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 27, 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 November 10, 2000, 40,061,119 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 27, 2000 September 29, 1999
------------------ ------------------
<S> <C> <C>
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $ 282,619 $ 297,674
Franchise and licensing revenue 20,023 16,164
--------- ---------
Total operating revenue 302,642 313,838
--------- ---------
Cost of company restaurant sales:
Product costs 73,568 75,975
Payroll and benefits 111,341 114,719
Occupancy 15,359 16,363
Other operating expenses 41,848 39,692
--------- ---------
Total costs of company restaurant sales 242,116 246,749
Franchise restaurant costs 9,014 7,290
General and administrative expenses 15,850 18,516
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 10,342 22,229
Depreciation and other amortization 28,274 37,189
Gains on refranchising and other, net (16,315) (3,832)
--------- ---------
Total operating costs and expenses 289,281 328,141
--------- ---------
Operating income (loss) 13,361 (14,303)
--------- ---------
Other expenses:
Interest expense, net 20,578 21,219
Other nonoperating (income) expenses, net (418) (746)
--------- ---------
Total other expenses, net 20,160 20,473
--------- ---------
Loss before taxes (6,799) (34,776)
Provision for (benefit from) income taxes 478 (324)
--------- ---------
Loss from continuing operations (7,277) (34,452)
Discontinued operations:
Loss from operations of discontinued operations, net of
applicable income tax provision (benefit) of: 2000 -- $0;
1999 -- $(16) -- (10,763)
--------- ---------
Net loss applicable to common shareholders $ (7,277) $ (45,215)
========= =========
Per share amounts applicable to common shareholders:
Basic and diluted earnings per share:
Loss from continuing operations $ (0.18) $ (0.86)
Loss from discontinued operations, net -- (0.27)
--------- ---------
Net loss $ (0.18) $ (1.13)
========= =========
Average outstanding shares 40,079 40,025
========= =========
</TABLE>
See accompanying notes
2
<PAGE>
Advantica Restaurant Group, Inc.
Statements of Consolidated Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Quarters Three Quarters
Ended Ended
September 27, 2000 September 29, 1999
------------------ ------------------
<S> <C> <C>
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $ 829,658 $ 865,979
Franchise and licensing revenue 53,577 43,940
--------- ---------
Total operating revenue 883,235 909,919
--------- ---------
Cost of company restaurant sales:
Product costs 215,561 223,566
Payroll and benefits 330,875 340,526
Occupancy 47,641 48,292
Other operating expenses 122,184 118,540
--------- ---------
Total costs of company restaurant sales 716,261 730,924
Franchise restaurant costs 24,622 21,766
General and administrative expenses 51,650 59,012
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 31,637 66,556
Depreciation and other amortization 83,938 89,552
Restructuring and impairment charges 7,248 --
Gains on refranchising and other, net (38,339) (11,788)
--------- ---------
Total operating costs and expenses 877,017 956,022
--------- ---------
Operating income (loss) 6,218 (46,103)
--------- ---------
Other expenses:
Interest expense, net 62,322 60,947
Other nonoperating (income) expenses, net (1,398) 286
--------- ---------
Total other expenses, net 60,924 61,233
--------- ---------
Loss before taxes (54,706) (107,336)
Provision for (benefit from) income taxes 1,175 (1,263)
--------- ---------
Loss from continuing operations (55,881) (106,073)
Discontinued operations:
Loss from operations of discontinued operations, net of
applicable income tax provision of: 2000 -- $186;
1999 -- $249 (17,330) (42,028)
--------- ---------
Net loss applicable to common shareholders $ (73,211) $(148,101)
========= =========
Per share amounts applicable to common shareholders:
Basic and diluted earnings per share:
Loss from continuing operations $ (1.39) $ (2.65)
Loss from discontinued operations, net (0.44) (1.05)
--------- ---------
Net loss $ (1.83) $ (3.70)
========= =========
Average outstanding shares 40,073 40,023
========= =========
</TABLE>
See accompanying notes
3
<PAGE>
