UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 29, 1999
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___________
to __________
Commission file number 0-18051
ADVANTICA RESTAURANT GROUP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3487402
- ------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
203 East Main Street
Spartanburg, South Carolina 29319-9966
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(864) 597-8000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
As of November 12, 1999, 40,025,207 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Advantica Restaurant Group, Inc.
Statements of Consolidated Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarter Quarter
Ended Ended
September 29, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $ 393,408 $ 407,787
Franchise and licensing revenue 18,419 14,839
---------- -----------
Total operating revenue 411,827 422,626
---------- -----------
Cost of company restaurant sales:
Product costs 102,994 110,505
Payroll and benefits 152,014 147,335
Occupancy 22,077 22,899
Other operating expenses 57,215 63,793
---------- -----------
Total costs of company restaurant sales 334,300 344,532
Franchise restaurant costs 8,145 6,500
General and administrative expenses 16,338 16,779
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 31,962 31,611
Depreciation and other amortization 43,605 33,373
Gains on refranchising and other, net (4,055) (2,060)
---------- -----------
Total operating costs and expenses 430,295 430,735
---------- -----------
Operating loss (18,468) (8,109)
---------- -----------
Other expenses:
Interest expense, net 27,621 25,700
Other nonoperating expenses (income), net (746) 9
---------- -----------
Total other expenses, net 26,875 25,709
---------- -----------
Loss before taxes (45,343) (33,818)
(Benefit from) provision for income taxes (340) 500
---------- -----------
Loss from continuing operations (45,003) (34,318)
Discontinued operations:
Loss from operations of discontinued operations, net of
applicable income taxes of: 1998 -- $0; 1999 -- $0 (212) (2,222)
---------- -----------
Net loss applicable to common shareholders $ (45,215) $ (36,540)
========== ===========
</TABLE>
See accompanying notes
2
<PAGE>
Advantica Restaurant Group, Inc.
Statements of Consolidated Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarter Quarter
Ended Ended
September 29, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
(In thousands, except per share amounts)
Per share amounts applicable to common
shareholders:
Basic earnings per share:
Loss from continuing operations $ (1.13) $ (0.86)
Loss from discontinued operations, net (0.00) (0.05)
---------- ---------
Net loss $ (1.13) $ (0.91)
========== =========
Average outstanding shares 40,025 40,010
========== =========
Diluted earnings per share:
Loss from continuing operations $ (1.13) $ (0.86)
Loss from discontinued operations, net (0.00) (0.05)
---------- ---------
Net loss $ (1.13) $ (0.91)
========== =========
Average outstanding shares and equivalent common shares, 40,025 40,010
unless antidilutive ========== =========
</TABLE>
See accompanying notes
3
<PAGE>
Advantica Restaurant Group, Inc.
Statements of Consolidated Operations
(Unaudited)
<TABLE>
<CAPTION>
Successor Company Predecessor Company
-------------------------------------------- -------------------
Three Quarters Thirty-Eight One Week
Ended Weeks Ended Ended
September 29, 1999 September 30, 1998 January 7, 1998
------------------ ------------------ ---------------
<S> <C> <C> <C>
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $ 1,151,815 $ 1,147,298 $ 30,245
Franchise and licensing revenue 50,305 40,918 1,333
------------ ------------ --------------
Total operating revenue 1,202,120 1,188,216 31,578
------------ ------------ --------------
Cost of company restaurant sales:
Product costs 304,561 303,191 8,053
Payroll and benefits 451,355 431,511 11,840
Occupancy 65,804 65,590 839
Other operating expenses 172,861 182,832 5,068
------------ ------------ --------------
Total costs of company restaurant sales 994,581 983,124 25,800
Franchise restaurant costs 24,786 17,981 667
General and administrative expenses 52,678 45,598 2,323
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 95,723 98,543 ---
Depreciation and other amortization 112,584 94,371 1,584
Gains on refranchising and other, net (12,344) (5,552) (7,653)
------------ ------------ --------------
Total operating costs and expenses 1,268,008 1,234,065 22,721
------------ ------------ --------------
Operating (loss) income (65,888) (45,849) 8,857
------------ ------------ --------------
Other expenses:
Interest expense, net 80,114 78,207 2,569
Other nonoperating expenses (income), net 435 1,145 (313)
------------ ------------ --------------
Total other expenses, net 80,549 79,352 2,256
------------ ------------ --------------
(Loss) income before reorganization items and taxes (146,437) (125,201) 6,601
Reorganization items --- --- (626,981)
------------ ------------ --------------
(Loss) income before taxes (146,437) (125,201) 633,582
(Benefit from) provision for income taxes (1,014) 1,500 (13,829)
------------ ------------ --------------
(Loss) income from continuing operations (145,423) (126,701) 647,411
Discontinued operations:
Reorganization items of discontinued operations, net
of income tax provision of $7,509 --- --- 136,113
Loss from operations of discontinued operations, net
of applicable income taxes of: 1998 -- $0; 1999 -- $0 (2,678) (6,209) (1,451)
------------ ------------ -------------
(Loss) income before extraordinary items (148,101) (132,910) 782,073
Extraordinary items --- --- (612,845)
------------ ------------ -------------
Net (loss) income (148,101) (132,910) 1,394,918
Dividends on preferred stock --- --- (273)
------------ ------------ -------------
Net (loss) income applicable to common shareholders $ (148,101) $ (132,910) $ 1,394,645
============ ============ =============
</TABLE>
See accompanying notes
4
<PAGE>
Advantica Restaurant Group, Inc.
Statements of Consolidated Operations
(Unaudited)
<TABLE>
<CAPTION>
Successor Company Predecessor Company
-------------------------------------------- -------------------
Three Quarters Thirty-Eight One Week
Ended Weeks Ended Ended
September 29, 1999 September 30, 1998 January 7, 1998
------------------ ------------------ ---------------
<S> <C> <C> <C>
(In thousands, except per share amounts)
Per share amounts applicable to common
shareholders:
Basic earnings per share:
(Loss) income from continuing operations $ (3.63) $ (3.17) $ 15.26
(Loss) income from discontinued operations, net (0.07) (0.15) 3.17
----------- ---------- ---------
(Loss) income before extraordinary items (3.70) (3.32) 18.43
Extraordinary items --- --- 14.44
----------- ---------- ---------
Net (loss) income $ (3.70) $ (3.32) $ 32.87
=========== ========== =========
Average outstanding shares 40,023 40,005 42,434
=========== ========== =========
Diluted earnings per share:
(Loss) income from continuing operations $ (3.63) $ (3.17) $ 11.74
(Loss) income from discontinued operations, net (0.07) (0.15) 2.44
----------- ---------- ---------
(Loss) income before extraordinary items (3.70) (3.32) 14.18
Extraordinary items --- --- 11.12
----------- ---------- ----------
Net (loss) income $ (3.70) $ (3.32) $ 25.30
=========== ========== ==========
Average outstanding shares and equivalent common 40,023 40,005 55,132
shares, unless antidilutive =========== ========== ==========
</TABLE>
See accompanying notes
5
<PAGE>
Advantica Restaurant Group, Inc.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 29, 1999 December 30, 1998
------------------ -----------------
<S> <C> <C>
(In thousands)
Assets
Current Assets:
Cash and cash equivalents $ 87,198 $ 224,768
Receivables, less allowance for doubtful accounts of:
1999 --$3,683; 1998 -- $4,098 16,951 16,773
Inventories 16,489 16,341
Net assets held for sale 86,354 87,675
Other 12,189 14,085
Restricted investments securing in-substance defeased debt 20,215 19,025
------------ -------------
239,396 378,667
------------ -------------
Property and equipment 825,843 747,440
Less accumulated depreciation 208,921 117,177
------------ -------------
616,922 630,263
------------ -------------
Other Assets:
Reorganization value in excess of amounts allocable to identifiable assets,
net of accumulated amortization of:
1999 -- $224,427; 1998 -- $130,501 417,235 513,569
Other intangible assets, net of accumulated amortization of:
1999 -- $21,067; 1998 -- $12,289 189,248 189,379
Deferred financing costs, net 21,094 24,913
Other 45,698 37,231
Restricted investments securing in-substance defeased debt 147,845 156,721
------------ -------------
$ 1,677,438 $ 1,930,743
============ =============
Liabilities
Current Liabilities:
Current maturities of notes and debentures $ 166,356 $ 17,599
Current maturities of capital lease obligations 15,229 16,503
Current maturities of in-substance defeased debt 13,660 12,183
Accounts payable 64,197 94,457
Accrued salaries and vacations 48,674 48,350
Accrued insurance 25,049 31,611
Accrued taxes 22,416 19,331
Accrued interest 28,185 44,784
Other 68,845 89,848
------------ -------------
452,611 374,666
------------ -------------
Long-Term Liabilities:
Notes and debentures, less current maturities 753,604 911,266
Capital lease obligations, less current maturities 73,426 63,323
In-substance defeased debt, less current maturities 153,085 166,579
Deferred income taxes 2,988 5,400
Liability for self-insured claims 33,895 42,559
Other noncurrent liabilities and deferred credits 119,779 130,906
------------ -------------
1,136,777 1,320,033
------------ -------------
Total liabilities 1,589,388 1,694,699
------------ -------------
Shareholders' Equity 88,050 236,044
------------ -------------
$ 1,677,438 $ 1,930,743
============ =============
</TABLE>
See accompanying notes
6
<PAGE>
Advantica Restaurant Group, Inc.
