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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from
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Commission file number 0-18051
ADVANTICA RESTAURANT GROUP, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 13-3487402
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
203 EAST MAIN STREET 29319-9966
SPARTANBURG, SOUTH CAROLINA (Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (864) 597-8000.
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Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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None None
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Securities registered pursuant to Section 12(g) of the Act:
$.01 Par Value, Common Stock
Common Stock Warrants expiring January 7, 2005
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(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant was approximately $152,015,220 as of March 1,
1999, based upon the closing sales price of registrant's Common Stock on that
date of $5.00 per share.
As of March 1, 1999, 40,025,207 of registrant's Common Stock, $.01 par value per
share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of the registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held May 19, 1999 are
incorporated by reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
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PART I
Item 1 Business 1
Item 2. Properties 10
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Market for Registrant's Common Equity and Related
Item 5. Stockholder Matters 13
Item 6. Selected Financial Data 14
Management's Discussion and Analysis of Financial Condition
Item 7. and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 32
Item 8. Financial Statements and Supplementary Data 33
Changes in and Disagreements with Accountants on Accounting
Item 9. and Financial Disclosure 33
PART III
Item 10. Directors and Executive Officers of the Registrant 33
Item 11. Executive Compensation 33
Security Ownership of Certain Beneficial Owners and
Item 12. Management 33
Item 13. Certain Relationships and Related Transactions 33
PART IV
Exhibits, Financial Statement Schedules, and Reports on Form
Item 14. 8-K 35
INDEX TO FINANCIAL STATEMENTS F-1
SIGNATURES
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FORWARD-LOOKING STATEMENTS
The forward-looking statements included in the "Business," "Legal Proceedings,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Quantitative and Qualitative Disclosures About Market Risk"
sections, which reflect management's best judgment based on factors currently
known, involve risks and uncertainties. Words such as "expects," "anticipates,"
"believes," "intends," "plans," 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 this Form 10-K. (See Exhibit
99 -- Safe Harbor Under the Private Securities Litigation Reform Act of 1995.)
Forward-looking information provided by the Company in such sections pursuant to
the safe harbor established under the Private Securities Litigation Reform Act
of 1995 should be evaluated in the context of these factors.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Advantica Restaurant Group, Inc. (formerly Flagstar Companies, Inc.)
("Advantica" and together with its subsidiaries, including predecessors, the
"Company") is one of the largest restaurant companies in the United States,
operating (directly and through franchisees) approximately 2,600
moderately-priced restaurants.
Flagstar Companies, Inc. ("FCI") was organized as a holding company in 1988 in
order to effect the 1989 acquisition of Flagstar Corporation ("Flagstar"). On
November 16, 1992, FCI and Flagstar consummated the principal elements of a
recapitalization, as a result of which two partnerships affiliated with Kohlberg
Kravis Roberts & Co. acquired control of FCI and Flagstar. Prior to June 16,
1993, FCI and Flagstar had been known, respectively, as TW Holdings, Inc. and TW
Services, Inc.
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 mid-scale
family-style dining category. This acquisition was intended to strengthen the
Company's position in the family-style restaurant category, particularly in
California, one of the Company's core markets. The ultimate acquisition price of
$313.4 million was paid in consideration for all of the outstanding stock of
FRI-M Corporation ("FRI-M"), 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 its two food processing
operations, Portion-Trol Foods, Inc. and the Mother Butler Pies division of
Denny's, Inc., a subsidiary of Flagstar (Portion-Trol Foods, Inc. and the Mother
Butler Pies division are hereinafter referred to collectively as "PTF"). These
transactions marked the last in a series of nonrestaurant 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 TW Recreational Services,
Inc. ("TWRS"), a concession and recreation services subsidiary; Volume Services,
Inc. ("VS"), a stadium concession services subsidiary; and Proficient Food
Company ("PFC"), the Company's food distribution subsidiary.
THE 1997 RESTRUCTURING
As a result of the 1989 leveraged buyout of Flagstar, the Company became very
highly leveraged. While the Company's cash flows were sufficient to cover
interest costs, operating results subsequent to the buyout fell short of
expectations. Such shortfalls resulted from negative operating trends due to
increased competition, intense 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.
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
Title 11 of the United States Code (the "Bankruptcy Code"). Toward that end,
beginning in February 1997, FCI and Flagstar commenced intensive negotiations
with various creditors in an effort to enable them to restructure their
indebtedness through such a prepackaged filing. FCI's operating subsidiaries,
Denny's Holdings, Inc., Spartan Holdings, Inc. and FRD (and their respective
subsidiaries) did not file bankruptcy petitions and were not parties to such
Chapter 11 proceedings. The plan of reorganization dated as of November 7, 1997
(following the resolution of certain issues before the Bankruptcy Court) (the
"Plan of Reorganization") 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 the Company remains highly
leveraged. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" for additional
information concerning the Company's indebtedness and debt service requirements.
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Material features of the Plan of Reorganization, as it became effective as of
January 7, 1998 (the "Effective Date"), were 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 FCI and Flagstar were canceled, extinguished
and retired as of the Effective Date: (1) Flagstar's 10 7/8% Senior Notes
due 2002 and 10 3/4% Senior Notes due 2001 (collectively, the "Old Senior
Notes"), (2) Flagstar's 11.25% Senior Subordinated Debentures due 2004 and
11 3/8% Senior Subordinated Debentures due 2003 (collectively, the "Senior
Subordinated Debentures"), (3) Flagstar's 10% Convertible Junior
Subordinated Debentures due 2014 (the "10% Convertible Debentures"), (4)
FCI's $2.25 Series A Cumulative Convertible Exchangeable Preferred Stock and
(5) FCI's $.50 par value common stock (the "Old Common Stock");
(c) Advantica had 100 million authorized shares of $.01 par value common
stock (the "Common Stock") (of which 40 million were deemed issued and
outstanding on the Effective Date pursuant to the Plan of Reorganization
subject to completion of the exchange of securities as contemplated by the
Plan of Reorganization) and 25 million authorized shares of preferred stock
(none of which are currently outstanding). Pursuant to the Plan of
Reorganization, ten percent of the number of shares of Common Stock issued
and outstanding on the Effective Date, on a fully diluted basis, was
reserved for issuance under a new management stock option program.
Additionally, 4 million shares of Common Stock were reserved for issuance
upon the exercise of 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 "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 (1) shares of Common Stock equivalent to 4.5% of the Common
Stock issued on the Effective Date and (2) 100% of the Warrants issued on
the Effective Date; and
(g) Advantica refinanced its prior credit facilities by entering into a new
credit facility with The Chase Manhattan Bank ("Chase") and other lenders
named therein, providing the Company (excluding FRI-M) with a $200 million
senior revolving credit facility (as amended to date, the "Credit
Facility").
Further discussion of the bankruptcy reorganization proceedings is included in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 1 to the Consolidated Financial Statements.
DISPOSITIONS OF FLAGSTAR ENTERPRISES, INC. AND QUINCY'S RESTAURANTS, INC. AND
IN-SUBSTANCE DEFEASANCE OF RELATED DEBT
On April 1, 1998, the Company completed the sale to CKE Restaurants, Inc.
("CKE") of all of the capital stock of Flagstar Enterprises, Inc. ("FEI"), which
operated the Company's Hardee's restaurants under licenses from Hardee's Food
Systems, Inc. ("HFS"), a wholly-owned subsidiary of CKE, for $427 million. This
amount includes the assumption by CKE of $46 million of capital leases.
Approximately $173.1 million of the proceeds (together with $28.6 million
already on deposit with respect to certain mortgage financings as described
below) was applied to in-substance defease the 10.25% Guaranteed Secured Bonds
due 2000 (the "Spartan Mortgage Financing") of Spardee's Realty, Inc., a
wholly-owned subsidiary of FEI, and Quincy's Realty, Inc., a wholly-owned
subsidiary of Quincy's Restaurants, Inc. ("Quincy's"), with a book value of
$198.9 million plus accrued interest of $6.9 million at April 1, 1998. The
Spartan Mortgage Financing was collateralized by certain assets of Spardee's
Realty, Inc. and Quincy's Realty, Inc. The Company replaced such collateral
through the purchase of a portfolio of United States Government and AAA rated
investment securities which were deposited with the collateral agent with
respect to the Spartan Mortgage Financing to satisfy principal and interest
payments under such Spartan Mortgage Financing through the stated maturity date
in the year 2000.
As a result of the adoption of fresh start reporting, as of the Effective Date
the net assets of FEI were adjusted to fair value less estimated costs of
disposal based on the terms of the stock purchase agreement. The net gain
resulting from
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this adjustment is reflected as "Reorganization items of discontinued operation"
in the Statements of Consolidation Operations. As a result of this adjustment,
no gain or loss on disposition is reflected.
On June 10, 1998, the Company completed the sale of all of the capital stock of
Quincy's, the wholly-owned subsidiary which operated the Company's Quincy's
Family Steakhouse Division, to Buckley Acquisition Corporation ("BAC") for $84.7
million. This amount includes the assumption by BAC of $4.2 million of capital
leases. The resulting gain from such disposition of approximately $13.7 million
is reflected as an adjustment to reorganization value in excess of amounts
allocable to identifiable assets.
RESTAURANTS
The Company's operations are conducted through four restaurant chains or
concepts, three in the full-service mid-scale dining segment and one in the
quick-service segment. Denny's is the Company's largest concept, with 1,721
units. Coco's is a bakery restaurant chain operating 481 units. The Carrows
chain, consisting of 149 units, specializes in traditional American food. El
Pollo Loco, a chain of 265 quick-service restaurants, features marinated
flame-broiled chicken products and related Mexican food items. For a breakdown
of the total revenues contributed by each concept for the last three years, see
the corresponding section of "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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. During 1998, the Company
continued its strategy of growth through franchising, adding a net 70 total
units to the system, representing an increase of 129 franchise/licensed units,
offset by a net decrease of 59 Company-owned units. The increase in
franchise/licensed units and the decrease in Company-owned units includes a net
of 55 units which were sold to franchisees ("refranchised"). The Company intends
to continue focusing on growth in the franchise arena in 1999.
The Company believes its restaurant operations benefit from the diversity of the
restaurant concepts represented by its four 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 management team. Denny's, Coco's and Carrows may
benefit from the demographic trend of aging baby boomers and the growing
population of senior citizens. The largest percentage of "mid-scale" customers
are in the 35 and up age category. In the quick-service segment, the Company
expects El Pollo Loco to increase its strong position in the Southwest.
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 resulted in the elimination of
certain restaurant, field management and corporate support positions. As noted
above, during 1998 the Company sold all of the capital stock of Quincy's, and
accordingly, the net restructuring charge of $10.5 million is included in loss
from operations of discontinued operations in the accompanying Statement of
Consolidated Operations. Also included in the 1997 loss from operations of
discontinued operations is an impairment charge totaling $15.1 million related
to the write-down of certain Quincy's units in association with the 1997
restructuring plan, as well as the write-down of certain Hardee's units which
were disposed of during 1997.
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 market share, number of units
and U.S. systemwide sales. Denny's restaurants currently operate in 49 states,
two U.S. territories and three foreign countries, with principal concentrations
in California, Florida and Texas. 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. In 1998, Denny's restaurants had an average guest check of
$5.83 and average Company-owned restaurant sales of $1.3 million. Denny's
currently employs approximately 37,700 people.
Historically, Denny's has had one of the lower average guest checks within the
family-style category. This value positioning is reinforced through its Grand
Value menus, featuring value priced items for breakfast and lunch with tiered
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pricing starting at $2.99 and $3.29, respectively. Denny's has sought to further
expand the customer perception of value through the use of themed,
higher-quality products such as "All-Star Slams," "America's Favorite Omelets,"
"Major League Burgers" and "Signature Skillets." These 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 1999.
During 1998, the Denny's system opened ten "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, stainless steel facility, new uniforms, a jukebox 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. Denny's plans to
accelerate the development of the Classic Diner format in 1999.
Also during 1998, the Company began testing a new "reimage" program for existing
restaurants which will complement and support Denny's brand positioning as
"America's Original Breakfast Diner." This "Denny's Diner 2000" reimage program
borrows design elements from and was designed to complement the "Denny's Classic
Diner" concept. Once the market testing is completed, the Company plans to roll
this reimaging program out aggressively in 1999 beginning with Company-owned
restaurants.
Denny's has undertaken several capital spending initiatives designed to enhance
the competitive position of the brand. All domestic Company-owned restaurants
received new point-of-sale ("POS") technology during 1997, along with certain
other equipment designed to improve operations and accommodate new product
introductions. The final results of a restaurant reengineering project,
initiated in late 1996 and refined and tested during 1997 and 1998, are now
being incorporated into existing restaurants. In addition, plans are being
finalized to begin building a reengineered restaurant in 1999.
Denny's opened 72 new franchised units in 1998. Management believes that over
the last five years Denny's has opened more new units (Company-owned and
franchised units combined) 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 843
franchised/licensed units at December 30, 1998, or 49% 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. Initial fees and royalties for
licensed restaurants are negotiated under separate licensing agreements which
generally carry lower royalty rates than franchised restaurants.
Subsequent to December 30, 1998, Denny's purchased 30 operating restaurants in
western New York from a former franchisee of Perkins Family Restaurants. Denny's
took possession of the restaurants on March 1, 1999, and by March 8, 1999,
reopened 27 units as Denny's restaurants. The remaining units are being
evaluated for ultimate reopening or disposition. Management believes this
acquisition will provide important strategic benefits, including a rapid
increase in brand penetration and advertising spending capabilities in these
markets.
COCO'S
Coco's is a bakery restaurant chain operating primarily in California and
Arizona, as well as Japan and South Korea. Coco's ranks among the top 15 chains
in the family-style category based on U.S. systemwide sales and international
sales. Coco's offers a variety of fresh-baked goods such as pies, muffins and
cookies and value-priced and innovative menu items. The chain has positioned
itself at the upper end of the family-style category, and answers the needs of
quality-conscious family diners by offering consistently high-quality food,
great service, fair prices and a pleasant, comfortable atmosphere. Since the
Company acquired the chain in May 1996, 43 international units have been added
to the system. The Coco's chain currently consists of 150 Company-owned, 31
domestic franchised and 300 international licensed restaurants. The initial fee
for a single Coco's franchise in the United States is $35,000 and the current
royalty payment rate is 4% of net sales. Initial fees and royalties for licensed
restaurants are negotiated under separate licensing agreements which generally
carry lower royalty rates than franchised restaurants.
The restaurants are generally open 18 hours a day. Coco's restaurants have
uniform menus within the United States and serve breakfast, lunch and dinner.
Lunch and dinner dayparts are Coco's strongest, each comprising approximately
38% of 1998 sales. In 1998, the average guest check was $6.96, with average
Company-owned unit sales of approximately $1.6 million. Coco's currently employs
approximately 7,600 people.
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CARROWS
Carrows is a regional mid-scale family-style restaurant chain operating
primarily in six western states. Carrows currently consists of 123 Company-owned
units and 26 domestic franchises, and employs approximately 5,500 people.
Carrows specializes in traditional Santa Barbara-style 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 24 hours a day. Carrows
restaurants have uniform menus and serve breakfast, lunch and dinner.
Lunch and dinner dayparts (including "late night") are Carrows' strongest,
comprising approximately 31% and 43% of 1998 sales, respectively. In 1998, the
average guest check was $6.60, with average Company-owned unit sales of
approximately $1.4 million.
EL POLLO LOCO
El Pollo Loco, which specializes in marinated flame-broiled chicken, is one of
the leading chains in the quick-service chicken segment of the restaurant
industry. Of the total 265 El Pollo Loco restaurants, which are located in four
southwestern states and two foreign countries, 87% are located in Southern
California. 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 and dual
branding with the complementary Fosters Freeze dessert line, which commenced in
late 1995.
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-through facilities, which provided approximately 37% of revenues in 1998.
The dinner daypart for El Pollo Loco is the strongest, representing
approximately 54% of total sales. In 1998, the average guest check at El Pollo
Loco was $6.94. Average Company-owned restaurant sales were approximately $1.2
million. El Pollo Loco currently employs approximately 2,600 people. In 1998,
the chain had a net increase of 18 units domestically, representing an increase
of 16 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. Initial fees and royalties for licensed restaurants are negotiated
under separate licensing agreements which generally carry lower royalty rates
than franchised restaurants.
Based on El Pollo Loco's recent success, the Company is optimistic about future
expansion of the El Pollo Loco concept, principally through Company store
development and franchising in the Texas, Arizona and California markets. By the
year 2003, the Company hopes to add as many as 240 additional El Pollo Loco
restaurant units.
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.
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Each of the Company's restaurant chains regularly 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 media support. A successful menu item is
then incorporated into the restaurant system. 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 in all of the Company's
restaurants by the use of POS systems which transmit detailed sales reports,
payroll data and periodic inventory information for management review. In July
1997, the Company completed the rollout of a new POS system in its domestic
Company-owned Denny's restaurants. In January 1998 and July 1998, the Company
completed the rollout of the new system in its Canadian Company-owned Denny's
restaurants and its Company-owned El Pollo Loco restaurants, respectively. 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. During the second and third
quarters of 1999, management intends to install new POS systems in all
Company-owned Coco's and Carrows restaurants. The Company also intends to
implement a new back office system in all Company-owned restaurants. This new
system will provide additional functionality over the current restaurant
management system and will be used by restaurant management to handle payroll,
inventory, labor scheduling, financial and sales reporting. Management intends
to complete the rollout of the new back office system in all Company-owned
Coco's and Carrows restaurants by August 1999 and in all Denny's and El Pollo
Loco Company-owned restaurants by the second quarter of 2000.
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 used to
measure customer satisfaction and customers' evolving expectations.
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 favorable prices from several nationally recognized
manufacturers.
In connection with the 1995 sale of its distribution subsidiary, PFC, to
Meadowbrook Meat Company ("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 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 in two
separate transactions. In conjunction with these sales, the Company entered into
five-year purchasing agreements with the acquirers 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.
6
<PAGE> 9
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). Additionally,
severe weather, storms and similar conditions may impact sales volumes
seasonally in some operating regions. Occupancy and other operating costs, which
remain relatively constant, have a disproportionately greater negative effect on
operating results during quarters with lower restaurant sales.
TRADEMARKS AND SERVICE MARKS
The Company, either directly or through wholly-owned subsidiaries, has certain
trademarks and service marks registered with the United States Patent and
Trademark office and in international jurisdictions, including Denny's, El Pollo
Loco, Coco's, Carrows, and Grand Slam Breakfast. 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.
COMPETITION
The restaurant industry can be divided into three main segments: full-service
restaurants, quick-service restaurants, and other miscellaneous establishments.
Full-service restaurants include the mid-scale, casual dining and upscale (fine
dining) segments. A significant portion of the mid-scale segment is made up of
three categories -- family-style, family steak, and cafeteria -- and is
characterized by complete meals, menu variety and moderate prices ($5-$7 average
check). The family-style category, which includes Denny's, Coco's and Carrows,
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 a small number of national chains, regional
chains and small independent restaurants. The quick-service segment, which
includes 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.
On a segment-wide basis, the full-service and quick-service restaurant segments
currently have approximately the same revenues. Throughout the 1990's, the
quick-service segment has maintained steady growth in traffic volume. During the
same time period, the mid-scale segment's traffic volume has remained relatively
flat, reflecting increases in the family-style and cafeteria categories offset
by decreases in the family-steak category.
The restaurant industry is highly competitive, and competition among a few major
companies that own or operate restaurant chains is especially intense,
particularly in the quick-service and family-style segments. Restaurants compete
on the basis of name recognition and advertising, the price, quality and
perceived value of their food offerings, the quality and speed of their service,
convenience and the attractiveness of their facilities. In addition, recent
economic trends have increased competition for qualified managerial operations
personnel as well as hourly restaurant employees.
Management believes the Company's principal competitive strengths include its
restaurants' brand name recognition; restaurant locations; 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.
See Exhibit 99 to this Form 10-K for certain additional factors relating to the
Company's competition in the restaurant industry.
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 where restaurants are
located, changes in consumer tastes and preferences and increases in the number
of restaurants generally and in particular areas.
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 restaurant facilities, the sale of alcoholic
beverages and hiring and employment practices. The
7
<PAGE> 10
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 30, 1998, 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 paid to tipped employees in certain
states) increase the Company's labor costs. This is especially true for the
Company's operations in California, where there is no tip credit. The California
minimum wage increased from $4.25 to $5.00 per hour on March 1, 1997 and
increased to $5.75 per hour on March 1, 1998. Also, the Federal minimum wage
increased from $4.25 per hour to $4.75 per hour on October 1, 1996 and increased
again to $5.15 per hour on September 1, 1997. Employers must pay the higher of
the Federal or state minimum wage. The Company has attempted to offset increases
in the minimum wage through pricing and various cost control efforts; however,
there can be no assurance that the Company or its franchisees can continue to
pass on such cost increases to its customers.
ENVIRONMENTAL MATTERS
Federal, state and local environmental laws and regulations have not
historically had a material impact on the operations of the Company; however,
the Company cannot predict the effect on its operations of possible future
environmental legislation or regulations.
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.
which alleged 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 nondiscrimination
policies.
Denny's continues to meet all of its obligations under the Consent Decrees. As
part of orientation, every new Denny's employee receives notification of the
Consent Decree requirements. All newly-hired hourly employees who work in the
restaurants complete video-based nondiscrimination training that focuses on
employees' responsibilities under the Consent Decrees and public accommodations
law. Additionally, management employees are required to attend a
nondiscrimination training program consisting of two separate eight-hour live
sessions. During 1998, approximately 7,000 people participated in management
nondiscrimination training. In addition, during 1997 Denny's rolled out the
second phase of live management nondiscrimination 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, nondiscrimination testing was
conducted by independent civil rights organizations in over 600 Denny's
restaurants in 1998. This nondiscrimination 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 nondiscrimination 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.
8
<PAGE> 11
EXECUTIVE OFFICERS OF THE REGISTRANT
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 51 Chairman, Chief Executive Officer and President of Advantica
(1995-present); Chief Executive Officer of Burger King
Corporation (1993-1995).
Craig S. Bushey 43 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
(1996-February 1998); Managing Director, Vice President
(Western Europe) of Burger King (1995-1996); Region Vice
President (Central Region) of Burger King (1994-1995);
Burger King Reengineering Team (1993-1994).
Ronald B. Hutchison 49 Executive Vice President and Chief Financial Officer of
Advantica (March 1998-present); Vice President and Treasurer
of Advantica (1995-March 1998); Vice President and Treasurer
of Leaseway Transportation Corp. (1988-1995).
Nelson J. Marchioli 49 Executive Vice President of Advantica (March 1998-present);
Senior Vice President of Advantica (1997-February 1998);
President of El Pollo Loco Division (1997-present);
Executive Vice President and Chief Operating Officer of
Bruegger's Corporation (1996-1997); Senior Vice President of
Worldwide Supply for Burger King Corporation (1995-1996);
Senior Vice President, International Operation 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).
Rhonda J. Parish 42 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 48 Executive Vice President of Advantica (March 1998-present);
Senior Vice President of Advantica (1995-February 1998);
Chief Executive Officer of Denny's Division (January
1999-present); President of Denny's Division (1997-present);
President of El Pollo Loco Division (1995-1996); Vice
President of Operations for Burger King Corporation
(1989-1995).
Paul R. Wexler 55 Executive Vice President, Procurement and Distribution of
Advantica (March 1998-present); Senior Vice President,
Procurement and Distribution of Advantica (1995-February
1998); Vice President, Procurement and Quality Assurance for
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 (1996-February 1998); Vice President,
Compensation, Benefits, and Employee Information Systems and
Corporate Office Human Resources of Advantica (1993-1996).
</TABLE>
EMPLOYEES
At December 30, 1998, the Company had approximately 54,000 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. As is characteristic of the restaurant industry, the
Company experiences a high level of turnover among its restaurant employees. The
Company has experienced no significant work stoppages and considers its
relations with its employees to be satisfactory.
9
<PAGE> 12
ITEM 2. 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>
Denny's 42,000 4,750 140
Coco's 35,000 5,600 150
Carrows 35,000 4,900 150
El Pollo Loco 20,000 2,400 65
</TABLE>
The following table sets forth certain additional information regarding
Company-owned restaurant properties as of December 30, 1998:
<TABLE>
<CAPTION>
LAND AND LAND LEASED LAND AND
BUILDING AND BUILDING BUILDING
CONCEPT OWNED OWNED LEASED TOTAL
- ------- --------- ------------ --------- -----
<S> <C> <C> <C> <C>
Denny's 238 37 603 878
Coco's 2 33 115 150
Carrows 3 14 106 123
El Pollo Loco 7 31 62 100
--- --- --- -----
Total 250 115 886 1,251
=== === === =====
</TABLE>
10
<PAGE> 13
The number and location of the Company's restaurants as of December 30, 1998 are
presented below:
<TABLE>
<CAPTION>
DENNY'S COCO'S CARROWS EL POLLO LOCO
------------------- ------------------- ------------------- -------------------
FRANCHISED/ FRANCHISED/ FRANCHISED/ FRANCHISED/
STATE/COUNTRY OWNED LICENSED OWNED LICENSED OWNED LICENSED OWNED LICENSED
- ------------- ----- ----------- ----- ----------- ----- ----------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama 1 9 -- -- -- -- -- --
Alaska -- 4 -- -- -- -- -- --
Arizona 28 47 21 2 1 4 -- 8
Arkansas 1 10 -- -- -- -- -- --
California 219 152 125 21 115 6 100 141
Colorado 24 13 -- 2 -- -- -- --
Connecticut 2 8 -- -- -- -- -- --
Delaware 3 -- -- -- -- -- -- --
Florida 103 91 -- -- -- -- -- --
Georgia -- 23 -- -- -- -- -- --
Hawaii 4 3 -- -- -- -- -- --
Idaho -- 6 -- -- -- -- -- --
Illinois 47 14 -- -- -- -- -- --
Indiana 14 12 2 -- -- -- -- --
Iowa -- 5 -- -- -- -- -- --
Kansas 9 1 -- -- -- -- -- --
Kentucky -- 18 -- -- -- -- -- --
Louisiana 7 5 -- -- -- -- -- --
Maine -- 8 -- -- -- -- -- --
Maryland 14 17 -- -- -- -- -- --
Massachusetts 9 -- -- -- -- -- -- --
Michigan 24 15 -- -- -- -- -- --
Minnesota 6 10 -- -- -- -- -- --
Mississippi 2 2 -- -- -- -- -- --
Missouri 28 8 2 -- -- -- -- --
Montana -- 5 -- -- -- -- -- --
Nebraska -- 4 -- -- -- -- -- --
Nevada 11 6 -- -- 4 1 -- 9
New Hampshire 2 1 -- -- -- -- -- --
New Jersey 6 12 -- -- -- -- -- --
New Mexico 2 17 -- -- -- 4 -- --
New York 24 13 -- -- -- -- -- --
North Carolina 8 12 -- -- -- -- -- --
North Dakota -- 3 -- -- -- -- -- --
Ohio 32 25 -- -- -- -- -- --
Oklahoma 9 20 -- -- -- -- -- --
Oregon 5 20 -- -- -- 8 -- --
Pennsylvania 47 5 -- -- -- -- -- --
South Carolina 11 7 -- -- -- -- -- --
South Dakota -- 2 -- -- -- -- -- --
Tennessee 3 11 -- -- -- -- -- --
Texas 76 80 -- -- 3 2 -- 3
Utah 7 13 -- -- -- -- -- --
Vermont -- 2 -- -- -- -- -- --
Virginia 19 11 -- -- -- -- -- --
Washington 49 22 -- 6 -- 1 -- --
West Virginia -- 3 -- -- -- -- -- --
Wisconsin 12 7 -- -- -- -- -- --
Wyoming -- 6 -- -- -- -- -- --
Guam -- 3 -- -- -- -- -- --
Puerto Rico -- 10 -- -- -- -- -- --
Canada 10 33 -- -- -- -- -- --
Japan -- -- -- 267 -- -- -- --
South Korea -- -- -- 32 -- -- -- --
Other International -- 9 -- 1 -- -- -- 4
--- --- --- --- --- -- --- ---
Total 878 843 150 331 123 26 100 165
=== === === === === == === ===
</TABLE>
11
<PAGE> 14
In addition to the restaurant locations set forth above, the Company owns an
18-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 15 floors of the tower, with the balance leased to others.
See Note 11 to the accompanying Consolidated Financial Statements for
information concerning encumbrances on certain properties of the Company.
ITEM 3. 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
plaintiffs in that action, who were former El Pollo Loco franchisees, alleged
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 sought actual and punitive damages in excess of $90
million, together with declaratory and certain other equitable relief. The
defendants denied all material allegations, and certain defendants filed
cross-complaints against various plaintiffs in the action for breach of contract
and other claims. Subsequent to the filing of the action, the defendants entered
into settlements with six of the plaintiffs, leaving two plaintiff franchisees
remaining in the lawsuit. With respect to the remaining plaintiffs, the action
was stayed due to the bankruptcy filing of the principal stockholder of the
plaintiff corporations. On September 30, 1998, an order was entered in that
bankruptcy action approving the execution of a settlement agreement which would
resolve the lawsuit in its entirety. The settlement agreement was executed on
October 21, 1998, and on October 29, 1998, an order was entered in the Superior
Court of Orange County, California dismissing the case in its entirety.
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. The Company filed petitions in the United States Tax Court in 1998
for these periods. The case is not expected to be tried until late 1999 or early
2000.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
12
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock and Warrants were listed on The Nasdaq Stock Market(R) on a
"when issued" basis on January 8, 1998 under the symbols "DINEV" and "DINWV,"
respectively. On January 12, 1998 the Common Stock and Warrants were listed
under the symbols "DINE" and "DINEW," respectively. As of March 1, 1999,
40,025,207 shares of Common Stock and 3,999,992 Warrants were outstanding, and
there were approximately 3,200 record and beneficial holders of Common Stock and
29 Warrant holders of record. 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
11 to the accompanying Consolidated Financial Statements of the Company.
The following table lists the high and low closing sales prices of the Common
Stock for each quarter since Advantica's emergence from bankruptcy on January 7,
1998. The sales prices were obtained from The Nasdaq Stock Market(R).
<TABLE>
<CAPTION>
1998 HIGH LOW
- ---- ---- ---
<S> <C> <C>
First quarter (from January 7, 1998) $11 1/16 $8 7/8
Second quarter 11 5/16 8 3/4
Third quarter 10 5/8 4 1/2
Fourth quarter 7 1/2 3 13/32
</TABLE>
Prior to May 17, 1997, the Old Common Stock was traded on The Nasdaq Stock
Market(R) under the symbol "FLST." The following table lists the high and low
closing sales prices for the Old Common Stock for each quarter in the 1997
fiscal year. The sales prices were obtained from summaries obtained from The
Nasdaq Stock Market(R).
<TABLE>
<CAPTION>
1997 HIGH LOW
- ---- ---- ---
<S> <C> <C>
First quarter $ 1 7/32 $ 25/64
Second quarter (a) 19/32 9/32
Third quarter (a) 1/2 19/64
Fourth quarter (a) 23/64 -
</TABLE>
- ---------------
(a) At the close of business on May 16, 1997, the Old Common Stock was delisted
for trading on The Nasdaq Stock Market(R). Although such securities
continued to trade in the over-the-counter market until January 7, 1998,
such trading activity was limited and sporadic.
13
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are certain selected financial data concerning the Company for
each of the four years ended December 31, 1997, the one week ended January 7,
1998 and the 51 weeks ended December 30, 1998. 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 and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" presented elsewhere herein.
<TABLE>
<CAPTION>
SUCCESSOR
PREDECESSOR COMPANY COMPANY
-------------------------------------------------------------- ------------
ONE WEEK
FISCAL YEAR ENDED ENDED FIFTY-ONE
------------------------------------------------- JANUARY 7, WEEKS ENDED
DEC. 31, DEC. 31, DEC. 31, DEC. 31, JANUARY 7, DECEMBER 30,
(In millions, except ratios and per share 1994 (a) 1995 (a) 1996 (a)(b) 1997 (a)(c) 1998 1998 (d)
amounts) -------- -------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Income statement data:
Operating revenue $1,669.4 $1,603.7 $1,664.1 $1,810.6 $ 33.6 $1,720.5
Operating income (loss) 112.9(e) 71.6(f) 109.0 125.0 8.7 (67.3)
(Loss) income from continuing
operations (g) (24.2) (77.7) (53.0) (76.3) 734.3(h) (181.0)
Basic (loss) income per share from
continuing operations applicable to
common shareholders (0.91) (2.17) (1.58) (2.13) 17.30 (4.52)
Diluted (loss) income per share from
continuing operations applicable to
common shareholders (0.91) (2.17) (1.58) (2.13) 13.32 (4.52)
Cash dividends per common share (i) -- -- -- -- -- --
Ratio of earnings to fixed charges (j) -- -- -- -- 249.3x --
Deficiency in the coverage of fixed
charges to earnings before fixed
charges (j) 26.3 74.9 69.3 74.6 -- 182.8
Balance sheet data (at end of period):
Current assets (k) $ 186.1 $ 285.3 $ 185.5 $ 129.6 $ 295.4
Working capital (deficit) (k)(l) (205.6) (122.2) (297.7) (230.2) (96.1)
Net property and equipment 1,196.4 1,104.4 1,168.6 625.8 693.3
Total assets 1,587.5 1,507.8 1,687.4 1,407.4 1,986.2
Long-term debt, excluding current
portion 2,067.6 1,996.1 2,180.7 594.2(m) 1,156.0
Other data:
EBITDA as defined (n) $ 184.4 $ 185.2 $ 190.3 $ 218.1 $ 10.3 $ 218.6
Net cash flows from operating
activities (14.2) (2.4) (9.9) 62.8 8.6 25.5
Net cash flows provided by (used in)
investing activities 355.0(o) 190.0(p) (101.4)(q) (52.7) 7.9 235.3(r)
Net cash flows provided by (used in)
investing activities (298.2) (57.3) 6.8 (48.4) (11.9) (94.8)
</TABLE>
- ---------------
(a) Certain amounts for the four years ended December 31, 1997 have been
reclassified to conform to the 1998 presentation.
(b) Reflects the acquisition in May 1996 of Coco's and Carrows.
(c) Due to the change in the Company's fiscal year end, the year ended December
31, 1997 includes more than 52 weeks of operations as further described in
Note 4 to the Consolidated Financial Statements.
14
<PAGE> 17
(d) As discussed in more detail 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 resulting
from the bankruptcy required that the Company apply fresh start reporting
effective January 7, 1998 in accordance 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"). All financial statements subsequent to January 7, 1998
are referred to as "Successor Company," as they reflect periods subsequent
to the implementation of fresh start reporting and are not comparable to the
financial statements for periods prior to January 7, 1998.
(e) Operating income for the year ended December 31, 1994 reflects a recovery of
restructuring charges of $5.0 million.
(f) Operating income for the year ended December 31, 1995 reflects a provision
for restructuring charges of $10.3 million and a charge for impaired assets
of $24.8 million.
(g) The Company has classified as discontinued operations Canteen Corporation, a
food and vending subsidiary, TWRS, a recreation services subsidiary, VS, a
stadium concessions subsidiary, FEI, a restaurant subsidiary, and Quincy's,
a restaurant subsidiary. Canteen Corporation was sold in 1994. TWRS and VS
were sold during 1995. FEI and Quincy's were sold in 1998.
(h) The income from continuing operations for the one week ended January 7, 1998
includes reorganization items of $714.2 million.
(i) 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 11 to
the accompanying Consolidated Financial Statements appearing elsewhere
herein.
(j) For purposes of computing the ratio of earnings to fixed charges or
deficiency in the coverage of fixed charges to earnings before fixed
charges, fixed charges consist of interest expense including capitalized
interest, amortization of debt expenses and the interest element in rental
payments under operating leases (estimated to be one third). Earnings
consist of income from continuing operations before income taxes and fixed
charges excluding capitalized interest.
(k) The current assets and working capital deficit amounts presented exclude
assets held for sale of $77.3 million as of December 31, 1994, $5.1 million
as of December 31, 1996 and $347.0 million as of December 31, 1997. Such
assets held for sale relate to the Company's food and vending, concessions
and recreation services subsidiaries for the year ended December 31, 1994.
For the year ended December 31, 1997, net assets held for sale relate to FEI
and Quincy's.
(l) A negative working capital position is not unusual for a restaurant
operating company. The decrease in the working capital deficit from December
31, 1994 to December 31, 1995 is due primarily to an increase in cash
following the 1995 sales of the Company's distribution subsidiary, PFC, and
the concession and recreation services subsidiaries, net of current assets
and liabilities of such subsidiaries. The increase in the working capital
deficit 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 deficit 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 in accordance
with SOP 90-7, largely offset by a reduction in cash and cash equivalents
which was used for Company operations. The decrease in the working capital
deficit from December 31, 1997 to December 30, 1998 is attributable
primarily to an increase in cash and cash equivalents from the sales of FEI
and Quincy's. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Advantica -- Liquidity and Capital
Resources."
