to a subcommittee
of directors (the "Subcommittee") any and all authority granted to the Committee
with respect to the Plan, such Subcommittee to be constituted and to have such
authority as may be necessary to satisfy any and all requirements of Rule 16b-3
promulgated under Section 16 of the Exchange Act and/or Section 162(m) of the
Code and the regulations thereunder with respect to any Option granted or
exercised pursuant to the terms of the Plan.
No member of the Committee or Subcommittee shall be liable for any
action, omission, or determination relating to the Plan, and Advantica shall
indemnify and hold harmless each member of the Committee or Subcommittee and
each other director or employee of the Company to whom any duty or power
relating to the administration or interpretation of the Plan has been delegated
against any cost or expense (including counsel fees) or liability (including any
sum paid in settlement of a claim with the approval of Advantica) arising out of
any action, omission or determination relating to the Plan, unless, in either
case, such action, omission or determination was taken or made by such member,
director or employee in bad faith and without reasonable belief that it was in
the best interests of the Company.
Page 3
<PAGE>
5. Eligibility
The persons who shall be eligible to receive Options pursuant to the
Plan shall be Outside Directors.
6. Options
Options granted pursuant to the Plan shall be evidenced by an
Agreement. Options shall comply with and be subject to the following terms and
conditions:
(a) Identification of Options
All Options granted under the Plan shall be identified in the Agreement
as either a Nonqualified Stock Option or an Incentive Stock Option.
(b) Exercise Price
The exercise price in respect of each share of Common Stock covered by
any Option granted under the Plan shall be such price as the Committee shall
determine on the date on which such Option is granted.
(c) Term and Exercise of Options
(1) Each Option shall be exercisable on such date or dates, during such
period and for such number of shares of Common Stock as shall be determined by
the Committee on the day on which such Option is granted and set forth in the
Option Agreement with respect to such Option; provided, however, that each
Option shall be subject to earlier termination, expiration or cancellation as
provided in this Plan.
(2) Each Option shall be exercisable in whole or in part. Any partial
exercise of an Option shall not cause the expiration, termination or
cancellation of the remaining portion thereof.
(3) Subject to the provisions of Section 11 hereof, an Option shall be
exercised by delivering notice to Advantica's principal office, to the attention
of its Secretary or his or her designee, in such form and in accordance with
such procedures as may be provided from time to time by the office of the
Secretary of Advantica which may include the requirement that such notice: (i)
specify the number of shares of Common Stock with respect to which the Option is
being exercised and (ii) specify the effective date of the proposed exercise.
The Participant may withdraw such notice at any time prior to the opening of
business on the business day of the proposed exercise. Payment for shares of
Common Stock purchased upon the exercise of an Option shall be made on the
effective date of such exercise either (i) in cash, by certified check, bank
cashier's check or wire transfer; (ii) subject to the disallowance by the
Committee (such disallowance may be made, in the Committee's sole discretion,
for any reason whatsoever or for no reason), in shares of Common Stock owned by
the Participant and valued at their Fair Market
Page 4
<PAGE>
Value on the effective date of such exercise, or partly in shares of Common
Stock with the balance in cash, by certified check, bank cashier's check or wire
transfer, or (iii) subject to the disallowance by the Committee (such
disallowance may be made in the Committee's sole discretion, for any reason
whatsoever or for no reason) and at the election of the Participant, the Company
shall withhold a number of such shares determined by such Participant, the Fair
Market Value of which at the exercise date the Committee determines to be
sufficient to pay the exercise price. Any payment in shares of Common Stock
shall be effected by the delivery of such shares to the Secretary of Advantica,
duly endorsed in blank or accompanied by stock powers duly endorsed in blank,
together with any other documents and evidences as the Secretary of Advantica
shall require from time to time.