Statements of Consolidated Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Successor Company Predecessor Company
------------------------------------------ -------------------
Three Quarters Thirty-Eight One Week
Ended Weeks Ended Ended
September 29, 1999 September 30, 1998 January 7, 1998
------------------ ------------------ ---------------
<S> <C> <C> <C>
(In thousands)
Cash Flows from Operating Activities:
Net (loss) income $ (148,101) $ (132,910) $ 1,394,918
Adjustments to reconcile net (loss) income to cash flows
from operating activities:
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 95,723 98,543 ---
Depreciation and other amortization 112,584 94,371 1,584
Amortization of deferred gains (8,639) (8,315) (202)
Amortization of deferred financing costs 5,771 4,961 111
Deferred income tax benefit (2,249) --- (13,856)
Gains on refranchising and other, net (12,344) (5,552) (7,653)
Equity in loss (income) from discontinued operations, net 2,678 6,209 (134,662)
Amortization of debt premium (11,588) (10,489) ---
Noncash reorganization items --- --- (627,324)
Extraordinary items --- --- (612,845)
Other 3 2,395 (333)
Changes in Assets and Liabilities Net of Effects of
Acquisition and Dispositions:
Decrease (increase) in assets:
Receivables 464 (7,992) (2,058)
Inventories (684) (767) 237
Other current assets (487) (4,050) 1,496
Assets held for sale --- (2,869) 1,488
Other assets (12,337) 19,692 (1,049)
Increase (decrease) in liabilities:
Accounts payable (28,882) (16,228) (4,480)
Accrued salaries and vacations 325 (12,845) 5,945
Accrued taxes 2,484 (15,263) (894)
Other accrued liabilities (46,606) (39,006) 9,519
Other noncurrent liabilities and deferred credits (11,069) 3,624 (1,245)
----------- ---------- ------------
Net cash flows (used in) from operating activities (62,954) (26,491) 8,697
----------- ---------- ------------
Cash Flows from Investing Activities:
Purchase of property (55,044) (28,719) (1)
Acquisition of restaurant units (10,853) --- ---
Proceeds from disposition of property 9,236 1,410 7,255
(Advances to) receipts from discontinued operations, net (1,442) 9,751 564
Proceeds from sale of discontinued operations, net --- 460,424 ---
Purchase of investments securing in-substance defeased debt --- (201,713) ---
Proceeds from maturity of investments securing
in-substance defeased debt 9,675 14,213 ---
Other long-term assets, net --- (1,695) ---
----------- ---------- -----------
Net cash flows (used in) provided by investing activities (48,428) 253,671 7,818
----------- ---------- -----------
</TABLE>
See accompanying notes
7
<PAGE>
Advantica Restaurant Group, Inc.
Statements of Consolidated Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Successor Company Predecessor Company
------------------------------------------ -------------------
Three Quarters Thirty-Eight One Week
Ended Weeks Ended Ended
September 29, 1999 September 30, 1998 January 7, 1998
------------------ ------------------ ---------------
<S> <C> <C> <C>
Cash Flows from Financing Activities:
Net borrowings under credit agreements $ 30,000 $ --- $ ---
Long-term debt payments (53,420) (26,147) (6,870)
Deferred financing costs (2,418) --- (4,971)
Debt transaction costs (350) --- ---
------------ ------------ -----------
Net cash flows used in financing activities (26,188) (26,147) (11,841)
------------ ------------ -----------
Increase (decrease) in cash and cash equivalents (137,570) 201,033 4,674
Cash and Cash Equivalents at:
Beginning of period 224,768 58,753 54,079
------------ ------------ -----------
End of period $ 87,198 $ 259,786 $ 58,753
============ ============ ===========
</TABLE>
See accompanying notes
8
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 29, 1999
(UNAUDITED)
Note 1. GENERAL
Advantica Restaurant Group, Inc. ("Advantica" or, together with its subsidiaries
including predecessors, the "Company"), through its wholly owned subsidiaries,
Denny's Holdings, Inc. and FRD Acquisition Co. ("FRD") (and their respective
subsidiaries), owns and operates the Denny's, Coco's, Carrows, and El Pollo Loco
restaurant brands. At September 29, 1999, the Company has accounted for El Pollo
Loco ("EPL") as a discontinued operation in its Consolidated Financial
Statements 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" ("APB 30"). See Note 6.
On January 7, 1998 (the "Effective Date"), Flagstar Companies, Inc. ("FCI") and
Flagstar Corporation ("Flagstar") emerged from proceedings under Chapter 11 of
Title 11 of the United States Code pursuant to FCI's 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. FCI's operating subsidiaries, Denny's Holdings, Inc. and FRD (and
their respective subsidiaries), did not file bankruptcy petitions and were not
parties to the above mentioned Chapter 11 proceedings.
The consolidated financial statements of Advantica and its subsidiaries included
herein are unaudited and include all adjustments management believes are
necessary for a fair presentation of the results of operations for such interim
periods. All such adjustments are of a normal and recurring nature. The interim
consolidated financial statements should be read in conjunction with the
Consolidated Financial Statements and notes thereto for the year ended December
30, 1998 and the related Management's Discussion and Analysis of Financial
Condition and Results of Operations, both of which are contained in the
Advantica Restaurant Group, Inc. 1998 Annual Report on Form 10-K. The results of
operations for the three quarters ended September 29, 1999 are not necessarily
indicative of the results for the entire fiscal year ending December 29, 1999.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Note 2. FRESH START REPORTING
As of the Effective Date of the Plan, Advantica adopted fresh start reporting
pursuant to the guidance provided by the American Institute of Certified Public
Accountants' Statement of Position 90-7, "Financial Reporting By Entities In
Reorganization Under the Bankruptcy Code" ("SOP 90-7"). 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." 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 has been reported as "reorganization
value in excess of amounts allocable to identifiable assets, net of accumulated
amortization" in the accompanying Consolidated Balance Sheets. 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.
9
<PAGE>
The results of operations in the accompanying Statement of Operations for the
week ended January 7, 1998 reflect the results of operations prior to
Advantica's emergence from bankruptcy and the effects of fresh start reporting
adjustments. In this regard, the Statement of Operations reflects an
extraordinary gain on the discharge of certain debt as well as reorganization
items consisting primarily of gains and losses related to the adjustments of
assets and liabilities to fair value.
Subsequent to the first 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.
