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 June 28, 2000 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 August 11, 2000, 40,078,543 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
June 28, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $ 279,412 $ 292,256
Franchise and licensing revenue 17,521 14,527
--------- ---------
Total operating revenue 296,933 306,783
--------- ---------
Cost of company restaurant sales:
Product costs 73,360 75,243
Payroll and benefits 110,432 114,312
Occupancy 16,341 16,472
Other operating expenses 40,972 38,820
--------- ---------
Total costs of company restaurant sales 241,105 244,847
Franchise restaurant costs 8,419 8,116
General and administrative expenses 16,629 19,455
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 10,564 22,136
Depreciation and other amortization 28,516 27,944
Gains on refranchising and other, net (17,346) (4,784)
--------- ---------
Total operating costs and expenses 287,887 317,714
--------- ---------
Operating income (loss) 9,046 (10,931)
--------- ---------
Other expenses:
Interest expense, net 20,259 19,805
Other nonoperating (income) expenses, net (241) 3
--------- ---------
Total other expenses, net 20,018 19,808
--------- ---------
Loss before taxes (10,972) (30,739)
Provision for (benefit from) income taxes 337 (450)
--------- ---------
Loss from continuing operations (11,309) (30,289)
Discontinued operations:
Loss from operations of discontinued operations, net of
applicable income tax provision of: 2000 -- $104;
1999 -- $116 (8,150) (10,917)
--------- ---------
Net loss applicable to common shareholders $ (19,459) $ (41,206)
========= =========
Per share amounts applicable to common shareholders:
Basic and diluted earnings per share:
Loss from continuing operations $ (0.28) $ (0.76)
Loss from discontinued operations, net (0.21) (0.27)
--------- ---------
Net loss (0.49) $ (1.03)
========= =========
Average outstanding shares 40,079 40,025
========= =========
</TABLE>
See accompanying notes
2
<PAGE>
Advantica Restaurant Group, Inc.
Statements of Consolidated Operations
(Unaudited)
<TABLE>
<CAPTION>
Two Quarters Two Quarters
Ended Ended
June 28, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $ 547,039 $ 568,305
Franchise and licensing revenue 33,554 27,776
--------- ---------
Total operating revenue 580,593 596,081
--------- ---------
Cost of company restaurant sales:
Product costs 141,993 147,591
Payroll and benefits 219,534 225,807
Occupancy 32,282 31,929
Other operating expenses 80,336 78,848
--------- ---------
Total costs of company restaurant sales 474,145 484,175
Franchise restaurant costs 15,608 14,476
General and administrative expenses 35,800 40,496
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 21,295 44,327
Depreciation and other amortization 55,664 52,363
Restructuring and impairment charges 7,248 --
Gains on refranchising and other, net (22,024) (7,956)
--------- ---------
Total operating costs and expenses 587,736 627,881
--------- ---------
Operating loss (7,143) (31,800)
--------- ---------
Other expenses:
Interest expense, net 41,744 39,728
Other nonoperating (income) expenses, net (980) 1,032
--------- ---------
Total other expenses, net 40,764 40,760
--------- ---------
Loss before taxes (47,907) (72,560)
Provision for (benefit from) income taxes 697 (939)
--------- ---------
Loss from continuing operations (48,604) (71,621)
Discontinued operations:
Loss from operations of discontinued operations, net of
applicable income tax provision of: 2000 -- $186;
1999 -- $265 (17,330) (31,265)
--------- ---------
Net loss applicable to common shareholders $ (65,934) $(102,886)
========= =========
Per share amounts applicable to common shareholders:
Basic and diluted earnings per share:
Loss from continuing operations $ (1.21) $ (1.79)
Loss from discontinued operations, net (0.44) (0.78)
--------- ---------
Net loss (1.65) $ (2.57)
========= =========
Average outstanding shares 40,071 40,022
========= =========
</TABLE>
See accompanying notes
3
<PAGE>
Advantica Restaurant Group, Inc.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 28, 2000 December 29, 1999
------------- -----------------
<S> <C> <C>
(In thousands)