(4) Certificates for shares of Common Stock purchased upon the exercise
of an Option shall be issued in the name of the Participant or, at the election
of the Participant, in the name of a broker designated by the Committee, in its
sole discretion, to hold such shares on behalf of and for the benefit of the
Participant. Such shares shall be delivered accordingly as soon as practicable
following the effective date on which the Option is exercised.
(5) During the lifetime of a Participant, unless otherwise so provided
in the Agreement, each Option granted to him shall be exercisable only by him.
No option shall be assignable or transferable otherwise than by will or by the
laws of descent and distribution. Notwithstanding the foregoing, an Agreement
may provide, at the sole discretion of the Committee, that certain identified
Options are transferable by gift to such persons or entities and under such
terms and conditions as specified in the Agreement.
(d) Effect of Termination as a Member of the Board of Directors
Except as otherwise provided in the Agreement and subject to the
provisions of Section 4 hereof:
(1) In the event a Participant terminates as a member of the Board of
Directors for any reason other than for Cause or by reason of Voluntary
Termination (i) Options granted to such Participant, to the extent that they
were exercisable at the time of such termination, shall remain exercisable until
the expiration of one year after such termination, on which date they shall
expire and terminate; and (ii) Options granted to such Participant, to the
extent that they were not exercisable at the time of such termination, shall
expire and terminate at the close of business on the date of such termination;
provided, however, that no Option shall be exercisable after the expiration of
its term.
(2) In the event of a Voluntary Termination, all outstanding Options,
to the extent that they were exercisable on the date of termination, shall
continue to be exercisable for a period of 60 days from the date of termination.
After the lapse of such 60 days, all Options, exercisable or not exercisable on
the date of termination, shall expire and be terminated; provided, however, that
no Option shall be exercisable after the expiration of its term.
Page 5
<PAGE>
(3) In the event the termination of a Participant as a member of the
Board of Directors is for Cause, all outstanding Options granted to such
Participant, exercisable or not exercisable, shall expire and terminate at the
commencement of business on the date of such termination.
7. Adjustment Upon Changes in Common Stock
(a) Shares Available for Grants
In the event of any change in the number of shares of Common Stock
outstanding by reason of any stock dividend or split, recapitalization, merger,
consolidation, combination or exchange of shares or similar corporate change,
the maximum aggregate number of shares of Common Stock with respect to which the
Committee may grant Options shall be appropriately adjusted by the Committee. In
the event of any change in the number of shares of Common Stock outstanding by
reason of any other event or transaction, the Committee may, but need not, make
such adjustments in the number and class of shares of Common Stock with respect
to which Options may be granted as the Committee may deem appropriate.
(b) Outstanding Options - Increase or Decrease in Issued Shares
Without Consideration
Subject to any required action by the shareholders of Advantica, in the
event of any increase or decrease in the number of issued shares of Common Stock
resulting from a subdivision or consolidation of shares of Common Stock or the
payment of a stock dividend (but only on the shares of Common Stock), or any
other increase or decrease in the number of such shares effected without receipt
of consideration by Advantica, the Committee shall proportionally adjust the
number of shares of Common Stock subject to each outstanding Option and the
exercise price per share of Common Stock in respect of each such Option.
(c) Outstanding Options - Certain Mergers
Subject to any required action by the shareholders of Advantica, in the
event that Advantica shall be the surviving corporation in any merger or
consolidation (except a merger or consolidation as a result of which the holders
of shares of Common Stock receive securities of another corporation), each
Option outstanding on the date of such merger or consolidation shall pertain to
and apply to the securities which a holder of the number of shares of Common
Stock subject to such Option would have received in such merger or
consolidation.