Note 3. ACQUISITION
In March 1999, Denny's, Inc. ("Denny's"), a wholly owned subsidiary of the
Company, purchased 30 operating restaurants in western New York from Perk
Development Corp., a former franchisee of Perkins Family Restaurants, L.P. The
acquisition of the units has been accounted for under the purchase method of
accounting. The purchase price of approximately $24.7 million, consisting of
cash of approximately $10.9 million and capital leases and other liabilities
assumed of approximately $13.8 million, exceeded the estimated fair value of the
restaurants' identifiable assets by approximately $9.5 million. Denny's took
possession of the restaurants on March 1, 1999. By March 8, 1999, 26 units were
opened as Company-owned restaurants and one unit was reopened as a refranchised
restaurant.
Note 4. REPURCHASE OF SENIOR NOTES
In March 1999, the Company repurchased $20 million aggregate principal amount of
its 11 1/4% Senior Notes due 2008 (the "Senior Notes") for approximately $20.8
million, including approximately $469,000 of accrued interest. The repurchase of
the notes resulted in an immaterial gain.
Note 5. NEW FRD CREDIT FACILITY
On May 14, 1999, FRD and certain of its operating subsidiaries entered into a
new credit agreement with The Chase Manhattan Bank ("Chase") and Credit Lyonnais
New York Branch ("Credit Lyonnais") and other lenders named therein and thereby
established a $70 million Senior Secured Credit Facility (the "New FRD Credit
Facility") to replace the bank facility previously in effect for the Company's
Coco's and Carrows operations (the "Old FRD Credit Facility") which was
scheduled to mature in August 1999. The New FRD Credit Facility, which is
guaranteed by Advantica, consists of a $30 million term loan and a $40 million
revolving credit facility and matures in May 2003.
Note 6. DISCONTINUED OPERATIONS
During the second quarter of 1999, the Company announced that a formal plan was
approved by the Board of Directors to explore the sale of EPL. On November 9,
1999, the Company signed a definitive purchase agreement to sell EPL to an
affiliate of American Securities Capital Partners, L.P. for $128 million, which
includes the assumption of $14 million of debt. It is anticipated that the
transaction will be completed during fiscal year 1999 and will result in a gain
upon disposal. The financial statements presented herein have been reclassified
for all periods to reflect EPL as a discontinued operation. In accordance with
APB 30, EPL's results from operations subsequent to the date that EPL was
identified as a discontinued operation (the "measurement date") have been
included as a component of net assets held for sale.
On April 1, 1998, the Company consummated the sale of Flagstar Enterprises, Inc.
("FEI"), the wholly owned subsidiary which had operated Hardee's restaurants
under licenses from Hardee's Food Systems. 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. The Statements of Consolidated Operations and Cash
10
<PAGE>
Flows presented herein for the thirty-eight weeks ended September 30, 1998 and
the one week ended January 7, 1998 reflect FEI and Quincy's as discontinued
operations in accordance with APB 30.
Revenue and operating income of the discontinued operations for the reported
periods are as follows:
<TABLE>
<CAPTION>
Predecessor
Successor Company Company
---------------------------------------------------------------------------------------
Quarter Quarter Three Quarters Thirty-Eight One Week
Ended Ended Ended Weeks Ended Ended
September 29,1999 September 30,1998 September 29, 1999 September 30, 1998 January 7, 1998
----------------- ----------------- ------------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C>
(In millions)
REVENUE
EPL $ 38.5 $ 33.1 $ 107.1 $ 93.3 $ 2.0
FEI --- --- --- 116.2 9.2
Quincy's --- --- --- 78.7 3.5
-------- -------- --------- -------- ---------
$ 38.5 $ 33.1 $ 107.1 $ 288.2 $ 14.7
======== ======== ========= ======== =========
OPERATING INCOME
EPL $ 1.2 $ 0.6 $ 4.6 $ 3.2 $ (0.2)
FEI --- --- --- 5.5 0.2
Quincy's --- --- --- 0.2 (0.1)
-------- -------- --------- -------- ---------
$ 1.2 $ 0.6 $ 4.6 $ 8.9 $ (0.1)
======== ======== ========= ======== =========
</TABLE>
The net assets of EPL are included in Net assets held for sale in the
Consolidated Balance Sheets and consist of the following:
September 29, 1999 December 30, 1998
------------------ -----------------
(In thousands)
Assets
Current assets $ 3,775 $ 4,361
Property owned, net 70,183 63,050
Other assets 67,810 75,729
------------- -----------
141,768 143,140
------------- -----------
Less liabilities
Current liabilities 20,411 16,799
Long-term liabilities 35,003 38,666
------------- -----------
Total liabilities 55,414 55,465
------------- -----------
Net assets held for sale $ 86,354 $ 87,675
============= ===========
11
<PAGE>
Note 7. COMPREHENSIVE INCOME
The Company's comprehensive income for the quarters ended September 29, 1999 and
September 30, 1998 and for the three quarters ended September 29, 1999, the
thirty-eight weeks ended September 30, 1998 and the one week ended January 7,
1998, is as follows:
<TABLE>
<CAPTION>
Predecessor
Successor Company Company
----------------------------------------------------------------------------- ---------------
Quarter Quarter Three Quarters Thirty-Eight One Week
Ended Ended Ended Weeks Ended Ended
September 29,1999 September 30,1998 September 29, 1999 September 30, 1998 January 7, 1998
----------------- ----------------- ------------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Net (loss) income, excluding adjustments
for reorganization and fresh start
reporting for the one week ended
January 7, 1998 $ (45,215) $ (36,540) $ (148,101) $ (132,910) $ (3,087)
Other comprehensive income:
Foreign currency translation
adjustment (53) --- (84) --- ---
---------- ---------- ---------- ----------- ----------
Comprehensive income $ (45,268) $ (36,540) $ (148,185) $ (132,910) $ (3,087)
========== ========== ========== =========== ==========
</TABLE>
12
<PAGE>
Note 8. EARNINGS PER SHARE APPLICABLE TO COMMON SHAREHOLDERS
The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
Predecessor
Successor Company Company
---------------------------------------------------------------------------- ---------------
Quarter Quarter Three Quarters Thirty-Eight One Week
Ended Ended Ended Weeks Ended Ended
September 29,1999 September 30,1998 September 29, 1999 September 30, 1998 January 7, 1998
----------------- ----------------- ------------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C>
(In thousands, except per share amounts)
Numerator:
(Loss) income from continuing operations $ (45,003) $ (34,318) $ (145,423) $ (126,701) $ 647,411
Preferred stock dividends --- --- --- --- (273)
--------- ---------- ---------- ----------- ---------
Numerator for basic (loss) earnings
per share -- (loss) income from
continuing operations available to
common shareholders (45,003) (34,318) (145,423) (126,701) 647,138
--------- ---------- ---------- ----------- ---------
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 $ (45,003) $ (34,318) $ (145,423) $ (126,701) $ 647,411
========= ========== ========== =========== ==========
Denominator:
Denominator for basic earnings per share --
Weighted average shares 40,025 40,010 40,023 40,005 42,434
--------- ---------- ---------- ----------- ----------
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 40,025 40,010 40,023 40,005 55,132
========= ========== ========== =========== ==========
Basic (loss) earnings per share from
continuing operations $ (1.13) $ (0.86) $ (3.63) $ (3.17) $ 15.26
========= ========== ========= =========== ==========
Diluted (loss) earnings per share from $ (1.13) $ (0.86) $ (3.63) $ (3.17) $ 11.74
continuing operations ========= ========== ========= =========== ==========
</TABLE>
The calculations of basic and diluted loss per share have been based on the
weighted average number of Company shares outstanding. Because of the loss from
continuing operations for the quarters ended September 29, 1999 and September
30, 1998 and for the three quarters ended September 29, 1999 and the
thirty-eight weeks ended September 30, 1998, warrants and options of the
Successor Company have been omitted from the calculation of weighted average
dilutive shares for those periods.
13
<PAGE>
Note 9. SEGMENT INFORMATION
The Company currently operates four restaurant concepts -- Denny's, Coco's,
Carrows and El Pollo Loco -- and each concept is considered a reportable
segment. El Pollo Loco has been reclassified as a discontinued operation in the
consolidated financial statements; therefore, its operating results are shown
separately in this section. The "Corporate and other" segment consists primarily
of corporate operations.
