<PAGE>
As Filed with the Securities and Exchange Commission on April 20, 1998
Registration No. 333-45811
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
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.
Executive 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 ........... 9,301,820 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 9,526,775 shares initially registered and
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>
<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 APRIL 20, 1998
PROSPECTUS
Advantica Restaurant Group, Inc.
9,301,820 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. As described elsewhere herein, as of
April 1, 1998, the Company consummated the sale (the "FEI Sale") of Flagstar
Enterprises, Inc. ("FEI"), its wholly-owned subsidiary which had operated the
Company's Hardee's restaurants under licenses with Hardee's Food Systems, Inc.
("HFS"). Nevertheless, unless otherwise expressly stated, the information set
forth in this Prospectus continues to reflect the Company's Hardee's operations
since such operations are included in the historical financial statements
contained elsewhere in this Prospectus.
The Company
Advantica, through its wholly-owned subsidiaries, is one of the largest
restaurant companies in the United States, operating (directly and through
franchisees and including its just sold Hardee's operation) 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 (including Hardee's). 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 (prior to the FEI Sale (as
defined above)), with 557 units located primarily in the Southeast, was the
largest franchisee. Although specializing in sandwiches, these 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 Advantica issued
40,000,000 shares of Common Stock 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 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 2008 (the "New
Senior Notes") in exchange for 100% of the principal amount of such
holders' Old Senior Notes and accrued interest through the Effective
Date;
(e) Each holder of the Senior Subordinated Debentures received 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. 9,301,820 shares. See "Description of Common Stock."
Common Stock
Currently Outstanding........... 40,002,259 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 FEI, a wholly-owned
subsidiary which has operated the Company's Hardee's restaurants under licenses
from HFS. HFS is a wholly-owned subsidiary of CKE. The FEI Sale was consummated
on April 1, 1998. As contemplated by such agreement, the Company received
$380.8 million in cash (subject to certain adjustments) in exchange for all of
the outstanding stock of FEI. In addition, CKE assumed $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 FEI Sale. In
general, the covenant requires that the Company not engage, directly or
indirectly, in the quick-service hamburger restaurant business in certain
designated market areas. Approximately $173.1 million of the proceeds of the
FEI Sale (together with $28.6 million previously on deposit with respect to
certain Mortgage Financings as herein defined) was 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 had been
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 replaced such
collateral principally through the purchase of Defeasance Eligible Investments
(as defined in documents governing such Mortgage Financings) which were
deposited with the collateral agent with respect to such Mortgage Financings to
satisfy principal and interest payments under such Mortgage Financings through
the stated maturity date in the year 2000. For additional information
concerning such in-substance defeasance, see "Description of Indebtedness --
Mortgage Financings." The transaction required consents of the lenders under
the Credit Facility, and the Company negotiated the terms of an amendment which
included such consent. Certain terms and provisions of the Credit Facility
described herein reflect such amendment. See "Description of Indebtedness --
The Advantica Credit Agreement."
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" ("SFAS 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
6
<PAGE>
further discussion of earnings per share and the impact of SFAS 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, as of April 1, 1998, Advantica consummated the
sale of the stock of FEI, a wholly-owned subsidiary which has operated the
Company's Hardee's restaurants under licenses from HFS. See "Prospectus Summary
- -- Recent Developments." A portion of the proceeds of such transaction were
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 after consummation
of such transaction and the in-substance defeasance of such Mortgage
Financings, 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 were required to 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
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
8
<PAGE>
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.
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
9
<PAGE>
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 "ADA"). 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, issued by Advantica as of January 7, 1998, the effective
date of the Plan of Reorganization, 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, and including its just sold Hardee's operation) 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 (including Hardee's). 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 on quality, homestyle fare at an
excellent value. Hardee's is a chain of quick-service restaurants of which
Advantica (prior to the FEI Sale), with 557 units located primarily in the
Southeast, was the largest franchisee. Although specializing in sandwiches,
these 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 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.
10
<PAGE>
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 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. As of the date hereof,
a total of 40,002,259 shares of Common Stock are issued and outstanding.
The Common Stock and the Warrants are listed for trading as NASDAQ
National Market securities on The NASDAQ Stock MarketSM under the symbols
"DINE" and "DINW," respectively. 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 April 17 $11 9/16 $8 3/4
</TABLE>
Holders
The number of record and beneficial holders of Common Stock as of April
17, 1998 was approximately 4,200.
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 which
was completed on April 1, 1998, 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 (186,382) 987,304
Capital lease obligations, less
current maturities .............. 87,703 87,703
In-substance defeased debt,
less current maturities ......... -- 186,382 186,382
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 has operated the Company's Hardee's restaurants
under licenses from HFS. The transaction was consummated on April 1, 1998. The
Company received $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 assumed $45.6 million of capital leases. The FEI
Sale required consents of the lenders under the Credit Facility and the Company
negotiated the terms of an amendment which included such consent. For more
information see "Prospectus Summary -- Recent Developments."
Prior to consummation of the FEI Sale, 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 were collateralized by certain assets of FEI and
its subsidiary Spardee's Realty, Inc. and were not assumed by the purchaser in
the disposition. As a result, the Company replaced such collateral principally
through the purchase of Defeasance Eligible Investments which were deposited
with the collateral agent with respect to such Mortgage Financings to satisfy
principal and interest payments under such Mortgage Financings through the
stated maturity. Such action constituted an in-substance defeasance of such
Mortgage Financings. At the same time, the Company also effected 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. For additional information concerning such
in-substance defeasance, see "Description of Indebtedness -- Mortgage
Financings."
(21) To reflect the disposition of FEI, including the receipt of cash
proceeds of $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, TWRS, a recreation services
subsidiary, and 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 SFAS 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 SFAS 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 $6.8 million including charges of $1.7 million
for severance, $1.7 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 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 $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.
25
<PAGE>
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 and consummated such sale as of April 1, 1998. Upon such
consummation the Company realized cash proceeds of $380.8 million (subject to
certain adjustments) in exchange for all of the outstanding stock of FEI.
Approximately $173.1 million of the proceeds (together with $28.6 million
previously on deposit with respect to certain Mortgage Financings as herein
defined) was applied to effect an in-substance defeasance of such Mortgage
Financings with a carrying value of $198.9 million plus accrued interest of
$6.9 million at April 1, 1998. Together with the capital lease obligations
assumed by the buyer, this resulted in a reduced debt load for the Company. The
remaining proceeds, approximately $191 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 are 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 and including its just sold
Hardee's operation) 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 (including Hardee's). 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 (prior to the FEI Sale), with
557 units located primarily in the Southeast, was the largest franchisee.
Although specializing in sandwiches, these 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 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
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emphasizes superior value and quality, friendly 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.
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, 19 of which were closed during 1997. 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. As such,
the carrying values of these units were written down to the Company's estimate
of fair value.
See Note 5 to the Consolidated Financial Statements for additional
information concerning the 1995 and 1997 restructurings.
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
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,
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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 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, as of April 1, 1998 the Company sold its Hardee's
operation. The Company received $380.8 million in cash (subject to adjustment)
in exchange for all of the outstanding stock of FEI, the Company's subsidiary
which conducted the Hardee's operation. In addition, the purchaser assumed
$45.6 million of capital leases. For information concerning such 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 were 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. These
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 FEI'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 FEI'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. Prior to the FEI Sale, Advantica's Hardee's employed approximately
19,400 people.
Prior to the FEI Sale, each Hardee's restaurant was operated under a
separate license from HFS. Each license granted 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 had a term of
20 years from the date the restaurant was first opened for business and was
non-cancelable by HFS, except for the franchisee's failure to abide by its
covenants. Earlier issued license agreements were renewable under HFS' renewal
policy; more recent license agreements provided for successive five-year
renewals upon expiration, generally at rates then in effect for new licenses.
Each year, a number of FEI's licenses were scheduled for renewal. FEI
historically experienced no difficulty in obtaining such renewals. Prior to the
FEI Sale, an arbitration proceeding was pending between the Company and HFS
relating to certain matters arising under these license agreements. Such
proceeding was suspended in connection with the pending sale of FEI to HFS'
parent company. As a result of the consummation of such sale, all claims by the
Company against HFS have been 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
made FEI's development rights non-exclusive in the development territory. As a
result, HFS and other Hardee's franchisees along with FEI were permitted, prior
to the FEI Sale, to open Hardee's restaurants in such territory.
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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 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
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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 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
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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."
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 was 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.
Prior to the FEI Sale, food and packaging products for the Company's
Hardee's restaurants were 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 have been 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, 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.
43
<PAGE>
Trademarks and Service Marks
The Company, either directly or through wholly-owned subsidiaries, has
registered certain trademarks and service marks with the United States Patent
and Trademark office and in international jurisdictions, some of which include
Denny's(R), El Pollo Loco(R), Quincy's(R), Coco's(R), Carrows(R), and Grand
Slam Breakfast(R). The Company 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 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.
Prior to the FEI Sale, the Company, through Denny's, Inc., its
wholly-owned subsidiary, owned the rights to one trademark used by Hardee's
under a licensing agreement. All other Hardee's trademarks were 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,
44
<PAGE>
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.
The ADA, which became effective as to public accommodations and employment
in 1992, prohibits discrimination on the basis of disability. Because of the
absence of any comprehensive rules under the ADA, the Company is unable to
predict the extent to which such Act may affect the Company. The Company could
be required to expend funds to further modify existing restaurants to provide
service to, or make reasonable accommodations for the employment of, disabled
persons.
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.
45
<PAGE>
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>
46
<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 -- -- -- 4
Utah ........................ 7 12 -- -- -- --
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>
47
<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 now
released 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."
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.
48
<PAGE>
<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 to
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; Chairman, Maine Investments, Ltd., a diversified holding
company involved in mining, retail, manufacturing and distribution (1997 to present);
President and Chief Executive Officer, General Aquatics, Inc. (1995 to 1997);
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 Donnelley Enterprise Solutions,
Inc., 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).
Ronald B. Hutchison 48 Executive Vice President and Chief Financial Officer of Advantica (March 1998 to
present); Vice President and Treasurer of Advantica (1995-March 1998); Vice President
and Treasurer of Leaseway Transportation Corp. (1988-1995).
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Current Principal Occupation or
Name Age Employment and Five-year Employment History
- ---------------------- ----- --------------------------------------------------------------------------------------
<S> <C> <C>
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 40 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>
50
<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
expenses 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 $50,000. The
remaining amounts shown for Messrs. Bushey, Campbell and Romandetti
consist of additional compensation and/or expense reimbursement paid to
the respective named executive officers at or near the time of, or
otherwise arising in connection with, their initial employment with the
Company.
51
<PAGE>
(7) Reflects base salary paid for only the portion of the year in which the
named executive officer was employed by the Company.
Stock Options
There were no stock options granted to the named executive officers under
the Company's 1989 Non-Qualified Stock Option Plan (the "1989 Option Plan")
during the fiscal year ended December 31, 1997. The following table sets forth
information with respect to the 1997 year-end values of unexercised options,
all of which were granted by the Company pursuant to the 1989 Option Plan, held
by each of the persons named in the Summary Compensation Table above:
Aggregated Option Exercises in 1997 and
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised In-
Underlying the-Money Options
Unexercised at Fiscal
Options at Fiscal Year-End
Year-End (#) ($)
------------------- ------------------
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>
52
<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
53
<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
or other property 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
54
<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.
55
<PAGE>
OWNERSHIP OF CAPITAL SECURITIES
The following table sets forth, as of April 17, 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. ....................................... 9,301,820(1) 23.25%
(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 ..................................................... 451 *
Ronald E. Blaylock .................................................. 251 --
Vera King Farris .................................................... 251 --
James J. Gaffney .................................................... 251 --
Irwin N. Gold ....................................................... 251 --
Robert E. Marks ..................................................... 251 --
Charles F. Moran .................................................... 251 --
Elizabeth A. Sanders ................................................ 251 --
Donald R. Shepherd .................................................. 251 --
Craig S. Bushey ..................................................... -- --
C. Robert Campbell .................................................. -- --
John Romandetti ..................................................... -- --
Edna K. Morris ...................................................... -- --
All current directors and executive officers as a group (19 persons) 202,459 *
</TABLE>
- ---------
* less than one (1) percent.
(1) Shares which may be beneficially owned by Loomis Sayles & Company, L.P.
("Loomis") and certain related entities are as reported to the Company by
Loomis as of April 1, 1998. According to the latest Schedule 13D filing by
Loomis, 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 April 17, 1998, 40,002,259 shares of Common Stock were deemed issued
and outstanding subject to the completion of the exchange of securities as
contemplated by the Plan of Reorganization.
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."
56
<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 Credit Facility was amended in certain respects
in connection with the closing of the sale of FEI, which had operated the
Company's Hardee's restaurants, as of April 1, 1998.
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). Pursuant to the above-referenced amendment to the
Credit Facility, commitments under the Credit Facility were not reduced as a
result of the FEI Sale.
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 1.45:1.00 applicable on March 31, 1998 to a ratio of 1.85:1.00
applicable on or after March 31, 2000.
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
57
<PAGE>
(i) Cash Interest Expense and (ii) Lease Expense to be less than a specified
ratio, ranging from a ratio of 1.25:1.00 applicable on March 31, 1998 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 (plus
any unused amount from the immediately preceding fiscal year) in the aggregate
for each of the fiscal years ending December 31, 1998 and thereafter, provided,
that, after the occurrence of the FEI Sale, in addition to the Capital
Expenditures (or certain permitted investments in lieu thereof) permitted to be
incurred as provided above, the Company may from time to time incur Capital
Expenditures (or certain permitted investments in lieu thereof) in an aggregate
amount not to exceed the lesser of (a) $170,000,000 and (b) the Net Cash
Proceeds of the FEI Sale that have not previously been applied to incur Capital
Expenditures (or certain permitted investments in lieu thereof), pay
Indebtedness, effect the in-substance defeasance of the related Mortgage
Financings (as described elsewhere in this Prospectus) or make investments or
for any other purpose.
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 Credit Agreement and related documents, 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; provided, however, that (a) prior to the occurrence of the FEI Sale,
EBITDA for each period will be determined assuming that the consolidated
results of operations of FEI and its subsidiaries are attributable to
continuing operations of the Company, whether or not such consolidated results
of operations are at the time being classified by the Company in its
consolidated financial statements as the results of discontinued operations,
(b) upon and after the occurrence of the FEI Sale, EBITDA for each period that
includes the date of occurrence of such FEI Sale will, solely for purposes of
determining compliance with the above-referenced financial ratios, be
determined on a pro forma basis, as if FEI had been sold on the first day of
such period and (c) after the occurrence of any acquisition of any person by
the Company, EBITDA for each period that includes the date of occurrence of
such acquisition will, solely for purposes of determining compliance with the
above-referenced Total Debt to EBITDA and Senior Secured Debt ratios, be
determined on a pro forma basis, based on the actual historical results of
operations of such person, as if such acquisition had occurred on the first day
of such period.
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"Indebtedness" of any person means, without duplication, (a) all
indebtedness of such person for borrowed money; (b) all indebtedness of such
person for the deferred purchase price of property or services (other than
property, including inventory, and services purchased, and expense accruals and
deferred compensation items arising, in the ordinary course of business); (c)
all obligations of such person evidenced by notes, bonds, debentures or other
similar instruments (other than performance, surety and appeal bonds arising in
the ordinary course of business); (d) all indebtedness of such person created
or arising under any conditional sale or other title retention agreement with
respect to property acquired by such person (even though the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property); (e) all Capital Lease
Obligations of such person; (f) all reimbursement, payment or similar
obligations of such person, contingent or otherwise, under acceptance, letter
of credit or similar facilities; (g) all obligations of such person in respect
of (i) currency swap agreements, currency future or option contracts and other
similar agreements designed to hedge against fluctuations in foreign interest
rates and (ii) interest rate swap, cap or collar agreements, interest rate
future or option contracts and other similar agreements designed to hedge
against fluctuations in interest rates; (h) all Guarantees (as defined) by such
person of Indebtedness referred to in clauses (a) through (g) above; and (i)
all Indebtedness referred to in clauses (a) through (h) above secured by (or
for which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien (as defined) upon or in property
(including accounts and contract rights) owned by such person, even though such
person has not assumed or become liable for the payment of such Indebtedness.