(d) Outstanding Options - Certain Other Transactions
In the event of (i) a dissolution or liquidation of Advantica, (ii) a
sale of all or substantially all of Advantica's assets, (iii) a merger or
consolidation involving Advantica in which Advantica is not the surviving
corporation or (iv) a merger or consolidation involving Advantica in which
Advantica is the surviving corporation but the holders of shares of Common Stock
receive securities of another corporation and/or other property, including cash,
the Committee shall, in its absolute discretion, have the power to:
Page 6
<PAGE>
(i) cancel, effective immediately prior to the occurrence of such
event, each Option outstanding immediately prior to such event (whether
or not then exercisable), and, in full consideration of such
cancellation, pay to the Participant to whom such Option was granted an
amount in cash for each share of Common Stock subject to such Option,
equal to the excess of (a) the value, as determined by the Committee in
its absolute discretion, of the property (including cash) received or
to be received by the holder of a share of Common Stock as a result of
such event over (b) the exercise price in respect of each share of
Common Stock covered by such Option; or
(ii) provide for the exchange of each Option outstanding immediately
prior to such event (whether or not then exercisable) for an option on
some or all of the property for which each share of Common Stock
subject to such Option is exchanged and, incident thereto, make an
equitable adjustment as determined by the Committee in its absolute
discretion in the exercise price of the Option, or the number of shares
or amount of property subject to the Option or, if appropriate, provide
for a cash payment to the Participant to whom such Option was granted
in partial consideration for the exchange of the Option.
(e) Outstanding Options - Other Changes
In the event of any change in the capitalization of Advantica or
corporate change other than those specifically referred to in Section 7(a),(b),
or (d) hereof, the Committee may, in its absolute discretion, make such
adjustments in the number and class of shares subject to Options outstanding on
the date on which such change occurs and in the per share exercise price of each
such Option as the Committee may consider appropriate to prevent dilution or
enlargement of rights.
(f) No Other Rights
Except as expressly provided in the Plan, no Participant shall have any
rights by reason of any subdivision or consolidation of shares of stock of any
class, the payment of any dividend, any increase or decrease in the number of
shares of stock of any class or any dissolution, liquidation, merger or
consolidation of Advantica or any other corporation. Except as expressly
provided in the Plan, no issuance by Advantica of shares of stock of any class,
or securities convertible into shares of stock of any class, shall affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Common Stock subject to an Option or the exercise price of any Option.
8. Rights as a Stockholder
No person shall have any rights as a stockholder with respect to any
shares of Common Stock covered by or relating to any Option granted pursuant to
this Plan until the date of the issuance of a stock certificate with respect to
such shares. Except as otherwise expressly
Page 7
<PAGE>
provided in Section 7 hereof, no adjustment to any Option shall be made for
dividends or other rights for which the record date occurs prior to the date on
which such stock certificate is issued.
9. No Special Employment Rights; No Right to Option
Nothing contained in the Plan or any Option shall confer upon any
Participant any right with respect to the continuation of his position as a
member of the Board of Directors or interfere in any way with the right of the
Board of Directors, subject to the terms of any separate agreement to the
contrary, at any time to terminate such relationship.
No person shall have any claims or right to receive an Option
hereunder. The Committee's granting of an Option to a Participant at any time
shall neither require the Committee to grant an Option to such Participant or
any other Participant or other person at any time nor preclude the Committee
from making subsequent grants to such Participant or any other Participant or
other person.
10. Securities Law Matters
(a) Advantica shall be under no obligation to effect the registration
pursuant to the Securities Act of any shares of Common Stock to be issued
hereunder or to effect similar compliance under any state laws. Notwithstanding
anything herein to the contrary, Advantica shall not be obligated to cause to be
issued or delivered any certificates evidencing shares of Common Stock pursuant
to the Plan unless and until Advantica is advised by its counsel that the
issuance and delivery of such certificates is in compliance with all applicable
laws, regulations of governmental authority and the requirements of any
securities exchange on which shares of Common Stock are traded. The Committee
may require, as a condition of the issuance and delivery of certificates
evidencing shares of Common Stock pursuant to the terms hereof, that the
recipient of such shares make such covenants, agreements and representations,
and that such certificates bear such legends, as the Committee, in its sole
discretion, deems necessary or desirable.