Assets
Current Assets:
Cash and cash equivalents $ 5,948 $ 165,828
Investments -- 17,084
Receivables, less allowance for doubtful accounts of:
2000 --$3,303; 1999 -- $3,461 14,209 16,902
Inventories 12,994 12,221
Other 7,907 8,706
Restricted cash held in escrow 96,665 --
Restricted investments securing in-substance defeased debt 147,845 158,710
----------- -----------
285,568 379,451
----------- -----------
Property 657,655 667,564
Less accumulated depreciation 191,591 156,627
----------- -----------
466,064 510,937
----------- -----------
Other Assets:
Reorganization value in excess of amounts allocable to
identifiable assets, net of accumulated amortization of:
2000 -- $181,344; 1999 -- $160,319 105,583 126,910
Goodwill, net of accumulated amortization of:
2000 -- $1,643; 1999 -- $1,075 25,226 16,758
Other intangible assets, net of accumulated amortization of:
2000 -- $19,478; 1999 -- $16,829 120,619 131,513
Deferred financing costs, net 14,663 17,165
Other 50,578 53,529
----------- -----------
Total Assets $ 1,068,301 $ 1,236,263
=========== ===========
Liabilities
Current Liabilities:
Current maturities of notes and debentures $ 106,344 $ 164,811
Current maturities of capital lease obligations 11,051 12,614
Current maturities of in-substance defeased debt 147,676 158,731
Accounts payable 57,958 74,069
Accrued salaries and vacations 28,833 32,804
Accrued insurance 19,713 19,785
Accrued taxes 13,864 14,913
Accrued interest 31,375 33,974
Net liabilities of discontinued operations 70,022 53,979
Other 65,136 64,779
----------- -----------
551,972 630,459
----------- -----------
Long-Term Liabilities:
Notes and debentures, less current maturities 554,137 555,978
Capital lease obligations, less current maturities 42,240 59,385
Liability for insurance claims 28,673 26,708
Other 102,928 109,573
----------- -----------
727,978 751,644
----------- -----------
Total Liabilities 1,279,950 1,382,103
----------- -----------
Shareholders' Deficit (211,649) (145,840)
----------- -----------
Total Liabilities and Shareholders' Deficit $ 1,068,301 $ 1,236,263
=========== ===========
</TABLE>
See accompanying notes
4
<PAGE>
Advantica Restaurant Group, Inc.
Statements of Consolidated Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Two Quarters Two Quarters
Ended Ended
June 28, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
(In thousands)
Cash Flows from Operating Activities:
Net loss $ (65,934) $(102,886)
Adjustments to reconcile net loss to cash flows from
operating activities:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 21,295 44,327
Depreciation and other amortization 55,664 52,363
Restructuring and impairment charges 7,248 --
Amortization of deferred gains (6,729) (5,275)
Amortization of deferred financing costs 3,186 3,075
Deferred income tax benefit -- (1,499)
Gains on refranchising and other, net (22,024) (7,956)
Equity in loss from discontinued operations, net 17,330 31,265
Amortization of debt premium (6,124) (6,813)
Other (195) (9)
Changes in Assets and Liabilities Net of Effects of
Acquisitions and Dispositions:
Decrease (increase) in assets:
Receivables 5,130 246
Inventories (1,076) (518)
Other current assets (2,686) 828
Other assets (531) (8,321)
Increase (decrease) in liabilities:
Accounts payable 794 (3,759)
Accrued salaries and vacations (3,972) 1,988
Accrued taxes (1,228) (129)
Other accrued liabilities (10,732) (14,746)
Other noncurrent liabilities and deferred credits (2,620) (4,353)
--------- ---------
Net cash flows used in operating activities (13,204) (22,172)
--------- ---------
Cash Flows from Investing Activities:
Purchase of property (16,744) (14,737)
Acquisition of restaurant units (4,358) (10,853)
Proceeds from disposition of property 24,553 7,567
Advances to discontinued operations, net (1,287) (71)
Change in restricted cash, net (95,000) --
Proceeds from maturity of investments securing
in-substance defeased debt 10,865 9,675
Purchase of investments -- (45,564)
Proceeds from sale and maturity of investments 17,084 58,442
--------- ---------
Net cash flows (used in) provided by investing activities (64,887) 4,459
--------- ---------
</TABLE>
See accompanying notes
5
<PAGE>
Advantica Restaurant Group, Inc.