The Indebtedness of any person shall include the Indebtedness of any
partnership in which such person is a general partner. Notwithstanding the
foregoing, the amount of Indebtedness of Advantica and the Subsidiaries (or any
of them) shall exclude, for all purposes in the Credit Facility, (a) 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 and (b) if the in-substance defeasance of the Mortgage Financings (as
described elsewhere in this Prospectus) has occurred and remains effective, the
aggregate amount of Indebtedness outstanding in respect of such Mortgage
Financings.
"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 Credit Agreement and related documents), (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. Notwithstanding the foregoing, (a) prior to the
occurrence of the FEI Sale, Interest Expense for each period will be determined
assuming that the consolidated interest expense (net of interest income) of FEI
and its subsidiaries is attributable to continuing operations of the Company,
whether or not the consolidated results of operations of FEI and its
subsidiaries are at the time being classified by the Company in its
consolidated financial statements as the results of discontinued operations,
and (b) upon and after the occurrence of the FEI Sale, Interest Expense (i) for
each period that includes the date of occurrence of such FEI Sale will be
determined on a pro forma basis, as if FEI had been sold and the in-substance
defeasance of the related Mortgage Financing had been effected on the first day
of such period and (ii) for each period will be determined without regard to
(A) interest expense in respect of such Mortgage Financings and (B) interest
income in respect of the Defeasance Eligible Investments (as defined elsewhere
in this Prospectus).
"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. Notwithstanding the foregoing, (a) prior to the occurrence of the FEI
Sale, Lease Expense for each period will be determined assuming that the
consolidated payment obligations of FEI and its subsidiaries for such period
under Operating Leases are attributable to continuing operations of the
Company, whether or not the consolidated results of operations of FEI and its
subsidiaries are at the time being classified by the Company in its
consolidated financial statements as the results of discontinued operations,
and (b) upon and after the occurrence of the FEI Sale, Lease Expense for each
period that includes the date of occurrence of such FEI Sale will be determined
on a pro forma basis, as if FEI had been sold on the first day of such period.
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"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), minus, at any time after the
FEI Sale and the in-substance defeasance of the related Mortgage Financing have
occurred, the lesser of (x) $170,000,000, (y) the Net Cash Proceeds (as
defined) of such FEI Sale that have not previously been applied to incur
Capital Expenditures (or certain permitted investments in lieu thereof), pay
Indebtedness, effect such in-substance defeasance or make investments or for
any other purpose and (z) the aggregate amount of all cash and cash equivalents
of the Company (excluding the Defeasance Eligible Investments acquired in
connection with the in-substance defeasance) that would be set forth on a
consolidated balance sheet of the Company prepared as of such date in
accordance with GAAP.
The Company also covenanted in connection with the in-substance defeasance
of certain Mortgage Financings effected pursuant to the FEI Sale (within 30
days of consummation thereof), among other things, to transfer the obligations
in respect of such Mortgage Financings and the Defeasance Eligible Investments
and other related collateral which secure such Mortgage Financings to a newly
formed special purpose subsidiary and, in connection therewith, obtain a
release of Advantica and its other subsidiaries from certain obligations and
liens relating thereto.
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 aggregate principal amount of 11 1/4% Senior Notes. The New
Senior Notes are senior unsecured obligations of Advantica and rank pari passu
in right of payment to all Senior Indebtedness, including the Credit Facility.
Interest on the New Senior Notes accrues at a rate equal to 11 1/4% per annum
and is payable semi-annually in arrears on each July 15 and January 15,
beginning July 15, 1998. They will mature on January 15, 2008.
The New Senior Notes will be redeemable, in whole or in part, at the
option of Advantica at any time on or after January 15, 2003, initially at a
redemption price equal to 105.625% of the principal amount thereof to and
including January 14, 2004, at 103.750% of the principal amount thereof to and
including January 14, 2005, at 101.875% of the principal amount thereof to and
including January 14, 2006, and thereafter at 100% of the principal amount
thereof, together in each case with accrued interest.
Notwithstanding the foregoing, from January 15, 1998 until January 15,
2001, Advantica may redeem up to 35% of the aggregate principal amount of New
Senior Notes outstanding on the date of the Indenture at a redemption price
(expressed as a percentage of the principal amount) of 110%, plus accrued and
unpaid interest, if any, to the redemption date, from the net proceeds of any
public offering for cash of any equity securities of Advantica or any
subsidiary thereof.
Mortgage Financings
A subsidiary of Advantica had issued and outstanding, at December 31,
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 became due and payable on a monthly basis. Principal payments
total $12.5
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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, prior to the FEI Sale and the
in-substance defeasance described below, by collateral assignment of mortgage
loans on 238 Hardee's and 146 Quincy's restaurants. In connection with the FEI
Sale, as described elsewhere in this Prospectus, the Company used a portion of
the proceeds from the disposition to effect an in-substance defeasance of such
Mortgage Financings with a book value of $177.6 million at December 31, 1997
($102 million of which was collateralized by the assets of FEI). Such Mortgage
Financings were not retained or assumed by the purchaser in the disposition.
The Company replaced the mortgage collateral for such Mortgage Financing
principally through the purchase of Defeasance Eligible Investments (as defined
in the documents governing such Mortgage Financings) which were deposited with
the collateral agent with respect to such Mortgage Financings to satisfy
principal and interest payments on the related bonds through the stated
maturity. The Company is currently organizing and arranging to transfer the
obligations in respect of such Mortgage Financings and the Defeasance Eligible
Investments and other related collateral which secure such Mortgage Financings
to a newly formed special purpose subsidiary and, in connection therewith,
obtain a release of Advantica and its other subsidiaries from certain
obligations and liens relating thereto.
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 per quarter for four consecutive quarters
beginning February 28, 1998; $6 million per quarter on February 28, 1999; and
$7 million per quarter 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.
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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 25, 1997 to 2.10:1.00 on September 23,
1999 and each fiscal quarter end thereafter; (b) shall not 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 25,
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 25,
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 FRD's guaranty of borrowings under the FRI-M Credit Facility to the
extent of the value of FRD's assets securing such guaranty. 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 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). As of the date
hereof, a total of 40,002,259 shares of Common Stock are issued and
outstanding. All such shares 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.
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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
registration and without restriction or limitation under the Securities Act.
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 9,301,820 shares offered hereunder (the "Shares") as a
distribution under the Original Plan in respect of approximately $206,771,000
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:
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<TABLE>
<CAPTION>
Number of Shares
Owned and Registered
Selling Stockholder Hereunder
- -------------------------------------- ---------------------
<S> <C>
Loomis Sayles & Company, L.P 9,301,820
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 or Section 1145 of the
Bankruptcy Code may be sold pursuant to Rule 144 or Section 1145 rather than
pursuant to this Prospectus.
The Common Stock is currently listed for trading as a NASDAQ National
Market security on The NASDAQ Stock MarketSM, 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
64
<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.
65
<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 benefit 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 ........................................... 987,304
Capital lease obligations, less current maturities ...................................... 87,703
In-substance defeased debt, less current maturities ..................................... 186,382
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 deemed
issued and outstanding on the Effective Date and entitle the holders
thereof to purchase in the aggregate 4 million shares of Common Stock at
an exercise price of $14.60 per share (the "Warrants");
(d) Each holder of the Old Senior Notes received such holder's pro rata
portion of 100% of Advantica's 11 1/4% Senior Notes due 2008 (the "New
Senior Notes") in exchange for 100% of the principal amount of such
holders' Old Senior Notes and accrued interest through the Effective
Date;
(e) Each holder of the Senior Subordinated Debentures received each holder's
pro rata portion of shares of Common Stock equivalent to 95.5% of the
Common Stock issued on the Effective Date;
(f) Each holder of the 10% Convertible Debentures received such holder's pro
rata portion of (i) shares of Common Stock equivalent to 4.5% of the
Common Stock issued on the Effective Date and (ii) 100% of the Warrants
issued on the Effective Date; and
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 (186,382) 987,304
Capital lease obligations, less current
maturities ............................. 87,703 87,703
In-substance defeased debt, less
current maturities ..................... -- 186,382 186,382
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 recognition of liabilities associated with
severance and other exit costs, and the adjustments to self-insured claims
and contingent liabilities reflecting a change in methodology, and (vii)
the adjustment 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) income 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) income 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
F-11
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 2 FRESH START REPORTING -- Continued
as "reorganization value in excess of amounts allocable to identifiable
assets." Advantica intends to amortize such amount 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
F-12
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
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.
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.
F-13
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
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 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.
F-14
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
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 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
F-15
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 5 RESTRUCTURING AND IMPAIRMENT OF LONG-LIVED ASSETS -- Continued
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.
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 10,077 10,077
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) ............................................ 160,226 107,360 107,360
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
NOTE 8 DEBT -- 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 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 ..................... 55,202
--------
Present value of capital lease obligations $107,360
========
</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 2011 and 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 Old 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 Old 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 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 is deemed
to have 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 loss 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 and 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 ................................... 51
Ownership of Capital Securities ........................... 56
Certain Transactions ...................................... 56
Description of Indebtedness ............................... 57
Description of Common Stock ............................... 62
Selling Stockholder ....................................... 63
Plan of Distribution ...................................... 64
Legal Matters ............................................. 65
Experts ................................................... 65
</TABLE>
Advantica Restaurant Group, Inc.
9,301,820 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
Legal fees and expenses .............. 135,000
Accounting fees and expenses ......... 100,000
Printing costs ....................... 100,000
Miscellaneous ........................ 12,599
--------
Total .............................. $375,000
========
</TABLE>
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 and distributed pursuant to the Plan
of Reorganization, subject to completion of exchange of securities as
contemplated by
II-1
<PAGE>
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.
On or about April 14, 1998, Advantica issued a total of 2,259 shares of
Common Stock to its directors in lieu of director fees. Such issuance was
exempt from registration under the Securities Act of 1933, as amended, pursuant
to Section 4(2) thereof.
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 $98,000,000 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).
*4.9 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 (No. 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).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- --------------- -------------------------------------------------------------------------------------------------------
<S> <C>
*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).
*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 (the "1997 Third Quarter Form 10-Q")).
**4.21 Fifth Amendment to the FRI-M Credit Agreement, dated as of December 9, 1997.
5.1 Opinion of Parker, Poe, Adams & Bernstein L.L.P regarding the legality of securities to be issued.
*10.1 Consent Order dated March 26, 1993 between the U.S. Department of Justice, Flagstar and Denny's,
Inc. (incorporated by reference to Exhibit 10.42 to the Registration Statement on Form S-2 (No.
33-49843) of Flagstar (the "Form S-2")).
*10.2 Fair Share Agreement dated July 1, 1993 between Flagstar and the NAACP (incorporated by reference
to Exhibit 10.43 to the Form S-2).
*10.3 Form of Agreement providing certain supplemental retirement benefits (incorporated by reference to
Exhibit 10.7 to FCI's 1992 Form 10-K, File No. 0-18051 (the "1992 Form 10-K")).
*10.4 Form of Supplemental Executive Retirement Plan Trust of Advantica (incorporated by reference to
Exhibit 10.8 to the 1992 Form 10-K).
*10.5 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).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------------- ---------------------------------------------------------------------------------------------------------
<S> <C>
*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).
*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 (incorporated by reference to Exhibit 10.33 to Advantica's 1997
Form 10-K, File No. 0-18051 (the "1997 Form 10-K")).
*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 10.55 to the Registration Statement on Form S-4 (No.
333-23875) (the "1997 Form S-4")).
*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 10.56 to the 1997 Form S-4).
*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 10.1 to the 1997 Third Quarter Form 10-Q).
**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 ado-ted January 28, 1998.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------------ -----------------------------------------------------------------------------------------------------
<S> <C>
*10.46 Final Amendment to Revolving Credit and Guaranty Agreement, dated as of August 15, 1997
(incorporated by reference to the 1997 Third Quarter Form 10-Q).
10.47 Second Amendment to Loan Agreement between Secured Restaurants Trust and Spardee's Realty, Inc.,
dated as of April 1, 1998.
10.48 Second Amendment to Loan Agreement between Secured Restaurants Trust and Quincy's Realty, Inc.,
dated as of April 1, 1998.
10.49 Assignment and Assumption Agreement between Spardee's Realty, Inc. and Quincy's Realty, Inc.,
dated as of April 1, 1998.
10.50 First Amendment to Stock Pledge Agreement among Quincy's Restaurants, Inc. and Secured
Restaurants Trust, dated as of April 1, 1998.
10.51 First Amendment to Collateral Assignment Agreement, dated as of April 1, 1998, related to Secured
Restaurants Trust transaction.
10.52 Letter Agreement, dated as of April 1, 1998, relating to Secured Restaurants Trust mortgage note
defeasance.
10.53 Amendment No. 1 and Waiver, dated as of March 16, 1998, relating to Credit Agreement, dated as of
January 7, 1998, among certain Advantica subsidiaries, as borrowers, Advantica, as a guarantor, the
lenders named therein, and The Chase Manhattan Bank, as administrative agent.
**12 Computation of Ratio of Earnings to Fixed Charges.
*21 Subsidiaries of Advantica (incorporated by reference to Exhibit 21 to the 1997 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 (incorporated by reference to
Exhibit 99 to the 1997 Form 10-K).
</TABLE>
- ---------
* Certain of the exhibits to this Registration Statement on Form S-1, indicated
by an asterisk, are hereby incorporated by reference to other documents on
file with the Commission with which they are physically filed, to be part
hereof as of their respective dates.
** Previously filed.
(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
II-5
<PAGE>
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-6
<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 April 20, 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 April 20, 1998
----------------------------------
(James B. Adamson) Executive Officer
(Principal Executive Officer)
/s/ RONALD B. HUTCHISON Executive Vice President and Chief April 20, 1998
----------------------------------
(Ronald B. Hutchison) Financial Officer (Principal Financial
and Accounting Officer)
* Director April 20, 1998
----------------------------------
(Robert H. Allen)
* Director April 20, 1998
----------------------------------
(Ronald E. Blaylock)
* Director April 20, 1998
----------------------------------
(Vera King Farris)
* Director April 20, 1998
----------------------------------
(James J. Gaffney)
* Director April 20, 1998
----------------------------------
(Irwin N. Gold)
* Director April 20, 1998
----------------------------------
(Robert E. Marks)
* Director April 20, 1998
----------------------------------
(Charles F. Moran)
* Director April 20, 1998
----------------------------------
(Elizabeth A. Sanders)
* Director April 20, 1998
----------------------------------
(Donald R. Shepherd)
*By: /s/ RHONDA J. PARISH
------------------------------
(Rhonda J. Parish)
(attorney-in-fact for each of the persons indicated)
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Sequence No.
- --------------- ----------------------------------------------------------------------------- -------------
<S> <C> <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 $98,000,000 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).
*4.9 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 (No. 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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Sequence No.
- -------------------- ------------------------------------------------------------------------------ -------------
<S> <C> <C>
*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).
*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 (the
"1997 Third Quarter Form 10-Q")).
**4.21 Fifth Amendment to the FRI-M Credit Agreement, dated as of December 9,
1997.
5.1 Opinion of Parker, Poe, Adams & Bernstein L.L.P regarding the legality of
securities to be issued.
*10.1 Consent Order dated March 26, 1993 between the U.S. Department of
Justice, Flagstar and Denny's, Inc. (incorporated by reference to Exhibit
10.42 to the Registration Statement on Form S-2 (No. 33-49843) of
Flagstar (the "Form S-2")).
*10.2 Fair Share Agreement dated July 1, 1993 between Flagstar and the NAACP
(incorporated by reference to Exhibit 10.43 to the Form S-2).
*10.3 Form of Agreement providing certain supplemental retirement benefits
(incorporated by reference to Exhibit 10.7 to FCI's 1992 Form 10-K, File
No. 0-18051 (the "1992 Form 10-K")).
*10.4 Form of Supplemental Executive Retirement Plan Trust of Advantica
(incorporated by reference to Exhibit 10.8 to the 1992 Form 10-K).
*10.5 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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Sequence No.
- ------------------- ----------------------------------------------------------------------------- -------------
<S> <C> <C>
*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).
*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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Sequence No.