(b) The exercise of any Option granted hereunder shall only be
effective at such time as counsel to Advantica shall have determined that the
issuance and delivery of shares of Common Stock pursuant to such exercise is in
compliance with all applicable laws, regulations of governmental authority and
the requirements of any securities exchange or market on which shares of Common
Stock are traded. Advantica may, in its sole discretion, defer the effectiveness
of any exercise of an Option granted hereunder in order to allow the issuance of
shares of Common Stock pursuant thereto to be made pursuant to an effective
registration statement or an exemption from such registration or other methods
for compliance available under federal or state securities laws. Advantica shall
inform the Participant in writing of its decision to defer the effectiveness of
the exercise of an Option granted hereunder. During the period that the
effectiveness of the exercise of an Option has been deferred, the Participant
may, by written notice, withdraw such exercise and obtain the refund of any
amount paid or delivered with respect thereto.
Page 8
<PAGE>
11. Withholding Taxes
(a) Cash Remittance
Whenever shares of Common Stock are to be issued upon the exercise of
an Option, the Participant shall be required, as a condition to the exercise of
the related Option, to remit to the Company in cash an amount sufficient to
satisfy federal, state and local withholding tax requirements, if any,
attributable to such exercise prior to the delivery of any certificate or
certificates for such shares.
(b) Stock Remittance
At the election of the Participant, subject to the disallowance of the
Committee (such disallowance may be made by the Committee in its sole discretion
for any reason whatsoever or for no reason), when shares of Common Stock are to
be issued upon the exercise of any Option, in lieu of the cash remittance
required by Section 11(a) hereof, the Participant may tender to the Company a
number of shares of Common Stock determined by such Participant, the Fair Market
Value of which at the tender date the Committee determines, in its sole
discretion, to be sufficient to satisfy the federal, state and local withholding
tax requirements, if any, attributable to such exercise and not greater than the
Participant's calculated total federal, state and local tax obligations
associated with such exercise.
(c) Stock Withholding
At the election of the Participant, subject to the disallowance of the
Committee (such disallowance may be made by the Committee in its sole discretion
for any reason whatsoever or for no reason), when shares of Common Stock are to
be issued upon the exercise of an Option, in lieu of the cash remittance
required by Section 11(a) hereof, the Company shall withhold a number of such
shares determined by such Participant, the Fair Market Value of which at the
exercise date the Committee determines (in its sole discretion) to be sufficient
to satisfy the federal, state and local withholding tax requirements, if any,
attributable to such exercise and not greater than the Participant's calculated
total federal, state and local tax obligations associated with such exercise.
12. Amendment of the Plan; Term of the Plan
The Board of Directors or the Committee may at any time suspend,
discontinue or terminate the Plan. Additionally, the Board of Directors or the
Committee may revise or amend the Plan in any respect whatsoever subject only to
any applicable law, regulation or exchange/market requirement, provided that no
amendment or discontinuance may, in the absence
Page 9
<PAGE>
of written consent to the change by the affected Participant, adversely affect
the rights of any Participant under any Option granted under the Plan prior to
the date such amendment is adopted by the Board or the Committee. The Plan shall
continue in existence until terminated by the Board of Directors pursuant to the
terms set forth herein.
13. No Obligation to Exercise
The grant to a Participant of an Option shall impose no obligation upon
such Participant to exercise such Option.
14. Transfers Upon Death
Unless otherwise provided in the Agreement, upon the death of a
Participant, outstanding Options granted to such Participant may be exercised
only by the executors or administrators of the Participant's estate or by any
person or persons who shall have acquired such right to exercise by will or by
the laws of descent and distribution. No transfer by will or the laws of descent
and distribution of any Option, or the right to exercise any Option, shall be
effective to bind the Company unless the Committee shall have been furnished
with (a) written notice thereof and with a copy of the will and/or such evidence
as the Committee may deem necessary to establish the validity of the transfer
and (b) an agreement by the transferee to comply with all the terms and
conditions of the Option that are or would have been applicable to the
Participant and to be bound by the acknowledgments made by the Participant in
connection with the grant of the Option.