Statements of Consolidated Cash Flows (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Two Quarters Two Quarters
Ended Ended
June 28, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
(In thousands)
Cash Flows from Financing Activities:
Net borrowings under credit agreements $ 9,800 $ --
Long-term debt payments (81,038) (36,037)
Debt transaction costs (519) (350)
Bank overdrafts (10,032) (14,461)
---------- ----------
Net cash flows used in financing activities (81,789) (50,848)
---------- ----------
Decrease in cash and cash equivalents (159,880) (68,561)
Cash and Cash Equivalents at:
Beginning of period 165,828 158,183
---------- ----------
End of period $ 5,948 $ 89,622
========== ==========
</TABLE>
See accompanying notes
6
<PAGE>
Advantica Restaurant Group, Inc.
Notes to Consolidated Financial Statements
June 28, 2000
(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 and Carrows restaurant
brands. At June 28, 2000, the Company has accounted for FRD 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
2.
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
29, 1999 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. 1999 Annual Report on Form 10-K. The results of
operations for the two quarters ended June 28, 2000 are not necessarily
indicative of the results for the entire fiscal year ending December 27, 2000.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Note 2. Discontinued Operations
During the first quarter of 2000, the Company announced a plan to explore the
possible sale of FRD, its wholly owned subsidiary which operates the Company's
Coco's and Carrows restaurants. Due to the Company's progress in the sale
process, the financial statements presented herein have been reclassified for
all periods to reflect FRD as a discontinued operation in accordance with APB
30.
On December 29, 1999, the Company consummated the sale of its wholly owned
subsidiary, El Pollo Loco, Inc. ("EPL"). The Statements of Consolidated
Operations and Cash Flows presented herein for the quarter and two quarters
ended June 30, 1999 reflect EPL as a discontinued operation in accordance with
APB 30.
Revenue and operating income of the discontinued operations for the reported
periods are as follows:
<TABLE>
<CAPTION>
Quarter Quarter Two Quarters Two Quarters
Ended Ended Ended Ended
June 28, 2000 June 30, 1999 June 28, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(In millions)
REVENUE
FRD $ 93.8 $ 99.2 $ 188.5 $ 194.2
EPL -- 36.2 -- 68.6
-------- -------- --------- ---------
$ 93.8 $ 135.4 $ 188.5 $ 262.8
======== ======== ========= =========
OPERATING (LOSS) INCOME
FRD $ (1.6) $ (5.7) $ (4.3) $ (15.6)
EPL -- 4.2 -- 3.4
------- -------- ---------- ---------
$ (1.6) $ (1.5) $ (4.3) $ (12.2)
======= ======== ======== =========
</TABLE>
7
<PAGE>
The financial position of FRD at June 28, 2000 and December 29, 1999 is reported
in the Consolidated Balance Sheets as Net liabilities of discontinued operations
and includes the following:
June 28, 2000 December 29, 1999
------------- -----------------
(In thousands)
Assets
Current assets $ 13,801 $ 19,885
Property owned, net 104,171 111,669
Other assets 89,632 100,320
--------- ---------
207,604 231,874
--------- ---------
Less liabilities
Current liabilities 54,503 57,106
Long-term liabilities 223,123 228,747
--------- ---------
Total liabilities 277,626 285,853
--------- ---------
Net liabilities of discontinued operations $ (70,022) $ (53,979)
========= =========
Note 3. Debt
On March 31, 2000, the Company deposited $100 million with The Chase Manhattan
Bank ("Chase"), which equaled the then outstanding principal amount of the
mortgage notes secured by a pool of cross-collateralized mortgages on the land,
buildings, equipment and improvements of 239 Denny's restaurant properties (the
"Denny's Mortgage Notes"). Such deposit was required under the terms and
conditions of Advantica's $200 million senior secured revolving credit facility
(as amended to date, the "Credit Facility"). During the quarter ended June 28,
2000, the Company used a portion of the funds held in escrow to repurchase $5.0
million in aggregate principal amount of these notes. On July 12, 2000
(subsequent to the end of the quarter), the Company used the remaining funds to
repay in full the outstanding balance of the Denny's Mortgage Notes.