- ------------------- ----------------------------------------------------------------------------- -------------
<S> <C> <C>
*10.33 Form of Agreement dated December 3, 1997 providing certain retention
incentives and severance benefits for Company management (incorporated
by reference to Exhibit 10.33 to Advantica's 1997 Form 10-K, File No.
0-18051 (the "1997 Form 10-K")).
*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 10.55 to the Registration Statement on Form S-4 (No.
333-23875) (the "1997 Form S-4")).
*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 10.56 to the 1997 Form S-4).
*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 10.1 to
the 1997 Third Quarter Form 10-Q).
**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 ado-ted
January 28, 1998.
*10.46 Final Amendment to Revolving Credit and Guaranty Agreement, dated as
of August 15, 1997 (incorporated by reference to the 1997 Third Quarter
Form 10-Q).
10.47 Second Amendment to Loan Agreement between Secured Restaurants Trust
and Spardee's Realty, Inc., dated as of April 1, 1998.
10.48 Second Amendment to Loan Agreement between Secured Restaurants Trust
and Quincy's Realty, Inc., dated as of April 1, 1998.
10.49 Assignment and Assumption Agreement between Spardee's Realty, Inc. and
Quincy's Realty, Inc., dated as of April 1, 1998.
10.50 First Amendment Stock to Pledge Agreement among Quincy's Restaurants,
Inc. and Secured Restaurants Trust, dated as of April 1, 1998.
10.51 First Amendment to Collateral Assignment Agreement, dated as of April 1,
1998, related to Secured Restaurants Trust transaction.
10.52 Letter Agreement, dated as of April 1, 1998, relating to Secured
Restaurants Trust mortgage note defeasance.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Sequence No.
- --------------- -------------------------------------------------------------------------- -------------
<S> <C> <C>
10.53 Amendment No. 1 and Waiver, dated as of March 16, 1998, relating to
Credit Agreement, dated as of January 7, 1998, among certain Advantica
subsidiaries, as borrowers, Advantica, as a guarantor, the lenders named
therein, and The Chase Manhattan Bank, as administrative agent.
**12 Computation of Ratio of Earnings to Fixed Charges.
*21 Subsidiaries of Advantica (incorporated by reference to Exhibit 21 to the
1997 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
(incorporated by reference to Wxhibit 99 to the 1997 Form 10-K).
</TABLE>
- ---------
* Certain of the exhibits to this Registration Statement on Form S-1, indicated
by an asterisk, are hereby incorporated by reference to other documents on
file with the Commission with which they are physically filed, to be part
hereof as of their respective dates.
** Previously filed.
ARG
THIS CERTIFICATE MAY BE PRESENTED
FOR TRANSFER IN JERSEY CITY, N.J.
OR NEW YORK, N.Y.
ADVANTICA RESTAURANT GROUP, INC.
COMMON STOCK
SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 007588 10 9
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
This Certifies That
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
ADVANTICA RESTAURANT GROUP, INC. (hereinafter called the corporation),
transferable upon the books of the corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent and registered by the Registrar.
Witness the seal of the corporation and the signatures of its duly authorized
officers.
Dated
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(JERSEY CITY, N.J.)
TRANSFER AGENT
AND REGISTRAR
BY:
AUTHORIZED OFFICER
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
SECRETARY
-1-
<PAGE>
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS
THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR
OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND THE
QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM --
TEN ENT --
JT TEN --
as tenants in common
as tenants by the entireties
as joint tenants with right
of survivorship and not as tenants
in common
UNIF GIFT MIN ACT-- Custodian
(Cust) (Minor)
under Uniform Gifts to Minors
Act
(State)
Additional abbreviations may also be used though not in the above list.
For value received, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
<PAGE>
Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
Notice:
The signature to this assignment must correspond with the name as written upon
the face of the certificate in every particular, without alteration or
enlargement or any change whatever.
SIGNATURE(S) GUARANTEED:
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE
17Ad-15.
EXHIBIT 5.1
Parker, Poe, Adams & Bernstein L.L.P.
2500 Charlotte Plaza
Charlotte, NC 28244
April 20, 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
9,301,820 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, a specimen certificate evidencing the Common Stock,
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. When sold by the Selling Shareholder in accordance with an effective
Registration Statement, the Shares 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,
PARKER, POE, ADAMS & BERNSTEIN L.L.P.
<PAGE>
EX 10.47
EXECUTION COPY
SECOND AMENDMENT TO LOAN AGREEMENT
This SECOND AMENDMENT TO LOAN AGREEMENT, dated as of April 1, 1998 (the
"Amendment"), to that certain Loan Agreement dated as of November 1, 1990, as
amended by First Amendment to Loan Agreement thereto dated as of November 1,
1991 (together, the "Existing Loan Agreement"), between SPARDEE'S REALTY, INC.,
an Alabama corporation (formerly a Delaware corporation) ("Borrower") and
SECURED RESTAURANTS TRUST, a Delaware statutory business trust ("Issuer")
existing pursuant to an amended and restated Trust Agreement dated as of October
15, 1990.
RECITALS
A. All capitalized terms used herein and not otherwise defined shall have the
same meaning as set forth in the Existing Loan Agreement. The Existing Loan
Agreement, as amended by this Amendment, is referred to herein as the "Loan
Agreement." References to the Collateral Assignment Agreement mean the
Collateral Assignment Agreement as defined in the Existing Loan Agreement, as
amended by the First Amendment to Collateral Assignment Agreement dated as of
April 1, 1998.
B. Borrower and Issuer desire to amend the Existing Loan Agreement as set forth
below and in connection with an in-substance defeasance of the Mortgage Notes to
occur as of April 1, 1998.
AGREEMENTS
NOW, THEREFORE, for and in consideration of the mutual promises and
agreements set forth herein, the parties hereto, intending to be legally bound,
agree as follows:
1. The following Articles and Sections of the Existing Loan Agreement
are void and of no effect whatsoever from the date hereof: Section 2.05, Section
2.08, Section 2.09, Section 2.10, Section 2.11, Article III, Article IV, Section
5.01, Section 5.10, Section 5.12, Section 5.16, Section 5.17(a), Section 5.19,
Section 5.21, Section 5.23, Section 6.07, Section 6.11, Section 6.18(b) and
Sections 7.01(c), (d), (k), (l) and (n). The restrictions on sale of the
Properties set forth in Section 5.13 are void and have no effect.
2. The following Sections of the Existing Loan Agreement shall be void
and of no effect whatsoever from the date as of which the Borrower owns no
Properties or other real estate: Section 5.03, Section 5.06, Section 5.07,
Section 5.08, Section 5.09, Section 5.11, Section 5.15, Sections 5.17(b) and (c)
and Section 5.22.
3. Effective from the date as of which the Borrower owns no Properties
or other real estate: (a) the words "any of its Properties or the present use
thereof or" shall be deleted from
<PAGE>
Section 5.04 of the Existing Loan Agreement, (b) the words "or the Properties"
shall be deleted from Section 5.05 of the Existing Loan Agreement, (c) the words
"the Properties, Equipment, the Lease or" shall be deleted from Section 5.14(a)
of the Existing Loan Agreement, (d) the words "the Properties, the Lease or" and
the words "except for the Lease" shall be deleted from Section 5.14(b) of the
Existing Loan Agreement and (e) the words "or that of any of the Properties"
shall be deleted from Section 6.19(f) of the Existing Loan Agreement.
4. Effective from the date as of which the Borrower owns no Properties
or other real estate, Section 6.12 of the Existing Loan Agreement shall read as
follows:
Section 6.12. No Other Agreements. Except for this Agreement
and agreements contemplated by this transaction, Borrower is not a
party to any other agreement.
5. Section 6.16 of the Existing Loan Agreement shall be amended by
inserting the following paragraph (d):
(d) Conditions to Delivery. The audited financial
statements required pursuant to Section (a) above shall not be required
to be delivered if a special purpose entity is substituted as the
Borrower, prior to April 1, 1999, pursuant to the Letter Agreement,
dated April 1, 1998, between Financial Security, Quincy's Realty, Inc.,
Quincy's Restaurants, Inc. and Advantica Restaurants Group, Inc.
6. Section 6.23(iii) of the Existing Loan Agreement shall be limited to
the following by inserting the following provision at the end of such section:
The Borrower shall cause to be delivered on April 1,
1999, and April 1, 2000 an opinion of counsel (a) addressed to
Financial Security, the Collateral Agent and the Issuer, (b) in form
and substance, and from a law firm, acceptable to Financial Security
and (c) to the effect that the Collateral Agent has a first priority
perfected security interest in all Borrower Collateral.
7. The following Section is added to the Existing Loan Agreement:
Section 6.24. Disposition of Properties. At any time or from
time to time, the Borrower may sell, transfer or otherwise dispose of
(but may not create a lien against) any or all of the Properties
8.(a) The representations and warranties contained in Sections 6.01,
6.02, 6.03, 6.04, 6.05 and 6.06 of the Existing Loan Agreement are correct on
and as of the date hereof, as though made on and as of the date hereof.
(b) The Borrower hereby represents and warrants that the execution,
delivery and performance by Borrower of this Amendment and the Assignment and
Assumption Agreement (as defined in the Collateral Assignment Agreement) are
within Borrower's corporate powers,
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<PAGE>
have been duly authorized by all necessary corporate action and do not (i)
contravene Borrower's charter or bylaws, (ii) violate any law, rule, regulation,
order, writ, judgment, injunction, decree, determination or (iii) conflict with
or result in the breach of, or constitute a default under, any contract, loan
agreement, indenture, mortgage, deed of trust, lease or other instrument binding
on or affecting the Borrower, any of its affiliates or any of their properties.
(c) The Borrower hereby represents and warrants that no authorization,
approval or other action by, and no notice to or filing with, any governmental
authority or regulatory body is required for the due execution, delivery and
performance by Borrower of this Amendment or the Assignment and Assumption
Agreement.
(d) The Borrower hereby represents and warrants that this Amendment and
the Assignment and Assumption Agreement have been duly executed and delivered by
the Borrower and constitutes a legal, valid and binding obligation of Borrower,
enforceable against Borrower in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency, moratorium,
reorganization or other similar laws affecting creditors' rights generally and
to general principles of equity (regardless of whether considered in a
proceeding in equity or at law) and that no Event of Default exists under the
Loan Agreement.
9. The following provisions are added as Section 2.12 of the Loan
Agreement:
(a) As security for Borrower's obligations under this Agreement and the
Mortgage Notes, including, without limitation, its obligations to pay to the
Issuer the amounts payable under the Mortgage Notes and under this Agreement,
and the performance of all of its representations, warranties, covenants,
agreements and obligations under this Agreement and under the Mortgage Notes,
Borrower hereby expressly grants to Issuer for the benefit of Financial Security
and the Trustee, as secured parties, a first priority interest in and to all of
Borrower's right, title and interest in (i) the cash deposited with the
Collateral Agent pursuant to this Agreement, (ii) all Defeasance Eligible
Investments, (iii) the Accounts (as defined in the Collateral Assignment
Agreement) and any amounts deposited therein, and (iv) proceeds thereof, all
additions to and substitutions therefor, all proceeds and collections derived
from or in connection therewith, together with all investments made with such
proceeds and collections and all proceeds thereof and all powers and rights of
Borrower, including rights of enforcement thereunder (collectively, the
"Borrower Collateral").
Borrower intends such grant to be prior to all others to the full
extent of applicable law and shall take all actions reasonably necessary to
confer a first priority perfected security interest in the Borrower Collateral
granted hereunder. It is the intention of Borrower that, with respect to the
Borrower Collateral, this Agreement shall constitute a security agreement under
applicable law, and the Issuer shall have all of the rights and remedies of a
secured party and creditor under the UCC and other applicable law as in force in
the relevant jurisdictions.
The Borrower and the Issuer hereby agree that the Collateral Agent
shall accept Delivery of the Borrower Collateral on behalf of the Issuer and
that the Issuer has pledged and assigned all of its right, title and interest in
the Borrower Collateral to the Collateral Agent, for the benefit of Financial
Security and the Trustee, pursuant to the Collateral Assignment Agreement.
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<PAGE>
(b) On the Defeasance Date, Borrower shall deposit with the Collateral
Agent, for the benefit of the Issuer, $100,038,869 in immediately available
funds. The Collateral Agent will accept such funds and will use such funds,
together with cash held in the name of the Borrower already on deposit in the
Accounts (as defined in the Collateral Assignment Agreement) after liquidation
of all Eligible Investments therein held in the name of the Borrower (other than
existing Defeasance Eligible Investments), to purchase the Defeasance Eligible
Investments listed on Exhibit A hereto.
(c) The Issuer and the Borrower agree as follows with respect to the
Defeasance Eligible Investments, and the proceeds thereof, held by the
Collateral Agent from time to time in the Prepayment Account pursuant to the
Collateral Assignment Agreement:
(i) any Defeasance Eligible Investment that is held in deposit
accounts shall be made in the name of the Collateral Agent and shall be
subject to the exclusive custody and control of the Collateral Agent,
and the Collateral Agent shall have sole signature authority with
respect thereto;
(ii) any Defeasance Eligible Investment that constitutes
Physical Property (as defined in the definition of Delivery) shall be
delivered to the Collateral Agent in accordance with paragraph (i) of
the definition of "Delivery" and shall be held, pending maturity or
disposition, solely by the Collateral Agent or a securities
intermediary (as such term is defined in Section 8-102(a)(14) of the
UCC) acting solely for the Collateral Agent;
(iii) any Defeasance Eligible Investment that is a book-entry
security held through the Federal Reserve System pursuant to federal
book-entry regulations shall be delivered in accordance with paragraph
(ii) of the definition of "Delivery" and shall be maintained by the
Collateral Agent, pending maturity or disposition, through continued
book-entry registration of such Defeasance Eligible Investment as
described in such paragraph; and
(iv) any Defeasance Eligible Investment that is an
"uncertificated security" under Article 8 of the UCC and that is not
governed by clause (iii) above shall be delivered to the Collateral
Agent in accordance with paragraph (iii) of the definition of
"Delivery" and shall be maintained by the Collateral Agent, pending
maturity or disposition, through continued registration of the
Collateral Agent's (or its nominee's) ownership of such security
directly or through one or more securities intermediaries.
(d) In the event of any change of law regarding matters relating to the
perfection of security interests in any Account, the amounts or any Defeasance
Eligible Investments held therein, Borrower shall cause to be furnished to the
Collateral Agent, the Trustee and Financial Security an opinion of counsel, in
form and substance satisfactory to Financial Security, addressing such matters,
and, if necessary, Borrower shall cooperate with the Collateral Agent in taking
all actions necessary to comply with the change in law.
(e) Borrower hereby represents, warrants and covenants as follows:
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<PAGE>
(i) GOOD TITLE; ABSENCE OF LIENS; SECURITY INTEREST. Borrower
is the owner of, and has good and marketable title to, the Borrower
Collateral free and clear of all liens (other than the lien of the
secured parties hereunder) and has full right, corporate power and
lawful authority to assign, transfer and pledge the Borrower Collateral
(and any documents which are a part thereof) and all such substitutions
therefor and additions thereto delivered hereunder. Pursuant to the
Collateral Assignment Agreement, the Collateral Agent has a valid and
perfected first priority security interest in the Borrower Collateral
free and clear of all liens.
(ii) SOLVENT ENTITY. After giving effect to the defeasance of
the Mortgage Notes, Borrower will have sufficient capital to pay its
debts as they become due. Borrower is not engaged in any business, or
about to engage in any business or any transaction, for which it has,
or will have after engaging in such business or transaction,
unreasonably small capital in relation to such business or transaction.
Borrower does not intend to incur, or believe that it will incur,
additional debts that would be beyond its ability to pay as such debts
become due.
(iii) NO INTENT TO DEFRAUD. Borrower has valid business
reasons for entering into the transactions contemplated by the
defeasance and has not entered into the transactions contemplated by
the defeasance or this Loan Agreement with any intent to hinder, delay
or defraud any entity to which Borrower is or may become indebted.
(iv) PROHIBITED ACTIONS. Borrower covenants that it will not
take any actions with respect to the Borrower Collateral or otherwise
that the Issuer is prohibited from taking pursuant to Section 3.01 of
the Collateral Assignment Agreement.