(m) 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 Chapter 11 filing.
(n) "EBITDA as defined" 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 as defined 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. The Company's measure of EBITDA as defined may not be comparable
to similarly titled measures reported by other companies. The following
restructuring and impairment charges (recoveries) have been excluded from
EBITDA as defined for the periods indicated: 1994 -- ($5.0 million) and
1995 -- $35.1 million.
(o) Net cash flows provided by investing activities include proceeds from sale
of discontinued operations of $447.1 million.
(p) Net cash flows provided by investing activities include proceeds from sale
of discontinued operations and subsidiaries of $294.6 million.
(q) Net cash flows used in investing activities include the acquisition of
Coco's and Carrows, net of cash acquired, of $127.1 million as well as the
net proceeds from the disposition of PTF of $63.0 million.
(r) Net cash flows provided by investing activities include proceeds from sales
of discontinued operations of $460.4 million.
15
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with "Selected Financial
Data," and the Consolidated Financial Statements and other more detailed
financial information appearing elsewhere herein. For purposes of providing a
meaningful comparison of the Company's 1998 operating performance, the following
discussion and presentation of the results of operations for the one week ended
January 7, 1998 (Predecessor Company) and the 51 weeks ended December 30, 1998
(Successor Company) will be combined and referred to as the year ended December
30, 1998.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 30,
COMPANY CONSOLIDATED 1996 1997 1998
- -------------------- ------------ ------------ ------------
<S> <C> <C> <C>
(In millions)
Net company sales $1,609 $1,749 $1,686
Franchise revenue 55 62 68
------ ------ ------
Operating revenue 1,664 1,811 1,754
Operating expenses 1,555 1,686 1,813
------ ------ ------
Operating income (loss) $ 109 $ 125 $ (59)
====== ====== ======
EBITDA as defined $ 190 $ 218 $ 229
Consolidated interest expense, net 177 165 117
Reorganization items -- 30 (714)
Income tax (benefit) provision (16) 2 (15)
Extraordinary gains -- -- (614)
Net (loss) income (85) (134) 1,213
</TABLE>
1998 RESTAURANT UNIT ACTIVITY
<TABLE>
<CAPTION>
ENDING UNITS ENDING
UNITS UNITS SOLD/ UNITS UNITS
12/31/97 OPENED CLOSED REFRANCHISED 12/30/98
-------- ------ ------ ------------ --------
<S> <C> <C> <C> <C> <C>
Denny's
Company-owned 894 21 (8) (29) 878
Franchised units (a) 740 72 (16) 29 825
Licensed units (a) 18 -- -- -- 18
----- --- ---- --- -----
1,652 93 (24) -- 1,721
Coco's
Company-owned 178 -- (17) (11) 150
Franchised units 17 4 (1) 11 31
Licensed units 298 12 (10) -- 300
----- --- ---- --- -----
493 16 (28) -- 481
Carrows
Company-owned 140 -- (5) (12) 123
Franchised units 14 2 (2) 12 26
----- --- ---- --- -----
154 2 (7) -- 149
El Pollo Loco
Company-owned 98 5 -- (3) 100
Franchised units 145 16 (3) 3 161
Licensed units 4 -- -- -- 4
----- --- ---- --- -----
247 21 (3) -- 265
Hardee's 557 -- (557)(b) -- --
Quincy's 180 -- (180)(c) -- --
----- --- ---- --- -----
3,283 132 (799) -- 2,616
===== === ==== === =====
</TABLE>
- ---------------
(a) Certain units have been reclassified to conform to the 1998 presentation.
(b) Reflects the consummation of the sale of FEI stock on April 1, 1998.
(c) Reflects the consummation of the sale of Quincy's stock on June 10, 1998.
16
<PAGE> 19
1998 VS. 1997
EMERGENCE FROM CHAPTER 11 BANKRUPTCY
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 (with the surviving corporation in the merger of
FCI and Flagstar on that date changing its name to Advantica Restaurant Group,
Inc.). As described in Note 2 to the Consolidated Financial Statements, the
change in ownership of the Company effected by the financial restructuring
required that the Company apply fresh start reporting effective January 7, 1998,
in accordance with SOP 90-7.
OPERATING RESULTS
The Company's CONSOLIDATED REVENUE for the year ended December 30, 1998
decreased by $56.5 million (3.1%) as compared to the prior year. The revenue
decrease is partially attributable to an estimated $32.6 million impact due to
fewer reporting days in the 1998 period versus the 1997 comparable period
because of the change in the Company's fiscal year end in 1997. Excluding the
impact of fewer days in the 1998 reporting period, revenue for 1998 decreased
$23.9 million compared to the prior year. This decrease is principally due to a
59-unit decrease in Company-owned units (excluding the impact of the FEI and
Quincy's dispositions) resulting primarily from refranchising activity, whereby
the Company has sold Company units to franchisees as part of its strategy to
optimize its portfolio of Company-owned and franchised restaurants. Denny's
posted positive same-store sales for the period, although the Company's other
concepts experienced declines. The decrease in Company sales is partially offset
by a $6.2 million (10.1%) increase in franchise and licensing revenue attributed
to a 129-unit increase in franchised and licensed units, reflecting the
Company's strategy to grow through franchising. The 129-unit increase results
primarily from an increase in the number of franchised units and includes 85
additional franchised units in Denny's, 14 in Coco's, 12 in Carrows and 16 in El
Pollo Loco.
The comparability of 1998 and 1997 CONSOLIDATED OPERATING EXPENSES is
significantly affected by the impact of the adoption of fresh start reporting as
of January 7, 1998. Specifically, the amortization of reorganization value in
excess of amounts allocable to identifiable assets, which is over a five-year
period, totaled $139.8 million for the 51 weeks ended December 30, 1998. In
addition, the adjustment of property and equipment and other intangible assets
to fair value as a result of the adoption of fresh start reporting resulted in
an estimated increase in amortization and depreciation of approximately $43.1
million. Excluding the effect of the estimated impact of fresh start reporting,
operating expenses decreased $55.8 million (3.3%), primarily reflecting the
effect of fewer reporting days than in the prior year, food cost controls, the
59-unit decrease in Company-owned restaurants, improvement in actuarial trends
for workers' compensation and health benefits costs and an increase of $12.3
million in gains on sales of units which are reflected as a reduction of
operating expenses. Such decreases are somewhat offset by increased labor costs
due to minimum wage increases.
EBITDA AS DEFINED, which is defined by the Company as operating income before
depreciation, amortization and charges for (recoveries of) restructuring and
impairment, increased by $10.8 million in 1998 as compared to 1997. This
increase is a result of the factors noted in the preceding paragraphs, excluding
the estimated $182.9 million increase in depreciation and amortization.
Excluding the estimated impact of the adoption of fresh start reporting as
discussed above, CONSOLIDATED OPERATING INCOME for 1998 decreased by $0.7
million compared to 1997 as a result of the factors noted above.
CONSOLIDATED INTEREST EXPENSE, NET, totaled $116.7 million during the year ended
December 30, 1998 as compared with $164.9 million during 1997. The decrease is
primarily due to the significant reduction in debt resulting from the
implementation of the Plan of Reorganization which became effective on January
7, 1998 and a $18.6 million increase in interest income in 1998 due to increased
cash and cash equivalents available for investment as a result of the FEI and
Quincy's dispositions. Also contributing to the decrease in interest expense in
1998 is the lower effective yield on Company debt resulting from the revaluation
of such debt to fair value at January 7, 1998 in accordance with fresh start
reporting, largely offset by the effect of the allocation of $24.8 million of
interest expense to discontinued operations in the prior year compared to $2.8
million in the current year period.
REORGANIZATION ITEMS include professional fees and other expenditures incurred
by the Company in conjunction with the reorganization as well as the impact of
adjusting assets and liabilities to fair value in accordance with SOP 90-7 as
discussed in Notes 2 and 7 to the Consolidated Financial Statements included
herein.
17
<PAGE> 20
The PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations for the
51-week period has been computed based on management's estimate of the annual
effective income tax rate applied to loss before taxes. The Company recorded an
income tax benefit reflecting an effective income tax rate of approximately
(1.0%) for the 51 weeks ended December 30, 1998 compared to a provision for the
1997 fiscal year period reflecting an approximate rate of 2.3%. The benefit from
income taxes from continuing operations for the one-week period ended January 7,
1998 of approximately $13.8 million includes adjustments of approximately $12.5
million of various tax accruals. The remaining benefit of approximately $1.3
million relates to the tax effect of the revaluation of certain Company assets
and liabilities in accordance with fresh start accounting (See Note 13 to the
accompanying Consolidated Financial Statements for additional information).
EXTRAORDINARY GAINS for the year ended December 30, 1998 total $613.8 million.
Of this amount, $612.8 million is due to the implementation of the Plan of
Reorganization which resulted in the exchange of the Senior Subordinated
Debentures and the 10% Convertible Debentures for 40 million shares of Common
Stock and Warrants to purchase four million additional shares of Common Stock.
The difference between the carrying value of such debt (including principal,
accrued interest and deferred financing costs) and the fair value of the Common
Stock and Warrants resulted in a gain on debt extinguishment which was recorded
as an extraordinary item. The remaining $1.0 million of the extraordinary gains
relates to the early retirement of $42.4 million of Senior Notes as a result of
Advantica's July 31, 1998 Net Proceeds Offer (as defined and further described
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources").
The Statements of Consolidated Operations and Cash Flows presented herein have
been reclassified for the 1997 period to reflect FEI and Quincy's as
DISCONTINUED OPERATIONS in accordance with Accounting Principles Board Opinion
No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." Revenue and operating income of the
discontinued operations for the year ended December 30, 1998 and the year ended
December 31, 1997 were $207.6 million and $5.8 million and $779.9 million and
$5.4 million, respectively. The operating results of FEI subsequent to January
7, 1998 and through the disposition date were reflected as an adjustment to "Net
assets held for sale" prior to the disposition. The adjustment to "Net assets
held for sale" as a result of the net loss of FEI for the twelve weeks ended
April 1, 1998 was ($1.4) million. Revenue and operating income of FEI for the
twelve weeks ended April 1, 1998 were $116.2 million and $5.7 million,
respectively.
NET INCOME was $1.2 billion for the year ended December 30, 1998 as compared to
a net loss of $0.1 million for the prior year, primarily as a result of the
adoption of fresh start reporting and the extraordinary gain discussed above.
ACCOUNTING CHANGES
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 April 1998, the AICPA issued Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5") which
provides additional guidance on the financial reporting of start-up costs,
requiring costs of start-up activities to be expensed as incurred.
In accordance with the adoption of fresh start reporting upon emergence from
bankruptcy (see Note 2 to the Consolidated Financial Statements herein), the
Company adopted both statements of position as of January 7, 1998. The adoption
of SOP 98-1 at January 7, 1998 resulted in the write-off of previously
capitalized direct costs of obtaining computer software associated with research
and development totaling $3.4 million. Subsequent to the Effective Date, similar
costs are being expensed as incurred. The adoption of SOP 98-5 at January 7,
1998 resulted in the write-off of an immaterial amount of previously capitalized
preopening costs. Subsequent to the Effective Date, preopening costs are being
expensed as incurred.
In 1998, the Company adopted 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. Comprehensive income consists of net income and foreign
currency translation adjustments and is presented in the Consolidated Statement
of Shareholders' Equity. The adoption of SFAS 130 does not impact the Company's
consolidated results of operations, financial position or cash flows. Prior year
financial statements have been reclassified to conform to the SFAS 130
requirements.
18
<PAGE> 21
In 1998, the Company adopted 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. The adoption of SFAS 131 does not impact
the Company's consolidated results of operations, financial position or cash
flows.
In 1998, the Company adopted statement of Financial Accounting Standards No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
("SFAS 132"). This Statement does not change the measurement or recognition of
those plans, but is designed to simplify disclosures about pension and other
postretirement benefit plans. Specifically, it standardizes the disclosure
requirements to the extent practicable, requires additional information on
changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis, and eliminates certain disclosures that are no
longer as useful as they were when SFAS No. 87, "Employers' Accounting for
Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
were issued. The Statement also suggests combined formats for presentation of
pension and other postretirement benefit disclosures. The adoption of SFAS 132
had no impact on the Company's consolidated results of operations, financial
position or cash flows.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Financial Instruments and Hedging Activities" ("SFAS 133"), was issued in June
1998. This statement establishes accounting and reporting standards for
derivative financial instruments and for hedging activities. It requires that
entities recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The accounting for
changes in fair value of the derivative (i.e., gains and losses) depends on the
intended use of the derivative and the resulting designation. SFAS No. 133 will
be effective for the Company's fiscal year-end 2000 financial statements. The
Company is in the process of evaluating the effect of SFAS 133 on its
consolidated results of operations, financial position and cash flows.
1997 VS. 1996
The Company's CONSOLIDATED REVENUE for 1997 increased by $146.5 million (8.8%)
as compared with 1996. This increase is primarily attributable to two factors:
(1) 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 (2) 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 $79.8 million compared to the prior year. This
decrease reflects decreases in same-store sales at Denny's and Carrows, as well
as a 23-unit decrease in Company-owned units (excluding Hardee's and Quincy's
unit activity). 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 $130.5 million (8.4%) as
compared with 1996. The expense increase is primarily attributable to two
factors: (1) the estimated $20.3 million impact of the additional days in the
1997 reporting period in comparison to the prior year comparable period and (2)
a $190.6 million impact of the additional five months of operations of Coco's
and Carrows in 1997 in comparison to the prior year. Excluding the extra
reporting days and the impact of the Coco's and Carrows acquisition, operating
expenses for 1997 decreased $80.4 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 23-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 $7.9 million in 1997.
EBITDA AS DEFINED, which is defined by the Company as operating income before
depreciation, amortization and charges for (recoveries of) restructuring and
impairment, increased by $27.8 million in 1997 as compared to 1996. This
increase is a result of the factors noted in the preceding paragraphs.
CONSOLIDATED OPERATING INCOME for 1997 increased by $16.0 million (14.7%) as
compared with 1996 as a result of the factors noted above.
CONSOLIDATED INTEREST EXPENSE, NET, totaled $164.9 million during 1997 compared
to $177.2 million during 1996. The decrease occurred principally because the
Company ceased recording interest on the Senior Subordinated Debentures
19
<PAGE> 22
and 10% Convertible Debentures (each as defined herein) on July 11, 1997, in
accordance with SOP 90-7. This decrease is partially offset by an increase of
$11.9 million of interest 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 1997
decreased $5.7 million compared to the prior year 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 7 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 2.3%
for 1997 compared to a benefit for 1996 which reflects an approximate rate of
(23.5%). 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 13 to the accompanying Consolidated Financial
Statements for additional information.
The Statements of Consolidated Operations and Cash Flows presented herein have
been reclassified for the 1997 and 1996 periods to reflect FEI and Quincy's as
DISCONTINUED OPERATIONS in accordance with Accounting Principles Board Opinion
No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." Revenue and operating income of the
discontinued operations for the years ended December 31, 1997 and 1996 were
$779.9 million and $5.4 million and $862.1 million and $47.4 million,
respectively.
The NET LOSS was $134.5 million in 1997 compared to a net loss of $85.5 million
for the prior year. The increase in the net loss is due to the factors noted
above.
CHANGE IN FISCAL YEAR
Effective January 1, 1997, the Company changed its fiscal year end from December
31 to the last Wednesday of the calendar year. Concurrent with this change, the
Company changed to a four-four-five week quarterly closing calendar which is the
restaurant industry standard, and generally results in four 13-week quarters
during the year with each quarter ending on a Wednesday. Due to the timing of
this change, the year ended December 31, 1997 includes more than 52 weeks of
operations. Carrows and Coco's include an additional six days, Denny's includes
an additional five days and El Pollo Loco includes an additional week.
ACCOUNTING CHANGES
The Company adopted SFAS 128 in the quarter ended December 31, 1997. SFAS 128
replaced the calculation of primary and fully diluted earnings (loss) per share
with basic and diluted earnings (loss) per share. Unlike primary earnings (loss)
per share, basic earnings (loss) per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings (loss) per share
is very similar to the previously reported fully diluted earnings (loss) per
share.
20
<PAGE> 23
RESTAURANT OPERATIONS
DENNY'S (a)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 30,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
($ in millions, except average unit and same-store data)
U. S. systemwide sales $ 1,850 $1,902 $1,963
======== ====== ======
Net company sales $ 1,220 $1,146 $1,128
Franchise and licensing revenue 43 47 51
-------- ------ ------
Total revenue 1,263 1,193 1,179
-------- ------ ------
Operating expenses:
Amortization of reorganization value in excess of amounts
allocable to identifiable assets -- -- 79
Other 1,149 1,073 1,086
-------- ------ ------
Total operating expenses 1,149 1,073 1,165
-------- ------ ------
Operating income $ 114 $ 120 $ 14
======== ====== ======
EBITDA as defined $ 165 $ 172 $ 184
Average unit sales (in thousands):
Company-owned 1,313 1,285 1,283
Franchised 1,090 1,079 1,091
Same-store data (Company-owned) (b):
Same-store sales increase (decrease) 1.7% (4.5%) 1.3%
Average guest check $ 5.04 $ 5.54 $ 5.83
Operated units:
Company-owned 894 894 878
Franchised 681(c) 740(c) 825
Licensed 21(c) 18(c) 18
-------- ------ ------
Total 1,596 1,652 1,721
======== ====== ======
</TABLE>
- ---------------
(a) Excludes the operating results of the Company's food processing (PTF)
operations for all years presented.
(b) Prior year amounts have not been restated for 1998 comparable units.
(c) Certain units have been reclassified to conform to the 1998 presentation.
1998 VS. 1997
Denny's NET COMPANY SALES decreased by $18.2 million (1.6%) during the year
ended December 30, 1998 compared to the prior year. The decrease primarily
reflects a $21.7 million impact resulting from five fewer reporting days in the
first quarter of 1998 in comparison to the prior year comparable period and 16
fewer equivalent Company-owned units. This was partially offset by $3.4 million
in additional sales at Company-owned units as year-to-date same-store sales
turned positive due to strong sales increases in the last half of the year. Such
increases were primarily driven by an increase in Denny's average guest check
due to successful promotions of higher-priced menu items as well as price
increases initiated to keep pace with minimum wage and other costs increases.
Additionally, in the fourth quarter Denny's experienced an increase in guest
counts, reversing recent negative guest traffic trends. FRANCHISE AND LICENSING
REVENUE increased $4.1 million, up 8.7% over last year. The increased
franchising revenue reflects the Company's strategy to grow its franchise store
base, including the sale of Company-owned units to franchisees to stimulate such
growth. Denny's added 72 franchised stores in the current year, reflecting a
growth pace similar to 1997 when Denny's opened a record 77 franchise units.
The comparability of 1998 and 1997 OPERATING EXPENSES is significantly affected
by the impact of the adoption of fresh start reporting as of January 7, 1998.
Specifically, the amortization of reorganization value in excess of amounts
allocable to identifiable assets, which is over a five-year period, totaled
$79.2 million for the 51 weeks ended December 30, 1998. In addition, the
adjustment of property and equipment and other intangible assets to fair value
resulted in an estimated increase in amortization and depreciation of
approximately $35.6 million. Excluding the estimated effect of fresh start
reporting, operating expenses decreased $22.7 million (2.1%), primarily
reflecting the effect of five fewer reporting days, fewer Company-owned units,
improvements in actuarial trends for workers' compensation and health benefits
costs and
21
<PAGE> 24
an increase of $10.8 million in gains on sales of units which are reflected as a
reduction of operating expenses. These decreases are partially offset by an
increase in labor costs due to minimum wage increases and the effect on the
prior year of a $5.8 million nonrecurring reduction of operating expenses.
EBITDA AS DEFINED, which is defined by the Company as operating income before
depreciation, amortization and charges for (recoveries of) restructuring and
impairment, increased by $12.8 million in 1998 as compared to 1997. This
increase is a result of the factors noted in the preceding paragraphs, excluding
the estimated $114.8 million increase in depreciation and amortization.
Excluding the estimated impact of fresh start reporting, Denny's OPERATING
INCOME for the year ended December 30, 1998 increased by $8.7 million over the
prior year comparable period as a result of the factors noted above.
1997 VS. 1996
Denny's NET COMPANY SALES decreased by $73.7 million (6.0%) in 1997 as compared
to 1996. This change reflects a decrease in same-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 same-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 LICENSING REVENUE for the period increased by
$3.8 million (8.7%), reflecting the effect of 56 more franchised units open at
the end of 1997 than at the end of 1996. The significant increase in franchised
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 $76.0
million (6.6%), 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 nonrecurring 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 $2.4 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.
EBITDA AS DEFINED, which is defined by the Company as operating income before
depreciation, amortization and charges for (recoveries of) restructuring and
impairment, increased $6.2 million in 1997 as compared to 1996. This increase is
a result of the factors noted in the preceding paragraphs.
Denny's OPERATING INCOME for 1997 increased $6.1 million (5.3%) over the prior
year as a result of the factors noted above.
22
<PAGE> 25
COCO'S AND CARROWS
The following information for the year ended December 31, 1996 is provided for
analysis purposes only, as it includes information for periods prior to the
Company's acquisition of Coco's and Carrows on May 23, 1996. Specifically, the
discussion of 1997 vs. 1996 results includes a full year of operating results
for both years, although such operating results prior to May 23, 1996 are not
included in consolidated operating results of the Company.
COCO'S
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 30,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
($ in millions, except average unit and same-store data)
U. S. systemwide sales $ 278 $ 288 $ 280
====== ====== ======
Net company sales $ 270 $ 276 $ 256
Franchise and licensing revenue 4 4 4
------ ------ ------
Total revenue 274 280 260
------ ------ ------
Operating expenses:
Amortization of reorganization value in excess of amounts
allocable to identifiable assets -- -- 22
Other 264 262 245
------ ------ ------
Total operating expenses 264 262 267
------ ------ ------
Operating income (loss) $ 10 $ 18 $ (7)
====== ====== ======
EBITDA as defined $ 19(a) $ 35 $ 35
Average annual unit sales (in thousands):
Company-owned 1,462 1,492 1,569
Franchised 1,719 1,728 1,356
Same-store data (Company-owned) (b):
Same-store sales decrease (1.6%) 0.0% (0.7%)
Average guest check $ 6.80 $ 6.77 $ 6.96
Operated units:
Company-owned 183 178 150
Franchised 5 17 31
Licensed 278 298 300
------ ------ ------
Total 466 493 481
====== ====== ======
</TABLE>
- ---------------
(a) EBITDA as defined relates only to the period subsequent to the Company's
acquisition of Coco's and Carrows, as the Company's measure of EBITDA as
defined may not be comparable to similarly titled measures reported by other
companies.
(b) Prior year amounts have not been restated for 1998 comparable units.
1998 VS. 1997
Coco's NET COMPANY SALES for the year ended December 30, 1998 decreased $20.1
million (7.3%) as compared to the prior year. The decrease includes a $4.8
million impact due to six fewer reporting days compared to the prior year
comparable period. The remaining decrease reflects a 28-unit decrease in the
number of Company-owned restaurants and a small decrease in same-store sales.
The decrease in same-store sales resulted primarily from a decline in customer
traffic, partially offset by a higher average guest check in the first half of
the year. The increase in average guest check reflects menu price increases
instituted in August 1997 and February 1998 in response to minimum wage
increases. In the third and fourth quarters, the Company was able to reverse the
negative trend in customer traffic through the implementation of successful
value-priced promotions. Due to the effect of such value pricing on average
guest check, same-store sales remained slightly negative on a year-to-date
basis. FRANCHISE AND LICENSING REVENUE was flat compared to the prior year,
reflecting an increase in franchise revenue offset by a decrease in licensing
revenue. The increase in franchise revenue resulted from the net increase of 14
franchised units in 1998. The decline in foreign licensing revenue resulted
primarily from a stronger dollar versus the yen. The stronger dollar versus the
yen and the increase in the number of franchised units also explain the large
variance in franchise average unit sales.
23
<PAGE> 26
The comparability of 1998 and 1997 OPERATING EXPENSES is significantly affected
by the impact of the adoption of fresh start reporting as of January 7, 1998.
Specifically, the amortization of reorganization value in excess of amounts
allocable to identifiable assets, which is over a five-year period, totaled
$22.1 million for the year ended December 30, 1998. In addition, the adjustment
of property and equipment and other intangible assets to fair value resulted in
an estimated increase in amortization and depreciation of $3.2 million.
Excluding the estimated impact of fresh start reporting, operating expenses
decreased $19.2 million (7.3%). This decrease reflects the effect of six fewer
reporting days than in the prior year and the 28-unit decrease in Company-owned
restaurants.
EBITDA AS DEFINED, which is defined by the Company as operating income before
depreciation, amortization and charges for (recoveries of) restructuring and
impairment, was flat for 1998 compared to 1997. This results from the factors
noted in the preceding paragraphs, excluding the estimated $25.3 million
increase in depreciation and amortization.
Excluding the estimated impact of the adoption of fresh start reporting, Coco's
OPERATING INCOME for the year ended December 30, 1998 decreased $0.5 million
compared to the prior year comparable period as a result of the factors noted
above.
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 same-store sales were flat in 1997 as compared to 1996. FRANCHISE AND
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 nonrecurring 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.
EBITDA AS DEFINED, which is defined by the Company as operating income before
depreciation, amortization and charges for (recoveries of) restructuring and
impairment, increased by $16.5 million in 1997 as compared to 1996. This
increase is primarily a result of calculating EBITDA using the twelve months'
operating results for 1997 versus using the operating results for only the seven
months after acquisition for 1996, as well as the other factors noted in the
preceding paragraphs.
OPERATING INCOME for Coco's increased to $18.4 million in 1997 as a result of
the factors noted above.
24
<PAGE> 27
CARROWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 30,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
($ in millions, except average unit and same-store data)
U. S. systemwide sales $ 217 $ 215 $ 204
===== ====== ======
Net company sales $ 217 $ 211 $ 185
Franchise and licensing revenue -- 1 2
----- ------ ------
Total revenue 217 212 187
----- ------ ------
Operating expenses:
Amortization of reorganization value in excess of amounts
allocable to identifiable assets -- -- 18
Other 210 198 179
----- ------ ------
Total operating expenses 210 198 197
----- ------ ------
Operating income $ 7 $ 14 $ (10)
===== ====== ======
EBITDA as defined $ 15(a) $ 27 $ 23
Average annual unit sales (in thousands)
Company-owned 1,343 1,362 1,377
Franchised NM NM 1,131
Same-store data (Company-owned) (b):
Same-store sales increase (decrease) 0.1% (1.7%) (2.0%)
Average guest check $6.25 $ 6.49 $ 6.60
Operated units:
Company-owned 160 140 123
Franchised -- 14 26
----- ------ ------
Total 160 154 149
===== ====== ======
</TABLE>
- ---------------
(a) EBITDA as defined relates only to the period subsequent to the Company's
acquisition of Coco's and Carrows, as the Company's measure of EBITDA as
defined may not be comparable to similarly titled measures reported by other
companies.
(b) Prior year amounts have not been restated for 1998 comparable units.
NM = Not meaningful
1998 VS. 1997
Carrows' NET COMPANY SALES decreased $26.3 million (12.4%) for the year ended
December 30, 1998 as compared to the prior year comparable period. The decrease
reflects a $3.8 million impact due to six fewer reporting days compared to the
prior year. The remaining decrease reflects a 17-unit decrease in the number of
Company-owned restaurants, 12 of which were converted to franchise units, and a
decrease in same-store sales. The decrease in same-store sales resulted
primarily from a decrease in customer traffic, partially offset by a higher
average guest check in the first half of the year. The increase in average guest
check reflects menu price increases instituted in August 1997 and February 1998
in response to minimum wage increases. In the third and fourth quarters, the
Company was able to reverse the negative trend in customer traffic through the
implementation of successful value-priced promotions. Due to the effect of such
value pricing on average guest check, same-store sales remained negative on a
year-to-date basis. FRANCHISE AND LICENSING REVENUE increased $1.3 million for
the year ended December 30, 1998 compared to the prior year. This increase
resulted from the addition of 12 franchised units over the prior year.
The comparability of 1998 and 1997 OPERATING EXPENSES is significantly affected
by the impact of the adoption of fresh start reporting as of January 7, 1998.
Specifically, the amortization of reorganization value in excess of amounts
allocable to identifiable assets, which is over a five-year period, totaled
$17.9 million for the year ended December 30, 1998. In addition, the adjustment
of property and equipment and other intangible assets to fair value resulted in
an estimated increase in amortization and depreciation of $2.2 million.
Excluding the estimated impact of fresh start reporting, operating expenses
decreased $21.2 million (10.7%), reflecting the effect of six fewer reporting
days than in the prior year comparable period and the 17-unit decrease in
Company-owned restaurants.
25
<PAGE> 28
EBITDA AS DEFINED, which is defined by the Company as operating income before
depreciation, amortization and charges for (recoveries of) restructuring and
impairment, decreased by $3.2 million in 1998 as compared to 1997. This decrease
is a result of the factors noted in the preceding paragraphs, excluding the
estimated $20.1 million increase in depreciation and amortization.
Excluding the estimated impact of the adoption of fresh start reporting,
Carrows' OPERATING INCOME for the year ended December 30, 1998 decreased $3.8
million from the prior year as a result of the factors noted above.
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 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 same-store sales, reflecting a decrease in traffic
partially offset by an increase in average guest check. FRANCHISE AND 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 nonrecurring
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.
EBITDA AS DEFINED, which is defined by the Company as operating income before
depreciation, amortization and charges for (recoveries of) restructuring and
impairment, increased by $11.7 million in 1997 as compared to 1996. This
increase is primarily a result of calculating EBITDA using the twelve months'
operating results for 1997 versus using the operating results for only the seven
months after acquisition for 1996, as well as the other factors noted in the
preceding paragraphs.
OPERATING INCOME for Carrows increased to $13.6 million in 1997 as a result of
the factors noted above.
26
<PAGE> 29
EL POLLO LOCO
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 30,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
($ in millions, except average unit and same-store data)
U. S. systemwide sales $ 218 $ 235 $ 245
====== ====== ======
Net company sales $ 115 $ 115 $ 117
Franchise and licensing revenue 9 10 10
------ ------ ------
Total revenue 124 125 127
------ ------ ------
Operating expenses
Amortization of reorganization value in excess of amounts
allocable to identifiable assets -- -- 11
Other 110 110 114
------ ------ ------
Total operating expenses 110 110 125
------ ------ ------
Operating income $ 14 $ 15 $ 2
====== ====== ======
EBITDA as defined $ 20 $ 20 $ 21
Average annual unit sales (in thousands):
Company-owned 1,155 1,206 1,176
Franchise 852 856 847
Same-store data (Company-owned) (a):
Same-store sales increase 7.2% 0.2% (0.9%)
Average guest check $ 6.64 $ 6.77 $ 6.94
Operated units:
Company-owned 96 98 100
Franchised 135 145 161
Licensed 10 4 4
------ ------ ------
Total 241 247 265
====== ====== ======
</TABLE>
- ---------------
(a) Prior year amounts have not been restated for 1998 comparable units.
1998 VS. 1997
El Pollo Loco's NET COMPANY SALES increased $1.8 million (1.6%) during the year
ended December 30, 1998 compared with the prior year comparable period. The
increase is primarily driven by the addition of four Company-owned units early
in the current year (with four units refranchised at the end of the year),
somewhat offset by a $2.3 million impact due to seven fewer reporting days in
the current period compared to the prior year period and a small decline in
same-store sales. The decline in same-store sales resulted from the first three
quarters of 1998, when lower customer counts were only partially offset by an
increase in the average guest check resulting from menu price increases
implemented in response to minimum wage increases. El Pollo Loco experienced an
increase in both same-store sales and customer guest counts in the fourth
quarter. FRANCHISE AND LICENSING REVENUE increased $0.4 million (4.5%),
reflecting 16 additional franchise units in 1998 compared to 1997.
The comparability of 1998 and 1997 OPERATING EXPENSES is significantly affected
by the impact of the adoption of fresh start reporting as of January 7, 1998.
Specifically, the amortization of reorganization value in excess of amounts
allocable to identifiable assets, which is over a five-year period, totaled
$11.0 million for the year ended December 30, 1998. In addition, the adjustment
of property and equipment and other intangible assets to fair value resulted in
an estimated increase in amortization and depreciation of approximately $2.6
million. Excluding the estimated impact of fresh start reporting, operating
expenses increased $1.8 million (1.6%) compared to 1997, reflecting the increase
in Company-owned units, higher labor costs due to minimum wage increases and
efforts to improve staffing levels and increased advertising expenditures in the
fourth quarter. Such increases were somewhat offset by the impact of fewer
reporting days in the current period, aggressive food cost controls, and a $0.7
million nonrecurring insurance recovery recorded in the current year as a
reduction to operating expenses.
27
<PAGE> 30
EBITDA AS DEFINED, which is defined by the Company as operating income before
depreciation, amortization and charges for (recoveries of) restructuring and
impairment, increased by $1.0 million in 1998 as compared to 1997. This increase
is a result of the factors noted in the preceding paragraphs, excluding the
estimated $13.6 million increase in depreciation and amortization.
Excluding the estimated impact of the adoption of fresh start reporting, El
Pollo Loco's operating income for the year ended December 30, 1998 increased by
$0.5 million compared to the prior year period as a result of the factors noted
above.
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. Same-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 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.
EBITDA AS DEFINED, which is defined by the Company as operating income before
depreciation, amortization and charges for (recoveries of) restructuring and
impairment, was flat in 1997 as compared to 1996. This is a result of the
factors noted in the preceding paragraphs.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Plan of Reorganization became effective January 7, 1998, and as a result,
the Company significantly reduced its debt and simplified its capital structure.
On the Effective Date, the Company entered into the Credit Facility with Chase
and other lenders named therein which includes a working capital and letter of
credit facility of up to a total of $200 million. At December 30, 1998, the
Company had no working capital advances outstanding under the Credit Facility;
however, letters of credit outstanding were $49.4 million. 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 matures on January 7, 2003 (subject to early termination
under certain circumstances -- see Note 11 to the Consolidated Financial
Statements) and is generally secured by liens on the stock of Advantica's direct
and indirect subsidiaries, accounts receivable, intellectual property and cash
and cash accounts, along with Advantica's guarantee and additional liens on the
Company's corporate headquarters in Spartanburg, South Carolina. 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 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.
28
<PAGE> 31
The following table sets forth a calculation of the Company's cash from
operations available for debt repayment and capital expenditures for the periods
indicated:
<TABLE>
<CAPTION>
FISCAL ONE FIFTY-ONE
YEAR WEEK WEEKS
ENDED ENDED ENDED
DECEMBER 31, JANUARY 7, DECEMBER 30,
1997 1998 1998
(In millions) ------------ ---------- ------------
<S> <C> <C> <C>
Net (loss) income $(134.5) $1,394.9 $(181.4)
Equity in (income) loss from discontinued operations, net 58.1 (47.7) 1.5
Extraordinary items -- (612.8) (1.0)
Noncash reorganization items -- (714.6) --
Other noncash charges 62.9 (6.4) 254.6
Deferred income tax provision (benefit) 0.1 (13.9) 0.1
Change in certain working capital items 32.4 10.0 (60.2)
Change in other assets and other liabilities, net 33.9 (0.9) 11.9
Increase in liabilities from reorganization activities 9.9 -- --
------- -------- -------
Cash from operations available for debt repayment and
capital expenditures $ 62.8 $ 8.6 $ 25.5
======= ======== =======
</TABLE>
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
$17.1 million, $1.0 million and $23.0 million for the year ended December 31,
1997, the one week ended January 7, 1998 and the 51 weeks ended December 30,
1998, respectively. Except for the payment of certain management fees and tax
reimbursements payable to Advantica under certain conditions, such cash flows
are currently unavailable to Advantica and its other subsidiaries.
In connection with the acquisition of Coco's and Carrows, FRI-M, which became
thereby a wholly-owned subsidiary of the Company, obtained a credit facility (as
amended to date, the "FRI-M 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. At December 30, 1998,
the amount of the term loan outstanding was $10.4 million and FRI-M had no
outstanding capital borrowings; however, letters of credit outstanding were
$13.2 million. Such facility is unavailable to Advantica and its other
subsidiaries.
On April 1, 1998, the Company completed the sale of all of the capital stock of
FEI for $427 million which included the assumption by the buyer of $46 million
of capital leases. Approximately $173.1 million of the proceeds (together with
$28.6 million already on deposit with respect to the Spartan Mortgage Financing)
was applied to in-substance defease the Spartan Mortgage Financing, with a book
value of $198.9 million plus accrued interest of $6.9 million at April 1, 1998.