Note 4. Restructuring and Impairment
In late 1999, the Company's management and Board began an extensive review of
the Company's operations and structure. Based on its review, in February 2000
the Company announced that its strategic direction would focus primarily on its
Denny's brand. At that time, management began the implementation of a
restructuring plan focused primarily on (1) streamlining its overhead structure
by merging corporate administrative functions with the Denny's organization and
(2) becoming a more franchised-based operation by refranchising a significant
number of its Denny's units over the next several years.
The implementation of the restructuring plan during the first quarter of 2000
involved a reduction of personnel related to the corporate reorganization and
the identification of units for closure. Fifty employees in the Company's
corporate offices were terminated as a result of the plan. Additionally, an
impairment charge was recorded for certain acquired software costs and
capitalized construction costs which became obsolete as a result of the
cancellation of projects identified through the review.
Charges attributable to the restructuring plan are comprised of the following:
Restructuring:
Severance and outplacement costs $3,713
Operating lease liabilities for closed stores 909
------
4,622
------
Impairment:
Acquired software costs 1,896
Capitalized construction costs 730
------
2,626
------
$7,248
======
8
<PAGE>
Approximately $5.1 million of the restructuring and impairment charges represent
cash charges of which approximately $2.6 million was paid through June 28, 2000.
Note 5. Acquisitions
In March 2000, Denny's, Inc., a wholly owned subsidiary of the Company,
purchased 9 Denny's franchise restaurants from Olajuwon Holdings, Inc. ("OHI"),
a franchisee of Denny's, Inc. The acquisition of the units has been accounted
for under the purchase method of accounting. The purchase price of approximately
$4.1 million, consisting of cash of approximately $3.4 million and the
forgiveness of debt and assumption of liabilities of $0.7 million, exceeded the
estimated fair value of the restaurants' identifiable net assets by
approximately $3.7 million. The excess has been reflected as goodwill in the
accompanying consolidated financial statements.
In May 2000, Denny's, Inc. purchased an additional 50 Denny's franchise
restaurants from OHI. The acquisition of the units has been accounted for under
the purchase method of accounting. The purchase price of approximately $10.3
million, consisting of cash of approximately $0.9 million and capital leases and
other liabilities assumed of approximately $9.4 million, exceeded the estimated
fair value of the restaurants' identifiable net assets by approximately $6.1
million. The excess has been reflected as goodwill in the accompanying
consolidated financial statements.
Assets acquired and liabilities assumed have been recorded at their estimated
fair values, and are subject to adjustment when additional information
concerning asset and liability valuations is finalized.
Note 6. Comprehensive Income (Loss)
The Company's comprehensive income (loss) for the periods indicated is as
follows:
<TABLE>
<CAPTION>
Quarter Quarter Two Quarters Two Quarters
Ended Ended Ended Ended
June 28, 2000 June 30, 1999 June 28, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(In thousands)
Net loss $ (19,459) $ (41,206) $ (65,934) $(102,886)
Other comprehensive income (loss):
Foreign currency translation adjustment 40 (22) 45 (31)
--------- --------- --------- ---------
Comprehensive income (loss) $ (19,419) $ (41,228) $ (65,889) $(102,917)
========= ========= ========= =========
</TABLE>
Note 7. Loss Per Share Applicable to Common Shareholders
The calculations of basic and diluted loss per share have been based on the
weighted average number of Advantica shares outstanding. Because of the loss
from continuing operations for the quarters and two quarters ended June 28, 2000
and June 30, 1999, warrants and options of the Company have been omitted from
the calculation of weighted average dilutive shares.
Note 8. Segment Information
The Company currently operates three restaurant concepts -- Denny's, Coco's and
Carrows -- and each concept is considered a reportable segment. Coco's and
Carrows are operated by FRD, the wholly owned subsidiary which has been
reclassified as a discontinued operation in the consolidated financial
statements; therefore, their operating results are shown separately in this
section. See Note 2.