Advantica Restaurant Group, Inc.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 27, 2000 December 29, 1999
------------------ -----------------
<S> <C> <C>
(In thousands)
Assets
Current Assets:
Cash and cash equivalents $ 12,571 $ 165,828
Investments -- 17,084
Receivables, less allowance for doubtful accounts of:
2000 -- $3,404; 1999 -- $3,461 10,171 16,902
Inventories 11,328 12,221
Other 10,973 8,706
Restricted investments securing in-substance defeased debt 147,845 158,710
----------- -----------
192,888 379,451
----------- -----------
Property 654,706 667,564
Less accumulated depreciation 208,074 156,627
----------- -----------
446,632 510,937
----------- -----------
Other Assets:
Reorganization value in excess of amounts allocable to identifiable
assets, net of accumulated amortization of:
2000 -- $191,807; 1999 -- $160,319 95,273 126,910
Goodwill, net of accumulated amortization of:
2000 -- $2,069; 1999 -- $1,075 25,784 16,758
Other intangible assets, net of accumulated amortization of:
2000 -- $21,385; 1999 -- $16,829 118,386 131,513
Deferred financing costs, net 13,233 17,165
Other 50,589 53,529
----------- -----------
Total Assets $ 942,785 $ 1,236,263
=========== ===========
Liabilities
Current Liabilities:
Current maturities of notes and debentures $ 13,825 $ 164,811
Current maturities of capital lease obligations 10,926 12,614
Current maturities of in-substance defeased debt 146,363 158,731
Accounts payable 60,702 74,069
Accrued salaries and vacations 35,583 32,804
Accrued insurance 17,905 19,785
Accrued taxes 14,557 14,913
Accrued interest 18,057 33,974
Net liabilities of discontinued operations 69,391 53,979
Other 50,620 64,779
----------- -----------
437,929 630,459
----------- -----------
Long-Term Liabilities:
Notes and debentures, less current maturities 554,377 555,978
Capital lease obligations, less current maturities 41,109 59,385
Liability for insurance claims 28,847 26,708
Other 99,536 109,573
----------- -----------
723,869 751,644
----------- -----------
Total Liabilities 1,161,798 1,382,103
----------- -----------
Shareholders' Deficit (219,013) (145,840)
----------- -----------
Total Liabilities and Shareholders' Deficit $ 942,785 $ 1,236,263
=========== ===========
</TABLE>
See accompanying notes
4
<PAGE>
Advantica Restaurant Group, Inc.
Statements of Consolidated Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Quarters Three Quarters
Ended Ended
September 27, 2000 September 29, 1999
------------------ ------------------
<S> <C> <C>
(In thousands)
Cash Flows from Operating Activities:
Net loss $ (73,211) $(148,101)
Adjustments to reconcile net loss to cash flows from
operating activities:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 31,637 66,556
Depreciation and other amortization 83,938 89,552
Restructuring and impairment charges 7,248 --
Amortization of deferred gains (9,807) (8,639)
Amortization of deferred financing costs 4,609 4,647
Deferred income tax benefit -- (2,249)
Gains on refranchising and other, net (38,339) (11,788)
Equity in loss from discontinued operations, net 17,330 42,028
Amortization of debt premium (8,003) (10,333)
Other (195) 3
Changes in Assets and Liabilities Net of Effects of
Acquisitions and Dispositions:
Decrease (increase) in assets:
Receivables 7,996 (1,736)
Inventories 17 (1,122)
Other current assets (3,006) 514
Other assets (1,989) (12,066)
Increase (decrease) in liabilities:
Accounts payable (640) (14,617)
Accrued salaries and vacations 2,779 1,832
Accrued taxes (668) 2,138
Other accrued liabilities (40,946) (37,568)
Other noncurrent liabilities and deferred credits (3,199) (9,337)
--------- ---------
Net cash flows used in operating activities (24,449) (50,286)
--------- ---------
Cash Flows from Investing Activities:
Purchase of property (24,764) (42,036)
Acquisition of restaurant units (4,461) (10,853)
Proceeds from disposition of property 47,514 8,875
Advances to discontinued operations, net (1,917) (3,286)
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 75,174
--------- ---------
Net cash flows (used in) provided by investing activities 44,321 (8,015)
--------- ---------
</TABLE>
See accompanying notes
5
<PAGE>
Advantica Restaurant Group, Inc.