The Spartan Mortgage Financing was collateralized by certain assets of Spardee's
Realty, Inc. and Quincy's Realty, Inc. The Company replaced such collateral
through the purchase of a portfolio of United States Government and AAA rated
investment securities which were deposited with the collateral agent with
respect to the Spartan Mortgage Financing to satisfy principal and interest
payments thereunder through the stated maturity date in the year 2000. On June
10, 1998, the Company completed the sale of all of the capital stock of Quincy's
for $84.7 million, which included the assumption by the buyer of $4.2 million of
capital leases. The remaining proceeds from both transactions, after transaction
expenses, improved the Company's short-term liquidity.
On July 31, 1998, the Company extended to the holders of the Senior Notes an
offer to purchase, on a pro rata basis, up to $100.0 million of the outstanding
Senior Notes at a price of 100% of the principal amount thereof plus accrued and
unpaid interest (the "Net Proceeds Offer"). Such offer was extended pursuant to
the terms of the indenture governing the Senior Notes (the "Senior Notes
Indenture") which requires the Company to apply the Net Proceeds (as defined
therein) from the sale of the Hardee's and Quincy's Business Segments (as
defined in the indenture) within 366 days of such sales to (1) an investment in
another asset or business in the same line or similar line of business, (2) a
net proceeds offer, as defined in the Indenture, or (3) the prepayment or
repurchase of Senior Indebtedness (as defined), or any combination thereof as
the Company may choose. The Net Proceeds Offer expired on August 31, 1998.
Tendering holders had the option to withdraw their tenders during a 30-day
period ending on September 30, 1998. At the close of the withdrawal period,
$42.4 million of such securities were tendered and not withdrawn. Such
securities, plus accrued and unpaid interest of $1.1 million, were retired on
October 5, 1998 resulting in an extraordinary gain of $1.0 million. During the
first quarter of 1999, the Company utilized a portion of the remaining proceeds
from the Hardee's and Quincy's sales transactions to purchase an additional $20
million aggregate principal amount of the Senior Notes.
29
<PAGE> 32
As noted above, since the completion of its financial reorganization in January
1998, Advantica has sold two declining restaurant concepts and, in addition, has
focused its attention on reinvigorating its remaining concepts, Denny's, Coco's,
Carrows and El Pollo Loco. Because of covenant limitations under the Senior
Notes Indenture and the Credit Facility and under the FRD Indenture and FRI-M
Credit Facility, the Company's ability to make further investments in FRD to
upgrade its Coco's and Carrows concepts has been severely limited. In an effort
to address this issue, during the latter half of 1998 the Company began
exploring various alternatives to restructure FRD's capital structure in order
to increase capital availability and otherwise improve FRD's financial
flexibility. Most recently, the Company has (1) designated FRD and its
subsidiaries as restricted subsidiaries in accordance with the terms of the
Senior Notes Indenture, generally increasing Advantica's investment flexibility
thereunder in its relationship with FRD and its subsidiaries, (2) obtained
certain amendments to the Credit Facility to increase Advantica's investment
flexibility under that facility with respect to the Coco's and Carrows
operations, and (3) held discussions with certain financial institutions
regarding refinancing the FRI-M Credit Facility prior to its scheduled maturity
date in August 1999. As a result of those discussions, Coco's and Carrows have
entered into a written commitment letter, pursuant to which they have received
commitments from Chase and Credit Lyonnais New York Branch ("Credit Lyonnais")
for a $70 million Senior Secured Credit Facility (the "New FRI-M Facility").
Such facility, which is expected to be guaranteed by Advantica, will consist of
a combined term loan and revolving credit facility and will mature four years
from the date of closing. The closing of such facility, expected to occur in the
second quarter of 1999, is subject to, among other conditions, the negotiation
of definitive agreements with Chase and Credit Lyonnais on mutually acceptable
terms.
Management believes the New FRI-M Facility, together with cash generated from
operations, various cash management measures and other sources, will provide FRD
with adequate liquidity to meet its working capital, debt service and capital
expenditure requirements for at least the next twelve months. However, a
significant downturn in the restaurant industry, the California economy or other
developments adversely affecting FRD's cash flow could materially impair its
ability to service its indebtedness.
Additionally, on or prior to July 12, 2000, the Company will be required to
repay or refinance the $160 million mortgage financing which is secured by a
pool of cross-collateralized mortgages on 240 Denny's restaurant properties
("the Denny's Mortgage Financing"). Although management believes that the
Company will be successful in refinancing or replacing such facility, the
Company's highly leveraged position may limit its ability to do so on acceptable
terms.
Although consummation of the Plan of Reorganization significantly reduced the
Company's debt obligations, the Company still has substantial indebtedness and
debt service requirements, both in absolute terms and in relation to
shareholders' equity. With respect to the long-term liquidity of the Company,
management believes that the Company will have sufficient cash flow from
operations (together with funds available under its existing credit facilities)
to pay interest and scheduled amortization on all of its outstanding
indebtedness and to fund anticipated capital expenditures through 2000 (provided
it is able to refinance on reasonable terms the FRI-M Credit Facility and the
Denny's Mortgage Financing). 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, prevailing economic conditions and
other matters, many of which are beyond the control of the Company.
As of December 30, 1998, scheduled maturities of long-term debt relative to
Advantica and its subsidiaries for the years 1999 and thereafter, excluding
approximately $165 million of in-substance defeased debt maturing in 2000, are
as follows:
<TABLE>
<CAPTION>
ADVANTICA
EXCLUDING FRD FRD
(In millions) ------------- ------
<S> <C> <C>
1999 $ 16.8 $ 13.6
2000 174.9 2.9
2001 12.3 2.8
2002 6.2 2.4
2003 4.9 1.8
Thereafter 583.6 161.0
</TABLE>
In addition to scheduled maturities of principal, on a consolidated basis,
approximately $121.6 million of cash (excluding $16.4 million related to the
in-substance defeased debt) will be required in 1999 to meet interest payments
on long-term debt.
30
<PAGE> 33
The Company's principal capital requirements are those associated with opening
new restaurants and remodeling and maintaining its existing restaurants and
facilities. During 1998, total capital expenditures were approximately $78.1
million. Of the total capital expenditures, approximately $12.3 million were
financed through capital leases. Capital expenditures during 1999, excluding the
estimated $16 million associated with the development or purchase of new
software (see "Impact of the Year 2000 Issue"), are expected to total
approximately $150 million to $160 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 deficit
because (1) restaurant operations and most food service operations are conducted
primarily on a cash (and cash equivalent) basis with a low level of accounts
receivable, (2) rapid turnover allows a limited investment in inventories, and
(3) accounts payable for food, beverages and supplies usually become due after
the receipt of cash from the related sales. At December 30, 1998, the Company's
working capital deficit, exclusive of net assets held for sale, was $96.1
million as compared with $230.2 million at December 31, 1997. The decrease in
the deficit is attributable primarily to an increase in cash and cash
equivalents from the sales of FEI and Quincy's.
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) requires annual payments by the Company ranging
from $26.9 million to $49.1 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.
STOCKHOLDER RIGHTS PLAN
As further discussed in Note 16 to the Consolidated Financial Statements, the
Company's Board of Directors adopted a stockholder rights plan (the "Rights
Plan") on December 14, 1998, which is designed to provide protection for the
Company's shareholders against coercive or unfair takeover tactics. The Rights
Plan is also designed to prevent an acquirer from gaining control of the Company
without offering a fair price to all shareholders. The Rights Plan was not
adopted in response to any specific proposal or inquiry to gain control of the
Company.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs which were written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or operating equipment that have date-sensitive software using
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 a comprehensive enterprise-wide program in place to address the
impact and issues associated with processing dates up to, through and beyond the
year 2000. This program consists of three main areas: (a) information systems,
(b) supply chain and critical third party readiness and (c) business equipment.
The Company is utilizing both internal and external resources to inventory,
assess, remediate, replace and test its systems for Year 2000 compliance. To
oversee the process, the Company has established a Steering Committee which is
comprised of senior executives from all functional areas within the Company and
which reports regularly to the Board of Directors and the Audit Committee.
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 systems will properly utilize dates beyond
December 31, 1999. For the most part, the Company intends to replace existing
systems and, based on current estimates, expects to spend approximately $20
million in 1999 to address its information systems issues. Relative to this
amount, the Company estimates that approximately $16 million will be used to
develop or purchase new software and will be capitalized. The remaining amounts
will be expensed as incurred. Total Year 2000 expenditures through December 30,
1998 are approximately $16.1 million. All estimated costs have been budgeted and
are expected to be funded by cash flows from operations. Currently all
information systems projects are on schedule and are fully staffed. Systems that
are critical to the Company's operations are targeted to be Year 2000 compliant
by June of 1999.
The nature of its business makes the Company very dependent on critical
suppliers and service providers, and the failure of such third parties to
adequately address the Year 2000 issue could have a material impact on the
Company's ability to conduct its business. Accordingly, the Company has a
dedicated team in place to assess the Year 2000 readiness of all
31
<PAGE> 34
third parties on which it depends. Surveys have been sent to critical suppliers
and service providers and each survey response is being scored and assessed
based on the third party's Year 2000 project plans in place and progress to
date. On-site visits or follow-up phone interviews are being performed for
critical suppliers and service providers. For any critical supplier or service
provider which does not provide the Company with satisfactory evidence of their
Year 2000 readiness, contingency plans will be developed which will include
establishing alternative sources for the product or service provided. The
Company is also communicating with its franchise business partners regarding
Year 2000 business risks. 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 relies will be timely converted, or that a failure to convert
by another company would not have a material adverse effect on the Company's
operations.
The Company has inventoried and determined the business criticality of all
restaurant equipment. Based on preliminary findings, the Company believes that
the date-related issues associated with the proper functioning of such assets
are insignificant and are not expected to represent a material risk to the
Company or its operations. The Company has conducted an inventory of its
facilities at the corporate office and is beginning the correction of certain
date-deficient systems.
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. As the Year 2000 project progresses, the Company will
establish contingency plans addressing business critical processes for
operations and other critical corporate functions. However, the costs of the
project and the ability of the Company to complete the Year 2000 transition on a
timely basis are based on management's best estimates, which were derived based
on numerous assumptions of future events including the availability of certain
resources, third party modification plans and other factors. Specific factors
that could have a material adverse effect on the cost of the project and its
completion date 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, unanticipated failures by critical vendors and franchisees as
well as a failure by the Company to execute its own remediation efforts. As a
result, there can be no assurance that these forward looking estimates will be
achieved and actual results may differ materially from those plans, resulting in
material financial risk to the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company has exposure to interest rate risk related to certain instruments
entered into for other than trading purposes. Specifically, the Company has in
place two bank credit facilities, Advantica's $200 million Credit Facility and
the FRI-M Credit Facility, which bear interest at variable rates. The Company
had no amounts outstanding under the Credit Facility during 1998. The FRI-M
Credit Facility consists of the FRI-M Term Loan, with a balance outstanding of
$10.4 million at December 30, 1998, and the $35 million FRI-M Revolver. There
were no amounts outstanding under the FRI-M Revolver at December 30, 1998.
Borrowings under the Credit Facility and the FRI-M Credit Facility bear interest
based on the prime rate or an adjusted Eurodollar rate (approximately 8.4% at
December 30, 1998). The Company's other outstanding long-term debt bear fixed
rates of interest. While changes in the prime rate and Eurodollar rate could
affect the cost of funds borrowed in the future, existing amounts outstanding
are at fixed rates; therefore, the Company believes the effect, if any, of
reasonably possible near-term changes in interest rates on the Company's
consolidated financial position, results of operations and cash flows would not
be material.
The Company may from time to time use interest rate swaps to manage overall
borrowing costs and reduce exposure to adverse fluctuations in interest rates.
The Company does not use derivative instruments for trading purposes. No
financial derivatives were in place at December 30, 1998.
COMMODITY PRICE RISK
The Company purchases certain products such as beef, poultry, pork and coffee
which are affected by commodity pricing and are, therefore, subject to price
volatility caused by weather, production problems, delivery difficulties and
other factors that are outside the Company's control and which are generally
unpredictable. Changes in commodity prices affect the Company and its
competitors generally and often simultaneously. In general, the food products
purchased by the Company are purchased based upon market prices established with
vendors. Although many of the items purchased are subject to changes in
commodity prices, certain purchasing arrangements are structured to contain
features that minimize price volatility by establishing price ceilings and/or
floors. The Company uses these types of purchase arrangements to control costs
as an alternative to using financial instruments to hedge commodity prices. In
32
<PAGE> 35
many cases, the Company believes it will be able to address commodity cost
increases which are significant and appear to be long-term in nature by
adjusting its menu pricing or changing its product delivery strategy. However,
competitive circumstances could limit such actions and in those circumstances
increases in commodity prices could result in lower margins for the Company.
Because of the often short-term nature of commodity pricing aberrations and the
ability of the Company to change menu pricing or product delivery strategies in
response to commodity price increases, the Company believes that the impact of
commodity price risk is immaterial.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements which appears on page F-1 herein.
FORM 11-K INFORMATION
Advantica, pursuant to Rule 15d-21 promulgated under the Securities Exchange Act
of 1934, as applicable, will file as an amendment to this Annual Report of Form
10-K the information, financial statements and exhibits required by Form 11-K
with respect to the Flagstar 401(k) Plan and the Denny's 401(k) Plan (these
plans were combined into one Advantica 401(k) Plan as of December 1, 1998).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item with respect to Advantica's directors and
compliance by Advantica's directors, executive officers and certain beneficial
owners of Advantica's Common Stock with Section 16(a) of the Securities Exchange
Act of 1934 is furnished by incorporation by reference to all information under
the captions entitled "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement (to be filed hereafter)
for Advantica's Annual Meeting of the Shareholders to be held on May 19, 1999
(the "Proxy Statement"). The information required by this item with respect to
Advantica's executive officers appears in Item I of Part I of this Annual Report
on Form 10-K under the caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is furnished by incorporation by reference
to all information under the captions entitled "Executive Compensation" and
"Election of Directors -- Compensation of Directors" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is furnished by incorporation by reference
to all information under the caption "General -- Equity Security Ownership" in
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
The information required by this item is furnished by incorporation by reference
to all information under the caption "Certain Transactions" in the Proxy
Statement.
INFORMATION REGARDING CERTAIN INDEBTEDNESS
The following information regarding certain 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, which have been filed as exhibits to filings of Advantica and/or
FRD with the Commission. Whenever particular provisions of such documents are
referred to herein, such provisions are incorporated herein by reference, and
the statements are qualified in their entirety by such reference. See Note 11 to
the Consolidated Financial Statements for additional information regarding the
Company's indebtedness and the terms thereof (including indebtedness under the
Credit Facility, the FRI-M Credit Agreement and certain mortgage financings).
33
<PAGE> 36
ADVANTICA PUBLIC DEBT
Pursuant to the Plan of Reorganization, Advantica issued on January 7, 1998,
$592,002,000 aggregate principal amount of 11 1/4% Senior Notes due 2008. The
Senior Notes are senior unsecured obligations of Advantica and rank pari passu
in right of payment to all Senior Indebtedness, including the Credit Facility.
The Senior Notes are effectively subordinated to Advantica's secured
indebtedness, including indebtedness under the Credit Facility. The Senior Notes
are structurally subordinated to indebtedness under the Credit Facility to the
extent of direct obligations of Advantica's subsidiaries, as Borrowers and as
subsidiary guarantors, thereunder. Interest on the 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 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 Senior Notes
outstanding on January 7, 1998 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.
As of October 5, 1998, Advantica repurchased $42.4 million in aggregate
principal amount of the Senior Notes tendered by holders thereof pursuant to the
Net Proceeds Offer.
THE FRD 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 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, including its
indebtedness under the FRI-M Credit Facility. 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 will be redeemable, in whole or in part, at the option of FRD at
any time on or after May 23, 2001, initially at a redemption price equal to
105.0% of the principal amount thereof to and including May 22, 2002, at 102.5%
of the principal amount thereof to and including May 22, 2003, and thereafter at
100% of the principal amount thereof, together in each case with accrued
interest.
Notwithstanding the foregoing, at any time prior to May 23, 1999, FRD may redeem
up to $50 million aggregate principal amount of the FRD Notes at a redemption
price equal to 107.5% of the principal amount thereof, together with accrued
interest, from the net cash proceeds of an initial public equity offering of
FRD, subject to certain further terms and conditions.
34
<PAGE> 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
See the Index to Financial Statements which appears on page F-1
hereof.
(2) 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.
(3) Exhibits:
Certain of the exhibits to this Report, indicated by an asterisk, are
hereby incorporated by reference to other documents on file with the
Commission with which they are physically filed, to be a part hereof
as of their respective dates.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
*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, dated November 12, 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 FCI filed January 7,
1998 (incorporated by reference to Exhibit 3.2 to Amendment
No. 1 to the Registration Statement (No. 333-45811) of
Advantica (the "Advantica Form S-1 Amendment No. 1")).
*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 Registration Rights Agreement (incorporated by reference to
Exhibit 10.1 to the Form 8-A).
*4.2 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")) .
*4.3 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).
*4.4 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).
*4.5 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")).
*4.6 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).
*4.7 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).
*4.8 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).
*4.9 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")).
*4.10 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-1/S-4).
</TABLE>
35
<PAGE> 38
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
*4.11 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).
*4.12 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).
*4.13 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")).
*4.14 Warrant Agreement (including the form of Warrant)
(incorporated by reference to Exhibit 10.1 to the Form 8-A).
*4.15 Rights Agreement, dated as of December 15, 1998, between
Advantica and Continental Stock Transfer and Trust Company,
as Rights Agent (including Form of Right Certificate)
(incorporated by reference to Exhibit 1 to Advantica's Form
8-A, dated December 15, 1998).
*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 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")).
*10.4 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).
*10.5 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")).
*10.6 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")).
*10.7 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).
*10.8 Fifth Amendment to the FRI-M Credit Agreement, dated as of
December 9, 1997 (incorporated by reference to Exhibit 4.21
to the Advantica Form S-1 Amendment No. 1).
*10.9 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).
*10.10 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).
*10.11 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).
*10.12 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).
*10.13 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 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).
*10.15 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).
*10.16 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).
*10.17 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).
*10.18 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).
</TABLE>
36
<PAGE> 39
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
*10.19 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).
*10.20 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).
*10.21 Amended Consent Decree dated May 24, 1994 (incorporated by
reference to Exhibit 10.50 to the 1994 Form 10-K).
*10.22 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).
*10.23 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).
*10.24 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).
*10.25 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).
*10.26 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).
*10.27 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).
*10.28 Employment Agreement between Advantica and James B. Adamson,
amended and restated as of January 7, 1998 (incorporated by
reference to Exhibit 10.38 to the Advantica Form S-1
Amendment).
*10.29 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 (the "Advantica Credit Agreement") (incorporated by
reference to Exhibit 10.1 to the 1998 Form 8-K).
*10.30 Amendment No. 1 and Waiver, dated as of March 16, 1998,
relating to the Advantica Credit Agreement (incorporated by
reference to Exhibit 10.53 to the Registration Statement
(No. 333-4581) of Advantica (the "Advantica Form S-1
Amendment No. 2").
*10.31 Stock Purchase Agreement among Advantica Restaurant Group,
Inc., Spartan Holdings, Inc., Flagstar Enterprises, Inc.,
and CKE Restaurants, Inc., dated as of February 18, 1998
(incorporated by reference to Exhibit 99.1 to Advantica's
Form 8-K filed April 16, 1998).
*10.32 Amendment No. 2 and Waiver, dated as of May 21, 1998,
relating to the Advantica Credit Agreement (incorporated by
reference to Exhibit 10.1 to Advantica's Quarterly Report on
Form 10-Q for the quarter ended July 1, 1998).
*10.33 Stock Purchase Agreement by and among Buckley Acquisition
Corporation, Spartan Holdings, Inc. and Advantica Restaurant
Group, Inc., dated as of May 13, 1998 (incorporated by
reference to Exhibit 99.1 to Advantica's Form 8-K filed June
25, 1998).
*10.34 Amendment No. 3 and Waiver, dated as of July 16, 1998, to
the Advantica Credit Agreement (incorporated by reference to
Exhibit 10.1 to Advantica's Quarterly Report on Form 10-Q
for the Quarter ended September 30, 1998 (the "1998 Third
Quarter 10-Q")).
10.35 Amendment No. 4, dated as of November 12, 1998, to the
Advantica Credit Agreement.
10.36 Sixth Amendment to the FRI-M Credit Agreement, dated as of
December 23, 1998.
10.37 Assignment and Assumption Agreement, by and between Quincy's
Realty, Inc. and I.M. Special, Inc. dated May 1, 1998.
10.38 Stock Pledge Agreement among Spartan Holdings, Inc.,
Financial Security Assurance, Inc. and The Bank of New York,
dated April 1, 1998.
10.39 Consent and Agreement Regarding Substitution among Financial
Security Assurance, Inc., I.M. Special, Inc., Collateral
Agent, Trustee, Owners, Issuer Trustee and Advantica dated
May 1, 1998.
</TABLE>
37
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
*10.40 Second Amendment to the Loan Agreement between Secured
Restaurants Trust and Spardee's Realty, Inc., dated as of
April 1, 1998 (incorporated by reference to Exhibit 10.47 to
the Advantica Form S-1 Amendment No. 2).
*10.41 Second Amendment to the Loan Agreement between Secured
Restaurants Trust and Quincy's Realty, Inc., dated as of
April 1, 1998 (incorporated by reference to Exhibit 10.48 to
the Advantica Form S-1 Amendment No. 2).
*10.42 First Amendment to the Collateral Assignment Agreement,
dated as of November 1, 1990, related to the Secured
Restaurants Trust transaction (incorporated by reference to
Exhibit 10.10 to the Advantica Form S-1 Amendment No. 2).
*10.43 Advantica Restaurant Group Stock Option Plan, as adopted
January 28, 1998 and amended through September 28, 1998
(incorporated by reference to Exhibit 10.2 to the 1998 Third
Quarter 10-Q).
*10.44 Advantica Restaurant Group Officer Stock Option Plan, as
adopted January 28, 1998 and amended through September 28,
1998 (incorporated by reference to Exhibit 10.3 to the 1998
Third Quarter 10-Q).
*10.45 Advantica Restaurant Group Director Stock Option Plan, as
adopted January 28, 1998 and amended through September 28,
1998 (incorporated by reference to Exhibit 10.4 to the 1998
Third Quarter 10-Q).
12 Computation of Ratio of Earnings to Fixed Charges.
21 Subsidiaries of Advantica.
23.1 Consent of Deloitte and Touche LLP.
27 Financial Data Schedule (for SEC use only).
99 Safe Harbor Under the Private Securities Litigation Reform
Act of 1995.
</TABLE>
- ---------------
(b) The Company filed a report on Form 8-K on December 16, 1998 reporting, under
Item 5 of such report, that on December 14, 1998, the Company had announced
in a press release that its Board of Directors had approved the adoption of
a Stockholder Rights Plan (the "Rights Plan"). The material terms of the
Rights Plan are described in the press release which is attached as an
exhibit to such report. No financial statements were included in the filing.
38
<PAGE> 41
ADVANTICA RESTAURANT GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report F-2
Statements of Consolidated Operations for the Two Years
Ended December 31, 1997, the One Week
Ended January 7, 1998 and the Fifty-One Weeks Ended
December 30, 1998 F-3
Consolidated Balance Sheets as of December 31, 1997 and
December 30, 1998 F-5
Statements of Consolidated Cash Flows for the Two Years
Ended December 31, 1997, the One Week Ended January 7,
1998 and the Fifty-One Weeks Ended December 30, 1998 F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE> 42
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 30, 1998 (Successor Company balance sheet) and
December 31, 1997 (Predecessor Company balance sheet), and the related
statements of consolidated operations and consolidated cash flows for the
fifty-one week period ended December 30, 1998 (Successor Company operations) and
for the one week period ended January 7, 1998 and the fiscal years ended
December 31, 1997 and 1996 (Predecessor Company operations). 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. Accordingly,
the accompanying consolidated financial statements have been prepared in
conformity with AICPA Statement of Position 90-7, "Financial Reporting for
Entities in Reorganization Under the Bankruptcy Code," for the Successor Company
as a new entity with assets, liabilities, and a capital structure having
carrying values not comparable with prior periods as described in Note 2.
In our opinion, the Successor Company consolidated financial statements present
fairly, in all material respects, the consolidated financial position of the
Company at December 30, 1998 and the results of its consolidated operations and
its consolidated cash flows for the fifty-one week period ended December 30,
1998 in conformity with generally accepted accounting principles. Further, in
our opinion, the Predecessor Company consolidated financial statements present
fairly, in all material respects, the consolidated financial position as of
December 31, 1997 and the results of its consolidated operations and its
consolidated cash flows for the one week period ended January 7, 1998 and the
fiscal years ended December 31, 1997 and 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Greenville, South Carolina
February 16, 1999
F-2
<PAGE> 43
ADVANTICA RESTAURANT GROUP, INC
STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR COMPANY
----------------------------------------- ------------------
ONE WEEK FIFTY-ONE WEEKS
ENDED ENDED
DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30,
1996 1997 1998 1998
(In thousands, except per share amounts) ------------ ------------ ----------- ------------------
<S> <C> <C> <C> <C>
Revenue:
Company restaurant sales $1,609,128 $1,748,787 $ 31,986 $1,654,092
Franchise and licensing revenue 54,966 61,840 1,629 66,433
---------- ---------- ---------- ----------
Total operating revenue 1,664,094 1,810,627 33,615 1,720,525
---------- ---------- ---------- ----------
Cost of company restaurant sales:
Product costs 444,425 478,889 8,638 449,421
Payroll and benefits 600,240 637,601 12,577 592,540
Occupancy 77,028 93,737 1,155 91,329
Other operating expenses 243,279 276,958 5,248 266,162
---------- ---------- ---------- ----------
Total costs of company restaurant
sales 1,364,972 1,487,185 27,618 1,399,452
Franchise restaurant costs 27,047 27,671 983 32,458
General and administrative expenses 90,184 85,625 2,323 82,647
Amortization of excess reorganization value -- -- -- 139,799
Depreciation and other amortization 81,321 93,090 1,684 146,052
Gain on disposition of assets, net (8,439) (7,943) (7,653) (12,617)
---------- ---------- ---------- ----------
Total operating costs and expenses 1,555,085 1,685,628 24,955 1,787,791
---------- ---------- ---------- ----------
Operating income (loss) 109,009 124,999 8,660 (67,266)
---------- ---------- ---------- ----------
Other expenses:
Interest expense, net (contractual interest
for the year ended December 31, 1997 is
$278,061; for the one week ended January 7,
1998 is $4,795) 177,151 164,924 2,669 114,077
Other nonoperating expenses (income), net 1,171 4,571 (313) 1,407
---------- ---------- ---------- ----------
Total other expenses, net 178,322 169,495 2,356 115,484
---------- ---------- ---------- ----------
(Loss) income before reorganization items and
taxes (69,313) (44,496) 6,304 (182,750)
Reorganization items -- 30,141 (714,207) --
---------- ---------- ---------- ----------
(Loss) income before taxes (69,313) (74,637) 720,511 (182,750)
(Benefit from) provision for income taxes (16,302) 1,688 (13,829) (1,794)
---------- ---------- ---------- ----------
(Loss) income from continuing operations (53,011) (76,325) 734,340 (180,956)
Discontinued operations:
Reorganization items of discontinued
operations, net of income tax provision of
$7,509 -- -- 48,887 --
Loss from operations of discontinued
operations, net of applicable income tax
(benefit) provision of: 1996 -- $(90);
1997 -- $81; 1998 -- $0 (32,449) (58,125) (1,154) (1,507)
---------- ---------- ---------- ----------
(Loss) income before extraordinary items (85,460) (134,450) 782,073 (182,463)
Extraordinary items -- -- (612,845) (1,044)
---------- ---------- ---------- ----------
Net (loss) income (85,460) (134,450) 1,394,918 (181,419)
Dividends on preferred stock (14,175) (14,175) (273) --
---------- ---------- ---------- ----------
Net (loss) income applicable to common
shareholders $ (99,635) $ (148,625) $1,394,645 $ (181,419)
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 44
ADVANTICA RESTAURANT GROUP, INC
STATEMENTS OF CONSOLIDATED OPERATIONS -- (CONTINUED)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR COMPANY
----------------------------------------- ------------------
ONE WEEK FIFTY-ONE WEEKS
ENDED ENDED
DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30,
1996 1997 1998 1998
(In thousands, except per share amounts) ------------ ------------ ----------- ------------------
<S> <C> <C> <C> <C>
Per share amounts applicable to common
shareholders:
Basic earnings per share:
(Loss) income from continuing operations $ (1.58) $ (2.13) $ 17.30 $ (4.52)
(Loss) income from discontinued operations,
net (0.77) (1.37) 1.13 (0.04)
---------- ---------- ---------- ----------
(Loss) income before extraordinary items (2.35) (3.50) 18.43 (4.56)
Extraordinary items -- -- 14.44 0.03
---------- ---------- ---------- ----------
Net (loss) income $ (2.35) $ (3.50) $ 32.87 $ (4.53)
========== ========== ========== ==========
Average outstanding shares 42,434 42,434 42,434 40,006
========== ========== ========== ==========
Diluted earnings per share:
(Loss) income from continuing operations $ (1.58) $ (2.13) $ 13.32 $ (4.52)
(Loss) income from discontinued operations,
net (0.77) (1.37) 0.87 (0.04)
---------- ---------- ---------- ----------
(Loss) income before extraordinary items (2.35) (3.50) 14.19 (4.56)
Extraordinary items -- -- 11.11 0.03
---------- ---------- ---------- ----------
Net (loss) income $ (2.35) $ (3.50) $ 25.30 $ (4.53)
========== ========== ========== ==========
Average outstanding shares and equivalent
common shares, unless antidilutive 42,434 42,434 55,132 40,006
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 45
ADVANTICA RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
COMPANY COMPANY
DECEMBER 31, DECEMBER 30,
1997 1998
------------------- -----------------
<S> <C> <C>
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 54,079 $ 224,768
Receivables, less allowance for doubtful accounts of:
1997 -- $4,177; 1998 -- $4,316 12,816 18,461
Inventories 18,161 17,239
Net assets held for sale 346,994 --
Other 44,568 15,860
Restricted investments securing in-substance defeased debt -- 19,025
---------- ----------
476,618 295,353
Property, net 625,837 693,313
Other Assets:
Reorganization value in excess of amounts allocable to
identifiable assets, net of accumulated amortization of:
1998 -- $139,799 -- 558,961
Goodwill, net of accumulated amortization of:
1997 -- $8,061 207,918 --
Other intangible assets, net of accumulated amortization
of: 1997 -- $16,781; 1998 -- $22,131 14,897 217,587
Deferred financing costs, net 56,716 24,913
Other 25,365 39,360
Restricted investments securing in-substance defeased debt -- 156,721
---------- ----------
$1,407,351 $1,986,208
========== ==========
LIABILITIES
Current Liabilities:
Current maturities of notes and debentures $ 37,572 $ 17,835
Current maturities of capital lease obligations 19,398 17,654
Current maturities of in-substance defeased debt -- 12,183
Accounts payable 103,262 102,405
Other 199,600 241,388
---------- ----------
359,832 391,465
---------- ----------
Long-Term Liabilities:
Notes and debentures, less current maturities 510,533 912,699
Capital lease obligations, less current maturities 83,642 76,740
In-substance defeased debt, less current maturities -- 166,579
Deferred income taxes 6,297 5,400
Liability for self-insured claims 52,764 44,442
Other noncurrent liabilities and deferred credits 144,333 152,839
---------- ----------
797,569 1,358,699
---------- ----------
Total liabilities not subject to compromise 1,157,401 1,750,164
Liabilities subject to compromise 1,612,400 --
---------- ----------
Total liabilities 2,769,801 1,750,164
---------- ----------
Commitments and contingencies
SHAREHOLDERS' EQUITY (DEFICIT)
$2.25 Series A Cumulative Convertible Exchanged Preferred
Stock:
$0.10 par value 25,000 shares authorized; 6,300 shares
issued and outstanding; liquidation preference $157,500
excluding dividends in arrears 630 --
Common Stock:
Predecessor Company -- $0.50 par value; shares
authorized -- 200,000; issued and outstanding -- 42,434 21,218 --
Successor Company -- $0.10 par value; shares
authorized -- 100,000; issued and outstanding -- 40,010 -- 489
Paid-in capital 724,912 416,927
Deficit (2,107,815) (181,419)
Foreign currency translation adjustment -- 47
Minimum pension liability adjustment (1,395) --
---------- ----------
(1,362,450) 236,044
---------- ----------
$1,407,351 $1,986,208
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 46
ADVANTICA RESTAURANT GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
SUCCESSOR
PREDECESSOR COMPANY COMPANY
---------------------------------------- ------------
FISCAL YEAR ENDED ONE WEEK FIFTY-ONE
--------------------------- ENDED WEEKS ENDED
DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30,
1996 1997 1998 1998
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
(In thousands)
Cash Flows from Operating Activities:
Net (loss) income $ (85,460) $(134,450) $1,394,918 $(181,419)
Adjustments to Reconcile Net (Loss) Income to Cash
Flows from Operating Activities:
Amortization of reorganization value in excess
of amounts allocable to identifiable assets -- -- -- 139,799
Depreciation and other amortization 81,321 93,090 1,684 146,052
Amortization of deferred gains (6,699) (6,623) (218) (11,159)
Amortization of deferred financing costs 5,590 6,052 111 6,898
Write-off of deferred financing costs -- 2,533 -- --
Deferred income tax (benefit) provision (8,542) 132 (13,856) 84
Gain on disposition of assets, net (8,439) (7,943) (7,653) (12,617)
Equity in loss (income) from discontinued
operations, net 32,449 58,125 (47,733) 1,507
Amortization of debt premium -- -- -- (14,831)
Noncash reorganization items -- -- (714,550) --
Extraordinary items -- -- (612,845) (1,044)
Other (6,118) (24,179) (333) 473
Changes in Assets and Liabilities Net of Effects
of Acquisition and Dispositions:
Decrease (increase) in assets:
Receivables 623 1,468 (2,054) (6,381)
Inventories (795) 2,437 237 474
Other current assets (3,666) 3,735 2,457 (4,736)
Assets held for sale -- -- 1,488 (2,869)
Other assets (1,798) (9,376) (1,049) 10,790
Increase (decrease) in liabilities:
Accounts payable (5,342) (11,856) (5,534) (1,742)
Accrued salaries and vacations 9,620 1,375 6,199 (8,723)
Accrued taxes (6,326) (4,592) (894) (22,639)
Other accrued liabilities 4,584 39,732 9,562 (13,495)
Other noncurrent liabilities and deferred
credits (10,912) 43,227 (1,302) 1,121
--------- --------- ---------- ---------
Net cash flows from operating activities before
reorganization activities (9,910) 52,887 8,635 25,543
Increase in liabilities from reorganization
activities -- 9,922 -- --
--------- --------- ---------- ---------
Net cash flows from operating activities (9,910) 62,809 8,635 25,543
--------- --------- ---------- ---------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 47
ADVANTICA RESTAURANT GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
SUCCESSOR
PREDECESSOR COMPANY COMPANY
---------------------------------------- ------------
FISCAL YEAR ENDED ONE WEEK FIFTY-ONE
--------------------------- ENDED WEEKS ENDED
DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30,
1996 1997 1998 1998
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
(In thousands)
Cash Flows from Investing Activities:
Purchase of property $ (28,492) $ (44,287) $ (1) $ (65,700)
Proceeds from disposition of property 11,586 20,382 7,255 17,714
(Advances to) receipts from discontinued
operations, net (13,551) (30,114) 647 1,504
Proceeds from sale of discontinued operations,
net -- -- -- 460,425
Proceeds from sales of subsidiaries 62,992 -- -- --
Acquisition of business, net of cash acquired (127,068) -- -- --
Purchase of investments securing in-substance
defeased debt -- -- -- (201,713)
Proceeds from maturity of investments securing
in-substance defeased debt -- -- -- 24,749
Other long term assets, net (6,911) 1,296 -- (1,696)
--------- --------- ---------- ---------
Net cash flows (used in) provided by investing
activities (101,444) (52,723) 7,901 235,283
--------- --------- ---------- ---------
Cash Flows from Financing Activities:
Net borrowings under credit agreements 56,000 -- -- --
Deferred financing costs (9,591) (4,605) (4,971) --
Long-term debt payments (22,677) (39,871) (6,891) (94,111)
Cash dividends on preferred stock (14,175) -- -- --
Net bank overdrafts (2,800) (3,900) -- (700)
--------- --------- ---------- ---------
Net cash flows provided by (used in) financing
activities 6,757 (48,376) (11,862) (94,811)
--------- --------- ---------- ---------
(Decrease) increase in cash and cash equivalents (104,597) (38,290) 4,674 166,015
Cash and Cash Equivalents at:
Beginning of period 196,966 92,369 54,079 58,753
--------- --------- ---------- ---------
End of period $ 92,369 $ 54,079 $ 58,753 $ 224,768
========= ========= ========== =========
Supplemental Cash Flow Information:
Income taxes paid $ 1,976 $ 124 $ -- $ 8,517
========= ========= ========== =========
Interest paid $ 211,853 $ 97,328 $ -- $ 104,755
========= ========= ========== =========
Non cash financing activities:
Capital lease obligations $ 11,333 $ 18,543 $ -- $ 12,315
========= ========= ========== =========
Non cash investing activities:
Other investing $ -- $ 3,050 $ -- $ 8,002
========= ========= ========== =========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 48
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 REORGANIZATION AND BASIS OF REPORTING
Advantica (formerly Flagstar Companies, Inc. ("FCI")), through its wholly-owned
subsidiaries, Denny's Holdings, Inc. and FRD Acquisition Co. (and their
respective subsidiaries), owns and operates the Denny's, Coco's, Carrows, and El
Pollo Loco restaurant brands. 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 and Texas. 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. El
Pollo Loco is a quick-service flame-broiled chicken concept which operates
primarily in southern California. On April 1, 1998 the Company consummated the
sale of Flagstar Enterprises, Inc. ("FEI"), the wholly-owned subsidiary which
had operated the Company's Hardee's restaurants under licenses from Hardee's
Food Systems, Inc. ("HFS") (See Note 5). In addition, on June 10, 1998, the
Company consummated the sale of Quincy's Restaurants, Inc. ("Quincy's"), the
wholly-owned subsidiary which had operated the Company's Quincy's Family
Steakhouse restaurants (See Note 5).