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 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
9
<PAGE>
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>
Quarter Quarter Two Quarters Two Quarters
Ended Ended Ended Ended
June 28, 2000 June 30, 1999 June 28, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(In millions)
REVENUE
Revenue from continuing operations $ 296.9 $ 306.8 $ 580.6 $ 596.1
======== ======== ======== ========
Revenue from discontinued operations:
Coco's $ 53.9 $ 57.2 $ 109.5 $ 112.1
Carrows 39.9 42.0 79.0 82.1
-------- -------- -------- --------
Total revenue from discontinued operations $ 93.8 $ 99.2 $ 188.5 $ 194.2
======== ======== ======== ========
EBITDA AS DEFINED
EBITDA as defined from continuing operations $ 48.1 $ 39.1 $ 77.1 $ 64.9
Depreciation and amortization expense (39.1) (50.0) (77.0) (96.7)
Restructuring and impairment charges -- -- (7.2) --
Other expenses:
Interest expense, net (20.2) (19.8) (41.7) (39.7)
Other, net 0.2 -- 0.9 (1.1)
-------- -------- -------- --------
Consolidated loss from continuing operations
before income taxes $ (11.0) $ (30.7) $ (47.9) $ (72.6)
======== ======== ======== ========
EBITDA as defined from discontinued operations:
Coco's $ 6.3 $ 7.4 $ 11.8 $ 12.8
Carrows 4.5 5.1 7.8 7.6
-------- -------- -------- --------
Total EBITDA as defined from discontinued
operations $ 10.8 $ 12.5 $ 19.6 $ 20.4
======== ======== ======== ========
</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 June 28, 2000 and the results of operations for the
quarter and two quarters ended June 28, 2000 compared to the quarter and two
quarters ended June 30, 1999. The forward-looking statements included in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, which reflect management's best judgment based on factors currently
known, involve risks, uncertainties, and other factors which may cause the
actual performance of Advantica and its subsidiaries and underlying concepts to
be materially different from the performance indicated or implied by such
statements. Such factors include, among others: competitive pressures from
within the restaurant industry; the level of success of the Company's operating
initiatives and advertising and promotional efforts, including the initiatives
and efforts specifically mentioned herein; adverse publicity; changes in
business strategy or development plans; terms and availability of capital;
regional weather conditions; overall changes in the general economy,
particularly at the retail level; and other factors included in the discussion
below, in Management's Discussion and Analysis of Financial Condition and Result
of Operations contained in the Company's Annual Report on Form 10-K for the year
ended December 29, 1999 and in Exhibit 99.1 thereto.
10
<PAGE>
RESTAURANT UNIT ACTIVITY
The table below summarizes restaurant unit activity for the quarter ended June
28, 2000.
<TABLE>
<CAPTION>
Ending Units Net Units Ending Ending
Units Opened/ Units Sold/ Units Units
3/29/00 Acquired Refranchised Closed 6/28/00 6/30/99
------- -------- ------------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Denny's
Company-owned units 822 4 12 (5) 833 883
Franchised units 938 16 (12) -- 942 862
Licensed units 18 -- -- -- 18 17
------ ------ ------ ------ ------ ------
1,778 20 -- (5) 1,793 1,762
------ ------ ------ ------ ------ ------
Discontinued Operations:
Coco's
Company-owned units 146 -- -- (2) 144 150
Franchised units 34 -- -- -- 34 34
Licensed units 302 -- -- (1) 301 301
------ ------ ------ ------ ------ ------
482 -- -- (3) 479 485
Carrows
Company-owned units 117 -- -- (1) 116 120
Franchised units 28 -- -- -- 28 27
------ ------ ------ ------ ------ ------
145 -- -- (1) 144 147
------ ------ ------ ------ ------ ------
2,405 20 -- (9) 2,416 2,394
====== ====== ====== ====== ====== ======
</TABLE>
RESULTS OF OPERATIONS
Quarter Ended June 28, 2000 Compared to Quarter Ended June 30, 1999
-------------------------------------------------------------------
The Company's CONSOLIDATED REVENUE for the second quarter of 2000 decreased $9.9
million (3.2%) compared to the second quarter of 1999. Denny's experienced a
modest increase in same-store sales for the quarter; however, company restaurant
sales decreased $12.8 million. This decrease is primarily due to a net 50-unit
decrease in company-owned restaurants, consistent with the Company's strategy to
reduce its portfolio of company-owned Denny's restaurants. FRANCHISE AND
LICENSING REVENUE increased $3.0 million (20.6%), primarily attributable to a
net 81-unit increase in franchised and licensed units.