Statements of Consolidated Cash Flows (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Three Quarters Three Quarters
Ended Ended
September 27, 2000 September 29, 1999
------------------ ------------------
<S> <C> <C>
(In thousands)
Cash Flows from Financing Activities:
Net borrowings under credit agreements $ 12,600 $ --
Long-term debt payments (179,405) (40,491)
Debt transaction costs (519) (350)
Bank overdrafts (5,805) (7,230)
--------- ---------
Net cash flows used in financing activities (173,129) (48,071)
--------- ---------
Decrease in cash and cash equivalents (153,257) (106,372)
Cash and Cash Equivalents at:
Beginning of period 165,828 158,183
--------- ---------
End of period $ 12,571 $ 51,811
========= =========
</TABLE>
See accompanying notes
6
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
Notes to Consolidated Financial Statements
September 27, 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 September 27, 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 three quarters ended September 27, 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 Company began accounting for FRD as a discontinued operation in the
second quarter. The financial statements presented herein have been reclassified
for all periods to reflect FRD as a discontinued operation, and in accordance
with APB 30, FRD's results from operations subsequent to the date that FRD was
identified as a discontinued operation (the "measurement date") have been
included as a component of net liabilities held for sale in the accompanying
Consolidated Balance Sheets.
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 three quarters
ended September 29, 1999 reflect EPL as a discontinued operation in accordance
with APB 30.
7
<PAGE>
Revenue and operating income of the discontinued operations for the reported
periods are as follows:
<TABLE>
<CAPTION>
Quarter Quarter Three Quarters Three Quarters
Ended Ended Ended Ended
September 27, 2000 September 29, 1999 September 27, 2000 September 29, 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
(In millions)
REVENUE
FRD $90.9 $ 98.0 $279.4 $292.2
EPL --- 38.5 --- 107.1
----- ------ ------ ------
$90.9 $136.5 $279.4 $399.3
===== ====== ====== ======
OPERATING (LOSS) INCOME
FRD $(4.3) $ (4.2) $ (8.7) $(19.8)
EPL --- 1.2 --- 4.6
----- ------ ------ ------
$(4.3) $ (3.0) $ (8.7) $(15.2)
===== ====== ====== ======
</TABLE>
The financial position of FRD at September 27, 2000 and December 29, 1999 is
reported in the Consolidated Balance Sheets as "Net liabilities of discontinued
operations" and consists of the following:
<TABLE>
<CAPTION>
(In thousands) September 27, 2000 December 29, 1999
------------------ -----------------
<S> <C> <C>
Assets
Current assets $ 12,212 $ 19,885
Property owned, net 102,168 111,669
Other assets 95,053 100,320
--------- ---------
209,433 231,874
--------- ---------
Less liabilities
Current liabilities 88,993 57,106
Long-term liabilities 189,831 228,747
--------- ---------
Total liabilities 278,824 285,853
--------- ---------
Net liabilities of discontinued operations $ (69,391) $ (53,979)
========= =========
</TABLE>
On May 14, 1999, FRD and certain of its operating subsidiaries entered into a
new $70 million credit facility (the "FRD Credit Facility"). The 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. FRD has entered
into an amendment with the lenders under the FRD Credit Facility which, among
other things, provides for a waiver of compliance with certain third quarter
financial covenants until January 8, 2001. If the FRD sales process is not
completed by January 8, 2001, the Company may be required to seek an additional
waiver or negotiate other arrangements with its lenders. No assurance can be
given that the Company will be able to obtain such additional waiver or to
negotiate such other arrangements on commercially reasonable terms or otherwise,
if needed. A default under the FRD Credit Facility, if not adequately resolved,
could give the lenders under the FRD Credit Facility the ability to exercise
their rights under the Advantica guarantee. As a result, the outstanding term
loan borrowings of $30.0 million have been reclassified as current debt. The
Company believes, however, that it will be able to successfully complete the FRD
sale process or negotiate other arrangements with its lenders.