(e) "Delivery," when used with respect to any Defeasance Eligible
Investments, means:
(i) with respect to bankers' acceptances, commercial paper,
negotiable certificates of deposit and other obligations that
constitute "instruments" within the meaning of Section 9-105(1)(i) of
the UCC and are susceptible of physical delivery, transfer thereof by
physical delivery to the Collateral Agent endorsed to, or registered in
the name of, the Collateral Agent or its nominee or endorsed to, or
registered in the name of, the Collateral Agent or its nominee or
endorsed in blank, and, with respect to a certificated security (as
defined in Section 8-102 of the UCC) transfer thereof (A) by delivery
of such certificated security to the Collateral Agent in accordance
with the provisions of Section 8-301(a) of the UCC, and such additional
or alternative procedures as may hereafter become appropriate to effect
the complete transfer of ownership of or a security interest in any
such Defeasance Eligible Investment to the Collateral Agent, consistent
with changes in applicable law or regulations or the interpretation
thereof;
(ii) with respect to any security issued by the U.S. Treasury,
the Federal Home Loan Mortgage Corporation or the Federal National
Mortgage Association that is a book-entry security held through the
Federal Reserve System pursuant to federal book-entry regulations, the
following procedures, all in accordance with applicable law,
5
<PAGE>
including applicable federal regulations and Articles 8 and 9 of the
UCC; the crediting of such Defeasance Eligible Investment to a
securities account maintained with a Federal Reserve Bank by a
securities intermediary; the indication by such securities intermediary
that such Defeasance Eligible Investment has been credited to the
Collateral Agent's securities account at the securities intermediary;
and such additional or alternative procedures as may hereafter become
appropriate to effect complete transfer of ownership of or a security
interest in any such Defeasance Eligible Investment to the Collateral
Agent, consistent with changes in applicable law or regulations or the
interpretation thereof; and
(iii) with respect to any Defeasance Eligible Investment that
is an uncertificated security under Article 8 of the UCC and that is
not governed by clause (ii) above, registration on the books and
records of the issuer thereof in the name of the Collateral Agent or
another Person (other than a "securities intermediary" (as defined in
Section 8-102(a)(4) of the UCC)) acting on behalf of the Collateral
Agent.
10. This Amendment may be executed in counterparts and by different
parties hereto in separate counterparts, each of which when so executed and
delivered shall be deemed to be an original and all of which taken together
shall constitute but one and the same instrument.
11. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
12. This Amendment shall be construed in connection with, and as part
of, the Existing Loan Agreement. The terms, conditions, representations,
warranties, covenants, agreements, rights, remedies, powers and privileges set
forth in the Existing Loan Agreement, as amended or otherwise modified hereby,
are hereby confirmed in all respects by the parties hereto and shall continue in
full force and effect.
13. Each reference to the Loan Agreement, or words of similar import in
the Existing Loan Agreement or any notice, communication, certificate,
instrument or other document executed and delivered in connection therewith
after the date hereof shall be deemed to be a reference to the Existing Loan
Agreement, as amended, supplemented and otherwise modified hereby, and, as the
same may be amended, supplemented or otherwise modified from time to time after
the date hereof, unless the context requires otherwise.
14. This Amendment shall be binding upon, shall inure to the benefit
of, and shall be enforceable by, the parties hereto and their respective
successors and permitted assigns.
15. Any provision of this Amendment which is prohibited or
unenforceable in any jurisdiction shall be, as to such jurisdiction, ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions of this Amendment, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to Loan Agreement to be executed effective as of the date first above
written.
SECURED RESTAURANTS TRUST
By Wilmington Trust Company, not in its
individual capacity, but solely as Issuer Trustee
By /s/ Mary St. Amand
---------------------------------------------
Mary St. Amand
Assistant Vice President
SPARDEE'S REALTY, INC.
By /s/ Kenneth E. Jones
---------------------------------------------
Kenneth E. Jones
Vice President and Treasurer
<PAGE>
The following parties consent to the execution of the Second Amendment
to Loan Agreement in accordance with the terms of this Amendment.
FINANCIAL SECURITY ASSURANCE INC.
By /s/ Bruce E. Stern
---------------------------------------------
Bruce E. Stern
General Counsel and Managing Director
THE BANK OF NEW YORK, as Trustee and
Collateral Agent
By /s/ Sandra Carreker
---------------------------------------------
Sandra Carreker
Title Agent
------------------------------------------
Exhibit 10.48
EXECUTION COPY
SECOND AMENDMENT TO LOAN AGREEMENT
This SECOND AMENDMENT TO LOAN AGREEMENT, dated as of April 1, 1998 (the
"Amendment"), to that certain Loan Agreement dated as of November 1, 1990, as
amended by First Amendment to Loan Agreement thereto dated as of November 1,
1991 (together, the "Existing Loan Agreement"), between QUINCY'S REALTY, INC.,
an Alabama corporation (formerly a Delaware corporation) ("Borrower") and
SECURED RESTAURANTS TRUST, a Delaware statutory business trust ("Issuer")
existing pursuant to an amended and restated Trust Agreement dated as of October
15, 1990.
RECITALS
A. All capitalized terms used herein and not otherwise defined shall have the
same meaning as set forth in the Existing Loan Agreement. The Existing Loan
Agreement, as amended by this Amendment, is referred to herein as the "Loan
Agreement." References to the Collateral Assignment Agreement mean the
Collateral Assignment Agreement as defined in the Existing Loan Agreement, as
amended by the First Amendment to Collateral Assignment Agreement dated as of
April 1, 1998.
B. Borrower and Issuer desire to amend the Existing Loan Agreement as set forth
below and in connection with an in-substance defeasance of the Mortgage Notes to
occur as of April 1, 1998.
AGREEMENTS
NOW, THEREFORE, for and in consideration of the mutual promises and
agreements set forth herein, the parties hereto, intending to be legally bound,
agree as follows:
1. The following Articles and Sections of the Existing Loan Agreement
are void and of no effect whatsoever from the date hereof: Section 2.05, Section
2.08, Section 2.09, Section 2.10, Section 2.11, Article III, Article IV, Section
5.01, Section 5.10, Section 5.12, Section 5.16, Section 5.17(a), Section 5.19,
Section 5.21, Section 5.23, Section 6.07, Section 6.11, Section 6.18(b) and
Sections 7.01(c), (d), (k), (l) and (n). The restrictions on sale of the
Properties set forth in Section 5.13 are void and have no effect.
2. The following Sections of the Existing Loan Agreement shall be void
and of no effect whatsoever from the date as of which the Borrower owns no
Properties or other real estate: Section 5.03, Section 5.06, Section 5.07,
Section 5.08, Section 5.09, Section 5.11, Section 5.15, Sections 5.17(b) and (c)
and Section 5.22.
3. Effective from the date as of which the Borrower owns no Properties
or other real estate: (a) the words "any of its Properties or the present use
thereof or" shall be deleted from
<PAGE>
Section 5.04 of the Existing Loan Agreement, (b) the words "or the Properties"
shall be deleted from Section 5.05 of the Existing Loan Agreement, (c) the
words "the Properties, Equipment, the Lease or" shall be deleted from
Section 5.14(a) of the Existing Loan Agreement, (d) the words "the Properties,
the Lease or" and the words "except for the Lease" shall be deleted from
Section 5.14(b) of the Existing Loan Agreement and (e) the words "or that of any
of the Properties" shall be deleted from Section 6.19(f) of the Existing Loan
Agreement.
4. Effective from the date as of which the Borrower owns no Properties
or other real estate, Section 6.12 of the Existing Loan Agreement shall read as
follows:
Section 6.12. No Other Agreements. Except for this Agreement
and agreements contemplated by this transaction, Borrower is not a
party to any other agreement.
5. Section 6.16 of the Existing Loan Agreement shall be amended by
inserting the following paragraph (d):
(d) Conditions to Delivery. The audited financial
statements required pursuant to Section (a) above shall not be required
to be delivered if a special purpose entity is substituted as the
Borrower, prior to April 1, 1999, pursuant to the Letter Agreement,
dated April 1, 1998, between Financial Security, Quincy's Realty, Inc.,
Quincy's Restaurants, Inc.
and Advantica Restaurants Group, Inc.
6. Section 6.23(iii) of the Existing Loan Agreement shall be limited to
the following by inserting the following provision at the end of such section:
The Borrower shall cause to be delivered on April 1,
1999, and April 1, 2000 an opinion of counsel (a) addressed to
Financial Security, the Collateral Agent and the Issuer, (b) in form
and substance, and from a law firm, acceptable to Financial Security
and (c) to the effect that the Collateral Agent has a first priority
perfected security interest in all Borrower Collateral.
7. The following Section is added to the Existing Loan Agreement:
Section 6.24. Disposition of Properties. At any time or from
time to time, the Borrower may sell, transfer or otherwise dispose of
(but may not create a lien against) any or all of the Properties
8.(a) The representations and warranties contained in Sections 6.01,
6.02, 6.03, 6.04, 6.05 and 6.06 of the Existing Loan Agreement are correct on
and as of the date hereof, as though made on and as of the date hereof.
(b) The Borrower hereby represents and warrants that the execution,
delivery and performance by Borrower of this Amendment and the Assignment and
Assumption Agreement (as defined in the Collateral Assignment Agreement) are
within Borrower's corporate powers,
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<PAGE>
have been duly authorized by all necessary corporate action and do not (i)
contravene Borrower's charter or bylaws, (ii) violate any law, rule, regulation,
order, writ, judgment, injunction, decree, determination or (iii) conflict with
or result in the breach of, or constitute a default under, any contract, loan
agreement, indenture, mortgage, deed of trust, lease or other instrument binding
on or affecting the Borrower, any of its affiliates or any of their properties.
(c) The Borrower hereby represents and warrants that no authorization,
approval or other action by, and no notice to or filing with, any governmental
authority or regulatory body is required for the due execution, delivery and
performance by Borrower of this Amendment or the Assignment and Assumption
Agreement.
(d) The Borrower hereby represents and warrants that this Amendment and
the Assignment and Assumption Agreement have been duly executed and delivered by
the Borrower and constitutes a legal, valid and binding obligation of Borrower,
enforceable against Borrower in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency, moratorium,
reorganization or other similar laws affecting creditors' rights generally and
to general principles of equity (regardless of whether considered in a
proceeding in equity or at law) and that no Event of Default exists under the
Loan Agreement.
9. The following provisions are added as Section 2.12 of the Loan
Agreement:
(a) As security for Borrower's obligations under this Agreement and the
Mortgage Notes, including, without limitation, its obligations to pay to the
Issuer the amounts payable under the Mortgage Notes and under this Agreement,
and the performance of all of its representations, warranties, covenants,
agreements and obligations under this Agreement and under the Mortgage Notes,
Borrower hereby expressly grants to Issuer for the benefit of Financial Security
and the Trustee, as secured parties, a first priority interest in and to all of
Borrower's right, title and interest in (i) the cash deposited with the
Collateral Agent pursuant to this Agreement, (ii) all Defeasance Eligible
Investments, (iii) the Accounts (as defined in the Collateral Assignment
Agreement) and any amounts deposited therein, and (iv) proceeds thereof, all
additions to and substitutions therefor, all proceeds and collections derived
from or in connection therewith, together with all investments made with such
proceeds and collections and all proceeds thereof and all powers and rights of
Borrower, including rights of enforcement thereunder (collectively, the
"Borrower Collateral").
Borrower intends such grant to be prior to all others to the full
extent of applicable law and shall take all actions reasonably necessary to
confer a first priority perfected security interest in the Borrower Collateral
granted hereunder. It is the intention of Borrower that, with respect to the
Borrower Collateral, this Agreement shall constitute a security agreement under
applicable law, and the Issuer shall have all of the rights and remedies of a
secured party and creditor under the UCC and other applicable law as in force in
the relevant jurisdictions.
The Borrower and the Issuer hereby agree that the Collateral Agent
shall accept Delivery of the Borrower Collateral on behalf of the Issuer and
that the Issuer has pledged and assigned all of its right, title and interest in
the Borrower Collateral to the Collateral Agent, for the benefit of Financial
Security and the Trustee, pursuant to the Collateral Assignment Agreement.
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<PAGE>
(b) On the Defeasance Date, Borrower shall deposit with the Collateral
Agent, for the benefit of the Issuer, $73,105,326 in immediately available
funds. The Collateral Agent will accept such funds and will use such funds,
together with cash held in the name of the Borrower already on deposit in the
Accounts (as defined in the Collateral Assignment Agreement) after liquidation
of all Eligible Investments therein held in the name of the Borrower (other than
existing Defeasance Eligible Investments), to purchase the Defeasance Eligible
Investments listed on Exhibit A hereto.
(c) The Issuer and the Borrower agree as follows with respect to the
Defeasance Eligible Investments, and the proceeds thereof, held by the
Collateral Agent from time to time in the Prepayment Account pursuant to the
Collateral Assignment Agreement:
(i) any Defeasance Eligible Investment that is held in deposit
accounts shall be made in the name of the Collateral Agent and shall be
subject to the exclusive custody and control of the Collateral Agent,
and the Collateral Agent shall have sole signature authority with
respect thereto;
(ii) any Defeasance Eligible Investment that constitutes
Physical Property (as defined in the definition of Delivery) shall be
delivered to the Collateral Agent in accordance with paragraph (i) of
the definition of "Delivery" and shall be held, pending maturity or
disposition, solely by the Collateral Agent or a securities
intermediary (as such term is defined in Section 8-102(a)(14) of the
UCC) acting solely for the Collateral Agent;
(iii) any Defeasance Eligible Investment that is a book-entry
security held through the Federal Reserve System pursuant to federal
book-entry regulations shall be delivered in accordance with paragraph
(ii) of the definition of "Delivery" and shall be maintained by the
Collateral Agent, pending maturity or disposition, through continued
book-entry registration of such Defeasance Eligible Investment as
described in such paragraph; and
(iv) any Defeasance Eligible Investment that is an
"uncertificated security" under Article 8 of the UCC and that is not
governed by clause (iii) above shall be delivered to the Collateral
Agent in accordance with paragraph (iii) of the definition of
"Delivery" and shall be maintained by the Collateral Agent, pending
maturity or disposition, through continued registration of the
Collateral Agent's (or its nominee's) ownership of such security
directly or through one or more securities intermediaries.
(d) In the event of any change of law regarding matters relating to the
perfection of security interests in any Account, the amounts or any Defeasance
Eligible Investments held therein, Borrower shall cause to be furnished to the
Collateral Agent, the Trustee and Financial Security an opinion of counsel, in
form and substance satisfactory to Financial Security, addressing such matters,
and, if necessary, Borrower shall cooperate with the Collateral Agent in taking
all actions necessary to comply with the change in law.
(e) Borrower hereby represents, warrants and covenants as follows:
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<PAGE>
(i) GOOD TITLE; ABSENCE OF LIENS; SECURITY INTEREST. Borrower
is the owner of, and has good and marketable title to, the Borrower
Collateral free and clear of all liens (other than the lien of the
secured parties hereunder) and has full right, corporate power and
lawful authority to assign, transfer and pledge the Borrower Collateral
(and any documents which are a part thereof) and all such substitutions
therefor and additions thereto delivered hereunder. Pursuant to the
Collateral Assignment Agreement, the Collateral Agent has a valid and
perfected first priority security interest in the Borrower Collateral
free and clear of all liens.
(ii) SOLVENT ENTITY. After giving effect to the defeasance of
the Mortgage Notes, Borrower will have sufficient capital to pay its
debts as they become due. Borrower is not engaged in any business, or
about to engage in any business or any transaction, for which it has,
or will have after engaging in such business or transaction,
unreasonably small capital in relation to such business or transaction.
Borrower does not intend to incur, or believe that it will incur,
additional debts that would be beyond its ability to pay as such debts
become due.
(iii) NO INTENT TO DEFRAUD. Borrower has valid business
reasons for entering into the transactions contemplated by the
defeasance and has not entered into the transactions contemplated by
the defeasance or this Loan Agreement with any intent to hinder, delay
or defraud any entity to which Borrower is or may become indebted.
(iv) PROHIBITED ACTIONS. Borrower covenants that it will not
take any actions with respect to the Borrower Collateral or otherwise
that the Issuer is prohibited from taking pursuant to Section 3.01 of
the Collateral Assignment Agreement.