CONSOLIDATED OPERATING EXPENSES decreased $29.8 million (9.4%) compared to the
prior year quarter. Excluding the impact of an $11.6 million decrease in
amortization of excess reorganization value and a $12.6 million increase in
refranchising gains, operating expenses decreased $5.6 million. The majority of
this decrease represents a reduction in the costs of company restaurant sales
driven by the decrease in the number of company-owned restaurants. As a
percentage of sales, cost of company restaurant sales increased due to higher
payroll, benefit and product costs and increased advertising expenses. Payroll
and benefit costs as a percentage of sales increased as a result of higher wage
rates in the current year quarter and improved workers' compensation actuarial
trends in the prior year quarter. Product costs as a percentage of sales
increased primarily due to higher commodity costs. Franchise margins improved
due to strong franchise growth in the current quarter and higher bad debt
expense in the prior year quarter. General and administrative expenses benefited
from reduced corporate overhead costs and a nonrecurring payroll tax adjustment.
Additionally, depreciation and other amortization increased as a result of the
net addition of assets throughout 1999 related to the Denny's Diner reimage
program. The decrease in amortization of excess reorganization value from the
prior year quarter resulted from an impairment charge to reorganization value
recorded in the fourth quarter of 1999.
11
<PAGE>
The Company's consolidated EBITDA AS DEFINED increased $9.0 million (23.0%)
compared to the prior year quarter. This increase is a result of the factors
noted in the preceding paragraphs, excluding the change in depreciation and
amortization expense.
CONSOLIDATED OPERATING INCOME for the second quarter of 2000 was $9.0 million
compared to an operating loss of $10.9 million for the second quarter of 1999,
primarily as a result of the factors noted above.
CONSOLIDATED INTEREST EXPENSE, NET, totaled $20.3 million for the second quarter
of 2000, an increase of $0.5 million compared to the prior year quarter.
Excluding the effect of $1.8 million of interest expense allocated to
discontinued operations in the prior year, interest expense, net, decreased $1.3
million. This decrease in interest expense, net, resulted primarily from the
repurchase of a portion of the Denny's Mortgage Notes in 2000.
The PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations for the
quarter ended June 28, 2000 has been computed based on management's estimate of
the annual effective income tax rate applied to loss before taxes. The Company
recorded an income tax provision reflecting an approximate rate of 3.1% for the
quarter ended June 28, 2000 compared to an income tax benefit reflecting an
approximate rate of (1.5)% for the quarter ended June 30, 1999.
The Statements of Consolidated Operations and Cash Flows presented herein for
the quarters ended June 28, 2000 and June 30, 1999 reflect FRD as DISCONTINUED
OPERATIONS in accordance with APB 30. Revenue and operating loss of FRD for the
quarter ended June 28, 2000 and June 30, 1999 were $93.8 million and $1.6
million and $99.2 million and $5.7 million, respectively. The decrease in the
operating loss of FRD is primarily due to the decrease in amortization of excess
reorganization value which resulted from an impairment charge to reorganization
value recorded in the fourth quarter of 1999. Additionally, the Statements of
Consolidated Operations and Cash Flows presented herein for the quarter ended
June 30, 1999 reflect EPL as a discontinued operation. EPL's revenue and
operating income for the quarter ended June 30, 1999 were $36.2 million and $4.2
million, respectively.
NET LOSS was $19.5 million for the second quarter of 2000 compared to a net loss
of $41.2 million for the second quarter of 1999, primarily as a result of the
factors discussed above.
Two Quarters Ended June 28, 2000 Compared to Two Quarters Ended June 30, 1999
-----------------------------------------------------------------------------
The Company's CONSOLIDATED REVENUE for the two quarters ended June 28, 2000
decreased $15.5 million (2.6%) compared to the two quarters ended June 30, 1999.
Denny's experienced an increase in same-store sales for the period; however,
company restaurant sales decreased $21.3 million. This decrease is primarily due
to a net 50-unit decrease in company-owned restaurants, consistent with the
Company's strategy to reduce its portfolio of company-owned Denny's restaurants.
FRANCHISE AND LICENSING REVENUE increased $5.8 million, primarily attributable
to a net 81-unit increase in franchised and licensed units.