On January 7, 1998 (the "Effective Date"), 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. 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: (1) 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"), (2) 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"), (3) Flagstar's 10% Convertible Junior
Subordinated Debentures due 2014 (the "10% Convertible Debentures"), (4)
FCI's $2.25 Series A Cumulative Convertible Exchangeable Preferred Stock
(the "Old Preferred Stock") and (5) 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 issued and outstanding on the Effective Date) and 25 million
authorized shares of preferred stock (none of which are currently
outstanding). Pursuant to the Plan, 10% of the number of shares of Common
Stock issued and outstanding on the Effective Date, on a fully diluted
basis, was reserved for issuance under a new management stock option
program. Additionally, 4 million shares of Common Stock were reserved for
issuance upon the exercise of new warrants expiring January 7, 2005 that
were issued and outstanding on the Effective Date and that 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 "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-8
<PAGE> 49
(f) Each holder of the 10% Convertible Debentures received such holder's pro
rata portion of (1) shares of Common Stock equivalent to 4.5% of the Common
Stock issued on the Effective Date and (2) 100% of the Warrants issued on
the Effective Date; and
(g) Advantica refinanced its prior credit facilities by entering into the
Credit Facility (as defined below).
Pursuant to the Plan, Advantica's certificate of incorporation and by-laws were
amended and restated in their entirety.
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. On September 18, 1998, an application for
final decree was filed with the Bankruptcy Court on behalf of FCI and Flagstar.
No objections were filed, and on November 2, 1998, the Bankruptcy Court entered
an order closing the case.
In connection with the reorganization, the Company realized a gain from the
extinguishment of certain indebtedness (See Note 18). 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 (1) net operating loss ("NOL") carryforwards,
(2) certain tax credits and (3) 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 NOL's 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 NOL's
or $7 million for tax credits, plus the recognition of certain built-in gains.
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 10) 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 and one week ended January
7, 1998 is disclosed in the accompanying Statements of Consolidated Operations.
NOTE 2 FRESH START REPORTING
As of the Effective Date of the Plan, Advantica adopted fresh start reporting
pursuant to the guidance provided by SOP 90-7. Fresh start reporting assumes
that a new reporting entity has been created and requires 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 Company was determined
which generally approximated the fair value of the Company before considering
debt and approximated the amount a buyer would pay for the assets of the Company
after reorganization. Under fresh start reporting, the reorganization value of
the Company was allocated to the Company's assets and the portion of the
reorganization value which was not attributable to specific tangible or
identified intangible assets of the Company upon emergence has been reported as
"reorganization value in excess of amounts allocable to identifiable assets, net
of accumulated amortization" in the accompanying Consolidated Balance Sheet at
December 30, 1998. Advantica is amortizing such amount over a five-year period.
All financial statements for any period subsequent to the Effective Date are
referred to as "Successor Company" statements, as they reflect the periods
subsequent to the implementation of fresh start reporting and are not comparable
to the financial statements for periods prior to the Effective Date.
The Company estimated a range of reorganization value between approximately
$1,631 million and $1,776 million. Such reorganization value was based upon a
review of the operating performance of 17 companies in the restaurant industry
that offer products and services that are comparable to or competitive with the
Company's various operating concepts. The following multiples were established
for these companies: (1) enterprise value (defined as market value of
outstanding equity, plus debt, minus cash and cash equivalents)/revenues for the
four most recent fiscal quarters;
F-9
<PAGE> 50
(2) enterprise value/earnings before interest, taxes, depreciation, and
amortization for the four most recent fiscal quarters; and (3) enterprise
value/earnings before interest and taxes for the four most recent fiscal
quarters. The Company did not independently verify the information for the
comparative companies considered in its valuations, which information was
obtained from publicly available reports. The foregoing multiples were then
applied to the Company's financial forecast for each of its restaurant chains or
concepts. Valuations achieved in selected merger and acquisition transactions
involving comparable businesses were used as further validation of the valuation
range. The valuation also took into account the following factors, not listed in
order of importance:
(A) The Company's emergence from Chapter 11 proceedings, pursuant to the Plan
as described herein, during the first quarter of 1998.
(B) The assumed continuity of the present senior management team.
(C) The tax position of Advantica.
(D) The general financial and market conditions as of the date of
consummation of the Plan.
The total reorganization value of $1,729 million, the midpoint of the range of
$1,631 million and $1,776 million (adjusted to reflect an enterprise value of
FEI based on the terms of the stock purchase agreement related to the
disposition thereof), includes a value attributed to shareholders' equity of
$417 million and long-term indebtedness contemplated by the Plan of $1,312
million.
The results of operations in the accompanying Statement of Consolidated
Operations for the week ended January 7, 1998 reflect the results of operations
prior to Advantica's emergence from bankruptcy and the effects of fresh start
reporting adjustments. In this regard, the Statement of Consolidated Operations
reflects an extraordinary gain on the discharge of certain debt as well as
reorganization items consisting primarily of gains and losses related to the
adjustments of assets and liabilities to fair value.
During the second quarter of 1998 the Company substantially completed valuation
studies performed in connection with the revaluation of its assets and
liabilities in accordance with fresh start reporting.
F-10
<PAGE> 51
The effect of the Plan and the adoption of fresh start reporting on the
Company's January 7, 1998 balance sheet are as follows:
<TABLE>
<CAPTION>
ADJUSTMENTS
PREDECESSOR ADJUSTMENTS FOR SUCCESSOR
COMPANY FOR FRESH START COMPANY
JANUARY 7, 1998 REORGANIZATION(a) REPORTING(b) JANUARY 7, 1998
(In thousands) --------------- ----------------- ------------ ---------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 58,753 $ 58,753
Receivables, net 15,247 $ (689) 14,558
Inventories 20,424 (425) 19,999
Net assets held for sale 288,039 110,027 398,066
Other 43,670 (496) 43,174
Property and equipment, net 719,152 64,501 783,653
Other Assets:
Goodwill, net 207,820 (207,820) --
Other intangible assets, net 12,954 216,995 229,949
Deferred financing costs, net 58,590 $ (25,218) (61) 33,311
Other 22,416 (6,684) 15,732
Reorganization value in excess of amounts
allocable to identifiable assets -- 761,736 761,736
---------- ----------- -------- ----------
$1,447,065 $ (25,218) $937,084 $2,358,931
========== =========== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Current Liabilities:
Current maturities of notes and debentures $ 30,913 $ 30,913
Current maturities of capital lease
obligations 17,863 17,863
Accounts payable 106,678 106,678
Accrued salaries and vacations 62,648 $ 4,355 67,003
Accrued insurance 36,104 292 36,396
Accrued taxes 40,142 2,662 42,804
Accrued interest and dividends 16,652 16,652
Other 95,152 8,008 103,160
Long-Term Liabilities:
Notes and debentures, less current
maturities 510,523 $ 592,005 72,388 1,174,916
Capital lease obligations, less current
maturities 87,667 216 87,883
Deferred income taxes 5,097 5,097
Liability for self-insured claims 55,444 4,700 60,144
Other noncurrent liabilities and deferred
credits 134,187 57,908 192,095
Liabilities subject to compromise 1,613,532 (1,613,532) --
Shareholders' Equity (1,365,537) 996,309 786,555 417,327
---------- ----------- -------- ----------
$1,447,065 $ (25,218) $937,084 $2,358,931
========== =========== ======== ==========
</TABLE>
- ---------------
(a) To record the transactions relative to the consummation of the Plan as
described in Note 1.
(b) To record (1) the increase in the value of net assets held for sale to their
fair value based on the terms of the stock purchase agreement related to the
disposition of FEI, (2) the adjustment of property, net to estimated fair
value, (3) the write-off of unamortized goodwill and establishment of
estimated fair value of other intangible assets (primarily franchise rights
and tradenames), (4) the establishment of reorganization value in excess of
amounts allocable to identifiable assets, (5) the increase in value of debt
to reflect estimated fair value, (6) 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 (7) the adjustment to
F-11
<PAGE> 52
reflect the new value of common shareholders' equity based on reorganization
value, which was determined by estimating the fair value of the Company.
NOTE 3 PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following unaudited pro forma financial information shows the results of
operations of the Company for the year ended December 31, 1997 as though the
Plan discussed in Note 1 and the adoption of fresh start reporting discussed in
Note 2 occurred as of January 1, 1997. These results include: the estimated net
increase in amortization and depreciation expense as a result of the write-off
of goodwill, the revaluation of property and intangible assets to estimated fair
value and the recording of reorganization value in excess of amounts allocable
to identifiable assets which is being amortized on a straight-line basis over a
five-year period; the net decrease in interest expense as a result of debt
securities retired and the amortization of the premium on long-term debt
recorded in conjunction with the adoption of fresh start reporting; and the
estimated income tax effects of fresh start reporting.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
(In millions, except per share amounts) -----------------
<S> <C>
Revenue $ 1,810.6
Loss from continuing operations (189.9)
Net loss (248.0)
Basic and diluted loss per common share:
Loss from continuing operations (4.75)
Net loss (6.20)
</TABLE>
The pro forma financial information presented above does not purport to be
indicative of either (1) the results of operations for the year ended December
31, 1997 had the Plan and the adoption of fresh start reporting been consummated
on January 1, 1997 or (2) future results of operations. The operations of the
Company on a pro forma basis for the period ended January 7, 1998 would differ
from historical results primarily due to the reorganization items credit of
approximately $714 million.
NOTE 4 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 included more than 52 weeks of operations. Denny's included an
additional five days and El Pollo Loco included an additional week.
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. Inventories are valued primarily at the lower of average cost
(first-in, first-out) or market.
F-12
<PAGE> 53
Property and Depreciation. Prior to January 7, 1998 owned property was stated
at cost. Property was adjusted to estimated fair value as of January 7, 1998 in
conjunction with the adoption of fresh start reporting. Property additions
subsequent to January 7, 1998 are stated at cost. Property 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 -- Two to ten years
Leasehold Improvements -- Estimated useful life limited by the lease period.
Goodwill and Other Intangible Assets. Prior to January 7, 1998 the excess of
cost over the fair value of the net assets acquired of FRI-M Corporation (see
Note 6 for further details) was being amortized over a 40-year period on the
straight-line method. Unamortized goodwill was written off at January 7, 1998 in
conjunction with the adoption of fresh start reporting. Other intangible assets
consist primarily of trademarks, tradenames, franchise and other operating
agreements. Prior to January 7, 1998, such assets are stated at cost. Intangible
assets were adjusted to estimated fair value at January 7, 1998, as a result of
the adoption of fresh start reporting. Such assets are being amortized on the
straight-line basis over the useful lives of the franchise and other agreements
and over 40 years for tradenames. The Company assesses the recoverability of
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.
Reorganization Value in Excess of Amounts Allocable to Identifiable Assets. The
portion of the reorganization value of the Company which was not attributable to
specific tangible or identifiable intangible assets of the Company is being
amortized using the straight-line method over a five-year period.
Impairment of Long-Lived Assets. 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. At the time impairment of an asset is identified,
the asset's carrying value is written down to the Company's estimate of fair
value, based on sales of similar assets or other estimates of selling price,
less costs to sell. In addition, long-lived assets and certain identifiable
intangibles to be disposed of are reported at the lower of carrying amount or
estimated fair value less costs to sell.
Deferred Financing Costs. Costs related to the issuance of debt are deferred
and amortized as a component of interest expense using the interest method over
the terms of the respective debt issues.
Preopening Costs. Prior to January 7, 1998, the Company capitalized certain
direct incremental costs incurred in conjunction with the opening of restaurants
and amortized such costs over a 12-month period from the date of opening.
Subsequent to January 7, 1998, preopening costs are being expensed as incurred
(see New Accounting Standards below).
Insurance. Through June 30, 1997, the Company was primarily self-insured for
workers' compensation, general liability, and automobile risks which were
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 30, 1998, the Company remains self-insured
for workers' compensation in only two states. The liabilities for prior and
current 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, 1997 and December 30, 1998 were $77.6 million and $69.4 million,
respectively, reflecting a 5% discount rate for 1997 and 1998. The related
undiscounted amounts at such dates were $86.1 million, and $78.1 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 30, 1998.
Advertising Costs. Production costs for radio and television advertising are
expensed as of the date the commercials are initially aired. Advertising expense
for the fiscal years ended December 31, 1996 and 1997, the one week ended
January 7, 1998 and the 51 weeks ended December 30, 1998 was $62.9 million,
$68.3 million, $1.4 million and $70.3 million, respectively.
F-13
<PAGE> 54
Interest Associated with Discontinued Operations. The Company has allocated to
the discontinued operations a pro-rata portion of interest expense based on a
ratio of the net assets of the discontinued operations to the Company's
consolidated net assets as of the 1989 acquisition date of Flagstar by FCI for
periods prior to January 7, 1998 and based on a ratio of the net assets of the
discontinued operations to the Company's net assets after the adoption of fresh
start reporting for periods subsequent to January 7, 1998. Interest related to
discontinued operations, including allocated interest expense, for the years
ended December 31, 1996 and 1997 and the one week ended January 7, 1998 and 51
weeks ended December 30, 1998 was $79.1 million, $62.8 million, $0.6 million and
$10.4 million, respectively.
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 these sales, the Company entered into five-year purchasing
agreements with the acquirers. These transactions resulted in deferred gains
totaling approximately $41.5 million that are being amortized over the lives of
the respective purchasing agreements as a reduction of product cost.
Cash Overdrafts. The Company has included in accounts payable on the
accompanying Consolidated Balance Sheets cash overdrafts totaling $31.9 million
and $32.6 million at December 31, 1997 and December 30, 1998, respectively.
Franchise and License Fees. Initial franchise and license fees are recognized
when all of the material obligations have been performed and conditions have
been satisfied, typically when operations have commenced. Initial fees for all
periods presented are insignificant. Continuing fees, based upon a percentage of
net sales, are recorded as income on a monthly basis.
Gains on Sales of Company-Owned Restaurants. Gains on sales of Company-owned
restaurants that include real estate owned by the Company 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 percent of the sales price. For
restaurant sale transactions that do not include real estate owned by the
Company, gains are recognized at the time of sale, if the collection of the sale
price is reasonably assured.
Cash proceeds received from sales of Company-owned restaurants totaled $8.5
million, $7.9 million, $7.3 million and $20.3 million for the years ended
December 31, 1996 and 1997, the one week ended January 7, 1998, and the 51 weeks
ended December 30, 1998, respectively. Deferred gains and the noncash 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 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 April 1998, the
AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"), which provides additional guidance on the financial
reporting of start-up costs, requiring costs of start-up activities to be
expensed as incurred.
In accordance with the adoption of fresh start reporting upon emergence from
bankruptcy (see Note 2), the Company adopted both statements of position as of
January 7, 1998. The adoption of SOP 98-1 at January 7, 1998 resulted in the
write-off of previously capitalized direct costs of obtaining computer software
associated with research and development totaling $3.4 million. Subsequent to
the Effective Date, similar costs are being expensed as incurred. The adoption
of SOP 98-5 at January 7, 1998 resulted in the write-off of an immaterial amount
of previously capitalized preopening costs. Subsequent to the Effective Date,
preopening costs are being expensed as incurred.
F-14
<PAGE> 55
In 1998, the Company adopted 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. Comprehensive income consists of net income and foreign
currency translation adjustments and is presented in Note 16. The adoption of
SFAS 130 does not impact the Company's consolidated results of operations,
financial position or cash flows. Prior year disclosures have been reclassified
to conform to the SFAS 130 requirements.
In 1998, the Company adopted 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. The adoption of SFAS 131 does not impact
the Company's consolidated results of operations, financial position or cash
flows.
In 1998, the Company adopted statement of Financial Accounting Standards No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
("SFAS 132"). This Statement does not change the measurement or recognition of
those plans, but is designed to simplify disclosures about pension and other
postretirement benefit plans. Specifically, it standardizes the disclosure
requirements to the extent practicable, requires additional information on
changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis, and eliminates certain disclosures that are no
longer as useful as they were when SFAS No. 87, "Employers' Accounting for
Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
were issued. The Statement also suggests combined formats for presentation of
pension and other postretirement benefit disclosures. The adoption of SFAS 132
does not impact the Company's consolidated results of operations, financial
position or cash flows.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Financial Instruments and Hedging Activities" ("SFAS 133"), was issued in June
1998. This statement establishes accounting and reporting standards for
derivative financial instruments and for hedging activities. It requires that
entities recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The accounting for
changes in fair value of the derivative (i.e., gains and losses) depends on the
intended use of the derivative and the resulting designation. SFAS No. 133 is
effective for the Company's fiscal year 2000 financial statements. The Company
is in the process of evaluating the effect of SFAS 133 on its consolidated
results of operations, financial position and cash flows, and therefore is
unable to estimate the effect of the adoption.
NOTE 5 DISPOSITIONS OF FLAGSTAR ENTERPRISES, INC. AND QUINCY'S RESTAURANTS, INC.
AND IN-SUBSTANCE DEFEASANCE OF RELATED DEBT
On April 1, 1998, the Company completed the sale to CKE Restaurants, Inc.
("CKE") of all of the capital stock of FEI, which had operated the Company's
Hardee's restaurants under licenses from HFS, a wholly-owned subsidiary of CKE,
for $427 million. This amount includes the assumption by CKE of $46 million of
capital leases. Approximately $173.1 million of the proceeds (together with
$28.6 million already on deposit with respect to certain Spartan Mortgage
Financing as defined below) was applied to in-substance defease the 10.25%
Guaranteed Secured Bonds due 2000 (the "Spartan Mortgage Financing") of
Spardee's Realty, Inc., a wholly-owned subsidiary of FEI, and Quincy's Realty,
Inc., a wholly-owned subsidiary of Quincy's, with a book value of $198.9 million
plus accrued interest of $6.9 million at April 1, 1998. Such Spartan Mortgage
Financing was collateralized by certain assets of Spardee's Realty, Inc. and
Quincy's Realty, Inc. The Company replaced such collateral through the purchase
of a portfolio of United States Government and AAA rated investment securities
which were deposited with the collateral agent with respect to such the Spartan
Mortgage Financing to satisfy principal and interest payments under the Spartan
Mortgage Financing through the stated maturity date in the year 2000. Such
investments are reflected in the Consolidated Balance Sheet at December 30, 1998
under the caption "Restricted investments securing in-substance defeased debt."
The Spartan Mortgage Financing is reflected under the caption "In-substance
defeased debt."
As a result of the adoption of fresh start reporting, as of the Effective Date
the net assets of FEI were adjusted to fair value less estimated costs of
disposal based on the terms of the stock purchase agreement. The net gain
resulting from this adjustment is reflected as "Reorganization items of
discontinued operation" in the Statements of Consolidated Operations. As a
result of this adjustment, no gain or loss on disposition is reflected in the 51
weeks ended
F-15
<PAGE> 56
December 30, 1998. Additionally, the operating results of FEI subsequent to
January 7, 1998 and through the disposition date were reflected as an adjustment
to "Net assets held for sale" prior to the disposition. The adjustment to "Net
assets held for sale" as a result of the net loss of FEI for the twelve weeks
ended April 1, 1998 was ($1.4) million. Revenue and operating income of FEI for
the twelve weeks ended April 1, 1998 were $116.2 million and $5.7 million,
respectively.
On June 10, 1998, the Company completed the sale of all of the capital stock of
Quincy's, the wholly-owned subsidiary which had operated the Company's Quincy's
Family Steakhouse Division, to Buckley Acquisition Corporation ("BAC") for $84.7
million. This amount includes the assumption by BAC of $4.2 million of capital
leases. The resulting gain of approximately $13.7 million from such disposition
is reflected as an adjustment to reorganization value in excess of amounts
allocable to identifiable assets.
The Statements of Consolidated Operations and Cash Flows for all periods
presented herein have been reclassified to reflect FEI and Quincy's as
discontinued operations in accordance with Accounting Principles Board Opinion
No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." Included in the Company's loss from
discontinued operations for the year ended December 31, 1997 is a net
restructuring charge of $10.5 million related primarily to a plan to reduce
significantly the size of the Company's Quincy's restaurant chain. In addition
to the sale or closure of restaurants, the restructuring plan resulted in the
elimination of certain restaurant, field management and corporate support
positions. Also included in the 1997 loss from operations of discontinued
operations is an impairment charge totaling $15.1 million related to the
write-down of certain Quincy's units in association with the 1997 restructuring
plan, as well as the write-down of certain Hardee's units disposed of in 1997.
Revenue and operating income of the discontinued operations for the reported
periods are as follows:
<TABLE>
<CAPTION>
SUCCESSOR
PREDECESSOR COMPANY COMPANY
---------------------------------------- ----------------
FISCAL YEAR ENDED ONE WEEK FIFTY-ONE WEEKS
--------------------------- ENDED ENDED
DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 31,
1996 1997 1998 1998
(In millions) ------------ ------------ ---------- ----------------
<S> <C> <C> <C> <C>
Revenue $862.1 $779.9 $12.7 $194.9
Operating income 47.4 5.4 0.1 5.7
</TABLE>
The net assets of FEI and Quincy's are included in net assets held for sale in
the accompanying Consolidated Balance Sheet at December 31, 1997, and consist of
the following:
<TABLE>
<CAPTION>
FEI QUINCY'S
(In thousands) -------- --------
<S> <C> <C>
Assets
Current assets $ 8,715 $ 3,176
Property owned, net 290,621 130,475
Property held under capital leases, net 32,619 2,061
Other assets 13,338 520
-------- --------
345,293 136,232
-------- --------
Less liabilities
Current liabilities
Current portion of obligations under capital lease 3,874 259
Other current liabilities 28,368 21,602
-------- --------
32,242 21,861
-------- --------
Long-term liabilities
Obligations under capital lease, noncurrent 41,339 4,061
Other long-term liabilities 29,233 5,795
-------- --------
70,572 9,856
-------- --------
Total liabilities 102,814 31,717
-------- --------
Net assets held for sale $242,479 $104,515
======== ========
</TABLE>
F-16
<PAGE> 57
NOTE 6 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"), 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. Prior to January 7, 1998, the resulting goodwill was being
amortized on a straight-line basis over 40 years. Unamortized goodwill was
written off at January 7, 1998 in conjunction with the adoption of fresh start
reporting.
NOTE 7 REORGANIZATION ITEMS
Reorganization items included in the accompanying Statements of Consolidated
Operations consist of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ONE WEEK
ENDED ENDED
DECEMBER 31, JANUARY 7,
1997 1998
(In thousands) ------------ ----------
<S> <C> <C>
Net gain related to adjustments of assets and
liabilities to fair value $ -- $(734,216)
Professional fees and other 28,313 8,809
Debtor-in-possession financing expenses 3,062 --
Interest earned on accumulated cash (1,234) --
Severance and other exit costs -- 11,200
------- ---------
$30,141 $(714,207)
======= =========
</TABLE>
NOTE 8 PROPERTY, NET
Property, net, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1997 1998
(In thousands) ------------ ------------
<S> <C> <C>
Property owned:
Land $143,681 $ 70,419
Buildings and improvements 487,739 476,327
Other property and equipment 352,765 162,342
-------- --------
Total property owned 984,185 709,088
Less accumulated depreciation 435,152 94,078
-------- --------
Property owned, net 549,033 615,010
-------- --------
Buildings and improvements, vehicles, and
other equipment held under capital
leases 160,432 108,146
Less accumulated amortization 83,628 29,843
-------- --------
Property held under capital leases, net 76,804 78,303
-------- --------
$625,837 $693,313
======== ========
</TABLE>
F-17
<PAGE> 58
NOTE 9 OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------
DECEMBER 31, DECEMBER 30,
1997 1998
(In thousands) ------------ ------------
<S> <C> <C>
Accrued salaries and vacations $ 55,367 $ 51,234
Accrued insurance 34,277 32,698
Accrued taxes 25,078 20,235
Accrued interest and dividends 15,473 44,837
Other 69,405 92,384
-------- --------
$199,600 $241,388
======== ========
</TABLE>
NOTE 10 LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise are obligations which were outstanding on the
Petition Date and were subject to compromise under the terms of the Plan (see
Note 11 for additional information).
<TABLE>
<CAPTION>
DECEMBER 31, 1997
(In thousands) -----------------
<S> <C> <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% Senior 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-18
<PAGE> 59
NOTE 11 DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1997 1998
(In thousands) ------------ ------------
<S> <C> <C>
Notes and Debentures:
10 3/4% Senior Notes due September 15, 2001, interest
payable semi-annually (a) --
10 7/8% Senior Notes due December 1, 2002, interest
payable semi-annually (a) --
11.25% Senior Subordinated Debentures due November 1,
2004, interest payable semi-annually (a) --
11 3/8% Senior Subordinated Debentures due September 15,
2003, interest payable semi-annually (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 (a) --
11 1/4% Senior Notes due January 15, 2008, interest
payable semi-annually -- $ 549,611
12.5% Senior Notes of FRD due July 15, 2004, interest
payable semi-annually $156,897 156,897
Mortgage Notes Payable:
10.25% Guaranteed Secured Bonds due 2000 (see Note 5) 177,615 --
11.03% Notes due 2000 160,000 160,000
Term loan of FRI-M, principal payable in quarterly
installments 40,000 10,411
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) 10,077 8,282
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) 3,516 3,608
Capital lease obligations (see Note 12) 103,040 94,394
In-substance defeased debt (see Note 5) -- 165,468
-------- ----------
651,145 1,148,671
Premium (discount), net (see Note 2):
11 1/4% Senior Notes, effective rate 10.79% -- 23,198
12.5% Senior Notes of FRD, effective rate 10.95% -- 11,839
11.03% Notes, effective rate 8.18% -- 8,059
In-substance defeased debt, effective rate 5.29% -- 13,294
Other notes payable -- (1,371)
-------- ----------
Total 651,145 1,203,690
Less current maturities 56,970 47,672
-------- ----------
Total long-term debt $594,175 $1,156,018
======== ==========
</TABLE>
- ---------------
(a) Included in liabilities subject to compromise at December 31, 1997 (See Note
10).
(b) Collateralized by restaurant and other properties with a net book value of
$13.0 million at December 30, 1998.
(c) Collateralized by equipment with a net book value of $6.8 million at
December 30, 1998.
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 10) in the accompanying
Consolidated Balance Sheet at December 31, 1997, were canceled, extinguished and
retired as of the Effective Date.
F-19
<PAGE> 60
Aggregate annual maturities of long-term debt at December 30, 1998 during the
next five years, excluding approximately $165 million of in-substance defeased
debt maturing in 2000, are as follows:
<TABLE>
<CAPTION>
YEAR:
- -----
(In millions)
<S> <C>
1999 $ 30.4
2000 177.8
2001 15.1
2002 8.6
2003 6.7
</TABLE>
On March 7, 1997, Flagstar'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 operated 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 Flagstar entered into a $200 million debtor-in-possession
financing facility (the "DIP Facility") between FCI, Flagstar, 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 was guaranteed by certain operating
subsidiaries of Flagstar and generally was secured by liens on the same
collateral that secured Flagstar's obligations under the Credit Agreement,
including the stock of certain operating subsidiaries and certain of Flagstar's
trade and service marks.
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 (as amended to date, the "Credit Facility"). The Credit Facility
refinanced the DIP Facility and is 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 Flagstar's obligations under the Credit
Agreement (with additional liens on the Company's corporate headquarters in
Spartanburg, South Carolina and accounts receivable).
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 (1)
dividends on capital stock; (2) redemptions and repurchases of capital stock;
(3) prepayments, redemptions and repurchases of debt (other than loans under the
Credit Facility); (4) liens and sale-leaseback transactions; (5) loans and
investments; (6) incurrence of debt; (7) capital expenditures; (8) operating
leases: (9) mergers and acquisitions; (10) asset sales; (11) transactions with
affiliates; (12) changes in the business conducted by Advantica and its
subsidiaries; and (13) 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
F-20
<PAGE> 61
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. In connection with the closing of
the sales of FEI and Quincy's, the Credit Facility was amended to accommodate
the sale transactions and in-substance defeasance consummated in conjunction
with the sale of FEI. In addition, the Credit Facility was amended to provide
the Company flexibility to reinvest the residual sales proceeds through
additional capital expenditures and/or strategic acquisitions, as well as to
modify certain other covenants and financial tests affected by the sales
transactions. The commitments under the Credit Facility were not reduced as a
result of the sales.
The Company was in compliance with the terms of the Credit Facility at December
30, 1998. Under the most restrictive provision of the Credit Facility (the
minimum fixed charge coverage ratio), for the four quarters ended December 30
1998, the Company's EBITDA could be approximately $38.1 million less and the
Company would still be in compliance.
As further discussed in Note 5, effective with the disposition of FEI on April
1, 1998, the Company in-substance defeased the Spartan Mortgage Financing.
The 11.03% mortgage notes are secured by a pool of cross-collateralized
mortgages on 240 Denny's restaurants with a net book value at December 30, 1998
of $187.4 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 credit
facility (as amended to date, the "FRI-M Credit Facility") consisting of a $56
million, 39-month term loan (the "FRI-M Term Loan") and a $35 million working
capital facility (the "FRI-M Revolver"). Proceeds from the FRI-M Term Loan were
used to fund the Coco's and Carrows acquisition, and to pay the transactions
costs associated therewith. Proceeds from the FRI-M Revolver are to be used for
working capital requirements and other general corporate purposes, which may
include the making of intercompany loans to any of the Borrower's wholly owned
subsidiaries for their own working capital and other general corporate purposes.
Letters of credit may be issued under the FRI-M Revolver for the purpose of
supporting (1) workers' compensation liabilities of the Borrower or any of its
subsidiaries; (2) the obligations of third party insurers of the Borrower or any
of its subsidiaries; and (3) certain other obligations of the Borrower and its
subsidiaries. At December 30, 1998, there were no working capital borrowings
outstanding; however, letters of credit outstanding were $13.2 million.
Beginning February 28, 1997, the principal installments of the FRI-M Term Loan
are 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. All borrowings under the FRI-M Credit Facility
accrue interest at a variable rate based on the prime rate or an adjusted
Eurodollar rate (approximately 8.4% at December 30, 1998) and are secured by
substantially all of the assets of FRD and its subsidiaries and by the issued
and outstanding stock of FRI-M and its subsidiaries. The FRI-M Credit Facility
expires, and all amounts must be repaid, on August 31, 1999. At December 30,
1998, the amount of the term loan outstanding was $10.4 million and FRI-M had no
outstanding capital borrowings; however, letters of credit outstanding were
$13.2 million. The Company is exploring various alternatives to restructure
FRD's capital structure in order to increase capital availability and otherwise
improve FRD's financial flexibility. Such efforts include pursuing a new credit
facility to refinance the FRI-M Credit Facility before its expiration, as well
as other alternatives to increase Advantica's investment flexibility with
respect to FRD's operations.
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
F-21
<PAGE> 62
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 $17.1 million, $1.0
million and $23.0 million for the year ended December 31, 1997, the one week
ended January 7, 1998 and the 51 weeks ended December 30, 1998, respectively.
FRD and its subsidiaries were in compliance with the terms of the FRI-M Credit
Facility at December 30, 1998. Under the most restrictive provision of the FRI-M
Credit Facility (the minimum interest coverage ratio), for the four quarters
ended December 30, 1998, FRD's EBITDA could be approximately $0.3 million less
and FRD would still be in compliance.
The estimated fair value of the Company's long-term debt (excluding capital
lease obligations) is approximately $1.1 billion at December 30, 1998. Such
computation is based on market quotations for the same or similar debt issues or
the estimated borrowing rates available to the Company.
NOTE 12 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.
Information regarding the Company's leasing activities at December 30, 1998 is
as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
------------------- -------------------
(In thousands) MINIMUM MINIMUM MINIMUM Minimum
LEASE SUBLEASE LEASE SUBLEASE
YEAR: PAYMENTS RECEIPTS PAYMENTS RECEIPTS
- -------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
1999 $29,386 $ 3,136 $ 61,207 $ 7,763
2000 22,916 2,600 60,483 7,128
2001 18,601 2,287 56,175 6,215
2002 12,968 2,001 48,585 5,097
2003 10,132 1,709 41,852 4,251
Subsequent years 43,613 9,333 205,253 18,701
------- ------- -------- -------
Total 137,616 $21,066 $473,555 $49,155
======= ======== =======
Less imputed interest 43,222
-------
Present value of capital lease obligations $94,394
=======
</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
continuing operations is as follows:
<TABLE>
<CAPTION>
FIFTY-ONE
FISCAL YEAR ENDED WEEK WEEKS
--------------------------- ENDED ENDED
DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30,
1996 1997 1998 1998
(In thousands) ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
Base rents $52,694 $65,202 $700 $56,837
Contingent rents 9,798 12,477 214 10,455
------- ------- ---- -------
Total $62,492 $77,679 $914 $67,292
======= ======= ==== =======
</TABLE>
Total rental expense does not reflect sublease rental income of $15.9 million,
$15.6 million, $0.2 million and $10.5 million for the years ended December 31,
1996 and 1997, the one week ended January 7, 1998 and the 51 weeks ended
December 30, 1998, respectively.
F-22
<PAGE> 63
NOTE 13 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>
ONE FIFTY-ONE
FISCAL YEAR ENDED WEEK WEEKS
--------------------------- ENDED ENDED
DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30,
1996 1997 1998 1998
(In thousands) ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
Current:
Federal $ (6,074) $ -- $ -- $(2,924)
State, Foreign and Other (1,686) 1,556 27 1,046
-------- ------ -------- -------
(7,760) 1,556 27 (1,878)
-------- ------ -------- -------
Deferred:
Federal (6,797) -- (12,513) --
State, Foreign and Other (1,745) 132 (1,343) 84
-------- ------ -------- -------
(8,542) 132 (13,856) 84
-------- ------ -------- -------
Provision for (benefit from) income taxes $(16,302) $1,688 $(13,829) $(1,794)
======== ====== ======== =======
The total provision for (benefit from) income taxes
related to:
Loss before discontinued operations and
extraordinary items $(16,302) $1,688 $(13,829) $(1,794)
Discontinued operations (90) 81 7,509 --
Extraordinary items -- -- -- --
-------- ------ -------- -------
Total (benefit from) provision for income
taxes $(16,392) $1,769 $ (6,320) $(1,794)
======== ====== ======== =======
</TABLE>
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 giving rise to deferred income tax assets or liabilities:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1997 1998
(In thousands) ------------ ------------
<S> <C> <C>
Deferred tax assets:
Deferred income $ 26,492 $ 21,336
Debt premium -- 22,584
Lease reserves -- 11,808
Self-insurance reserves 32,810 29,338
Capitalized leases 14,083 6,537
Intangible assets 8,386 --
Other accruals and reserves 26,246 31,487
Alternative minimum tax credit carryforwards 10,459 10,548
General business credit carryforwards 50,840 56,627
Capital loss carryforwards 10,400 8,135
Net operating loss carryforwards 85,155 9,512
Less: valuation allowance (222,823) (105,149)
--------- ---------
Total deferred tax assets 42,048 102,763
--------- ---------
Deferred tax liabilities:
Intangible assets -- (70,016)
Fixed assets (48,345) (38,147)
--------- ---------
Total deferred tax liabilities (48,345) (108,163)
--------- ---------
Net deferred tax liability $ (6,297) $ (5,400)
========= =========
</TABLE>
The Company has provided a valuation allowance for the portion of the deferred
tax assets for which it is more likely than not that a tax benefit will not be
realized.