(e) "Delivery," when used with respect to any Defeasance Eligible
Investments, means:
(i) with respect to bankers' acceptances, commercial paper,
negotiable certificates of deposit and other obligations that
constitute "instruments" within the meaning of Section 9-105(1)(i) of
the UCC and are susceptible of physical delivery, transfer thereof by
physical delivery to the Collateral Agent endorsed to, or registered in
the name of, the Collateral Agent or its nominee or endorsed to, or
registered in the name of, the Collateral Agent or its nominee or
endorsed in blank, and, with respect to a certificated security (as
defined in Section 8-102 of the UCC) transfer thereof (A) by delivery
of such certificated security to the Collateral Agent in accordance
with the provisions of Section 8-301(a) of the UCC, and such additional
or alternative procedures as may hereafter become appropriate to effect
the complete transfer of ownership of or a security interest in any
such Defeasance Eligible Investment to the Collateral Agent, consistent
with changes in applicable law or regulations or the interpretation
thereof;
(ii) with respect to any security issued by the U.S. Treasury,
the Federal Home Loan Mortgage Corporation or the Federal National
Mortgage Association that is a book-entry security held through the
Federal Reserve System pursuant to federal book-entry regulations, the
following procedures, all in accordance with applicable law,
5
<PAGE>
including applicable federal regulations and Articles 8 and 9 of the
UCC; the crediting of such Defeasance Eligible Investment to a
securities account maintained with a Federal Reserve Bank by a
securities intermediary; the indication by such securities intermediary
that such Defeasance Eligible Investment has been credited to the
Collateral Agent's securities account at the securities intermediary;
and such additional or alternative procedures as may hereafter become
appropriate to effect complete transfer of ownership of or a security
interest in any such Defeasance Eligible Investment to the Collateral
Agent, consistent with changes in applicable law or regulations or the
interpretation thereof; and
(iii) with respect to any Defeasance Eligible Investment that
is an uncertificated security under Article 8 of the UCC and that is
not governed by clause (ii) above, registration on the books and
records of the issuer thereof in the name of the Collateral Agent or
another Person (other than a "securities intermediary" (as defined in
Section 8-102(a)(4) of the UCC)) acting on behalf of the Collateral
Agent.
10. This Amendment may be executed in counterparts and by different
parties hereto in separate counterparts, each of which when so executed and
delivered shall be deemed to be an original and all of which taken together
shall constitute but one and the same instrument.
11. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
12. This Amendment shall be construed in connection with, and as part
of, the Existing Loan Agreement. The terms, conditions, representations,
warranties, covenants, agreements, rights, remedies, powers and privileges set
forth in the Existing Loan Agreement, as amended or otherwise modified hereby,
are hereby confirmed in all respects by the parties hereto and shall continue in
full force and effect.
13. Each reference to the Loan Agreement, or words of similar import in
the Existing Loan Agreement or any notice, communication, certificate,
instrument or other document executed and delivered in connection therewith
after the date hereof shall be deemed to be a reference to the Existing Loan
Agreement, as amended, supplemented and otherwise modified hereby, and, as the
same may be amended, supplemented or otherwise modified from time to time after
the date hereof, unless the context requires otherwise.
14. This Amendment shall be binding upon, shall inure to the benefit
of, and shall be enforceable by, the parties hereto and their respective
successors and permitted assigns.
15. Any provision of this Amendment which is prohibited or
unenforceable in any jurisdiction shall be, as to such jurisdiction, ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions of this Amendment, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to Loan Agreement to be executed effective as of the date first above
written.
SECURED RESTAURANTS TRUST
By Wilmington Trust Company, not in its
individual capacity, but solely as Issuer Trustee
By /s/ Mary St. Amand
Mary St. Amand
Assistant Vice President
QUINCY'S REALTY, INC.
By /s/ Kenneth E. Jones
Kenneth E. Jones
Vice President and Treasurer
<PAGE>
The following parties consent to the execution of the Second Amendment
to Loan Agreement in accordance with the terms of this Amendment.
FINANCIAL SECURITY ASSURANCE INC.
By /s/ Bruce E. Stern
Bruce E. Stern
General Counsel and Managing Director
THE BANK OF NEW YORK, as Trustee and
Collateral Agent
By /s/ Sandra Carreker
Sandra Carreker
Title Agent
<PAGE>
Exhibit 10.49
EXECUTION COPY
ASSIGNMENT AND ASSUMPTION AGREEMENT
This Assignment and Assumption Agreement is made and entered into as of
the 1st day of April, 1998, by and between Spardee's Realty, Inc., an Alabama
corporation (the "Assignor"), and Quincy's Realty, Inc., an Alabama corporation
(the "Assignee").
Reference is made to that certain Loan Agreement, dated as of November
1, 1990, between the Assignor, as borrower, and Secured Restaurants Trust (the
"Issuer") in the original principal amount of One Hundred Thirty Million Dollars
($130,000,000) (as amended as of the date hereof, the "Spardee's Loan
Agreement"). Capitalized terms used herein and not otherwise defined shall have
the meanings assigned to them in the Spardee's Loan Agreement. The Spardee's
Loan Agreement was entered into concurrently with that certain Loan Agreement,
dated as November 1, 1990, between Assignee, as borrower, and the Issuer, in the
original principal amount of Ninety-Five Million Dollars ($95,000,000) (as
amended as of the date hereof, the "Quincy's Loan Agreement", and collectively
with the Spardee's Loan Agreement, the "Loan Agreements"), and certain other
agreements and instruments relating to the Loan Agreements (the "SRT Financing
Documents").
Reference is also made to the Stock Purchase Agreement dated February
18, 1998 among Advantica Restaurant Group, Inc. ("Advantica"), Spartan Holdings,
Inc. ("Spartan"), Flagstar Enterprises, Inc. ("FEI"), and CKE Restaurants, Inc.
("Purchase Agreement") pursuant to which Spartan has this day sold to CKE
Restaurants, Inc. (the "Buyer") the stock of FEI (the "FEI Stock Sale"). The
Assignor is the wholly owned subsidiary of FEI. Under the provisions of the
Purchase Agreement, Advantica and Spartan are required, among other things, as
applicable, to deliver to Buyer evidence of the release of FEI and the Assignor
and their assets from any obligations and liens relating to the SRT Financing
Documents.
Concurrently with the closing of the FEI Stock Sale (the "Closing") and
in order to effect the release of certain obligations and liens relating to the
SRT Financing Documents in connection therewith, Advantica, Spartan, the
Assignor and the Assignee, together with the other requisite parties to the SRT
Financing Documents, have undertaken to effect a defeasance of the Mortgage
Notes underlying the Loan Agreements in accordance with the terms of such Loan
Agreements (and certain waivers, consents, and directions from the Controlling
Party provided pursuant to the terms and provisions of the SRT Financing
Documents) (the "Defeasance Transaction"). As a result of the Defeasance
Transaction, among other things, FEI and the Assignor and their assets shall be
released from any obligations and liens relating to the SRT Financing Documents,
and the other Collateral under the Collateral Assignment Agreement (other than
the Borrower Collateral (as defined in the Second Amendment to the Loan
Agreement)) shall be released from any lien, security interest or encumbrance,
charge or other claim of any kind, character or nature whatsoever securing,
arising out of or in any way connected with or relating to the SRT Financing
Documents.
<PAGE>
In order to effect such Defeasance Transaction and the release of FEI
and the Assignor in connection therewith, Assignee is required to (a) assume all
of the obligations and take an assignment of the rights of Assignor under the
Spardee's Loan Agreement and the Mortgage Notes thereunder and (b) take an
assignment of all amounts held (including all cash, Eligible Investments and
Defeasance Eligible Investments already on deposit with the Collateral Agent) by
the Collateral Agent in the name of Assignor in the Accounts (as defined in the
Collateral Assignment Agreement) (the "Spardee's Reserve Amount"). Concurrently
with the execution and delivery of this Assignment and Assumption Agreement, and
the consummation of the FEI Stock Sale, Assignee shall also receive a portion of
the proceeds of the FEI Stock Sale to be used for the purchase of Defeasance
Eligible Investments sufficient, together with the (i) Spardee's Reserve Amount,
and (ii) all amounts (including all cash, Eligible Investments (to be liquidated
in connection herewith) and Defeasance Eligible Investments already on deposit
with the Collateral Agent) held by the Collateral Agent in the name of Assignee
in the Accounts, and application of all such cash and Eligible Investments
described in (i) and (ii) to purchase Defeasance Eligible Investments to effect
the Defeasance Transaction.
In consideration of the foregoing, the Assignor hereby transfers and
assigns to Assignee all of Assignor's right, title and interest in and to the
Spardee's Loan Agreement and the Mortgage Notes thereunder and any related Loan
Documents, as applicable, and all of Assignor's right, title and interest in and
to the Spardee's Reserve Amount, and Assignee hereby assumes all liabilities and
obligations and agrees to perform and discharge each and all obligations of
Assignor under the Spardee's Loan Agreement and the Mortgage Notes thereunder
and any related Loan Documents, as applicable, and in respect of the Spardee's
Reserve Amount, when and as the same become due.
This Assignment and Assumption Agreement shall automatically become
effective, without any further action of the undersigned required, upon the
occurrence of the Closing. In the event that the Closing does not occur and the
Purchase Agreement is terminated for any reason, this Assignment and Assumption
Agreement shall have no force or effect and shall automatically be extinguished
and terminated as a result of the termination of the Purchase Agreement.
IN WITNESS WHEREOF, each party has caused this Assignment and
Assumption Agreement to be executed in its corporate name as of the day and year
first above written.
SPARDEE'S REALTY, INC.
By:____________________________________
Title: Vice President and Treasurer
QUINCY'S REALTY, INC.
By:____________________________________
Title: Vice President and Treasurer
<PAGE>
<PAGE>
Exhibit 10.50
EXECUTION COPY
FIRST AMENDMENT TO STOCK PLEDGE AGREEMENT
This FIRST AMENDMENT TO STOCK PLEDGE AGREEMENT, dated as of April 1,
1998 (this "Amendment"), to that certain Stock Pledge Agreement dated as of
November 1, 1990 (the "Existing Agreement") among QUINCY'S RESTAURANTS, INC., an
Alabama corporation ("Pledgor") and SECURED RESTAURANTS TRUST, a Delaware
statutory business trust ("Issuer") existing pursuant to an Amended and Restated
Trust Agreement dated as of October 15, 1990.
RECITALS
A. All capitalized terms used herein and not otherwise defined shall have the
same meanings as set forth in the Existing Agreement. The Existing Agreement, as
amended by this Amendment, is referred to as this "Pledge Agreement."
B. In consideration of Financial Security Assurance Inc., a New York stock
insurance company ("Financial Security") giving its consent to an in-substance
defeasance of mortgage notes made by affiliates of Pledgor, Pledgor and Issuer
desire to amend the Existing Agreement as set forth below.
AGREEMENTS
NOW, THEREFORE, for and in consideration of the mutual promises and
agreements set forth herein, the parties hereto, intending to be legally bound,
agree as follows:
1. Because the Guaranty and the Leases are being terminated, Section 6
of the Existing Agreement is amended to read as follows: "The occurrence of any
one or more (a) Events of Default under (i) the Loan Agreement dated as of
November 1, 1990 between the Pledged Entity and the Issuer, as amended by
Amendment No. 1 thereto dated as of November 1, 1991 and Amendment No. 2 thereto
dated as of April 1, 1998, (ii) the Loan Agreement dated as of November 1, 1990
between Spardee's Realty, Inc. ("Spardee's") and the Issuer as amended by
Amendment No. 1 thereto dated as of November 1, 1991 and Amendment No. 2 thereto
dated as of April 1, 1998 (each of (i) and (ii) are a "Loan Agreement"), (iii)
any Mortgage Note (as defined in either Loan Agreement), or (iv) this Pledge
Agreement shall constitute an Event of Default hereunder.
2. Because the Guaranty and the Leases are being terminated, Section 9
of the Existing Agreement is amended to provide for certain restrictions to be
set forth in this Pledge Agreement and shall provide as follows: "Pledgor agrees
it shall not cause the Pledged Entity to declare or make payment of (i) any
dividend or other distribution on any shares of its capital stock, including
without limitation any dividends payable in cash or other assets or (ii) any
payment on account of the purchase, redemption, retirement or acquisition of any
option, warrant
<PAGE>
or other right to acquire shares of stock of the Pledged Entity. If the Pledged
Entity declares or makes any such dividend, it shall be an "Event of Default"
under this Pledge Agreement."
3. Section 24 of the Existing Agreement is amended to read as follows:
"This Pledge Agreement shall terminate when the "Substitution" occurs. The
"Substitution" shall occur when certain conditions precedent thereto, as set
forth in a Letter Agreement dated as of April 1, 1998, between Financial
Security, the Pledgor, the Pledged Entity and Advantica Restaurants Group Inc.,
are satisfied and the Release (as defined in such Letter Agreement) occurs.
4. Because the Guaranty and the Leases are being terminated, the
following Sections are added to the Existing Agreement.
Section 27 Voting Proxy. Pledgor hereby grants to the
Collateral Agent for the benefit of Financial Security an irrevocable
proxy to vote the Pledged Stock with respect to the dissolution,
insolvency, liquidation, consolidation, merger, sale of assets,
transfer of shares or amendment of the certificate of incorporation or
the bylaws of the Pledged Entity, which proxy is coupled with an
interest and shall continue until this Pledge Agreement terminates.
Pledgor represents and warrants that it has directed the Pledged Entity
to reflect the Collateral Agent's right to vote the Pledged Stock, on
behalf of Financial Security, on the Pledged Entity's books. Upon the
request of the Collateral Agent or Financial Security, Pledgor shall
deliver to the Collateral Agent such further evidence of such
irrevocable proxy or such further irrevocable proxy to vote the
Collateral as the Collateral Agent or Financial Security may reasonably
request. Any violation of this Section shall constitute an Event of
Default under this Pledge Agreement.
Section 28 Third-Party Beneficiary. Financial Security shall
be a third-party beneficiary of this Pledge Agreement and entitled to
enforce the provisions hereof directly, as if a party hereto.
5. This Amendment may be executed in counterparts and by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be deemed to be an original and all of which taken together shall
constitute but one and the same instrument.
6. This Amendment shall be construed in connection with, and as part
of, the Existing Agreement. The terms, conditions, representations, warranties,
covenants, agreements, rights, remedies, powers and privileges set forth in the
Existing Agreement, as amended or otherwise modified hereby, are hereby
confirmed in all respects by the parties hereto and shall continue in full force
and effect.
7. Each reference to the Pledge Agreement, or words of similar import
in the Existing Agreement or any notice, communication, certificate, instrument
or other document executed and delivered in connection therewith after the date
hereof shall be deemed to be a reference to the Existing Agreement, as amended,
supplemented and otherwise modified hereby, and, as the same may be amended,
supplemented or otherwise modified from time to time after the date hereof,
unless the context requires otherwise.
2
<PAGE>
8. This Amendment shall be binding upon, shall inure to the benefit of,
and shall be enforceable by, the parties hereto and their respective successors
and permitted assigns.
9. Any provision of this Amendment which is prohibited or unenforceable
in any jurisdiction shall be, as to such jurisdiction, ineffective to the extent
of such prohibition or unenforceability without invalidating the remaining
provisions of this Amendment, and any such prohibition or unenforceability in
any jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to Stock Pledge Agreement to be executed effective as of the date first above
written.
SECURED RESTAURANTS TRUST
By Wilmington Trust Company, not in its
individual capacity, but solely as Issuer Trustee
By /s/ Mary St. Amand
Mary St. Amand
Assistant Vice President
QUINCY'S RESTAURANTS, INC.
By /s/ Kenneth E. Jones
Kenneth E. Jones
Vice President and Treasurer
<PAGE>
The following parties consent to the First Amendment to Stock Pledge
Agreement in accordance with the terms of this Amendment.
FINANCIAL SECURITY ASSURANCE INC.
By /s/ Bruce E. Stern
Bruce E. Stern
General Counsel and Managing Director
THE BANK OF NEW YORK, as Collateral Agent
By /s/ Sandra Carreker
Sandra Carreker
Title Agent
Exhibit 10.51
EXECUTION COPY
FIRST AMENDMENT TO
COLLATERAL ASSIGNMENT AGREEMENT
Among
SECURED RESTAURANTS TRUST,
FINANCIAL SECURITY ASSURANCE INC.
and
THE BANK OF NEW YORK,
as Trustee and Collateral Agent.