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"). EBITDA as defined 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, or as a measure of a company's
profitability or liquidity. The Company's measure of EBITDA as defined may not
be comparable to similarly titled measures reported by other companies.
<TABLE>
<CAPTION>
Predecessor
Successor Company Company
----------------------------------------------------------------------------- ---------------
Quarter Quarter Three Quarters Thirty-Eight One Week
Ended Ended Ended Weeks Ended Ended
September 29,1999 September 30, 1998 September 29, 1999 September 30, 1998 January 7, 1998
----------------- ------------------ ------------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C>
(In millions)
REVENUE
Denny's $ 313.1 $ 310.3 $ 907.6 $ 858.4 $ 23.2
Coco's 56.1 65.0 168.2 191.4 4.9
Carrows 41.9 47.3 124.0 138.4 3.5
Corporate and other 0.7 --- 2.3 --- ---
--------- -------- --------- --------- --------
Total consolidated revenue from
continuing operations $ 411.8 $ 422.6 $ 1,202.1 $ 1,188.2 $ 31.6
========= ======== ========= ========= ========
Revenue from discontinued operations:
El Pollo Loco $ 38.5 $ 33.1 $ 107.1 $ 93.3 $ 2.0
========= ======== ========= ========= ========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Predecessor
Successor Company Company
----------------------------------------------------------------------------- ---------------
Quarter Quarter Three Quarters Thirty-Eight One Week
Ended Ended Ended Weeks Ended Ended
September 29,1999 September 30, 1998 September 29, 1999 September 30, 1998 January 7, 1998
----------------- ------------------ ------------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C>
(In millions)
EBITDA AS DEFINED
Denny's $ 52.9 $ 52.9 $ 134.8 $ 127.2 $ 11.1
Coco's 6.4 10.2 19.2 27.8 0.8
Carrows 5.6 4.9 13.2 15.7 ---
Corporate and other (7.8) (8.5) (24.8) (21.0) (1.5)
-------- -------- --------- -------- --------
Total EBITDA as defined from
continuing reportable segments 57.1 59.5 142.4 149.7 10.4
Eliminate EBITDA as defined from
intersegment transactions --- (2.6) --- (2.6) ---
-------- -------- --------- --------- --------
Total EBITDA as defined from
continuing operations 57.1 56.9 142.4 147.1 10.4
Depreciation and amortization expense (75.6) (65.0) (208.3) (192.9) (1.6)
Other charges:
Interest expense, net (27.6) (25.7) (80.1) (78.2) (2.5)
Other, net 0.8 (0.0) (0.4) (1.2) 0.3
Reorganization items --- --- --- --- 627.0
-------- -------- --------- --------- --------
Consolidated (loss) income from
continuing operations before income
taxes and extraordinary items $ (45.3) $ (33.8) $ (146.4) $ (125.2) $ 633.6
======== ======== ========= ========= ========
EBITDA as defined from discontinued operations:
El Pollo Loco $ 6.7 $ 5.1 $ 20.0 $ 16.7 $ (0.1)
======== ======== ========= ========= ========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to highlight significant changes in
financial position as of September 29, 1999 and the results of operations for
the quarter and three quarters ended September 29, 1999 as compared to the
quarter ended September 30, 1998 and the thirty-eight weeks ended September 30,
1998 and one week ended January 7, 1998. For purposes of providing a meaningful
comparison of the Company's year-to-date operating performance, the following
discussion and presentation of the results of operations for the thirty-eight
weeks ended September 30, 1998 and the one week ended January 7, 1998 will be
combined and referred to as the three quarters ended September 30, 1998. Where
appropriate, the impact of the adoption of fresh start reporting on the results
of operations during this period will be separately disclosed.
The forward-looking statements included in Management's Discussion and Analysis
of Financial Condition and Results of Operations, including its "Strategic
Focus" and "Impact of the Year 2000" sections, which reflect management's best
judgment based on factors currently known, involve risks, uncertainties, and
other factors which may cause the actual performance of Advantica and its
subsidiaries and underlying concepts to be materially different from the
performance indicated or implied by such statements. Words such as "expects,"
"anticipates," "believes," "projects," "intends," "plans" and "hopes,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. Factors that could cause actual performance to
differ materially from the performance indicated by such statements include,
among others: competitive pressures from within the restaurant industry; the
level of success of the Company's operating initiatives and advertising and
promotional efforts, including the initiatives and efforts specifically
mentioned herein; the ability of the Company to mitigate the impact of the Year
2000 issue successfully; adverse publicity; changes in business strategy or
development plans; terms and availability of capital; regional weather
conditions; overall changes in the general
15
<PAGE>
economy, particularly at the retail level; and other factors included in the
discussion below, or in the Management's Discussion and Analysis of Financial
Condition and Result of Operations in, and Exhibit 99 to, the Company's Annual
Report on Form 10-K for the period ended December 30, 1998.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 29, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998
The Company's CONSOLIDATED REVENUE for the third quarter of 1999 decreased $10.8
million (2.6%) compared to the third quarter of 1998. Company restaurant sales
decreased $14.4 million primarily due to a net 44-unit decrease in Company-owned
restaurants. Franchise and licensing revenue increased $3.6 million, primarily
attributable to a 117-unit increase in Denny's, Coco's and Carrows' franchised
and licensed restaurants. Denny's reported revenue growth resulting from
increased franchise revenue in the quarter. The revenue increase at Denny's was
offset, however, by lower revenue at Coco's and Carrows, where fewer
Company-owned units and lower same-store sales resulted in 13.8% and 11.4%
declines in revenue, respectively.
CONSOLIDATED OPERATING EXPENSES decreased $0.4 million (0.1%) compared to the
prior year quarter. Excluding the impact of a $10.2 million increase in
depreciation and other amortization and a $2.0 million increase in refranchising
and other gains, operating expenses decreased $8.6 million. This decrease is
primarily attributable to a net decrease of 44 Company-owned restaurants,
partially offset by increases in payroll costs. Increased payroll costs resulted
from higher wage rates driven by market conditions. In addition, prior year
payroll costs benefitted from adjustments related to improvements in workers'
compensation and health benefits actuarial trends. The increase in depreciation
and other amortization is primarily the result of the retirement of assets
replaced in conjunction with recently reimaged units.
The Company's consolidated EBITDA AS DEFINED increased $0.2 million (0.4%)
compared to the prior year quarter as a result of the factors discussed in the
preceding paragraphs, excluding the increase in depreciation and other
amortization.
CONSOLIDATED OPERATING LOSS increased $10.4 million compared to the prior year
quarter as a result of the factors noted above.
CONSOLIDATED INTEREST EXPENSE, NET, totaled $27.6 million for the third quarter
of 1999, an increase of $1.9 million compared to the prior year quarter. This
increase in interest expense, net, resulted primarily from a decrease in
interest income on lower cash balances partially offset by a decrease in
interest expense from lower debt balances. For the quarter ended September 29,
1999, $2.4 million of interest expense has been allocated to discontinued
operations compared to $2.8 million in the prior year quarter.
The PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations for the
quarter ended September 29, 1999 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 0.7% for the third quarter of 1999 compared to an income
tax provision of approximately 1.5% for the third quarter of 1998.
The Statements of Consolidated Operations and Cash Flows presented herein have
been reclassified for the quarters ended September 29, 1999 and September 30,
1998 to reflect EPL as DISCONTINUED OPERATIONS in accordance with APB 30.
Revenue and operating income of EPL for the quarters ended September 29, 1999
and September 30, 1998 were $38.5 million and $1.2 million and $33.1 million and
$0.6 million, respectively. Loss from operations of discontinued operations
decreased $1.0 million compared to the prior year quarter as a result of
improved operating results at EPL in the current quarter. The $1.0 million of
EPL's net loss incurred subsequent to the measurement date is included as a
component of net assets held for sale. Including this portion of EPL's loss, the
loss from operations of discontinued operations decreased $2.0 million.