F-23
<PAGE> 64
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>
FISCAL YEAR ENDED ONE FIFTY-ONE
--------------------------- WEEK ENDED WEEKS ENDED
DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30,
1996 1997 1998 1998
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
Statutory rate 35% 35% 35% 35%
Differences:
State, foreign, and other taxes, net of federal
income tax benefit 2 (2) -- (1)
Amortization of goodwill 1 (3) -- --
Amortization of reorganization value in excess
of amounts allocable to identifiable assets -- -- -- (29)
Reversal of certain reserves established in
connection with proposed Internal Revenue
Service deficiencies 11 -- -- --
Nondeductible costs related to the
reorganization -- (6) -- --
Nontaxable income related to the reorganization -- -- (28) --
Nondeductible wages related to the FICA tip
credit -- (3) -- (1)
Portion of losses and income tax credits not
benefited as a result of the establishment of
a valuation allowance (28) (19) (7) (7)
Other 3 (4) (2) 4
--- --- --- ---
Effective tax rate 24% (2)% (2)% 1%
=== === === ===
</TABLE>
The Company utilized substantially all of its NOL carryforwards and portions of
certain other carryforwards to offset taxable income principally generated from
the sale of its discontinued operations during 1998.
At December 30, 1998, the Company has available, on a consolidated basis,
general business credit carryforwards of approximately $57 million, most of
which expire in 2004 through 2013, and alternative minimum tax ("AMT") credit
carryforwards of approximately $11 million. The AMT credits may be carried
forward indefinitely. In addition, the Company has available AMT net operating
loss ("NOL") carryforwards of approximately $19 million which expire in 2012.
Due to the reorganization of the Company on January 7, 1998, the Company's
ability to utilize the general business credit carryforwards, AMT credit
carryforwards, and AMT NOL carryforwards which arose prior to the reorganization
is limited to a specified annual amount. The annual limitation for the
utilization of these carryforwards is approximately $21 million for NOL
carryforwards or $7 million for tax credits. The annual limitation may also be
increased for the recognition of certain built-in gains. General business
credits of approximately $7 million arose subsequent to the reorganization and
are not subject to any limitation as of the end of 1998. See Note 1 for further
discussions of the reorganization including additional discussion of the
reorganization's impact on the Company's carryover tax benefits and its tax
basis in its assets for future taxable years.
In connection with the purchase of FRI-M in May 1996, the Company acquired
certain income tax attributes which may be used only to offset the separate
taxable income of FRI-M and its subsidiaries. Approximately $24 million of
regular NOL carryforwards and $21 million of regular and AMT capital loss
carryforwards are available at December 30, 1998 to reduce the future separate
taxable income of FRI-M and its subsidiaries. Due to FRI-M's prior ownership
changes in January 1994 and May 1996, FRI-M's ability to utilize these
carryforwards is limited. The annual limitation for the utilization of FRI-M's
NOL carryforwards and capital loss carryforwards which were generated after
January 1994 and before May 1996 is approximately $4 million, plus the
recognition of certain built-in gains. These NOL carryforwards expire
principally in 2009 through 2011. FRI-M's capital loss carryforward , which will
expire in 2000, can only be utilized to offset certain capital gains generated
by FRI-M or its subsidiaries. Utilization of FRI-M's loss carryforwards are also
subject to the Company's overall annual limitation of $21 million. FRI-M
utilized approximately $4 million in 1997 and $5 million in 1998 of capital loss
carryover to offset capital gains recognized during 1997 and 1998.
F-24
<PAGE> 65
NOTE 14 EMPLOYEE BENEFIT PLANS
PENSION AND OTHER DEFINED BENEFIT AND CONTRIBUTION PLANS
The Company maintains several defined benefit plans for continuing operations
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.
The components of net pension cost of the pension plan and other defined benefit
plans for the years ended December 31, 1996 and 1997, the one week ended January
7, 1998 and 51 weeks ended December 30, 1998 determined under SFAS No. 87 are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED ONE FIFTY-ONE
--------------------------- WEEK ENDED WEEKS ENDED
DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30,
1996 1997 1998 1998
(In thousands) ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
PENSION PLAN:
Service cost $ 2,963 $ 3,210 $ 70 $ 1,040
Interest cost 2,560 2,872 63 2,861
Expected return on plan assets (2,646) (3,085) (71) (3,658)
Amortization of prior service cost 69 -- -- --
Recognized net actuarial loss 339 325 -- --
------- ------- ------- -------
Net periodic benefit cost $ 3,285 $ 3,322 $ 62 $ 243
======= ======= ======= =======
Purchase accounting -- -- $11,633 --
Settlement loss -- -- -- $ 119
OTHER DEFINED BENEFIT PLANS:
Service cost $ 188 $ 145 $ 2 $ 125
Interest cost 335 198 3 166
Expected return on plan assets -- -- -- --
Amortization of prior service cost 41 41 -- 27
Recognized net actuarial gain (322) (3) -- (1)
------- ------- ------- -------
Net periodic benefit cost $ 242 $ 381 $ 5 $ 317
======= ======= ======= =======
Settlement loss -- $ 1,342 -- --
</TABLE>
Net pension and other defined benefit plan costs charged to continuing
operations for the years ended December 31, 1996 and 1997 and the 51 weeks ended
December 30, 1998 were $0.7 million, $2.2 million and $0.7 million,
respectively. Costs charged to continuing operations for the one week ended
January 7, 1998 were immaterial.
F-25
<PAGE> 66
The following table sets forth the funded status and amounts recognized in the
Company's balance sheet for its pension plan and other defined benefit plans:
<TABLE>
<CAPTION>
PENSION PLAN OTHER DEFINED BENEFIT PLANS
--------------------------- ---------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 31, DECEMBER 30,
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(In thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $36,416 $46,800 $ 6,944 $ 2,258
Service cost 3,210 1,110 144 127
Interest cost 2,872 2,923 198 169
Actuarial loss 6,498 2,102 682 132
Curtailment gains -- (6,338) -- --
Settlement (1998 lump sum payments) -- (3,776) -- --
Benefits paid (periodic only for 1998) (2,196) (1,698) (5,710) (190)
------- ------- ------- -------
Benefit obligation at end of year $46,800 $41,123 $ 2,258 $ 2,496
======= ======= ======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $31,109 $37,342 $ -- $ --
Actual return on plan assets 5,374 3,561 -- --
Employer contributions 3,055 1,614 5,710 190
Settlement (1998 lump sum payments) -- (3,776) -- --
Benefits paid (periodic only for 1998) (2,196) (1,698) (5,710) (190)
------- ------- ------- -------
Fair value of plan assets at end of year $37,342 $37,043 $ -- $ --
======= ======= ======= =======
RECONCILIATION OF FUNDED STATUS
Funded Status $(9,457) $(4,080) $(2,258) $(2,498)
Unrecognized actuarial (gain)/loss 10,773 1,293 (48) 135
Unrecognized transition amount -- -- (1) (1)
Unrecognized prior service cost -- -- 26 --
Fourth Quarter contribution -- -- 49 --
------- ------- ------- -------
Net amount recognized $ 1,316 $(2,787) $(2,232) $(2,364)
======= ======= ======= =======
AMOUNTS RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEET CONSIST OF:
Accrued benefit liability $ (79) $(2,787) $(2,232) $(2,364)
Accumulated other comprehensive income 1,395 -- -- --
------- ------- ------- -------
Net amount recognized $ 1,316 $(2,787) $(2,232) $(2,364)
======= ======= ======= =======
</TABLE>
Assets held by the Company's plans are invested in money market and other fixed
income funds as well as equity funds.
Significant assumptions used in determining net pension cost and funded status
information for all the periods shown above are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Discount rate 8.0% 7.0% 6.8%
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% to 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 for continuing
operations were $2.0 million and $2.1 million for the year ended December 31,
1997 and the 51 weeks ended December 30, 1998, respectively. Matching
contributions related to the one week ended January 7, 1998 were immaterial. The
Company made no matching contributions for the year ended December 31, 1996.
F-26
<PAGE> 67
STOCK OPTION PLANS
At December 30, 1998, the Company has three 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.
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 "1998 Stock Option Plans"). The
1998 Stock Option Plans permit the Compensation and Incentives Committee of the
Advantica Board (the "Committee") to award stock options as incentives to
employees and consultants of Advantica. The Committee has 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.
In addition to the 1998 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 1998 Stock Option
Plans. A total of 200,000 shares of Advantica Common Stock are authorized to be
issued under the Director Plan.
Effective January 28, 1998, options to purchase 1,927,500 shares, 409,000 shares
and 54,000 shares of Common Stock at market value at the date of grant were
issued under the Officer Plan, the Non-Officer Plan and the Director Plan,
respectively. Thirty percent of such grants under the Officer and Non-Officer
Plans became exercisable immediately, with an additional 20% vesting the first
and second anniversaries of the date of grant and an additional 15% vesting on
the third and fourth anniversaries. The grants under the Director Plan vest at a
rate of 33.3% per year beginning on the first anniversary of the grant date. On
September 11, 1998, options to purchase an additional 910,000 and 79,100 shares
of Common Stock at market value at the date of grant were issued under the
Officer Plan and the Non-Officer Plan, respectively. Such grants vest at a rate
of 25% per year beginning on the first anniversary of the grant date. All
options issued in 1998 expire ten years from the date of grant.
Prior to its emergence from bankruptcy the Company had two stock-based
compensation plans, the 1989 Stock Option Plan (the "1989 Plan") and the 1990
Non-qualified Stock Option Plan (the "1990 Plan"). On the Effective Date,
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 fact that all options under the 1989 Plan and the 1990 Plan were
canceled, extinguished and retired on the Effective Date, the effect on the
accompanying Statement of Consolidated Operations of the compensation expense
calculated under SFAS 123 related to such plans 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 during 1998 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 such grants: dividend yield of 0.0%; expected volatility of
.64; risk-free interest rate of 4.6% and a weighted average expected life of the
options of 9.0 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>
FIFTY-ONE
WEEKS ENDED
DECEMBER 30,
1998
------------
<S> <C>
(In millions, except per share data)
Pro forma net loss $(189.6)
Pro forma loss per share:
Basic and diluted (4.73)
</TABLE>
F-27
<PAGE> 68
A summary of the Company's stock option plans as of December 30, 1998 and the
changes during the 51 weeks ended December 30, 1998 is presented below.
<TABLE>
<CAPTION>
1998
--------------------------
OPTIONS WEIGHTED-AVERAGE
(000) EXERCISE PRICE
------- ----------------
<S> <C> <C>
Outstanding at January 7, 1998 -- $ --
Granted 3,380 8.45
Exercised (1) 10.00
Forfeited/Expired (287) 9.75
-----
Outstanding at end of year 3,092 8.32
=====
Exercisable at year-end 637 10.00
</TABLE>
The following table summarizes information about stock options outstanding at
December 30, 1998:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES 12/30/98 CONTRACTUAL LIFE EXERCISE PRICE 12/30/98 EXERCISE PRICE
- --------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 4.69 975,600 9.70 $ 4.69 -- $ --
10.00 2,116,150 9.08 10.00 636,600 10.00
</TABLE>
The weighted average fair value per option of options granted during the 51
weeks ended December 30, 1998 was $6.06.
NOTE 15 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 30, 1998, 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. The Company filed petitions in the United States Tax Court in 1998
for these periods. The case is not expected to be tried until late 1999 or early
2000.
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 were operated under licenses from Hardee's
Food Systems, Inc. ("HFS"). The Company did not believe HFS 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 made a number of
claims, including, (1) breach by HFS of its license agreements with the
Company's subsidiary, (2) breach of fiduciary duty and negligence by HFS in
mishandling and misapplying funds of the Company's subsidiary held for
advertising, and (3) unfair trade practices. Such arbitration proceeding was
suspended by the parties as a result of the definitive agreement for the sale of
FEI to HFS' parent company. Upon the consummation of the sale of FEI on April 1,
1998 all claims made by the Company against HFS were released.
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), which requires annual payments ranging from
F-28
<PAGE> 69
$26.9 million to $49.1 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.
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 30, 1998 relative to Portion-Trol Foods, Inc.
and Mother Butler Pies, respectively, are approximately $192.0 million and $41.9
million after giving effect to the dispositions of FEI and Quincy's.
NOTE 16 SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER SHAREHOLDERS'
TOTAL COMPREHENSIVE EQUITY/
OTHER EQUITY DEFICIT INCOME (DEFICIT)
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
(In thousands)
Balance December 31, 1995 $ 745,800 $(1,877,274) $ 497 $(1,130,977)
--------- ----------- ----- -----------
Comprehensive income:
Net loss -- (85,460) -- (85,460)
Other comprehensive income -- minimum pension
liability adjustment -- -- (459) (459)
--------- ----------- ----- -----------
Comprehensive income -- (85,460) (459) (85,919)
Dividends declared on Old Preferred Stock -- (10,631) -- (10,631)
--------- ----------- ----- -----------
Balance December 31, 1996 745,800 (1,973,365) 38 (1,227,527)
--------- ----------- ----- -----------
Comprehensive income:
Net loss -- (134,450) -- (134,450)
Other comprehensive income -- minimum pension
liability adjustment -- -- (473) (473)
--------- ----------- ----- -----------
Comprehensive income -- (134,450) (473) (134,923)
--------- ----------- ----- -----------
Balance December 31, 1997 745,800 (2,107,815) (435) (1,362,450)
--------- ----------- ----- -----------
Comprehensive income:
Net income excluding adjustments for
reorganization and fresh start reporting -- (3,087) -- (3,087)
--------- ----------- ----- -----------
Comprehensive income -- (3,087) -- (3,087)
Adjustments for reorganization 383,464 612,845 -- 996,309
Adjustments for fresh start reporting (711,937) 1,498,057 435 786,555
--------- ----------- ----- -----------
Balance January 7, 1998 417,327 -- -- 417,327
--------- ----------- ----- -----------
Comprehensive income:
Net loss -- (181,419) -- (181,419)
Other comprehensive income -- foreign
currency translation adjustments -- -- 47 47
--------- ----------- ----- -----------
Comprehensive income -- (181,419) 47 (181,372)
Issuance of Common Stock 89 -- -- 89
--------- ----------- ----- -----------
Balance December 30, 1998 $ 417,416 $ (181,419) $ 47 $ 236,044
========= =========== ===== ===========
</TABLE>
As discussed in Note 1, pursuant to the Plan, Flagstar's 10% Convertible
Debentures, FCI's Old Preferred Stock and FCI's Old 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.
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
F-29
<PAGE> 70
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 14).
STOCKHOLDER RIGHTS PLAN
The Company's Board of Directors adopted a stockholder rights plan (the "Rights
Plan") on December 14, 1998, which is designed to provide protection for the
Company's shareholders against coercive or unfair takeover tactics. The Rights
Plan is also designed to prevent an acquirer from gaining control of the Company
without offering a fair price to all shareholders. The Rights Plan was not
adopted in response to any specific proposal or inquiry to gain control of the
Company. Under the Rights Plan the Company's Board of Directors declared a
dividend of one right payable to shareholders of record as of December 30, 1998.
Such rights are exercisable for one one-thousandth share of a new series of
junior participating preferred stock. In conjunction with the adoption of the
Rights Plan, the Company designated 100,000 shares of preferred stock as Series
A Junior Participating Preferred Stock (the "Participating Preferred Stock")
having a par value of $1.00 per share.
The rights may only be exercised if a third party acquires 15% or more of the
outstanding common shares of the Company or ten days following the commencement
of, or announcement of intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a third party
of 15% or more of the common shares. The Rights Plan provides that the current
ownership of Advantica common stock by Loomis Sayles & Company, L.P. and certain
related entities ("Loomis Sayles"), which exceeds 15%, will not cause the rights
to become exercisable so long as Loomis Sayles does not increase its ownership
in excess of one percent without the consent of the Company's Board of
Directors. When exercisable, each right will entitle the holder to purchase one
one-thousandth share of the Participating Preferred Stock at an exercise price
of $42.50. If a person or group acquires 15% or more of the outstanding common
shares of the Company, each right, in the absence of timely redemption of the
rights by the Company, will entitle the holder, other than the acquiring party,
to purchase shares of Advantica common stock at a 50% discount from the then
market value of such common stock. Additionally, in the event that Advantica is
acquired in a merger or other business combination transaction after any person
or group has acquired 15% or more of Advantica outstanding common stock, each
right will entitle the holder, other than the acquirer, to receive, upon payment
of the exercise price, common shares of the acquiring company at a 50% discount
from the then market value.
The rights, until exercised, do not entitle the holder to vote or receive
dividends. The Company has the option to redeem the rights at a price of $.01
per right, at any time prior to the earlier of (1) the time the rights become
exercisable or (2) December 30, 2008, the date the rights expire. Until the
rights become exercisable, they have no dilutive effect on earnings per share.
F-30
<PAGE> 71
NOTE 17 EARNINGS (LOSS) PER SHARE APPLICABLE TO COMMON SHAREHOLDERS
The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED ONE WEEK FIFTY-ONE
--------------------------- ENDED WEEKS ENDED
DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30,
1996 1997 1998 1998
(In thousands) ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
Numerator:
(Loss) income from continuing operations $(53,011) $(76,325) $734,340 $(180,956)
Preferred stock dividends (14,175) (14,175) (273) --
-------- -------- -------- ---------
Numerator for basic (loss) earnings per share --
(loss) income from continuing operations
available to common shareholders (67,186) (90,500) 734,067 (180,956)
-------- -------- -------- ---------
Effect of dilutive securities:
$2.25 Series A Cumulative Convertible
Exchangeable Preferred Stock -- -- 273 --
10% Convertible Junior Subordinated Debentures -- -- -- --
-------- -------- -------- ---------
-- -- 273 --
-------- -------- -------- ---------
Numerator for diluted (loss) earnings per share--
(loss) income from continuing operations
available to common shareholders after assumed
conversions $(67,186) $(90,500) $734,340 $(180,956)
======== ======== ======== =========
Denominator:
Denominator for basic earnings per share --
weighted average shares 42,434 42,434 42,434 40,006
-------- -------- -------- ---------
Effect of dilutive securities:
$2.25 Series A Cumulative Convertible
Exchangeable Preferred Stock -- -- 8,562 --
10% Convertible Junior Subordinated Debentures -- -- 4,136 --
-------- -------- -------- ---------
Dilutive potential common shares -- -- 12,698 --
-------- -------- -------- ---------
Denominator for diluted (loss) earnings per
share -- adjusted weighted average shares
and assumed conversions 42,434 42,434 55,132 40,006
======== ======== ======== =========
Basic (loss) earnings per share from
continuing operations $ (1.58) $ (2.13) $ 17.30 $ (4.52)
======== ======== ======== =========
Diluted (loss) earnings per share from
continuing operations $ (1.58) $ (2.13) $ 13.32 $ (4.52)
======== ======== ======== =========
</TABLE>
The calculations of basic and diluted loss per share have been based on the
weighted average number of Company shares outstanding. The Predecessor Company
warrants, options, $2.25 Preferred Stock and 10% Convertible Debentures have
been omitted from the calculations for the 1996 and 1997 periods because they
have an antidilutive effect on loss per share. For additional disclosures
regarding such warrants, options, $2.25 Preferred Stock and 10% Convertible
Debentures, see Notes 1, 11, 14 and 16. The warrants and options of the
Successor Company have been omitted from the calculations for the 51 weeks ended
December 30, 1998 because they have an antidilutive effect on loss per share.
NOTE 18 EXTRAORDINARY ITEMS
The implementation of the Plan resulted in the exchange of the Senior
Subordinated Debentures and the 10% Convertible Debentures for 40 million shares
of Common Stock and Warrants to purchase 4 million shares of Common Stock. The
difference between the carrying value of such debt (including principal, accrued
interest and deferred financing costs of $946.7 million, $74.9 million and $25.6
million, respectively) and the fair value of the Common Stock and Warrants
resulted in a gain on debt adjustment of $612.8 million which was recorded as an
extraordinary item.
On July 31, 1998 the Company extended to the holders of the Senior Notes an
offer to purchase, on a pro rata basis, up to $100.0 million of the outstanding
Senior Notes at a price of 100% of the principal amount thereof plus accrued and
F-31
<PAGE> 72
unpaid interest (the "Net Proceeds Offer"). Such offer was extended pursuant to
the terms of the indenture governing the Senior Notes (the "Indenture") which
requires the Company to apply the Net Proceeds (as defined therein) from the
sale of the Hardee's and Quincy's Business Segments (as defined in the
Indenture) within 366 days of such sales to (1) an investment in another asset
or business in the same line or similar line of business, (2) a net proceeds
offer, as defined in the Indenture, or (3) the prepayment or repurchase of
Senior Indebtedness (as defined), or any combination thereof as the Company may
choose. The Net Proceeds Offer expired on August 31, 1998. Tendering holders had
the option to withdraw their tenders during a 30-day period ending on September
30, 1998. At the close of the withdrawal period, $42.4 million of such
securities were tendered and not withdrawn. Such securities, plus accrued and
unpaid interest of $1.1 million, were retired on October 5, 1998 resulting in an
extraordinary gain of $1.0 million.
NOTE 19 RELATED PARTY TRANSACTIONS
The Company recorded charges against income of approximately $1.3 million for
the years ended December 31, 1996 and 1997 relative to financial advisory fees
to a former shareholder.
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 nonoperating expenses in the accompanying Statement of
Consolidated Operations for the year ended December 30, 1996.
Interest income for the loan receivable from the former officer for the year
ended December 31, 1996 totaled $935,000.
NOTE 20 SEGMENT INFORMATION
Advantica operates entirely in the food service industry with substantially all
revenues resulting from the sale of menu products at restaurants operated by the
Company, franchisees or licensees. The Company operates four restaurant
concepts -- Denny's, Coco's, Carrows and El Pollo Loco -- and each concept is
considered a reportable segment. The amounts reported for Coco's and Carrows
reflect only the periods subsequent to the acquisition date of May 23, 1996. The
"Corporate and other" segment consists primarily of the corporate headquarters.
The corporate and other segment also includes the operating results of the
Company's food processing operations for the year ended December 31, 1996.
Advantica evaluates performance based on several factors, of which the primary
financial measure is business segment operating income before interest, taxes,
depreciation, amortization and charges for (recoveries of) restructuring and
impairment ("EBITDA as defined"). The accounting policies of the business
segments are the same as those described in the summary of significant
accounting policies in Note 4. Intersegment transactions generally consist of
sales of restaurant units or lease buyouts and are accounted for at fair value
as if the sales were to unrelated third parties.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED ONE WEEK FIFTY-ONE
--------------------------- ENDED WEEKS ENDED
DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30,
1996 1997 1998 1998
(In millions) ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
REVENUE
Denny's $1,243.4 $1,193.3 $23.2 $1,156.0
Coco's 163.7 280.0 4.9 255.4
Carrows 131.4 212.5 3.5 184.0
El Pollo Loco 124.2 124.8 2.0 125.1
Corporate and other 19.8 -- -- --
-------- -------- ----- --------
Total revenue for reportable segments 1,682.5 1,810.6 33.6 1,720.5
Elimination of intersegment revenue (18.4) -- -- --
-------- -------- ----- --------
Total consolidated revenue $1,664.1 $1,810.6 $33.6 $1,720.5
======== ======== ===== ========
</TABLE>
F-32
<PAGE> 73
<TABLE>
<CAPTION>
FISCAL YEAR ENDED ONE WEEK FIFTY-ONE
--------------------------- ENDED WEEKS ENDED
DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30,
1996 1997 1998 1998
(In millions) ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
DEPRECIATION AND AMORTIZATION
Denny's $ 51.4 $ 51.5 $ 1.1 $ 169.8
Coco's 10.3 16.6 0.3 41.8
Carrows 8.2 13.0 0.2 33.5
El Pollo Loco 6.3 5.4 -- 19.4
Corporate and other 5.1 6.6 0.1 21.4
------- ------- ------ -------
Total consolidated depreciation and amortization $ 81.3 $ 93.1 $ 1.7 $ 285.9
======= ======= ====== =======
EBITDA AS DEFINED
Denny's $ 165.4 $ 171.6 $ 11.1 $ 173.3
Coco's 18.5 35.0 0.8 37.2
Carrows 14.9 26.6 -- 23.4
El Pollo Loco 20.1 20.1 (0.1) 21.2
Corporate and other (28.6) (35.2) (1.5) (33.2)
------- ------- ------ -------
Total EBITDA as defined for reportable segments 190.3 218.1 10.3 221.9
Eliminate EBITDA as defined resulting from
intersegment transactions -- -- -- (3.3)
------- ------- ------ -------
Total consolidated EBITDA as defined 190.3 218.1 10.3 218.6
Depreciation and amortization expense (81.3) (93.1) (1.7) (285.9)
Other charges:
Interest expense, net (177.2) (164.9) (2.6) (114.1)
Other, net (1.1) (4.6) 0.3 (1.4)
Reorganization items -- (30.1) 714.2 --
------- ------- ------ -------
Consolidated (loss) income from continuing
operations before income taxes and extraordinary
items $ (69.3) $ (74.6) $720.5 $(182.8)
======= ======= ====== =======
</TABLE>
F-33
<PAGE> 74
<TABLE>
<CAPTION>
FISCAL YEAR ENDED ONE WEEK FIFTY-ONE
--------------------------- ENDED WEEKS ENDED
DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30,
1996 1997 1998 1998
(In millions) ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
CAPITAL EXPENDITURES
Denny's $29.0 $43.1 $ -- $52.7
Coco's 1.5 8.4 -- 5.4
Carrows 1.2 6.5 -- 5.0
El Pollo Loco 2.4 5.1 -- 11.9
Corporate and other 5.6 1.2 1.0 4.6
----- ----- ----- -----
Total capital expenditures for reportable
segments 39.7 64.3 1.0 79.6
Elimination of intersegment capital expenditures -- -- -- (2.5)
----- ----- ----- -----
Total consolidated capital expenditures $39.7 $64.3 $ 1.0 $77.1
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1997 1998
(In millions) ------------ ------------
<S> <C> <C>
ASSETS
Denny's $ 497.7 $1,021.0
Coco's 226.5 205.7
Carrows 145.0 153.1
El Pollo Loco 73.5 148.8
Corporate and other 731.6 464.8
-------- --------
Total assets for reportable segments 1,674.3 1,993.4
Elimination of intersegment receivables (266.9) (7.2)
-------- --------
Total consolidated assets $1,407.4 $1,986.2
======== ========
</TABLE>
Information as to Advantica's operations in different geographical areas is as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED ONE WEEK FIFTY-ONE
--------------------------- ENDED WEEKS ENDED
DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30,
1996 1997 1998 1998
(In millions) ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
REVENUE
United States $1,647.4 $1,793.0 $33.3 $1,705.3
Other 16.7 17.7 0.3 15.2
</TABLE>
Because a substantial portion of the Company's international revenue is derived
from restaurants operated by franchisees and licensees, assets located outside
the United States are not material.
NOTE 21 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. All such adjustments are of a normal and recurring nature. During the
fourth quarter of 1997, the Company recorded a $5.8 million reduction in
operating expenses resulting from various nonrecurring 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.
F-34
<PAGE> 75
Selected consolidated financial data for each quarter within 1997, the one week
ended January 7, 1998, the twelve weeks ended April 1, 1998 and the second,
third and fourth quarters of 1998 are as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
(In thousands, except per share data) -------- -------- -------- --------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Revenue:
Company sales $455,167 $431,664 $441,703 $420,253
Franchise and license revenue 14,298 16,101 16,031 15,410
-------- -------- -------- --------
Total revenue 469,465 447,765 457,734 435,663
Total costs and expenses 449,598 413,184 423,454 399,392
-------- -------- -------- --------
Operating income $ 19,867 $ 34,581 $ 34,280 $ 36,271
======== ======== ======== ========
Loss before extraordinary items $(51,728) $(32,271) $(17,759) $(32,692)
Basic and diluted net loss per share before extraordinary
items (1.30) (0.84) (0.50) (0.86)
Net loss (51,728) (32,271) (17,759) (32,692)
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY SUCCESSOR COMPANY
------------ ------------------------------------------
ONE TWELVE
WEEK WEEKS
ENDED ENDED
JANUARY 7, APRIL 1, SECOND THIRD FOURTH
1998 1998 QUARTER QUARTER QUARTER
(In thousands, except per share data) ------------ --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Year Ended December 30, 1998:
Revenue:
Company sales $ 31,986 $371,747 $423,160 $438,311 $420,874
Franchise and license revenue 1,629 13,996 16,933 17,403 18,101
--------- -------- -------- -------- --------
Total revenue 33,615 385,743 440,093 455,714 438,975
Total costs and expenses 24,955 400,306 460,633 463,260 463,592
--------- -------- -------- -------- --------
Operating income (loss) $ 8,660 $(14,563) $(20,540) $ (7,546) $(24,617)
========= ======== ======== ======== ========
Income (loss) before extraordinary items $ 782,073 $(43,080) $(53,290) $(36,540) $(49,553)
Basic net income (loss) per share before
extraordinary items 18.43 (1.08) (1.33) (0.91) (1.24)
Diluted net income (loss) per share before
extraordinary items 14.19 (1.08) (1.33) (0.91) (1.24)
Net income (loss) 1,394,918 (43,080) (53,290) (36,540) (48,509)
</TABLE>
F-35
<PAGE> 76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ADVANTICA RESTAURANT GROUP, INC.
By: /s/ RHONDA J. PARISH
--------------------------------------
Rhonda J. Parish
(Executive Vice President,
General Counsel and Secretary)
Date: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES B. ADAMSON Director, Chairman, President, and Chief March 30, 1999
- ----------------------------------------------------- Executive Officer (Principal Executive
(James B. Adamson) Officer)
/s/ RONALD B. HUTCHISON Executive Vice President and Chief March 30, 1999
- ----------------------------------------------------- Financial Officer (Principal Financial
(Ronald B. Hutchison) and Accounting Officer)
/s/ ROBERT H. ALLEN Director March 30, 1999
- -----------------------------------------------------
(Robert H. Allen)
/s/ RONALD E. BLAYLOCK Director March 30, 1999
- -----------------------------------------------------
(Ronald E. Blaylock)
/s/ VERA KING FARRIS Director March 30, 1999
- -----------------------------------------------------
(Vera King Farris)
/s/ JAMES J. GAFFNEY Director March 30, 1999
- -----------------------------------------------------
(James J. Gaffney)
/s/ IRWIN N. GOLD Director March 30, 1999
- -----------------------------------------------------
(Irwin N. Gold)
/s/ ROBERT E. MARKS Director March 30, 1999
- -----------------------------------------------------
(Robert E. Marks)
/s/ CHARLES F. MORAN Director March 30, 1999
- -----------------------------------------------------
(Charles F. Moran)
/s/ ELIZABETH A. SANDERS Director March 30, 1999
- -----------------------------------------------------
(Elizabeth A. Sanders)
/s/ DONALD R. SHEPHERD Director March 30, 1999
- -----------------------------------------------------
(Donald R. Shepherd)
</TABLE>
<PAGE> 1
CONFORMED COPY
AMENDMENT NO. 4 dated as of November 12, 1998 (this
"Amendment"), to the Credit Agreement dated as of January 7,
1998, as amended by Amendment No. 1 and Waiver dated as of
March 16, 1998, Amendment No. 2 and Waiver dated as of May 21,
1998, and Amendment No. 3 and Waiver dated as of July 16, 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, except
for FLAGSTAR ENTERPRISES, INC. and QUINCY'S RESTAURANTS, INC.,
for purposes of this Amendment and the Credit Agreement,
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
agree to amend certain provisions of the Credit Agreement.
C. The Required Lenders are willing to agree to such amendments, 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 after giving effect to this
Amendment.
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. 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:
"'FRD Restructuring' shall mean, collectively: (a) the
consummation of the exchange of FRD Senior Notes for New Senior Notes
(Series II) and/or cash pursuant to the FRD Senior Notes Exchange
Offer; (b) the effectiveness of the New Senior Notes (Series II)
Indenture upon consummation of the FRD Senior Notes Exchange Offer; (c)
FRD's receipt in response to the FRD Senior Notes Consent Solicitation
of consents from holders representing at least a majority in aggregate
principal amount of the FRD Senior Notes approving the FRD Senior Notes
Supplemental Indenture; (d) the effectiveness of such FRD Senior Notes
Supplemental Indenture; and (e) the payment in full of all principal,
interest, fees and other amounts due under, the discharge of all
obligations (other than indemnification obligations that would
customarily survive termination) and security interests related to, and
the permanent termination of, the FRI-M Credit Agreement."
<PAGE> 2
2
"'FRD Restructuring Offering Memorandum' shall mean the
Offering Memorandum and Solicitation Statement, dated as November 12,
1998, of Parent and FRD with respect to the FRD Senior Notes Exchange
Offer and the FRD Senior Notes Consent Solicitation."
"'FRD Senior Notes' shall mean FRD's 12-1/2% Senior Notes due
2004."
"'FRD Senior Notes Consent Solicitation' shall mean FRD's
solicitation of consents from holders of the FRD Senior Notes to the
amendments to the FRD Senior Notes Indenture set forth in the FRD
Senior Notes Supplemental Indenture and as more particularly described
in the FRD Restructuring Offering Memorandum."
"'FRD Senior Notes Documents' shall mean the FRD Senior Notes,
the FRD Senior Notes Indenture, the FRD Senior Notes Supplemental
Indenture and all material agreements, documents and instruments
related thereto, in each case as amended, supplemented or otherwise
modified from time to time in accordance with the terms hereof and
thereof."
"'FRD Senior Notes Exchange Offer' shall mean the offer by
Parent to holders of FRD Senior Notes to exchange such FRD Senior Notes
for (i) a specified cash payment, (ii) a specified principal amount of
New Senior Notes (Series II) or (iii) a combination of cash and New
Senior Notes (Series II), at each holder's option in such proportion as
the holder shall determine, subject to (A) the condition, among others,
that at least a majority of the aggregate principal amount of FRD
Senior Notes must be tendered and not withdrawn and (B) Advantica's
right to reallocate tenders of FRD Senior Notes for New Senior Notes
(Series II) or cash in order to cause the aggregate principal amount of
FRD Senior Notes tendered for cash to be not less than $60,000,000 and
not more than $80,000,000, all as more particularly described in the
FRD Restructuring Offering Memorandum."
"'FRD Senior Notes Indenture' shall mean the Indenture with
respect to the FRD Senior Notes between FRD and The Bank of New York,
as trustee, as amended, supplemented or otherwise modified from time to
time in accordance with the terms hereof and thereof."
"'FRD Senior Notes Supplemental Indenture' shall mean the
Supplemental Indenture to the FRD Senior Notes Indenture to be entered
into by FRD and The Bank of New York, as trustee, to effect the
amendments to the FRD Senior Notes Indenture contemplated by the FRD
Senior Notes Consent Solicitation, as amended, supplemented or
otherwise modified from time to time in accordance with the terms
hereof and thereof."
"'FRI-M' shall mean FRI-M Corporation, a Delaware corporation
and a direct, wholly owned subsidiary of FRD."
"'FRI-M Credit Agreement' shall mean the Credit Agreement
dated as of May 23, 1996, as heretofore amended, among FRD, FRI-M,
certain financial institutions and Credit Lyonnais New York Branch, as
administrative agent."
"'New Senior Notes (Series I)' shall mean Parent's 11-1/4%
Senior Notes due 2008 issued as part of the Emergence Transactions."
"'New Senior Notes (Series I) Indenture' shall mean the
Indenture with respect to the New Senior Notes (Series I) between
Parent and the New Senior
<PAGE> 3
3
Notes Trustee, as amended, supplemented or otherwise modified from time
to time in accordance with the terms hereof and thereof."
"'New Senior Notes (Series II)' shall mean Parent's 11-1/4%
Senior Notes due 2008 to be issued as part of the FRD Senior Notes
Exchange Offer or any senior notes of Parent ("New Senior Exchange
Notes") issued in exchange for New Senior Notes (Series II) and having
terms substantially identical to the terms of the New Senior Notes
(Series II) (with certain additional provisions relating to
restrictions on transfers of New Senior Notes (Series II) issued as
part of the FRD Senior Notes Exchange Offer and certain registration
rights in respect thereof), all as contemplated by the FRD
Restructuring Offering Memorandum."
"'New Senior Notes (Series II) Indenture' shall mean the
Indenture with respect to the New Senior Notes (Series II) (including
any New Senior Exchange Notes) between Parent and the New Senior Notes
Trustee, as amended, supplemented or otherwise modified from time to
time in accordance with the terms hereof and thereof."
"'Remaining H&Q Net Cash Proceeds' shall mean, at any time,
(a) $245,000,000 less (b) the aggregate amount of the Net Cash Proceeds
of the Enterprise Sale and the Quincy's Sale that prior to such time
has been applied to (i) pay Indebtedness (including the repayment of
all amounts due under the FRI- M Credit Agreement in connection with
the FRD Restructuring), (ii) purchase New Senior Notes and/or FRD
Senior Notes (including pursuant to any Net Proceeds Offer (as defined
in the New Senior Notes Indenture) and in connection with the FRD
Restructuring), (iii) incur Capital Expenditures (or investments in
lieu thereof permitted under Section 6.04(k)), (iv) make investments or
(v) for any other purpose other than to effect the SRT Defeasance.";
(ii) by substituting the following new definitions for the existing
definitions of the terms "Excluded Subsidiaries", "New Senior Notes" and "New
Senior Notes Indenture":
"'Excluded Subsidiaries' shall mean FRD and its subsidiaries;
provided that upon and after the consummation of the FRD Restructuring
and the effectiveness of Amendment No. 4 to this Agreement, Parent
shall not have any Excluded Subsidiaries."