Dated as of April 1, 1998
<PAGE>
FIRST AMENDMENT TO
COLLATERAL ASSIGNMENT AGREEMENT
THIS FIRST AMENDMENT TO COLLATERAL ASSIGNMENT AGREEMENT (this
"Amendment") is dated as of April 1, 1998 among SECURED RESTAURANTS TRUST, a
Delaware statutory business trust (the "Issuer") existing pursuant to the
Amended and Restated Trust Agreement dated as of October 15, 1990 between
Spartan Holdings, Inc. and Wilmington Trust Company, FINANCIAL SECURITY
ASSURANCE INC. ("Financial Security") and THE BANK OF NEW YORK, as Trustee under
the Indenture (in such capacity, the "Trustee") and as Collateral Agent
hereunder (in such capacity, the "Collateral Agent").
This Amendment amends and supplements the Collateral Assignment
Agreement, dated as of November 1, 1990, among the Issuer, Financial Security
and The Citizens and Southern National Bank of South Carolina, as Trustee and
Collateral Agent (as succeeded in such capacities by The Bank of New York) (the
"Original Agreement," and as amended by this Amendment, the "Collateral
Assignment Agreement"), as set forth below.
Terms used in this Amendment and not otherwise defined in this
Amendment have the meanings assigned to such terms in the Original Agreement.
RECITALS
A. The Issuer has entered into separate Loan Agreements with Quincy's
Realty, Inc. ("Quincy's") and Spardee's Realty Inc. ("Spardee's") pursuant to
which the Issuer made a Loan to each of Quincy's and Spardee's, which Loans were
in the aggregate initial outstanding principal amount of $225,000,000.
B. Each of Quincy's and Spardee's owned its Properties and executed and
delivered to the Issuer certain Mortgage Notes to evidence its borrowings
pursuant to the related Loan Agreement.
C. As security for its obligations under the related Loan Agreement and
its Mortgage Notes, each of Quincy's and Spardee's executed and delivered to the
Issuer one or more Mortgages and certain other Collateral.
D. In order to obtain sufficient funds for the making of the Loans, the
Issuer issued Bonds in the initial aggregate principal amount of $225,000,000
pursuant to the Indenture between the Issuer and the Trustee.
E. Financial Security issued its Policy, under which Financial Security
has guaranteed the scheduled payment of interest and principal payable on the
Bonds.
F. As an inducement to Financial Security to issue and deliver the
Policy and the Liquidity Policy, the Issuer and Financial Security executed and
delivered the Insurance Agreement.
<PAGE>
G. As additional inducement to Financial Security to issue the Policy
and the Liquidity Policy and to execute the Insurance Agreement, and as security
for the repayment of all sums paid by Financial Security under the Policy and
the Liquidity Policy and the payment and performance by the Issuer of all of its
obligations then or thereafter existing under the Insurance Agreement, pursuant
to the Original Agreement, the Issuer assigned certain of its property as
Collateral to the Collateral Agent, as agent for (i) Financial Security and (ii)
the Trustee, as trustee for the holders of the Bonds, as the interests of
Financial Security and the Trustee may appear, upon the terms and conditions set
forth in the Original Agreement.
H. Quincy's and Spardee's now desire to defease the Mortgage Notes by
causing the deposit with the Collateral Agent of Defeasance Eligible Investments
and cash sufficient to pay the principal of and interest on each Mortgage Note
as the same becomes due.
I. On the date of this Amendment, pursuant to an Assignment and
Assumption Agreement, made as of April 1, 1998 by and between Spardee's and
Quincy's (the "Assignment and Assumption Agreement") Spardee's has assigned to
Quincy's, and Quincy's has assumed, all obligations and liabilities of Spardee's
under the Spardee's Loan Agreement and under the related Mortgage Notes, and, as
consideration for such assumption by Quincy's, there has been delivered to
Quincy's by or on behalf of Spardee's immediately available funds sufficient to
purchase Defeasance Eligible Investments to defease the Spardee's Mortgage
Notes.
J. On the Defeasance Date, Quincy's shall deliver to the Collateral
Agent immediately available funds which, together with funds on deposit in the
Accounts, after liquidation of all Eligible Investments held therein (other than
existing Defeasance Eligible Investments), shall be sufficient to purchase
Defeasance Eligible Investments, which together with the Defeasance Eligible
Investments currently held by the Collateral Agent, are sufficient to defease
all remaining payments due under the Mortgage Notes.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
SECTION 1. DEFINITIONS. The following capitalized terms have the
meanings set forth below for purposes of the Collateral Assignment Agreement.
"BORROWER" or "BORROWERS" means Quincy, both in its capacity as one of
the original Borrowers (as defined in the Original Agreement) and as assignee of
Spardee's obligations as one of the original Borrowers (as defined in the
Original Agreement).
"BORROWER COLLATERAL" has the meaning set forth in the Loan Agreements,
as amended.
"CHASE LETTER OF CREDIT" has the meaning set forth in Section 6(c) of
this Amendment.
"COLLATERAL" means Collateral (as defined in the Original Agreement, as
amended by this Amendment) and the Borrower Collateral.
"COLLATERAL ASSIGNMENT AGREEMENT" means the Original Agreement, as
amended by this Amendment.
2
<PAGE>
"DEFEASANCE DATE" means April 1, 1998.
"DELIVERY," when used with respect to any Defeasance Eligible
Investments, means:
(i) with respect to bankers' acceptances, commercial paper,
negotiable certificates of deposit and other obligations that
constitute "instruments" within the meaning of Section 9-105(1)(i) of
the UCC and are susceptible of physical delivery, transfer thereof by
physical delivery to the Collateral Agent endorsed to, or registered in
the name of, the Collateral Agent or its nominee or endorsed in blank,
and, with respect to a certificated security (as defined in Section
8-102 of the UCC) transfer thereof (A) by delivery of such certificated
security to the Collateral Agent in accordance with the provisions of
Section 8-301(a) of the UCC, and such additional or alternative
procedures as may hereafter become appropriate to effect the complete
transfer of ownership of or a security interest in any such Defeasance
Eligible Investment to the Collateral Agent, consistent with changes in
applicable law or regulations or the interpretation thereof;
(ii) with respect to any security issued by the U.S. Treasury,
the Federal Home Loan Mortgage Corporation or the Federal National
Mortgage Association that is a book-entry security held through the
Federal Reserve System pursuant to federal book-entry regulations, the
following procedures, all in accordance with applicable law, including
applicable federal regulations and Articles 8 and 9 of the UCC; the
crediting of such Defeasance Eligible Investment to a securities
account maintained with a Federal Reserve Bank by a securities
intermediary; the indication by such securities intermediary that such
Defeasance Eligible Investment has been credited to the Collateral
Agent's securities account at the securities intermediary; and such
additional or alternative procedures as may hereafter become
appropriate to effect complete transfer of ownership of or a security
interest in any such Defeasance Eligible Investment to the Collateral
Agent, consistent with changes in applicable law or regulations or the
interpretation thereof; and
(iii) with respect to any Defeasance Eligible Investment that
is an uncertificated security under Article 8 of the UCC and that is
not governed by clause (ii) above, registration on the books and
records of the issuer thereof in the name of the Collateral Agent or
another Person (other than a "securities intermediary" (as defined in
Section 8-102(a)(4) of the UCC)) acting on behalf of the Trustee.
"STOCK PLEDGE" means the Stock Pledge Agreement, dated as of November
1, 1990, among Quincy's Restaurants, Inc. and the Issuer, as amended by the
First Amendment to Stock Pledge Agreement, dated as of April 1, 1998, and any
further amendments thereto.
SECTION 2. SECURITY AGREEMENTS.
(a) Section 2.01(a) of the Original Agreement is hereby
amended by adding the word "and" at the end of subsection (vi) and
adding the following new subsection (vii) thereto:
"(vii) the Borrower Collateral."
3
<PAGE>
(b) The Issuer hereby restates and confirms the provisions set
forth in the first paragraph of Section 2.01 of the Original Agreement
with respect to the granting of a security interest in the Collateral
(as amended by this Agreement) and hereby collaterally assigns,
transfers, sets over, pledges and conveys to the Collateral Agent, as
agent for Financial Security and the Trustee, as trustee for the
holders of the Bonds, and their respective successors and assigns, as
the interests of Financial Security and the Trustee may appear, all of
the right, title, interest and estate of the Issuer, whether now or
hereafter acquired in, to and under the Collateral (as such term is
defined in the Original Collateral Agreement, as amended by this
Amendment).
(c) Section 2.01 of the Original Agreement is hereby further
amended by adding the following new subsections thereto:
"(c) As of the date hereof, Quincy's has deposited
with the Collateral Agent $173,144,195 in immediately
available funds. The Collateral Agent hereby accepts such
funds and will use such funds, together with all funds on
deposit in the Accounts, after liquidation of all Eligible
Investments held in or credited to the Accounts (other than
any existing Defeasance Eligible Investments), to purchase the
Defeasance Eligible Securities listed on Exhibit A attached
hereto.
(d) The Collateral Agent agrees as follows with
respect to the Defeasance Eligible Investments, and the
proceeds thereof, held from time to time in the Prepayment
Account:
(i) any Defeasance Eligible Investment that
is held in deposit accounts shall be made in the name
of the Collateral Agent and shall be subject to the
exclusive custody and control of the Collateral
Agent, and the Collateral Agent shall have sole
signature authority with respect thereto;
(ii) any Defeasance Eligible Investment that
constitutes Physical Property (as defined in the
definition of Delivery) shall be delivered to the
Collateral Agent in accordance with paragraph (i) of
the definition of "Delivery" and shall be held,
pending maturity or disposition, solely by the
Collateral Agent or a securities intermediary (as
such term is defined in Section 8-102(a)(14) of the
UCC) acting solely for the Collateral Agent;
(iii) any Defeasance Eligible Investment
that is a book-entry security held through the
Federal Reserve System pursuant to federal book-entry
regulations shall be delivered in accordance with
paragraph (ii) of the definition of "Delivery" and
shall be maintained by the Collateral Agent, pending
maturity or disposition, through continued book-entry
registration of such Defeasance Eligible Investment
as described in such paragraph; and
4
<PAGE>
(iv) any Defeasance Eligible Investment that
is an "uncertificated security" under Article 8 of
the UCC and that is not governed by clause (iii)
above shall be delivered to the Collateral Agent in
accordance with paragraph (iii) of the definition of
"Delivery" and shall be maintained by the Collateral
Agent, pending maturity or disposition, through
continued registration of the Collateral Agent's (or
its nominee's) ownership of such security directly or
through one or more securities intermediaries."
SECTION 3. REPRESENTATIONS AND WARRANTIES.
(a) The Issuer hereby confirms that, as of the Defeasance
Date, its representations and warranties set forth in Section 3.01, of
the Original Agreement are true and correct with respect to this
Collateral Assignment Agreement.
(b) The Collateral Agent hereby confirms that, as of the
Defeasance Date, its representations and warranties set forth in
Section 3.04(b), (c), (d), (e) and (f) of the Original Agreement are
true and correct with respect to this Collateral Assignment Agreement
and hereby makes the following representation:
"The Collateral Agent is a state banking corporation
organized and existing under the laws of the State of
New York; and is duly qualified to do business, is in
good standing and has obtained all necessary
licenses, permits, charters, registrations and
approvals (together, "approvals") necessary for their
performance of its obligations under this Agreement."
SECTION 4. DELETION OF PROVISIONS. The Original Agreement is hereby
amended by deleting the following Sections thereof: Section 3.02, Sections
4.02(f) and (g) and Sections 4.10(a), (c), (d), (e), (f), (g) and (i). Section
4.10(h) of the Original Agreement is hereby amended and restated to provide as
follows:
"The Borrower or the Issuer will deliver to the Collateral Agent, and
the Collateral Agent shall maintain on file, copies of all financing
statements required to be prepared by the Controlling Party."
SECTION 5. COLLECTIONS AND ACCOUNTS.
(a) Section 6.02(f) of the Original Agreement is hereby
amended and restated in its entirety to provide as follows:
"The Collateral Agent will deposit the proceeds of
any drawing under the Chase Letter of Credit in the
Collection Account and apply such funds solely as
directed by Financial Security."
(b) Section 6.02(g) of the Original Agreement is amended and
restated to provide as follows:
5
<PAGE>
"(g) Within the Prepayment Account, the Collateral
Agent shall maintain a Defeasance Collateral Subaccount and
shall deposit in and maintain within such subaccount the
Defeasance Eligible Investments delivered by, or purchased
with cash by the Collateral Agent at the direction of the
Issuer in connection with the defeasance of the Mortgage
Notes. Prior to their maturity, such Defeasance Eligible
Investments shall not be liquidated or otherwise transferred
to the Mortgage Payment Account or any other Account and shall
be used solely to make payments due and payable on the Bonds,
or otherwise in accordance with the Collateral Assignment
Agreement. All payments and collections on the Defeasance
Eligible Investments will be deposited in the Prepayment
Account on the day of receipt."
(c) Section 6.03(i) of the Original Agreement is hereby
amended and restated to provide as follows:
"(i) by 10:00 on each Payment Date, the Collateral
Agent shall transfer from the Prepayment Account to the
Mortgage Payment Account funds equal to the aggregate amount
of principal and interest due on the Bonds on such Payment
Date;"
Sections 6.03(ii), (iii) and (iv) of the Original
Agreement are hereby deleted in their entirety.
(d) Sections 6.03(v) and (vi) of the Original Agreement are
hereby amended and restated to provide as follows:
"(v) by 10:30 a.m. on each Payment Date, moneys on
deposit in the Mortgage Payment Account shall be applied first
as set forth in Section 6.04(a), and then as set forth in
Section 6.04(c) below;
(vi) by 11:00 a.m. on each Payment Date, moneys on
deposit in the Mortgage Payment Account shall be applied as
set forth in Section 6.04(d) below;"
(e) Sections 6.03(vii), (viii), (ix), (x), (xi), (xii),
(xiii), (xiv), (xv), (xvi) and (xvii) are hereby deleted in their
entirety.
(f) Sections 6.04(b), (e), (f), (g), (j), (k) and (l) and
Section 6.06 of the Original Agreement are hereby deleted in their
entirety.
(g) Section 6.08(a) of the Original Agreement is hereby
deleted in its entirety.
SECTION 6. MISCELLANEOUS.
(a) Section 7.08 of the Original Agreement is hereby amended
and restated to provide as follows:
6
<PAGE>
"Section 7.08. NOTICES. All demands, notices and
other communications to be given hereunder shall be in writing
(except as otherwise specifically provided herein) and shall
be mailed by overnight delivery or personally delivered or
telecopied to the recipient as follows:
<TABLE>
<CAPTION>
<S> <C>
(b) To Financial Security: Financial Security Assurance Inc.
350 Park Avenue
New York, NY 10022
Attention: Surveillance Department
Telephone: (212) 826-0100
Facsimile Nos.: (212) 339-3518
(212) 339-3527
(in each case in which notice or other
communication to Financial Security refers
to a Security Event, Event of Default, a
claim on the Policy or with respect to which
failure on the part of Financial Security to
respond shall be deemed to constitute
consent or acceptance, then a copy of such
notice or other communication should also be
sent to the attention of each of the General
Counsel and the Head-Financial Guaranty
Group and shall be marked to indicate
"URGENT MATERIAL ENCLOSED.")
(c) To the Issuer: Secured Restaurants Trust
Wilmington Trust Company
Rodney Square North
Wilmington, DE 19890
Attention: Corporate Trust
Administration
Telephone No.: (302) 651-1284
Telex No.: 835437
Answer Back: WILM-TR
Facsimile No.: (302) 651-1576
with a copy to
the Manager: Advantica Restaurant Group, Inc.
203 East Main Street
Spartanburg, SC 29301
Attention: Legal Department
Telephone No.: (803) 596-8000
Facsimile No.: (803) 596-8327
7
<PAGE>
(d) To the Trustee: The Bank of New York
Towermarc Plaza
10161 Centurion Parkway
Jacksonville, FL 32256
Attention: Corporate Trust Department
Telephone No.: (904) 998-4700
Fax No.: (904) 645-1932
(e) To the Collateral
Agent: The Bank of New York
Towermarc Plaza
10161 Centurion Parkway
Jacksonville, FL 32256
Attention: Corporate Trust Department
Telephone No.: (904) 998-4700
Fax No.: (904) 645-1932
(f) To the Borrower: Quincy's Realty, Inc.