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 "Advantica 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, the Company used the remaining funds to repay in full the outstanding
balance of the Denny's Mortgage Notes.
8
<PAGE>
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 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
=======
Approximately $5.1 million of the restructuring and impairment charges represent
cash charges of which approximately $3.3 million was paid through September 27,
2000.
Note 5. Acquisitions
During 2000, Denny's, Inc., a wholly owned subsidiary of the Company, purchased
59 Denny's franchise restaurants from Olajuwon Holdings, Inc. ("OHI"), a
bankrupt franchisee. The purchases were made with the approval of the bankruptcy
court and other parties having an interest in OHI bankruptcy estate. Denny's,
Inc. separately reacquired 3 other restaurants from affiliated franchisees of
OHI. The acquisitions of these units have been accounted for under the purchase
method of accounting. The purchase price of approximately $16.4 million,
consisting of cash of approximately $4.5 million, the forgiveness of debt of
$1.4 million and the assumption of capital leases and other liabilities of $10.5
million, exceeded the estimated fair value of the restaurants' identifiable net
assets by approximately $10.2 million. This excess has been reflected as
goodwill in the accompanying consolidated financial statements.
The Company is in the process of identifying which units will ultimately be
retained, sold or closed. 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.
9
<PAGE>
Note 6. Comprehensive Income (Loss)
---------------------------
The Company's comprehensive income (loss) for the periods indicated is as
follows:
<TABLE>
<CAPTION>
Quarter Quarter Three Quarters Three Quarters
Ended Ended Ended Ended
September 27, 2000 September 29, 1999 September 27, 2000 September 29, 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
(In thousands)
Net loss $ (7,277) $(45,215) $(73,221) $(148,101)
Other comprehensive income (loss):
Foreign currency translation adjustment (87) (53) (42) (84)
-------- -------- -------- ---------
Comprehensive income (loss) $ (7,364) $(45,268) $(73,263) $(148,185)
======== ======== ======== =========
</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 three quarters ended September
27, 2000 and September 29, 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 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.
10
<PAGE>
The Company's measure of EBITDA as defined may not be comparable to similarly
titled measures reported by other companies.
<TABLE>
<CAPTION>
Quarter Quarter Three Quarters Three Quarters
Ended Ended Ended Ended
September 27, 2000 September 29, 1999 September 27, 2000 September 29, 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
(In millions)
REVENUE
Revenue from continuing operations $302.6 $313.8 $ 883.2 $ 909.9
====== ====== ======= =======
Revenue from discontinued operations:
Coco's $ 51.8 $ 56.1 $ 161.3 $ 168.2
Carrows 39.1 41.9 118.1 124.0
------ ------ ------- -------
Total revenue from discontinued operations $ 90.9 $ 98.0 $ 279.4 $ 292.2
====== ====== ======= =======
EBITDA AS DEFINED
EBITDA as defined from continuing operations $ 52.0 $ 45.1 $ 129.0 $ 110.0
Depreciation and amortization expense (38.6) (59.4) (115.6) (156.1)
Restructuring and impairment charges --- --- (7.2) ---
Other expenses:
Interest expense, net (20.6) (21.2) (62.3) (60.9)
Other, net 0.4 0.7 1.4 (0.3)
------ ------ ------- -------
Consolidated loss from continuing operations
before income taxes $ (6.8) $(34.8) $(54.7) $(107.3)
====== ====== ====== =======
EBITDA as defined from discontinued operations:
Coco's $ 3.8 $ 6.4 $ 15.5 $ 19.2
Carrows 3.3 5.6 11.2 13.2
------ ------ ------ -------
Total EBITDA as defined from discontinued
operations $ 7.1 $ 12.0 $ 26.7 $ 32.4
====== ======= ====== =======
</TABLE>
Note 9. SFAS 133 and SFAS 138 Implementation
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). In June 2000, the FASB issued
Statement of Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities -- an amendment of FASB
Statement No. 133" ("SFAS 138"), which amends certain provisions of SFAS 133 to
clarify areas causing difficulties in implementation, including expanding the
normal purchase and sale exemption for supply contracts. Advantica has appointed
a team to implement SFAS 133 for the entire company. This team has been
implementing a SFAS 133 risk management process, educating both financial and
nonfinancial personnel, reviewing contracts to identify derivatives and embedded
derivatives and addressing various other SFAS 133-related issues. Advantica will
adopt SFAS 133 and the corresponding amendments under SFAS 138 on January 1,
2001. SFAS 133, as amended by SFAS 138, is not expected to have a material
impact on the Company's consolidated results of operations, financial position
or cash flows.