"'New Senior Notes' shall mean collectively the New Senior
Notes (Series I) and the New Senior Notes (Series II) (including any
New Senior Exchange Notes)."
"'New Senior Notes Indenture' shall mean collectively the New
Senior Notes (Series I) Indenture and the New Senior Notes (Series II)
Indenture.";
(iii) by substituting the words "U.S. Bank Trust" for the words "First
Trust" in the definition of the term "New Senior Notes Trustee";
(iv) by deleting after the words "the lesser of" in the definition of
the term "Consolidated Total Debt" the remaining text of such definition and
substituting in its place the following:
"(x) the Remaining H&Q Net Cash Proceeds as of such date and (y) 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
<PAGE> 4
4
Borrowers and the Specified Subsidiaries prepared as of such date in
accordance with GAAP.";
(v) by (A) substituting the words "(or other similar property
or assets of a Real Estate Subsidiary that have been substituted for
such specific property or assets)" for the parenthetical phrase in
clause (f) of the definition of the term "Real Estate Refinancing", (B)
substituting the word "and" for the comma at the end of clause (g) of
such definition and (C) deleting all the text beginning with the word
"and" at the end of clause (h) of such definition up to (but not
including) the period at the end of such definition; and
(vi) by deleting the definition of the term "Significant
Subsidiary Group".
(b) Section 3.08 of the Credit Agreement is hereby amended by
substituting (i) the words "(other than the shares of the capital stock of the
Real Estate Subsidiaries)" for the parenthetical phrase in Section 3.08(a) and
(ii) a new Schedule 3.08(a) attached to this Amendment for the existing Schedule
3.08(a) to the Credit Agreement.
(c) Section 5.11 of the Credit Agreement is hereby amended by deleting
the words "(other than a subsidiary of FRD)".
(d) Section 6.01 of the Credit Agreement is hereby amended as follows:
(i) by substituting a new Schedule 6.01 attached to this
Amendment for the existing Schedule 6.01 to the Credit Agreement;
(ii) by substituting the words ", (iv) the FRD Senior Notes
Documents and (v)" for the words "and (iv)" in Section 6.01(b); and
(iii) by inserting at the end of Section 6.01(b) before the
semicolon the following:
", provided that (i) Indebtedness evidenced by the New Senior
Notes (Series II) and the New Senior Notes (Series II)
Indenture (A) shall be incurred only pursuant to the
consummation of the FRD Senior Notes Exchange Offer or the
exchange offer of unregistered New Senior Notes (Series II)
for New Senior Exchange Notes as contemplated by the FRD
Restructuring Offering Memorandum and (B) shall not exceed an
aggregate principal amount of $101,742,000 and (ii)
Indebtedness evidenced by the FRD Senior Notes Documents shall
not exceed an aggregate principal amount of $78,292,000.".
(e) Section 6.02 of the Credit Agreement is hereby amended as follows:
(i) by deleting (A) after the words "subject to the Lien of a
Loan Document, so long as" in the last proviso to Section 6.02(a), the
word "(i)" and (B) after the words "made is fully and effectively
released from such Lien" in such proviso, the remaining text of such
proviso up to (but not including) the semicolon at the end of such
proviso; and
(ii) by deleting after the words "arising in connection with
intercompany transactions among Borrowers or Subsidiary Guarantors" in
Section 6.02(f) the remaining text of such Section 6.02(f) up to (but
not including) the semicolon.
(f) Section 6.04 of the Credit Agreement is hereby amended (i) by
deleting after the words "in the ordinary course of business" in Section 6.04(c)
the comma and the entire proviso up to (but not including) the semicolon at the
end of Section 6.04(c) and (ii) by substituting the following new Section
6.04(l) for the existing Section 6.04(l):
<PAGE> 5
5
"(l) investments by Parent in FRD Senior Notes to the extent
that Parent is permitted to repurchase such FRD Senior Notes pursuant
to Section 6.08(a); and".
(g) Section 6.05 of the Credit Agreement is hereby amended
(i) by deleting after the words "its assets to any Subsidiary Guarantor" in
Section 6.05(d) the comma and the proviso to Section 6.05(d) up to (but not
including) the semicolon; and (ii) by substituting the following new Section
6.05(g) for the existing Section 6.05(g):
"(g) any Subsidiary Guarantor may merge or consolidate with or
transfer all or substantially all of its assets to any other Subsidiary
Guarantor and acquire by merger the assets of any person to the extent
permitted by Section 6.04(k), provided that no such merger,
consolidation, transfer or acquisition involving a Subsidiary Guarantor
results in any loss of ownership by Parent of such Subsidiary
Guarantor;".
(h) Section 6.08 of the Credit Agreement is hereby amended as
follows:
(i) by substituting the following new Section 6.08(a) for the
existing Section 6.08(a):
"(a) Make any voluntary or optional payments, prepayments or
redemptions of principal or premium or voluntarily repurchase, acquire
or retire for value prior to the stated maturity with respect to
Indebtedness (other than Indebtedness arising under the Loan
Documents); provided that:
(i) the Mortgage Notes may be repaid with the proceeds of the
Real Estate Refinancing,
(ii) Parent or the Subsidiaries may make up to an aggregate of
$2,000,000 in prepayments of Indebtedness of Enterprises
retained by Parent or any Subsidiary in connection with the
Enterprises Sale,
(iii) Parent shall be permitted to purchase voluntarily FRD
Senior Notes pursuant to the FRD Senior Notes Exchange Offer
in an aggregate principal amount of not more than
$156,897,000, provided that (A) Parent promptly contributes
such FRD Senior Notes to FRD and FRD promptly cancels such FRD
Senior Notes and (B) any cash purchase price of such FRD
Senior Notes, not to exceed in aggregate $82,400,000, shall be
funded from and shall reduce the Remaining H&Q Net Cash
Proceeds,
(iv) Parent shall be permitted to purchase voluntarily New
Senior Notes and/or FRD Senior Notes from time to time,
provided, that (A) the purchase price of any such New Senior
Note or FRD Senior Note, not to exceed the lesser of such
note's then current Fair Market Value and its unpaid principal
amount, shall be funded from and shall reduce the Remaining
H&Q Net Cash Proceeds, (B) immediately after giving effect to
such a purchase, (x) the Remaining H&Q Net Cash Proceeds shall
not be less than the sum of the aggregate principal amount of
the Loans outstanding at such time plus $40,000,000 and (y) no
Default or Event of Default shall have occurred or be
continuing or would result therefrom and (C) Parent promptly
cancels such New Senior Notes and/or contributes such FRD
Senior Notes to FRD and FRD promptly cancels such FRD Senior
Notes,
(v) Parent shall be permitted to acquire unregistered New
Senior Notes (Series II) pursuant to an exchange offer of such
New Senior Notes for New Senior Exchange Notes as contemplated
by the FRD Restructuring Offering Memorandum, and
<PAGE> 6
6
(vi) FRI-M shall be permitted to prepay all Indebtedness and
other amounts due under the FRI-M Credit Agreement pursuant to
the FRD Restructuring, provided that such payments shall be
funded from and shall reduce the Remaining H&Q Net Cash
Proceeds;
provided further that such payments shall be permitted to retire
Indebtedness to the extent required under a "due on sale" clause
applicable to any disposition of assets permitted under Section 6.05.";
and
(ii) by inserting at the end of Section 6.08 the following new section:
"(c) If, as a result of the receipt of any cash proceeds by
Parent or any Subsidiary in connection with an Asset Sale, Parent or
FRD would be required by the terms of the FRD Senior Notes Indenture or
the New Senior Notes Indenture to make an offer to repurchase FRD
Senior Notes or New Senior Notes, respectively, prior to the respective
maturity dates of such Notes, then Parent shall or shall cause one or
more of the Subsidiaries to invest such cash proceeds in assets or
businesses of Parent or the Subsidiaries in a manner that is permitted
by the other provisions of this Agreement and that will eliminate any
requirement under the FRD Senior Notes Indenture or the New Senior
Notes Indenture to offer to repurchase FRD Senior Notes or New Senior
Notes, respectively. Any such investment shall be made prior to the
first day on which FRD or Parent would be required to commence a tender
offer to repurchase with such cash proceeds FRD Senior Notes or New
Senior Notes, respectively, under the FRD Senior Notes Indenture or New
Senior Notes Indenture, respectively.".
(i) Section 6.10 of the Credit Agreement is hereby amended by (i)
deleting after the words "from time to time incur Consolidated Capital
Expenditures (or investments in lieu thereof permitted under Section 6.04(k))"
in the second proviso thereto the remaining text of Section 6.10 and
substituting in its place the following:
"to the extent that such additional Consolidated Capital Expenditures
or investments are funded solely from (and shall reduce) the Remaining
H&Q Net Cash Proceeds at such time (provided that immediately after
giving effect to any such additional Consolidated Capital Expenditure
or investment, the Remaining H&Q Net Cash Proceeds shall not be less
than the aggregate principal amount of the Loans outstanding at such
time)".
(j) Section 6.15 of the Credit Agreement is hereby amended by inserting
at the end of Section 6.15 the following:
"Parent shall not permit FRD to (i) own or acquire any assets (other
than shares of capital stock of FRD's subsidiaries, cash and Permitted
Investments, provided that the amount of such cash, together with the
Fair Market Value of such Permitted Investments, shall not at any time
exceed $500,000 other than on any day on which a payment is due in
respect of the FRD Senior Notes, in which event FRD may during such day
hold additional cash in an amount up to the aggregate amount of such
payment) or (ii) incur any liabilities (other than (A) liabilities
under the Loan Documents or the FRD Senior Notes Documents, (B)
liabilities imposed by law, including tax liabilities, and (C) other
liabilities incidental to its existence and permitted business and
activities).".
(k) Section 6.04 of the Credit Agreement is hereby amended by inserting
at the end of Section 6.04(e) before the semicolon the words ", or to the extent
that Parent transfers all or a portion of such capital stock to a Subsidiary
Guarantor, investments by such Subsidiary Guarantor in such capital stock".
(l) Section 6.06(a) of the Credit Agreement is hereby amended (i) by
substituting a comma for the word "and" immediately following the words "to
Parent, to the Borrowers or to
<PAGE> 7
7
the Subsidiary Guarantors" in the proviso to such Section 6.06(a) and (ii) by
inserting at the end of such Section 6.06(a) immediately before the period the
following:
"and (iii) Parent may declare and distribute to its stockholders a
dividend comprised of rights to purchase preferred stock and/or common
stock of Parent, provided that (A) such rights are issued and
distributed to Parent's stockholders pursuant to a stockholders' rights
plan, with substantially the same terms and conditions as described in
the form of Rights Agreement, between Parent and a Rights Agent (to be
determined), furnished to the Administrative Agent by Parent on or
prior to the date hereof, and have only nominal value at the time of
their issuance and distribution and (B) no Default or Event of Default
shall have occurred or be continuing or would result therefrom".
(m) Section 6.07 of the Credit Agreement is hereby amended by inserting
at the end of such Section 6.07 immediately before the period the following:
", provided that Parent may issue and distribute to its stockholders
that are Affiliates rights to purchase preferred stock and/or common
stock of Parent to the extent that such rights are permitted to be
issued and distributed to Parent's stockholders pursuant to Section
6.06(a)(iii)".
SECTION 2. Effectiveness Date. The "Effectiveness Date" shall be
specified by Parent and the Borrowers and shall be a date not later than
December 31, 1998, as of which all the conditions set forth or referred to in
Section 4 hereof shall be satisfied. Parent and the Borrowers shall give the
Administrative Agent not less than five Business Day's written notice proposing
a date as the Effectiveness Date to the Administrative Agent. Sections 1(a)
through 1(j) of this Amendment shall terminate at 5:00 p.m., New York City time,
on December 31, 1998, if the Effectiveness Date shall not have occurred at or
prior to such time.
SECTION 3. 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) Before and after giving effect to this Amendment, no Event
of Default or Default has occurred and is continuing.
(d) Immediately after the consummation of the FRD
Restructuring on the Effectiveness Date, (a) the fair value of the
assets of each Loan Party, at a fair valuation, will exceed its debts
and liabilities, subordinated, contingent or otherwise; (b) the present
fair saleable value of the property of each Loan Party will be greater
than the amount that will be required to pay the probable liability of
its debts and other liabilities, subordinated, contingent or otherwise,
as such debts and other liabilities become absolute and matured; (c)
each Loan Party will be able to pay its debts and liabilities,
subordinated, contingent or otherwise, as such debts and liabilities
become absolute and matured; and (d) each Loan Party will not have
unreasonably small capital with which to conduct the business in which
it is engaged as such business is now conducted and is proposed to be
conducted following the Effectiveness Date.
<PAGE> 8
8
SECTION 4. Conditions to Effectiveness. Effectiveness of Sections 1(a)
through 1(j) of this Amendment shall be subject to satisfaction of all of the
following conditions:
(a) On or prior to the Effectiveness Date, the FRD
Restructuring shall have been consummated on terms and conditions
reasonably satisfactory to the Required Lenders (it being understood
that the terms and conditions of the FRD Restructuring that are
described in the FRD Restructuring Offering Memorandum shall, to the
extent specifically described in such FRD Restructuring Offering
Memorandum, be deemed satisfactory to the Required Lenders) and after
giving effect thereto and the other transactions contemplated hereby,
no default or event of default would exist under the FRD Senior Notes
Indenture (as amended by the FRD Senior Notes Supplemental Indenture),
the New Senior Notes Indenture or the Credit Agreement, as amended
hereby.
(b) The Administrative Agent shall have received, on behalf of
itself, the Lenders and the Issuing Bank, a favorable written opinion
of Parker, Poe, Adams & Bernstein L.L.P., counsel for Parent and the
Borrowers, substantially to the effect set forth in Exhibit A hereto,
(A) dated the Effectiveness Date, (B) addressed to the Issuing Bank,
the Administrative Agent, the Collateral Agent and the Lenders and (C)
covering such other matters relating to the Loan Documents and the FRD
Restructuring as the Administrative Agent shall reasonably request, and
Parent and the Borrowers hereby request such counsel to deliver such
opinions.
(c) All legal matters incident to this Amendment and the other
Loan Documents to be entered into in connection herewith shall be
satisfactory to the Lenders, to the Issuing Bank and to Cravath, Swaine
& Moore, counsel for the Administrative Agent.
(d) The Administrative Agent shall have received (i) a copy of
the certificate or articles of incorporation, including all amendments
thereto, of FRD and each of its subsidiaries (each, a "FRD Subsidiary
Guarantor"), certified as of a recent date by the Secretary of State of
the state of its organization, and a certificate as to the good
standing of each FRD Subsidiary Guarantor as of a recent date, from
such Secretary of State; (ii) a certificate of the Secretary or
Assistant Secretary of each FRD Subsidiary Guarantor dated the
Effectiveness Date and certifying (A) that attached thereto is a true
and complete copy of the by-laws of such FRD Subsidiary Guarantor as in
effect on the Effectiveness Date and at all times since a date prior to
the date of the resolutions described in clause (B) below, (B) that
attached thereto is a true and complete copy of resolutions duly
adopted by the Board of Directors of such FRD Subsidiary Guarantor
authorizing the execution, delivery and performance of the Loan
Documents executed or to be executed in connection herewith and to
which such person is a party and that such resolutions have not been
modified, rescinded or amended and are in full force and effect, (C)
that the certificate or articles of incorporation of such FRD
Subsidiary Guarantor have not been amended since the date of the last
amendment thereto shown on the certificate of good standing furnished
pursuant to clause (i) above, and (D) as to the incumbency and specimen
signature of each officer executing any such Loan Document or any other
document delivered in connection herewith on behalf of such FRD
Subsidiary Guarantor; (iii) a certificate of another officer as to the
incumbency and specimen signature of the Secretary or Assistant
Secretary executing the certificate pursuant to clause (ii) above; and
(iv) such other documents as the Lenders, the Issuing Bank or Cravath,
Swaine & Moore, counsel for the Administrative Agent, may reasonably
request.
(e) The representations and warranties set forth in Section 3
hereof shall be true and correct with the same effect as if made on the
Effectiveness Date, except to the extent such representations and
warranties expressly relate to an earlier date, and the Administrative
Agent shall have received a certificate, dated the Effectiveness Date
and signed by a Financial Officer of Parent, confirming compliance with
such condition.
<PAGE> 9
9
(f) A Pledge Agreement shall have been duly executed by FRD
and the Subsidiaries of FRD listed on Schedule 4(f) hereto and
delivered to the Collateral Agent and shall be in full force and
effect, and all the outstanding capital stock of each FRD Subsidiary
Guarantor shall have been duly and validly pledged thereunder to the
Collateral Agent for the ratable benefit of the Secured Parties and
certificates representing such shares, accompanied by instruments of
transfer and stock powers endorsed in blank, shall be in the actual
possession of the Collateral Agent; provided that to the extent to do
so would cause adverse tax consequences to Parent or FRD, (A) no
Domestic Subsidiary shall be required to pledge more than 65% of the
capital stock of any Foreign Subsidiary and (B) no Foreign Subsidiary
shall be required to pledge the capital stock of any of its
subsidiaries.
(g) A Security Agreement shall have been duly executed by each
FRD Subsidiary Guarantor and shall have been delivered to the
Collateral Agent and shall be in full force and effect on such date and
each document (including each Uniform Commercial Code financing
statement) required by law or reasonably requested by the
Administrative Agent to be filed, registered or recorded in order to
create in favor of the Collateral Agent for the benefit of the Secured
Parties a valid, legal and perfected first-priority security interest
in and lien on the Collateral of the FRD Subsidiary Guarantors (subject
to any Lien expressly permitted by Section 6.02 of the Credit
Agreement) described in such agreement shall have been delivered to the
Collateral Agent.
(h) The Collateral Agent shall have received the results of a
search of the Uniform Commercial Code filings (or equivalent filings)
made with respect to the FRD Subsidiary Guarantors in the states (or
other jurisdictions) in which the chief executive office of each such
person is located, any offices of such persons in which records have
been kept relating to Accounts (as defined in the Security Agreement)
of the FRD Subsidiary Guarantors and the other jurisdictions in which
Uniform Commercial Code filings (or equivalent filings) are to be made
pursuant to the preceding paragraph, together with copies of the
financing statements (or similar documents) disclosed by such search,
and accompanied by evidence satisfactory to the Collateral Agent that
the Liens indicated in any such financing statement (or similar
document) would be permitted under Section 6.02 or have been released
(or will be released pursuant to UCC termination statements which have
been received by, and are satisfactory to, the Collateral Agent).
(i) The Collateral Agent shall have received a Perfection
Certificate with respect to the FRD Subsidiary Guarantors dated the
Effectiveness Date and duly executed by a Responsible Officer of
Parent.
(j) A Subsidiary Guarantee Agreement shall have been duly
executed by each FRD Subsidiary Guarantor, shall have been delivered to
the Collateral Agent and shall be in full force and effect.
(k) An Indemnity, Subrogation and Contribution Agreement shall
have been duly executed by each FRD Subsidiary Guarantor, shall have
been delivered to the Collateral Agent and shall be in full force and
effect.
(l) The Administrative Agent shall have received with respect
to each FRD Subsidiary Guarantor a copy of, or a certificate as to
coverage under, the insurance policies required by Section 5.02 of the
Credit Agreement and the applicable provisions of the Security
Documents, each of which shall be endorsed or otherwise amended to
include a "standard" or "New York" lender's loss payable endorsement
and to name the Collateral Agent as additional insured, in form and
substance satisfactory to the Administrative Agent.
(m) The Lenders shall have received a pro forma consolidated
balance sheet of Parent as of the Effectiveness Date, after giving
effect to the consummation of the FRD
<PAGE> 10
10
Restructuring and the other transactions contemplated hereby, which
shall not be materially inconsistent with the forecasts previously
provided to the Lenders.
(n) The Board of Directors of Parent shall have designated FRD
and its subsidiaries as "Subsidiaries" for purposes of the New Senior
Notes (Series I) Indenture and the New Senior Notes (Series II)
Indenture in accordance with the terms thereof, and the Administrative
Agent shall have received a copy of the resolutions of the Board of
Directors of Parent authorizing such designation together with a
reasonably detailed calculation of the Fixed Charge Coverage Ratio (as
defined in the New Senior Notes (Series I) Indenture), determined on a
pro forma basis to give effect to the FRD Restructuring.
(o) The terms and conditions of the New Senior Notes (Series
II) to be issued by Parent in connection with the FRD Senior Notes
Exchange Offer (including the terms and conditions thereof relating to
the interest rate, fees, amortization, maturity, prepayment
requirements, mandatory call or redemption features, sinking funds,
security, subordination (if any), covenants, events of default and
remedies) shall be substantially identical to the terms and conditions
of the New Senior Notes (Series I) with only certain additional
provisions relating to restrictions on transfer of New Senior Notes
(Series II) issued as part of the FRD Senior Notes Exchange Offer and
certain registration rights in respect thereof and such other changes
as shall be satisfactory to the Lenders.
(p) The terms and conditions of the FRD Senior Notes
Supplemental Indenture shall be satisfactory to the Lenders (it being
understood that the terms and conditions set forth in the form of FRD
Senior Notes Supplemental Indenture provided to the Administrative
Agent in connection with the FRD Restructuring Offering Memorandum
shall be deemed satisfactory to the Lenders).
(q) On or prior to the Effectiveness Date, (i) the principal,
interest, fees and other amounts due under the FRI-M Credit Agreement
shall have been repaid in full, (ii) all commitments to lend under the
FRI-M Credit Agreement shall have been permanently terminated, (iii)
all obligations under or relating to the FRI-M Credit Agreement (other
than indemnification obligations that would customarily survive
termination) and all security interests related thereto shall have been
discharged and (iv) the Administrative Agent shall have received
satisfactory evidence of such repayment, termination and discharge.
(r) The Lenders shall be satisfied with the capitalization,
structure and equity ownership of Parent and the Subsidiaries after
giving effect to the consummation of the FRD Restructuring (it being
understood that the post-FRD Restructuring capitalization and structure
of Parent and the Subsidiaries that are described in the FRD
Restructuring Offering Memorandum shall, to the extent specifically
described in such FRD Restructuring Offering Memorandum, be deemed
satisfactory to the Lenders).
(s) There shall be no litigation, arbitration or
administrative proceeding or consent decree that would reasonably be
expected to have a material adverse effect on the business, assets,
operations, properties, condition (financial or otherwise), prospects
or material agreements of Parent and the Subsidiaries, taken as a
whole, or on the ability of the parties to consummate the FRD
Restructuring.
(t) The Administrative Agent shall be reasonably satisfied
with the liquidity, and sufficiency of amounts available under the
Credit Agreement to meet the ongoing working capital and other cash
requirements, of Parent and the Subsidiaries following the consummation
of the FRD Restructuring and the other transactions contemplated
hereby.
(u) The consummation of the FRD Restructuring shall not (i)
violate any applicable law, statute, consent decree, rule or regulation
or (ii) conflict with, or result in a
<PAGE> 11
11
default or event of default under, or a termination or interruption of,
any material agreement of Parent or any of the Subsidiaries.
(v) 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.
Sections 1(k), 1(l) and 1(m) of this Amendment shall be
effective upon satisfaction of the condition set forth in Section 4(v)
notwithstanding any termination of the other provisions of Section 1
pursuant to Section 2.
SECTION 5. Additional Agreements. Parent and the Borrowers agree that
(i) their respective obligations pursuant to this Amendment to deliver to the
Collateral Agent Security Documents with respect to assets of the FRD Subsidiary
Guarantors shall not in any way affect their obligations under Section 5.11 of
the Credit Agreement and (ii) any Security Documents delivered to the Collateral
Agent pursuant to this Amendment shall be deemed for purposes of the Credit
Agreement also to have been delivered by the applicable Loan Party pursuant
Section 5.11 of the Credit Agreement.
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. On and after the
Effectiveness Date, 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. Delivery of an executed
counterpart of a signature page of this Amendment by telecopy shall be effective
as delivery of a manually executed counterpart of this Amendment.
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
/s/ Kenneth E. Jones
------------------------------------
Name: Kenneth E. Jones
Title: Vice President and Treasurer
<PAGE> 12
12
DENNY'S, INC.,
by
/s/ Kenneth E. Jones
------------------------------------
Name: Kenneth E. Jones
Title: Vice President and Treasurer
EL POLLO LOCO, INC.,
by
/s/ Kenneth E. Jones
------------------------------------
Name: Kenneth E. Jones
Title: Vice President and Treasurer
FLAGSTAR SYSTEMS, INC.,
by
/s/ Kenneth E. Jones
------------------------------------
Name: Kenneth E. Jones
Title: Vice President and Treasurer
THE CHASE MANHATTAN BANK, individually and
as Administrative Agent, Collateral Agent,
Swingline Lender and Issuing Bank,
by
/s/ William P. Rindfuss
------------------------------------
Name: William P. Rindfuss
Title: Vice President
GREEN TREE FINANCIAL SERVICING
CORPORATION,
by
/s/ C. A. Gouskos
------------------------------------
Name: C. A. Gouskos
Title: Senior Vice President
JACKSON NATIONAL LIFE INSURANCE
COMPANY, as Assignee, by PPM Finance, Inc., its
attorney in fact,
by
/s/ Martin J. Battaglia
------------------------------------
Name: Martin J. Battaglia
Title: Senior Managing Director
<PAGE> 13
13
KZH III LLC,
by
/s/ Andrew Taylor
------------------------------------
Name: Andrew Taylor
Title: Authorized Agent
KZH CNC LLC,
by
/s/ Andrew Taylor
------------------------------------
Name: Andrew Taylor
Title: Authorized Agent
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED, NEW YORK BRANCH,
by
/s/ Koji Sasayama
------------------------------------
Name: Koji Sasayama
Title: Deputy General Manager
SANWA BUSINESS CREDIT CORPORATION,
by
/s/ Mark Flamm
------------------------------------
Name: Mark Flamm
Title: Vice President
<PAGE> 1
FRI-M CORPORATION
SIXTH AMENDMENT TO CREDIT AGREEMENT
This SIXTH AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is dated as
of December 23, 1998 and entered into by and among FRD ACQUISITION CO., a
Delaware corporation ("HOLDINGS"), FRI-M CORPORATION, a Delaware corporation
("COMPANY"), the other Credit Support Parties (as defined in Section 4 hereof),
THE FINANCIAL INSTITUTIONS LISTED ON THE SIGNATURE PAGES HEREOF (each
individually referred to herein as a "LENDER" and collectively as "LENDERS"),
BANKERS TRUST COMPANY, THE CHASE MANHATTAN BANK (formerly known as CHEMICAL
BANK) and CITICORP USA, INC., as co-syndication agents for Lenders (in such
capacity, each individually referred to herein as a "CO-SYNDICATION AGENT" and
collectively as "CO-SYNDICATION AGENTS"), and CREDIT LYONNAIS NEW YORK BRANCH,
as administrative agent for Lenders (in such capacity, "ADMINISTRATIVE AGENT"),
and is made with reference to that certain Credit Agreement dated as of May 23,
1996, by and among Holdings, Company, Lenders, Co-Syndication Agents and
Administrative Agent, as amended by the First Amendment to Credit Agreement,
Guaranties and Certain Collateral Documents dated as of July 1, 1996, the Second
Amendment to Credit Agreement, Guaranties and Certain Collateral Documents dated
as of November 19, 1996, the Third Amendment to Credit Agreement dated as of
March 7, 1997, the Consent dated as of March 7, 1997, the Fourth Amendment to
Credit Agreement dated as of July 9, 1997, and the Fifth Amendment to Credit
Agreement dated December 9, 1997 (as so amended, the "CREDIT AGREEMENT"), and to
the other Loan Documents. Capitalized terms used herein without definition shall
have the same meanings herein as set forth in the Credit Agreement.
RECITALS
WHEREAS, Loan Parties and Lenders desire to amend the Credit Agreement
to permit Company and its Subsidiaries to make Asset Sales having a fair market
value not in excess of $30,000,000.
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, the parties hereto agree as follows:
SECTION 1. AMENDMENT TO THE CREDIT AGREEMENT
1.1 AMENDMENT TO SECTION 7.7: RESTRICTION ON FUNDAMENTAL CHANGES;
ASSET SALES AND ACQUISITIONS
Subsection 7.7(vi) of the Credit Agreement is hereby amended by
deleting the reference to "$20,000,000" contained therein and substituting
"$30,000,000" therefor.
<PAGE> 2
SECTION 2. CONDITIONS TO EFFECTIVENESS
Section 1 of this Amendment shall become effective only upon the prior
or concurrent satisfaction of all of the following conditions precedent (the
date of satisfaction of such conditions being referred to herein as the
"AMENDMENT EFFECTIVE DATE"):
A. On or before the Amendment Effective Date, Company shall deliver to
Lenders (or to Administrative Agent for Lenders) the following, each, unless
otherwise noted, dated the Amendment Effective Date:
1. Resolutions of its Board of Directors of Company approving
and authorizing the execution, delivery, and performance of this
Amendment, certified as of the Amendment Effective Date by its
corporate secretary or an assistant secretary as being in full force
and effect without modification or amendment;
2. Signature and incumbency certificates of the officers of
Company certified by its corporate secretary or assistant secretary;
and
3. Counterparts of this Amendment executed by Requisite
Lenders and each of the other parties hereto.
B. On or before the Amendment Effective Date, all corporate and other
proceedings taken or to be taken in connection with the transactions
contemplated hereby and all documents incidental thereto not previously found
acceptable by Administrative Agent, acting on behalf of Lenders, and its counsel
shall be satisfactory in form and substance to Administrative Agent and such
counsel, and Administrative Agent and such counsel shall have received all such
counterpart originals or certified copies of such documents as Administrative
Agent may reasonably request.
Company hereby agrees that Company shall deliver to Lenders (or to
Administrative Agent for Lenders) on or before January 15, 1999 (i) resolutions
of the Board of Directors of Holdings approving and authorizing (retroactively
or otherwise) the execution, delivery and performance of this Amendment,
certified on or before January 15, 1999 by its corporate secretary or an
assistant secretary as being in full force and effect without modification or
amendment, and (ii) signature and incumbency certificates of Holdings dated on
or before January 15, 1999 certified by its corporate secretary or assistant
secretary.
SECTION 3. REPRESENTATIONS AND WARRANTIES
In order to induce Lenders to enter into this Amendment and to amend
the Credit Agreement in the manner provided herein, each of Holdings, Company
and each other Loan Party party hereto represents and warrants to each Lender
that the following statements are true, correct and complete:
A. CORPORATE POWER AND AUTHORITY. Each Loan Party party hereto has all
requisite corporate power and authority to enter into this Amendment and to
carry out the
2
<PAGE> 3
transactions contemplated hereby and each of Holdings, Company and each other
Loan Party party hereto has all requisite corporate power and authority to carry
out the transactions contemplated by, and perform its obligations under, the
Credit Agreement as further amended by this Amendment (the "AMENDED AGREEMENT").
B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of this
Amendment and the performance of the Amended Agreement have been duly authorized
by all necessary corporate action on the part of Holdings, Company and each of
the other Loan Parties party hereto, as the case may be.
C. NO CONFLICT. The execution and delivery by each Loan Party party
hereto of this Amendment and the performance by such Loan Party of this
Amendment and the performance by Holdings and Company of the Amended Agreement
do not and will not (i) violate any provision of any law or any governmental
rule or regulation applicable to Holdings or any of its Subsidiaries, the
Certificate or Articles of Incorporation or Bylaws of Holdings or any of its
Subsidiaries or any order, judgment or decree of any court or other agency of
government binding on Holdings or any of its Subsidiaries, (ii) conflict with,
result in a breach of or constitute (with due notice or lapse of time or both) a
default under the Holdings Note Indenture or the Holdings Note or any other
Contractual Obligation of Holdings or any of its Subsidiaries, (iii) result in
or require the creation or imposition of any Lien upon any of the properties or
assets of Holdings or any of its Subsidiaries (other than any Liens created
under any of the Loan Documents in favor of Administrative Agent on behalf of
Lenders), or (iv) require any approval of stockholders or any approval or
consent of any Person under any Contractual Obligation of Holdings or any of its
Subsidiaries.
D. GOVERNMENTAL CONSENTS. The execution and delivery by each Loan Party
party hereto of this Amendment and the performance by such Loan Party of this
Amendment and the performance by Holdings and Company of the Amended Agreement
do not and will not require any registration with, consent or approval of, or
notice to, or other action to, with or by, any federal, state or other
governmental authority or regulatory body.
E. BINDING OBLIGATION. This Amendment has been duly executed and
delivered by each Loan Party party hereto and this Amendment and the Amended
Agreement are the legally valid and binding obligations of such Loan Party,
enforceable against such Loan Party in accordance with their respective terms,
except as may be limited by bankruptcy, insolvency, reorganization, moratorium
or similar laws relating to or limiting creditors' rights generally or by
equitable principles relating to enforceability.
F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM CREDIT
AGREEMENT. The representations and warranties contained in Section 5 of the
Credit Agreement and the Amended Credit Agreement are and will be true, correct
and complete in all material respects on and as of the Amendment Effective Date
to the same extent as though made on and as of that date, except to the extent
such representations and warranties specifically relate to an earlier date, in
which case they were true, correct and complete in all material respects on and
as of such earlier date.
3
<PAGE> 4
G. ABSENCE OF DEFAULT. No event has occurred and is continuing or will
result from the consummation of the transactions contemplated by this Amendment
that would constitute an Event of Default or a Potential Event of Default.
SECTION 4. ACKNOWLEDGEMENT AND CONSENT
Company is a party to certain Collateral Documents, in each case as
amended through the Amendment Effective Date, pursuant to which Company has
created Liens in favor of Administrative Agent on certain Collateral to secure
the Obligations. Each of the other Loan Parties party hereto is a party to
certain Collateral Documents, the Subsidiary Guaranty or the Holdings Guaranty,
in each case as amended through the Amendment Effective Date, pursuant to which
each such Loan Party has (i) guarantied the Obligations and (ii) created Liens
in favor of Administrative Agent on certain Collateral to secure the obligations
of such Loan Party under the Subsidiary Guaranty or the Holdings Guaranty, as
the case may be. The Loan Parties party hereto are collectively referred to
herein as the "CREDIT SUPPORT PARTIES", and the Collateral Documents, the
Subsidiary Guaranty and the Holdings Guaranty are collectively referred to
herein as the "CREDIT SUPPORT DOCUMENTS".
Each Credit Support Party hereby acknowledges that it has reviewed the
terms and provisions of the Credit Agreement, the Collateral Documents and
Guaranties and this Amendment and consents to the further amendment of the
Credit Agreement effected pursuant to this Amendment. Each Credit Support Party
hereby confirms that each Credit Support Document to which it is a party or
otherwise bound and all Collateral encumbered thereby will continue to guaranty
or secure, as the case may be, to the fullest extent possible the payment and
performance of all "Obligations," "Guarantied Obligations" and "Secured
Obligations," as the case may be (in each case as such terms are defined in the
applicable Credit Support Document), including without limitation the payment
and performance of all such "Obligations," "Guarantied Obligations" or "Secured
Obligations," as the case may be, in respect of the Obligations of Company now
or hereafter existing under or in respect of the Amended Agreement and the Notes
defined therein.
Each Credit Support Party acknowledges and agrees that any of the
Credit Support Documents to which it is a party or otherwise bound shall
continue in full force and effect and that all of its obligations thereunder
shall be valid and enforceable and shall not be impaired or limited by the
execution or effectiveness of this Amendment. Each Credit Support Party
represents and warrants that all representations and warranties contained in the
Amended Agreement and the other Credit Support Documents to which it is a party
or otherwise bound are true, correct and complete in all material respects on
and as of the Amendment Effective Date to the same extent as though made on and
as of that date, except to the extent such representations and warranties
specifically relate to an earlier date, in which case they were true, correct
and complete in all material respects on and as of such earlier date.
Each Credit Support Party (other than Holdings and Company)
acknowledges and agrees that (i) notwithstanding the conditions to effectiveness
set forth in this
4
<PAGE> 5
Amendment, such Credit Support Party is not required by the terms of the Credit
Agreement or any other Loan Document to consent to the amendments to the Credit
Agreement effected pursuant to this Amendment and (ii) nothing in the Credit
Agreement, this Amendment or any other Loan Document shall be deemed to require
the consent of such Credit Support Party to any future amendments to the Credit
Agreement.
SECTION 5. MISCELLANEOUS
A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER LOAN
DOCUMENTS.