16
<PAGE>
NET LOSS was $45.2 million for the third quarter of 1999 compared to a net loss
of $36.5 million for the third quarter of 1998, primarily as a result of the
factors discussed above.
Restaurant Operations:
The table below summarizes restaurant unit activity for the quarter ended
September 29, 1999.
<TABLE>
<CAPTION>
Ending Units Net Ending Ending
Units Units Sold/ Units Units Units
June 30, 1999 Opened Closed Refranchised September 29, 1999 September 30, 1998
------------- ------ ------ ------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Denny's
Company-owned units 883 1 (4) (11) 869 887
Franchised units 862 22 (16) 11 879 794
Licensed units 17 -- -- -- 17 18
-------- ------ ------ ----- ------- --------
1,762 23 (20) -- 1,765 1,699
Coco's
Company-owned units 150 -- -- -- 150 160
Franchised units 34 -- -- -- 34 19
Licensed units 301 5 (1) -- 305 299
-------- ------ ------ ----- ------- --------
485 5 (1) -- 489 478
Carrows
Company-owned units 120 -- -- -- 120 136
Franchised units 27 1 -- -- 28 16
-------- ------ ------- ----- ------- --------
147 1 -- -- 148 152
-------- ------ ------- ----- ------- --------
2,394 29 (21) -- 2,402 2,329
Assets Held for Sale:
El Pollo Loco
Company-owned units 108 5 -- 2 115 100
Franchised units 157 -- -- (2) 155 157
Licensed units 4 -- -- -- 4 4
-------- ------ ------- ----- ------- --------
269 5 -- -- 274 261
-------- ------ ------- ----- ------- --------
2,663 34 (21) -- 2,676 2,590
======== ====== ======= ===== ======= ========
</TABLE>
17
<PAGE>
DENNY'S
<TABLE>
<CAPTION>
Quarter Ended %
September 29, 1999 September 30, 1998 Increase/(Decrease)
------------------ ------------------ -------------------
<S> <C> <C> <C>
($ in millions, except average unit data)
U.S. systemwide sales $ 555.5 $ 523.0 6.2
========= =========
Net company sales $ 297.0 $ 297.0 ---
Franchise and licensing revenue 16.1 13.4 20.1
--------- ---------
Total revenue 313.1 310.4 0.9
--------- ---------
Operating expenses:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 20.3 19.8 2.5
Other 294.8 279.8 5.4
--------- ---------
Total operating expenses 315.1 299.6 5.2
--------- ---------
Operating (loss) income $ (2.0) $ 10.8 NM
========= =========
EBITDA as defined $ 52.9 $ 52.9 ---
Average unit sales
Company-owned 340,800 338,500 0.7
Franchised 307,200 294,400 4.3
Same-store sales increase (Company-owned) 1.4% 2.6%
NM = Not Meaningful
</TABLE>
Denny's NET COMPANY SALES for the third quarter of 1999 were comparable to the
third quarter of 1998. The effect of the increase in same-store sales was offset
by a decrease in Denny's Company-owned stores. The increase in same-store sales
was driven primarily by a higher guest check average resulting from successful
promotions of higher-priced menu items and from moderate price increases.
FRANCHISE AND LICENSING REVENUE increased $2.7 million (20.1%), primarily
attributable to a net increase of 85 franchised units over the prior year
quarter.
Denny's OPERATING EXPENSES increased $15.5 million (5.2%) compared to the prior
year quarter. Excluding the impact of a $12.4 million increase in depreciation
and amortization expense and a $2.6 million increase in refranchising and other
gains, operating expenses increased $5.7 million. The increase is primarily the
result of increased payroll costs, offset slightly by a decrease in product
costs. Increased payroll costs in the current year resulted from higher wage
rates driven by market conditions. In addition, prior year payroll costs
benefitted from adjustments related to improvements in workers' compensation and
health benefits actuarial trends. The increase in depreciation and amortization
expense resulted primarily from the retirement of assets replaced in conjunction
with recently reimaged restaurants.
EBITDA AS DEFINED was comparable to the prior year quarter as a result of the
factors noted in the preceding paragraphs, excluding the increase in
depreciation and other amortization.
Denny's OPERATING INCOME decreased $12.8 million compared to the prior year
quarter as a result of the factors noted above.
18
<PAGE>
COCO'S
<TABLE>
<CAPTION>
Quarter Ended %
September 29, 1999 September 30, 1998 Increase/(Decrease)
------------------ ------------------ -------------------
<S> <C> <C> <C>
($ in millions, except average unit data)
U.S. systemwide sales $ 66.0 $ 70.0 (5.7)
======== ========
Net company sales $ 54.5 $ 64.0 (14.8)
Franchise and licensing revenue 1.6 1.1 45.5
-------- --------
Total revenue 56.1 65.1 (13.8)
-------- --------
Operating expenses:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 5.2 5.4 (3.7)
Other 53.5 62.5 (14.4)
-------- --------
Total operating expenses 58.7 67.9 (13.5)
-------- --------
Operating loss $ (2.6) $ (2.8) 7.1
======== ========
EBITDA as defined $ 6.4 $ 7.6 (15.8)
Average unit sales
Company-owned 364,800 369,900 (1.4)
Franchised 336,200 340,500 (1.3)
Same-store sales decrease (Company-owned) (5.6%) (1.6%)
</TABLE>
Coco's NET COMPANY SALES for the third quarter of 1999 decreased $9.5 million
(14.8%) compared to the third quarter of 1998. This decline reflects a decrease
in same-store sales and lower revenue due to 23 fewer Company-owned restaurants
than last year (including 13 Company-owned restaurants sold on the last day of
the prior year quarter). FRANCHISE AND LICENSING REVENUE increased $0.5 million
(45.5%), primarily attributable to a net increase of 15 franchised units and six
licensed units over the prior year quarter.
Coco's OPERATING EXPENSES decreased $9.2 million (13.5%) compared to the prior
year quarter, primarily resulting from sales declines and a decrease in
Company-owned restaurants. Additionally, operating expenses decreased in the
current year quarter due to a nonrecurring reduction of an environmental
accrual, which is reflected as a credit to operating expenses. Depreciation and
other amortization decreased primarily as a result of a significant group of
assets becoming fully depreciated in the second quarter of the current year. The
decrease in operating expenses is partially offset by increased labor costs due
to higher wage rates driven by market conditions.
EBITDA AS DEFINED decreased $1.2 million (15.8%) compared to the prior year
quarter as a result of the factors noted in the preceding paragraphs, excluding
the decrease in depreciation and other amortization.
Coco's OPERATING INCOME increased $0.2 million compared to the prior year
quarter as a result of the factors noted above.
19
<PAGE>
CARROWS
<TABLE>
<CAPTION>
Quarter Ended %
September 29, 1999 September 30, 1998 Increase/(Decrease)
------------------ ------------------ -------------------
<S> <C> <C> <C>
($ in millions, except average unit data)
U.S. systemwide sales $ 48.3 $ 51.7 (6.6)
======== ========
Net company sales $ 41.2 $ 46.9 (12.2)
Franchise and licensing revenue 0.7 0.4 75.0
-------- --------
Total revenue 41.9 47.3 (11.4)
-------- --------
Operating expenses:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 4.5 4.4 2.3
Other 39.0 46.4 (15.9)
-------- --------
Total operating expenses 43.5 50.8 (14.4)
-------- --------
Operating loss $ (1.6) $ (3.5) 54.3
======== ========
EBITDA as defined $ 5.6 $ 4.9 14.3
Average unit sales
Company-owned 343,900 343,000 0.3
Franchised 259,500 274,400 (5.4)
Same-store sales decrease (Company-owned) (3.7%) (2.1%)
</TABLE>
Carrows' NET COMPANY SALES for the third quarter of 1999 decreased $5.7 million
(12.2%) compared to the third quarter of 1998. The decrease reflects a 16-unit
decrease in Company-owned restaurants and a decrease in same-store sales.