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 27, 2000 and the results of operations for
the quarter and three quarters ended September 27, 2000 compared to the quarter
and three quarters ended September 29, 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
11
<PAGE>
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.
RESTAURANT UNIT ACTIVITY
The table below summarizes restaurant unit activity for the quarter ended
September 27, 2000.
<TABLE>
<CAPTION>
Ending Ending Ending
Units Units Net Units Units Units
June 28, Opened/ Units Sold/ September 27, September 29,
2000 Acquired Refranchised Closed 2000 1999
------------ -------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Denny's
Company-owned units 833 1 (39) (11) 784 869
Franchised units 942 36 39 (4) 1,013 879
Licensed units 18 1 -- -- 19 17
------ ------ ------ ------ ------ ------
1,793 38 -- (15) 1,816 1,765
------ ------ ------ ------ ------ ------
Discontinued Operations:
Coco's
Company-owned units 144 -- -- -- 144 150
Franchised units 34 2 -- -- 36 34
Licensed units 301 2 -- (3) 300 305
------ ------ ------ ------ ------ ------
479 4 -- (3) 480 489
------ ------ ------ ------ ------ ------
Carrows
Company-owned units 116 -- -- -- 116 120
Franchised units 28 1 -- (1) 28 28
------ ------ ------ ------ ------ ------
144 1 -- (1) 144 148
------ ------ ------ ------ ------ ------
2,416 43 -- (19) 2,440 2,402
====== ====== ====== ====== ====== ======
</TABLE>
RESULTS OF OPERATIONS
Quarter Ended September 27, 2000 Compared to Quarter Ended September 29, 1999
-----------------------------------------------------------------------------
The Company's CONSOLIDATED REVENUE for the third quarter of 2000 decreased $11.2
million (3.6%) compared to the third quarter of 1999. Denny's experienced a 1.4%
increase in same-store sales for the quarter; however, company restaurant sales
decreased $15.1 million. This decrease is primarily due to a net 85-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 $3.9 million (23.9%), primarily attributable to a
net 136-unit increase in franchised and licensed units.
CONSOLIDATED OPERATING EXPENSES decreased $38.9 million (11.8%) compared to the
prior year quarter. Excluding the impact of an $11.9 million decrease in
amortization of excess reorganization value, an $8.9 million decrease in
depreciation and other amortization and a $12.5 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 primarily due to
higher payroll costs, commodity costs and repairs and maintenance expenses.
Franchise
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margins improved primarily due to strong franchise revenue growth in the current
quarter. General and administrative expenses benefited from reduced corporate
overhead and information systems costs. The decrease in depreciation expense
results from asset retirements related to the restaurants reimaged in 1999. Such
retirements are recorded as a component of depreciation expense. The decrease
was partially offset by higher depreciation expense resulting from asset
additions throughout 1999 and 2000 related to the 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.
The Company's consolidated EBITDA AS DEFINED increased $6.9 million (15.2%)
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 third quarter of 2000 was $13.4 million
compared to an operating loss of $14.3 million for the third quarter of 1999,
primarily as a result of the factors noted above.
CONSOLIDATED INTEREST EXPENSE, NET, totaled $20.6 million for the third quarter
of 2000, an decrease of $0.6 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 $2.4
million. This decrease primarily resulted from the repayment of the Denny's
Mortgage Notes in 2000.
The PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations for the
quarter ended September 27, 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
7.0% for the quarter ended September 27, 2000 compared to an income tax benefit
reflecting an approximate rate of (0.9)% for the quarter ended September 29,
1999. The change is due to the decrease in the Company's loss before taxes in
the current year quarter and to the change in management's estimate of the
annual effective income tax rate for the third quarter of 2000 compared to the
third quarter of 1999.
The Statements of Consolidated Operations and Cash Flows presented herein for
the quarters ended September 27, 2000 and September 29, 1999 reflect FRD as
DISCONTINUED OPERATIONS in accordance with APB 30. Revenue and operating loss of
FRD for the quarters ended September 27, 2000 and September 29, 1999 were $90.9
million and $4.3 million and $98.0 million and $4.2 million, respectively. In
accordance with APB 30, FRD's net loss of $10.4 million for the quarter ended
September 27, 2000, which was incurred subsequent to the measurement date, is
included as a component of net liabilities held for sale. Additionally, the
Statements of Consolidated Operations and Cash Flows presented herein for the
quarter ended September 29, 1999 reflect EPL as a discontinued operation. EPL's
revenue and operating income for the quarter ended September 29, 1999 were $38.5
million and $1.2 million, respectively.
NET LOSS was $7.3 million for the third quarter of 2000 compared to a net loss
of $45.2 million for the third quarter of 1999, primarily as a result of the
factors discussed above.
Three Quarters Ended September 27, 2000 Compared to Three Quarters Ended
September 29, 1999
--------------------------------------------------------------------------------
The Company's CONSOLIDATED REVENUE for the three quarters ended September 27,
2000 decreased $26.7 million (2.9%) compared to the three quarters ended
September 29, 1999. Denny's experienced a 1.6% increase in same-store sales for
the period; however, company restaurant sales decreased $36.3 million. This
decrease is primarily due to a net 85-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
$9.6 million, primarily attributable to a net 136-unit increase in franchised
and licensed units.
CONSOLIDATED OPERATING EXPENSES decreased $79.0 million (8.3%) compared to the
prior year period. Excluding the impact of a $34.9 million decrease in
amortization of excess reorganization value, a $5.6 million decrease in
depreciation
13
<PAGE>
and other amortization, $7.2 million of restructuring and impairment charges in
the current year period and a $26.6 million increase in refranchising gains,
operating expenses decreased $19.1 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,
commodity and advertising expenses. Franchise margins improved due to strong
franchise revenue growth. General and administrative expenses benefited from
reduced corporate overhead and information system costs and from a nonrecurring
payroll tax adjustment. The decrease in depreciation expense results from asset
retirements related to the restaurants reimaged in 1999. Such retirements are
recorded as a component of depreciation expense. The decrease was partially
offset by higher depreciation expense resulting from asset additions throughout
1999 and 2000 related to the 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.
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 $19.0 million (17.3%)
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 INCOME for the period was $6.2 million compared to an
operating loss of $46.1 million for the prior year period, primarily as a result
of the factors noted above.
CONSOLIDATED INTEREST EXPENSE, NET, totaled $62.3 million for the three quarters
ended September 27, 2000, an increase of $1.4 million compared to the prior year
period. Excluding the effect of $5.5 million of interest expense allocated to
discontinued operations in the prior year, interest expense, net, decreased $4.1
million. This decrease primarily resulted from the effects of the repayment of
Denny's Mortgage Notes in 2000 partially offset by an increase related to
Advantica Credit Facility borrowings.
The PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations for the
three quarters ended September 27, 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
2.1% for the three quarters ended September 27, 2000 compared to an income tax
benefit reflecting an approximate rate of (1.2)% for the three quarters ended
September 29, 1999.
The Statements of Consolidated Operations and Cash Flows presented herein for
the three quarters ended September 27, 2000 and September 29, 1999 reflect FRD
as DISCONTINUED OPERATIONS in accordance with APB 30. Revenue and operating loss
of FRD for the three quarters ended September 27, 2000 and September 29, 1999
were $279.4 million and $8.7 million and $292.2 million and $19.8 million,
respectively. In accordance with APB 30, FRD's net loss of $10.4 million for the
quarter ended September 27, 2000, which was incurred subsequent to the
measurement date, is included as a component of net liabilities held for sale.