(i) On and after the Amendment Effective Date, each reference
in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import referring to the Credit Agreement, and
each reference in the other Loan Documents to the "Credit Agreement",
"thereunder", "thereof" or words of like import referring to the Credit
Agreement shall mean and be a reference to the Amended Agreement.
(ii) Except as specifically amended by this Amendment, the
Credit Agreement and the other Loan Documents shall remain in full
force and effect and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this
Amendment shall not, except as expressly provided herein, constitute a
waiver of any provision of, or operate as a waiver of any right, power
or remedy of Agent or any Lender under, the Credit Agreement or any of
the other Loan Documents.
B. FEES AND EXPENSES. Company acknowledges that all reasonable costs,
fees and expenses as described in subsection 11.2 of the Credit Agreement
incurred by Administrative Agent and its counsel with respect to this Amendment
and the documents and transactions contemplated hereby shall be for the account
of Company.
C. HEADINGS. Section and subsection headings in this Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose or be given any substantive effect.
D. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT
LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW
YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
E. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed an original, but
all such counterparts together shall constitute but one and the same instrument;
signature pages may be detached
5
<PAGE> 6
from multiple separate counterparts and attached to a single counterpart so that
all signature pages are physically attached to the same document. This Amendment
(other than the provisions of Section 1, which shall become effective upon the
satisfaction of each of the conditions set forth in Section 2 hereof) shall
become effective upon the execution of a counterpart hereof by Requisite Lenders
and each of the other parties hereto and receipt by Company and Administrative
Agent of written or telephonic notification of such execution and authorization
of delivery thereof.
[Remainder of page intentionally left blank]
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
FRD ACQUISITION CO.
By: /s/ Kenneth E. Jones
----------------------------------------------
Title: Kenneth E. Jones, Vice President and
Treasurer
-------------------------------------------
FRI-M CORPORATION
By: /s/ Kenneth E. Jones
----------------------------------------------
Title: Kenneth E. Jones, Vice President and
Treasurer
-------------------------------------------
FRI-FRD CORPORATION
By: /s/ Kenneth E. Jones
----------------------------------------------
Title: Kenneth E. Jones, Vice President and
Treasurer
-------------------------------------------
CFC FRANCHISING COMPANY
By: /s/ Kenneth E. Jones
----------------------------------------------
Title: Kenneth E. Jones, Vice President and
Treasurer
-------------------------------------------
FRI-J CORPORATION
By: /s/ Kenneth E. Jones
----------------------------------------------
Title: Kenneth E. Jones, Vice President and
Treasurer
-------------------------------------------
JOJOS RESTAURANTS, INC.
By: /s/ Kenneth E. Jones
----------------------------------------------
Title: Kenneth E. Jones, Vice President and
Treasurer
-------------------------------------------
7
<PAGE> 8
JOJOS CALIFORNIA FAMILY RESTAURANTS, INC.
By: /s/ Kenneth E. Jones
----------------------------------------------
Title: Kenneth E. Jones, Vice President and
Treasurer
-------------------------------------------
COCO'S RESTAURANTS, INC.
By: /s/ Kenneth E. Jones
----------------------------------------------
Title: Kenneth E. Jones, Vice President and
Treasurer
-------------------------------------------
FRI-C CORPORATION
By: /s/ Kenneth E. Jones
----------------------------------------------
Title: Kenneth E. Jones, Vice President and
Treasurer
-------------------------------------------
CARROWS RESTAURANTS, INC.
By: /s/ Kenneth E. Jones
----------------------------------------------
Title: Kenneth E. Jones, Vice President and
Treasurer
-------------------------------------------
CARROWS CALIFORNIA FAMILY RESTAURANTS, INC.
By: /s/ Kenneth E. Jones
----------------------------------------------
Title: Kenneth E. Jones, Vice President and
Treasurer
-------------------------------------------
FRI-DHD CORPORATION
By: /s/ Kenneth E. Jones
----------------------------------------------
Title: Kenneth E. Jones, Vice President and
Treasurer
-------------------------------------------
FAR WEST CONCEPTS, INC.
By: /s/ Kenneth E. Jones
----------------------------------------------
Title: Kenneth E. Jones, Vice President and
Treasurer
-------------------------------------------
8
<PAGE> 9
FRI-NA CORPORATION
By: /s/ Kenneth E. Jones
----------------------------------------------
Title: Kenneth E. Jones, Vice President and
Treasurer
-------------------------------------------
9
<PAGE> 10
LENDERS: CREDIT LYONNAIS NEW YORK BRANCH,
individually and as Administrative Agent
By: /s/ Attila O. Koc
----------------------------------------------
Title: SVP
-------------------------------------------
BANKERS TRUST COMPANY, individually and as
Co-Syndication Agent
By: /s/ Mary Jo Jolly
----------------------------------------------
Title: Assistant Vice President
-------------------------------------------
THE CHASE MANHATTAN BANK (FORMERLY KNOWN
AS CHEMICAL BANK), individually and as Co-
Syndication Agent
By: /s/ Lawrence Palumbo, Jr.
----------------------------------------------
Title: Vice President
-------------------------------------------
CITICORP USA, INC., individually and as Co-
Syndication Agent
By: /s/ Timothy L. Freeman
----------------------------------------------
Title: Vice President
-------------------------------------------
10
<PAGE> 1
Exhibit 10.37
EXECUTION COPY
ASSIGNMENT AND ASSUMPTION AGREEMENT
This Assignment and Assumption Agreement (this "Agreement") is
made and entered into as of the 1st day of May, 1998, by and between Quincy's
Realty, Inc., an Alabama corporation (the "Assignor"), and I.M. Special, Inc., a
Delaware corporation (the "Assignee").
Reference is made to (i) that certain Loan Agreement, dated as of
November 1, 1990, as amended by a First Amendment to Loan Agreement, dated as of
November 15, 1991, and as further amended by a Second Amendment to Loan
Agreement, dated as of April 1, 1998, between Spardee's Realty, Inc.
("Spardee's") as borrower, and Secured Restaurants Trust (the "Issuer") with
respect to a loan in the original principal amount of One Hundred Thirty Million
Dollars ($130,000,000) (the "Spardee's Loan Agreement"), and (ii) that certain
Loan Agreement, dated as November 1, 1990, as amended by a First Amendment to
Loan Agreement, dated as of November 15, 1991, and as further amended by a
Second Amendment to Loan Agreement, dated as of April 1, 1998, between Assignor,
as borrower, and the Issuer, in the original principal amount of Ninety-Five
Million Dollars ($95,000,000) (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") and certain other agreements and instruments executed as of the date
hereof pursuant to the Letter Agreement (as defined herein) (collectively with
the SRT Financing Documents, the "Documents"). Capitalized terms used herein and
not otherwise defined shall have the meanings assigned to them in the Loan
Agreements.
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, as of April
1, 1998, sold to CKE Restaurants, Inc. (the "Buyer") the stock of FEI (the "FEI
Stock Sale"). Under the provisions of the Purchase Agreement, Advantica and
Spartan were required, among other things, as applicable, to deliver to Buyer
evidence of the release of FEI and Spardee's 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, Spardee's and the Assignor, together with the other requisite parties
to the SRT Financing Documents, effected 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") and, pursuant to an Assignment and
Assumption Agreement, dated as of April 1, 1998, by and between Spardee's and
the Assignor (the "Spardee's Assignment Agreement"), the Assignor assumed all
liabilities and obligations of Spardee's and agreed to
<PAGE> 2
perform and discharge all obligations of Spardee's under the Spardee's Loan
Agreement and the Mortgage Notes thereunder and any related Loan Documents. As a
result of (and after giving effect to) the Defeasance Transaction, among other
things, FEI and Spardee's and their assets were released from any obligations
and liens relating to the SRT Financing Documents, and the other Collateral
under the Collateral Assignment Agreement, as amended (other than the Borrower
Collateral (as defined in the Second Amendments to Loan Agreement)) was 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.
In order to effect the releases and terminations contemplated by
that certain letter agreement dated April 1, 1998 among Advantica, Quincy's
Restaurants, Inc., Assignor and Financial Security Assurance Inc. ("FSA") (the
"Letter Agreement"), Assignee is required to assume all of the obligations and
take an assignment of the rights of Assignor under the Assignor's interest in
Loan Agreements and the respective Mortgage Notes thereunder and take an
assignment of the Assignor's interest in the Borrower Collateral. Concurrently
with the execution and delivery of this Agreement, Assignee shall receive title
to the Assignor's interest in the Borrower Collateral held by the Collateral
Agent subject to the first priority security interest of the Collateral Agent.
I. Assignment.
In consideration of the foregoing, the Assignor hereby transfers,
conveys and assigns to Assignee all of Assignor's right, title and interest in,
to and under the Documents, including without limitation, the Loan Agreements
and the respective Mortgage Notes thereunder and any related Loan Documents, as
applicable, and all of Assignor's right, title and interest in, to and under the
Borrower Collateral, including without limitation, each Defeasance Eligible
Investment and proceeds thereof. Assignee hereby accepts such transfer,
conveyance and assignment and assumes, in full, all liabilities, duties,
covenants, agreements and obligations and agrees to perform and discharge each
and every agreement, liability, duty, covenant and obligation of Assignor under
the Documents, including without limitation, the Loan Agreements and the
respective Mortgage Notes thereunder and any related Loan Documents, as
applicable. The transfer, conveyance and assignment of the Assignor's right,
title and interest in, to and under the Borrower Collateral made hereby is
intended to be an absolute transfer, conveyance and assignment.
This Assignment and Assumption Agreement shall automatically
become effective, without any further action of the undersigned required, upon
its full execution with the prior written consent of FSA.
II. Representations and Warranties.
Assignee represents and warrants as follows:
(a) Due Organization and Qualification. Assignor
and Assignee are corporations, duly organized, validly existing
and in good standing under the laws of
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<PAGE> 3
the States of Alabama and Delaware, respectively and each is duly
qualified to do business, is in good standing and has obtained
all necessary licenses, permits, charter, registrations and
approvals (together, "approvals") necessary for the conduct of
its business as currently conducted and as proposed to be
conducted and the performance of its obligations under this
Agreement or any Loan Document, in each jurisdiction in which the
failure to be so qualified or to obtain such approvals would
render this Agreement or any Loan Document unenforceable in any
respect or would have a material adverse effect upon the
transaction.
(b) Power and Authority. Assignor and Assignee have
all necessary corporate power and authority to conduct their
business as currently conducted and as proposed to be conducted,
to execute, deliver and perform its obligations under this
Agreement or any Loan Document and to consummate the transaction.
(c) Due Authorization. The execution, delivery and
performance of this Agreement and, as applicable, the Loan
Documents by Assignor and Assignee have been duly authorized by
all necessary corporate action and do not require any additional
approvals or consents or other action by or any notice to or
filing with any person, including, without limitation, any
governmental entity or the Assignor's and Assignee's respective
stockholders.
(d) Noncontravention. Neither the execution and
delivery of this Agreement or any Loan Document by the Assignor
or Assignee, the consummation of the transactions contemplated
thereby nor the satisfaction of the terms and conditions of this
Agreement or any Loan Document,
(i) conflicts with or results in any breach or
violation of any provision of the certificate of
incorporation or bylaws of either the Assignor or
Assignee or any law, rule, regulation, order, writ,
judgment, injunction, decree, determination or
award currently in effect having applicability to
the Assignor or Assignee or any of its properties,
including regulations issued by an administrative
agency or other governmental authority having
supervisory powers over the Assignor or Assignee,
(ii) constitutes a default by the Assignor or
Assignee under or a breach of any provision of any
loan agreement, mortgage, indenture or other
agreement or instrument to which the Assignor or
Assignee is a party or by which it or any of their
properties is or may be bound or affected, or
(iii) results in or requires the creation of any
Lien upon or in respect of any of the assets of the
Assignor or Assignee except as otherwise expressly
contemplated by this Agreement or any Loan
Document.
(e) Legal Proceedings. There is no action,
proceeding or investigation by or before any court, governmental
or administrative agency or arbitrator against or affecting the
Assignor or Assignee or the Borrower Collateral, or any of
Assignor's or
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<PAGE> 4
Assignee's properties or rights pending or, to their knowledge
after reasonable inquiry, threatened, which, in any case, if
decided adversely to either, would result in a material adverse
change with respect to either of them.
(f) Valid and Binding Obligations. This Agreement
has been duly executed and delivered by Assignor and Assignee and
it constitutes their legal, valid and binding obligations
enforceable in accordance with their respective terms, except as
such enforceability may be limited by bankruptcy; insolvency,
reorganization, moratorium or other similar laws affecting
creditors' rights generally and general equitable principles.
(g) Good Title; Absence of Liens; Security
Interest. Assignor is the owner of, and has good and marketable
title to, all Borrower Collateral free and clear of all Liens
(other than the Liens created by the Loan Agreements) and has
full right, corporate power and lawful authority to assign,
convey, transfer and pledge its interests in, to and under the
Borrower Collateral (and any documents which are a part thereof)
and all such substitutions therefor and additions thereto
delivered under the Loan Agreements. The Collateral Agent has a
valid and perfected first priority security interest in the
Borrower Collateral free and clear of all Liens. Upon transfer to
Assignee, Assignee will have good and marketable title free and
clear of all Liens (other than the Liens created by the Loan
Agreements).
(h) Solvent Entity. After giving effect to the
transactions contemplated by this Agreement, each of Assignee and
Assignor will have sufficient capital to pay its debts as they
become due. Neither Assignee nor Assignor is 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. Neither Assignee nor Assignor intends to
incur, or believes that it will incur, additional debts that
would be beyond its ability to pay as such debts become due.
(i) No Intent To Defraud. Each of Assignor and
Assignee has valid business reasons for entering into the
transactions contemplated by this Agreement and has not entered
into the transactions contemplated by this Agreement or the Loan
Agreements with any intent to hinder, delay or defraud any entity
to which Assignor or Assignee is or may become indebted.
(j) Loan Agreement. The representations and
warranties contained in Sections 6.01, 6.02, 6.03, 6.04, 6.05 and
6.06 of the Loan Agreements are true and correct on and as of the
date hereof, as though made on and as of the date hereof.
III. Covenants.
Assignee covenants and agrees that:
(i) Its capital is adequate for its business and
undertakings.
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<PAGE> 5
(ii) Other than with respect to this Agreement, it
is not engaged in any business transactions with Assignor or any
affiliate.
(iii) At least one director of Assignee is not, and
will not be, a director, officer, employee or holder of any of
the equity securities of Assignor or any affiliate thereof.
(iv) Its funds and assets are not, and will not be,
commingled with those of Assignor or any other person.
(v) Its bylaws require it to maintain (a) correct
and complete books and records of account, and (b) minutes of the
meetings and other proceedings of its stockholders and board of
directors.
(vi) It is solvent and will not be rendered
insolvent by the transactions contemplated by the Loan Agreements
and Mortgage Notes thereunder and any related Loan Documents and,
after giving effect to such transactions, it will not be left
with an unreasonably small amount of capital with which to engage
in its business nor will it have intended to incur, or believe
that it has incurred, debts beyond its ability to pay such debts
as they mature. Assignee does not contemplate the commencement of
insolvency, bankruptcy, liquidation or consolidation proceedings
or the appointment of a receiver, liquidator, conservator,
trustee or similar official in respect of itself or any of its
assets.
(vii) All the outstanding shares of capital stock
of Assignee are owned by Spartan Holdings, Inc.
(viii) It will comply and perform all covenants set
forth in the Loan Documents, including, in particular, but
without limitations, those set forth in Article VI of the Loan
Agreements.
(ix) It will not take any actions, or permit any
actions to be taken, with respect to the Borrower Collateral or
otherwise, that would cause a default under the Collateral
Assignment Agreement.
(x) It will comply with its organizational
documents.
IV. Security Interest.
As security for Assignee's obligations under the Loan Agreements,
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, Assignee hereby expressly
grants to Issuer for the benefit of Financial Security and the Trustee, as
secured parties, a first priority security interest in and to all of Assignee's
right, title and interest in, to and under the Borrower Collateral and any
proceeds thereof.
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<PAGE> 6
Assignee 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, to and under the
Borrower Collateral granted hereunder. It is the intention of Assignee 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.
Assignee hereby agrees that the Collateral Agent has accepted
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.
V. Miscellaneous.
The representations, warranties, covenants and agreements set
forth in this Agreement are made for the benefit of the Issuer, the Collateral
Agent, the Trustee and Financial Security and each of the Issuer, the Collateral
Agent, the Trustee and Financial Security shall be third party beneficiaries of
this Agreement.
This Agreement shall be construed in accordance with the laws of
the State of New York.
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.
I.M. SPECIAL, INC.
By: /s/ Kenneth E. Jones
-----------------------------------
Name: Kenneth E. Jones
---------------------------
Title: President and Treasurer
QUINCY'S REALTY, INC.
By: /s/ Kenneth E. Jones
-----------------------------------
Name: Kenneth E. Jones
---------------------------
Title: Vice President and Treasurer
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<PAGE> 1
EXHIBIT 10.38
EXECUTION COPY
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT (this "Pledge Agreement") dated as of
April l, 1998 among SPARTAN HOLDINGS, INC., a New York corporation (the
"Pledgor"), who owns all of the outstanding capital stock in I. M. Special,
Inc., a Delaware corporation (the "Pledged Entity"), FINANCIAL SECURITY
ASSURANCE INC., a New York stock insurance company ("Financial Security"), and
THE BANK OF NEW YORK, as collateral agent (the "Collateral Agent"), on behalf of
Financial Security. Capitalized terms used herein and not otherwise defined have
the meanings assigned to them in the Insurance Agreement (as defined below).
INTRODUCTORY STATEMENTS
The Pledgor is the sole shareholder of the Pledged Entity. Pursuant to an
Assignment and Assumption Agreement, dated May 1, 1998, the Pledged Entity has
assumed all obligations and responsibilities of Quincy's Realty, Inc.
("Quincy's") and has been substituted as the "Borrower" under:
(i) the Loan Agreement, dated as of November 1,
1990, between Quincy's Realty, Inc. and Secured Restaurants Trust
(the "Issuer"), as amended by a First Amendment to Loan
Agreement, dated as of November 1, 1991, and as further amended
by a Second Amendment to Loan Agreement, dated as of April 1,
1998, and the related Mortgage Notes (collectively, the "Quincy's
Loan Agreement"); and
(ii) the Loan Agreement, dated as of November 1,
1990, between Spardee's Realty, Inc. ("Spardee's") and the
Issuer, as amended by a First Amendment to Loan Agreement, dated
as of November 1, 1991, and as further amended by a Second
Amendment to Loan Agreement, dated as of April 1, 1998 and the
related Mortgage Notes, each, as assumed by Quincy's pursuant to
an Assignment and Assumption Agreement, made as of April 1, 1998,
by and between Quincy's and Spardee's (collectively, the
"Spardee's Loan Agreement").
(Each of the Quincy's Loan Agreement and the Spardee's Loan Agreement are
referred to as a "Loan Agreement" and together, as the "Loan Agreements").
Pursuant to the Insurance and Indemnity Agreement, dated as of
November 1,1990, between Financial Security and the Issuer (the "Insurance
Agreement"), Financial Security has issued its Financial Guaranty Insurance
Policy #50137A-N with respect to the Issuer's $225,000,000 initial aggregate
principal amount of 10 1/4% Guaranteed Secured Bonds Due 2000. The Collateral
Agent has succeeded The Citizens and Southern National Bank of South Carolina
(the "Previous Collateral Agent") as collateral agent under the Collateral
Assignment Agreement, dated as of November 1, 1990, among the Issuer, Financial
Security and the Previous Collateral Agent, as amended by the First Amendment to
Collateral Assignment Agreement, dated as of April 1, 1998 (as amended, the
"Collateral Assignment Agreement").
<PAGE> 2
In consideration of the premises and of the agreements herein
contained, the Pledgor, Financial Security and the Collateral Agent agree as
follows:
SECTION 1. SECURITY INTEREST. As security for the full and
complete performance of all of the obligations of the Pledged Entity under the
Loan Agreements (the "Obligations"), Pledgor hereby delivers, pledges and
assigns to the Collateral Agent on behalf of Financial Security, and creates in
the Collateral Agent on behalf of Financial Security, a first priority security
interest in all of the Pledgor's right, title and interest in, to and under its
shares of the Pledged Entity (collectively, the "Pledged Shares"), together with
all of Pledgor's rights and privileges with respect thereto, including without
limitation all dividends thereon, all proceeds, income and profits thereof and
all property received in exchange thereof or in substitution therefor (the
"Collateral").
SECTION 2. STOCK DIVIDENDS, OPTIONS OR OTHER ADJUSTMENTS. Until
the Termination Date (as defined in Section 17), the Pledgor shall deliver, as
Collateral, to the Collateral Agent, any and all additional shares of stock or
any other property of any kind distributable on or by reason of the Collateral,
whether in the form of or by way of stock dividends, warrants, total or partial
liquidation, conversion, prepayments, redemptions or otherwise. If any
additional shares of capital stock, instruments or other property a security
interest in which can be perfected only by possession by the Collateral Agent,
which are distributable on or by reason of the Collateral pledged hereunder,
shall come into the possession or control of the Pledgor, Pledgor shall
forthwith transfer and deliver such property to the Collateral Agent, as
Collateral hereunder.
SECTION 3. DELIVERY OF SHARE CERTIFICATES; STOCK POWERS.
Simultaneously with the delivery of this Pledge Agreement, the Pledgor is
delivering to the Collateral Agent all instruments and stock certificates
representing the Collateral, together with stock powers duly executed in blank
by Pledgor. Pledgor shall promptly deliver to the Collateral Agent, or cause the
Pledged Entity or any other entity issuing any Collateral to deliver directly to
the Collateral Agent, share certificates or other instruments representing any
Collateral acquired or received after the date of this Pledge Agreement with a
stock or bond power duly executed by Pledgor. If at any time either the
Collateral Agent or Financial Security notifies Pledgor that it requires
additional stock powers endorsed in blank, Pledgor shall, at its expense,
promptly execute in blank and deliver the requested power to the requesting
party.
SECTION 4. POWER OF ATTORNEY. Pledgor hereby constitutes and
irrevocably appoints the Collateral Agent and Financial Security, or either one
acting alone, with full power of substitution and revocation, as Pledgor's true
and lawful attorney-in-fact, with the power, after the occurrence of a Stock
Pledge Event (as defined in Section 10), to the full extent permitted by law, to
affix to any certificates and documents representing the Collateral the stock or
bond powers delivered with respect thereto, and to transfer or cause the
transfer of the Collateral, or any part thereof, on the books of the Pledged
Entity or other entity issuing any Collateral, to the name of the Collateral
Agent or Financial Security or any nominee, and thereafter to exercise, with
respect to such Collateral, all the rights, powers and remedies of an owner. The
power of attorney granted pursuant to this Pledge Agreement and all authority
hereby conferred are granted and conferred solely to protect Financial
Security's interest in the Collateral and shall not impose any duty upon the
Collateral Agent or Financial Security to exercise any power. This power of
attorney shall be irrevocable as one coupled with an interest until the
occurrence of the Termination Date.
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<PAGE> 3
SECTION 5. INDUCING REPRESENTATIONS OF PLEDGOR.
(a) Pledgor represents and warrants to Financial Security that:
(i) The Pledged Shares are validly issued, fully
paid and nonassessable.
(ii) The Pledged Shares represent all of the issued
and outstanding capital stock of the Pledged Entity.
(iii) The Pledgor is the sole legal and beneficial
owner of the Pledged Shares, free and clear of all Liens (other
than the Lien created by this Pledge Agreement) and the Pledgor
has the unqualified power, right and authority to execute and
perform this Pledge Agreement.
(iv) No options, warrants or other agreements with
respect to the Collateral are outstanding.
(v) Any consent, approval or authorization of, or
designation or filing with, any authority on the part of the
Pledgor which is required in connection with the pledge and
security interest granted under this Pledge Agreement has been
obtained or effected.
(vi) Neither the execution and delivery of this
Pledge Agreement by the Pledgor, the consummation of the
transaction contemplated hereby nor the satisfaction of the teems
and conditions of this Pledge Agreement:
(A) conflicts with or results in any
breach or violation of any provision of the
articles of incorporation or bylaws of the Pledgor
or any law, rule, regulation, order, writ,
judgment, injunction, decree, determination or
award currently in effect having applicability to
the Pledgor or any of its properties, including
regulations issued by an administrative agency or
other governmental authority having supervisory
powers over the Pledgor;
(B) conflicts or will conflict with,
constitutes or will constitute a default (or an
event which with the giving of notice or the
passage of time, or both, would constitute a
default) by the Pledgor under, or a breach of, or
contravenes or will contravene any provision of its
organizational documents, either Loan Agreement, or
any Mortgage Note (collectively, the "Borrower
Documents") or any loan agreement, mortgage,
indenture or other agreement or instrument to which
the Pledgor is a party or by which it or any of its
properties is or may be bound or affected; or
(C) results in or requires the
creation of any Lien upon or in respect of any of
the Pledgor's assets (other than the Lien created
by this Pledge Agreement).
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(vii) Upon the Pledgor's delivery of the Pledged
Shares to the Collateral Agent, the Collateral Agent, on behalf
of Financial Security, will have a valid, perfected first
priority Lien on the Collateral, enforceable as such against all
creditors of the Pledgor and against all Persons purporting to
purchase any of the Collateral from the Pledgor.
(b) Any damages payable due to a breach of this Section 6 are
limited to amounts payable (i) pursuant to a drawing under Irrevocable Letter of
Credit No. P-360919 issued by The Chase Manhattan Bank and dated April 1, 1998
and (ii) from the Collateral, including pursuant to any action taken with
respect to the Collateral pursuant to Section 10 hereof.
SECTION 6. OBLIGATIONS OF PLEDGOR.
(a) Pledgor hereby covenants and agrees as follows:
(i) Pledgor shall not incur, assume or guarantee
any indebtedness for money borrowed by the Pledged Entity.
(ii) Pledgor does not, and will not, assume
liability for any debts of the pledged Entity and does not, and
will not, guarantee any of the debts or obligations of the
Pledged Entity. Pledgor will not hold itself out as being liable
for the debts of the Pledged Entity.
(iii) Pledged Entity is not referred to as a
"department" or "division" in the incorporation or other internal
materials, records or documents of Pledgor.
(iv) Pledgor shall conduct its business solely in
its own name so as not to mislead others as to the identity of
the Pledged Entity with which those others are concerned and
particularly will use its best efforts to avoid the appearance of
conducting business on behalf of the Pledged Entity. Without
limiting the generality of the foregoing, all oral and written
communications, including, without limitation, letters, invoices,
purchase orders, contracts, statements and loan applications,
will be made solely in the name of the Pledgor.
(v) Pledgor will act solely in its corporate name
and through its duly authorized officers or agents in the conduct
of its business.
(vi) Where necessary and appropriate, Pledgor shall
disclose the nature of the transaction referred to above and the
independent corporate status of the Pledged Entity to creditors
of Pledgor, if any.
(vii) The annual financial statements of Pledgor,
including consolidated financial statements, if any, will
disclose the effects of Pledgor's transactions in accordance with
generally accepted accounting principles and will disclose that
the assets of the Pledged Entity are not available to pay any
creditors of Pledgor.
(viii) The resolutions, agreements and other
instruments of Pledgor, if any, underlying the transactions
described in this Pledge Agreement will be continuously
maintained by Pledgor as the official records.
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<PAGE> 5
(ix) Pledgor will use its best efforts to maintain
an arm's-length relationship with the Pledged Entity.
(x) Pledgor will use its best efforts to keep its
assets and its liabilities wholly separate from those of the
Pledged Entity.
(xi) Except for actions taken by it as the sole
shareholder of the Pledged Entity, Pledgor will not direct, or
otherwise control, the ongoing business decisions of the Pledged
Entity.
(b) Any damages payable due to a breach of this Section 6 are
limited to amounts payable (i) pursuant to a drawing under Irrevocable Letter of
Credit No. P-360919 issued by The Chase Manhattan Bank and dated April 1, 1998
and (ii) from the Collateral, including pursuant to any action taken with
respect to the Collateral pursuant to Section 10 hereof.
SECTION 7. FURTHER COVENANTS; CERTAIN VOTING RIGHTS.
(a) Pledgor hereby further covenants and agrees as follows:
(i) The Pledgor will not sell, transfer or convey
any interest in, or suffer or permit any Lien or encumbrance to
be created upon or with respect to, any of the Collateral (other
than as created under this Pledge Agreement) during the term of
this Pledge Agreement.
(ii) The Pledgor will, at its own expense, at any
time and from time to time at the request of the Collateral Agent
or Financial Security, do, make, procure, execute and deliver all
acts, things, writings, assurances and other documents as may be
reasonably requested by the Collateral Agent or Financial
Security to preserve or establish Financial Security's Lien on
the Collateral.
(iii) The Pledgor has not and will not take any
action which would cause the Pledged Entity to issue any other
capital stock, without the prior written consent of Financial
Security. Any such issuance shall be subject to this Pledge
Agreement.
(iv) The Pledgor will not consent to any amendment
of the Pledged Entity's Certificate of Incorporation or Bylaws
without the prior written consent of Financial Security.
(v) The Pledgor will not voluntarily permit the
Pledged Entity to engage in any dissolution, insolvency
proceeding, liquidation, consolidation, merger, asset sale,
transfer of ownership or amendment of organic documents without
the prior written consent of Financial Security.
(vi) Pledgor will not file or cause to be filed a
voluntary petition in bankruptcy against the Pledged Entity, nor
seek substantive consolidation of the assets and liabilities of
the Pledged Entity and Pledgor in any bankruptcy or insolvency
proceeding, for one year and one day after maturity of all debt
of the Pledged Entity under the Loan Agreements.
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(b)(i) Subject to Section 8, so long as no Stock Pledge Event (as
defined in Section 10) exists, Pledgor shall be entitled to vote its Pledged
Stock and to give consents, waivers or ratifications in respect of its Pledged
Stock;
(ii) provided, however, that until the date
described in 7(a)(vi), no vote shall be cast, or consent, waiver
or ratification given, by Pledgor with respect to any matter
described in Section 7(a) hereof, any matter prohibited by the
organizational documents of the Pledged Entity in effect as of
the date hereof or as amended with the prior written consent of
Financial Security, any matter relating to the Loan Agreements,
or any matter relating to the Borrower Collateral (as defined in
the Loan Agreements) without the prior written consent of
Financial Security.
All rights of Pledgor to vote and give consents, waivers and
ratifications pursuant to (b)(i) above shall cease if a Stock Pledge Event
exists, except to the extent that Financial Security in writing otherwise
agrees.
SECTION 8. VOTING PROXY. Pledgor hereby grants to the Collateral
Agent on behalf of Financial Security an irrevocable proxy to vote the Pledged
Shares with respect to any matter described in Section 7(b)(ii) above, which
proxy is coupled with an interest and shall continue until the Termination Date.
Pledgor represents and warrants that it has directed the Pledged Entity to
reflect the Collateral Agent's right to vote the Collateral, 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. The Collateral Agent shall exercise all such
rights to vote the Collateral granted hereunder in accordance with the written
directions given by Financial Security.
SECTION 9. RIGHTS OF FINANCIAL SECURITY. At any time and without
notice, Financial Security may, upon providing the Collateral Agent with the
full amount necessary to carry out such direction, direct the Collateral Agent
to discharge any taxes, liens, security interests or other encumbrances levied
or placed on the Collateral, or pay for the maintenance and preservation of the
Collateral. The Collateral Agent shall have no duty or obligation to follow any
direction provided in this Section 9 unless Financial Security has provided the
Collateral Agent with the full amount necessary to carry out such direction.
SECTION 10. REMEDIES UPON EVENT OF DEFAULT.
(a) If a material default exists under this Pledge Agreement or
an "Event of Default" exists under either Loan Agreement, any Mortgage Note or
the Insurance Agreement (any such event, a "Stock Pledge Event"), Financial
Security may, directly or through the Collateral Agent, without notice to
Pledgor:
(i) cause the Collateral to be transferred to the
Collateral Agent's name or Financial Security's name or in the
name of nominees of either and thereafter exercise as to such
Collateral all of the rights, powers and remedies of an owner;
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<PAGE> 7
(ii) collect by legal proceedings or otherwise all
amounts now or hereafter payable on account of the Collateral,
and hold all such sums as part of the Collateral, or apply such
sums to the payment of the Obligations in such manner and order
as Financial Security may decide, in its sole discretion; and
(iii) enter into any extension, subordination,
reorganization, deposit, merger, or consolidation agreement, or
any other agreement relating to or affecting the Collateral, and
in connection therewith deposit or surrender control of the
Collateral thereunder, and accept other property in exchange
therefor and hold and apply such property or money so received in
accordance with the provisions hereof.
(b) In addition to all the rights and remedies of a secured party
under the Uniform Commercial Code, Financial Security shall have the right, and
without demand of performance or other demand, advertisement or notice of any
kind, except as specified below, to or upon Pledgor or any other person (all and
each of which demands, advertisements and/or notices are hereby expressly waived
to the extent permitted by law), to proceed forthwith, or direct the Collateral
Agent to proceed forthwith, to collect, receive, appropriate and realize upon
the Collateral, or any part thereof and to proceed forthwith to sell, assign,
give an option or options to purchase, contract to sell, or otherwise dispose of
and deliver the Collateral or any part thereof in one or more parcels in
accordance with applicable securities laws and in a manner designed to ensure
that such sale will not result in a distribution of the Pledged Shares in
violation of the Securities Act and on such terms (including, without
limitation, a requirement that any purchaser of all or any part of the
Collateral shall be required to purchase any securities constituting the
Collateral solely for investment and without any intention to make a
distribution thereof) as Financial Security, in its sole and absolute discretion
deems appropriate without any liability for any loss due to decrease in the
market value of the Collateral during the period held. If any notification of
intended disposition of the Collateral is required by law, such notification
shall be deemed reasonable and properly given if mailed to Pledgor, postage
prepaid, at least 10 days before any such disposition at the address indicated
in Section 20. Any disposition of the Collateral or any part thereof may be for
cash or on credit or for future delivery without assumption of any credit risk,
with the right of Financial Security to purchase all or any part of the
Collateral so sold at any such sale or sales, public or private, free of any
equity or right of redemption in Pledgor, which right of equity is, to the
extent permitted by applicable law, hereby expressly waived or released by
Pledgor.
(c) Financial Security, in its sole discretion, may elect to
obtain or cause the Collateral Agent to obtain the advice of any independent
nationally known investment banking firm which is a member firm of the New York
Stock Exchange, with respect to the method and manner of sale or other
disposition of any of the Collateral, the best price reasonably obtainable
therefor, the consideration of cash and/or credit terms, or any other details
concerning such sale or disposition; costs and expenses of obtaining such advice
shall be for the account of the Pledged Entity. Financial Security, in its sole
discretion, may elect to sell, or cause the Collateral Agent to sell, the
Collateral on any credit terms which it deems reasonable; the out-of-pocket
costs and expenses of such sale shall be for the account of the Pledged Entity.
The sale of any of the Collateral on credit terms shall not relieve the Pledged
Entity of its liabilities with respect to the Obligations. All payments received
by the Collateral Agent, if any, and Financial Security in respect of any sale
of the Collateral shall be applied to the Obligations as and when such payments
are received. Pledgor shall not have an obligation to register the Pledged
Shares under the Securities Act or any state securities laws.
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<PAGE> 8
(d) Pledgor recognizes that it may not be feasible to effect a
public sale of all or a part of the Collateral by reason of certain prohibitions
contained in the Securities Act and that it may be necessary to sell privately
to a restricted group of purchasers who will be obliged to agree, among other
things, to acquire the Collateral for their own account, for investment and not
with a view for the distribution or resale thereof. Pledgor agrees that private
sales may be at prices and other terms less favorable to the seller than if the
Collateral were sold at public sale and that neither the Collateral Agent nor
Financial Security has any obligation to delay the sale of any Collateral for
the period of time necessary to permit the registration of the Collateral for
public sale under the Securities Act. Pledgor agrees that a private sale or
sales made under the foregoing circumstances shall be deemed to have been made
in a commercially reasonable manner.
(e) If any consent, approval or authorization of any state,
municipal or other governmental department, agency or authority shall be
necessary to effectuate any sale or other disposition of the Collateral, or any
partial disposition of the Collateral, Pledgor will execute all such
applications and other instruments as may be required in connection with
securing any such consent, approval or authorization and will otherwise use its
best efforts to secure the same.
(f) Upon any sale or other disposition, the Collateral Agent,
acting at the direction of Financial Security, or Financial Security, shall have
the right to deliver, assign and transfer to the purchaser thereof the
Collateral so sold or disposed of. Each purchaser at any such sale or other
disposition (including Financial Security) shall hold the Collateral free from
any claim or right of whatever kind, including any equity or right of redemption
of Pledgor. Pledgor specifically waives, to the extent permitted by applicable
law, all rights of redemption, stay or appraisal which it may have under any
rule of law or statute now existing or hereafter adopted.