CONSOLIDATED OPERATING EXPENSES decreased $40.1 million (6.4%) compared to the
prior year period. Excluding the impact of a $23.0 million decrease in
amortization of excess reorganization value, $7.2 million of restructuring and
impairment charges in the current year period and a $14.1 million increase in
refranchising gains, operating expenses decreased $10.2 million. The majority of
this decrease represents a reduction in the costs of company restaurant sales
driven by the decrease in the number of company-owned restaurants. As a
percentage of sales, cost of company restaurant sales increased due primarily to
higher payroll costs and increased advertising expenses. Franchise margins
improved due to strong revenue growth and higher bad debt expense in the prior
year period. General and administrative expenses benefited from reduced
corporate overhead costs and a nonrecurring payroll tax adjustment.
Additionally, depreciation and other amortization increased as a result of the
net addition of assets throughout 1999 related to the Denny's Diner reimage
program. The decrease in amortization of excess reorganization value from the
prior year period resulted from an impairment charge to reorganization value
recorded in the fourth quarter of 1999.
12
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During the first quarter of 2000, the Company announced a restructuring plan as
a result of an extensive review of the Company's operations and structure
completed in early 2000. The plan's implementation involved a reduction of
personnel related to the corporate reorganization and the identification of
units for closure. Consequently, the Company recorded approximately $3.7 million
of severance and outplacement costs and $0.9 million of operating lease
liabilities for closed stores as a result of the plan. Additionally, a $2.6
million impairment charge was recorded related to certain acquired software and
capitalized construction costs which became obsolete as a result of the
cancellation of projects identified as part of the plan.
The Company's consolidated EBITDA AS DEFINED increased $12.2 million (18.8%)
compared to the prior year period. This increase is a result of the factors
noted in the preceding paragraphs, excluding the restructuring and impairment
charges and the change in depreciation and amortization expense.
CONSOLIDATED OPERATING LOSS decreased $24.7 million compared to the prior year
period as a result of the factors noted above.
CONSOLIDATED INTEREST EXPENSE, NET, totaled $41.7 million for the two quarters
ended June 28, 2000, an increase of $2.0 million compared to the prior year
period. Excluding the effect of $3.6 million of interest expense allocated to
discontinued operations in the prior year, interest expense, net, decreased $1.6
million. The decrease in interest expense, net, resulted primarily from the
effects of the repurchase of $20 million of Advantica's 11 1/4 % Senior Notes in
April 1999 and the repurchase of Denny's Mortgage Notes in 2000 offset by an
increase related to Credit Facility borrowings.
The PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations for the
two quarters ended June 28, 2000 has been computed based on management's
estimate of the annual effective income tax rate applied to loss before taxes.
The Company recorded an income tax provision reflecting an approximate rate of
1.5% for the two quarters ended June 28, 2000 compared to an income tax benefit
reflecting an approximate rate of (1.3)% for the two quarters ended June 30,
1999.
The Statements of Consolidated Operations and Cash Flows presented herein for
the two quarters ended June 28, 2000 and June 30, 1999 reflect FRD as
DISCONTINUED OPERATIONS in accordance with APB 30. Revenue and operating loss of
FRD for the two quarters ended June 28, 2000 and June 30, 1999 were $188.5
million and $4.3 million and $194.2 million and $15.6 million, respectively. The
decrease in the operating loss of FRD is primarily due to the decrease in
amortization of excess reorganization value which resulted from an impairment
charge to reorganization value recorded in the fourth quarter of 1999.
Additionally, the Statements of Consolidated Operations and Cash Flows presented
herein for the two quarters ended June 30, 1999 reflect EPL as a discontinued
operation. EPL's revenue and operating income for the two quarters ended June
30, 1999 were $68.6 million and $3.4 million, respectively.
NET LOSS was $65.9 million for the two quarters ended June 28, 2000 compared to
a net loss of $102.9 million for the two quarters ended June 30, 1999, primarily
as a result of the factors discussed above.
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Restaurant Operations
Denny's
<TABLE>
<CAPTION>
Quarter Ended Two Quarters Ended
------------------------------------ --------------------------------------
June 28, June 30, Increase/ June 28, June 30, Increase/
2000 1999 (Decrease) 2000 1999 (Decrease)
----------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total systemwide sales (in millions) $ 556.6 $ 542.0 2.7% $ 1,088.5 $ 1,043.7 4.3%
Average unit sales:
Company-owned 340,100 331,300 2.7% 663,000 645,200 2.8%
Franchise 291,800 286,500 1.8% 568,300 551,000 3.1%
Same-store sales increase (company-owned) 0.6% 4.1% 1.4% 3.9%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
As of June 28, 2000 and December 29, 1999, the Company had working capital
deficits, exclusive of net liabilities of discontinued operations, of $196.4
million and $197.0 million, respectively. 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.