FRANCHISE AND LICENSING REVENUE increased $0.3 million primarily attributable to
a net increase of 12 franchised units over the prior year quarter.
Carrows' OPERATING EXPENSEs decreased $7.3 million (14.4%) compared to the prior
year quarter, primarily resulting from sales declines, fewer Company-owned
restaurants and management's continued focus on cost controls. Additionally,
operating expenses decreased in the current year quarter due to a nonrecurring
reduction of an environmental accrual, which is reflected as a credit to
operating expenses. Depreciation and other amortization decreased primarily as a
result of a significant group of assets becoming fully depreciated in the second
quarter of the current year. The decrease in operating expenses is partially
offset by increased labor costs due to higher wage rates driven by market
conditions.
EBITDA AS DEFINED increased $0.7 million (14.3%) compared to the prior year
quarter as a result of the factors noted in the preceding paragraphs, excluding
the decrease in depreciation and other amortization.
Carrows' OPERATING INCOME increased $1.9 million compared to the prior year
quarter as a result of the factors noted above.
20
<PAGE>
RESULTS OF OPERATIONS
THREE QUARTERS ENDED SEPTEMBER 29, 1999 COMPARED TO THREE QUARTERS ENDED
SEPTEMBER 30, 1998
The Company's CONSOLIDATED REVENUE for the three quarters ended September 29,
1999 decreased $17.7 million (1.4%) compared to the 1998 comparable period.
Company restaurant sales decreased $25.7 million primarily due to a net 44-unit
decrease in Company-owned restaurants, partially offset by higher sales at
Denny's. Franchise and licensing revenue increased $8.0 million, primarily
attributable to a 117-unit increase in Denny's, Coco's and Carrows' franchised
and licensed restaurants. Denny's reported revenue increases reflecting positive
same-store sales growth and increased franchise revenue in the period. The
revenue growth at Denny's was offset, however, by lower revenue at Coco's and
Carrows, where fewer Company-owned units and lower same-store sales resulted in
14.3% and 12.6% declines in revenue, respectively.
CONSOLIDATED OPERATING EXPENSES increased $11.2 million (0.9%) compared to the
prior year comparable period. Excluding the impact of a $16.6 million increase
in depreciation and other amortization and a $0.9 million decrease in
refranchising and other gains, operating expenses decreased $6.3 million. This
decrease is primarily attributable to a net decrease of 44 Company-owned
restaurants, partially offset by increases in payroll costs. Increased payroll
costs resulted from higher wage rates driven by market conditions. General and
administrative expenses increased compared to the prior year as a result of an
insurance recovery in the prior year period which was reflected as a credit to
operating expenses in the prior year period. The increase in depreciation and
other amortization is the result of the retirement of assets replaced in
conjunction with recently reimaged units and the revaluation of assets and
liabilities in accordance with fresh start reporting. The revaluation was
completed during the latter half of 1998 and resulted in increased depreciation
and other amortization being recorded in subsequent 1998 and 1999 quarters.
The Company's consolidated EBITDA AS DEFINED decreased $15.1 million (9.6 %)
compared to the prior year comparable period. This decrease is a result of the
factors noted in the preceding paragraphs, excluding the increase in
depreciation and other amortization.
CONSOLIDATED OPERATING INCOME decreased $28.9 million compared to the prior year
comparable period as a result of the factors noted above.
CONSOLIDATED INTEREST EXPENSE, NET, totaled $80.1 million for the three quarters
ended September 29, 1999, a decrease of $0.7 million (0.8%) compared to the
prior year comparable period. The decrease in interest expense, net, is
attributable primarily to lower debt balances in the current year period, offset
by a decrease in interest income in the current period due to decreased cash
balances and by a decrease in the allocation of interest expense to discontinued
operations. For the three quarters ended September 29, 1999, $8.3 million of
interest expense has been allocated to discontinued operations compared to $11.5
million in the prior year period.
REORGANIZATION ITEMS recorded in the one week ended January 7, 1998 include
professional fees and other expenditures incurred by the Company in conjunction
with the reorganization as well as the impact of adjusting assets and
liabilities to fair value in accordance with SOP 90-7 as discussed in Note 2 to
the consolidated financial statements included herein.
The PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations for the
three quarters ended September 29, 1999 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 0.7% for the three quarters ended September 29, 1999
compared to an income tax provision of approximately 1.2% for the thirty-eight
weeks ended September 30, 1998. 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.
21
<PAGE>
The EXTRAORDINARY ITEM recorded in the one week ended January 7, 1998 relates to
the implementation of the Plan which resulted in the exchange of the Company's
Senior Subordinated Debentures and 10% Convertible Debentures previously
outstanding for 40 million shares of common stock of Advantica and warrants to
purchase an additional 4 million shares of Advantica common stock. The
difference between the carrying value of such debt (including principal, accrued
interest and deferred financing costs) and the fair value of the common stock
and warrants resulted in a gain on debt extinguishment of $612.8 million which
was recorded as an extraordinary item.
The Statements of Consolidated Operations and Cash Flows presented herein have
been reclassified for the three quarters ended September 29, 1999, the
thirty-eight weeks ended September 30, 1998 and the one week ended January 7,
1998 to reflect EPL as DISCONTINUED OPERATIONS in accordance with APB 30.
Revenue and operating income (loss) of EPL for the three quarters ended
September 29, 1999, the thirty-eight weeks ended September 30, 1998 and the one
week ended January 7, 1998 were $107.1 million and $4.6 million, $93.3 million
and $3.2 million, and $2.0 million and $(0.2) million, respectively.
Additionally, the Statements of Consolidated Operations and Cash Flows presented
herein for the three quarters ended September 30, 1998 also reflect FEI and
Quincy's as discontinued operations. FEI and Quincy's revenue and operating
income for the thirty-eight weeks ended September 30, 1998 and the one week
ended January 7, 1998 were $194.9 million and $5.7 million and $12.7 million and
$0.1 million, respectively. Loss from operations of discontinued operations
decreased $4.0 million compared to the prior year period as a result of the
completion of the FEI and Quincy's sales during 1998 and improved operating
results at EPL in the current year period. The $1.0 million of EPL's net loss
incurred subsequent to the measurement date is included as a component of net
assets held for sale. Including this portion of EPL's loss, the loss from
operations of discontinued operations decreased $5.0 million.
NET LOSS was $148.1 million for the three quarters ended September 29, 1999
compared to net income of $1.3 billion for the 1998 comparable period, primarily
as a result of the adoption of fresh start reporting and the extraordinary gain
recorded in the prior year period.
22
<PAGE>
Restaurant Operations:
DENNY'S
<TABLE>
<CAPTION>
Three Quarters Ended %
September 29, 1999 September 30, 1998 Increase/(Decrease)
------------------ ------------------ -------------------
<S> <C> <C> <C>
($ in millions, except average unit data)
U.S. systemwide sales $ 1,576.6 $ 1,467.9 7.4
========= ===========
Net company sales $ 863.7 $ 843.7 2.4
Franchise and licensing revenue 43.9 37.9 15.8
--------- -----------
Total revenue 907.6 881.6 2.9
--------- -----------
Operating expenses:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 60.6 57.8 4.8
Other 855.5 808.3 5.8
--------- -----------
Total operating expenses 916.1 866.1 5.8
--------- -----------
Operating income $ (8.5) $ 15.5 NM
========= ===========
EBITDA as defined $ 134.8 $ 138.3 (2.5)
Average unit sales
Company-owned 985,900 962,200 2.5
Franchised 856,100 822,200 4.1
Same-store sales increase (Company-owned) 3.0% 0.3%
NM = Not Meaningful
</TABLE>
Denny's NET COMPANY SALES for the three quarters ended September 29, 1999
increased $20.0 million (2.4%) compared to the 1998 comparable period. The
increase reflects growth in same-store sales driven primarily by a higher guest
check average. The increase in guest check average resulted from successful
promotions of higher-priced food items and from moderate price increases.