Additionally, the Statements of Consolidated Operations and Cash Flows presented
herein for the three quarters ended September 29, 1999 reflect EPL as a
discontinued operation. EPL's revenue and operating income for the three
quarters ended September 29, 1999 were $107.1 million and $4.6 million,
respectively.
NET LOSS was $73.2 million for the three quarters ended September 27, 2000
compared to a net loss of $148.1 million for the three quarters ended September
29, 1999, primarily as a result of the factors discussed above.
14
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Restaurant Operations
<TABLE>
<CAPTION>
Denny's
Quarter Ended Three Quarters Ended
----------------------------------------- -----------------------------------------
September 27, September 29, Increase/ September 27, September 29, Increase
2000 1999 (Decrease) 2000 1999 (Decrease)
--------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total systemwide sales (in millions) $ 592.7 $ 569.4 4.1% $ 1,681.2 $ 1,613.0 4.2%
Average unit sales:
Company-owned 349,500 340,800 2.6% 1,012,300 985,900 2.7%
Franchise 314,500 307,200 2.4% 883,700 858,900 2.9%
Same-store sales increase (company-owned) 1.4% 1.4% 1.6% 3.0%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
As of September 27, 2000 and December 29, 1999, the Company had working capital
deficits, exclusive of net liabilities of discontinued operations, of $175.7
million and $197.0 million, respectively. The decrease in deficit relates
primarily to Denny's refranchising activity. 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 the Advantica 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, 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 Advantica Credit Facility in effect and available to the Company.
The Advantica Credit Facility provides to the Company (excluding FRD) a working
capital and letter of credit facility of up to $200 million. At September 27,
2000, the Company had outstanding working capital advances of $12.6 million and
letters of credit outstanding of $67.3 million under the Advantica Credit
Facility, leaving a net availability of $120.1 million.
At September 27, 2000, FRD had $30.0 million outstanding term loan borrowings,
working capital borrowings of $11.8 million and letters of credit outstanding of
$16.3 million under the FRD Credit Facility, leaving a net availability of $11.9
million. FRD has entered into an amendment with the lenders under the FRD Credit
Facility which, among other things, provides for a waiver of compliance with
certain third quarter financial covenants until January 8, 2001. If the FRD
sales process is not completed by January 8, 2001, the Company may be required
to seek an additional waiver or negotiate other arrangements with its lenders.
No assurance can be given that the Company will be able to obtain such
additional waiver or to negotiate such other arrangements on commercially
reasonable terms or otherwise, if needed. A default under the FRD Credit
Facility, if not adequately resolved, could give the lenders under the FRD
Credit Facility the ability to exercise their rights under the Advantica
guarantee. The Company believes, however, that it will be able to successfully
complete the FRD sale process or negotiate other arrangements with its lenders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposure at September 27, 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.
15
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
One current and two former managers of Denny's restaurant units initiated, in
the Superior Court of Los Angeles County, California, a class action lawsuit
seeking, among other things, overtime compensation. The action was originally
filed on September 2, 1997. The suit alleged that Denny's requires its managers
to work more than 50% of their time performing nonmanagement related tasks, thus
entitling them to overtime compensation. Denny's contends that it properly
classifies its managers as salaried employees, thereby exempting them from the
payment of overtime compensation. During the third quarter of 2000, the parties
reached an agreement to resolve the claims of individuals who were employed as
managers of Denny's in California between September 2, 1994 and July 21, 2000.
While continuing to deny liability, the Company elected to resolve the case to
avoid the expense of continued litigation and the risk of loss. The total
settlement of $4.0 million was approved by the Court on October 27, 2000.
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 for the nine months ended September 27, 2000.
----------------------------------
b. No reports on Form 8-K were filed during the quarter ended
September 27, 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: November 13, 2000 By: /s/Rhonda J. Parish
------------------------------------
Rhonda J. Parish
Executive Vice President,
General Counsel and Secretary
Date: November 13, 2000 By: /s/Ronald B. Hutchison
------------------------------------
Ronald B. Hutchison
Executive Vice President and
Chief Financial Officer
17
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