201 East Main Street
Spartanburg, SC 29301
Attention: Legal Department
Telephone No.: (803) 596-8000
Facsimile No.: (803) 596-8327
</TABLE>
A party may specify an additional or different
address or addresses by writing mailed or delivered to the
other parties as aforesaid. Except as may be otherwise
specified herein, all such notices and other communications
shall be effective two Business Days after being sent. Any
notice required to be given to any Non-Controlling Party shall
also be given to the Controlling Party."
(g) Notwithstanding any provision in the Original Agreement to
the contrary, each of the Collateral Agent and the Trustee acknowledges
and agrees that all of their fees and expenses due and payable on or
prior to the Defeasance Date, and fees due thereafter, have been paid
in full by or on behalf of Quincy's, and neither the Trustee nor the
Collateral Agent has any lien on the Collateral for payment thereof or
for any expenses incurred in connection with this Collateral Assignment
Agreement or the Indenture. Financial Security hereby agrees that if,
at the direction of Financial Security, the Collateral Agent takes any
action to enforce a Mortgage Note, a Loan Agreement, this Agreement or
takes action against the Borrower or its Properties, Financial Security
will reimburse the Collateral Agent for any reasonable expenses
incurred in connection with taking such actions. The Collateral Agent
agrees to assist with such actions described in the preceding sentence
as it is reasonably requested to take.
(h) On the Defeasance Date, Quincy's will deliver to the
Collateral Agent, to hold for the benefit of Financial Security, a
letter of credit having an aggregate available amount of $1 million
issued by The Chase Manhattan Bank (the "Chase Letter of Credit"). The
Collateral Agent will (i) hold the Chase Letter of Credit on behalf of
8
<PAGE>
Financial Security in accordance with the terms of this Collateral
Assignment Agreement (ii) make drawings thereunder, at the times and
for the amounts directed in writing by Financial Security, in
accordance with the terms of the Chase Letter of Credit, and (iii)
release such Chase Letter of Credit, only at the time and as directed
in writing by Financial Security. If the Collateral Agent receives
notice from The Chase Manhattan Bank that the Chase Letter of Credit
will expire and will not be automatically extended, the Collateral
Agent shall provide a copy of such notice to Financial Security within
two Business Days.
(i) This Amendment may be executed in counterparts and by
different parties hereto in separate counterparts, each of which when
so executed and delivered shall be deemed to be an original and all of
which taken together shall constitute but one and the same instrument.
(j) THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
(k) This Amendment shall be construed in connection with, and
as part of, the Original Agreement. The terms, conditions,
representations, warranties, covenants, agreements, rights, remedies,
powers and privileges set forth in the Original Agreement, as amended
or otherwise modified hereby, are hereby confirmed in all respects by
the parties hereto and shall continue in full force and effect.
(l) Each reference to the Collateral Assignment Agreement, or
words of similar import in the Original Agreement or any notice,
communication, certificate, instrument or other document executed and
delivered in connection therewith after the date hereof shall be deemed
to be a reference to the Original Agreement, as amended, supplemented
and otherwise modified hereby, and as the same may be amended,
supplemented or otherwise modified from time to time after the date
hereof, unless the context requires otherwise.
(m) This Amendment shall be binding upon, shall inure to the
benefit of, and shall be enforceable by, the parties hereto and their
respective successors and permitted assigns.
(n) Any provision of this Amendment which is prohibited or
unenforceable in any jurisdiction shall be, as to such jurisdiction,
ineffective to the extent of such prohibition or unenforceability
without invalidating the remaining provisions of this Amendment, and
any such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other
jurisdiction.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment to Collateral Assignment Agreement as of the date set forth on the
first page hereof.
SECURED RESTAURANTS TRUST
By Wilmington Trust Company, not in its
individual capacity but solely as Issuer Trustee
By /s/ Mary St. Amand
Mary St. Amand
Assistant Vice President
FINANCIAL SECURITY ASSURANCE INC.
By /s/ Bruce E. Stern
Bruce E. Stern
General Counsel and Managing Director
THE BANK OF NEW YORK, in its capacity as Trustee
By /s/ Sandra Carreker
Sandra Carreker
Title Agent
THE BANK OF NEW YORK, in its capacity as Collateral Agent
By /s/ Sandra Carreker
Sandra Carreker
Title Agent
10
<PAGE>
EXHIBIT A
DEFEASANCE ELIGIBLE INVESTMENTS
[List to be Attached]
<PAGE>
Exhibit 10.52
April 1, 1998
Advantica Restaurant Group, Inc.
203 East Main Street
Spartanburg, SC 29319
Quincy's Restaurants, Inc.
203 East Main Street
Spartanburg, SC 29319
Quincy's Realty, Inc.
203 East Main Street
Spartanburg, SC 29319
Ladies and Gentlemen:
This Letter Agreement (this "Agreement") sets forth the conditions
precedent to the following releases and terminations (collectively, the
"Release"): (a) release of the SPE LOC (defined below); (b) termination of the
Reimbursement Agreement, dated as of April 1, 1998 (the "Reimbursement
Agreement"), between Advantica Restaurant Group, Inc. ("Advantica") and
Financial Security Assurance Inc. ("Financial Security"); (c) termination of the
Stock Pledge Agreement, dated as of November 1, 1990 (the "Quincy's Stock Pledge
Agreement"), between Quincy's Restaurants, Inc. and Secured Restaurants Trust
(the "Issuer"), as amended, and (d) release of Quincy's Realty, Inc.
("Quincy's") from all obligations as Borrower under each of the two Loan
Agreements, each dated as of November 1, 1990, as amended, and the Mortgage
Notes thereunder. One Loan Agreement is between Quincy's and the Issuer.
Quincy's has assumed all of the obligations of Spardee's Realty, Inc. under the
second Loan Agreement, and the Mortgage Notes thereunder, pursuant to an
Assignment and Assumption Agreement, dated as of April 1, 1998. The two Loan
Agreements are referred to herein as the "Loan Agreements."
Capitalized terms used herein but not defined herein shall have the
meanings given to such terms in the Loan Agreements.
On the date hereof, Advantica will provide two letters of credit to or
for the benefit of Financial Security from The Chase Manhattan Bank. One letter
of credit (the "Overcollateralization LOC") will have an initial stated amount
of $1 million and shall be available to be drawn by the Collateral Agent for the
benefit of Financial Security (i) to pay any expenses associated with the
transaction contemplated to be paid by the Borrower pursuant to the Loan
Agreements, if the Defeasance Eligible Investments deposited with the Collateral
Agent are insufficient to pay such costs and expenses, including any amounts due
and payable on the
<PAGE>
Bonds, or (ii) if such letter of credit is not extended on each anniversary
hereof, to draw the full available amount prior to termination. Such
Overcollateralization LOC shall be returned for cancellation upon the return for
cancellation of the Policy. The second letter of credit (the "SPE LOC") shall
have an initial stated amount equal to $1 million and shall be drawable by
Financial Security in increments of $250,000 under the following circumstances.
If the SPE described below has not been formed and the Substitution (defined
below) and Release has not occurred by July 1, 1998, October 1, 1998, January 1,
1999 or April 1, 1999, Financial Security may make a drawing under the SPE LOC
on or after each such date for an amount equal to $250,000. The SPE LOC shall
not reinstate for any amount so drawn.
The conditions precedent consist of the following:
(i) Formation by Advantica of a single-purpose,
bankruptcy-remote entity (the "SPE") to be substituted for Quincy's as
the "Borrower" under the Loan Agreements and the Mortgage Notes (the
"Substitution"). The SPE shall meet all standard rating agency
requirements for special purpose entities in an "AAA/Aaa"rated
transactions, and Financial Security and its counsel shall have
reviewed the organizational documents of the SPE and confirmed that the
SPE is a single-purpose bankruptcy-remote entity;
(ii) The SPE shall have assumed in writing all obligations of
Quincy's under the existing Loan Agreements and the Mortgage Notes and
shall make all representations, warranties and covenants set forth in
the Loan Agreements and the Mortgage Notes related to the Borrower's
obligations thereunder and its operations as a special purpose entity
and maintenance of its single-purpose bankruptcy-remote nature;
(iii) Counsel to the SPE shall have delivered to Financial
Security , the Trustee and the Collateral Agent legal opinions, in form
and substance satisfactory to Financial Security, addressing matters
typically required in connection with formation of a special purpose
entity to serve as an Issuer in an "AAA/Aaa" rated mortgage backed
securities transaction, including opinions regarding enforceability of
the assumption of all obligations of the SPE as Borrower under the Loan
Agreements and the Mortgage Notes, corporate matters, preference
issues, nonconsolidation issues and fraudulent conveyance issues and
that the first priority perfected security interest of the Collateral
Agent in the Borrower Collateral will continue to have such status
after the Substitution;
(iv) No Event of Default exists under the Loan Agreements or
the Mortgage Notes;
(v) The owners of the equity interests in the SPE, or if the
SPE is a limited partnership or a limited liability company, the owners
of the special purpose entity which serves as the general partner or
the special purpose member, as applicable, shall execute a Stock Pledge
Agreement substantially in the form provided to Advantica on or prior
to the date of this Agreement, together with a legal opinion, in form
and substance satisfactory to Financial Security, with respect to the
enforceability thereof; and
<PAGE>
(vi) Advantica shall have paid all costs and expenses of
Financial Security, the Trustee and the Collateral Agent incurred in
connection with the Substitution, including reasonable fees and
disbursements of legal counsel.
If the conditions precedent set forth above are satisfied in full,
Financial Security will give its written consent to terminate the Quincy's Stock
Pledge Agreement and the Reimbursement Agreement, to release the SPE LOC and to
the Substitution under the Loan Agreements and the Mortgage Notes.
[Signature page follows]
<PAGE>
Your signature below indicates your agreement and acceptance of the
terms and conditions set forth above.
Yours truly,
Financial Security Assurance Inc.
By /s/ Bruce E. Stern
Bruce E. Stern
General Counsel and Managing Director
Letter Agreement Acknowledged and
Agreed:
Advantica Restaurant Group Inc.
By /s/ Kenneth E. Jones Date: April 1, 1998
---------------------------------------------- --------------
Name Kenneth E. Jones
--------------------------------------------
Title Vice President and Treasurer
-------------------------------------------
Quincy's Restaurants, Inc.
By /s/ Kenneth E. Jones Date: April 1, 1998
---------------------------------------------- --------------
Name Kenneth E. Jones
--------------------------------------------
Title Vice President and Treasurer
-------------------------------------------
Quincy's Realty, Inc.
By /s/ Kenneth E. Jones Date: April 1, 1998
---------------------------------------------- --------------
Name Kenneth E. Jones
--------------------------------------------
Title Vice President and Treasurer
-------------------------------------------
<PAGE>
<PAGE>
AMENDMENT NO. 1 AND WAIVER, dated as of
March 16, 1998 (this "AMENDMENT"), to the Credit
Agreement dated as of January 7, 1998 (the "CREDIT
AGREEMENT"), among DENNY'S, INC., a California
corporation, EL POLLO LOCO, INC., a Delaware
corporation, FLAGSTAR ENTERPRISES, INC., an Alabama
corporation, FLAGSTAR SYSTEMS, INC., a Delaware
corporation, QUINCY'S RESTAURANTS, INC., an Alabama
corporation (each of the foregoing, individually, a
"BORROWER" and, collectively, the "BORROWERS"),
ADVANTICA RESTAURANT GROUP, INC., a Delaware
Corporation ("PARENT"), the Lenders (as defined in
Article I of the Credit Agreement) and THE CHASE
MANHATTAN BANK, a New York banking corporation, as
swingline lender (in such capacity, the "SWINGLINE
LENDER"), as issuing bank, as administrative agent
(in such capacity, the "ADMINISTRATIVE AGENT") and as
collateral agent (in such capacity, the "COLLATERAL
AGENT") for the Lenders.
A. The Lenders have extended credit to the Borrowers, and have
agreed to extend credit to the Borrowers, in each case pursuant to the terms and
subject to the conditions set forth in the Credit Agreement.
B. Parent and the Borrowers have requested that the Required
Lenders (i) grant certain waivers of compliance by Parent and the Borrowers with
certain provisions of the Credit Agreement as provided herein and (ii) agree to
amend certain provisions of the Credit Agreement as provided herein.
C. The Required Lenders are willing to grant such waivers and
agree to such amendments, in each case on the terms and subject to the
conditions set forth herein.
D. Capitalized terms used but not defined herein shall have
the meanings assigned to them in the Credit Agreement.
Accordingly, in consideration of the mutual agreements herein
contained and other good and valuable consideration, the sufficiency and receipt
of which are hereby acknowledged, the parties hereto agree as follows:
SECTION 1. Waivers. (a) The Required Lenders hereby waive
compliance by Parent and the Borrowers with Section 5.11 of the Credit Agreement
to the extent, but only to the extent, necessary to permit any newly-formed,
special purpose subsidiary of Parent (the "SPC") the only assets of which are
(i) Defeasance Eligible Investments (as defined in the Real Estate Financing
Documents) that were acquired or retained in connection with the SRT Defeasance
(as defined below) and the earnings thereon and proceeds thereof and (ii) cash
in an amount necessary to effect the SRT Defeasance not to execute a Subsidiary
Guarantee Agreement, an Indemnity, Subrogation and Contribution Agreement or any
Security Document until such time when the SPC is no longer subject to a
contractual prohibition on doing so.
(b) The Required Lenders hereby waive compliance by Parent and
the Borrowers with Sections 5.12, 6.04, 6.05 and 6.08 of the Credit Agreement to
the extent, but only to the extent, necessary to permit (i) the use of a portion
of the proceeds of the Enterprises Sale (as defined in the Credit Agreement as
amended by this Amendment) to
<PAGE>
2
cause (A) the defeasance in full of (1) the Mortgage Notes of Spardee's Realty
(the "Spardee's Mortgage Notes") relating to the 10.25% Guaranteed Secured Bonds
due 2000 of Secured Restaurants Trust and (2) the Mortgage Notes of Quincy's
Realty (the "Quincy's Mortgage Notes") relating to the 10.25% Guaranteed Secured
Bonds due 2000 of Secured Restaurants Trust in accordance with their respective
terms (or otherwise on terms reasonably satisfactory to the Administrative
Agent) or (B) the defeasance in full of the 10.25% Guaranteed Secured Bonds due
2000 of Secured Restaurants Trust in accordance with their terms (or otherwise
on terms reasonably satisfactory to the Administrative Agent) and, in the case
of this clause (B), in consideration of such defeasance, the extinguishment of
all obligations of the Subsidiaries in respect of the Spardee's Mortgage Notes
and the Quincy's Mortgage Notes (the transactions referred to in clause (i)(A)
or (i)(B) above, the "SRT DEFEASANCE"), (ii) the transfer of the Defeasance
Eligible Investments and cash deposited to effect the SRT Defeasance to the SPC
(the "SPC Transfer") and (iii) waivers, amendments and supplements to the Real
Estate Financing Documents in connection with the implementation of the SRT
Defeasance reasonably acceptable to the Administrative Agent, among other
things, (A) to provide for reimbursement or indemnification by Parent of certain
costs of Financial Security Assurance Inc. ("FSA"), (B) to impose limitations on
distributions by Quincy's Realty and (C) to require the posting of a $1,000,000
letter of credit as part of the SRT Defeasance.
SECTION 2. Amendment. (a) Section 1.01 of the Credit Agreement
is hereby amended as follows:
(i) by inserting the following definitions in the appropriate
alphabetical order:
"'DENNY'S MORTGAGE NOTES' shall mean the 11.03% Mortgage Notes
of Denny's Realty due 2000."
"'ENTERPRISES SALE' shall have the meaning assigned to such
term in Section 6.05(h)."
"'QUINCY'S MORTGAGE NOTES' shall mean the Mortgage Notes of
Quincy's Realty relating to the 10.25% Guaranteed Secured
Bonds due 2000 of Secured Restaurants Trust."