15. Expenses
The expenses of the Plan shall be paid by the Company.
16. Failure to Comply
In addition to the remedies of the Company elsewhere provided for
herein, if a Participant shall fail to comply with any of the terms or
conditions of the Plan or the Agreement, the Committee may cancel such Option
and cause such Option to be forfeited, in whole or in part, as the Committee, in
its absolute discretion, may determine, unless such failure is remedied by such
Participant within ten days after such Participant's receipt of written notice
of such failure from the Committee or the Company.
17. Effective Date
The Plan shall be effective on the date that the Plan is approved by
the Board of Directors, contingent upon approval of the Plan by the shareholders
of the Company at the next annual meeting of shareholders following such Board
of Director approval.
Page 10
EXHIBIT 12
ADVANTICA RESTAURANT GROUP, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1993 1994
(In thousands) ---------------- --------------
<S> <C> <C>
Loss from continuing operations before income taxes ........ $ (1,317,892) $ (19,033)
Add:
Net interest expense excluding capitalized interest ....... 203,709 220,985
Amortization of debt expense .............................. 9,416 6,453
Interest factor in rents .................................. 16,290 16,411
------------ ----------
Total earnings (losses) ................................. $ (1,088,477) $ 224,816
============ ==========
Fixed charges:
Gross interest expense including capitalized interest ..... 203,987 221,245
Amortization of debt expense .............................. 9,416 6,453
Interest factor in rents .................................. 16,290 16,411
------------ ----------
Total fixed charges ..................................... $ 229,693 $ 244,109
============ ==========
Ratio of earnings (losses) to fixed charges ................ -- --
============ ==========
Deficiency in the coverage of fixed charges by
earnings
(losses) before fixed charges ............................. $ 1,318,170 $ 19,293
============ ==========
<CAPTION>
Year Ended December 31,
----------------------------------------------
1995 1996 1997
(In thousands) --------------- --------------- --------------
<S> <C> <C> <C>
Loss from continuing operations before income taxes ........ $ (132,920) $ (101,852) $ (132,681)
Add:
Net interest expense excluding capitalized interest ....... 221,645 245,787 216,837
Amortization of debt expense .............................. 7,504 8,921 9,551
Interest factor in rents .................................. 16,090 19,774 24,003
----------- ----------- ----------
Total earnings (losses) ................................. $ 112,319 $ 172,630 $ 117,710
=========== =========== ==========
Fixed charges:
Gross interest expense including capitalized interest ..... 221,726 245,787 216,837
Amortization of debt expense .............................. 7,504 8,921 9,551
Interest factor in rents .................................. 16,090 19,774 24,003
----------- ----------- ----------
Total fixed charges ..................................... $ 245,320 $ 274,482 $ 250,391
=========== =========== ==========
Ratio of earnings (losses) to fixed charges ................ -- -- --
=========== =========== ==========
Deficiency in the coverage of fixed charges by
earnings
(losses) before fixed charges ............................. $ 133,001 $ 101,852 $ 132,681
=========== =========== ==========
</TABLE>
For purposes of these computations, the ratio of earnings to fixed charges has
been calculated by dividing pretax earnings by fixed charges; earnings, as used
to compute the ratio, equals the sum of income before income taxes and fixed
charges excluding capitalized interest. Fixed charges are the total interest
expenses including capitalized interest, amortization of debt expenses and a
rental factor that is representative of an interest factor (estimated to be one
third) on operating leases.
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement
No. 333-45811 on Form S-1 of our report on Advantica Restaurant Group, Inc.
(formerly Flagstar Companies, Inc.) dated February 20, 1998, 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
March 25, 1998