FRANCHISE AND LICENSING REVENUE increased $6.0 million (15.8%), primarily
attributable to a net increase of 85 franchised units over the prior year
period.
Denny's OPERATING EXPENSES increased $50.0 million (5.8%) compared to the prior
year comparable period. Excluding the impact of a $17.3 million increase in
depreciation and other amortization and a $1.3 million decrease in refranchising
and other gains, operating expenses increased $31.4 million. This increase is
primarily the result of increased sales and higher labor costs. Increased
payroll costs resulted from higher wage rates driven by market conditions. The
increase in depreciation and other amortization is the result of the retirement
of assets replaced in conjunction with recently reimaged units and the
revaluation of assets and liabilities in accordance with fresh start reporting.
The revaluation was completed during the latter half of 1998 and resulted in
increased depreciation and other amortization being recorded in subsequent 1998
and 1999 quarters.
EBITDA AS DEFINED decreased $3.5 million compared to the prior year comparable
period as a result of the factors noted in the preceding paragraphs, excluding
the increase in depreciation and other amortization.
Denny's OPERATING INCOME decreased $24.0 million compared to the prior year
comparable period as a result of the factors noted above.
23
<PAGE>
COCO'S
<TABLE>
<CAPTION>
Three Quarters Ended %
September 29, 1999 September 30, 1998 Increase/(Decrease)
------------------ ------------------ -------------------
<S> <C> <C> <C>
($ in millions, except average unit data)
U.S. systemwide sales $ 196.1 $ 210.4 (6.8)
========= =========
Net company sales $ 163.7 $ 193.2 (15.3)
Franchise and licensing revenue 4.5 3.1 45.2
--------- ---------
Total revenue 168.2 196.3 (14.3)
--------- ---------
Operating expenses:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 15.7 16.2 (3.1)
Other 162.2 185.1 (12.4)
--------- ---------
Total operating expenses 177.9 201.3 (11.6)
---------- ---------
Operating loss $ (9.7) $ (5.0) (94.0)
========== =========
EBITDA as defined $ 19.2 $ 26.0 (26.2)
Average unit sales
Company-owned 1,093,400 1,115,600 (2.0)
Franchised 968,400 1,005,000 (3.6)
Same-store sales decrease (Company-owned) (6.1%) (0.8%)
</TABLE>
Coco's NET COMPANY SALES for the three quarters ended September 29, 1999
decreased $29.5 million (15.3%) compared to the 1998 comparable period. The
decrease reflects lower same-store sales and fewer Company-owned restaurants.
FRANCHISE AND LICENSING REVENUE increased $1.4 million (45.2%), primarily
attributable to a net increase of 15 domestic franchised units and six licensed
restaurants over the prior year comparable period.
Coco's OPERATING EXPENSES decreased $23.4 million (11.6%) compared to the prior
year comparable period, primarily reflecting the decrease in Company-owned
restaurants. Additionally, depreciation and other amortization decreased
primarily as a result of a significant group of assets becoming fully
depreciated in the second quarter of the current year.
EBITDA AS DEFINED decreased $6.8 million (26.2%) compared to the prior year
comparable period as a result of the factors noted in the preceding paragraphs,
excluding the decrease in depreciation and other amortization.
Coco's OPERATING INCOME decreased $4.7 million compared to the prior year
comparable period as a result of the factors noted above.
24
<PAGE>
CARROWS
<TABLE>
<CAPTION>
Three Quarters Ended %
September 29, 1999 September 30, 1998 Increase/(Decrease)
------------------ ------------------ -------------------
<S> <C> <C> <C>
($ in millions, except average unit data)
U.S. systemwide sales $ 143.1 $ 154.5 (7.4)
=========== ===========
Net company sales $ 122.1 $ 140.7 (13.2)
Franchise and licensing revenue 1.9 1.2 58.3
----------- -----------
Total revenue 124.0 141.9 (12.6)
----------- -----------
Operating expenses:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 13.4 12.9 3.9
Other 120.7 137.7 (12.3)
----------- -----------
Total operating expenses 134.1 150.6 (11.0)
----------- -----------
Operating loss $ (10.1) $ (8.7) (16.1)
=========== ===========
EBITDA as defined $ 13.2 $ 15.7 (15.9)
Average unit sales
Company-owned 1,017,800 1,024,000 (0.6)
Franchised 785,500 850,200 (7.6)
Same-store sales decrease (Company-owned) (3.9%) (1.6%)
</TABLE>
Carrows' NET COMPANY SALES for the three quarters ended September 29, 1999
decreased $18.6 million (13.2%) compared to the 1998 comparable period. This
decrease reflects lower same-store sales and fewer Company-owned restaurants.
FRANCHISE AND LICENSING REVENUE increased $0.7 million for the three quarters
ended September 29, 1999 compared to the 1998 comparable period. This increase
resulted from a net increase of 12 domestic franchise units over the prior year.
Carrows' OPERATING EXPENSES decreased $16.5 million (11.0%) compared to the
prior year comparable period, reflecting a decrease in Company-owned restaurants
and management's continued focus on cost controls. Additionally, depreciation
and other amortization decreased primarily as a result of a significant group of
assets becoming fully depreciated in the second quarter of the current year.
EBITDA AS DEFINED decreased $2.5 million (15.9%) compared to the prior year
comparable period as a result of the factors noted in the preceding paragraphs,
excluding the decrease in depreciation and other amortization.
Carrows' OPERATING INCOME decreased $1.4 million compared to the prior year
comparable period as a result of the factors noted above.
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On the Effective Date, the Company entered into a credit agreement with Chase
and other lenders named therein providing the Company (excluding FRD) with a
senior secured revolving credit facility (the "Credit Facility") which includes
a working capital and letter of credit facility of up to a total of $200 million
and matures in January 2003, subject to earlier termination on March 31, 2000 in
the event that Advantica's currently outstanding mortgage financings have not
been refinanced on or prior to such date. At September 29, 1999, Advantica had
no outstanding working capital advances against the Credit Facility, and letters
of credit outstanding were $42.7 million.
In connection with the acquisition of Coco's and Carrows, FRD entered into the
Old FRD Credit Facility on May 23, 1996. Because of covenant limitations under
Advantica's and FRD's various financing documents, the Company's ability to make
further investments in FRD to upgrade its Coco's and Carrows concepts was
severely limited. In an effort to address this issue and otherwise improve FRD's
financial flexibility, during the first half of 1999, the Company (1) designated
FRD and its subsidiaries as restricted subsidiaries in accordance with the terms
of Advantica's 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) effective May 14, 1999, entered into the
New FRD Credit Facility which consists of a $30 million term loan and a $40
million revolving credit facility and matures in May 2003 (see Note 5 to the
consolidated financial statements). The New FRD Credit Facility, which is
guaranteed by Advantica, refinanced the Old FRD Credit Facility and is available
to fund Coco's and Carrows' capital expenditures and for general corporate
purposes. Such facility is not available to Advantica and its other
subsidiaries. At September 29, 1999, FRD and its subsidiaries had $30.0 million
outstanding term loan borrowings, no outstanding working capital borrowings and
letters of credit outstanding of $12.7 million.
In March 1999, the Company repurchased $20 million aggregate principal amount of
its Senior Notes, as also permitted by the Credit Facility amendments referenced
above, for approximately $20.8 million, including approximately $469,000 of
accrued interest. The repurchase of the notes resulted in an immaterial gain.
On or prior to July 12, 2000, the Company will be required to repay or refinance
the $160 million 11.03% mortgage notes payable which are secured by a pool of
cross-collateralized mortgages on 240 Denny's restaurants properties. During the
third quarter, the Company began preliminary discussions with certain financial
institutions regarding the refinancing or replacement of such facility.
Although there are no assurances in this regard, management believes that,
through a combination of cash on hand and available debt capacity, the Company
will be successful in repaying or refinancing such facility within applicable
time periods.