(g) Neither the Collateral Agent nor Financial Security shall be
obligated to make any sale or other disposition of the Collateral, unless the
terms thereof shall be satisfactory to Financial Security. The Collateral Agent
or Financial Security may, without notice or publication, adjourn any private or
public sale and, upon 10 days' prior notice to Pledgor, hold such sale at any
time or place to which the same may be so adjourned. In case of any sale of all
or any part of the Collateral, on credit or future delivery, the Collateral so
sold may be retained by the Collateral Agent or Financial Security until the
selling price is paid by the purchaser thereof, but neither the Collateral Agent
nor Financial Security shall incur any liability in case of the failure of such
purchaser to take up and pay for the property so sold and, in case of any such
failure, such property may again be sold as herein provided.
(h) Except as otherwise expressly provided herein, all of the
rights and remedies herein provided, including, but not limited to the
foregoing, shall be cumulative and not exclusive of any other remedies provided
by law or any other agreement, and shall be enforceable alternatively,
successively or concurrently as Financial Security may deem expedient.
8
<PAGE> 9
SECTION 11. LIMITATION ON LIABILITY.
(a) Neither the Collateral Agent nor Financial Security, nor any
of their respective directors, officers or employees, shall be liable to Pledgor
or to the Pledged Entity for any action taken or omitted to be taken by it or
them hereunder, or in connection herewith, except that the Collateral Agent and
Financial Security shall each be liable for its own negligence, bad faith or
willful misconduct.
(b) The Collateral Agent shall incur no liability to Financial
Security except for the Collateral Agent's negligence or willful misconduct in
carrying out its duties hereunder.
(c) The Collateral Agent shall be protected and shall incur no
liability to any party in relying upon the accuracy, acting in reliance upon the
contents, and assuming the genuineness of any notice, demand, certificate,
signature, instrument or other document the Collateral Agent reasonably believes
to be genuine and to have been duly executed by the appropriate signatory, and
(absent actual knowledge to the contrary) the Collateral Agent shall not be
required to make any independent investigation with respect thereto. The
Collateral Agent shall at all times be free independently to establish to its
reasonable satisfaction, but shall have no duty to independently verify, the
existence or nonexistence of facts that are a condition to the exercise or
enforcement of any right or remedy hereunder.
(d) The Collateral Agent may consult with qualified counsel,
financial advisors or accountants and shall not be liable for any action taken
or omitted to be taken by it hereunder in good faith and in accordance with the
written advice of such counsel, financial advisors or accountants.
(e) The Collateral Agent shall not be under any obligation to
exercise any of the remedial rights or powers vested in it by this Pledge
Agreement unless it shall have received reasonable security or indemnity
satisfactory to the Collateral Agent against the reasonable costs, expenses and
liabilities which it might incur.
SECTION 12. PERFORMANCE OF DUTIES. The Collateral Agent shall
have no duties or responsibilities except those expressly set forth in this
Pledge Agreement, subject to the provisions of this Pledge Agreement or as
directed by Financial Security in accordance with this Pledge Agreement. The
Collateral Agent on behalf of Financial Security and its successors and assigns
shall have no obligation in respect of the Collateral, except to use reasonable
care in holding the Collateral and to hold and dispose of the same in accordance
with the terms of this Pledge Agreement.
SECTION 13. APPOINTMENT AND POWERS. Subject to the terms and
conditions hereof, Financial Security appoints The Bank of New York as its
Collateral Agent and The Bank of New York accepts such appointment and agrees to
act as Collateral Agent on behalf of Financial Security to maintain custody and
possession of the Collateral and to perform the other duties of the Collateral
Agent in accordance with the provisions of this Pledge Agreement. The Collateral
Agent shall, subject to the other terms and provisions of this Pledge Agreement,
act upon and in compliance with Financial Security's written instructions
delivered pursuant to this Pledge Agreement as promptly as possible following
receipt of such written instructions. Receipt of written instructions shall not
be a condition
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<PAGE> 10
to the exercise by the Collateral Agent of its express duties hereunder, unless
this Pledge Agreement provides that the Collateral Agent is permitted to act
only following receipt of such instructions.
SECTION 14. SUCCESSOR COLLATERAL AGENT.
(a) Merger. Any Person into which the Collateral
Agent may be converted or merged, or with which it may be
consolidated, or to which it may sell or transfer its corporate
trust business and assets as a whole or substantially as a whole,
or any Person resulting from any such conversion, merger,
consolidation, sale or transfer to which the Collateral Agent is
a party, shall (provided it is otherwise qualified to serve as
the Collateral Agent hereunder) be and become a successor
Collateral Agent hereunder and be vested with all of the title to
and interest in the Collateral and all of the trusts, powers,
immunities, privileges and other matters as was its predecessor
without the execution or fling of any instrument or any further
act, deed or conveyance on the part of any of the parties hereto,
anything herein to the contrary notwithstanding.
(b) Resignation. The Collateral Agent and any
successor Collateral Agent may resign only (i) with the 45 days'
prior written notice to Financial Security or (ii) if the
Collateral Agent is unable to perform its duties hereunder as a
matter of law as evidenced by an opinion of counsel acceptable to
Financial Security. Upon the occurrence of (i) or (ii) above, the
Collateral Agent shall give notice of its resignation by
registered or certified mail to Pledgor (with a copy to Financial
Security). Any resignation by the Collateral Agent shall take
effect only upon the date which is the later of (x) the effective
date of the appointment by Financial Security of a successor
Collateral Agent and the acceptance in writing by such successor
Collateral Agent of such appointment and (y) the date on which
the Collateral is delivered to the successor Collateral Agent.
Notwithstanding the preceding sentence, if by the contemplated
date of resignation specified in the written notice of
resignation delivered (as described above) no successor
Collateral Agent has been appointed Collateral Agent or becomes
the Collateral Agent pursuant to subsection (d) below, the
resigning Collateral Agent may petition a court of competent
jurisdiction for the appointment of a successor.
(c) Removal. The Collateral Agent may be removed by
Financial Security at any time, with or without cause, by an
instrument or concurrent instruments in writing delivered to the
Collateral Agent. Any removal pursuant to the provisions of this
subsection (c) shall take effect only upon the later to occur of
(i) the effective date of the appointment of a successor
Collateral Agent and the acceptance in writing by such successor
Collateral Agent of such appointment and of its obligation to
perform its duties hereunder in accordance with the provisions
hereof and (ii) the date on which the Collateral is delivered to
the successor Collateral Agent.
(d) Appointment of and Acceptance by Successor.
(i) Financial Security shall have
the sole right to appoint each successor Collateral
Agent. Every successor Collateral Agent appointed
hereunder shall execute, acknowledge and deliver to
its predecessor and to Financial Security and
Pledgor an instrument in writing accepting such
appointment hereunder and the relevant predecessor
shall execute, acknowledge and deliver such other
documents
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<PAGE> 11
and instruments as will effectuate the delivery of
all Collateral to the successor Collateral Agent,
whereupon such successor, without any further act,
deed or conveyance, shall become fully vested with
all the estates, properties, rights, powers, duties
and obligations of its predecessor. Such
predecessor shall, nevertheless, on the written
request of Financial Security, execute and deliver
an instrument transferring to such successor all
the estates, properties, rights and powers of such
predecessor hereunder.
(ii) Every predecessor Collateral
Agent shall assign, transfer and deliver all
Collateral held by it as Collateral Agent
hereunder to its successor as Collateral Agent.
(iii) Should any instrument in
writing from Pledgor or the Pledged Entity be
reasonably required by a successor Collateral Agent
for more fully and certainly vesting in such
successor the estates, properties, rights, powers,
duties and obligations vested or intended to be
vested hereunder in the Collateral Agent, any and
all such written instruments shall, at the request
of the successor Collateral Agent, be forthwith
executed, acknowledged and delivered by Pledgor.
(iv) The designation of any
successor Collateral Agent and the instrument or
instruments removing any Collateral Agent and
appointing a successor hereunder, together with all
other instruments provided for herein, shall be
maintained with the records relating to the
Collateral and, to the extent required by
applicable law, filed or recorded by the successor
Collateral Agent in each place where such filing or
recording is necessary to effect the transfer of
the Collateral to the successor Collateral Agent or
to protect and preserve the security interests
granted hereunder.
SECTION 15. REIMBURSEMENT AND INDEMNIFICATION.
(a) The Pledgor hereby agrees to pay, and to protect, indemnify
and save harmless Financial Security and its officers, directors, shareholders,
employees, agents and each Person, if any, who controls Financial Security
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Securities Exchange Act from and against, any and all claims, losses,
liabilities (including penalties), actions, suits, judgments, demands, damages,
costs or expenses (including, without limitation, the costs and expenses of
defending against any claim of liability) of any nature arising out of or in
connection with this Pledge Agreement, except such loss, liabilities, actions,
suits, judgments, demands, damages, costs or expenses as shall result from the
negligence, bad faith or willful misconduct of Financial Security or its
officers, directors, shareholders, employees, agents and each Person, if any,
who controls Financial Security within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act; PROVIDED, however, that, any
provision herein to the contrary notwithstanding:
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<PAGE> 12
(i) Pledgor's obligations pursuant to this Section
15 arising in connection with any breach of Section 5 or Section
6 hereof shall be limited to amounts payable (A) pursuant to a
drawing under Irrevocable Letter of Credit No. P-360919 issued by
The Chase Manhattan Bank and dated April 1, 1998 and (B) from the
Collateral, including pursuant to any action taken with respect
to the Collateral pursuant to Section 10 hereof; and
(ii) The only damages indemnifiable or payable with
respect to a breach of Section 7 hereof shall be any loss or
damages which (A) are not recovered by a drawing under
Irrevocable Letter of Credit No. P-360919 issued by The Chase
Manhattan Bank and dated April 1, 1998, and (B) result from the
loss of the ability or right, or any delay in the exercise of
ability or right, of either the "Collateral Agent" under the
Collateral Assignment Agreement or Financial Security to realize
the full and timely benefits of the Defeasance Eligible
Investments or other Borrower Collateral, or any loss resulting
from a delay in such realization, including any and all charges,
fees, costs and expenses which Financial Security may reasonably
pay or incur, including, but not limited to, attorneys' and
accountants' fees and expenses, in connection with (1)
reimbursement of the Collateral Agent, or (2) the administration,
enforcement, defense or preservation of any rights in respect of
any of the Related Documents (as defined in the Insurance
Agreement), including defending, monitoring or participating in
any litigation or proceeding (including any bankruptcy proceeding
in respect of the Pledged Entity or any affiliate of the Pledged
Entity) relating to any of the Related Documents, any party to
any of the Related Documents or the Transaction.
(b) The obligations of Pledgor under this Section
15 shall survive the termination of this Pledge Agreement and the
resignation or removal of the Collateral Agent.
SECTION 16. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
COLLATERAL AGENT. The Collateral Agent represents and warrants to Pledgor and to
Financial Security as follows:
(a) The Collateral Agent is a state banking
corporation, duly organized, validly existing and in good
standing under the laws of the State of New York and is duly
authorized and licensed under applicable law to conduct its
business as presently conducted.
(b) The Collateral Agent has all requisite right,
power and authority to execute and deliver this Pledge Agreement
and the other Transaction Documents to which it is or becomes a
party and to perform all of its duties as Collateral Agent
hereunder and thereunder.
(c) The execution and delivery by the Collateral
Agent of this Pledge Agreement, and the performance by the
Collateral Agent of its duties hereunder, have been duly
authorized by all necessary corporate proceedings and no further
approvals or filings, including any governmental approvals, are
required or will be required, as the case may be, for the valid
execution and delivery by the Collateral Agent, or the
performance by the Collateral Agent, of this Pledge Agreement.
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<PAGE> 13
(d) The Collateral Agent has duly executed and
delivered this Pledge Agreement, and, assuming the due
authorization, execution and delivery hereof by the other parties
hereto, this Pledge Agreement constitutes the legal, valid and
binding obligation of the Collateral Agent, enforceable against
the Collateral Agent in accordance with its terms, except as (i)
such enforceability may be limited by bankruptcy, insolvency,
reorganization and similar laws relating to or affecting the
enforcement of creditors' rights generally and (ii) rights of
acceleration and the availability of equitable remedies may be
limited by equitable principles of general applicability.
(e) The Collateral Agent has been paid in full its
ordinary administrative fee for acting as Collateral Agent under
this Pledge Agreement.
SECTION 17. TERMINATION. This Pledge Agreement shall continue in
full force and effect until the date (the "Termination Date") on which the
Insurance Agreement terminates in accordance with its terms.
SECTION 18. RESERVED.
SECTION 19. RESERVED.
SECTION 20. NOTICES. Any notice or other communication given
hereunder shall be in writing and shall be sent by registered mail, postage
prepaid, or personally delivered or telecopied to the recipient as follows:
(a) To the Collateral Agent:
The Bank of New York
Towermarc Plaza
10161 Centurion Parkway
Jacksonville, FL 32256
Attention: Corporate Trust Department
Telephone: (904) 998-4700
Facsimile: (904) 645-1932
(b) To Financial Security:
Financial Security Assurance Inc.
350 Park Avenue
New York, NY 10022
Attention: Surveillance Department
Telephone: (212) 826-0100
Facsimile: (212) 339-3518
(212) 339-3529
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<PAGE> 14
(c) To Pledgor:
Spartan Holdings, Inc.
203 East Main Street
Spartanburg, SC 29301
Attention: General Counsel
Facsimile: (864) 597-8216
With a copy to:
Advantica Restaurant Group, Inc.
203 East Main Street
Spartanburg, SC 29301
Attention: General Counsel
Facsimile: (864) 596-8327
SECTION 21. GENERAL PROVISIONS.
(a) The failure of the Collateral Agent or Financial Security to
exercise, or delay in exercising, any right, power or remedy hereunder shall not
operate as a waiver thereof, nor shall any single or partial exercise by the
Collateral Agent or Financial Security of any right, power or remedy hereunder
preclude any other or future exercise thereof, or the exercise of any other
right, power or remedy.
(b) The representations of Pledgor herein contained shall survive
the date hereof.
(c) Neither this Pledge Agreement nor the provisions hereof can
be changed, waived or terminated orally. This Pledge Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors, legal representatives and assigns. If any provision of this Pledge
Agreement shall be invalid or unenforceable in any respect or in any
jurisdiction, the remaining provisions shall remain in full force and effect and
shall be enforceable to the maximum extent permitted by law.
(d) Unless otherwise indicated, all references to particular
Sections are references to Sections of this Pledge Agreement.
(e) This Pledge Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same document.
(f) Each of the parties hereto waives, to the fullest extent
permitted by law, any right it may have to a trial by jury in respect of any
litigation arising directly or indirectly out of, under or in connection with
this Pledge Agreement or any of the transactions contemplated hereunder. Each of
the parties hereto (i) certifies that no representative, agent or attorney of
any other party has represented, expressly or otherwise, that such other party
would not, in the event of litigation, seek to enforce the foregoing waiver and
(ii) acknowledges that it has not been induced to enter into this Pledge
Agreement and the other Borrower Documents (as defined in Section 5) to which it
is a party
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<PAGE> 15
nor will have been induced to enter into any other Borrower Documents to which
it becomes a party by, among other things, this waiver.
(g) THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED, AND
THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE
DETERMINED, IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
(h) PLEDGOR IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE UNITED
STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, ANY COURT IN THE
STATE OF NEW YORK LOCATED IN THE CITY AND COUNTY OF NEW YORK, AND ANY APPELLATE
COURT FROM ANY THEREOF, IN ANY ACTION, SUIT OR PROCEEDING BROUGHT AGAINST IT AND
RELATED TO OR IN CONNECTION WITH THIS PLEDGE AGREEMENT, THE OTHER BORROWER
DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREUNDER OR THEREUNDER OR FOR
RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND EACH OF THE PARTIES HERETO
IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH
SUIT OR ACTION OR PROCEEDING MAY BE HEARD OR DETERMINED IN SUCH NEW YORK STATE
COURT OR, TO THE EXTENT PERMITTED BY LAW, IN SUCH FEDERAL COURT. EACH OF THE
PARTIES HERETO AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION, SUIT OR
PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY
SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. TO THE EXTENT
PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES HEREBY WAIVES AND AGREES NOT TO
ASSERT BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE IN ANY SUCH SUIT, ACTION OR
PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF
SUCH COURTS, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT
FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER OR THAT THIS
PLEDGE AGREEMENT OR ANY OF THE OTHER BORROWER DOCUMENTS OR THE SUBJECT MATTER
HEREOF OR THEREOF MAY NOT BE LITIGATED IN OR BY SUCH COURTS. PLEDGOR IRREVOCABLY
APPOINTS AND DESIGNATES CT CORPORATION SYSTEM AS ITS TRUE AND LAWFUL ATTORNEY
AND DULY AUTHORIZED AGENT FOR ACCEPTANCE OF SERVICE OF LEGAL PROCESS. PLEDGOR
AGREES THAT SERVICE OF SUCH PROCESS UPON SUCH PERSON SHALL CONSTITUTE PERSONAL
SERVICE OF PROCESS UPON IT. NOTHING CONTAINED IN THIS PLEDGE AGREEMENT SHALL
LIMIT OR AFFECT THE RIGHTS OF ANY PARTY HERETO TO SERVE PROCESS IN ANY OTHER
MANNER PERMITTED BY LAW OR TO START LEGAL PROCEEDINGS RELATED TO ANY OF THE
BORROWER DOCUMENTS AGAINST PLEDGOR OR ITS RESPECTIVE PROPERTY IN THE COURTS OF
ANY JURISDICTION.
(i) The Collateral Agent, by the execution hereof, acknowledges
receipt of the Pledged Shares on behalf of Financial Security.
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<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Stock Pledge Agreement on the date first above written.
SPARTAN HOLDINGS, INC.
By: /s/ James H. Allyn
-------------------------------------------
Name James H. Allyn
-----------------------------------------
Title Director
----------------------------------------
FINANCIAL SECURITY ASSURANCE INC.
By: /s/ Alex G. Makowski
-------------------------------------------
Alex G. Makowski
Managing Director
THE BANK OF NEW YORK
By: /s/ Heidi Van Horn-Bash
-------------------------------------------
Name Heidi Van Horn-Bash
-----------------------------------------
Agent
16
<PAGE> 1
EXHIBIT 10.39
EXECUTION COPY
CONSENT AND AGREEMENT REGARDING SUBSTITUTION
This Consent And Agreement Regarding Substitution (this "Agreement"),
dated as of May 1, 1998, is by and among SFS SECURED RESTAURANTS, INC., SPARTAN
SECURED RESTAURANTS, INC. (each of SFS Secured Restaurants, Inc. and Spartan
Secured Restaurants, Inc. are referred to herein as an "Owner" and together as
the "Owners"), SECURED RESTAURANTS TRUST (the "Issuer"), THE BANK OF NEW YORK,
I. M. SPECIAL, INC., and FINANCIAL SECURITY ASSURANCE INC. ("Financial Security"
and ADVANTICA RESTAURANT GROUP, INC. ("Advantica")).
Reference is made to:
(i) the Loan Agreement, dated as of November 1,
1990, as amended by a First Amendment to Loan Agreement, dated as
of November 1, 1991, and as further amended by a Second Amendment
to Loan Agreement, dated as of April 1, 1998, (collectively, the
"Quincy's Loan Agreement") between the Issuer and Quincy's
Realty, Inc. ("Quincy's Realty"),
(ii) the Loan Agreement, dated as of November 1,
1990, as amended by a First Amendment to Loan Agreement, dated as
of November 1, 1991, and as further amended by a Second Amendment
to Loan Agreement, dated as of April 1, 1998 (collectively, the
"Spardee's Loan Agreement"), between the Issuer and Spardee's
Realty, Inc. ("Spardee's Realty"),
(iii) the Collateral Assignment Agreement, dated as
of November l, 1990, as amended by a First Amendment to
Collateral Assignment Agreement, dated as of April 1, 1998
(collectively, the "Collateral Assignment Agreement") among the
Issuer, Financial Security and The Bank of New York, as successor
to The Citizens and Southern Bank of South Carolina, as indenture
trustee (the "Trustee") and as collateral agent (the "Collateral
Agent"), and
(iv) The Intercreditor Agreement, dated as of
November l, 1990 (the "Intercreditor Agreement"), among Financial
Security, the Trustee and the Collateral Agent.
All obligations and liabilities of Spardee's under the Spardee's
Loan Agreement were assigned to, and assumed by, Quincy's Realty pursuant to an
Assignment and Assumption Agreement, dated April 1, 1998 between Quincy's Realty
and Spardee's Realty. The Quincy's Loan Agreement, the Spardee's Loan Agreement,
the Collateral Assignment Agreement and the Intercreditor Agreement all relate
to the Issuer's 10 1/4 % Guaranteed Secured Bonds Due 2000 (the "Bonds") issued
pursuant to an indenture dated as of November 1, 1990 (the "Indenture") between
the Issuer and the Trustee. The Quincy's Loan Agreement and the Spardee's Loan
Agreement, and the Mortgage Notes thereunder (as defined in such agreements),
are referred to collectively herein as the "Loan Agreements."
<PAGE> 2
Financial Security is the Controlling Party (as defined in the
Intercreditor Agreement). On April 1, 1998, Quincy's Realty effected a
defeasance of the Mortgage Notes pursuant to Section 2.04(c) of each of the
Quincy's Loan Agreement and the Spardee's Loan Agreement (such transaction, the
"Defeasance").
Quincy's Realty has requested that Financial Security and the
other parties hereto consent to the substitution of I. M. Special, Inc. as
"Borrower" for Quincy's under (a) the Quincy's Loan Agreement, (b) the Spardee's
Loan Agreement and (c) in connection with the related Mortgage Notes. Such
substitution (the "Substitution") will occur pursuant to an Assignment and
Assumption Agreement dated May 1, 1998 (the "Assignment Agreement") by and
between Quincy's Realty and I. M. Special, Inc.
In consideration of the premises the parties hereto agree as
follows:
I. FINANCIAL SECURITY CONSENT TO SUBSTITUTION
Financial Security hereby consents to the Substitution subject to
the following:
(1) Receipt by Financial Security of executed originals (or
copies of executed originals, provided that Advantica shall deliver executed
originals to Financial Security by May 30, 1998) of:
(1) The Assignment Agreement;
(2) Certified copies of the certificate of
incorporation and bylaws of I. M. Special, Inc.;
(iii) Evidence that the Board of Directors of I.
M. Special, Inc. has authorized I. M. Special, Inc. to enter into
the Substitution;
(iv) Stock Pledge Agreement, dated as of May 1,
1998, among Spartan Holdings Inc., Financial Security and the
Collateral Agent;
(v) One or more legal opinions from Parker Poe
Adams and Bernstein L.L.P. addressed to, and in form and
substance acceptable to, Financial Security relating to the
Substitution and such other matters as may be contemplated
thereby or by this Agreement; and
(vi) Certificates from Advantica, Quincy's Realty,
I. M. Special, Inc. and/or their affiliates and such other
documents as Financial Security may reasonably request.
2
<PAGE> 3
(b) Payment to Kutak Rock, as set forth in a statement from Kutak
Rock, of fees and disbursements for legal services provided to Financial
Security in connection with the Substitution.
(c) Execution of this Agreement by Advantica
II. CONSENTS AND DIRECTIONS REGARDING DOCUMENTS.
(a) Financial Security hereby directs The Bank of
New York, as Trustee and as Collateral Agent, to execute, and
directs the Owners to cause Wilmington Trust Company (the "Issuer
Trustee"), on behalf of the Issuer, to execute, as applicable:
(i) the Quincy's Realty, Inc.
Release and Agreement, dated May 1, 1998 (the
"Quincy's Release"), by the Issuer, Financial
Security, the Trustee and the Collateral Agent;
(ii) the Termination of
Reimbursement Agreement, dated May 1, 1998, by
Financial Security and Advantica; and
(iii) the Termination of Stock
Pledge Agreement, dated May 1, 1998 (the
"Termination of Stock Pledge"), by Quincy's
Restaurants, Inc. and the Issuer.
(b) Financial Security hereby consents to the
Issuer Trustee's execution, on its own behalf, of this Agreement;
(c) Financial Security hereby directs the Owners to
direct the Issuer Trustee to execute this Agreement, the Quincy's
Release and the Termination of Stock Pledge and any other
certificates or instruments required to be executed by the Owners
in connection with the matters contemplated hereby;
(d) The Owners hereby direct the Issuer Trustee to
execute this Agreement, the Quincy's Release and the Termination
of Stock Pledge.
(e) Upon satisfaction of all conditions set forth
in this Agreement, Financial Security will cancel Irrevocable
Letter of Credit No. 360920 issued by The Chase Manhattan Bank
dated April 1, 1998.
III. DEFINED TERMS.
The parties hereby agree that for purposes of the Collateral
Assignment Agreement, the Loan Agreements, the Mortgage Notes and the Insurance
Agreement (as defined in the Collateral Assignment Agreement), the following
terms shall have the meanings set forth below:
3
<PAGE> 4
"Borrower" means I. M. Special, Inc., a Delaware corporation.
"Stock Pledge Agreement," "Stock Pledge" or "Quincy's Stock
Pledge" means the Stock Pledge Agreement, dated as of May 1, 1998, among Spartan
Holdings, Inc., Financial Security and the Collateral Agent.
IV. ADVANTICA AGREEMENTS.
Advantica hereby covenants and agrees as follows:
(a) Advantica and its affiliates have received adequate
consideration and fair value in connection with the Defeasance and the
Substitution and neither such action has been taken with the intent of
defrauding any creditors of Advantica or of any of its affiliates;
(b)(i) Following the substitution, neither Advantica nor any of
its affiliates, other than I. M. Special, Inc., has any right, title or interest
in, to or under the Defeasance Eligible Investments (as defined in the
Collateral Assignment Agreement) or any other part of the Borrower Collateral
(as defined in the Loan Agreements) or has made any representation to the Banks
(as defined in (v) below) that it has any such right, title or interest;
(ii) Prior to transfer of ownership of either Quincy's
Restaurants, Inc. or Quincy's Realty to any entity which is not an affiliate of
Advantica (a "Transferee"), Advantica will provide to Financial Security a
written confirmation, in form and substance satisfactory to Financial Security,
from the Transferee that neither such Transferee nor Quincy's Realty, Inc. has
any right, title or interest in, to or under the Defeasance Eligible Investments
or any other part of the Borrower Collateral;
(iii) Neither Advantica nor any of its affiliates will take any
action to obtain or recover any interest in the Defeasance Eligible Investments
or any other part of the Borrower Collateral until the Term of the Agreement (as
defined in the Insurance Agreement) has expired; and
(iv) Advantica confirms that the Banks have approved the
Substitution and the transfer of all right, title and interest of Quincy's
Realty in, to and under the Borrower Collateral to I. M. Special, Inc. in
connection therewith.
(v) Advantica will enforce the agreement pursuant to the Credit
Agreement, dated as of January 7, 1998, as amended or waived by Amendment No. l
and Waiver (the "Amendment"), dated as of March 16, 1998, each among Quincy's
Restaurants, Inc., Flagstar Enterprises Inc., Advantica Restaurant Group, Inc.,
the Lenders (as defined in the Credit Agreement), The Chase Manhattan Bank and
the other parties thereto, set forth in Section l(a) of the Amendment, which
provides that I. M. Special, Inc., as the SPC referred to in such amendment,
shall not be required to execute a
4
<PAGE> 5
Subsidiary Guarantee Agreement, an Indemnity and Contribution Agreement or any
Security Document until] such time when I. M. Special], Inc. is no longer
subject to a contractual prohibition on doing so. The Lenders and The Chase
Manhattan Bank are collectively referred to herein as the "Banks".
V. MISCELLANEOUS.
(a) 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
facsimile to the recipient as follows:
(i) 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.")
(ii) To the Issuer: Secured Restaurants Trust
c/o Wilmington Trust Company
Rodney Square North
Wilmington, DE 19890
Attention: Corporate Trust Administration
Telephone No.: (302) 651-1428
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
5
<PAGE> 6
(iii) 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
Facsimile No.: (904) 645-1932
(iv) 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
Facsimile No.: (904) 645-1932
(v) To the Borrower: I. M. Special, Inc.
201 East Main Street
Spartanburg, SC 29301
Attention: Legal Department
Telephone No.: (864) 596-8000
Facsimile No.: (864) 596-8327
(vi) To Advantica: Advantica Restaurant Group, Inc.
201 East Main Street
Spartanburg, SC 29301
Attention: Legal Department
Telephone No.: (864) 596-8000
Facsimile No.: (864) 596-8327
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.
(b) COUNTERPARTS. This Agreement 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.
(c) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
6
<PAGE> 7
(d) BINDING AGREEMENT. This Agreement 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.
IN WITNESS WHEREOF, each party has hereby executed this Consent
and Agreement Regarding Substitution as of the date first above written.
SFS SECURED RESTAURANTS, INC.
By /s/ Lamont R. Wallin
--------------------------------------
Name Lamont R. Wallin
------------------------------------
Title President
-----------------------------------
SPARTAN SECURED RESTAURANTS, INC.
By /s/ Lamont R. Wallin
--------------------------------------
Name Lamont R. Wallin
------------------------------------
Title President
-----------------------------------
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
THE BANK OF NEW YORK, as Collateral
Agent and as Trustee
By /s/ Heidi Van Horn-Bash
--------------------------------------
Name Heidi Van Horn-Bash
------------------------------------
Title Agent
-----------------------------------
FINANCIAL SECURITY ASSURANCE INC.
By: /s/ Alex G. Makowski
-------------------------------------
Alex G. Makowski, Managing Director
7
<PAGE> 8
I. M. SPECIAL, INC.
By /s/ Kenneth G. Jones
--------------------------------------
Name Kenneth G. Jones
------------------------------------
Title President and Treasurer
-----------------------------------
ADVANTICA RESTAURANT GROUP, INC.
By /s/ Kenneth G. Jones
--------------------------------------
Name Kenneth G. Jones
------------------------------------
Title Vice President and Treasurer
-----------------------------------
8
<PAGE> 1
EXHIBIT 12
ADVANTICA RESTAURANT GROUP, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
SUCCESSOR
PREDECESSOR COMPANY COMPANY
---------------------------------------------------------------- ------------
FISCAL YEAR ENDED ONE WEEK FIFTY-ONE
----------------------------------------------------- ENDED WEEKS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30,
1994 1995 1996 1997 1998 1998
------------ ------------ ------------ ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Loss from continuing operations
before income taxes $ (25,998) $ (74,771) $ (69,313) $ (74,637) $720,511 $(182,750)
--------- --------- --------- --------- -------- ---------
Add:
Interest expense excluding
capitalized interest 141,397 147,325 177,278 158,872 2,558 140,207
Amortization of debt expense 3,411 4,203 5,590 6,052 111 (7,933)
--------- --------- --------- --------- -------- ---------
Subtotal 144,808 151,528 182,868 164,924 2,669 132,274
Interest factor in rents 14,172 13,850 17,565 21,734 233 18,946
--------- --------- --------- --------- -------- ---------
Total earnings (losses) $ 132,982 $ 90,607 $ 131,120 $ 112,021 $723,413 $ (31,530)
========= ========= ========= ========= ======== =========
Fixed charges:
Interest expense including
capitalized interest 141,657 147,406 177,278 158,872 2,558 140,207
Amortization of debt expense 3,411 4,203 5,590 6,052 111 (7,933)
--------- --------- --------- --------- -------- ---------
Subtotal 145,068 151,609 182,868 164,924 2,669 132,274
Interest factor in rents 14,172 13,850 17,565 21,734 233 18,946
--------- --------- --------- --------- -------- ---------
Total fixed charges $ 159,240 $ 165,459 $ 200,433 $ 186,658 $ 2,902 $ 151,220
========= ========= ========= ========= ======== =========
Ratio of earnings (losses) to
fixed charges --- --- --- --- 249.3x --
========= ========= ========= ========= ======== =========
Deficiency in the coverage of fixed
charges by earnings (losses)
before fixed charges $ 26,258 $ 74,852 $ 69,313 $ 74,637 $ --- $ 182,750
========= ========= ========= ========= ======== =========
</TABLE>
For purposes of these computations, the ratio of earnings to fixed charges has
been calculated by dividing pretax earnings by fixed charges. Earnings, as used
to compute the ratio, equals the sum of income before income taxes and fixed
charges excluding capitalized interest. Fixed charges are the total interest
expenses including capitalized interest, amortization of debt expenses and a
rental factor that is representative of an interest factor (estimated to be one
third) on operating leases.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF ADVANTICA RESTAURANT GROUP, INC.
NAME STATE OF INCORPORATION
- ---- ----------------------
TWS Funding, Inc. Delaware
Denny's Holdings, Inc. New York
FRD Acquisition Co. Delaware
FRI-J Corporation Delaware
Far West Concepts Delaware
FRI-M Corporation Delaware
FRI-NA Corporation Delaware
FRI-C Corporation Delaware
FRI-DHD Corporation Delaware
FRI-FRD Corporation Delaware
CFC Franchising Company Delaware
Spartan Holdings, Inc. New York
Flagstar Holdings, Inc. New York
TWS 800 Corporation Delaware
TWS 500 Corporation Delaware
TWS 600 Corporation Delaware
TWS 700 Corporation Delaware
El Pollo Loco, Inc. Delaware
Denny's, Inc. California
DFO, Inc. Delaware
Denny's Realty, Inc. Delaware
Spartan Realty, Inc. Delaware
Flagstar Systems, Inc. Delaware
IM Purchasing, Inc. Delaware
I.M. Special, Inc. Delaware
Coco's Restaurants, Inc. California
Carrows Restaurants, Inc. California
Carrows California Family Restaurants, Inc. Delaware
jojo's Restaurants, Inc. California
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Advantica Restaurant Group,
Inc.'s Registration Statement Nos. 333-53031, 333-58169, 333-58167 of our
report dated February 16, 1999, appearing in the Annual Report on Form 10-K of
Advantica Restaurant Group, Inc., for the year ended December 30, 1998.
Deloitte & Touche LLP
Greenville South Carolina
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-30-1998
<PERIOD-START> JAN-08-1998
<PERIOD-END> DEC-30-1998
<CASH> 224,768
<SECURITIES> 0
<RECEIVABLES> 22,777
<ALLOWANCES> 4,316
<INVENTORY> 17,239
<CURRENT-ASSETS> 295,353
<PP&E> 817,234
<DEPRECIATION> 123,921
<TOTAL-ASSETS> 1,986,208
<CURRENT-LIABILITIES> 391,465
<BONDS> 912,699
0
0
<COMMON> 489
<OTHER-SE> 235,555
<TOTAL-LIABILITY-AND-EQUITY> 1,986,208
<SALES> 0
<TOTAL-REVENUES> 1,720,525
<CGS> 0
<TOTAL-COSTS> 1,399,452
<OTHER-EXPENSES> 1,407
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 114,077
<INCOME-PRETAX> (182,750)
<INCOME-TAX> (1,794)
<INCOME-CONTINUING> (180,956)
<DISCONTINUED> (1,507)
<EXTRAORDINARY> (1,044)
<CHANGES> 0
<NET-INCOME> (181,419)
<EPS-PRIMARY> (4.53)
<EPS-DILUTED> (4.53)
</TABLE>
<PAGE> 1
EXHIBIT 99
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. The Company desires to
take advantage of the "safe harbor" provisions of the Act. Certain information,
particularly information regarding future economic performance, finances, the
impact of the Year 2000 issue and management's plans and objectives, contained
or incorporated by reference in the Company's 1998 Annual Report on Form 10-K,
is forward-looking. In some cases information regarding certain important
factors that could cause actual results to differ materially from any such
forward-looking statement appear together with such statement. Also, the
following factors, in addition to other possible factors not listed, could
affect the Company's actual results and cause such results to differ materially
from those expressed in forward-looking statements:
Liquidity and Capital Resources. On July 11, 1997, FCI and Flagstar filed
voluntary petitions for relief under the Bankruptcy Code. The Plan 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 stockholders' 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 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.
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 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.
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
consideration and the type, number and location of competing restaurants.
Multi-unit food service chains such as the Company's can also be materially and
adversely affected by publicity resulting from food quality, illness, injury, or
other health concerns or operating issues stemming from one restaurant or a
limited number of restaurants. Dependence on frequent deliveries of fresh
produce and groceries subjects food service businesses to the risk that
shortages or interruptions in supply caused by adverse weather or other
conditions could adversely affect the availability, quality and cost of
ingredients. In addition, unfavorable trends or developments concerning factors
such as inflation, increased food, labor and employee benefit costs (including
increases in hourly wage and minimum unemployment tax rates), regional weather
conditions and the availability of experienced management and hourly employees
may also adversely affect the food service industry in general and the Company's
results of operations and financial condition in particular.
<PAGE> 2
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 American With Disabilities Act of 1990. The operation of
the Company's franchisee system is also subject to regulations enacted by a
number of states and to 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.