"'SPARDEE'S MORTGAGE NOTES' shall mean the Mortgage Notes of
Spardee's Realty relating to the 10.25% Guaranteed Secured
Bonds due 2000 of Secured Restaurants Trust."
"'SRT BONDS' shall mean the 10.25% Guaranteed Secured Bonds
due 2000 of Secured Restaurants Trust."
"'SRT DEFEASANCE' shall have the meaning assigned to such term
in Section 6.05(h).";
<PAGE>
3
(ii) by inserting at the end of the definition of the term
"Consolidated EBITDA" before the period the following proviso:
"; provided, however, that (a) prior to the occurrence of an
Enterprises Sale, Consolidated EBITDA for each period will be
determined assuming that the consolidated results of
operations of Enterprises and its subsidiaries are
attributable to continuing operations of Parent and the
Subsidiaries, whether or not such consolidated results of
operations are at the time being classified by Parent in its
consolidated financial statements as the results of
discontinued operations, (b) upon and after the occurrence of
an Enterprises Sale, Consolidated EBITDA for each period that
includes the date of occurrence of such Enterprises Sale will,
solely for purposes of determining compliance with Sections
6.11, 6.12, 6.13 and 6.14, be determined on a pro forma basis,
as if Enterprises had been sold on the first day of such
period and (c) after the occurrence of any acquisition of any
person by Parent, any Borrower or any Specified Subsidiary,
Consolidated EBITDA for each period that includes the date of
occurrence of such acquisition will, solely for purposes of
determining compliance with Sections 6.11 and 6.12, be
determined on a pro forma basis, based on the actual
historical results of operations of such person, as if such
acquisition had occurred on the first day of such period";
(iii) by inserting at the end of the definition of the term
"Consolidated Interest Expense" after the period the following
sentence:
"Notwithstanding the foregoing, (a) prior to the occurrence of
an Enterprises Sale, Consolidated Interest Expense for each
period will be determined assuming that the consolidated
interest expense (net of interest income) of Enterprises and
its subsidiaries is attributable to continuing operations of
Parent and the Subsidiaries, whether or not the consolidated
results of operations of Enterprises and its subsidiaries are
at the time being classified by Parent in its consolidated
financial statements as the results of discontinued
operations, and (b) upon and after the occurrence of an
Enterprises Sale, Consolidated Interest Expense (i) for each
period that includes the date of occurrence of such
Enterprises Sale will, for all purposes in this Agreement, be
determined on a pro forma basis, as if Enterprises had been
sold and the SRT Defeasance had been effected on the first day
of such period and (ii) for each period will, for all purposes
in this Agreement, be determined without regard to (A)
interest expense in respect of the Spardee's Mortgage Notes,
the Quincy's Mortgage Notes and the SRT Bonds and (B) interest
income in respect of the Defeasance Eligible Investments (as
defined in the Real Estate Financing Documents).";
(iv) by inserting at the end of the definition of the term
"Consolidated Lease Expense" after the period the following sentence:
"Notwithstanding the foregoing, (a) prior to the occurrence of
an Enterprises Sale, Consolidated Lease Expense for each
period will be determined assuming that the consolidated
payment obligations of Enterprises and its subsidiaries for
such period under Operating Leases are
<PAGE>
4
attributable to continuing operations of Parent and the
Subsidiaries, whether or not the consolidated results of
operations of Enterprises and its subsidiaries are at the time
being classified by Parent in its consolidated financial
statements as the results of discontinued operations, and (b)
upon and after the occurrence of an Enterprises Sale,
Consolidated Lease Expense for each period that includes the
date of occurrence of such Enterprises Sale will, for all
purposes of this Agreement, be determined on a pro forma
basis, as if Enterprises had been sold on the first day of
such period.";
(v) by inserting at the end of the definition of the term
"Consolidated Total Debt" before the period the following text:
", MINUS, at any time after the Enterprises Sale and the SRT
Defeasance have occurred, the lesser of (x) $170,000,000, (y)
the Net Cash Proceeds of such Enterprises Sale that have not
previously been applied to incur Consolidated Capital
Expenditures (or investments in lieu thereof permitted under
Section 6.04(k)), pay Indebtedness, effect the SRT Defeasance
or make investments or for any other purpose and (z) the
aggregate amount of all cash and cash equivalents of Parent,
the Borrowers and the Specified Subsidiaries (excluding the
Defeasance Eligible Investments (as defined in the Real Estate
Financing Documents) acquired in connection with the SRT
Defeasance) that would be set forth on a consolidated balance
sheet of Parent, the Borrowers and the Specified Subsidiaries
prepared as of such date in accordance with GAAP";
(vi) by inserting immediately before the words "the fair
market value" in the last sentence of the definition of the term
"Indebtedness" the text "(a)" and inserting at the end of such
definition before the period the following text:
"and (b) if the SRT Defeasance has occurred and remains
effective, the aggregate amount of Indebtedness outstanding in
respect of the Quincy's Mortgage Notes and the Spardee's
Mortgage Notes or the SRT Bonds, as the case may be"; and
(vii) by deleting the words "each series of the Mortgage
Notes" set forth in the first line of the definition of the term "Real
Estate Refinancing" and substituting therefor the following words:
"(a) each series of the Mortgage Notes or (b) if the SRT
Defeasance has occurred and remains effective, the Denny's
Mortgage Notes".
(b) Section 6.04 of the Credit Agreement is hereby amended as
follows:
(i) by inserting immediately before the word "Subsidiaries" in
Section 6.04(k) the word "Domestic", by inserting immediately before
the words "any Borrower" in Section 6.04(k) the text "any of Parent,"
and by deleting the word "and" at the end of Section 6.04(k); and
<PAGE>
5
(ii) by deleting the period at the end of Section 6.04(l) and
substituting therefor the text "; and" and by inserting after Section
6.04(l) the following new section:
"(m) Defeasance Eligible Investments (as defined in the Real
Estate Financing Documents) acquired in connection with the
SRT Defeasance.".
(c) Section 6.05 of the Credit Agreement is hereby amended as
follows:
(i) by deleting the word "$5,000,000" in clause (ii) of
Section 6.05(e) and substituting therefor the word "$10,000,000";
(ii) by inserting at the end of Section 6.05(f) immediately
before the semicolon the following:
", except that during the three-fiscal-year period ending on
or about December 31, 2000, Quincy's and its subsidiaries may
dispose of additional underperforming restaurants (as
determined in the good faith judgment of Parent) pursuant to
this Section 6.05(f), having an aggregate Fair Market Value of
not more than $45,000,000";
(iii) by deleting the word "and" set forth at the end of
Section 6.05(f); and
(iv) by inserting after Section 6.05(g) the word "and" and the
following new sections:
"(h) Spartan may sell all the capital stock of Enterprises
(the "ENTERPRISES SALE"), provided that (i) at the time of
such sale and immediately after giving effect thereto no Event
of Default or Default shall have occurred and be continuing,
(ii) such sale is consummated in accordance with the terms of
the Stock Purchase Agreement among Parent, Spartan,
Enterprises and CKE Restaurants, Inc. dated as of February 18,
1998 (without giving effect to any amendments, waivers,
supplements or other modifications thereto that are adverse to
the Lenders) (the "Purchase Agreement"), and applicable law
and regulations and otherwise on terms reasonably satisfactory
to the Administrative Agent, (iii) Spartan shall have received
gross cash proceeds of not less than $380,799,679 (subject to
adjustment as provided in the Purchase Agreement) from such
sale, (iv) a portion of the cash proceeds of the Enterprises
Sale is used immediately (A) to defease in full (1) the
Spardee's Mortgage Notes and (2) the Quincy's Mortgage Notes
in accordance with their respective terms (or otherwise on
terms reasonably satisfactory to the Administrative Agent) or
(B) to defease in full the SRT Bonds in accordance with their
terms (or otherwise on terms reasonably satisfactory to the
Administrative Agent) in exchange for the extinguishment of
all obligations of the Subsidiaries in respect of the
Spardee's Mortgage Notes and the Quincy's Mortgage Notes and
(v) all Liens under or related to the Spardee's Mortgage Notes
and the Quincy's Mortgage Notes affecting the Properties (as
defined in the Spartan Indenture, but excluding the Defeasance
Eligible Investments (as defined in the Real Estate Financing
Documents) and cash deposited to effect the SRT Defeasance)
are released and eliminated (the transactions
<PAGE>
6
referred to in clause (iv)(A) or (iv)(B) above, together with
the transactions referred to in clause (v) above, the "SRT
DEFEASANCE");".
(d) Section 6.08 of the Credit Agreement is hereby amended by
inserting after the word "that" in the first proviso to Section 6.08(a) the word
"(i)" and inserting at the end of such proviso before the semicolon the
following:
"and (ii) Parent or the Subsidiaries may make up to an
aggregate of $2,000,000 in prepayments of Indebtedness of
Enterprises retained or to be retained by Parent or any
Subsidiary in connection with the Enterprises Sale".
(e) Section 6.10 of the Credit Agreement is hereby amended by
inserting at the end thereof before the period the following proviso:
", PROVIDED FURTHER, that, after the occurrence of an
Enterprises Sale, in addition to the Consolidated Capital
Expenditures (or investments in lieu thereof permitted under
Section 6.04(k)) permitted to be incurred pursuant to the
foregoing provisions of this Section, Parent, the Borrowers
and the Specified Subsidiaries may from time to time incur
Consolidated Capital Expenditures (or investments in lieu
thereof permitted under Section 6.04(k)) in an aggregate
amount during the term of this Agreement not to exceed the
lesser of (a) $170,000,000 and (b) the Net Cash Proceeds of
such Enterprises Sale that have not previously been applied to
incur Consolidated Capital Expenditures (or investments in
lieu thereof permitted under Section 6.04(k)), pay
Indebtedness, effect the SRT Defeasance or make investments or
for any other purpose";
(f) Section 6.13 of the Credit Agreement is hereby amended,
effective upon the occurrence of the Enterprises Sale and the SRT Defeasance, by
deleting the second through ninth lines of the table set forth therein and
substituting therefor the following:
Date Ratio
---- -----
March 31, 1998 1.45 to 1.00
June 30, 1998 1.45 to 1.00
September 30, 1998 1.45 to 1.00
December 31, 1998 1.50 to 1.00
March 31, 1999 1.60 to 1.00
June 30, 1999 1.60 to 1.00
September 30, 1999 1.75 to 1.00
December 31, 1999 1.75 to 1.00
(g) Section 6.14 of the Credit Agreement is hereby amended,
effective upon the occurrence of the Enterprises Sale and the SRT Defeasance, by
deleting the second through ninth lines of the table set forth therein and
substituting therefor the following:
Date Ratio
---- -----
<PAGE>
7
March 31, 1998 1.25 to 1.00
June 30, 1998 1.25 to 1.00
September 30, 1998 1.25 to 1.00
December 31, 1998 1.28 to 1.00
March 31, 1999 1.32 to 1.00
June 30, 1999 1.32 to 1.00
September 30, 1999 1.40 to 1.00
December 31, 1999 1.40 to 1.00
SECTION 3. Additional Agreements. Parent and the Borrowers
hereby agree (a) to effect the SPC Transfer and (b) in connection therewith, to
obtain (i) the release of (A) Quincy's Realty from all obligations under the
Quincy's Mortgage Notes and the Spardee's Mortgage Notes and (B) Parent from all
reimbursement and indemnification obligations related thereto and (ii) the
release and elimination of the pledge of, and any other Liens affecting, the
capital stock of Quincy's Realty under or related to the Quincy's Mortgage Notes
or the Spardee's Mortgage Notes within 30 days after the date of occurrence of
the Enterprises Sale. Parent and the Borrowers hereby further agree not to
permit (a) Quincy's Realty or, after the SPC Transfer, the SPC to transfer the
Defeasance Eligible Investments (as defined in the Real Estate Financing
Documents) or any earnings thereon or proceeds thereof to any other person or to
use the Defeasance Eligible Investments or any earnings thereon or proceeds
thereof for any purpose, in each case other than to satisfy the obligations of
Quincy's Realty or the SPC, as applicable, in respect of the Quincy's Mortgage
Notes, the Spardee's Mortgage Notes or the other Real Estate Financing
Documents, or (b) the SPC to engage in any business or activity other than
holding such assets and using them for such purpose. The failure of Parent and
the Borrowers to comply with this Section 3 will be deemed to constitute an
Event of Default under the Credit Agreement.
SECTION 4. Representations and Warranties. Parent and the
Borrowers represent and warrant to the Administrative Agent and to each of the
Lenders that:
(a) This Amendment has been duly authorized, executed and
delivered by Parent and each of the Borrowers and constitutes their
legal, valid and binding obligations, enforceable in accordance with
its terms except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally and by general principles of equity
(regardless of whether such enforceability is considered in a
proceeding at law or in equity).
(b) Before and after giving effect to this Amendment, the
representations and warranties set forth in Article III of the Credit
Agreement are true and correct in all material respects with the same
effect as if made on the date hereof, except to the extent such
representations and warranties expressly relate to an earlier date.
(c) The execution, delivery and performance by Parent and each
necessary Loan Party of the Purchase Agreement, and the completion of
both the Enterprises Sale and the SRT Defeasance (a) have been duly
authorized by all requisite corporate and, if required, stockholder
action and (b) will not (i) violate (A) any provision of law, statute,
rule or regulation, or of the certificate or articles of incorporation
or other constitutive documents or by-laws of Parent, any Borrower or
any Subsidiary, (B) any order of any Governmental Authority or
<PAGE>
8
(C) any provision of any indenture, agreement or other instrument to
which Parent, any Borrower or any Subsidiary is a party or by which any
of them or any of their property is or may be bound or (ii) be in
conflict with, result in a breach of or constitute (alone or with
notice or lapse of time or both) a default under, or give rise to any
right to accelerate or to require the prepayment, repurchase or
redemption of any obligation under any such indenture, agreement or
other instrument.
(d) Before and after giving effect to this Amendment, no Event
of Default or Default has occurred and is continuing.
SECTION 5. Conditions to Effectiveness. This Amendment shall
become effective as of the date first above written when the Administrative
Agent shall have received counterparts of this Amendment that, when taken
together, bear the signatures of Parent, each of the Borrowers and the Required
Lenders.
SECTION 6. Credit Agreement. Except as specifically amended
hereby, the Credit Agreement shall continue in full force and effect in
accordance with the provisions thereof as in existence on the date hereof. After
the date hereof, any reference to the Credit Agreement shall mean the Credit
Agreement as amended hereby.
SECTION 7. Loan Document. This Amendment shall be a Loan
Document for all purposes.
SECTION 8. APPLICABLE LAW. THIS AMENDMENT SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF NEW YORK.
SECTION 9. Counterparts. This Amendment may be executed in two
or more counterparts, each of which shall constitute an original but all of
which when taken together shall constitute but one agreement.
SECTION 10. Expenses. Parent and the Borrowers agree to
reimburse the Administrative Agent for its out-of-pocket expenses in connection
with this Amendment, including the reasonable fees, charges and disbursements of
Cravath, Swaine & Moore, counsel for the Administrative Agent.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed by their respective authorized officers as of the
day and year first written above.
ADVANTICA RESTAURANT GROUP, INC.,
by
-------------------------
Name:
Title:
<PAGE>
9
DENNY'S, INC.,
by
-------------------------
Name:
Title:
EL POLLO LOCO, INC.,
by
-------------------------
Name:
Title:
FLAGSTAR ENTERPRISES, INC.,
by
-------------------------
Name:
Title:
FLAGSTAR SYSTEMS, INC.,
by
-------------------------
Name:
Title:
QUINCY'S RESTAURANTS, INC.,
by
-------------------------
Name:
Title:
THE CHASE MANHATTAN BANK, individually
and as Administrative Agent, Collateral
Agent, Swingline Lender and Issuing
Bank,
by
-------------------------
Name:
Title:
<PAGE>
10
SIGNATURE PAGE TO
AMENDMENT NO. 1,
CONSENT AND WAIVER DATED AS OF
March 16, 1998
To approve the Amendment:
Name of Institution ________________________________________________
by
-----------------------------------
Name:
Title:
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement
No. 333-45811 on Form S-1 of Advantica Restaurant Group, Inc. (formerly
Flagstar Companies, Inc.) of our report 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
April 20, 1998