As of September 29, 1999 and December 30, 1998, the Company had working capital
deficits, exclusive of net assets held for sale, of $299.6 million and $83.7
million, respectively. The increase in the deficit is attributable primarily to
the reclassification of the $160 million 11.03% mortgage notes payable to
current liabilities, debt-related interest payments, the repurchase of Senior
Notes for approximately $20.8 million and the acquisition of certain Perkins
restaurants by Denny's for approximately $10.9 million cash and the assumption
of capital leases and other liabilities (see Note 4 to the consolidated
financial statements). The Company is able to operate with a substantial working
capital deficit because (1) restaurant 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 related sales.
As of September 29, 1999, the Company had cash balances of $87.2 million
consisting of $82.9 million at the Advantica level and $4.3 million at the FRD
level. The Company believes that these cash balances, the availability of funds
under the Credit Facility and the New FRD Credit Facility and future operating
cash flows will be sufficient to fund its major capital
26
<PAGE>
reimaging and remodeling programs that it is undertaking at its Denny's and
Coco's concepts in order to expand its customer base and enhance value. Subject
to applicable restrictions, the Company plans, from time to time, to consider
using its cash resources for the purchase of its securities.
STRATEGIC FOCUS
As indicated in prior reports, the Company's primary objective is to maintain
and enhance shareholder value over time through its restaurant operations.
Management believes this objective can be attained through investment in its
restaurants, by reducing the Company's debt through the reduction of debt over
time and by improving its restaurant operations. These tactics are not mutually
exclusive and must be accomplished if shareholder value is to be enhanced.
During the third quarter and into the fourth quarter of 1999, the Company has
continued to invest in its Denny's brand. Denny's has reimaged 110 units to date
and expects to complete 140 reimages for the full year. The initial results from
the completed units show year-over-year same-store sales increases of 10
percent, which exceeds the Company's minimum return requirements. These initial
results are encouraging; however, the Company realizes that the results must be
sustainable over a longer period. Accordingly, during the early part of next
year, the Company intends to slow the reimaging pace at Denny's and to evaluate
and fine tune the reimage elements of the initial group of restaurants completed
during 1999. Additionally, the Company continues to strive to lower the cost of
the reimaging program to enhance its potential long-term return. The Company
continues to believe that capital must be invested in Denny's to offer a more
contemporary dining experience to its customers and to ensure its leadership
position in family dining.
During the first three quarters of 1999, the Company completed the reimaging
of 12 Coco's Cafe and Bakery restaurants in Southern California. Nine of these
units were completed late in the third quarter; accordingly, it is too early to
measure the returns. Coco's plans to evaluate the post-reimage performance of
these restaurants through the first quarter of next year before beginning a full
rollout of the program. Additionally, Coco's is developing an alternative
reimage package which will be available for implementation at a lower cost in
certain markets as appropriate. As with Denny's, the Company believes that
Coco's must invest capital into its older facilities to attract new customers
and retain its existing customer base against constant competitive pressures.
Although the Company believes that a program of reinvestment in its restaurants
must be undertaken to prevent a deterioration in value and long-term potential
of its family dining brands, the Company will continue to explore ways to reduce
debt. Since its emergence from restructuring in early 1998, the Company has sold
two declining businesses, Hardee's (FEI) and Quincy's, and used the majority of
those proceeds to reduce debt significantly and to invest in its restaurants.
The proceeds from the sale of El Pollo Loco will provide an opportunity to
reduce the Company's debt further. The Company continues to believe that
reinvestment in its restaurants and the prudent delevering of the Company will,
over time, enhance shareholder value.
To assist the Company in attaining its objective, McKinsey & Company
("McKinsey"), a global business consulting firm, has been retained. McKinsey
will provide analysis, evaluation and consideration of strategic alternatives to
improve business efficiencies. Accordingly, McKinsey will focus on
implementation of "best practices" techniques within the Company's restaurant
operations and corporate support functions, as well as provide recommendations
designed to provide the most efficient business model for maximizing Advantica's
enterprise value. The review is expected to be completed early next year.
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
27
<PAGE>
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. Over the past two years,
the Company has had 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 consisted of three main areas: (a) information
systems, (b) supply chain and critical third party readiness and (c) business
equipment. An executive steering committee, comprised of senior executives from
all functional areas, oversaw all Year 2000 efforts and reported to the Board of
Directors regularly. The Company utilized both internal and external resources
to inventory, assess, remediate, replace and test its systems for Year 2000
compliance.
The Company performed an assessment of the impact of the Year 2000 issue and
determined that a significant portion of its software applications needed to be
modified or replaced so that its systems would properly recognize dates beyond
December 31, 1999. For the most part, the Company replaced existing systems.
Based on current estimates, it is anticipated that total Company spending in
1999 related to Year 2000 remediation efforts will be approximately $16 million.
Of that amount, the Company estimates that by year end a total of approximately
$13 million expended to develop or purchase new software will have been
capitalized.
All Year 2000 projects addressing critical business issues are complete.
Financial systems that are critical to the Company's operations became Year 2000
compliant by the end of June 1999, and restaurant systems became compliant by
September 1999. Incremental testing of some lower priority systems is in process
to provide further assurance of Year 2000 compliance.
The nature of its business makes the Company very dependent on critical
suppliers and service providers, and failure of such third parties to address
the Year 2000 issues adequately could have a material impact on the Company's
ability to conduct its business. To address these concerns, the Company has had
a dedicated team in place to assess the Year 2000 readiness of all third parties
on which it depends. Surveys were sent to critical suppliers and service
providers and each survey response was 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 were performed for critical suppliers and service
providers. For any critical supplier or service providers which did not provide
the company with satisfactory evidence of their Year 2000 readiness, contingency
plans were developed which included establishing alternative sources for the
product or service provided. The Company also communicated with its franchise
business partners regarding Year 2000 business risks. The Company's costs
associated with the Year 2000 issues exclude 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 inventoried and determined the business criticality of all
restaurant equipment. Based on its 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
operations. The Company conducted an inventory and assessment of its facilities
at its corporate offices and corrected 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. The Company has established contingency plans addressing
business-critical processes for operations and other critical corporate
functions. In addition, the Company has developed a detailed Year 2000 rollover
plan and communications strategy, and has frozen system changes until the first
quarter of 2000. A team is in place to validate that systems are functioning
correctly once year 2000 arrives and to quickly address issues should they
arise.
28
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The following are included as exhibits to this report:
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule.
- ------------------------------------
b. No reports on Form 8-K were filed during the quarter ended
September 29, 1999.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANTICA RESTAURANT GROUP, INC.
Date: November 12, 1999 By: /s/ Rhonda J. Parish
---------------------------------------
Rhonda J. Parish
Executive Vice President,
General Counsel and Secretary
Date: November 12, 1999 By: /s/ Ronald B. Hutchison
---------------------------------------
Ronald B. Hutchison
Executive Vice President and
Chief Financial Officer
30
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Advantica Restaurant Group, Inc. as contained in its
Form 10-Q for the nine months ended September 29, 1999, and is qualified in its
entirety to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-29-1999
<PERIOD-END> SEP-29-1999
<CASH> 87,198
<SECURITIES> 0
<RECEIVABLES> 20,634
<ALLOWANCES> 3,683
<INVENTORY> 16,489
<CURRENT-ASSETS> 239,396
<PP&E> 825,843
<DEPRECIATION> 208,921
<TOTAL-ASSETS> 1,677,438
<CURRENT-LIABILITIES> 452,611
<BONDS> 827,030
0
0
<COMMON> 596
<OTHER-SE> 87,454
<TOTAL-LIABILITY-AND-EQUITY> 1,677,438
<SALES> 0
<TOTAL-REVENUES> 1,202,120
<CGS> 0
<TOTAL-COSTS> 1,268,008
<OTHER-EXPENSES> 435
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,114
<INCOME-PRETAX> (146,437)
<INCOME-TAX> (1,014)
<INCOME-CONTINUING> (145,423)
<DISCONTINUED> (2,678)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (148,101)
<EPS-BASIC> (3.70)
<EPS-DILUTED> (3.70)
</TABLE>