On March 31, 2000, the Company deposited $100 million with Chase, which equaled
the then outstanding principal amount of the Denny's Mortgage Notes. Such
deposit was required under the terms and conditions of Advantica's Credit
Facility. During the quarter ended June 28, 2000, the Company used a portion of
the funds held in escrow to repurchase $5.0 million in aggregate principal
amount of these notes. On July 12, 2000 (subsequent to the end of the quarter),
the Company used the remaining funds to repay in full the outstanding balance of
the Denny's Mortgage Notes. The repayment or refinancing of the Denny's Mortgage
Notes was required to maintain the Credit Facility in effect and available to
the Company.
The Credit Facility provides to the Company (excluding FRD) a working capital
and letter of credit facility of up to $200 million. At June 28, 2000, Advantica
had outstanding working capital advances of $9.8 million and letters of credit
outstanding of $47.8 million under the Credit Facility, leaving a net
availability of $142.4 million.
On May 14, 1999, FRD and certain of its operating subsidiaries entered into a
new $70 million credit facility (the "New FRD Credit Facility") to replace a
prior facility 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. Such facility is
unavailable to Advantica and its other subsidiaries. At June 28, 2000, the
Company had $30.0 million outstanding term loan borrowings, no outstanding
working capital borrowings and letters of credit outstanding of $11.1 million,
leaving a net availability of $28.9 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposure at June 28, 2000 is consistent with the types
of market risk and amount of exposure presented in its Annual Report on Form
10-K for the year ended December 29, 1999.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of Advantica was held on Wednesday, May 24,
2000, at which the following matters were voted on by the stockholders of
Advantica:
(i) Election of Directors
Votes Against
Name Votes For or Withheld
---------------- ---------- -------------
James B. Adamson 29,945,240 165,583
Ronald E. Blaylock 29,605,687 505,136
Vera King Farris 29,972,651 138,172
James J. Gaffney 29,971,687 139,136
Robert E. Marks 29,973,451 137,372
Lloyd I. Miller, III 30,001,585 109,238
Charles F. Moran 29,972,582 138,241
Elizabeth A. Sanders 29,971,564 139,259
Donald R. Shepherd 29,974,449 136,374
(ii) Ratification of the Selection of Auditors
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
30,066,439 28,998 15,386
(iii) Approval of 2000 Incentive Program for the Company's employees
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
28,340,309 1,750,746 19,768
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The following are included as exhibits to this report:
EXHIBIT
NO. DESCRIPTION
------- -----------
10.1 Master Service Agreement for Information Technology Services, dated
January 25, 2000, between Advantica and Affiliated Computer
Services, Inc.
10.2 Advantica Stock Option Plan, as amended through May 19, 1999.
10.3 Amendment No. 7, dated as of June 20, 2000, to the 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.
27.1 Financial Data Schedule for the 6 months ended June 28, 2000.
27.2 Restated Financial Data Schedule for the 3 months ended March 29,
2000.
15
<PAGE>
27.3 Restated Financial Data Schedule for the year ended December 29,
1999.
27.4 Restated Financial Data Schedule for the 9 months ended
September 29, 1999.
27.5 Restated Financial Data Schedule for the 6 months ended June 30,
1999.
27.6 Restated Financial Data Schedule for the 3 months ended March 30,
1999.
27.7 Restated Financial Data Schedule for the 51 weeks ended December 30,
1998.
27.8 Restated Financial Data Schedule for the one week ended January 7,
1998.
--------------------------------
b. No reports on Form 8-K were filed during the quarter ended June 28,
2000.
16
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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: August 14, 2000 By: /s/ Rhonda J. Parish
--------------------------------
Rhonda J. Parish
Executive Vice President,
General Counsel and Secretary
Date: August 14, 2000 By: /s/ Ronald B. Hutchison
--------------------------------
Ronald B. Hutchison
Executive Vice President and
Chief Financial Officer
17
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